Mid-, small-cap indices miss the recent rally

The rally in the equity markets that started in mid-October has largely been led by blue-chip stocks in the Sensex and Nifty. The mid-and small-cap indices have significantly unperformed the benchmark indices.

While the Sensex and Nifty have risen 6% since October 13 (when the current rally began) to date, the BSE mid-cap was up 3.1% and the BSE small-cap rose 1.3%. Both the Sensex and Nifty closed in the green 10 times out of the previous 11 sessions.

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Analysts said weak earnings by mid and small-cap firms in the September quarter was the major reason for the underperformance. So far, 28 mid-cap firms have reported September quarter earnings and revenues for these firms jumped 16% year-on-year (YoY). On a quarter-on-quarter (QoQ) basis, the numbers were down 5%. The total expenditure and interest cost jumped 21% and 15% YoY, respectively, the operating profit was flat at 0.7% YoY and the net profit declined 0.7% YoY. On a QoQ basis, both declined 8%.

The analysis excluded extraordinary profit and loss items. Financial and energy companies were not included because they follow a different earnings model.

The analysis of 205 companies of the BSE small-cap index shows that aggregate net sales increased 21.18% YoY and declined 1.5 % QoQ. Net profit, however, dipped 10% from a year ago, while the operating profit climbed just 1%. Total expenditure jumped 25% while interest cost rose 19% YoY.

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Analysts said any significant recovery in earnings for mid- and small-cap is unlikely due to challenges of rate hike fears globally, higher inflation and tensions between Russia and Ukraine.

Few analysts suggest the recent underperformance was due to the profit booking by domestic investors. “The focus of both domestic and foreign investors has been on large-cap stocks over the past few weeks, both on the buy side and the sell side. Small and mid-cap stocks did well between June and September 2022, but underperformed later. Fresh triggers out of these were few and far between. Considering global equity market conditions, some investors preferred shifting their focus to large-caps from mid and small caps,” analysts said.