More money to be made on investment beyond Nifty50 stocks

• Analysts say that midcaps, small and micro cap stocks are valued at a discount over large caps offering ‘margin of safety’.
  
  
• The investment opportunity in the broader markets has been validated through increasing mutual fund investments in midcap and smallcap funds in the last three quarters.
  
  
• The net inflows in midcap and smallcap funds have been higher than large cap funds, as per Association of Mutual Funds in India (AMFI) data.

Even as foreign funds are choosing to sell Indian equities in favour of other markets like China and the US where valuations are ‘attractive’, analysts and experts insist that there is a lot of juice left in the Indian markets.

Going beyond the Nifty50, a lot of mid and smallcap stocks are available at a discount as compared to large caps, says an ICICI Securities report. The analysts say that midcaps are valued at a discount over large caps offering ‘margin of safety’. Margin of safety is an investing formula that says investors must buy into a stock or a security when its market price is less than its intrinsic value.

ICICI Securities also says that there is potential for these stocks ahead. “Consensus earnings growth of Nifty small cap 100 and Nifty midcap 100 index over FY23E to FY25E may exceed Nifty50 earnings growth, which could support their valuations,” said the brokerage firm in a report.

Small and micro caps have a relatively higher ‘margin of safety’, the report says.

Mutual funds & broader markets

The investment opportunity in the broader markets has been validated through increasing mutual fund investments in midcap and smallcap funds in the last three quarters. The net inflows in midcap and smallcap funds have been higher than large cap funds, as per Association of Mutual Funds in India (AMFI) data.

In the last three quarters, while the smallcap funds saw net inflows of ₹15,172 crore and midcap funds had inflows of ₹14,632 crore, large-cap funds witnessed inflows worth less than half of the two at ₹6,392 crore.

AMFI data shows that since October 2021, smallcap schemes witnessed continuous inflows hovering around ₹1,600 crore. In January 2023, the inflows into smallcaps was at a multi-month high of ₹2,300 crore and that too without any new fund offers (NFOs).

“The higher growth expectations going ahead (FY23E to FY25E) for Nifty small cap 100 index (22% CAGR) and Nifty midcap 100 index (23% CAGR – ex Vodafone) is attributable to the 'normalisation of profit within financials, industrials, discretionary consumption and commodities,” said the ICICI Securities report.

However, the report stated that midcaps have not yet reached the extreme optimism seen during 2017-18 where they traded at a premium to large caps.

Recently, foreign portfolio investment (FPI) holdings in smallcap stocks have increased gradually to nearly 13% during December 2022 from 12% in June 2022. However, FPI holdings in the category have been on a downhill since the peak of 2018 when they held close to 17%.

Midcaps, on the other hand, haven’t seen any major erosion in FPI holdings since the peak of 2018 and have oscillated in the 14-16% range, said the report.

Here are midcap and smallcap shares that are at a discount to large caps


Sources: ICICI Securities report & NSE

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