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'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 may continue.'
The ongoing correction in mid and smallcap stocks (SMID) is likely to extend further, analysts cautioned.
The warning comes even as the Nifty Midcap 100 index and the Nifty Smallcap 100 index have declined 6.7 per cent and 3 per cent, respectively, in 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'," said A K Prabhakar, a market veteran.
"Further correction is required to trigger some value buying. The euphoria in SMID stocks could not have lasted forever," Prabhakar added.
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 midcap stocks plunged between 15 per cent and around 25 per cent last month.
Among smallcaps, Chennai Petroleum Corporation, PNC Infratech, MOIL, Sobha, Shipping Corporation of India, Escorts Kubota, and Ceat crashed 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 elections on Tuesday and the US Federal Reserve set to announce its interest rate decision on Friday, November 8, volatility may persist.
"Further, the Reserve Bank of India has stayed put on the interest rate action, for now, and India Inc is seeing a slowdown in quarterly earnings," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.
"There is no reason the markets would see a bounce back anytime soon," Khemka added.
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 firms 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) against the expectation of the 4 per cent dip.
As for Nifty 50, earnings of the 34 Nifty firms that have declared results, so far, have been flat Y-o-Y 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.
'Consumption has emerged as a weak spot while select segments of BFSI are seeing asset-quality stress,' the brokerage noted.
'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 added.
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 2025-2026.
"Financials, healthcare, industrials, discretionary, including real estate and jewellery players, and electronics manufacturers, meanwhile, may stay relatively resilient," Khemka of MOFSL said.
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Feature Presentation: Ashish Narsale/Rediff.com
