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SEBI Chairperson Madhabi Puri Buch recently raised an alarm over stretched valuations of small and mid-cap stocks. She said, “There are pockets of froth in the market. Some people call it bubble, some may call it froth. It may not be appropriate to allow that froth to keep building.”
Cafemutual spoke to a few fund managers and leading MFDs to understand their opinion on valuation of small and mid cap companies. Here’s what they said.
A CIO of one of the largest fund houses requesting anonymity agreed with the SEBI Chairperson’s observation on valuation. He said, “Small and mid-cap companies are trading at very high valuation and investors should be cautious to deploy lumpsum money.”
Agreeing with the Chairperson’s view, Vinay Paharia, CIO, PGIM Mutual Fund points out that the overvaluation is in low quality companies. He said, “We don’t bifurcate companies as small cap or mid cap or large cap but by their quality and growth. In recent times, companies with low quality and poor growth have outperformed high growth companies. This is where the overvaluation lies. These companies also include SME stocks, pockets of capital goods, real estate companies and some PSUs.”
Another CIO requesting anonymity said not all small and mid-cap stocks are overvalued. He said, “Small and mid-cap form majority of the market. So, it would be incorrect to say that entire small or mid cap sector is overvalued. There are segments of the market that are overvalued, in particular segments where there have been tailwinds due to governance issues. Such stocks are flying in the market right now.”
Sandeep Bagla, CEO, Trust MF feels that India’s growth may be a factor for such valuations. He said, “The smallcap valuations are currently higher compared to historical standards. Individual stocks may be facing what we can call froth. The earnings growth projected is higher for small cap for the next couple of years which could justify higher valuations. India’s growth story is very strong and combined with global liquidity and risk appetite, it is driving up the valuations.”
Agra MFD Shifali Satsangee, Funds Vedaa recommends investors to stay cautious. She said, “The 5-year average valuations of small cap companies are trading at a premium. However, the past track record suggests that whenever the 5-year average valuations trade at a premium level, small cap funds delivered subpar returns for the next three years. A very long-term investment in SIP form may be okay, but it’s not advisable to enter the small-cap in lump sum over a short-term period.”
Mumbai MFD Nikul Parmar of Chamunda Investments also echoed a similar sentiment. He said, “We also anticipate a correction and have been advising our clients to stay away from small cap funds right now. However, we feel that such an investment may be good over a long-term period if approached through SIPs.”
