Amidst a significant market downturn, the Nifty Smallcap 250 index has witnessed a substantial decline of over 8 percent, while the Nifty Midcap 150 index has also experienced a downturn of 5 percent over the past month, reflecting a pronounced selloff across the broader market.
The recent market correction has instilled apprehension among retail investors, although there have been instances of selective buying observed in certain small-cap and mid-cap stocks.
According to an insightful strategy report by ICICI Securities, a favorable period characterized by enhanced profitability is anticipated, driven by an “investment rate” propelled upcycle. The report, dated March 16, highlights the rising trajectory of the “PAT to GDP” ratio within the listed space, which has ascended to the mid-cycle range of 4.9 percent, up from 4.3 percent in FY23.
Taking a long-term perspective, the report suggests that small-cap stocks offer significant growth potential, particularly in terms of the “PAT/GDP” ratio. Currently standing at 0.7 percent of GDP, small caps are yet to reach their cycle peak of 1.2 percent, indicating ample room for expansion moving forward.
A promising outlook is projected for the earnings growth of Nifty Midcap 100 (excluding Vodafone) and Nifty Small Cap 100 indices, expected to soar by 25 percent during the FY23-FY26 period. In comparison, the benchmark Nifty index is anticipated to witness a growth rate of 17 percent over the same period.
The report underscores several factors contributing to the potentially robust performance of the broader indices, notably their substantial weightage in the industrial sector and discretionary consumption space. These sectors are poised to capitalize on the prevailing demand dynamics stemming from the ongoing capex cycle and discretionary spending trends.
Highlighting the sectoral composition, the report reveals a significant allocation of 56 percent, 38.38 percent, 39.33 percent, and 30.19 percent to capex and manufacturing-related companies across the Nifty Microcap 250 index, Nifty Smallcap 100 index, Nifty Midcap 100 index, and Nifty benchmark, respectively. Such a pronounced presence of capex and manufacturing-related entities within the broader market indices underscores the anticipated growth trajectory of these segments.
On March 18, the Nifty Smallcap 250 index concluded the trading session with a marginal decline of 0.29 percent. Despite this overall downturn, the index witnessed notable activity among its constituents. Specifically, seven stocks within the index surged by more than 5 percent, while 24 stocks experienced gains ranging between 2 to 5 percent. Additionally, a significant number of 85 index constituents recorded upticks of up to 2 percent, reflecting a varied performance across the small-cap segment.
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