The brokerage believes these microcap stocks, with market capitalisation rank from 501 to 1,000, offer relatively cheap valuations versus large, mid and small caps stocks and present an opportunity amid the rising market.
The Indian benchmark equity indices hit their record high levels on June 28, with the Sensex crossing above 64,000 and the Nifty surpassing 19,000 level for the first time during the trading session.
Read here: Nifty hits fresh record high, rallies past 19,000-mark: What lies ahead?
From its microcap universe, ICICI Securities recommends stocks such as Wonderla Holidays, Somany Ceramics, Greenpanel, Sansera Engineering, ISGEC, Fusion Micro Finance, Repco Home Finance, Nazara Technologies, Tatva Chintan, Astra Microwave, Kewal Kiran and Gokaldas Exports.
“Current microcap universe valuation in terms of trailing earnings yield excluding loss pools is around 6% (trailing P/E of 16x-17x) as compared to 4% for large caps (trailing P/E of ~24x), thereby, offering reasonably cheap valuations in terms of risk spread in a bull market environment,” the brokerage said in a report.
On the other hand, mid and small cap valuations in terms of earnings yield spread over large caps have diminished significantly with their average trailing earnings yield at 4.7%.
Going by the past trends, the brokerage believes ‘risk tolerance’ towards microcaps has room for expansion if the current bull market continues.
Earlier instances of bull markets in broader equities have seen microcap earnings yield spread over large caps drop to near zero versus current spread of 150-200 bps.
“Assuming that the current bull market continues, driven by a broad-based investment cycle, the probability of a repeat of past behavior cannot be ruled out,” it said.
Also Read: Nifty hits 19,000 for the first time; here’s why market is rallying today
Mid and small caps, on the other hand, have marginal earnings yield spread over large caps although they too have not reached extreme bull market valuations wherein they trade at a premium to large caps.
Moreover, microcap stocks are also likely to benefit from the current demand environment in the economy.
The brokerage noted that Nifty Microcap 250 index has a large weight in the broader industrial sector (50%) and discretionary consumption related manufacturing (18%) as compared to Nifty50, and given the current trend of economic growth, such stocks are favourably placed in the economic upcycle.
However, it highlighted that microcaps face liquidity risks in a bear market scenario.
“Apart from being largely cyclical in nature, microcaps have another major risk in terms of liquidity with bulk of stocks having an average daily turnover of below ₹100 million. Hence, in an economic downturn driven bear market, the ‘beta’ factor works against microcaps along with liquidity risk, thereby, resulting in sharp corrections,” ICICI Securities said.
Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 28 Jun 2023, 03:59 PM IST