Mid, smallcap stocks outlook: Worst not over yet, caution analysts

Stock market today: The Nifty MidCap100 index and the Nifty SmallCap100 index have declined 8.8 per cent and 6.9 per cent, respectively, from their respective all-time highs

Midcaps, smallcaps to buy: The ongoing correction in mid and smallcap stocks (SMID) is likely to extend further, analysts cautioned on Monday.

 

The warning comes even as the Nifty MidCap100 index and the Nifty SmallCap100 index have declined 6.7 per cent and 3 per cent, respectively, in the month of October, and 8.8 per cent and 6.9 per cent from their respective all-time highs, as per ACE Equity data. 

 

A decline of more than 10 per cent from a security's recent peak puts it in a 'correction' phase.

 

 

"Despite the recent correction of nearly 10 per cent in Mid, SmallCap indices, the pack doesn't seem to trade at 'reasonable valuations'. Further correction is required to trigger some value buying. The euphoria in SMID stocks could not have lasted forever," said AK Prabhakar, a market veteran.

 

Individually, Indraprastha Gas, Vodafone Idea, L&T Finance, M&M Financial Services, Colgate Palmolive (India), Oil India, Steel Authority of India, Star Health and Allied Insurance, Suzlon Energy, Delhivery, and Jubilant FoodWorks among the mid-cap stocks plunged between 15 per cent and around 25 per cent last month. 

 

Among small-caps, Chennai Petroleum Corporation, PNC Infratech, MOIL, Sobha, Shipping Corporation of India, Escorts Kubota, and Ceat crashed up to 31.5 per cent during the period.

 

Analysts said the markets lack positive triggers for a turnaround, at least in the immediate term. With the US election results due on Tuesday, November 5, and the US Federal Reserve set to announce its interest rate decision on November 8, volatility may persist.

 

"Further, the Reserve Bank of India (RBI) has stayed put on the interest rate action, for now, and India Inc is seeing a slowdown in quarterly earnings. There is no reason the markets would see a bounce back anytime soon," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.

 

The SMID pack, he added, may enter a consolidation phase with only stock-specific action ruling the universe.

India Inc earnings in slow lane

 

According to an analysis of 166 companies in Motilal Oswal Financial Services' coverage, earnings growth hit a 17-quarter low in the September quarter of the current financial year (Q2 FY25), falling 8 per cent  year-on-year (Y-o-Y) as against the expectation of the 4 per cent dip.

 

As for Nifty50, earnings of the 34 Nifty companies that have declared results so far have been flat Y-o-Y as against an estimate of 2 per cent Y-o-Y growth. Thus, the Nifty EPS estimate for FY25 has been cut by 1.2 per cent to Rs 1,059, largely owing to BPCL, Reliance Industries, and Coal India.

 

"Consumption has emerged as a weak spot while select segments of BFSI are seeing asset-quality stress. The overall Nifty EPS has, now, seen a 7-per cent downward revision in the last six months, reducing the expected FY25 earnings growth to just 5 per cent, the weakest since FY20," the brokerage noted. 

 

This, analysts said, may weigh on mid and smallcap stocks' outlook in the near-term.

 

"Retail investors, who had not seen such a massive correction in the SMID universe since Covid-19, are witnessing something like this for the first time. Panic profit booking by them may continue," Prabhakar added.

Where to invest?

 

That said, while analysts do not foresee a sustainable recovery in the markets anytime soon, they expect select financials, and public sector enterprises to bounce back once the market stabilises.

 

"Railways, fertilisers, and agri-related stocks may see a bounce back, especially ahead of the Union Budget for 2025-26. Financials, healthcare, industrials, discretionary, including real estate and jewellery players, and electronics manufacturers, meanwhile, may stay relatively resilient," Khemka of MOFSL said.