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Midcap and smallcap stocks light up the Street

Lower tax rate to attract investors to the mid- and smallcap space as the downside looks limited

, ET Bureau|
Updated: Sep 21, 2019, 05.40 PM IST
Nirmala Sitharaman-1200
India’s broad market indices logged their biggest one-day gain in several years on Friday after the government unexpectedly cut the corporate tax rate to fire up economic growth.

The return of positive sentiment to the market and higher scope to expand business as a result of the lower tax rate are likely to attract investors to the mid- and small-cap space.

The BSE MidCap index ended up 6.3% at 14,120, marking its biggest single-day rise since May 18, 2009, when the index had gained 11.7%. Rising the most since May 2014, the BSE SmallCap index ended up 4% at 13,204.

“The move will benefit profit-making companies. Small and midcap companies will get more room to expand business,” said A Balasubramanian, CEO, Aditya Birla Sun Life Mutual Fund. “As confidence comes back, the improvement in sentiment will also revive the lending market and transmission of rates will also benefit these companies,” said Balasubramanian.

Gains in the Midcap space were led by Edelweiss, ICICI Securities, Page Industries, RBL Bank, TVS Motor, Endurance Technologies and MRF, which surged 11-19%. Among the BSE SmallCap index constituents, Bharat Seats, NCC, Lincoln Pharmaceuticals and Bombay Burmah’s shares ended up 17-18%.

Although the broad market posted strong gains on Friday, they have a long way to go before recovering their earlier peaks. The BSE MidCap index is down over 22% from its all-time high of 18,321 which was hit in January 2018. From its all-time high of 20,183, also hit in January 2018, the BSE SmallCap index has fallen 34.6%. The rally in the broader market that took these indices to lifetime highs has faltered due to Sebi guidelines on mutual funds re-categorisation and rationalisation, tepid earnings growth, and concerns over high valuations. These concerns have not entirely abated.

“Not all stocks will see a reversal in trend. However, after these big-bang measures, overall sentiment is likely to improve in terms of business and investor confidence and that will reflect in valuations of the broader market as well,” said Gaurav Dua, headstrategy & investments at Sharekhan by BNP Paribas.

Valuation comfort may also drive buying in mid- and smallcaps in the near term. From a premium of over 50% to the benchmark Nifty, mid-cap valuations are now at an 18% discount.

Edelweiss said the level of valuation discount is close to historical lows of 2011 and 2014, which lends comfort that downside to valuation multiples in mid- and smallcaps may be limited. However, the earnings downgrade is yet to play out fully.

“Majority of the small- and midcaps correction, so far, has been led by a fall in valuation multiples, while downgrade in earnings has been only mild. This implies potentially some more earnings cuts. The small- and midcaps space is not a blanket ‘buy’ yet, and earnings resilience should have a huge bearing on stock picking at this stage,” Edelweiss said in a report.
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