ICICI Securities Suggests Smallcaps’ PAT to GDP Ratio of 0.7% Offers Room for Expansion

The past month witnessed a notable downturn in the Nifty Smallcap 250 index, dropping over 8%, and the Nifty Midcap 150 index, down 5%, reflecting a significant sell-off in the broader market. This correction has unnerved retail investors, despite some observed buying activity in select smallcaps and midcaps.

According to a recent strategy report by ICICI Securities, there’s a promising outlook for profitability driven by an “investment rate” fueled upcycle. The report highlights a rising trend in the “PAT to GDP” ratio within the listed space, reaching a mid-cycle range of 4.9% (from 4.3% in FY23) as of March 16.

Looking ahead, the report suggests that smallcaps present substantial growth potential, especially considering their PAT to GDP ratio currently stands at 0.7% compared to a cycle peak of 1.2%. Projections indicate an anticipated earnings growth of 25% for the FY23-FY26 period for Nifty Midcap 100 (excluding Vodafone) and Nifty Smallcap 100, surpassing the benchmark Nifty’s expected growth of 17%.

The report attributes the potential outperformance of broader indices to their relatively higher weightage in the industrial sector and discretionary consumption space, which are poised to benefit from the prevailing demand environment driven by the capex cycle and discretionary spending.

Highlighting the sectoral distribution, the report reveals significant weightage to capex and manufacturing-related companies in the broader market indices, with respective percentages of 56%, 38.38%, 39.33%, and 30.19% in the Nifty Microcap 250 index, Nifty Smallcap 100 index, Nifty Midcap 100 index, and Nifty.

The Nifty Smallcap 250 index saw a marginal decline of 0.29% on March 18, with notable movements in various index constituents, including seven stocks gaining over 5%, 24 stocks rising between 2% to 5%, and around 85 index constituents gaining up to 2%.

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