BSE Small and Midcap 400 Index (SMID) rebounded sharply during the month, recovering to its pre-war level of 12,000 following the US-Iran ceasefire.(AI-generated image)AI Quick ReadSmall- and mid-cap stocks delivered a strong performance in April, even as the broader Indian equity market remained volatile amid ongoing geopolitical tensions in the Middle East linked to the US-Iran conflict.
The BSE Small and Midcap 400 Index (SMID) rebounded sharply during the month, recovering to its pre-war level of 12,000 following the US-Iran ceasefire. The index has surged 14% over the past month, significantly outperforming benchmark indices such as the Sensex and the Nifty 50, which gained over 7% during the same period.
That said, the BSE Small and Midcap 400 Index has largely remained range-bound over the past two years, oscillating between the 11,000 and 13,000 levels. Despite the recent uptrend, analysts remain cautious and do not anticipate a decisive breakout beyond this range in the near term.
Brokerage firm Nuvama Institutional Equities doubts that the index may see a strong upmove on the back of multiple factors. It expects smallcap and midcap stocks to remain range bound until fresh stimulus arrives or valuations turn cheap. It finds attractive bottoms up ideas, especially in consumption and exports.
Valuations in the small- and mid-cap (SMID) segment continue to appear stretched, with Nuvama Equities noting that they are nearly one standard deviation above long-term averages across key metrics.
The brokerage firm highlighted that the correction over the last two years has not materially eased SMID valuations, largely due to the elevated starting base. Thus, it expects a prolonged period of correction unless there is a sharp drop in interest rates or earnings see a V-shaped recovery.
On an absolute basis, SMIDs are trading at around 4x price-to-book (P/B), representing a 20% premium to their 10-year average and roughly double the trough-cycle valuation range of 1.5–2x. Historically, such valuation levels have translated into muted five-year returns, typically below 5% CAGR.
From a relative standpoint, SMIDs are trading at a 40% premium to the Nifty 50, compared to a long-term average premium of about 20%. They also command a similar 40% premium over US SMIDs, versus a historical average of near parity — despite a relatively modest growth differential. Typically, SMIDs trade at a discount when growth differential is subdued.
In terms of growth versus interest rates, the SMID earnings yield currently sits about 3 percentage points below India’s bond yield — a historically rare discount that can only be justified by robust growth expectations. However, earnings momentum has remained subdued, with one-year forward EPS estimates largely flat over the past two years.
The key question now is whether SMID earnings can stage a sharp rebound, similar to the post-shock recoveries seen after the Covid-19 disruption in 2020 or the Russia-Ukraine conflict in 2022.
While consensus estimates are building in a V-shaped recovery, with 22% profit CAGR over FY26–28, Nuvama remains cautious. It noted that the supply shock normalisation should certainly support, but a sharp rebound is unlikely
Unlike 2020, there is no large-scale global stimulus to drive demand, and unlike 2022, there is limited scope for pent-up demand to be unleashed. Also, income across agents remains weak and there are early signs of capex moderation.
Although credit growth has picked up, it is being driven largely by gold and MSME loans which are substitutes for weak income and thus not increasing activity.
Against this backdrop, the brokerage cautions that earnings expectations may be too optimistic and flags a high probability of downgrades going forward.
Nuvama Equities believes value is now emerging in durables, chemicals, IT and a few auto ancillaries. It categorises its preferred SMID ideas under its RRR framework — Restructurers, Reinvestors, and Rewarders:
Restructurers (cyclicals turning around): JK Cement, Page Industries, ACME Solar Holdings, Crompton Greaves Consumer Electrical, Aarti Industries and PG Electroplast.
Reinvestors (consistent compounders): UNO Minda, The Phoenix Mills, Coromandel International, APL Apollo tubes, Max Financial Services, Coforge and Gravita India.
Rewarders (cash cows): NMDC, Embassy Office Parks REIT
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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
Ankit Gohel is the Deputy Chief Content Producer at Livemint, specialising in financial markets, macroeconomics, and regulatory developments. With a strong focus on equity markets, primary issuances, and policy-driven market movements, he brings clarity to complex financial developments for investors and market participants.
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