Are tailwinds for small & midcaps, PSUs fading? Here’s what Nuvama thinks
Calling it an equity euphoria that has gripped the domestic cyclicals such as real estate, PSUs, industrials and SMIDs (small & midcaps) — leading to a 50-100% rally — Nuvama said strong revival in profits in FY24 versus moderation in FY23 were the trigger points for the rally.
The melt-up in small, midcap and is likely to halt soon as FY2024 tailwinds, which have led to their rally, appear to be fading away, said in a note. Earnings headwinds, lofty valuations and neutral liquidity could be their undoing as the tide now takes a turn, stated this report.Calling it an that has gripped the domestic cyclicals such as real estate, PSUs, industrials and SMIDs (small & midcaps) — leading to a 50-100% rally — Nuvama said strong revival in profits in FY24 versus moderation in FY23 were the trigger points for the rally.
SMIDs
While most (SMIDs) are languishing 10–20% below their pre-Covid peaks, Indian SMIDs have had a dream run in FY2024 to date. Calling this divergence in performance as a "historical anomaly", Nuvama attributed it to a strong revival in profits in FY24 versus moderation in FY23. The topline growth, however, remained weak during the year and for FY25 and FY26, consensus is forecasting that profit growth will remain strong.
Margin tailwinds for SMIDs are fading because oil prices are no longer decelerating on a YoY basis, Nuvama said, adding that anecdotal evidence suggested that some sectors like paints, tyres have already taken a price cut.
While a Bloomberg consensus forecasted that margins would expand by another 200 bps, Nuvama deemed it unlikely unless demand improves substantially.
PSUs
The rally in PSUs over the last six months has been quite sharp and broken out of its 10-year range. Typically, such melt-ups happen during the last phases of a bull run like it happened in 2007, Nuvama argued. "This is essentially because PSUs are mostly deep cyclicals and no phase of a bull market ends without a melt-up in PSUs," it said.
For PSU banks, the decline in credit costs was a big tailwind and a further moderation on this front is quite unlikely, given that credit growth could be peaking now.
Notwithstanding an improvement in the balance sheets of PSUs, these are still deep cyclicals with high operating and financial leverages. Nuvama stated that the recent rally had pushed valuations to a decade-high in the context of India’s capex cycle. In its view, if capex recovery stalls, then both earnings and PSU valuations could be at risk.
The has come following a report by another domestic brokerage PhillipCapital, which estimated a sharp correction in the euphoric Nifty. The 50 stock index could plunge to 18,550 in what could be a timewise correction that may last for a minimum of three quarters according to the brokerage's estimates. This is a 3,470-point or near 16% fall from the Friday closing price of 22,023.35.
In the worst-case scenario, it could even test levels of 16,000-15,500, which would be a whopping 6,523 points or 30% fall. In this case, the timewise correction could last for a maximum 6-7 quarters.
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Source: Stocks-Markets-Economic Times
