MumbaiSmall caps saw impressive gains in the last fiscal year, much of which was driven by foreign portfolio investors (FPIs) investing in smaller Indian companies, despite concerns of a bubble caused in part by some opaque trading.
In fiscal year 2023-24 (FY24), about 35% of total revenue will come from ₹Of the total FPI investments in India, $2.08 trillion flowed into the top 100 companies in the BSE Small Cap Index, ₹71,631 crore, accounting for 70 per cent of total investment in small cap stocks, according to an analysis of BSE shareholding data. mint.
The investment inflows helped both the Nifty Smallcap 250 and the BSE SmallCap index, which comprises 946 companies, outperform the returns of the benchmark Nifty and Sensex indices last year.
Also, though shareholder data for the first quarter of the current fiscal will not be available until June 30, BSE SmallCap has already outperformed the Sensex by more than 6 percentage points with a return of 9.6% since April 1, 2024, compared with the Sensex’s return of 3.6%.
But the meteoric rise has not gone unnoticed by regulators: In March, Madhavi Puri Buch, chairman of the Securities and Exchange Board of India, warned of the existence of a “frothy market” in an overheated small- and mid-cap market.
mint We have previously reported (here, here and here) about Dubai-based hawala operator Hari Shankar Tibrewala possibly funneling illicit proceeds from the Mahadev online gambling scandal into Indian small cap stocks.
However, a surge in foreign investors into India’s small-cap market has helped maintain a semblance of stability.
“FPIs can continue to invest in fundamentally sound small caps that are properly valued,” said SK Joshi, executive director at Khambatta Securities. “Any pullback in the overall market could be a good opportunity for long-term investors to invest in quality small caps.”
Similarly, Kranti Batini, director, equity strategy, Wealth Mills Securities, emphasised the importance of a smart approach to small-cap investing and stressed the need to evaluate individual stocks on their specific merits.
“Some fund managers will invest in small caps, but a one-size-fits-all approach doesn’t work. Parts of the small cap market are showing signs of a bubble due to overvaluation. But other parts have clear earnings prospects and offer interesting opportunities. These stocks need to be analysed individually,” Battini said.
Investments: Sectors and companies
The surge in FPI investments in small cap stocks in FY24 highlights a steady increase compared to a few years ago when only 10% of FPI equity investments were targeted at small cap stocks.
FPI Investments Investments in the top 100 small and midcap stocks grew by 54% in FY22, 27% in FY23 and 25% in FY24. FPIs were net sellers across the equity market in FY22 and FY23, despite outflows of 20% to 25% in FY24. ₹1.4 trillion ₹37,632 crore, while in the top 100 small caps, FPI net purchases were at Rs. ₹44,913 crores and Rs. ₹57,044 crore respectively.
In this analysis, mint The top 100 companies were selected from the BSE SmallCap index.
In contrast, the situation for midcap stocks has been more volatile. FPI investment in the BSE midcap index has ₹98,320 crore in FY24, showing a decline of 10.5% compared to FY23. It may be noted that investments in midcap stocks surged 203% in FY23 compared to FY22, but declined 17.3% YoY in FY22.
In the smallcap segment, FPIs particularly preferred stocks in banking & finance (28%), capital goods (16%), information technology (11.3%) and consumer durables (8%) in FY24.
Five companies (Suzlon Energy, PNB Housing Finance, Coforge, Blue Star, and Computer Age Management Services) ₹15,700 crore, accounting for 22% of total FPI investments in BSE small cap. 24th fiscal year.
Suzlon Energy emerged as a leader in attracting foreign investment in FY24. Foreign Institutional Investors (FIIs) significantly increased their stake in the company, rising from 13.4% in FY23 to 23.6% in FY24, with investment of ₹4,246 crore, a significant increase of 10.25 percentage points in holdings.
Other notable increases in FII holding include PNB Housing, where foreign investor holding increased from 56.7% to 58%, with additional investment coming in at ₹3,662 crores.
In Coforge, FII shareholding increased from 26.3% to 35.8%; ₹In Blue Star, FII shareholding increased significantly from 12.1% to 17.7%; ₹In CAMS services, FII shareholding increased from 36.1% to 54.8%, ₹2,315 crore, as per the analysis. mint Data from the Capitaline database.
Suzlon Energy has the highest price-to-earnings ratio (P/E) of 96 but the lowest earnings per share (EPS) of 0.19, suggesting that investors expect a strong increase in future earnings. Blue Star follows a similar pattern, with a high P/E ratio (75) but low EPS (7.77). PNB Housing shows a different trend, with a low P/E ratio (13) compared to its EPS (16.9).
Finally, Coforge and CAMS Services find the middle ground, balancing healthy EPS of 36.2 and 20.9, respectively, with P/E ratios around 38.
The BSE SmallCap, Midcap and LargeCap indices currently trade at 32.26, 29 and 24.25 times compared to their past five-year average P/Es of 45.60, 32.30 and 25.40 times respectively.
“In my opinion, the only story in India is small caps. If you want to make money in India, you have no option but to invest in a well-constructed portfolio of small caps as large caps are not going to give you phenomenal returns over time,” said ace investor Shankar Sharma.
Not only did companies receive capital, but domestic small-cap funds also saw a large increase in capital inflows in FY2012. ₹40,188.55 crore. In contrast, midcap and largecap funds have ₹22,226 crore and outflows. ₹613 crores respectively.
This is a notable change compared to FY22, when inflows favoured mid-cap stocks ( ₹16,309 crore) and large funds ( ₹13,518 crore), while small cap funds ₹10,115 crores.
Market Outlook
“Sectors such as speciality chemicals, pharmaceuticals, niche manufacturing and state-owned enterprises could offer promising growth prospects in the small-cap space given the potential for innovation, export opportunities and capacity expansion,” said Atul Palak, chief executive officer at Biguru, an online investing and trading firm.
The selected companies delivered impressive returns to investors in FY24, with Suzlon Energy leading the way with a staggering 411.4% return, followed by Blue Star (85%), PNB Housing (48.2%), Coforge (44.3%) and CAMS Services (43.5%).
In FY24, the BSE SmallCap index delivered a return of 60%, significantly outperforming the Sensex which delivered a return of 24.8%. This follows a period of mixed performance in FY23 and FY22, when returns were -6% and 34% respectively, compared to -0.48% and 17% for the Sensex.
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