Several mid-cap and small-cap stocks slide; analysts advise caution

Even as the BSE Sensex and NSE’s Nifty50 are close to their record highs, several stocks in the small- and mid-cap space have seen a huge correction. Stocks such as RCom, IDBI Bank, Bank of India and Glenmark are down 17-44 per cent in the past month. In small-caps, Videocon, Shilpi Cable and Nitin Fire have dropped 58-74 per cent. While RCom, Videocon and IDBI Bank have corrected due to case-specific developments, analysts say a sharp run-up in the past six months make stocks in this space vulnerable to negative news flows.

“Indian mid-caps and small-caps as an asset class may not be that exciting after their sharp run-up, especially in the near term. Over the past few months, we have downgraded some ratings, as we didn’t find comfort at their valuations, despite being positive on their business models and long-term growth outlook,” said Gautam Chhaochharia, head of India Research, UBS Securities.

After scaling new highs for three months, the BSE Midcap and Smallcap indices entered a brief correction in May, with the indices coming off by nearly 10 per cent. But, the indices have recovered most of the lost ground and are now near their record highs. Analysts say large-cap stocks could outperform small- and mid-caps as valuations look more in favour of the former. Currently, mid-caps trade at premium valuations to the blue-chip stocks. Analysts expect the valuation gap to narrow. According to BSE data, the Sensex trades at 12-month trading price-to-earnings multiple of 22.5 times. The Midcap index trades at 31.4 times, while the Smallcap index trades at 71 times. Analysts recommend investors exercise caution while buying shares of smaller firms.