Wonderla, Fusion Micro, Nazara Tech among top microcap picks of ICICI Securities

ICICI Securities remain positive on select microcap counters, considering their cheaper valuations and scope for expansion in risk tolerance. However, it remains concerned about the liquidity and has cited it as the key risk for these counters. ICICI Securities has categorized stocks with market cap rank from 501 to 1,000 as its microcap universe.

Current microcap universe valuation in terms of trailing earnings yield excluding loss pools is about 6 per cent as compared to 4 per cent, thereby, offering reasonably cheap valuations in terms of risk spread in a bull market environment, said ICICI Securities.

On the other hand, mid and small cap valuations in terms of earnings yield spread over large caps have diminished significantly with their average trailing earnings yield at 4.7 per cent, it said. "Earlier instances of bull markets in broader equities have seen microcap earnings yield spread over large caps drop to near zero versus current spread of 150-200 basis points (bps)."

The brokerage does not rule out the possibilities of past behaviour, if the current bull market continues, driven by a broad-based investment cycle. Microcap 250 index has a large weight in the broader industrial sector and discretionary consumption related manufacturing as compared to Nifty50.

"Liquidity risk of microcaps in a bear market scenario: Apart from being largely cyclical in nature, microcaps have another major risk in terms of liquidity with bulk of stocks having an average daily turnover of below Rs 100 crore. Hence, in an economic downturn driven by a bear market, the ‘beta’ factor works against microcaps along with liquidity risk, thereby, resulting in sharp corrections," said ICICI Securities.

Currently, in the microcap universe there are around 80 stocks with RoE over 10 per cent and earnings yield more than 10-year government bond yield which allows screening within a wider universe of stocks available at cheap valuations with minimum quality standards, it added.

Wonderla Holidays, Somany Ceramics, Greenpanel, Sansera Engineering, ISGEC, Fusion Micro Finance, Repco Home Finance, Nazara Tech, Tatva Chintan, Astra Microwave, Kewal Kiran and Gokaldas Exports remain top picks from ICICI Securities from Microcap segment. 

Also read: Brightcom Group shares snap 4-day losing run, locked in 5% upper circuit; here's what tech charts hint

Also read: Sensex tops 64,000, Nifty scales fresh all-time peak of 19,000: Investor wealth jumps over Rs 1.84L cr; IFB Ind & Adani Ent jump up to 5%