There is significant pain across indices today. The cuts are even sharper in the small and midcap space as the broader markets continue to bleed on worries of valuation and earnings downgrade. The BSE Smallcap Index is down over 2% intra-day. For the month, the BSE Smallcap is down over 14% and the decline in 2025 is over 20% so far.
The picture is no different for BSE Midcap Index either. The BSE Midcap is down over 2% as well. The cuts are equally sharp over 1-month basis. The BSE Midcap has fallen closer to 11% and the losses in 2025 so far exceed 17%.
The question then is what’s the big worry in this space?
Smallcap valuations a big concern
The valuation worries are primary in the midcap space. As we reported earlier on Financial Express.com, Kotak Institutional Equities had warned of a sharper correction in the midcaps and smallcaps primarily on account of “valuations are still fair-to-full-to-frothy for most parts of the market. The midcap., smallcaps. and ‘narrative’ stocks will likely see further sharp correction.” Even Nomura recently highlighted the downside risks in terms of valuation when they mentioned that though MSCI India valuations have come down to 21x from 24x last October, they are still higher than the average valuations of 19x between 2015-2022. What further exacerbates the pain is the dollar’s relative strength over the last few months. That’s increased the extent of loss.
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Further downgrade in earnings is another big worry for the street. While the large caps saw marginal downgrade in their earnings, the cuts are significant for mid and smallcaps. The over midcap universe saw an earnings downgrade averaging close to 3% while the smallcaps earnings saw nearly 6% revision downwards. This indicates that the earnings pain in the space will be sharper compared to the Index.
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There are also worries about redemption pressure from Mutual Funds. Channel checks and conversation with several small and midcap fund managers indicate that many smallcap and midcap funds are sitting on quite a bit of cash at the moment and they are looking at select buying opportunities based on value and business fundamentals.
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