- You may be overlooking the biggest price‑dislocation in the market.
- 55‑60% of small‑caps trade at COVID‑era multiples – a historic rarity.
- HDFC Bank’s standalone P/E of 12‑13× signals deep value versus its peers.
- Reliance’s market cap is only $200 bn while Jio alone was once valued at $150‑160 bn.
- Medium‑ to long‑term accumulation can turn today’s red into tomorrow’s green.
You’re probably skimming past small‑caps, but that could be your biggest missed trade.
Why Small‑Cap Valuations Mirror COVID‑Era Levels
During the pandemic’s peak, investors chased growth at any price, inflating price‑to‑earnings (P/E) ratios across the board. Today, a new study shows roughly 55‑60% of Indian small‑cap stocks sit at those same lofty multiples. That means the market is pricing small‑caps as if the COVID‑era growth engine were still humming, even though earnings have normalized. For a value‑oriented investor, this creates a classic “value trap” scenario if the upside stalls, but also a rare “value opportunity” if fundamentals hold up.
Key metrics to watch: forward P/E, price‑to‑book (P/B), and earnings growth estimates. When forward P/E is high but earnings growth is modest, the risk of a correction rises. Conversely, a high forward P/E paired with solid earnings trajectory can signal a mispriced upside.
How HDFC Bank’s Standalone Metrics Reveal Hidden Upside
HDFC Bank is often hailed as the benchmark Indian bank, yet its market narrative is clouded by the value of its stakes in subsidiaries. Stripping those holdings reduces the standalone market cap to roughly Rs 12 lakh crore. With projected PAT of Rs 82‑85 crore for FY24, the implied P/E compresses to just 12‑13× – a stark contrast to the 20‑plus multiples many large‑cap banks trade at.
What does a 12‑13× P/E mean? Historically, banks with P/E below 15× have outperformed the broader index during recovery phases, as earnings visibility improves and credit growth resumes. HDFC’s strong loan‑book quality, low non‑performing assets, and robust digital adoption further reinforce the case for a valuation uplift.
Reliance Industries vs Jio Platforms: What the Valuation Gap Means for You
Reliance’s total market cap hovers around $200 bn, yet its flagship subsidiary Jio was once pegged at $150‑160 bn during the 2021 IPO window. The disparity suggests the conglomerate’s other assets – petrochemicals, retail, and renewables – are currently undervalued relative to the telecom arm.
Investors can view this as a “conglomerate discount” opportunity. When a single business dominates market perception, the remainder often trades at a discount to intrinsic value. If Reliance can unlock synergies or accelerate growth in its non‑telecom verticals, the overall multiple could rise, delivering a multi‑digit upside.
Sector‑Wide Trends: Large‑Cap vs Mid‑ and Small‑Cap Dynamics
The broader market correction has widened the gap between large‑caps, which enjoy stable cash flows, and the more volatile mid‑ and small‑caps, which are earnings‑sensitive. Large‑caps have benefited from defensive positioning and stronger balance sheets, but their valuations are now approaching historical highs (P/E > 25× for many). Mid‑caps sit in a sweet spot: enough scale to weather volatility yet still possessing growth levers.
Small‑caps, however, have been the most price‑sensitive. The current dip has driven many to sub‑50‑day moving averages, a technical signal that could precede a rebound if macro fundamentals improve. For investors, this creates a tiered approach: secure core exposure with large‑caps, add growth via mid‑caps, and selectively accumulate small‑caps that meet strict quality filters.
Historical Precedent: What 2020 Valuation Spikes Taught Investors
In early 2020, Indian equities plunged, only to recover sharply as fiscal stimulus flowed. Small‑cap indexes, after hitting pandemic lows, delivered an average 150% gain by mid‑2022. The key lesson was patience: investors who bought during the trough and held for 12‑18 months captured the bulk of the upside.
That episode also taught us to watch for “valuation compression” – when multiples fall faster than earnings, creating a gap that can be filled as sentiment normalizes. The current environment mirrors that pattern, albeit with a different catalyst (global rate hikes rather than a pandemic).
Investor Playbook: Bull and Bear Cases for the Current Landscape
Bull Case: Small‑caps continue to trade at COVID‑era multiples but earnings start to beat estimates, compressing P/E ratios and unlocking upside. HDFC Bank’s standalone valuation narrows further as PAT exceeds forecasts, pushing the stock toward a 10× P/E. Reliance leverages its telecom cash flow to fund high‑margin retail and renewable projects, narrowing the conglomerate discount.
Bear Case: Macro headwinds (higher interest rates, slower credit growth) suppress earnings across the board. Small‑caps, being more cyclically exposed, see earnings contraction, keeping high multiples unjustified and leading to a deeper correction. HDFC’s earnings miss due to loan‑growth slowdown could push its P/E back above 15×, eroding the perceived discount.
Actionable steps:
- Screen small‑caps with forward P/E < 25× and earnings growth > 10% YoY.
- Allocate 5‑10% of portfolio to HDFC Bank if price falls below Rs 1,650, targeting the 12‑13× P/E sweet spot.
- Maintain a core holding of Reliance Industries while adding exposure to its retail and renewable subsidiaries at a discount to peers.
- Use a staggered buying plan – dip‑buy on market pullbacks, then scale in as technical indicators (e.g., 50‑day moving average) turn bullish.
Remember, the market rewards patience more than speed. By focusing on fundamentally sound businesses, regardless of market‑cap size, and maintaining a medium‑ to long‑term horizon, you can turn today’s red lines into tomorrow’s green returns.