Small-caps bear the brunt as geopolitical risks dent valuations

Currently, 58.3% of the small-cap stocks in the BSE 500 index trade below their three-year average valuations compared with sub-50% levels seen in large and mid-cap segments. The valuation gap persists across longer horizons and technical indicators such as daily moving average (DMA), implying that small-caps are slipping into the oversold region faster than their larger counterparts.

When seven-year average valuations are considered, 46% of the small-caps in the sample are undervalued compared with 41% and 34% of the large-caps and mid-caps respectively. Stretching the horizon further to 10 years, 42% of the small-caps look cheaper compared with 37% large-caps and 39% mid-caps.

For the total sample of BSE 500 companies, over half or 52% are undervalued on a three-year horizon while the proportion falls to 41% and 31% for seven-year and 10-year horizons.

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GEOPOLITICS HURTS These stocks slipping into oversold region faster than larger peers

In addition, at present, 90% of the small-caps trade below their 200 DMA compared with 63% large caps and 74% midcaps. It implies that small caps are showing significant price exhaustion.

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For this analysis, companies in the BSE 500 index with a market capitalisation of ‘50,000 crore and above are considered as large-caps, those with market cap between ‘20,000 crore and ‘50,000 crore are designated as mid-caps and the remaining are assigned small-cap status. It broadly adheres to the distribution of 85-10-05 wherein top companies arranged in the descending order of their market caps form 85% of the total market cap of the index, mid-caps account for 10% and the remaining portion is assigned to small-caps.
Among the valuation parameters, price-book (P/B) multiple is used for banking and finance companies while price-earnings (P/E) multiple is considered in the case of non-lending companies that include manufacturing, services and trading enterprises.