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

2 Jul 2024 , 11:29 AM

DID SMALL CAPS CREATE VALUE FOR INVESTORS?

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 AMFI definition, the large caps are the top 100 stocks ranked on market cap, while the next 150 are mid-caps. Anything beyond 250 is classified as small caps, although small cap funds normally exclude the microcaps from the list. While small caps are exciting alpha generators, they also carry risks. Firstly, small caps are known to have longer drawdowns in times of falling markets. That means, they take longer to recover pre-correction prices. Secondly, small cap companies tend to be riskier business models with their businesses largely 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 quickly 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 an impressive 8.48% returns in the last one month. The stress continues to be high due to the recent concerns expressed by the SEBI to mutual funds over small cap schemes.
• However, over the last one year, the small caps have flattered with returns of 69.74%, although it is slightly off the recent peaks. These stocks have also shown good resilience as well as a strong swing factor.
• Out of the 100 stocks in the Nifty Small Cap 100 index, 5 stocks had to be removed due to insufficient data. Of the balance 95 stocks, 77 stocks gave positive returns in the last 1 month, while just 18 stocks gave negative returns over the last 1 month.

Clearly, the short term momentum has returned in favour of the small cap stocks, which is not surprising considering the strong appetite for small cap stories in India.

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
PRAJIND	731.00	42.62%	92.74%	742.00	365.95	99.75%	1.50%
RAYMOND	2,915.00	33.05%	73.82%	3,030.00	1,487.60	95.95%	3.95%
TITAGARH	1,857.00	32.91%	265.36%	1,896.95	482.00	285.27%	2.15%
RKFORGE	891.80	31.02%	97.82%	968.90	435.80	104.64%	8.65%
AMBER	4,507.00	26.94%	105.87%	4,614.20	2,171.00	107.60%	2.38%
CANFINHOME	915.00	26.72%	17.02%	927.45	680.00	34.56%	1.36%
IIFL	517.30	25.89%	3.21%	682.91	304.13	70.09%	32.01%
CHAMBLFERT	505.50	25.48%	86.39%	574.35	250.05	102.16%	13.62%
MGL	1,605.00	22.48%	54.35%	1,628.00	970.55	65.37%	1.43%
MANAPPURAM	208.50	21.01%	60.85%	214.00	122.60	70.07%	2.64%

Data Source: NSE

What are the sectors that showed favourable momentum in last one month. The monthly momentum did favour the budget plays, which explains why stocks like Praj Industries, Amber Enterprises and Chambal Fertilizers have done so well. In terms of the distribution of monthly returns; out of the 95 stocks considered, only 33 stocks delivered double-digit returns in last one month, while 60 stocks delivered more than 5% in the last one month. There was no sectoral trend visible, apart from a pre-budget theme.

The list of laggards is stock specific and includes names like Hindustan Copper, J&K Bank, IRB, Ujjivan Small Finance Bank, IOB etc. If you look at the Nifty Small-Cap 100 index in the last one month 4 stocks scored fell by more than 10% in the last one month while 7 stocks fell more than 5%. Clearly, the positive momentum in the last one month is outshining the negative momentum, if any, in the small caps.

EVALUATING SMALL CAPS IN TERMS OF ONE-YEAR RETURNS

If the momentum story captured the short term story of the small caps, the fundamental picture is captured by 1-year returns. For the Nifty Small-Cap 100 index as a whole, annual returns were strong at 69.74%. Out of the 95 stocks in the Nifty Small-Cap 100 index with full data available, 88 stocks gave positive returns and only 7 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	280.40	7.12%	391.18%	300.00	56.90	392.79%	6.99%
NBCC	156.99	10.34%	308.22%	176.85	38.20	310.97%	12.65%
COCHINSHIP	2,228.00	9.77%	293.04%	2,427.90	277.90	701.73%	8.97%
TITAGARH	1,857.00	32.91%	265.36%	1,896.95	482.00	285.27%	2.15%
IRCON	269.50	-0.99%	222.16%	301.45	79.00	241.14%	11.86%
HSCL	391.85	15.62%	193.74%	418.50	125.50	212.23%	6.80%
CENTURYTEX	2,290.10	6.75%	189.49%	2,396.60	794.15	188.37%	4.65%
ITI	308.30	6.01%	186.28%	384.30	106.40	189.76%	24.65%
MRPL	214.67	-0.64%	176.20%	289.25	76.80	179.52%	34.74%
HINDCOPPER	319.00	-15.48%	175.10%	415.80	115.10	177.15%	30.34%

Data Source: NSE

What were the fundamental winning stories of FY24? The 1-year story is largely dominated by PSU stocks with 8 out of the top 10 gainers on 1-year returns belonging to the PSU theme. The PSU names include HUDCO, NBCC, Cochin Shipyards, Titagarh Wagons, IRCON, ITI, MRPL, and Hindustan Copper. Himadri Specialty Chemicals and Century Textiles were the only private players. Based on annual returns, there were 29 out of the 95 Nifty-Small-Cap stocks that generated more than 100% returns, while 60 out of the 95 small cap index companies generated more than 50%. A total of 76 out of the 95 companies yielded more than 20% returns. Even if you had selected a small-cap index stock at random, there was an 80% probability that you would still be invested in 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, Happiest Minds and Tanla 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 lows of the last one year. 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 65.88%, despite the volatility in this period. Out of the 95 stocks evaluated in the Nifty Small-Cap 100 index, an amazing 34 stocks bounced more than 100% from the lows (doubled from lows), while 68 stocks bounced more than 50% from the lows and a total of 88 stocks showed a bounce of 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	2,228.00	9.77%	293.04%	2,427.90	277.90	701.73%	8.97%
HUDCO	280.40	7.12%	391.18%	300.00	56.90	392.79%	6.99%
NBCC	156.99	10.34%	308.22%	176.85	38.20	310.97%	12.65%
TITAGARH	1,857.00	32.91%	265.36%	1,896.95	482.00	285.27%	2.15%
IRCON	269.50	-0.99%	222.16%	301.45	79.00	241.14%	11.86%
HSCL	391.85	15.62%	193.74%	418.50	125.50	212.23%	6.80%
ITI	308.30	6.01%	186.28%	384.30	106.40	189.76%	24.65%
CENTURYTEX	2,290.10	6.75%	189.49%	2,396.60	794.15	188.37%	4.65%
MRPL	214.67	-0.64%	176.20%	289.25	76.80	179.52%	34.74%
MCX	3,930.00	4.67%	138.93%	4,270.00	1,411.40	178.45%	8.65%

Data Source: NSE

Once again, no prizes for guessing. A total of 7 out of the top 10 stocks in terms of resilience from the lows were PSU stocks and they included Cochin Shipyards, HUDCO, NBCC, Titagarh Wagons, IRCON, ITI, and MRPL. This has been the consistent story where many of the small and mid-sized PSU stocks displayed the best traction in the space. The non-PSU stocks in the top-10 list included Himadri Specialty Chemicals, and MCX Industries. They are 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 95 stocks evaluated, not a single stock bounced less than 10% from the lows. There were just 7 out of 95 companies that bounced less than 20% from the lows of the year. The stocks that were under pressure on the resilience measure were Happiest Minds, Credit Access Grameen, GSPL, Equitas Bank, PVR Inox, and Ujjivan SFB. Micro finance appears to be feeling the brunt of regulatory pressures.

FINALLY, THE SWING IN SMALL CAPS WAS STRONG TOO

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 just about 0.65% from its 52-week high, which shows a sharp recovery from the volatility of April and May. Out of the 95 stocks evaluated in the Nifty Small-Cap 100 index, 16 stocks are less than 5% away from their 52-week highs, while a total of 40 stocks are less than 10% away from their 52-week high levels. Just 18 out of 95 stocks are still over 30% 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
CDSL	2,407.40	15.05%	113.67%	2,407.40	1,076.50	123.63%	0.00%
CANFINHOME	915.00	26.72%	17.02%	927.45	680.00	34.56%	1.36%
MGL	1,605.00	22.48%	54.35%	1,628.00	970.55	65.37%	1.43%
PRAJIND	731.00	42.62%	92.74%	742.00	365.95	99.75%	1.50%
TITAGARH	1,857.00	32.91%	265.36%	1,896.95	482.00	285.27%	2.15%
AMBER	4,507.00	26.94%	105.87%	4,614.20	2,171.00	107.60%	2.38%
CUB	167.61	17.46%	35.51%	171.82	120.05	39.62%	2.51%
GLENMARK	1,233.00	4.24%	82.13%	1,264.00	647.65	90.38%	2.51%
GESHIP	1,223.50	15.99%	63.04%	1,255.00	718.05	70.39%	2.57%
MANAPPURAM	208.50	21.01%	60.85%	214.00	122.60	70.07%	2.64%

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 CDSL, Can Fin Homes, CUB and Manappuram in that list of top 10 stocks by swing. Among the other names are the budget beneficiaries like Praj Industries, Titagarh Wagons, and Amber.

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 financial and IT space. Some of the prominent names in the bottom of the list include Angel One, Ujjivan, Sonata, Tanla etc.

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 24,000 levels.