Nuvama Institutional Equities, a domestic brokerage, has conducted a comprehensive analysis of the Small & Midcap sector (SMIDs) and uncovered exciting prospects for investors. The brokerage emphasizes that market leaders within the SMID segment have consistently delivered higher investor returns.
While challengers have historically faced their share of difficulties, their growing sizes have made them increasingly relevant players in their respective ecosystems. In some SMID sectors, Nuvama suggests that the definition of leadership is evolving, potentially reducing the valuation gap between challengers and market leaders over time. The brokerage has compiled a shortlist of potential candidates based on these criteria.
Nuvama’s top SMID picks include Polycab, Blue Dart, Coforge, Escorts Kubota, Prince Pipes, PI Industries, BHEL, APL Apollo Tubes, and Sterling & Wilson.
Regarding the SMID outlook, the brokerage provides mixed signals. It advises caution for midcaps, as valuations have risen above the mean, but it does not see this as indicative of a bubble. Nuvama also points out pockets of potential upside, including value stocks with pending triggers and others with high earnings growth certainty.
The preference for market leaders has historically kept challengers attractively priced. Nuvama acknowledges that it has consistently supported market leadership among Indian SMIDs, leading to remarkable returns and significant rating increases for leaders. However, the brokerage notes that large outsized returns from leaders are becoming less likely due to re-rated valuation multiples over the past decade.
Nuvama believes that the market’s ongoing preference for leaders may pave the way for the next wave of outsized returns to emerge from challengers, particularly given their larger sizes compared to a decade ago.
While some categories may witness challengers narrowing the business metrics gap, the brokerage acknowledges that backing leaders may still be the better choice in certain cases where leaders have continued to strengthen their positions, leaving challengers unable to compete effectively.
Nuvama’s analysis of SMIDs also touches on factors affecting their performance compared to large-cap stocks. The brokerage observes that downgrades among SMID companies have decreased since Q4FY23, although the rise in SMID valuations from Jun-23 partly offsets this trend. While SMID valuations relative to large-caps have increased, Nuvama does not view this as reaching bubble-like levels.
In conclusion, Nuvama anticipates that while significant outperformance in SMIDs is unlikely, substantial underperformance, particularly for midcaps, is not expected. The brokerage also provides a list of stocks that have the potential to trigger positive movements in the coming quarters, along with a list of stocks that have exhibited strong performance this year with high earnings growth certainty.
Investors and market participants will closely watch these developments as they navigate the dynamic landscape of the Small & Midcap sector in the Indian market.
