Talking about 2017, the small and mid-cap segment enjoyed the eyeballs of the domestic and foreign investors. S&P BSE Small-cap Index skyrocketed by more than 50% whereas the Mid-cap Index surged by more than 40%. During the same tenure, Sensex marked an appreciation to the tune of 28%. Irrespective of the impressive growth trajectory in the past four years, many investors are scampering for an exit in these stocks.
Bargain Sale Is On For Several High Quality Small & Mid-cap Stocks
For many investors, the golden period for small and mid-caps seem to have vanished into thin air. After the continuous uptick in the prices, small and mid-cap have witnessed sharp corrections in the recent months. Since the beginning of the year, S&P BSE Midcap Index has plummeted by more than 10%, whereas BSE Small-cap has tanked by close to 12%. In the same period, 30-packed benchmark index soared by approx. 5%.
After the prolonged rally, more than 20 stocks have tanked by more than 30%.
So what has led to this meltdown? This segment which was attracting huge inflows from both domestic and foreign investors is now under pressure of massive sell-offs. Add to this, weak global cues, soaring crude oil prices, political uncertainty, depreciation of the rupee, high valuations, heightened market volatility and other macro indicators has forced many investors to pull back from the small and mid-cap segment. Clearly, investor’s sentiments have taken a complete U-turn. Many novice investors have these questions in mind:
Have we reached the dead end for small and mid-caps in India?
Should we divert our funds in only large-cap stocks now?
It is quite interesting to note that even though there is massive correction in the prices of the stocks in this segment, the fundamentals of few small and mid-cap stocks have not yet changed. Havells India, PVR, Natco Pharma amongst others are few examples that have marked healthy growth in their earnings. Even so, they are trading at comparatively lower prices.
This makes many investors shun this segment while making an equity investment. Due to the erosion in the price, many investors have already exited these stocks in a hope to iron out the wrinkles from their portfolio. However, that does not help much and in fact, deteriorates the health of the stock portfolio even further.
Separating Wheat From The Chaff
Most of the stocks have experienced correction in their prices. This definitely does not mean that all stocks will rise big in the future. When investing in stocks, it is mandatory to distinguish quality stocks from the rest.
For this, it is essential to conduct a thorough fundamental analysis of stocks. Investors should look out for stocks which boast of superior earnings visibility, business and management quality, company’s policies to manage the risks, adherence to compliance policies, consistency in cash flows, scalability of the organisation and ability to deliver performance over the time.
Irrespective of the downfall in the small and mid-cap segment, there are few quality stocks whose value have not deteriorated with time and possess all the attributes of becoming a multibagger stocks in the future. Such market correction opportunities should be optimized to start your SIP’s to accumulate the value stocks in the Indian stock market.
The only caution point is to stay invested for about 4-7 years to achieve significant wealth.
We at Research and Ranking stick to the basic tenets of value investing. Our endeavour is to pick the fundamentally sound stocks for you that have the potential to grow manifold over the next few years.
Here are the two solid small-cap stocks that are worth buying on dips:
1. NRB Bearings Limited
NRB is the global benchmark for quality and innovative design in high-precision friction solutions. NRB Bearings is a recognised leader in needle roller bearings, conventional cylindrical roller bearings and has developed a new generation of lightweight drawn cup bearings.
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According to the Ball & Roller Bearing Manufacturers Association-BRBMA, the annual production of the domestic organized sector stood at Rs. 55bn in FY17, where NRB’s contribution stood at ~13%. According to various market research sources, the automotive bearings market in India is anticipated to cross $2.3bn by 2021, on account of expanding the fleet size and growing replacement market demand.
NRB, being an important player in the automotive bearings space with a leadership position in needle roller bearings, is expected to be a key beneficiary of robust automobile growth, incremental revenue from the Defence, Marine and Railway segments, and a revival in exports.
Going ahead, we expect the company to deliver ~18% CaGR in earnings over next 5 years period (FY18-FY23). The operational and profit margins are likely to be supported by strong client relationships in its category of bearings, volume growth in OEMs, revival in exports, incremental revenue from new segments like railways, defence and aerospace, customization led superior mix and benefit of operating leverage.
2. Subros Limited
Subros is supported by strong lineage and is well-equipped to ride the next wave in the automobile industry in India. Apart from its core business of car AC, the company has successfully forayed into a) Radiators business to Maruti b) Driver Cabin AC for Railways c) Condenser supply to Whirlpool and d) Blower Application for Trucks e) AC for bus coaches. Subros growth acceleration is driven by strong momentum in its core business of PV ACs, incremental revenues from new segments and improvements in margins through cost rationalization measures. Based on these initiatives we believe the company is poised for profitable growth over the medium term.
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Remember: Stock market investment is all about stock selection and psychology. If you have identified stocks that can survive the rough storm and flourish with time, then do not allow transient hiccups come your way.
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Invest Through SIPs – Buy Low, Sell High
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- The following article should not be construed as the Investment Recommendation.
- It is safe to assume that this opportunity could be a part of the portfolio recommended to our paid customers.
- Most importantly, since we design personalized portfolio as per your risk profile, this investment opportunity may or may not be a part of your portfolio.