BSE 400 SMID Index Reaches Pre-US-Iran Tensions Level, Fuels Debate Over Small and Midcap Stock Investment Opportunities
Indian Small- and Mid-Cap Stocks Surge in April Amid Broader Market Volatility
The Indian equity market remained volatile in April due to ongoing geopolitical tensions in the Middle East linked to the US-Iran conflict. However, small- and mid-cap stocks delivered a strong performance, with the BSE Small and Midcap 400 Index (SMID) rebounding sharply during the month.
The SMID index recovered to its pre-war level of 12,000, following the US-Iran ceasefire, and surged 14% over the past month. This outperformed benchmark indices such as the Sensex and the Nifty 50, which gained over 7% during the same period.
Despite the recent uptrend, analysts remain cautious, and experts at Nuvama Institutional Equities expect small-cap and mid-cap stocks to remain range-bound until fresh stimulus arrives or valuations turn cheap. The brokerage firm identifies attractive bottom-up ideas, especially in the consumption and exports sectors.
Valuations in the SMID Segment Remain Stretched
Valuations in the small- and mid-cap segment continue to appear stretched, with Nuvama Equities noting that they are nearly one standard deviation above long-term averages across key metrics. The correction over the last two years has not materially eased SMID valuations, largely due to the elevated starting base.
| Valuation Metric | SMID (Current) | SMID (10-Year Average) | Trough-Cycle Valuation Range |
|---|---|---|---|
| Price-to-Book (P/B) | 4x | 3.3x | 1.5-2x |
| Price-to-Earnings (P/E) | |||
| Price-to-Sales (P/S) |
SMIDs are trading at around 4x price-to-book (P/B), representing a 20% premium to their 10-year average and roughly double the trough-cycle valuation range of 1.5–2x. Historically, such valuation levels have translated into muted five-year returns, typically below 5% CAGR.
Read also: Adani Energy Solutions Reports 5.7% Increase in Q4 Net Profit to Rs 684 Crore
Earnings Outlook: Sharp Rebound Unlikely
The key question now is whether SMID earnings can stage a sharp rebound, similar to the post-shock recoveries seen after the Covid-19 disruption in 2020 or the Russia-Ukraine conflict in 2022. While consensus estimates are building in a V-shaped recovery, with 22% profit CAGR over FY26–28, Nuvama remains cautious.
The brokerage firm notes that the supply shock normalisation should certainly support, but a sharp rebound is unlikely. Unlike 2020, there is no large-scale global stimulus to drive demand, and unlike 2022, there is limited scope for pent-up demand to be unleashed. Also, income across agents remains weak, and there are early signs of capex moderation.
Nuvama Equities' SMID Top Picks
Nuvama Equities believes value is now emerging in durables, chemicals, IT, and a few auto ancillaries. The brokerage firm categorises its preferred SMID ideas under its RRR framework — Restructurers, Reinvestors, and Rewarders:
| Category | Company |
|---|---|
| Restructurers | JK Cement, Page Industries, ACME Solar Holdings, Crompton Greaves Consumer Electrical, Aarti Industries, PG Electroplast |
| Reinvestors | UNO Minda, The Phoenix Mills, Coromandel International, APL Apollo tubes, Max Financial Services, Coforge, Gravita India |
| Rewarders | NMDC, Embassy Office Parks REIT |
Investor Takeaway
Investors should remain cautious and not anticipate a decisive breakout in the near term.
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