The ongoing correction in mid and small-cap stocks (SMID) is expected to continue, according to analysts who voiced concerns on Monday. The Nifty MidCap100 index and Nifty SmallCap100 index have seen significant declines, dropping 6.7% and 3%, respectively, in October alone. Additionally, they have fallen 8.8% and 6.9% from their all-time highs, as reported by ACE Equity data.
A decline of over 10% from a security’s recent peak signals a ‘correction’ phase. Market veteran AK Prabhakar noted that despite the recent corrections in mid and small-cap indices, these stocks do not yet trade at “reasonable valuations.” He emphasized that further declines may be necessary to spark value buying, asserting that the recent euphoria surrounding SMID stocks could not sustain indefinitely.
Individual stocks have also suffered, with notable mid-cap companies like Indraprastha Gas, Vodafone Idea, and L&T Finance experiencing drops between 15% and 25% last month. Among small-caps, Chennai Petroleum Corporation, PNC Infratech, and Ceat saw declines of up to 31.5%.
Analysts are cautious about a market turnaround in the immediate term, lacking positive triggers. With the U.S. election results anticipated on November 5 and the U.S. Federal Reserve’s interest rate decision set for November 8, volatility is expected to persist. Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services, indicated that the Reserve Bank of India (RBI) has paused interest rate changes for now, and a slowdown in quarterly earnings is impacting market sentiment. He added that the SMID pack may enter a consolidation phase, driven primarily by stock-specific actions.
India Inc Earnings in Slow Lane
An analysis by Motilal Oswal Financial Services revealed that earnings growth for 166 covered companies hit a 17-quarter low in the September quarter of FY25, declining by 8% year-on-year, contrary to an expected 4% dip. Earnings for the 34 Nifty companies that have reported results so far have remained flat year-on-year, against a projected growth of 2%. Consequently, the Nifty earnings per share (EPS) estimate for FY25 has been revised down by 1.2% to ₹1,059, largely influenced by BPCL, Reliance Industries, and Coal India.
Analysts pointed out that consumer spending has become a weak spot, while certain segments of the banking and financial services industry face asset quality stress. The overall Nifty EPS has been revised downward by 7% in the last six months, lowering expected earnings growth for FY25 to just 5%, the weakest since FY20. This trend may continue to impact the outlook for mid and small-cap stocks in the near term.
Retail investors, unfamiliar with such significant corrections in the SMID space since the COVID-19 pandemic, may experience panic-driven profit booking, according to Prabhakar.
Where to Invest?
Despite a lack of anticipated sustainable recovery, analysts suggest that certain financial stocks and public sector enterprises may rebound once the market stabilizes. They predict that sectors such as railways, fertilizers, and agriculture-related stocks could see a resurgence, especially in the lead-up to the Union Budget for 2025-26. Khemka also highlighted that financials, healthcare, industrials, discretionary sectors—including real estate and jewelry—and electronics manufacturers may remain relatively resilient amidst market fluctuations.
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