A total of 55 smallcap shares hit their fresh 52-week lows on Thursday amid a broader selloff in the second rung stocks, as moderating earnings growth is failing to justify high valuation premiums they enjoyed over largecap peers. While months of foreign outflows have kept valuations for largecaps relatively reasonable, continuous domestic inflows into sectoral and thematic funds have made valuations rich on many smallcap counters.
This made many Dalal Street veterans such as S Naren of ICICI Prudential asking investors to take out “lock, stock and barrel from small and midcaps”. The BSE Smallcap index has plunged 16 per cent in 2025 so far against a 3 per cent drop in largecap benchmark Sensex. Not only the 12-month trailing returns for smallcaps have turned weak, three 3-month and 6-month returns are negative now, raising fears of retail selloff.
"This the first time since 2020, we are seeing one big round of supply emerging in mid and small cap stocks. This can be gauged by looking at many breadth indicators like the spike in number of stocks breaking 200 days moving average, underperformance of equal weighted portfolios, JPY unwind trade etc. This supply has the potential to change the demand-supply equation of markets on the negative side for a longer time," Elara Securities warned on Thursday.
Data showed one out of every three BSE smallcap index constituents have revisited their one-year lows in February itself. Despite the recent fall, the BSE Smallcap index now trades at 28 times trailing 12 month EPS against Sensex's 21.43 times.
Among smallcap stocks, Kamdhenu Ventures Ltd, Dish TV India Ltd, Sterling and Wilson Renewable Energy Ltd, Honasa Consumer Ltd, Salasar Techno Engineering Ltd, Vakrangee Ltd, Subex Ltd, Hardwyn India Ltd and Gensol Engineering Ltd are among 276 of 938 index constituents, which have fallen 75-80 per cent from their 52-week highs levels.
Ideaforge Technology Ltd, Ahluwalia Contracts (India) Ltd, Easy Trip Planners Ltd, Yatra Online Ltd. MMTC Ltd, Rajesh Exports Ltd, Data Patterns (India) Ltd and Juniper Hotels Ltd tumbled over 50 per cent. Sanghi Industries Ltd, Ircon International Ltd, New Delhi Television Ltd, Voltamp Transformers Ltd,Tanla Platforms Ltd, PNC Infratech Ltd. DB Corp Ltd and Butterfly Gandhimathi Appliances Ltd also lost half their market values. The list is long.
Smallcap stocks (say Smallcap 250 index), as the percentage of total market cap, hit 20 per cent level in 2024 from a mere 9.1 per cent, thanks to expansion in their valuations. But they have caught under intense pressure pressure.
"Our analysis shows that returns of retail investors have been far lower than returns of SMID indices—retail investors have invested more funds at higher market levels. Could the ‘breaking’ point of investors be a lot closer than is generally believed," Kotak Institutional Equities asked.
For now, mutual fund industry data suggests retail investors continued with smallcap investments at least in January. “Sectoral and thematic still continue to attract the maximum flows followed by smallcap, indicating a rise in the risk appetite of investors," said Juzer Gabajiwala, Director and Company Secretary, Ventura Securities.
But flows were strong in smallcaps even in the last correction phase. Elara Securities said: "Even during the big SMID correction of 2018-2020 period, small and midcap schemes saw consistent inflows for most part of that cycle. But median stock drawdown was 50 per cent. The current leg of correction has also come with no slowdown in MF inflows."
Not every expert, meanwhile, is bearish on smallcaps. Pawan Bharaddia, Co-founder at Equitree Capital said small-cap corrections play out over 8-12 weeks historically, before stabilising. He said midcaps in India are entering the final phase of this correction, with valuations looking increasingly attractive.