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Economic Times
3 days ago
- Business
- Economic Times
Smallcap mania is back. But do Q4 earnings really justify the multibagger hype?
A blistering rally in smallcap stocks is reigniting investor dreams of overnight riches but the numbers are telling a far more complicated story. With the BSE Smallcap Index up nearly 10% in one month, retail participation is surging, echoing the speculative fervor of the last bull market that climaxed in September 2024. And the excitement isn't just index-level: in the last one month, a staggering 69 smallcap stocks have delivered over 30% returns. Among the biggest gainers, Suven Life Sciences surged 83%, while GRSE, Timex, IFCI, Nelcast, and HLE Glascoat all rallied at least 50%. ADVERTISEMENT But while prices soar, fundamentals remain shaky and earnings aren't keeping pace with the hype. 'Indian smallcaps and midcaps seem to have outperformed largecaps in Q4 FY25, but the numbers tell a different story,' said Akshay Badjate, Fund Manager at Merisis PMS. 'Our analysis of the top 750 listed companies shows smallcaps lagging in profit growth, with a median PBT growth of just 4% compared to 11% for the top 250 largecaps. Many smallcaps even posted flat or negative growth, undermining the narrative of a broad-based rally.' Despite the tepid performance on the bottom line, investor appetite has remained insatiable. The Nifty Smallcap 250 has rallied 9% in the last two months, triple the 3% rise seen in the Nifty 50. Badjate attributes this surge to 'liquidity, retail enthusiasm, and domestic growth optimism,' but warns that the disconnect between price and performance may not be sustainable.'Our view at Merisis Advisors is cautious,' he said. 'While select smallcaps with strong fundamentals remain appealing, the segment risks a correction if earnings don't align with valuations. We're trimming smallcap exposure and leaning into largecaps and large midcaps, where we see better operational momentum and value.' Also read | Rs 7 lakh crore boom in just 10 days! Is the smallcap stocks party getting out of hand? ADVERTISEMENT Q4 did deliver a few bright spots for the broader market. 'The Nifty Midcap 150 reported 15% YoY profit growth and the Smallcap 250 delivered 12%. Margin performance was largely stable in midcaps, though smallcaps saw some pressure,' said Krishna Appala, Fund Manager at Capitalmind Appala also flagged that the earnings catch-up story has its limits. 'Valuations remain stretched — midcaps trade at 34x and smallcaps at 32x trailing earnings, well above the 22x seen in largecaps. The divergence between earnings and valuations in the broader market calls for greater selectivity.' ADVERTISEMENT He further added that while largecaps may appear sluggish, they now offer a better risk-reward profile. 'Despite the sharp upmove recently, largecaps currently offer a better balance of earnings visibility and valuation comfort on a forward-looking basis. The environment today rewards fundamentals and discipline over broad-based exposure — especially when mid and smallcap multiples leave little room for error.'Still, not all fund managers are ready to write off smallcaps just yet. Vaibhav Chugh, Director and Head of Sales at Whiteoak Capital AMC, sees rich opportunity in the chaos — provided investors pick wisely. ADVERTISEMENT 'Yes, the result season started slow but as it progressed, midcaps and smallcaps have surprised on growth trajectory as well as upgrades to downgrades statistics,' Chugh said. 'We continue to be overweight small caps. We find relatively high alpha opportunities due to the heterogeneity of business models, sectors and sub-sectors in the smallcap space — which is the ideal setup for bottom-up stock pickers.' With nearly 70 smallcap names delivering eye-popping returns in a matter of weeks, the lure of the next multibagger is proving hard to resist. But experts caution that investors need to tread carefully — the fundamentals are not as broad-based as the rally suggests, and elevated valuations leave little room for disappointment. The smallcap story is far from over, but chasing momentum without earnings to back it could lead to painful lessons. Also read | Sensex soars 10,000 points from April lows. But India Inc's Q4 numbers expose cracks in market rally (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
Time of India
3 days ago
- Business
- Time of India
Smallcap mania is back. But do Q4 earnings really justify the multibagger hype?
A smallcap rally is exciting investors, with the BSE Smallcap Index rising nearly 10% in a month and many stocks delivering over 30% returns. However, earnings growth lags behind, with smallcaps showing lower profit growth compared to largecaps. Experts advise caution, suggesting a focus on fundamentals and a potential shift towards largecaps due to stretched valuations in the smallcap segment. Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads A blistering rally in smallcap stocks is reigniting investor dreams of overnight riches but the numbers are telling a far more complicated story. With the BSE Smallcap Index up nearly 10% in one month, retail participation is surging, echoing the speculative fervor of the last bull market that climaxed in September 2024. And the excitement isn't just index-level: in the last one month, a staggering 69 smallcap stocks have delivered over 30% returns. Among the biggest gainers, Suven Life Sciences surged 83%, while GRSE Nelcast , and HLE Glascoat all rallied at least 50%.But while prices soar, fundamentals remain shaky and earnings aren't keeping pace with the hype.'Indian smallcaps and midcaps seem to have outperformed largecaps in Q4 FY25, but the numbers tell a different story,' said Akshay Badjate, Fund Manager at Merisis PMS. 'Our analysis of the top 750 listed companies shows smallcaps lagging in profit growth, with a median PBT growth of just 4% compared to 11% for the top 250 largecaps. Many smallcaps even posted flat or negative growth, undermining the narrative of a broad-based rally.'Despite the tepid performance on the bottom line, investor appetite has remained insatiable. The Nifty Smallcap 250 has rallied 9% in the last two months, triple the 3% rise seen in the Nifty 50. Badjate attributes this surge to 'liquidity, retail enthusiasm, and domestic growth optimism,' but warns that the disconnect between price and performance may not be sustainable.'Our view at Merisis Advisors is cautious,' he said. 'While select smallcaps with strong fundamentals remain appealing, the segment risks a correction if earnings don't align with valuations. We're trimming smallcap exposure and leaning into largecaps and large midcaps, where we see better operational momentum and value.'Q4 did deliver a few bright spots for the broader market. 'The Nifty Midcap 150 reported 15% YoY profit growth and the Smallcap 250 delivered 12%. Margin performance was largely stable in midcaps, though smallcaps saw some pressure,' said Krishna Appala, Fund Manager at Capitalmind Appala also flagged that the earnings catch-up story has its limits. 'Valuations remain stretched — midcaps trade at 34x and smallcaps at 32x trailing earnings, well above the 22x seen in largecaps. The divergence between earnings and valuations in the broader market calls for greater selectivity.'He further added that while largecaps may appear sluggish, they now offer a better risk-reward profile. 'Despite the sharp upmove recently, largecaps currently offer a better balance of earnings visibility and valuation comfort on a forward-looking basis. The environment today rewards fundamentals and discipline over broad-based exposure — especially when mid and smallcap multiples leave little room for error.'Still, not all fund managers are ready to write off smallcaps just yet. Vaibhav Chugh, Director and Head of Sales at Whiteoak Capital AMC, sees rich opportunity in the chaos — provided investors pick wisely.'Yes, the result season started slow but as it progressed, midcaps and smallcaps have surprised on growth trajectory as well as upgrades to downgrades statistics,' Chugh said. 'We continue to be overweight small caps. We find relatively high alpha opportunities due to the heterogeneity of business models, sectors and sub-sectors in the smallcap space — which is the ideal setup for bottom-up stock pickers.'With nearly 70 smallcap names delivering eye-popping returns in a matter of weeks, the lure of the next multibagger is proving hard to resist. But experts caution that investors need to tread carefully — the fundamentals are not as broad-based as the rally suggests, and elevated valuations leave little room for disappointment. The smallcap story is far from over, but chasing momentum without earnings to back it could lead to painful lessons.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
Time of India
03-05-2025
- Business
- Time of India
Retail pain rises as smallcap stocks miss the bluechip party: Is the undercurrent turning bearish?
As the Sensex danced 1,300 points higher this week, toasting a 1.6% gain, the smallcap brigade looked like it had shown up at the wrong party — or worse, got turned away at the gates. The BSE Smallcap Index slipped 1.33%, and the real drama unfolded deeper down: at least 50 smallcap stocks crashed into double-digit losses, some nosediving as much as 18%. Call it the tale of two markets. On one side, heavyweight Reliance Industries — India's most valued stock — roared 9% higher, buoyed by a Q4 earnings glow and a fresh wave of FII love. On the other hand, investors in names like Gensol Engineering, Tejas Networks, Sterling and Wilson Renewable Energy, Godrej Agrovet, and Senco Gold lost money. Foreign institutional investors (FIIs) pumped nearly $1 billion into Indian equities this week, drawn in by a softening dollar and the stability of bluechips. But while the giants soaked in the inflows, investors used the rally as an exit cue from broader markets that had sprinted ahead from April lows. 'By definition, the majority of the Indian market, except the top 250, is smallcaps,' said Dr. Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital. 'There are nearly 1250 smallcaps which are actually larger than Rs 1000 crore market cap, so they are actually quite large in size. This is where one will have to focus attention to build a wealth creating portfolio. We would caution against companies below Rs 1,000 crore market cap and penny stocks etc.' Gupta warns against blindly chasing momentum. 'Avoid the Capital Destroyers — high debt; Capital Eroders — low RoE; Capital Imploders — high PE stocks above 40; and companies with little to no growth. This isn't treasure-hunting on WhatsApp forwards — it needs a scientific screener and real diligence.' Also read | Sensex, Nifty soar 10% in 2 months but can this bull run survive the shadows of war? Indeed, while some see the recent crash as a cleansing fire, others view it as a much-needed reset. 'There has been a steep correction in many good quality mid and small-cap stocks. It's a good time to add good-quality small and mid-cap companies that have favorable earnings growth ahead of them. The recent correction in the small and mid-cap space has provided an opportunity to pick up quality stocks at attractive valuations. They tend to outperform during periods of economic recovery, as they are more sensitive to growth in domestic consumption and infrastructure,' said Vaibhav Agrawal, CIO – Alternates (Public Equity) at Motilal Oswal AMC. But the jury is still out on valuations. 'Mid and small cap valuations, though off the peak, are still trading more than one standard deviation above their historical average,' said Ashutosh Tiwari, MD and Head of Equities at Equirus Securities. 'Investors should look for companies that have a good track record on cash flow generation and trading at reasonable valuation vs their pre Covid multiples. In many cases investors look at the last 3–5-year average trading multiples and compare current multiples but it's not the right approach as last 3-year multiples were significantly higher than the mean,' he said. Also read | Rs 37,600 crore in 11 days! FIIs are flooding Indian stocks with cash but will it last? Valuation red flags are flashing louder than ever. According to Nuvama, both the SMID (Small and Midcap) market cap-to-GDP and forward PE are hovering around levels seen in previous market peaks — 2007, 2010, and 2018. And what followed back then? Painful drawdowns ranging from 30% to 60%. 'While liquidity concerns have been largely addressed, growth concerns persist. SMID profit growth has been slowing as margin tailwinds have faded on a YoY basis. The falling crude could help somewhat, but that may not be sufficient to inflate earnings a la FY24,' Nuvama notes. So is this the end of the road for smallcaps? Not quite. But it is no longer the high-speed highway of 2023. Investors need to unlearn the easy wins and embrace quality, discipline, and hard-nosed valuation sanity. In other words, the smallcap rally may be down, but it's not out.
Economic Times
03-05-2025
- Business
- Economic Times
Retail pain rises as smallcap stocks miss the bluechip party: Is the undercurrent turning bearish?
As the Sensex danced 1,300 points higher this week, toasting a 1.6% gain, the smallcap brigade looked like it had shown up at the wrong party — or worse, got turned away at the gates. The BSE Smallcap Index slipped 1.33%, and the real drama unfolded deeper down: at least 50 smallcap stocks crashed into double-digit losses, some nosediving as much as 18%. ADVERTISEMENT Call it the tale of two markets. On one side, heavyweight Reliance Industries — India's most valued stock — roared 9% higher, buoyed by a Q4 earnings glow and a fresh wave of FII love. On the other hand, investors in names like Gensol Engineering, Tejas Networks, Sterling and Wilson Renewable Energy, Godrej Agrovet, and Senco Gold lost money. Foreign institutional investors (FIIs) pumped nearly $1 billion into Indian equities this week, drawn in by a softening dollar and the stability of bluechips. But while the giants soaked in the inflows, investors used the rally as an exit cue from broader markets that had sprinted ahead from April lows. 'By definition, the majority of the Indian market, except the top 250, is smallcaps,' said Dr. Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital. 'There are nearly 1250 smallcaps which are actually larger than Rs 1000 crore market cap, so they are actually quite large in size. This is where one will have to focus attention to build a wealth creating portfolio. We would caution against companies below Rs 1,000 crore market cap and penny stocks etc.'Gupta warns against blindly chasing momentum. 'Avoid the Capital Destroyers — high debt; Capital Eroders — low RoE; Capital Imploders — high PE stocks above 40; and companies with little to no growth. This isn't treasure-hunting on WhatsApp forwards — it needs a scientific screener and real diligence.' Also read | Sensex, Nifty soar 10% in 2 months but can this bull run survive the shadows of war? ADVERTISEMENT Indeed, while some see the recent crash as a cleansing fire, others view it as a much-needed reset. 'There has been a steep correction in many good quality mid and small-cap stocks. It's a good time to add good-quality small and mid-cap companies that have favorable earnings growth ahead of them. The recent correction in the small and mid-cap space has provided an opportunity to pick up quality stocks at attractive valuations. They tend to outperform during periods of economic recovery, as they are more sensitive to growth in domestic consumption and infrastructure,' said Vaibhav Agrawal, CIO – Alternates (Public Equity) at Motilal Oswal AMC. But the jury is still out on valuations. ADVERTISEMENT 'Mid and small cap valuations, though off the peak, are still trading more than one standard deviation above their historical average,' said Ashutosh Tiwari, MD and Head of Equities at Equirus Securities.'Investors should look for companies that have a good track record on cash flow generation and trading at reasonable valuation vs their pre Covid multiples. In many cases investors look at the last 3–5-year average trading multiples and compare current multiples but it's not the right approach as last 3-year multiples were significantly higher than the mean,' he said. ADVERTISEMENT Also read | Rs 37,600 crore in 11 days! FIIs are flooding Indian stocks with cash but will it last? Valuation red flags are flashing louder than ever. According to Nuvama, both the SMID (Small and Midcap) market cap-to-GDP and forward PE are hovering around levels seen in previous market peaks — 2007, 2010, and 2018. And what followed back then? Painful drawdowns ranging from 30% to 60%.'While liquidity concerns have been largely addressed, growth concerns persist. SMID profit growth has been slowing as margin tailwinds have faded on a YoY basis. The falling crude could help somewhat, but that may not be sufficient to inflate earnings a la FY24,' Nuvama notes. ADVERTISEMENT So is this the end of the road for smallcaps? Not quite. But it is no longer the high-speed highway of 2023. Investors need to unlearn the easy wins and embrace quality, discipline, and hard-nosed valuation sanity. In other words, the smallcap rally may be down, but it's not out. (You can now subscribe to our ETMarkets WhatsApp channel)
