Midcap and smallcap stocks tumbled in Monday's trade, in a broader market selloff that saw two stocks falling for every stock that rose. The second-rung stocks fell over valuation concerns amid disappointing December quarter earnings by a few companies, leading to earnings downgrades. Investors wonder whether their premium over largecap stocks is justified amid a slowing economy.
Among smallcaps, Jyoti CNC Automation Ltd sank 7.06 per cent to Rs 1,067.85. JM Financial declined 6.81 per cent to Rs 109.50. Apar Industries Ltd, Kaynes Technology India Ltd, Techno Electric & Engineering Company Ltd, Sumitomo Chemical India Ltd and Caplin Point Laboratories Ltd dropped 5.6 per cent. Poly Medicure, KFin Technologies Ltd and Sonata Software were among other smallcap shares falling over 5 per cent today. Among midcap stocks, Oil India shed 6.31 per cent to Rs 397.95. Max Healthcare, Delhivery, Bharti Hexaware and One 97 Communications Ltd (Paytm) declined 5-6 per cent. CG Power, SAIL, Rail Vikas Nigam Ltd, Sun TV Ltd and Persistent Systems Ltd also fell up to 4 per cent.
BNP Paribas India in a strategy note said the strong performance of midcap and smallcap stocks since January 2023 has increased their valuation premiums over Nifty. Both midcaps and smallcaps are currently trading at rich valuations compared with their respective long-term averages, it said adding that it finds better value in large-caps and prefer them over second run peers in 2025.
The brokerage noted that DII flows in 2024 stood at $60 billion and 60 per cent of such flows were driven by SIPs, which are generally sticky. It said domestic mutual funds are holding $22 billion in cash or 5.2 per cent of AUM as of December 2024, which may cap any significant near-term downside.
MOFSL said Nifty50 is trading at 19.8 times, 4 per cent below its LPA, on a 12-month forward basis, while the Nifty Midcap 100 is at 30 times -- 50 per cent premium to the Nifty50. In the case of Nifty Smallcap 100, the index at 22 times is trading 13 per cent premium over the Nifty50.
This brokerage recommended a largecap heavy-portfolio owing to valuation differentials against smallcaps and midscaps (SMIDs).
Valuation guru Aswath Damodaran in his latest blog said India is the most expensive market in the world and no amount of handwaving about the India story can justify paying 31 times earnings, 3 times revenue and 20 times Ebitda, in the aggregate, for Indian companies.