Mid, SmallCap indices bleed; US Fed's rate cut to blame? Analysts weigh

Nifty Midcap 100 slipped below the 59,000 mark, meanwhile, Nifty SmallCap 100 declined below 19,100

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Broader market indices-- Nifty MidCap 100 and Smallcap 100-- plunged over 1 per cent and nearly 2 per cent respectively in the afternoon deals. The fall comes after the US Federal Reserve cut 50 basis points (bps) interest rate in a meeting that happened late evening on Wednesday.

Neeraj Chadawar, Head of Fundamental and Quantitative Research at Axis Securities reckons the next 3-5 trading sessions remain critical in the global market, as investors will monitor any further signals of carry trade unwinding with this 50 bps rate cut move. 

Back home, on the broader market front, Chadawar sees some time correction in certain pockets in the near term, and flows are shifting to large caps.

At around 1:18 PM, Nifty Midcap 100 slipped below the 59,000 mark and was down 1.64 per cent at 58,770.75. Meanwhile, Nifty SmallCap 100 declined below 19,100 and was down 1.97 per cent at 19,007.20. In comparison, NSE Nifty was up 37.8 points at 25,415.35.

Meanwhile, the BSE MidCap index was down 0.91 per cent at 48,411.54 and the BSE SmallCap index slipped 1.25 per cent at 56,204.73. The BSE Sensex was at around the same time was up 370.45 at 83,318.68.

Why sudden fall in mid-and-small-cap indices?

Analysts believe that the market is correcting the overvalued stocks in the mid-and-smallcap space.

"The MidCap and SmallCap segments, particularly sectors like defense, railways, and capital goods, which have performed exceptionally well over the past 2-3 years, are now witnessing a sharp correction. Valuations have long been a concern in the broader market, yet these stocks continued to rally despite being considered expensive," said Santosh Meena, Head of Research, Swastika Investmart Ltd.

On a similar note, Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers said, "There were already some pockets(in the small-and-mid cap space) where valuations were very rich and the correction was due. Thus, markets are adjusting to excess valuations and profit booking out of unsustainable multiples."

Further, Meena said, "Domestic institutions, too, have shown signs of caution, holding significant cash reserves at elevated levels in the space."

On August 5, a study by Capitalmind Financial Services, Sebi registered portfolio manager, raised concerns about the sustainability of this surge. The index's P/E ratio has expanded by a significant 63 per cent in the past year, while earnings per share (EPS) remained flat, indicating that the price increase is not backed by strong fundamentals. READ MORE

Meena believes this correction could extend further, presenting a strong buying opportunity in high-quality stocks for long-term investors.

On the Nifty Midcap 100, 75 stocks declined and 25 stocks advanced.  Vodafone Idea and Indus Towers were the top laggards declining 11.71 per cent which perhaps dragged the index. The telecom stocks declined after the Supreme Court (SC), reportedly, rejected telecom companies' plea on re-computation of adjusted gross revenues (AGR).

An AGR is the basis for a revenue sharing mechanism between the government and the telecom operators.

Further, as per reports, the SC also upheld the quantum of the AGR demand already sought by the government, reports said.

Vodafone Idea and Bharti Airtel, in their petitions, had contended that AGR should include only core telecom revenues. While the DoT insisted it should encompass all revenue, including from non-telecom services. READ MORE

Meanwhile, 89 stocks declined on the Nifty SmallCap 100, and 11 stocks advanced. Chambal Ferilizers and IIFL Finance were the top drags declining up to 7.56 per cent. On BSE MidCap, Vodafone Idea and Oil India were the top losers. Likewise, on the BSE SmallCap index, Nava and Kennametal India were the top laggards slipping up to 6.65 per cent.