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

7 Oct 2024 , 04:17 AM

HOW GOOD WERE SMALL CAPS IN THE ALPHA JOURNEY?

The Small Cap 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 the list is updated every 6 months. Here is how the companies are classified by market cap. The large caps are the top 100 stocks ranked on market cap, while the next 150 are mid-caps. Any stock ranked 251 and below, are classified as small caps. However, that also includes micro-caps, so larger sized funds use a lower cut-off of ₹10,000 Crore while smaller funds can even go up to ₹2,000 Crore. Small caps, by definition, are high-risk and high on rewards. But, they are still preferred by retail investors for their potential to transform into mid-caps and large caps over time and, in the process, generate multi-bagger returns. There are two distinct risks in small caps to be conscious of. Firstly, they have longer drawdowns in falling markets and secondly, small cap business models are more vulnerable. However, these small caps have been retail and institutional favourites for their alpha capabilities.

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 September 2024, generating just -0.66% returns in the month. This comes on top of measly 0.89% returns in August, indicating that the small caps have virtually not gone anywhere since the end of July 2024.
• Over the last one year, the small caps have flattered the street with returns of 50.24%, although it has been gradually tapering in the last 3 months. These stocks have also shown good resilience with a bounce of 59.18% from the lows of the year.
• Out of the 100 stocks in the Nifty Small Cap 100 index, 7 stocks had to be removed due to insufficient data. Of the balance 93 stocks, only 38 stocks gave positive returns in the last 1 month, while the balance 55 stocks generated negative returns.
• What about the intensity of movement. The gaining stocks gave monthly average returns of 6.76%, while the losing stocks contracted by -6.95%, hinting at a fairly vast dispersion in the performance of small cap stocks.

Clearly, the short term momentum seems to be against the small cap stocks in the month of August and September 2024. The sharp recovery in FPI flows have largely gravitated towards the large caps and that has put the small backs behind the overall rat race.

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 -0.66%; dipping into negative after a long time. Out of the 93 stocks evaluated, 38 stocks gave positive returns while 55 small cap stocks gave negative returns in September 2024, hinting at momentum that is gradually becoming biased in favour of the losers. The table below ranks the 15 best small  caps on monthly returns for September 2024.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
PPLPHARMA	229.00	21.18%	12.43%	243.99	87.50	161.71%	6.14%
BLUESTARCO	2,068.00	21.12%	13.57%	2,199.55	814.00	154.05%	5.98%
CENTURYTEX	2,860.00	19.29%	15.50%	2,936.45	1,046.45	173.30%	2.60%
BRIGADE	1,424.00	17.64%	14.94%	1,453.10	565.00	152.04%	2.00%
NATIONALUM	211.55	15.16%	11.62%	214.69	88.60	138.77%	1.46%
KAYNES	5,428.00	14.14%	13.57%	5,810.00	2,158.00	151.53%	6.57%
SHYAMMETL	908.50	13.86%	10.56%	956.90	420.20	116.21%	5.06%
PVRINOX	1,668.00	9.84%	-0.31%	1,830.40	1,204.20	38.52%	8.87%
KEC	1,037.25	9.63%	5.67%	1,068.00	550.05	88.57%	2.88%
MCX	5,670.00	9.21%	17.60%	6,035.45	1,913.15	196.37%	6.06%
MGL	1,943.00	8.28%	8.85%	1,988.00	978.75	98.52%	2.26%
AMBER	4,800.00	7.65%	6.15%	5,361.15	2,721.05	76.40%	10.47%
ACE	1,397.75	7.58%	10.16%	1,695.00	657.30	112.65%	17.54%
INOXWIND	238.40	7.40%	2.30%	261.90	47.25	404.55%	8.97%
SIGNATURE	1,598.80	6.24%	23.42%	1,647.00	446.80	257.83%	2.93%

Data Source: NSE

What are the sectors that showed favourable momentum in last one month. The monthly momentum was mixed with stocks like Piramal Pharma, Blue Star, Century Textiles, Brigade Enterprises, NALCO and Kaynes among the major gainers.  In terms of the distribution of monthly returns; out of the 93 stocks considered, 7 stocks delivered double-digit returns in last one month, while 19 stocks delivered more than 5% in the last one month. There was no sectoral trend visible in the small cap stocks, with 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. In fact, that has been the theme in the recent small cap sell-off. Some of the key laggards in September 2024 were stocks like Data Patterns, ITI, Swan Energy, Titagarh Wagons, TTML, BLS, Crompton Greaves, IRCON, Zensar, IFCI, Raymond etc. If you look at the Nifty Small-Cap 100 index in the last one month 14 stocks fell by more than 10% in the last one month while 24 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 are still leaders in terms of one year returns, due to the more secular view taken there.

HOW DID SMALL CAPS PERFORM ON ONE-YEAR RETURNS

If the momentum of 1-month returns captured the short term story of small caps, the fundamental or secular picture is best captured by 1-year returns. Many times, the momentum can be negative, but the long term story would still be intact. For the Nifty Small-Cap 100 index as a whole, annual returns were strong at 50.42%. Out of the 93 stocks in the Nifty Small-Cap 100 index with full data available, 77 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
SIGNATURE	1,598.80	6.24%	23.42%	1,647.00	446.80	257.83%	2.93%
NBCC	179.23	-3.79%	20.63%	209.75	56.85	215.27%	14.55%
MCX	5,670.00	9.21%	17.60%	6,035.45	1,913.15	196.37%	6.06%
IFCI	65.90	-11.78%	17.07%	91.40	20.40	223.04%	27.90%
CENTURYTEX	2,860.00	19.29%	15.50%	2,936.45	1,046.45	173.30%	2.60%
BRIGADE	1,424.00	17.64%	14.94%	1,453.10	565.00	152.04%	2.00%
KAYNES	5,428.00	14.14%	13.57%	5,810.00	2,158.00	151.53%	6.57%
BLUESTARCO	2,068.00	21.12%	13.57%	2,199.55	814.00	154.05%	5.98%
HBLPOWER	603.40	-3.34%	12.62%	724.00	249.10	142.23%	16.66%
PPLPHARMA	229.00	21.18%	12.43%	243.99	87.50	161.71%	6.14%
CESC	200.48	3.80%	12.38%	212.49	82.30	143.60%	5.65%
KPIL	1,365.35	1.46%	11.64%	1,449.00	601.25	127.09%	5.77%
NATIONALUM	211.55	15.16%	11.62%	214.69	88.60	138.77%	1.46%
HINDCOPPER	342.55	3.41%	11.16%	415.80	135.65	152.52%	17.62%
360ONE	1,038.00	-3.11%	10.69%	1,215.00	487.55	112.90%	14.57%

Data Source: NSE

What were the fundamental winning stories of FY24? The 1-year story seems to be missing the PSU stocks, with just 3 PSU stocks appearing in the top-15 in one year returns. Other well-known 1-year performers in the small cap were Signature Global, MCX, IFCI, Century Textiles, Kaynes, Piramal Pharma etc. Based on annual returns, there were a total of 2 out of the 93 companies yielding more than 20% returns and 19 companies yielding more than 10% returns on a yoy basis. There has clearly been some pressure building up on the small cap stocks and while momentum has been a problem, even the long term picture of secular returns appears to have been substantially damaged in the process.

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. Zee Entertainment, Sonata Software, RITES, RBL Bank, TTML, Tanla, IDFC Ltd, Bata India, Credit Access Grameen and Navin Fluorine are some of the laggards on one-year returns.

DID SMALL CAPS DISPLAY RESILIENCE IN LAST ONE YEAR?

Here, we look at resilience in terms of the bounce from the 52-week lows. It gives a fair proxy for resilience. For the Nifty Small-Cap 100 index as a whole, the bounce from the low of the year was a full 59.18%, despite the volatility in this period. Out of the 93 stocks evaluated in the Nifty Small-Cap 100 index, an amazing 28 stocks bounced more than 100% from the lows (doubling from lows), while 58 stocks bounced more than 50% from the lows and a total of 82 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
INOXWIND	238.40	7.40%	2.30%	261.90	47.25	404.55%	8.97%
SIGNATURE	1,598.80	6.24%	23.42%	1,647.00	446.80	257.83%	2.93%
IFCI	65.90	-11.78%	17.07%	91.40	20.40	223.04%	27.90%
NBCC	179.23	-3.79%	20.63%	209.75	56.85	215.27%	14.55%
MCX	5,670.00	9.21%	17.60%	6,035.45	1,913.15	196.37%	6.06%
CENTURYTEX	2,860.00	19.29%	15.50%	2,936.45	1,046.45	173.30%	2.60%
GRSE	1,726.90	-4.90%	10.47%	2,833.80	648.30	166.37%	39.06%
PPLPHARMA	229.00	21.18%	12.43%	243.99	87.50	161.71%	6.14%
BLUESTARCO	2,068.00	21.12%	13.57%	2,199.55	814.00	154.05%	5.98%
HINDCOPPER	342.55	3.41%	11.16%	415.80	135.65	152.52%	17.62%
BRIGADE	1,424.00	17.64%	14.94%	1,453.10	565.00	152.04%	2.00%
KAYNES	5,428.00	14.14%	13.57%	5,810.00	2,158.00	151.53%	6.57%
CESC	200.48	3.80%	12.38%	212.49	82.30	143.60%	5.65%
HBLPOWER	603.40	-3.34%	12.62%	724.00	249.10	142.23%	16.66%
HFCL	148.21	-0.82%	9.22%	171.00	61.50	140.99%	13.33%

Data Source: NSE

Were there any sectoral themes in these top-15 stocks on resilience? A total of 3 out of the top 15 stocks in terms of resilience from the lows were PSU stocks and they included NBCC, Garden Reach Shipbuilders, and Hindustan Copper. 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-15 list included interesting names like Inox Wind (play on green energy), GRSE (play on defence), Hindustan Copper (play on copper mining for EVs), Kaynes (play on chip manufacturing), HFCL (new age telecom solutions), and a lot more. Clearly, the traditional favourites in the list are making way for the more niche players in the space with strong futuristic business model and content.

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 93 stocks evaluated, 5 stocks bounced less than 10% from the lows and they included RBL Bank, Credit Access Grameen, IDFC Ltd, Happiest Minds, and Zee Entertainment. Three of these laggards were financials. There were just 11 out of 93 companies that bounced less than 20% from the lows of the year. Clearly, the short term momentum is a much bigger challenge for small caps than longer term returns or even resilience from lower levels.

SWING SHOWS PERSISTENT PROFIT BOOKING IN SMALL CAPS

Let us finally turn to the top ranked small cap 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 in their favour and vice versa. The Nifty Small-Cap 100 index itself is about 2.35% from its 52-week high, showing some deterioration in last 2 months. However, the huge dispersion is the issue. For example, the top 10 stocks have an average swing factor of 3.04%, while the bottom 10 have a swing factor of 38.37%. Out of the 93 stocks evaluated in the Nifty Small-Cap 100 index, 10 stocks are less than 5% away from their 52-week highs, while a total of 29 stocks are less than 10% away from their 52-week high levels. A total of 34 out of 93 stocks are more than 20% off the yearly highs; once again highlighting the sharp dispersion in swing and the immense pressure on laggards individually.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
NATIONALUM	211.55	15.16%	11.62%	214.69	88.60	138.77%	1.46%
BRIGADE	1,424.00	17.64%	14.94%	1,453.10	565.00	152.04%	2.00%
MGL	1,943.00	8.28%	8.85%	1,988.00	978.75	98.52%	2.26%
CENTURYTEX	2,860.00	19.29%	15.50%	2,936.45	1,046.45	173.30%	2.60%
KEC	1,037.25	9.63%	5.67%	1,068.00	550.05	88.57%	2.88%
SIGNATURE	1,598.80	6.24%	23.42%	1,647.00	446.80	257.83%	2.93%
RKFORGE	1,008.00	4.24%	5.67%	1,038.70	583.50	72.75%	2.96%
PEL	1,099.85	5.77%	0.52%	1,143.80	736.60	49.31%	3.84%
LALPATHLAB	3,297.85	-3.36%	3.08%	3,459.40	1,943.70	69.67%	4.67%
GLENMARK	1,683.95	-3.36%	9.55%	1,769.60	722.10	133.20%	4.84%
SHYAMMETL	908.50	13.86%	10.56%	956.90	420.20	116.21%	5.06%
CESC	200.48	3.80%	12.38%	212.49	82.30	143.60%	5.65%
KPIL	1,365.35	1.46%	11.64%	1,449.00	601.25	127.09%	5.77%
ATUL	7,650.00	-3.48%	0.91%	8,135.40	5,174.85	47.83%	5.97%
BLUESTARCO	2,068.00	21.12%	13.57%	2,199.55	814.00	154.05%	5.98%

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 NALCO, Brigade Enterprises, Mahanagar Gas, Century Textiles, KEC International, Signature, RK Forge and PEL in that list. There is no sectoral trend, but the list has a lot of interesting companies in sectors engaged in futuristic technologies. That is an interesting trend.

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 the previous months, 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 Zee, Garden Reach, Data Patterns, Titagarh Wagons, IRCON, Angel One, Credit Access Grameen, ITI etc. Once again, the rallying stocks of the last one year are here.

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. The short term momentum and the swing factor may be working against these small cap names, but the longer secular trend is still intact. That is the good news!