“Dive into the opportunities for Midcaps and Small-Caps in the Indian market with a 5-year vision. Understand the economic sector-wise prospects, investor trends, and factors driving growth. Stay informed for informed stock investments.”
In continuation to the previous article India Shines among Global Recession Nightmare. it’s time for Midcaps and Smalls Cap allocation provided one has a 5 years vision. We as investors need to understand that we need to know the economy-wise opportunities for midcap and small-caps before jumping blindly into stock bets. We need to understand that from here 2023 onwards the speed of midcaps and small caps changing buckets will be faster hence more than stock-specific broader securitise opportunity identification is the key to success. Since stocks change but economic sector wise opportunity takes time to change.
The Indian market is going to be less impacted by recessionary fears as compared to history at the same time inflows into the market by DII’s is so strong that Indian markets might show new highs. The Index has already witnessed a significant strong rally from the March’23 lows where extreme pessimism amid recession fears, Inflation concerns and the Global Financial Crisis prevailed. For two fiscal years, FPIs sold equities in amounts of ₹140010 crores in FY22 and ₹37632 crores in FY 23. The NIFTY 50 saw a 2% negative return for the fiscal year while the NIFTY 500 experienced a 3.5% shrink. Unexpectedly, the NIFTY Midcap 100 index had a flat return for the year while NIFTY Next 50 index fell by 9.5% followed by NIFTY Small Cap 250, with a reported decrease of 9% witnessed during FY23.
Every Fund manager gives example of valuations for the midcap space investment but moving ahead of the curve one needs to understand the opportunities in mid and small cap investments aligned with Indian economic growth across sectors. Those who are expecting the markets to fall awaiting in side-lines well like last year this year also their wish will remain the same.
- India’s retail Mutual Fund SIP book size is around Rs 14000cr monthly and this number is growing significantly. 10 years before this number was Rs.3000 cr every month.
- As per the CAMS report, it has been found that over the last five fiscal years (FY2019-FY2023), 7.65 million new millennial investors have entered the MF industry and this number is growing consistently backed by technology-driven ease of investment options.
- Retail investors, which included high net-worth individuals (HNIs), were in possession of mutual funds to the tune of Rs 23.27 lakh-crore as of March 2023 turning out 11.8% YoY growth since 2022 as per AMFI
- The national pension scheme deployed around Rs 8.71 lakh cr in FY-23 in the market followed by 1,73,97,499 subscribers.
- During the period of Jan to March 2023 guaranteed insurance products have been sold with the highest collection compared to the last 10 years.
- The change in the high ticket insurance taxation regime from April 1st 2023 resulted from significant sales of products during March 2023. If we look at the numbers we find Private life insurers reported 53% APE (annualised premium equivalent) growth in March, translating to 24% growth for FY23.
- Individual APE was up 56 % for March and 24 % for the year, as per industry data.
- Life insurers aggressively sold non-par policies above ₹5 lakh in February-March which resulted in a 14-76 % YoY increase in average ticket sizes in March.
- Of the four listed players, HDFC Life posted 94% APE growth, whereas SBI Life it was the lowest at 13%. Max Life reported 60% growth and ICICI Prudential Life 57 %. Including unlisted players, Tata AIA Life saw the strongest growth at 97%, and Aditya Birla Sun Life at 73%.
Now all these inflows are now getting deployed in the market which leads to a significant rise in valuations and equity market. One needs to know who owns the money on the table for investing in Indian equities. There have been significant shifts which have happened in terms of investors in the Indian equity market which many traditional investors are not able to understand which leads to more holding of liquidity when investment options are ripe for long-term wealth creation.
Coming to the Midcaps and small-cap sector-driven opportunities for long-term wealth creation we need to identify the growth opportunities before getting into stock specific approach. A blind way of investing will be ignoring the former and replacing it with the later.
- Auto finance NBFCs reported AUM growth in the range of 13-38% over the last 12 months driven by strong auto demand and business diversification
- In FY23, CV/PV sales grew 34%/27% YoY.
- The commercial segment of the automobile industry will find significant growth as the supply chain dynamics of India improvises and as transporter freight rates are at an all-time high indicating strong cash flow generation for fleet owners.
- Demand for MSME loans has grown 1.7 times the demand seen two years ago.
- India has 70mn MSMEs with credit demand estimated at Rs106tn, of which only 20% of demand is met through formal financing. Even if we assume that only 50% of these are eligible for institutional credit, the scope for growth is tremendous.
- Private Final Consumption Expenditure (PFCE) has grown at a CAGR of 11.3% (in nominal terms) over the last 10 years as against a nominal GDP growth rate of 10.6%. In coming years this will grow which will benefit many Midcaps and small caps.
- National Statistical Office (NSO), the annual per capita (net national income) at current prices is estimated at Rs 1,72,000 in 2022-23, up from Rs 86,647 in 2014-15, suggesting an increase of about 99 per cent. This is a major boost for consumption. Midcaps have pricing powers since technology has reduced input cost and distribution costs.
- Electronic goods exports clocked $25.3 billion, rising a stunning 49% since 2021-22, even in a year when overall exports grew just 6.5%. The category alone contributed around 30% of the total growth in exports. There are many Midcap and small companies which are going to change the buckets form mid to large and small to mid.
Conclusion:
Those who have questions and doubts on FII’s inflows well they are going to coming faster before interest rates start coming down. The reason is that current valuations in mid and small caps are low in India and buying current low valuations over the long term will get much higher returns. Further, as interest rates will start coming down the valuations will raise hence early bird investors from FII’s will benefit more. Even if monsoon remains weak this time we will still find buying at lower levels since liquidity hoarding is high in the market. Well before investing risk profiling is very important and asset allocation rules should not be violated otherwise one might have to pay a huge price for going wrong on both. Opportunities in Midcap and small-cap will continue in coming insights articles.
Author Bio
