How small caps fared on returns, resilience, and swing?

28 May 2024 , 02:35 PM

DID SMALL CAPS CREATE VALUE IN THE LAST ONE YEAR?

We look at the Small Cap index 100 index on the Nifty as a reasonable proxy for the small cap space in India. Needless to say, the small cap stocks have performed better than the Nifty and the Nifty mid-cap 100. However, small caps have two sides to the story. On the downside, there are two major risks in small cap stocks. Firstly, they are known to have much longer drawdowns in times of falling markets. That means, they take longer to recover pre-correction prices. Secondly, small cap companies tend to be riskier business models as their business largely predicated on a handful of clients or just one business line. In addition, these small caps are also subjected to a higher degree of volatility as well as regulatory and compliance risks, as we get to see time again in the markets.

Despite these factors, the small caps continue to be the favourite of retail and HNI investors and the slew of small cap funds and multi-cap funds have created a perpetual demand for these small cap stocks in India. The reasons are not far to seek. They have outperformed the large caps and the mid-caps over the medium term and especially in times of bullish sentiments, these small caps tend to outperform. These small caps are less vulnerable to leverage related problems as they are, by default, more of cash generative businesses. Here are some interesting macro perspectives emerging on the small cap stocks.

• Small caps have been under stress in the last one month, generating just about 0.81% returns in the last one month. The stress continues to be high due to the recent concerns expressed by the SEBI to mutual funds over small cap schemes.
• However, over the last one year, the small caps have flattered with returns of 69.54%, although it is slightly away from its recent peaks. To that extent, the swing in small cap stocks is much less than the swing in the large cap and mid-cap stocks.
• Out of the 100 stocks in the Nifty Small Cap 100 index, 7 stocks had to be removed due to lack of complete data. Of the balance 93 stocks, 44 stocks gave positive returns in the last 1 month, while 49 stocks gave negative returns over the last 1 month.

Clearly, the short term momentum is not in favour of the small cap stocks, but in the Indian market, the appetite for small cap stories is fairly strong.

BEST SMALL CAP STOCKS ON MOMENTUM MEASURE

Let us start with the momentum story of the Nifty Small-Cap 100 Index using the 1-month returns as the proxy. For the Nifty Small-Cap 100 index as a whole, monthly returns for March 2024 stood at just 0.81%. Out of the 100 stocks in the Nifty Small Cap 100 index, 7 stocks were eliminated due to paucity of full data. Out of the remaining 93 stocks, only 44 stocks gave positive returns while 49 small cap stocks gave negative returns in the last one month, hinting at stress in the short term. This uncertainty has prevailed for last 3 months. The table below ranks small cap stocks on best 1-month returns.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
COCHINSHIP	1,905.75	50.05%	304.39%	2,030.00	234.48	712.76%	6.52%
HUDCO	256.95	30.29%	355.46%	277.90	54.40	372.33%	8.15%
FINCABLES	1,283.75	26.76%	52.50%	1,363.30	774.05	65.85%	6.20%
CROMPTON	391.30	25.92%	42.79%	410.00	261.25	49.78%	4.78%
CENTURYTEX	2,227.00	19.33%	179.46%	2,278.85	774.65	187.48%	2.33%
AFFLE	1,222.10	14.19%	30.90%	1,336.90	903.35	35.29%	9.39%
NCC	281.75	13.12%	139.41%	294.00	99.65	182.74%	4.35%
IRCON	271.90	12.63%	238.04%	301.45	78.45	246.59%	10.87%
NBCC	145.50	9.79%	241.33%	176.85	38.20	280.89%	21.55%
TRITURBINE	589.20	9.39%	49.33%	654.40	312.00	88.85%	11.07%

Data Source: NSE

What are the sectors that showed favourable momentum in last one month. The monthly momentum did favour the PSU as they topped the tables with Cochin Shipyards and HUDCO delivering 50% and 30% returns respectively. In terms of the distribution of monthly returns; out of the 93 stocks considered, only 8 stocks delivered double-digit positive momentum in in last one month, while 23 stocks delivered more than 5% in the last one month. There was no sectoral trend visible as most of them were bottom-up stories.

The list of laggards was much longer in terms of monthly momentum. If you look at the Nifty Small-Cap 100 index in the last one month 6 stocks scored fell by more than 10% in the last one month while 26 stocks fell more than 5%. Clearly, there was substantial negative momentum in the small cap stocks. Most of the stocks on the downside were news driven.

EVALUATING SMALL CAPS IN TERMS OF YEARLY RETURNS

If the momentum story captured the short term story of the small caps, the bigger fundamental picture is captured by 1-year returns. For the Nifty Small-Cap 100 index as a whole, annual returns were strong at 69.54%. Out of the 93 stocks in the Nifty Small-Cap 100 index with full data available, 85 stocks gave positive returns and only 8 stocks gave negative returns in the last one year period.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
HUDCO	256.95	30.29%	355.46%	277.90	54.40	372.33%	8.15%
COCHINSHIP	1,905.75	50.05%	304.39%	2,030.00	234.48	712.76%	6.52%
HINDCOPPER	371.00	-2.12%	261.30%	415.80	101.05	267.14%	12.08%
NBCC	145.50	9.79%	241.33%	176.85	38.20	280.89%	21.55%
IRCON	271.90	12.63%	238.04%	301.45	78.45	246.59%	10.87%
MRPL	219.00	-12.08%	224.17%	289.25	64.10	241.65%	32.08%
APARINDS	8,032.75	2.60%	193.52%	8,399.00	2,672.00	200.63%	4.56%
ITI	308.45	3.89%	187.38%	384.30	104.50	195.17%	24.59%
IOB	67.25	6.25%	183.54%	83.75	23.55	185.56%	24.54%
CENTURYTEX	2,227.00	19.33%	179.46%	2,278.85	774.65	187.48%	2.33%

Data Source: NSE

What were the fundamental winning stories of FY24? The 1-year story is largely dominated by PSU stocks with 8 out of the top 10 gainers on 1-year returns belonging to the PSU theme. The PSU names include HUDCO, Cochin Shipyards, Hindustan Copper, NBCC, IRCON, MRPL, ITI, and IOB. Apar Industries and Century Textiles were the only private players. Based on annual returns, there were 30 out of the 93 Nifty-Small-Cap stocks that generated more than 100% returns, while 56 out of the 93 small cap index companies generated more than 50%. A total of 74 out of the 93 companies yielded more than 20% returns, so even if you had selected a small-cap index stock at random, there was an 80% probability that you would still be invested in the best performing asset class in India.

What is the story of the laggards in the Nifty Small-Cap 100 index on one-year returns? These are largely stock specific stories that you find here, which makes the 1-year list more reliable in terms of bottom-up stories. Indiamart has been under pressure for some time as valuations moderated. In the case of others like Navin Fluorine, Sonata Software, and JP Chemicals, the correction was more news driven.

HOW MANY OF THE SMALL CAPS WERE TRULY RESILIENT?

How do we assess resilience of stocks in an index? We look at resilience in terms of the bounce from the lows of the last one year. It gives a good approximation of resilience. For the Nifty Small-Cap 100 index as a whole, the bounce from the low of the year was a full 63.78%, despite the late correction in March 2024. Out of the 93 stocks evaluated in the Nifty Small-Cap 100 index, an amazing 36 stocks bounced more than 100% from the lows (doubled from lows), while 65 stocks bounced more than 50% from the lows and a total of 82 stocks showed a bounce of at least 20% from the lows of the last one year. This is despite the late correction in March 2024, although small caps have recovered since.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
COCHINSHIP	1,905.75	50.05%	304.39%	2,030.00	234.48	712.76%	6.52%
HUDCO	256.95	30.29%	355.46%	277.90	54.40	372.33%	8.15%
NBCC	145.50	9.79%	241.33%	176.85	38.20	280.89%	21.55%
HINDCOPPER	371.00	-2.12%	261.30%	415.80	101.05	267.14%	12.08%
IRCON	271.90	12.63%	238.04%	301.45	78.45	246.59%	10.87%
MRPL	219.00	-12.08%	224.17%	289.25	64.10	241.65%	32.08%
APARINDS	8,032.75	2.60%	193.52%	8,399.00	2,672.00	200.63%	4.56%
HSCL	350.35	5.08%	170.97%	398.75	118.00	196.91%	13.81%
ITI	308.45	3.89%	187.38%	384.30	104.50	195.17%	24.59%
SWANENERGY	630.80	3.36%	174.57%	782.25	214.25	194.42%	24.01%

Data Source: NSE

Once again, no prizes for guessing. A total of 7 out of the top 10 stocks in terms of resilience from the lows were PSU stocks and they included Cochin Shipyards, HUDCO, NBCC, Hindustan Copper, IRCON, MRPL and ITI Ltd. This has been the consistent story where many of the small and mid-sized PSU stocks displayed the best traction in the space. The non-PSU stocks in the top-10 list included Swan Energy, Himadri Specialty Chemicals, and Apar Industries. They are all essentially bottom-up stories.

Let us also focus on the laggards, or the stock that struggled to bounce from the lows of the year in the small-cap index. There were a total 4 stocks out of 93 stocks that bounced less than 10% from the lows, hinting that there were closer to their lows during the year. Stocks being so close to their yearly lows, when the index, is close its high, is a clear sign of weakness. The stocks that were under pressure on the resilience measure were Renuka Sugars, Indiamart, PVR Inox and Happiest Minds.

THERE WAS A SWING STORY IN SMALL CAPS IN LAST 1 YEAR

Let us finally turn to the top ranked swing stocks for the year, wherein we use the proximity to the 52-week high. The closer the stock is to the 52-week high, the higher is the swing factor working in their favour. The Nifty Small-Cap 100 index itself is just about 1.49% from its 52-week high, which shows a sharp recovery from the ides of March. Out of the 93 stocks evaluated in the Nifty Small-Cap 100 index, only 9 stocks are less than 5% away from their 52-week highs, while a total of 24 stocks are less than 10% away from their 52-week high levels. Surprisingly, a total of 40 out of 93 stocks are more than 20% off the yearly highs.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
NAM-INDIA	610.00	4.55%	164.37%	623.95	230.30	164.87%	2.29%
CENTURYTEX	2,227.00	19.33%	179.46%	2,278.85	774.65	187.48%	2.33%
IRB	72.75	7.32%	164.30%	75.85	24.95	191.58%	4.26%
NCC	281.75	13.12%	139.41%	294.00	99.65	182.74%	4.35%
EXIDEIND	473.95	6.79%	128.03%	495.50	203.85	132.50%	4.55%
APARINDS	8,032.75	2.60%	193.52%	8,399.00	2,672.00	200.63%	4.56%
CDSL	2,140.00	3.11%	117.28%	2,239.00	982.25	117.87%	4.63%
CROMPTON	391.30	25.92%	42.79%	410.00	261.25	49.78%	4.78%
RAYMOND	2,225.00	8.37%	39.41%	2,333.00	1,487.60	49.57%	4.85%
NATIONALUM	193.00	2.74%	139.79%	204.20	79.40	143.07%	5.80%

Data Source: NSE

What are the sectors that are showing the best swing in terms of proximity to their 52-week highs. These were largely stock specific bottom-up stories. NAM-India has been among the most reasonably priced AMC companies. Century saw good traction from its realty business, while IRB has gained sharply on the back of new road contracts. Stories like Exide are a mix of monetization of insurance and the EV battery opportunity; while CDSL is more of a play on financial inclusion.

What is the story of the laggards in the Nifty in terms of proximity to the 52-week highs. The story, once again, reads like a very familiar script. They are largely news driven or some recent headwinds, but are predominantly from the financial and IT space.

WHERE WAS THE MAXIMUM CONVICTION IN SMALL CAPS?

One way to check the conviction of outperformance, is to look at the stock that have outperformed on multiple parameters. Here we look at the common factors across momentum, fundamentals, resilience, and swing in small caps Here are quick takeaways.

• PSU stocks like HUDCO and Cochin Refineries appear to be showing the maximum conviction by figuring in the top in most of the ranking lists above.
• In the previous month, there was dichotomy in that some PSU stocks rated highly on some factors but not on other parameters. That has been overcome as PSUs appear to be ranking at the top in all the key measures.

The latest performance of the small cap index assumes importance as the Nifty has recently touched an all-time high of 23,000. Despite the hiccup in March, small caps have recovered sharply. The real alpha stories have been in the small cap index.