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

4 Aug 2024 , 09:33 PM

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 in relative terms as per the model put out by SEBI and administered by AMFI. This list is updated every 6 months. As per this model, 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 microcaps are excluded from this list. Small caps are exciting alpha creators, they also carry risks. Firstly, small caps have longer drawdowns in falling markets. Secondly, small cap business models are riskier, being predicated on a handful of clients or a single business line. Compliance and regulator risks is an added concern for these stocks. In spite of these challenges, these small caps are favoured by millions of investors.

Let us look at 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, despite the volatility and the stress in the last few months, generated 1.92% returns in July 2024 (sharply lower than June). The stress continues to be high due to the recent concerns expressed by the SEBI over small cap company valuations.
• Over the last one year, the small caps have flattered the street with returns of 60.83%, although it is slightly off the recent peaks. These stocks have also shown good resilience, although the swing factor of 1.57% shows profit booking at higher levels.
• 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, 53 stocks gave positive returns in the last 1 month, while just 43 stocks gave negative returns over the last 1 month.

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 of the market; and that was evident in July too.

BEST SMALL CAP STOCKS ON SHORT TERM MOMENTUM

Let us start with the momentum story of the 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 8.48%. Out of the 95 stocks evaluated, 77 stocks gave positive returns while 18 small cap stocks gave negative returns in the last one month, hinting at strong momentum favouring the small caps in the short term.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
FSL	300.40	40.69%	105.04%	309.30	140.60	113.66%	2.88%
CAMS	4,419.70	20.81%	86.17%	4,910.00	2,230.00	98.19%	9.99%
TTML	93.30	19.37%	16.96%	111.40	65.05	43.43%	16.25%
SWANENERGY	730.00	18.70%	232.26%	782.25	214.25	240.72%	6.68%
CASTROLIND	256.60	17.84%	77.08%	279.80	132.40	93.81%	8.29%
HFCL	133.50	17.31%	103.13%	140.50	61.50	117.07%	4.98%
NLCINDIA	284.50	16.41%	140.95%	311.80	114.65	148.15%	8.76%
JYOTHYLAB	522.50	15.55%	70.88%	573.85	298.00	75.34%	8.95%
NBCC	179.80	14.62%	294.92%	198.30	43.35	314.76%	9.33%
COCHINSHIP	2,579.00	13.87%	285.00%	2,979.45	316.10	715.88%	13.44%
NATCOPHARM	1,366.20	13.60%	65.14%	1,384.00	724.20	88.65%	1.29%
GLENMARK	1,439.00	13.43%	82.40%	1,479.40	722.10	99.28%	2.73%
HSCL	448.00	12.83%	221.20%	450.65	133.50	235.58%	0.59%
CESC	181.64	12.64%	135.24%	192.70	76.30	138.06%	5.74%
MCX	4,390.00	12.29%	167.92%	4,400.00	1,538.00	185.44%	0.23%

Data Source: NSE

What are the sectors that showed favourable momentum in last one month. The monthly momentum was mixed with stocks like Firstsource, CAMS, Tata Tele, Swan Energy, and Castrol among the top performers. In terms of the distribution of monthly returns; out of the 96 stocks considered, only 17 stocks delivered double-digit returns in last one month, while 29 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? We will exclude Raymond from this list as the fall in price was due to the demerger scheme. Among others, the list of laggards is stock specific and includes names like Equitas Bank, Titagarh Wagons, Tejas Networks, Angel One, RBL Bank, Intellect Designs etc. If you look at the Nifty Small-Cap 100 index in the last one month 9 stocks scored 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.

EVALUATING SMALL CAPS IN TERMS OF 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. For the Nifty Small-Cap 100 index as a whole, annual returns were strong at 60.83%. Out of the 96 stocks in the Nifty Small-Cap 100 index with full data available, 84 stocks gave positive returns and only 12 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	306.80	8.82%	373.40%	353.70	60.75	405.02%	13.26%
NBCC	179.80	14.62%	294.92%	198.30	43.35	314.76%	9.33%
COCHINSHIP	2,579.00	13.87%	285.00%	2,979.45	316.10	715.88%	13.44%
SWANENERGY	730.00	18.70%	232.26%	782.25	214.25	240.72%	6.68%
HSCL	448.00	12.83%	221.20%	450.65	133.50	235.58%	0.59%
IRCON	287.65	5.86%	191.67%	351.60	93.40	207.98%	18.19%
ITI	304.00	-1.71%	169.05%	384.30	108.85	179.28%	20.90%
MCX	4,390.00	12.29%	167.92%	4,400.00	1,538.00	185.44%	0.23%
MRPL	221.50	2.47%	164.34%	289.25	81.10	173.12%	23.42%
IRB	65.25	0.54%	158.02%	78.15	24.95	161.52%	16.51%
TATAINVEST	6,290.00	-4.78%	147.76%	9,756.85	2,401.00	161.97%	35.53%
IOB	66.64	4.65%	146.36%	83.75	25.70	159.30%	20.43%
NLCINDIA	284.50	16.41%	140.95%	311.80	114.65	148.15%	8.76%
APARINDS	8,829.80	3.85%	137.27%	9,659.90	3,545.15	149.07%	8.59%
TITAGARH	1,567.15	-14.06%	137.02%	1,896.95	610.10	156.87%	17.39%

Data Source: NSE

What were the fundamental winning stories of FY24? The 1-year story is largely dominated by PSU stocks with 9 out of the top 15 gainers on 1-year returns belonging to the PSU theme. The PSU names include HUDCO, NBCC, Cochin Shipyards, IRCON, ITI, MRPL, IOB, NLC India, and Titagarh Wagons. Swan Energy, IRB Infra, and Apar Industries were among the well-known private sector names. Based on annual returns, there were 26 out of the 96 Nifty-Small-Cap stocks that generated more than 100% returns, while 55 out of the 96 small cap index companies generated more than 50%. A total of 70 out of the 96 companies yielded more than 20% returns. Even if you had selected a small-cap index stock at random, there was an 73% probability that it would still be the best performing asset class in India.

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, Tanla, and Happiest Minds are some of the laggards on one-year returns.

DID THE SMALL CAPS SHOW RESILIENCE IN THE LAST ONE YEAR?

Here, we look at resilience in terms of the bounce from the 52-week lows. It gives a good approximation of resilience. For the Nifty Small-Cap 100 index as a whole, the bounce from the low of the year was a full 64.55%, despite the volatility in this period. Out of the 96 stocks evaluated in the Nifty Small-Cap 100 index, an amazing 30 stocks bounced more than 100% from the lows (doubled from lows), while 65 stocks bounced more than 50% from the lows and a total of 90 stocks bounced at least 20% from the lows of the last one year. That is a lot of resilience shown by the 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	2,579.00	13.87%	285.00%	2,979.45	316.10	715.88%	13.44%
HUDCO	306.80	8.82%	373.40%	353.70	60.75	405.02%	13.26%
NBCC	179.80	14.62%	294.92%	198.30	43.35	314.76%	9.33%
SWANENERGY	730.00	18.70%	232.26%	782.25	214.25	240.72%	6.68%
HSCL	448.00	12.83%	221.20%	450.65	133.50	235.58%	0.59%
IRCON	287.65	5.86%	191.67%	351.60	93.40	207.98%	18.19%
MCX	4,390.00	12.29%	167.92%	4,400.00	1,538.00	185.44%	0.23%
ITI	304.00	-1.71%	169.05%	384.30	108.85	179.28%	20.90%
MRPL	221.50	2.47%	164.34%	289.25	81.10	173.12%	23.42%
TATAINVEST	6,290.00	-4.78%	147.76%	9,756.85	2,401.00	161.97%	35.53%
IRB	65.25	0.54%	158.02%	78.15	24.95	161.52%	16.51%
IOB	66.64	4.65%	146.36%	83.75	25.70	159.30%	20.43%
TITAGARH	1,567.15	-14.06%	137.02%	1,896.95	610.10	156.87%	17.39%
NCC	347.75	7.91%	123.44%	364.50	136.55	154.67%	4.60%
BLUESTARCO	1,761.00	8.22%	123.97%	1,897.80	701.70	150.96%	7.21%

Data Source: NSE

Were there any sectoral themes in these top-15 stocks on resilience? A total of 8 out of the top 15 stocks in terms of resilience from the lows were PSU stocks and they included Cochin Shipyards, HUDCO, NBCC, IRCON, ITI, MRPL, IOB, and Titagarh Wagons. 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. The non-PSU stocks in the top-10 list included names like Swan Energy, MCX, Tata Investments, IRB, and Blue Star; all essentially bottom-up stories.

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, 3 stocks bounced less than 10% from the lows and they included Equitas Bank, IDFC Ltd and Happiest Minds. There were just 6 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 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. The Nifty Small-Cap 100 index itself is about 1.57% from its 52-week high, which shows aggressive bouts of profit booking in July, after the enthusiasm of June. 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 37 stocks are less than 10% away from their 52-week high levels. A total of 25 out of 96 stocks are over 20% off the yearly highs.

Stock Symbol	Market Price (₹)	1-Month Return	1-Year Return	52-week High (₹)	52-week Low (₹)	Bounce from Low	Proximity to High
MCX	4,390.00	12.29%	167.92%	4,400.00	1,538.00	185.44%	0.23%
HSCL	448.00	12.83%	221.20%	450.65	133.50	235.58%	0.59%
NATCOPHARM	1,366.20	13.60%	65.14%	1,384.00	724.20	88.65%	1.29%
IEX	190.50	0.58%	49.47%	194.30	121.35	56.98%	1.96%
PPLPHARMA	173.45	9.44%	62.75%	177.20	87.50	98.23%	2.12%
CUB	172.49	3.43%	27.56%	176.82	120.05	43.68%	2.45%
JBCHEPHARM	1,911.00	6.68%	-25.74%	1,963.20	1,232.15	55.09%	2.66%
GLENMARK	1,439.00	13.43%	82.40%	1,479.40	722.10	99.28%	2.73%
FSL	300.40	40.69%	105.04%	309.30	140.60	113.66%	2.88%
KARURVYSYA	225.98	9.03%	79.24%	232.75	115.60	95.48%	2.91%
AARTIIND	741.65	5.20%	55.47%	769.25	438.00	69.33%	3.59%
CROMPTON	453.05	8.30%	54.39%	470.70	261.25	73.42%	3.75%
NAM-INDIA	659.00	-0.83%	108.24%	685.90	306.05	115.32%	3.92%
MGL	1,831.40	4.45%	62.77%	1,912.15	970.55	88.70%	4.22%
SHYAMMETL	737.00	3.45%	87.87%	769.95	386.10	90.88%	4.28%

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. Financial inclusion appears to be a theme were the swing is favourable. We have MCX,CUB, Karur Vysya and NAM-India in that list of top 10 stocks by swing. Among the other names are the pharma names, that are seeing a lot of short term interest across the board.

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. They are largely news driven or some recent headwinds, but are predominantly from the small finance space. Some of the prominent names in the bottom of the list include Angel One, Equitas Bank, Ujjivan SFB, J&K Bank, and Credit Access Grameen.

To sum up, the story of small caps has been one of bouncing and showing resilience despite the odds stacked against them. That is amply evident in the last one month as the Nifty has made its way to an all-time high of 25,000 levels. However, like in the case of mid-caps, the small caps have also faltered on the swing factor, showing that in the short term, investors are still opting to take profits off the table in mid-cap and small cap stocks due to their stiff valuations and the inherent business risks.