Small caps on returns, resilience, and swing in August 2024

9 Sep 2024 , 09:36 AM

HOW GOOD WERE SMALL CAPS IN THE ALPHA JOURNEY?

The Small Cap index 100 index is a reasonable proxy for the small cap space in India. Today, small caps, mid-caps and large caps are defined by SEBI and administered by AMFI; and updated every 6 months. The large caps are the top 100 stocks ranked on market cap, while the next 150 are mid-caps. Any stock ranked 251 and beyond on market cap, are classified as small caps, although any company below market cap of ₹10,000 Crore tends to be included under micro caps. Small caps are a high-risk and high return space. However, they are still preferred by retail investors for their potential to transform into large caps over time. There are two distinct risks in small caps. Firstly, they have longer drawdowns in falling markets and secondly, small cap business models are more vulnerable. Despite these challenges, these small caps are favoured by millions of Indian investors.

Here are some interesting return and resilience parameters pertaining to the small cap index as a whole, before getting into the story of specific stocks.

• Small caps were relatively subdued in August 2024, generating just 0.89% returns in the month; sharply lower than June and July 2024. The stress continues to be high due to regulatory concerns and relatively stiff valuations.
• Over the last one year, the small caps have flattered the street with returns of 57.69%, although it is slightly lower on a rolling basis. These stocks have also shown good resilience with a bounce of 60.24% from the lows of the year.
• Out of the 100 stocks in the Nifty Small Cap 100 index, 4 stocks had to be removed due to insufficient data. Of the balance 96 stocks, 48 stocks gave positive returns in the last 1 month, while the balance 48 stocks gave negative returns.
• What about the intensity of movement. The gaining stocks gave monthly average returns of 7.62%, while the losing stocks delivered -6.45%, showing high dispersion.

Clearly, the short term momentum in the month of July 2024 was not so much in favour of the small cap stocks as it has been in favour of the large cap stocks. The small caps are still facing unwinding pressure at higher levels; and that is a trend in the last 3 months.

BEST SMALL CAP STOCKS ON SHORT TERM MOMENTUM

Let us start with the momentum story of Nifty Small-Cap 100 Index using 1-month returns as the proxy. For the Nifty Small-Cap 100 index as a whole, monthly returns stood at a modest 0.89%; sharply lower than the previous two months. Out of the 96 stocks evaluated, 48 stocks gave positive returns while 48 small cap stocks gave negative returns in August 2024, hinting at mixed momentum, which is evident in the wide dispersion of returns. The table below ranks the 15 best small  caps on monthly returns for August 2024.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
GSPL	442.35	30.46%	60.28%	447.00	254.50	73.81%	1.04%
HSCL	525.15	21.91%	133.13%	539.80	215.00	144.26%	2.71%
PNBHOUSING	978.35	21.35%	50.27%	995.00	604.00	61.98%	1.67%
TRITURBINE	721.10	21.12%	83.97%	843.95	312.00	131.12%	14.56%
MCX	5,179.60	20.82%	206.99%	5,234.60	1,611.00	221.51%	1.05%
ANGELONE	2,586.00	19.40%	38.32%	3,896.00	1,705.00	51.67%	33.62%
GLENMARK	1,732.90	17.91%	125.83%	1,750.00	722.10	139.98%	0.98%
BLS	420.15	17.30%	46.66%	449.30	229.80	82.83%	6.49%
TATAINVEST	7,261.05	14.76%	198.81%	9,756.85	2,407.55	201.59%	25.58%
NATCOPHARM	1,545.00	12.94%	68.29%	1,584.95	724.20	113.34%	2.52%
RKFORGE	966.00	12.83%	35.70%	998.45	583.50	65.55%	3.25%
RADICO	1,953.60	12.68%	53.92%	1,975.75	1,141.25	71.18%	1.12%
CYIENT	1,973.00	12.55%	20.76%	2,458.95	1,542.10	27.94%	19.76%
CESC	193.61	12.47%	133.22%	210.00	82.15	135.68%	7.80%
HFCL	148.99	11.21%	96.35%	152.00	61.50	142.26%	1.98%

Data Source: NSE

What are the sectors that showed favourable momentum in last one month. The monthly momentum was mixed with stocks like Gujarat State Petronet, Himadri Chemicals, PNB Housing, Triveni Turbine, MCX and Angel One among the gainers. In terms of the distribution of monthly returns; out of the 96 stocks considered, 16 stocks delivered double-digit returns in last one month, while 23 stocks delivered more than 5% in the last one month. There was no sectoral trend visible in the small cap stocks, with the stories being largely bottom-up.

What about laggards? Once again, these are a mix of stocks had rallied sharply in the last few months making them vulnerable to selling at higher levels. Some of the key laggards in August 2024 were stocks like Cochin Shipyards, Aarti Industries, Navin Fluorine, Titagarh Wagons, Data Patterns, NCC, Swan Energy, HUDCO etc. If you look at the Nifty Small-Cap 100 index in the last one month 8 stocks scored fell by more than 10% in the last one month while 26 stocks fell more than 5%. Clearly, there is unwinding pressure on small caps at higher levels; and this trend is the most pronounced in stocks that had seen a huge run up in the last few months. Ironically, many of the monthly laggards appeared in the 1-year return leaders, which we will see in the subsequent paragraph.

HOW DID SMALL CAPS PERFORM ON ONE-YEAR RETURNS

If the momentum of 1-month returns captured the short term story of the small caps, the fundamental picture is best captured by 1-year returns. Many times, the momentum can be negative, but the long term story may still be intact. For the Nifty Small-Cap 100 index as a whole, annual returns were strong at 57.69%. Out of the 96 stocks in the Nifty Small-Cap 100 index with full data available, 80 stocks gave positive returns and only 16 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	278.40	-10.12%	274.70%	353.70	67.65	311.53%	21.29%
NBCC	186.60	2.85%	262.24%	209.75	51.00	265.88%	11.04%
MCX	5,179.60	20.82%	206.99%	5,234.60	1,611.00	221.51%	1.05%
TATAINVEST	7,261.05	14.76%	198.81%	9,756.85	2,407.55	201.59%	25.58%
ITI	303.70	-1.42%	154.28%	384.30	117.35	158.80%	20.97%
CESC	193.61	12.47%	133.22%	210.00	82.15	135.68%	7.80%
HSCL	525.15	21.91%	133.13%	539.80	215.00	144.26%	2.71%
CENTURYTEX	2,376.90	2.30%	132.30%	2,525.00	995.60	138.74%	5.87%
BLUESTARCO	1,697.90	-1.15%	130.12%	1,897.80	728.05	133.21%	10.53%
IRCON	260.30	-9.58%	129.04%	351.60	112.10	132.20%	25.97%
GLENMARK	1,732.90	17.91%	125.83%	1,750.00	722.10	139.98%	0.98%
IRB	63.45	-4.56%	123.85%	78.15	27.95	127.01%	18.81%
SWANENERGY	673.30	-10.60%	122.46%	782.25	273.05	146.58%	13.93%
MRPL	207.20	-5.95%	117.71%	289.25	85.40	142.62%	28.37%
NAM-INDIA	673.00	4.35%	115.79%	739.45	309.50	117.45%	8.99%

Data Source: NSE

What were the fundamental winning stories of FY24? The 1-year story seems to be missing the PSU stocks, with just 5 PSU stocks appearing in the top-15 in one year returns. Tata Investment, CESC, Century Textiles and Glenmark were among the other well-known private sector names to feature in this list. Based on annual returns, there were 18 out of the 96 Nifty-Small-Cap stocks that generated more than 100% returns, while 49 out of the 96 small cap index companies generated more than 50% returns. A total of 71 out of the 96 companies yielded more than 20% returns. Even if you had selected a small-cap index stock at random, there was a 74% probability that it would still be the best performing asset class in India during the one-year period.

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. Sonata Software, JB Chemicals, Navin Fluorine, PVR Inox, Credit Access, and Happiest Minds are some of the laggards on one-year returns.

DID SMALL CAPS SHOW RESILIENCE IN LAST ONE YEAR?

Here, we look at resilience in terms of the bounce from the 52-week lows. It gives a good proxy for resilience. For the Nifty Small-Cap 100 index as a whole, the bounce from the low of the year was a full 60.24%, despite the volatility in this period. Out of the 96 stocks evaluated in the Nifty Small-Cap 100 index, an amazing 31 stocks bounced more than 100% from the lows (doubling from lows), while 66 stocks bounced more than 50% from the lows and a total of 85 stocks bounced at least 20% from the lows of the last one year. That is a lot of resilience shown by small cap stocks in the year.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
COCHINSHIP	1,871.00	-27.99%	108.31%	2,979.45	421.50	343.89%	37.20%
HUDCO	278.40	-10.12%	274.70%	353.70	67.65	311.53%	21.29%
NBCC	186.60	2.85%	262.24%	209.75	51.00	265.88%	11.04%
MCX	5,179.60	20.82%	206.99%	5,234.60	1,611.00	221.51%	1.05%
TATAINVEST	7,261.05	14.76%	198.81%	9,756.85	2,407.55	201.59%	25.58%
CDSL	1,435.00	-42.64%	26.04%	1,664.40	553.68	159.17%	13.78%
ITI	303.70	-1.42%	154.28%	384.30	117.35	158.80%	20.97%
SWANENERGY	673.30	-10.60%	122.46%	782.25	273.05	146.58%	13.93%
HSCL	525.15	21.91%	133.13%	539.80	215.00	144.26%	2.71%
HINDCOPPER	330.35	3.40%	109.88%	415.80	135.65	143.53%	20.55%
MRPL	207.20	-5.95%	117.71%	289.25	85.40	142.62%	28.37%
HFCL	148.99	11.21%	96.35%	152.00	61.50	142.26%	1.98%
GLENMARK	1,732.90	17.91%	125.83%	1,750.00	722.10	139.98%	0.98%
CENTURYTEX	2,376.90	2.30%	132.30%	2,525.00	995.60	138.74%	5.87%
CESC	193.61	12.47%	133.22%	210.00	82.15	135.68%	7.80%

Data Source: NSE

Were there any sectoral themes in these top-15 stocks on resilience? A total of 6 out of the top 15 stocks in terms of resilience from the lows were PSU stocks and they included Cochin Shipyards, HUDCO, NBCC, ITI, Hindustan Copper, and MRPL. This has been the consistent story where many of the small and mid-sized PSU stocks displayed the best traction in the last one year on value discovery. The non-PSU stocks in the top-10 list included prominent names like MCX, Tata Investments, CDSL, Swan Energy, Himadri Chemicals, HFCL, Glenmark, Century Textiles, and CESC. However, there were really no sectoral trends and most of these were the typical bottom-up stories only.

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. Out of the 96 stocks evaluated, 5 stocks bounced less than 10% from the lows and they included Credit Access, IDFC Ltd, Equitas Bank, Ujjivan SFB, and Happiest Minds. Four of these laggards were financials, with 3 of them being micro focused institutions. There were just 11 out of 96 companies that bounced less than 20% from the lows of the year. Small finance banks or shadow banks have borne the brunt of the tighter regulatory norms  and they are the ones struggling to bounce from the lows of the year.

SWING FACTOR SHOWED CONCERTED PROFIT BOOKING IN SMALL CAPS

Let us finally turn to the top ranked small cap swing stocks for the year, wherein we use the closeness to the 52-week high. The closer the stock is to the 52-week high, the higher is the swing factor in their favour. The Nifty Small-Cap 100 index itself is about 0.68% from its 52-week high, which shows a positive swing at a broad level. However, the huge dispersion is the issue. For example, the top 10 stocks have an average swing factor of 1.47%, while the bottom 10 have a swing factor of 31.67%. Out of the 96 stocks evaluated in the Nifty Small-Cap 100 index, 17 stocks are less than 5% away from their 52-week highs, while a total of 35 stocks are less than 10% away from their 52-week high levels. A total of 33 out of 96 stocks are over 20% off the yearly highs; once again highlighting the sharp dispersion in swing.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
CROMPTON	477.00	5.68%	58.99%	481.00	261.25	82.58%	0.83%
GLENMARK	1,732.90	17.91%	125.83%	1,750.00	722.10	139.98%	0.98%
GSPL	442.35	30.46%	60.28%	447.00	254.50	73.81%	1.04%
MCX	5,179.60	20.82%	206.99%	5,234.60	1,611.00	221.51%	1.05%
RADICO	1,953.60	12.68%	53.92%	1,975.75	1,141.25	71.18%	1.12%
KEC	955.95	2.38%	41.09%	969.00	550.05	73.79%	1.35%
PNBHOUSING	978.35	21.35%	50.27%	995.00	604.00	61.98%	1.67%
HFCL	148.99	11.21%	96.35%	152.00	61.50	142.26%	1.98%
PPLPHARMA	189.12	7.34%	84.37%	193.50	87.50	116.14%	2.26%
IEX	203.70	6.00%	61.35%	208.76	121.35	67.86%	2.42%
NATCOPHARM	1,545.00	12.94%	68.29%	1,584.95	724.20	113.34%	2.52%
HSCL	525.15	21.91%	133.13%	539.80	215.00	144.26%	2.71%
RKFORGE	966.00	12.83%	35.70%	998.45	583.50	65.55%	3.25%
CUB	171.00	-0.92%	38.32%	176.82	120.05	42.44%	3.29%
JBCHEPHARM	1,959.00	1.52%	-29.43%	2,030.00	1,244.45	57.42%	3.50%

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. We have prominent names like Crompton, Glenmark, GSPL, MCX, Radico, KEC International and PNB Housing; among others in this list. We do see a concentration of healthcare related plays with names like Glenmark, Piramal Pharma, Natco Pharma and JB Chemicals & Pharmaceuticals appearing in the list.

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. Like last month, we ignore Raymonds as the correction is due to the scheme of arrangement to demerge the entity into 3 separate listed companies. Among other laggards in the list are some familiar names like Cochin Shipyards, Angel One, Credit Access, Alok Industries, Ujjivan SFB, Equitas Bank, Navin Fluorine etc. Once again, the microfinance institutions are facing regulatory pressures.

To sum up, the story of small caps has been a story of resilience in a market that has been tough in terms of regulatory and compliance challenges. However, the smaller indices continues to outperform the Nifty nearly two times over on a one-year basis. The only issue is that there is too much dispersion in the proximity to the top, indicating that investors don’t want to miss out on profit booking opportunities. That could be an overhang!