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Mid-caps, Small-caps outperform post Budget; analysts advise caution

Markets have been on an uptrend since the presentation of the Union Budget in February with the benchmark Nifty50 index moving up nearly 12.5% since then. However, the mid-and the small-caps have gained ground at a faster clip.

While the Nifty Mid-cap 50 index has moved up nearly 24% post the presentation of Union Budget in February, the Nifty Small-cap 50 index has gained 22% during this period. On the other hand, the S&P BSE Mid-cap and the S&P BSE Small-cap indices outperformed the S&P BSE Sensex by rallying around 15% and 16% respectively during this period, compared with around 12% rise in benchmark index.

Though the recovery has been sharp, the fall in the first two months in mid-and-small-cap indices when the overall markets had corrected in line with global peers was equally spectacular.

While the S&P BSE Sensex corrected around 12% in the first two months of CY16, the S&P BSE Mid-cap and the S&P BSE Small-cap indices tanked 14% and 19%, respectively.


So what should you do now? Is it a good time to exit, or at least partially book profits in these counters?

Given the sharp recovery since February, analysts say that investors now need to be cautious and invest selectively. The rally in the mid-and-small caps now has to be backed by financial performance for the up move to sustain, they add.

Ravi Shenoy, vice-president for midcap research at Motilal Oswal, explains: "Mid-caps, we believe, have been overvalued since the last one year compared to the large-caps. As at March-end, mid-caps have been valued at 35% premium to their historical valuation to the S&P BSE Sensex. This phenomenon typically does not continue, unless there is an expectation of significant improvement of financial performance, which is what the markets now probably wait for. In case there is an improvement, the up move will continue. Having said that, one needs to be very selective in the mid-cap space now. One should exit those stocks where the valuations are not justified by earnings," he adds.

From a fund flows view-point as well, mid-and-small caps are favourites of domestic funds and retail investors. Retail investors, analysts say, want to get into the mid-and-small cap segment given the rally in their larger peers, which in turn is pushing up stock prices.

"Mid-caps always follow their larger peers and often witness sharper correction once the large-caps correct. However, I do not see this happening in the immediate term. Retail investors who missed the large-cap rally post the Budget now want to get in. This, in turn, could keep prices firm till May-mid. By that time, a lot of companies will also announce their March quarter numbers that will lead to a rerating of these stocks. I feel investors still have a window of 15 - 20 days to play the mid-and-small cap theme. However, I would not bet on these scrips beyond that," said Prakash Diwan, director, Altamount Capital Management.

Repco Home, TVS Motors, Suprajit Engineering, Eveready, Finolex Cables and PI Industries are some of the stocks Shenoy of Motilal Oswal has recommended to his clients.

"We also have a 'buy' rating on City Union Bank. For those who have an appetite for risk can also look at Andhra Bank, M&M Financial Services and Shriram Transport," he adds.