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Multibagger Marvels: Big Bucks Chasing 95 Smallcap Stocks with Astonishing 1,140% Rally

Foreign investors in India have increased their stake in 95 smallcap stocks that have given high returns this fiscal year.

Foreign institutional investors (FIIs) have been selling off Indian equities in recent months, but they couldn't resist the allure of small-cap stocks that have the potential for multibagger returns. An analysis of shareholding patterns of BSE-listed companies reveals that FIIs increased their stake in 95 small-cap stocks that have delivered impressive returns this fiscal year.

During the September quarter, FIIs raised their stake in 529 stocks, with the majority of 496 counters generating positive returns for investors. Notably, 95 of these stocks have more than doubled investor wealth, according to ACE Equity data.

One example is Jai Balaji Industries, a small-cap iron and steel stock with a market capitalization of around Rs 9,000 crore. FIIs owned just 0.09% stake in the company at the end of the June quarter, but increased it to 0.67% in Q2. The stock has witnessed a staggering 1,143% increase in share price in FY24, making it one of the best-performing small-cap stocks in the FII portfolio.

Suzlon Energy, a favorite among both retail and foreign investors, has also seen a significant increase in FII stake. The stock has delivered a 287% return, driven by favorable tailwinds and a turnaround in the balance sheet. FIIs increased their stake by 309 basis points to 10.88%.

Other notable stocks in which FIIs raised their ownership include Jupiter Wagons, Apollo Micro Systems, Aurionpro Solutions, D.B. Corp, ITI, Mazagon Dock Shipbuilders, Titagarh Rail Systems, Newgen Software Technologies, Inox Wind, RVNL, Zen Technologies, Railtel Corporation, Birlasoft, Apar Industries, and Cochin Shipyard.

Titagarh Rail Systems, for example, witnessed FIIs more than doubling their holding from 7.05% in Q1 to 16.85% in Q2. The company, which benefits from the surge in railway capex, reported a 54% year-on-year increase in Q2 revenue and a 106% YoY jump in adjusted PAT.

Analysts are optimistic about the future prospects of these stocks. Nuvama, for instance, has raised the target P/E to 33x and revised the target price of Titagarh Rail Systems to Rs 949. Similarly, Zen Technologies, which designs and manufactures combat training solutions for defense and security forces, has also doubled investor wealth. FIIs increased their stake by 137 basis points to 4.84%. With a large order inflow and revenue visibility for the next few years, analysts believe there is further potential for rerating.

As for investors, the Nifty has delivered a 7.6% return in the past year, while the Nifty Smallcap 250 and Nifty Midcap 100 indices have delivered returns of 28.3% and 26%, respectively. Sectors such as capital goods, auto, and metals have been the top winners.

After a 3% correction in October, the valuation model used by Kotak Equities suggests that the index is now "only" 8% overvalued, compared to 10% at the end of September. Geopolitical tensions could be the trigger that brings the index to fair value, as they have already brought the median pairwise correlations close to their long-term average and increased index volatility slightly.

In the ongoing quarterly earnings season, there haven't been any major negative surprises or significant positives. Upgrades in earnings estimates for FY24E/FY25E have been driven by cyclical sectors related to capex, discretionary consumption, and credit growth. On the other hand, downgrades are mainly due to defensive sectors like IT, FMCG, and grocery retail, as well as cyclical sectors related to QSRs, retail, building materials, rural finance, and RIL.

(Note: The views and opinions expressed in this article are those of the experts and do not necessarily reflect the views of The Economic Times.)

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