Domestic share market growth is mainly emerging from midcap and small-cap stocks after recovering from Covid.
Domestic share market growth is mainly emerging from midcap and small-cap stocks after recovering from Covid, said ICICI Securities. The brokerage firm is bullish on small-cap and midcap stocks, even as Dalal Street equity indices struggle to continue the momentum seen in 2021. ICICI Securities added that low valuation discount on midcaps and small-caps over large caps and reducing risk appetite may act as headwinds. The risk of a faster than anticipated interest rate hike by global central banks, inflation, and escalating geopolitical tensions have been weighing on domestic equities so far in 2022.
Mid and Small-caps yet to reach extreme optimism
“Mid and small-cap valuation discount over large caps in terms of earnings yield relatively low currently at around 100 bps on a TTM basis,” said ICICI Securities. “However, they have not yet reached the extreme optimism seen during 2017-18 where they traded at a premium to large caps,” it added. Benchmark NSE Nifty 50 is down 8% from its all-time high, while the Nifty Midcap 50 is down about 15%, and Nifty Smallcap 50 is down 28% from its high.
Analysts believe that the earnings growth of mid and small caps is expected to be much faster than large caps (Nifty 50 index) over FY22-24 which could support valuations. ICICI Securities expects Nifty Midcap 100 net profits to grow at a CAGR of 28% between the current financial year and the one ending in 2024. Nifty Small-cap 100 net profit is estimated to grow at a CAGR of 33% during the same period. Nifty 50, however, is expected to see net profit growth of just 16%.
Worst hit by pandemic
Midcaps and small-caps are believed to benefit from the resumption of normal economic activity as analysts believe the firms occupying the space were among the worst hit during the pandemic-induced lockdowns. “The higher growth is attributable to the significantly larger impact of covid on mid and small-cap space and the imminent opening up of the economy over the next two years which is likely to show higher growth on a depressed base,” ICICI Securities said. They highlighted that mid and small caps have the lion’s share of the most severely impacted sectors due to covid such as hotels, resorts, restaurants, cinema, casino, airlines, capital goods, small banks, and NBFCs.
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NHPC
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Gujarat Fluoro Chemicals
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Smallcaps:
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