Pressure on smallcaps and midcaps will be relentless: Saurabh Mukherjea

June 14, 2018

NEW DELHI: Overvaluation and earnings disappointment have been the main reasons behind retail investors and high net worth individuals (HNIs) bailing out of midcap and smallcap stocks.

The second-rung stocks, which had a spectacular rally last year, have fallen like a pack of cards in 2018, and Saurabh Mukherjea, CEO of Ambit Capital believes the pain is far from getting over.

According to Mukherjea, smallcap and midcap companies do not have much pricing power. When raw material prices and cost of money start pushing up, these companies cede operating margin.

“We saw that in Q3 and Q4. I am pretty confident that through Q1 and Q2, we will see small and midcap companies suffer operating margin pressure,” he said in an exclusive interaction with ETNow.

Since the start of the year, the BSE Smallcap index has slipped 13.14 per cent. The pack shut shop at 17,040.06 on Thursday against 19,279.96 on January 1.

Small-cap (5)

On similar lines, the BSE Midcap index has slipped 9.92 per cent in 2018 to 16,065.38 as of Thursday’s close from 17,835.83 on January 1.

Midcap (1)

In a stark contrast, midcap and smallcap indices have gained 47 per cent and 58 per cent, respectively, in 2017.

Mukherjea believes pressure on smallcaps and midcaps will be relentless, as there is clear overvaluation in that space.

Take Vakrangee case. The Mumbai-based technology company from the midcap space has fallen a jaw-dropping 89.67 per cent in 2018 alone. The stock price was Rs 420.05 at the beginning of the year, which had tumbled to Rs 43.35 as of Thursday’s close.

However, some analysts see this correction as a positive for the battered packs. S Naren, CIO at ICICI Prudential AMC, in a recent interview with ETNow said one-year returns of the stock are ‘pretty good’ and hence does not qualify for the meltdown.

“Our base was in the period from 2013 to 2016, commodity prices had fallen and interest rates had also fallen. At such times, midcaps and smallcaps are big beneficiaries. Coupled with that, there were huge inflows into midcaps and small cap as a category in mutual funds, AIFs, PMSs, etc. The result: most of the mid and smallcaps started to have trailing PEs of 40 and 50 and that meant that the mid and smallcaps had become seriously overvalued,” Naren said.

The process of correction of the over-valuation is on. It is too early to call the bottom at this point of time, Naren had opined.

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