Small-Caps: Book Profits Or Remain Invested?

Our analysis of the performance of small-cap stocks indicates that while the broader markets are expected to rise, caution is advised regarding extreme valuations. Therefore, it is recommended to choose quality small-cap stocks based on thorough fundamental and technical research. The article highlights the reasons for doing so

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Over the past one year, the Indian equity market has experienced remarkable gain, particularly in small-cap stocks, which have delivered exceptional returns. There are more than 300 companies in the small-cap space that have witnessed their share price doubling over the past 12 months. A company like Waaree Renewable Technologies with market capitalisation of ₹24,000 crore has seen its share price soaring upward by 13.6 times since the start of FY24. Its price has increased from ₹158 on April 3 to ₹2,313 as of now.

Another example is Transformers and Rectifiers (India) Ltd. that saw its share price increasing by 981 per cent in the same period. However, this ascent has not been without its challenges and we have witnessed hiccups in between. In September 2023, Kotak Institutional Securities raised concerns about ‘irrational exuberance’ among investors with regard to the broader market, leading to a significant drop in prices for small stocks along with mid-cap stocks.

Before that, the Nifty Mid-Cap index had risen by 20 per cent and 32 per cent, while the Nifty Small-Cap index was up 23 per cent and 35 per cent in the three and six months ending August 2023, respectively. At the index level we saw the mid-cap and small-cap indices dropping by 3 per cent and 4 per cent, respectively, in a single day after this report. The graph below shows the movement of major Nifty equity indices since the start of April 2023. It clearly shows the ascent with two drops in between.