Shares of mid- and small-cap companies could remain under pressure despite the recent correction, according to experts.
“Even after the recent correction, almost 70 per cent of the mid- and small-cap stocks are trading at lofty valuations. Several stocks have run up 10-20 times in the aftermath of Covid and need to correct 20-50 per cent for the valuations to cool,” said AK Prabhakar, a market expert.
On Monday, mid- and small-cap indices slid another 1 per cent. The Nifty Midcap 100 and Nifty Smallcap 100 have now fallen 21.4 per cent and 17.6 per cent from the peaks they hit in September and December, respectively.
Rising investor base
Small- and mid-caps are high beta and tend to rise and fall more than the large-caps. Individual investors hold a large chunk of these shares unlike large caps where the institutional holding is relatively high. The number of investors has almost quadrupled post Covid, many of whom are new to the market.
“The correction could continue for some more time given that the macro and micro numbers do not look that encouraging and foreign institutional buying is yet to resume,” said Deepak Jasani, an analyst.
While the valuations are not as expensive as they were 2-3 months back, the mid- and small-cap names are far from bottoming out, said Jasani.
The rout
Indian equities have seen a sharp correction due to sustained FPI outflow, rising US yields and weak earnings growth. Individual stocks have seen a bigger correction than what the benchmark indices would suggest.
About 75 per cent stocks from mid- and small-cap indices are down by more than 20 per cent from all-time highs, suggests a note by Motilal Oswal Private Wealth.
“We expect the markets to remain in a corrective to consolidation phase for the next 3-4 months and such phases should be considered for gradual accumulation. Investors can increase allocation by implementing a lump sum investment strategy for hybrid and large-cap equity-oriented funds and a staggered approach over the next six months for flexi-, mid- and small-cap strategies,” the note observed.