Smallcap Profits Shrink In Q4, But Motilal Oswal Bets Big On These Stocks For Long Term

The small-cap segment of the Indian stock market emerged as the biggest laggard by recording not only weaker-than-expected profits but also witnessing a significant decline in their margins during the March quarter of FY25.

Nearly all the small-cap sector stocks reported a 22% decline in their profit (before tax), with metals, oil and gas (O&G) emerging as an exception, noted Motilal Oswal in its latest report. The brokerage, in its analysis of selected small-cap stocks, stated that the earnings growth of the segment was hugely impacted by the smaller financial companies.

Large Cap, Midcap Outshone While Smallcap tumbled

Mid-cap sector companies showcased unexpected resilience during the March quarter with an 19% annual increase in their profit margins during the quarter, whereas the large cap sector stocks continued to stay strong during the period. However, smallcap sector emerged as the top laggard.

"Within our MOFSL coverage universe, large-caps (86 companies) posted an earnings growth of 10% YoY. Mid-caps (89 companies) stood out and delivered 19% earnings growth (est. of 10%), led by Financials (PSU Banks and NBFCs), Metals, Healthcare, and Retail. In contrast, small-caps (122 companies) experienced a broad-based miss adversely impacted by the Financials sector," read the MOFSL report.

Financials Emerged As Top Laggards Under Smallcap Segment

The March quarter remained specially challenging for smaller BFSI players during the quarter, with small-cap NBFC-lending sub-sector suffering the most with a 68% annual dip in their profit after tax.

"The weak Small-cap earnings outcome was influenced materially by the Financials sector, wherein most sub-segments posted not just lower-than-expected numbers but also negative YoY PAT growth - underlining the challenges for smaller BFSI players during the quarter. Small-cap NBFC-lending sub-sector suffered the most, posting a 68% YoY dip in PAT," noted Motilal Oswal.

Decline in profit margins of small-cap NBFC lending consisted of around 92% of the overall small-cap annual PAT decline. "This was owing to weak revenue growth and even weaker asset quality - particularly at the MFIs. The aggregate outcome was weaker than our already glum expectations of -50% PAT YoY," added Motilal Oswal in its report.

Motilal Oswal's Smallcap Pick For June

Motilal Oswal, in its preferred pick idea, mentioned LT Foods and Niva Bupa, as top bets for June. The brokerage, in its 'Focus Investment Ideas' report, had indicated a 22% upside in Niva Bupa stock valuation and a 3% valuation upside.

Niva Bupa stock closed marginally lower at Rs 81.39 per share on BSE on Friday, June 13. Motilal Oswal had fixed a target price of Rs 100 per share for the company scrip, indicating a 22% upside in its valuation.

LT Foods shares ended marginally lower at Rs 458.8 per share on BSE on June 13. Motilal Oswal had fixed a target price of Rs 470 per share for the stock indicating an upside of 3% in its valuation.

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