A study by Bajaj Finserv AMC has suggested that small-caps may be approaching a favourable entry point, supported by improving fundamentals, a potential earnings recovery, corrected valuations, and historically-strong rebound patterns.
It notes an increase in aggregate capex in the segment from approximately Rs 2.2 lakh crore during FY19-FY22 to about Rs 3.4 lakh crore between FY23 and FY26. The debt-to-equity levels dropped from 0.52x in FY19 to near-zero levels in FY26. Return on equity has improved from 9% to 12% during this period, reflecting stronger financial discipline and sustainable business models.
Further, the increasing exposure of domestic institutional investors in small-caps through the SIP route may also help reduce volatility in small-caps over time, the study said.
The fund house highlights that recent market corrections have also created opportunities for valuations supported by earnings growth and contextual factors, with nearly 50% of small-cap stocks trading below their 10-year average valuations, one of the highest such readings in recent years. The study notes that this broad-based correction has helped clear overvaluations from the market and created selective opportunities in fundamentally-strong businesses.
The AMC also notes the outperformance of small-caps during recovery phases of the market in the past as a key reason to look at the segment.
