Despite having seen more earnings downgrades and target price cuts in the latest earnings season, the broader market has not seen a bigger correction than the benchmark indices, warranting experts to caution investors of bargain hunting in this segment.
The Sensex is down 10% from its record high levels hit in late September. Similarly, the BSE Smallcap and the BSE Midcap indices are down around 9% and 11%, respectively. This is despite some segments of the broader market like defence, state-owned banks, and the real estate sector seeing a 30-40% drop from their lifetime high values.
Jefferies pointed out in its recent strategy note that more than a fifth of stocks under its coverage in India are trading below the lows hit during General Election results in June, and around 30% are down more than 20% from year-to-date peaks.
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While it said a near-term bounce back was possible, it has adopted “a cautious view on the market for the medium term given the earnings downgrades, concerns on equity supply and potential concerns on the upcoming budget on the 1st Feb.”
Robust economic and earnings growth has been a key factor driving Indian equities to new highs in the last four years. The optimism and attractive returns post-Covid pandemic have propelled more retail investors to enter the market.
However, the first two quarters of the financial year 2024-25 have been underwhelming – both in terms of economic and earnings growth.
The September quarter performance is seen as the worst since March 2020 in terms of earnings downgrades. Brokerage firm JM Financial Services said 23% of small-caps and 17% of midcaps under its portfolio saw more than a 10% cut in earnings forecast after the latest numbers. This was much higher compared to 10% for large-caps.
While this has led to more target price cuts in the broader market, the retail money flowing into the segment has not slowed.
“Normally the broader market outperforms large-cap stocks with a lag when the market is rising. Whereas on the way down they are normally the first ones to fall. But that has not happened this time around,” said Ambareesh Baliga,
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