The retail investor bloodbath in smids might just be the beginning
Source: Live Mint
The recent correction in indices comprising small and mid-size companies (smids) may not be the end of the bloodbath for retail investors, with industry veterans pointing out that these stocks remain expensive.
The Nifty Midcap 150 index has corrected 12.5% from its record high of 22,515.4 points on 25 September through Friday’s closing of 19,708.95. In that period, Kalyan Jewellers Ltd, ZF Commercial Vehicle Control Systems India Ltd, wind turbine maker Suzlon Ltd, Godrej Properties Ltd, and industrial gases producer Linde India Ltd have lost between 33% and 39%, per analytics firm IndiaCharts.
The Nifty Smallcap 250 index has fallen 14.4% from a record high of 18,688.3 on 24 September to 16,001.7 on Friday. In that period, Sterling & Wilson Renewable Energy Ltd shed almost half of its share price to ₹338.6 apiece, while skincare brand Mamaearth’s owner Honasa Consumer Ltd, Inox Wind Ltd and realty firm Sobha Ltd have lost 43-49%.
In all, 92 out of 250 stocks in the smallcap index have fallen by more than 20% while 54 out of 150 stocks in the midcap 150 index have corrected below 20%, said Rohit Srivastava, founder of IndiaCharts.
Meanwhile, retail investor holdings through mutual funds in certain midcap and smallcap companies have increased.
In counters like Sobha, mutual funds increased their holding to 22.63% in the December quarter from 21.80% in the September quarter. Godrej Properties saw mutual fund holdings rise to 5.66% in the December quarter from 4.36% at the end of the preceding three months.
“We believe that small and midcaps remain expensive even after the correction so far,” said Sankaran Naren, executive director and chief investment officer at ICICI Prudential Mutual Fund. “Investors need to exercise caution in this segment. If they choose to invest, a bottom-up approach is crucial, focusing on carefully selecting companies with high free cash flows and sustainable dividend yields.”
Largecap stocks appear “relatively more attractive” after the recent correction, he added. The benchmark Nifty 50 index has fallen 12% from its record high of 26,277.35 points on 27 September to 23,092.2 on Friday.
Also read | Smallcap and midcap valuations are sky-high, bringing bluechips back in vogue
Smids lose weight
Some mutual fund honchos have cut the weight of small and mid-sized companies in their flexicap funds.
“Small and mid-sized companies have seen significant gains, leading to elevated valuations on a one-year forward basis,” said Ganesh Mohan, chief executive, Bajaj Finserv AMC. “The benchmark midcap index is trading two standard deviations above its long-term average, while the smallcap index is at one standard deviation above the same benchmark.”
“In response, we have increased the allocation to largecaps in our flexicap fund to 61%, up from 55%. Concurrently, we have reduced the weighting of midcaps and smallcaps to 39% over the past three to four months,” Mohan said.
Also read | Temper return expectations from Smids, says Valentis’ Jaipuria
The retail craze for Smids has been visible even amid the correction. Inflows into smallcaps and midcaps stood at ₹33,412 crore from September through December, show data from the Association of Mutual Funds of India. Over the same period, largecap inflows stood at ₹9,781 crore.
From a valuations perspective, the Nifty Midcap 150 trades at a 12-month trailing price-to-earnings multiple of 37.6 times against the two-year average of 35.2 times, per Bloomberg.
After the recent correction, the Nifty Smallcap 250 trades at 27.4 times on a 12-month trailing basis, which is in line with its two-year average.
Also read | Bharat Shah: Views that midcaps are fleeting and smallcaps are destined to fizzle out are outdated
