Many smallcap stocks, where retail investors have considerable stakes, witnessed a sharp selloff of late, with shares losing up to 72 per cent of their market values from 52-week high levels. They include Delta Corp Ltd, GVK Power & Infrastructure Ltd, Coffee Day Enterprises Ltd, Subex Ltd, Orient Green Power Company Ltd and Easy Trip Planners Ltd. Stock analysts see signs of reversal in smallcap outperformance and expect more pain ahead for the smallcap basket as a whole.
Elara Securities said a leg of depolarisation started in 2021 and emerged as one of the strongest since 2003-2007, where smallcap stocks saw a significant outperformance.
"Many participants moved their allocation from few large cap names into many smaller cap names to play the tail. But we are seeing early signs of reversal in that trend. We could see outperformance of larger names coming back across all indices. One should start aggressively reducing the tail from the portfolio," Elara Securities said in a note.
GVK Power & Infrastructure, where individuals with up to Rs 2 lakh worth shares held 36.43 per cent stake, eroded 72 per cent of its value from its 52-week high of Rs 17. Retail favourite stocks such as Coffee Day Enterprises, Subex, Orient Green, Easy Trip Planners and Kopran have lost 51-67 per cent of values from their respective 52-week highs.
Elara Securities said a general rule of thumb is that caution is advised when abnormal flows start moving from broader mandated funds into sectoral and thematic funds. Although the buying by thematic and sector funds is in select stocks, Elara sees relative valuations coming at play and shifting the valuation orbit higher for all stocks in that sector and theme.
Orient Paper & Industries, Rico Auto Industries, Dwarikesh Sugar Industries, Hindustan Construction Company, Bajaj Hindusthan Sugar and Manali Petrochemicals have seen 40-50 per cent decline their share prices. Ujjivan Small Finance Bank, Patel Engineering, Reliance Industrial Infrastructure, Olectra Greentech, HIL, Syncom Formulations (India), Thirumalai Chemicals and Delta Corp have plunged 35-40 per cent from their one-year highs.
Nuvama in a note said the SMID dynamics suggests smallcap and midcaps are in a bear grip as unlike 2015 and 2022, the domestic growth is now slowing, durable liquidity has slipped into deficit à la 2011/18; and SMID valuations are still high.
This brokerage said cyclicals (industrials, RE, NBFCs and PSU banks) have corrected more than 50 per cent during the past bear markets. While some SMID stocks have already corrected by a similar amount this time, valuations are still rich and margins very elevated, making them prone to larger earnings cuts amid a demand slowdown, Nuvama said.
Mirae Asset Sharekhan expects the year 2025 would be marked with correction in small and midcap space.