Deal in small-caps with caution: analysts

The sharp run-up in mid- and small-cap stocks in the last few months have managed to attract retail investors’ interest, but market experts have a word of caution. They advise thorough research before betting on these stocks.

The scope for earning good returns in a short span with limited investment has made retail investors flock to these stocks. While the benchmark Sensex had gained 1.5 per cent in the last one month, the BSE Small-Cap index had rallied 6.5 per cent in the same period. The BSE Mid Cap index was up 3.8 per cent the last one month.

The BSE Small Cap index consists of companies with market capitalisation between ₹150 crore and ₹4,600 crore, while the Mid Cap index covers companies with ₹5,000-17,000 crore market capitalisation.

Some of the companies in the mid-cap space include Response Industries, Delta Corp, Gujarat State Fertilizer and Chemicals, Symphony and VA Tech Wabag. Companies which come under small-cap space include Force Motors, Kitex Garments, PC Jeweller and Pricol.

In the last one year, valuations of many mid-cap stocks have been beaten down due to the economic slowdown and high interest rates.

The fortunes of these companies may change if economic revival sets in and interest rate come down.

Paras Bothra, Vice-President, Ashika Stock Broking, said retail investors should resist herd mentality and source quality analysis on these stocks before taking a call on their investments.

Despite the recent rally, he said, there is enough steam left for the next six to eight months in this space, if one manages to get the right pick. “The macro economics are well poised to sustain the current bull-run and the small- and mid-caps would be the major beneficiaries of this,” he said.

Vinod Nair, Head – Fundamental Research, Geojit BNP Paribas Financial Services, said domestic institutions have been a major investor in the small- and mid- cap space as most retail investors have played it safe by investing through mutual funds.

The fact that companies in the broader BSE 500 index have managed to register an overall increase of 12 per cent in profitability in the first quarter of this fiscal is an indication that the markets will be driven by earnings growth in the future, he said.

However, investors should be wary of small-cap companies with diversified business interests and large debt on their books. Though many small- and mid-sized companies have managed to bring down their debt by selling off assets, there are a few which are waiting for the earnings growth to kick in.

“We expect consumer durables, textiles, auto ancillary and export-oriented companies to benefit from the economic revival. However, investors should be cautious when dealing with real estate and infrastructure companies in the small-cap space,” he said.