The rally in midcap and smallcap stocks is a sign that retail investors might be coming back to stock markets after the sharp rally that has taken the Sensex and Nifty to successive record highs. Foreign institutional investors, the driving force behind the current rally in Indian stock markets, generally invest through Exchange Traded Funds, which put money in Sensex and Nifty stocks. On the other hand, retail investors in India are known to put their money in small and midcap stocks.
In 2013, the Sensex gained nearly 9 per cent, but smallcap and midcap stocks returned losses of up to 16 per cent. However, 2014 has proved to be relatively better for small and midcap stocks. Year-to-date, the BSE smallcap index is up 6.5 per cent, while the BSE midcap index is up 3.3 per cent as against a 4.8 per cent gain in the broader Sensex.
Gains in some of the small and midcap stocks have not been devoid of fundamentals either. For instance, tyre stocks have witnessed strong returns over the last year on the back of moderation in rubber prices. The recent appreciation in the rupee has also helped as tyre companies have to import rubber.
Lower input prices and a higher participation in midcap stocks helped the tyre shares, says Rahul Shah VP Equity Advisory Group at Motilal Oswal Securities Ltd.
Ceat has gained around 400 per cent in the last year. Apollo Tyres is up 93 per cent and JK Tyre has gained 89.7 per cent over the previous 12 months.
Some other midcaps such as Just Dial continue to see buying interest despite strong gains last year.
Amar Ambani of domestic brokerage IIFL expects the up-move in Indian market to be front-ended with consolidation likely in the second half of the fiscal.
The brokerage has come out with a buy recommendation on 10 midcap names. These include Motherson Sumi, Gujarat Gas, KEC International, Tata Communications, JK Lakshmi, Tech Mahindra, Jyothy Labs, Federal Bank, Bajaj Finance and Magma Corp.