The pain in the small and midcap stocks continues with the BSE Smallcap and the BSE Midcap Indices seeing 2% cuts intra-day even though the Nifty and Sensex are off intra-day lows. According to Kotak Institutional Equities, despite the recent correction, valuations are still rich. While “large-cap. indices and stocks may be range-bound, several midcap, small-cap and ‘narrative’ stocks may see a sharper correction.”
The four key headwinds for the India markets, as per the report, include
- Expensive valuations
- Likely earnings downgrades
- Higher-for-longer global interest rates
- Likely low interest in EMs among global investors
Concerns continue about small and midcap valuations
The report highlighted that analysts at Kotak Institutional Equities expect a “directionless market (headline indices) for the next few months, as the market adjusts to the excesses of the past 1-2 years.” The Indian market has been largely flat on a 12-month basis even as large-cap., mid-cap. and small-cap. indices, several sectors and stocks have declined significantly from the peak levels. “Nonetheless, valuations are still fair-to-full-to-frothy for most parts of the market. The mid-cap., small-cap. and ‘narrative’ stocks will likely see further sharp correction,” they stated.
According to them, “expect a further correction in the mid- and small-cap. indices and ‘narrative’ stocks, given a dangerous combination of rich valuations and weak fundamentals in many cases.” They however ruled out a major correction in headline indices or large caps on the back of “India’s decent macroeconomic position and reasonable earnings outlook for FY2026.” They believe that these positive drivers “will likely sustain the interest of investors in the market. As such, we would rule out a major correction in the market.”
The report further stated that “mid-cap and small-cap indices have severe data limitations, given limited or no coverage of several stocks with a high share of profits in the indices. This reduces the utility of the top-down index multiples. As per their calculations, “The 12-month trailing returns have moderated in the past few months, with negative returns in the past few months across major headline and broad indices. In addition, the indices mask a much deeper correction in most parts of the market.”
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“It would be interesting to see if non-institutional investors remain as bullish as they have been in the past few years or panic based on low and negative near-term trailing returns,” they observed.
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