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Forget bluechips, this market veteran says it's time for midcaps, smallcaps

Brokerage HDFC Securities has joined a growing chorus to invest in smaller stocks.

Bloomberg|
Updated: Jun 18, 2019, 03.02 PM IST
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By Ameya Karve and John Xavier

A year ago, India’s third-largest brokerage advised investors to load up on shares of the nation’s biggest companies. Now, it’s telling them to shift holdings to mid- and small-sized counterparts after a steep decline made the stocks cheaper.

“Mid- and small-cap indexes have slumped from their peak in January 2018 and, because of the time and price correction, there’s an opportunity in these stocks,” Dhiraj Relli, chief executive officer at HDFC Securities Ltd., said in an interview at his office in Mumbai. “There’s limited prospects in large-caps as they are quoting at all-time high valuations.”

The brokerage has joined a growing chorus to invest in smaller stocks after their share prices declined, citing the prospect of a rebound triggered by expectations of better earnings growth. Since Relli gave his previous advise about a year ago, the NSE Nifty 50 Index has gained about 8 per cent, a measure of mid-sized companies fell more than 7 per cent and that of small-cap shares slumped 19 per cent.

Prime Minister Narendra Modi’s re-election with an even bigger majority last month has spurred hopes that the new government will take steps to boost economic growth and increase spending on infrastructure, while giving more cash to consumers to help bolster demand. Lower borrowing costs, a reduced oil price and slowing inflation have also improved the earnings outlook for Indian companies.

“If we get a ‘high teens’ kind of earning growth, there will be a huge catch-up for mid- and small-caps,” Relli said. He sees individual investors continuing to pump more money into stocks as returns on equities are still seen beating other assets, such as property and gold.

Domestic investors in mid- and small-cap stocks pumped 27 billion rupees ($387 million) -- about half the total inflows from funds -- into the nation’s equities last month, data released by the Association of Mutual Funds in India show. Local funds are the largest investors in shares of India’s smaller companies as their foreign counterparts stick with larger stocks due to risk concerns.

HDFC Securities’s shift in strategy was prompted by the Nifty MidCap 100 Index’s more than 20 per cent tumble from a January 2018 record and a more than 35 per cent slide in the Nifty SmallCap 100 Index as the Nifty 50 climbed by nearly 9 per cent, Relli said. The brokerage advises selectively buying stocks of smaller companies with good governance, stronger earnings outlook, and those that are gaining market share.

“Investors need to do enough due diligence and take reasonable care to enter and book profits at or near the right times,” Relli said. HDFC Securities had more than 650,000 trading accounts out of the nearly 9 million total active profiles in India as on May 31, according to data provided by the National Stock Exchange of India.
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