Low-quality smallcaps led rally in last 6 months while better ones saw no rerating: Kotak Equities

The brokerage has been warning investors against the structural problems in many smallcap stocks that were riding on sentiments, especially the . In its last report titled 'Myth versus reality', the brokerage highlighted severe mispricing in most non-financial PSU stocks.

ETMarkets.com

Bullish sentiments and not bottom-up structural fundamentals are driving the rally in PSU stocks, Kotak had said, as it highlighted problems in the "euphoric sentiment" surrounding PSU stocks.

Also Read:

Excluding the PSUs, the Nifty Midcap-100 Index was up 11%, while the Nifty Smallcap100 Index was up 13%. The non-PSU capital goods stocks were up 30%, healthcare services were up 8%, IT services were up 16% and QSRs were down 21% over this period, the note said. Small-cap companies in these sectors did not fare much better. As for mid-cap consumer stocks, they were down 2%.

Valuations of better-quality mid-and small-cap stocks have tempered a bit with them seeing no rerating or have even seen derating in a few cases over the past six months.

In the past 12 months, the Nifty Smallcap index has surged over 62%.

Amid warnings of froth in the broader market stocks first by the market regulator Securities and Exchange Board of India (Sebi) followed by mutual funds limiting lump sum investments in smallcap-oriented products has dented the market sentiments. The Nifty Smallcap 100 index has corrected by nearly 9% in the past month.

Domestic mutual funds have had large underweight positions in PSU stocks over the past six months in their mid-cap and small-cap. funds. Out of 29 active mid and 24 smallcap schemes, 26 and 21 have understandably underperformed their benchmark indices over this period. "We would also note that large inflows from retail investors may have supported valuations of the struggling sectors as well," the note said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)