SMIDs on declining path

Mumbai: Small and mid-cap stocks (SMIDs) were drivers of the post-Covid recovery in the markets. Some froth may recede in the coming quarters, but the medium-term outlook remains robust. However, latest trading patterns indicate that investments are gradually shifting to large-caps from small and mid-cap stocks amid surging unrest in the Middle East region and rising US bond yields. Earnings growth has been democratised in India with broader participation across companies, which is reflecting in SMIDs enjoying their time in the sun. Fragmented industrial sectors, with no clear leaders, reinforce the momentum, Emkay Global Financial Services said in a note.

“We see broader markets moving sideways with a negative bias for the rest of FY24. The longer term top-down narrative remains attractive, with small and mid caps leading the markets for the next 2-3 years”, the report said.

The report pointed to three key themes on stocks:

Manufacturing: A multi-year growth trend that is yet to fully play out. This includes capital goods, auto ancillaries, chemicals, metals, and pharmaceuticals. The focus of this theme will be SMIDs, as there are few large caps available.

Premiumization: B2C companies will generally remain laggards, but we see a pocket of opportunity in premiumization. As India’s per-capita income breaks new levels, premium segment growth should get an impetus and companies catering to this segment should outperform.

The technology wave, which has allowed mass-market companies (mainly consumer and BFSI) a non-linear footprint expansion. Internet companies and digital transformers benefit and are the third bucket of outperformers, the report said.

The drivers of growth in Indian stocks are cutting across Financials (ROE normalisation), capital goods and urban consumption, Tata Mutual Fund said in a report.

The recovery in the investment cycle led by healthy cash flows in the corporate sector and the government’s counter-cyclical fiscal policy makes us incrementally positive on the industrial/capital goods sector leading us to progressively increase the exposure to this segment, it said.

Recovery in power demand, capex in generation (renewable + thermal) and transmission implies an overweight stance on the associated sectors/stocks.

In Financials, after a period of margin expansion and lowering credit costs, growth will normalise.