Reliance Energy has easily the best performing Sensex stock in recent times. Between November 1 and now, it has rallied 38 per cent.
However, a number of low-profile stocks, which had little or no news flow, have been giving the Anil Ambani behemoth a run for its money, literally.
While the Sensex has inched up from 19724 to 20812 in the period, gaining 5 per cent, the BSE Small Cap index has gone on a rampage — from 9646 to 13975, a gain of 44.9 per cent.
On Monday, it closed at a life high of 13975.
The index comprising 482 small stocks has been on fire since the focus shifted to the smaller stocks after the curb on participatory notes in late October.
Though foreign institutional investors have exposure to most of the stocks on the BSE Small Cap index, experts said domestic interest has been the chief driver of small caps in the last two months.
"Definitely interest in the small and mid-sized companies comes from domestic players. Overseas investors have restrictions in terms of market cap and liquidity issues, that they cannot take huge positions in these stocks," says R Rajagopal, chief investment officer, DBS Chola AMC.
Devesh Kumar, managing director of Centrum Broking said typically when new money comes in the Sensex stocks go up.
"When domestic players and investors put their money, they look for value in the smaller stocks. Mid and small caps had largely been ignored before November. In the last two months they have caught up."
The run-up in small caps has been across the sectors, says Rajagopal.
"In small and midcaps there is nothing called sectoral selection. Sector sentiments can be used to identify certain stocks. But bottom-up approach is key," he said.
The small-cap universe comprises a number of emerging sectors such as financial services, entertainment and logistics.
These sectors have little or no large-cap representation, but are said to have immense growth potential and are in the centre of the India growth story.
One caveat is crucial, but: as the rally chugs along making new highs, the valuation gap between large-caps and small caps is narrowing fast.
The rally since November has ramped up the price-earnings multiples of the BSE Small-Cap index by 44 per cent from 16 times to over 23 times trailing 12-month earnings.
This has substantially narrowed the valuation gap between the Sensex companies and the small-caps.
While the Sensex price-earnings ratio was 28 times at Monday’s close of 20812, the BSE Small Cap index, at 13975, was quoting at 23.2 times.
Valuations of some small caps have now almost caught up with large-caps or even crossed based on historical price-earnings, but there are still number of stocks which are available for cheap, point out experts.
Suresh Jain, chairman and managing director, Networth Stock Broking, says many are still quoting at price-earnings of 10-12 times.
"These stocks can go up to 15 times easily," he claims.
"The small caps have not performed for the last 18 months. With more and more retail money coming in, I expect them to do well at least for a few weeks till the Budget," he said.
But not all are so confident. "It is unlikely that this (small cap) run will continue," says DBS Chola’s Rajagopal, who recently launched a scheme that invests in small cap stocks.
"From Friday’s trade, the focus seems to have shifted to the large caps. I think small caps will now consolidate at current levels before moving up."
