Small-Caps: Winners and losers on Dalal Street

28 Jan 2024 , 07:08 AM

SMALL CAPS LIVE UP TO “SMALL IS BEAUTIFUL” THEORY

You can almost be certain that if the mid-cap index has outperformed the large cap index by a margin, then the small cap index would have still done better. That is absolutely true, when it comes to the year 2023. The Nifty Small-Cap 100 generated returns of 60.86% in the last one year. That is phenomenal returns, even if you consider the fact that small-caps are higher on the risk scale than the large cap stocks and even the mid-cap stocks, due to relatively vulnerable business models. There have been concerns over valuations for some time, but these small caps have shown the ability to sustain such valuations. We shall look at a microcosm of the small-cap universe in India, through the window of 4 key attributes of outperformance; momentum, fundamentals, resilience, and swing. For each of these attributes, there will be a proxy. For instance, 1-month returns will be a proxy for momentum, 1-year returns will represent fundamentals, bounce from 52-week low will represent resilience, while the proximity to the 52-week high will represent swing.

Nifty Small-Cap 100 Index (The Momentum Story)

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 were 3.27%. Out of the 100 stocks in the Nifty Small Cap 100 index, 6 stocks were eliminated due to paucity of full data due to various reasons. Out of the remaining 94 stocks, 57 stocks gave positive returns and 37 gave negative returns in the last one month. The 1-month return column is shaded.

Stock  Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
HUDCO	163.30	56.96%	239.30%	178.30	40.40	304.21%	9.19%
NBCC	115.70	34.25%	176.61%	119.40	30.95	273.83%	3.20%
MRPL	173.75	32.17%	194.85%	186.00	49.25	252.79%	7.05%
HFCL	106.20	28.84%	48.70%	108.80	55.75	90.49%	2.45%
JBMA	1,853.25	28.60%	256.69%	2,006.80	482.95	283.74%	8.29%
IDBI	83.20	27.67%	57.24%	87.00	42.90	93.94%	4.57%
BLS	389.90	27.08%	121.96%	412.90	149.65	160.54%	5.90%
SJVN	117.15	26.14%	231.33%	118.90	30.40	285.36%	1.49%
AMBER	4,152.65	25.11%	86.87%	4,217.95	1,762.50	135.61%	1.57%
EASEMYTRIP	47.00	21.30%	-12.46%	56.20	37.00	27.03%	19.57%

Data Source: NSE

What are the sectors that are showing momentum over the last one month. The momentum clearly appears to be in favour of the PSU stocks. In fact, PSU stocks account for 4 out of the 10 best stocks in the Nifty Small-Cap 100 index, showing the amount of momentum that is there in PSU small-cap stocks. In the last one month, there was just 1 stock that gained more than 50%, while 24 stocks in the Nifty Small-Cap 100 index gained more than 10% during the last one month. HUDCO, MRPL and Himachal Futuristic have been among the big performers in the last one month in small caps.

What is the story of the laggards in the Nifty Small-Cap 100 index on one-month returns? The laggards were largely rally impacted stocks. Cyient and Angel One were among the stock were the stock have corrected in the last one month, but that is more on the back of a very sharp rally in these stock in recent weeks. That must be looked at in the proper perspective.

Nifty Small-Cap 100 index (The Fundamental story)

If the momentum story above captured the short term moves, the fundamental picture is better captured by 1-year returns. For the Nifty Small-Cap 100 index as a whole, annual returns were strong at 60.86%. Out of the 94 stocks in the Nifty Small-Cap 100 index with full data available, 78 stocks gave positive returns and only 16 stocks gave negative returns in the last one year period. The 1-year return column is shaded.

Stock  Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
BSE	2,120.00	-8.96%	293.21%	2,595.00	406.20	421.91%	22.41%
JBMA	1,853.25	28.60%	256.69%	2,006.80	482.95	283.74%	8.29%
APARINDS	5,489.50	-0.51%	247.88%	6,133.00	1,358.55	304.07%	11.72%
HUDCO	163.30	56.96%	239.30%	178.30	40.40	304.21%	9.19%
SJVN	117.15	26.14%	231.33%	118.90	30.40	285.36%	1.49%
KALYANKJIL	355.10	8.33%	204.04%	395.00	100.95	251.76%	11.24%
MRPL	173.75	32.17%	194.85%	186.00	49.25	252.79%	7.05%
NLCINDIA	237.65	2.55%	190.27%	266.70	69.70	240.96%	12.22%
NBCC	115.70	34.25%	176.61%	119.40	30.95	273.83%	3.20%
BSOFT	816.00	11.00%	168.72%	841.55	250.25	226.07%	3.13%

Data Source: NSE

What are the sectors that are showing momentum over the last one month? In terms of the story in the small-caps, it is still the PSUs that dominate even the 1-year return story. In fact, if you look at the top-10 stocks on 1-year returns in the small-cap index, 4 out of the 10 are PSU stocks once again. These include HUDCO, SJVN, NLC India and NBCC. Based on annual returns, there were 22 out of the Nifty-Small-Cap 100  stocks that generated more than 100% returns, while 48 out of the 94 small cap index companies generated more than 50%. A total of 68 out of the 94 companies yielded more than 20% returns, so even if you had selected a small-cap index stock at random, there was a 72% probability that you would still be in the best performing asset class.

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. Even in the case of Campus Activewear and VIP Industries, it was more a case of valuations moderating at higher levels of the market.

Nifty Small-Cap 100 Index (The Resilience Story)

We look at resilience in terms of the extent of bounce from the lows of the year. That may not be an entirely accurate proxy, but it comes close enough. For the Nifty Small-Cap 100 index as a whole, the bounce from the low of the year was a full 77.31%. Out of the 94 stocks in the Nifty Small-Cap 100 index, an amazing 38 stocks bounced more than 100% from the lows (doubled from lows), while 66 stocks bounced more than 50% from the lows and a total of 84 stocks showed a bounce of at least 20% from the lows of the year. The resilience in terms of bounce from the 52-week lows is indicated by the shaded column.

Stock  Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
BSE	2,120.00	-8.96%	293.21%	2,595.00	406.20	421.91%	22.41%
COCHINSHIP	868.55	-34.59%	71.53%	898.50	205.20	323.27%	3.45%
HUDCO	163.30	56.96%	239.30%	178.30	40.40	304.21%	9.19%
APARINDS	5,489.50	-0.51%	247.88%	6,133.00	1,358.55	304.07%	11.72%
SJVN	117.15	26.14%	231.33%	118.90	30.40	285.36%	1.49%
JBMA	1,853.25	28.60%	256.69%	2,006.80	482.95	283.74%	8.29%
NBCC	115.70	34.25%	176.61%	119.40	30.95	273.83%	3.20%
MRPL	173.75	32.17%	194.85%	186.00	49.25	252.79%	7.05%
KALYANKJIL	355.10	8.33%	204.04%	395.00	100.95	251.76%	11.24%
NLCINDIA	237.65	2.55%	190.27%	266.70	69.70	240.96%	12.22%

Data Source: NSE

Once again, no prizes for guessing. 5 out of the top 10 stocks in terms of resilience from the lows were the PSU stocks and they were largely common with the PSU stocks that also featured in the fundamental ranking list. Cochin Shipyards is an addition here. This is an indication that the bounce in these stock was not just a freak bounce, but a bounce to actually outperform its larger counterparts. The non-PSU stocks in the top-10 list included BSE, HUDCO, Apar Industries and Kalyan Jewellers. In fact, BSE has been a star performer on the financial inclusion story. Others are more of a bottom-up story.

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 10 stocks out of 94 stocks that bounced less than 20% from the lows, hinting that there were closer to their lows during the year. Some of the sugar stocks find themselves at the bottom while some of the valuation depletion stories like VIP Industries and Indiamart are also in this list. One of the surprising stocks in this list is Happiest Minds, which has generally been an outperformer in earlier years.

Nifty Small-Cap 100 (The Swing story)

Let us finally turn to the top ranked swing stocks for the year, wherein we use the proximity to the 52-week high as the proxy. 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 1.90% short of the 52-week high, which is the level it had just touched towards the end of December 2023. Out of the 94 stocks in the Nifty Small-Cap 100 index, 21 stocks are less than 5% away from their 52-week highs, while a total of 43 stocks are less than 10% away from their 52-week high levels. The column for proximity to the 52-week high (a proxy for the swing factor) has been shaded.

Stock  Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
RITES	682.50	18.56%	67.18%	689.00	311.30	119.24%	0.95%
MGL	1,373.05	12.65%	54.13%	1,387.00	830.50	65.33%	1.02%
SJVN	117.15	26.14%	231.33%	118.90	30.40	285.36%	1.49%
JYOTHYLAB	545.50	11.83%	164.34%	554.00	180.15	202.80%	1.56%
AMBER	4,152.65	25.11%	86.87%	4,217.95	1,762.50	135.61%	1.57%
HFCL	106.20	28.84%	48.70%	108.80	55.75	90.49%	2.45%
NATIONALUM	140.40	17.81%	61.43%	144.00	75.65	85.59%	2.56%
HINDCOPPER	282.00	20.76%	112.71%	289.30	93.85	200.48%	2.59%
IRB	50.10	18.01%	-83.38%	51.45	22.50	122.67%	2.69%
GLENMARK	889.25	6.06%	115.49%	916.35	369.05	140.96%	3.05%

Data Source: NSE

What are the sectors that are showing the best swing in terms of proximity to their 52-week highs. Once again there are 5 PSU companies in this list, which is not too surprising considering the sharp spike in these stocks. In the private sector, HFCL is a stock that finds itself in this list after the recent big orders that came its way. Glenmark has got close to its high after it managed to complete the sale of its generics API business to Nirma group  of Gujarat. Among the defence stocks, Cochin Shipyards is close to the top, post-split also.

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. At the bottom of the heap, you have stocks like stocks like Campus Activewear, Indiamart and some recent IPO plays like Medplus and Data Patterns. In most cases, it looks like systematic unwinding of the stock. Angel One is another stock that is still way off from the highs of the year.

High conviction plays in the Nifty Small-Cap 100 index

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.

• In terms of the thematic plays, it is the PSU stocks that have dominated all the segments of this analysis. HUDCO, SJVN, RITES are some of the examples.
• Among the non-PSU stocks, the one stock with the highest conviction and appearing in multiple lists include BSE and then stocks like Kalyan Jewellers which have seen momentum on multiple quarters.
• Finally, there are stocks like Campus Activewear, Indiamart, Aavas Financiers and Angel One that have lagged and struggled on more than one parameters.

To sum it up, why did we take a multi-dimensional view. It is hard to come to any conclusive story based on just momentum, fundamentals, resilience, or swing. However, if we combine multiple such parameters, there is the scope for a more organized view. Does such a view help in identifying future winners? Hard to say, because this is like driving by looking at the rear-view mirror. However, if there is one attribute among winners, it is consistency and that is what this multi-variate approach shows.