Small- and mid-cap stocks are making waves in the Indian stock market as their respective sectoral indices touched new records last week. This rally is due to their better corporate performance and attractive valuations. What’s more, analysts expect these stocks to maintain their momentum in the coming days as well.
While the broader indices are also nearing all-time highs, the three-month gains of the S&P BSE MidCap and SmallCap stood at 11% and 11.7%, respectively. As for last month, both indices witnessed gains of 5.42% and 6.98%, respectively, compared to Sensex’s 4.7% and 1.4% returns over three and one-month periods, respectively.
This rally is a result of the growth prospects of these smaller companies, which have attracted investments from retail investors and foreign funds. Analysts believe the rebound in retail investor inflows, following a period of heavy selling from December 2022 to March 2023, has provided support for the performance of mid- and small-cap stocks. The moderation in raw material prices and valuations has also helped.
The decline in raw material costs has supported earnings in Q4, and the moderation in costs has also boosted the forward earnings outlook of the companies. Although the overall outlook for this category is promising, it is important to note that broad valuations still remain above long-term averages. Therefore, it is important to exercise stock-specific analysis.
Small-caps present a more attractive opportunity as their valuations trade at a discount compared to long-term averages. Sectors that have done very well in the mid-cap space include the hospitality sector, luggage space, publishing business, and the aviation sector. Companies in these industries have shown significant improvement in their performance due to easing raw material costs and the reopening of the economy.
Overall, analysts predict that these inflows will persist due to the moderation in raw material prices and valuations. The domestic demand scenario has surpassed the initial projections of the fourth quarter, and the outlook for margins has improved due to a decline in operational costs. As the demand-supply matrix remains favorable, companies in the aviation sector remain in the limelight while the publishing space has seen good traction in stock prices helped by improved operating performance.
