Smallcap and midcap (SMID) stocks, represented by the BSE Small and Midcap 400 Index, have rebounded sharply in April to the pre-war level of 12,000 despite lingering uncertainties around supply shocks. While Nuvama Alternative & Quantitative Research viewed SMID valuations as expensive, despite the index being stuck between 11,000 to 13,000 levels for the last two years, it identified value-buying opportunities in consumer durables, chemicals, IT and select auto ancillaries. The brokerage preferred stocks such as ACME Solar Holdings Ltd, Coforge Ltd, Page Industries Ltd, UNO Minda, NMDC Ltd, Gravita India Ltd, PG Electroplast Ltd and Aarti Industries Ltd. It also favoured Max Financial Services Ltd, JK Cement Ltd and Crompton Greaves Consumer Electricals Ltd among its top picks.

Nuvama classified these stocks into three groups. The first, termed ‘Restructurers’, included cyclicals with bottoming margins and policy support. The second category, ‘Reinvestors’, comprised consistent compounders, while the third, ‘Rewarders’, included companies with high free cash flow yields. Embassy Office Parks REIT and NMDC Ltd were grouped under ‘Rewarders’. UNO Minda, Coromandel International Ltd and Coforge Ltd were categorised as ‘Reinvestors’, while Page Industries Ltd and PG Electroplast Ltd were identified as ‘Restructurers’.

With regards to valuations, consumption stocks are now much cheaper than most cyclicals, not just relative to their own history, but also with regards to levels, Nuvama said.

"Durables, FMCG, even retail are all trading at the lower end of their valuations. While some of the cyclicals in SMIDs—industrials, defence, metals are trading at the higher end of the spectrum. Real estate is perhaps a space amongst cyclicals where valuations have moved somewhat lower," Nuvama added.

The brokerage sees near-term earnings pressure. But while demand recovery post the 2022 disruption was led by capex, it sees consumption outpacing capex this time, given the higher policy support. 

"SMIDs are trading at 20–30 per cent premium to large caps—nearly all-time high, despite their one-year forward EPS growth differential vanishing as compared to 40 per cent discount seen during the previous bottoms. The valuation premiums look particularly high in the context of weak earnings differential," Nuvama said.

That said, it said earnings growth of Indian SMIDs is now in line or rather underperforming their global peers, back to its pre-Covid-19 trend. This is in sharp contrast to the 2023–24 phase where higher earnings growth justified a larger premium. Thus, large premium to global peers may perhaps not be warranted, Nuvama said.