Asian stock markets are higher in morning trade as shares in China and Hong Kong shares show gains. The Hang Seng is up 0.23% while the Shanghai Composite is trading up by 0.3%. The Nikkei 225 is down 0.62%. Over the weekend, US markets closed lower.

Meanwhile, Indian share markets opened the day on a flat note. BSE Sensex is trading lower by 14 points and NSE Nifty is trading lower by 5 points. S&P BSE Mid Cap and S&P BSE Small Cap are trading up by 0.1% respectively. Gains are largely seen in software stocks and auto stocks. Capital good stocks and realty stocks are witnessing majority of the selling pressure. The rupee is trading at Rs 65.01 against the US$.

Small caps have comfortably outperformed the Large caps and how. The BSE Small Cap Index has returned 21.7% in FY18 compared to 12.5% by BSE 100 and 11.7% by the Sensex.

Small Caps – Outperformers in Current Financial Year

Expectedly, valuations of certain Small cap companies have gone through the roof. It is important to understand the highly volatile nature of these stocks. In a downturn, these stocks tend to move in the opposite direction much faster as well.

While there, undoubtedly, lies hidden opportunities in the small cap space, it is important to focus on fundamentals of these stocks. Next, assess if they have the potential to move on to the ‘Safe stock’ category in the future.

In news from engineering sector, Larsen and Toubro (L&T) reported a higher than expected 27% rise in second quarter net profit, beating street estimates, helped by a one-off gain from the sale of a subsidiary.

Consolidated net profit rose to Rs 18.2 billion (US$279.31 million) in the three months ended September quarter from Rs 14.35 billion a year earlier.

Painting a subdued domestic investment environment, L&T said it won’t be able to meet its order inflow guidance of a growth of 12-14% in the financial year 2017-18. Revenue, on the other hand, grew by 5.7% to Rs 264.46 billion, aided by a 49.9% jump in the heavy engineering segment to Rs 12.11 billion.