Midcap and smallcap stocks have been the flavour of the season for Dalal Street investors, giving superlative returns.
However, the sharp rally has prompted mutual funds to book profits in some of them.
The monthly MF holdings data showed that the domestic institutions have reduced exposure to 10 such mid- and smallcap stocks for three consecutive months.
Of the 10 stocks, nine of them have given double-digit returns of up to 43% so far in the current financial year, while one has turned multibagger.
Mazagon Dock Shipbuilders, Bank of India, Thermax, Uno Minda, and Vedant Fashions are the five midcap stocks which saw mutual funds reducing their exposure for three months in a row, according to the data shared by Nuvama Institutional Equities.
The five smallcap stocks that saw selling by MFs for three consecutive months were Galaxy Surfactants, Ingersoll Rand, BEML, Home First Finance, and MTAR Technologies.
Mazagon Dock Shipbuilders/BEML
These two defence sector superstars have given whopping returns to investors so far in FY24. Taking note of such a sharp rally, mutual funds have been steadily booking profits in the counter.
As of September 30, MFs held a 0.35% stake in Mazagon Dock compared to 0.44% a quarter ago. The selling continued in October also, with Aditya Birla Sun Life PSU Equity Fund being the highest seller of 29,814 shares, according to Trendlyne.
In BEML, MFs have been steadily reducing their exposure in the last four quarters. This trend continued in the current quarter as well, with data showing that Invesco India Smallcap Fund was the highest seller of 88,878 shares in October.
The Indian defence sector has seen a sharp rerating in recent months on expectations of large spending by the government and a steady increase in indigenization.
In Kotak Institutional Equities’ view, stocks such as Mazagon Dock largely factor in the positives, but not the potential risks of delays in ordering and lower profitability, and is, therefore, a bit cautious on the sector.
MTAR Technologies
This is another best-performing stock in the smallcap space and has rallied more than 41% so far in the current financial year. However, mutual funds have steadily reduced their exposure to the company in the last three months. Data shows Aditya Birla Sun Life was the highest seller of 181,576 shares in October, constituting a 0.59% stake.
In the last one month, the stock has seen over 13% correction amid disappointing earnings and growth outlook.
Despite this disappointment, analysts at JM Financial Institutional have held a positive stance on the company.
“We maintain our positive view on MTAR as the current setback appears temporary and estimate 36% EPS CAGR over FY23-26,” the brokerage said, maintaining a “buy” rating and a target price of Rs 2,575.
Home First Finance
This non-bank financial major, which has given more than 28% returns to investors, saw selling by mutual funds for three consecutive months. Data showed Union Midcap Fund was the highest seller of 78,407 shares in October.
While the stock has seen continued selling by mutual funds, analysts remain largely positive on the stock and the company’s growth prospects.
“Home First remains our preferred pick due to lean business model, strong growth outlook, levers available to maintain NIMs, controlled opex, expectation of low credit costs and continuity in senior management,” said Centrum Broking’s Sonal Gandhi.
The brokerage has assigned 4x multiple to the company due to its faster AUM growth, geographical spread, lean business model and sharp improvement in RoE profile over the next two years.
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