13-Mar-2019 : You might have heard that all analysts and fund managers are suggesting to buy small and mid cap stocks in different public medias. The reason is quite obvious. After prolong bear market of small and mid cap stocks, the risk-reward is quite favorable at this point of time. The nifty mid cap index started its downward journey in the month of January, 2018. In January 2018, the mid cap index climbed all the way to around 21730. At the time, NIFTY was hovering around 11080. Now we have crossed more than a year. Today i.e. as on close of 13-Mar-2019, nifty mid cap is at 17733. Thus there is a drop of 18%. Whereas the NIFTY is hovering at 11341 as on close of 13-Mar-2019. Thus, there is an increase of 2%. Thus, we can see that there is a divergence of 20% between NIFTY and the mid cap NIFTY. Needless to say that this deviation is not sustainable. Here, one important point to be remembered that this deviation is after last couple of week’s good performance of the mid and small cap stocks.

We believe that barring the volatile period around the election time, the mid cap stocks and small cap stocks will again come back to the investor’s radar. Going forward, once the private CAPEX will come in full pace, we may see considerable earning pick up from mid and small cap category. In Q3, though we saw a YoY increase in revenue over 15%, the increase in profit is below 5%. One of the main reasons being higher input cost, mainly steel and crude. FY-2020 may see these input cost stabilized. It is also to be remembered that rupee was depreciated in FY-2019. This has further aggravated outflow of the FII investment. With stabilized rupee and reasonable valuation of the Indian market, the FII already started pouring in money. And hence we can see that rupee has been appreciated and currently stands at 69.61.

FY-2020 may start with a volatile mood. But once the election dusts settle down, the second half may be promising. And with lower mid cap and small cap valuation, we believe that in the next couple of years mid cap stocks and small cap stocks may outperform NIFTY. So what should one buy? Investors need to be very selective in choosing his\her stock. We believe that Capital Goods will take some more time to show result. Though, if you want to catch them low, this is the perfect time. With few quarters of lull, Auto will again start performing. If India grows economically, the Auto industry cannot be an underperformer. Similarly, banks, the proxy of economic growth, can be another investment avenue. We would prefer private banks in comparison to the public sector banks. For those investors, who don’t have time to do research, we would recommend to take either the MF route or the ETF route.

 

Written by Research Analyst (SEBI Registered) Suvendu Manna

Disclaimer : I, Suvendu Manna, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. We also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.  

Other Disclosures:

This report is a view of the Research Analyst as mentioned above and not a solicitation for purchase or sale. This report is solely meant for personal use and not for circulation. The information and opinion contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guarantee, representation of warranty, express or implied, is made to its accuracy, completeness or correctness.

The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. We accept no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other Jurisdiction, where such distribution, publication, availability or use would be contrary to law.