Kotak Institutional Equities said domestic stocks have seen meaningful price correction over the past week but it still finds little value in midcap and smallcap shares. In a strategy note, the brokerage said the recent sharp correction in stock prices may reflect a growing recognition of short-term challenges such as higher-for-longer interest rates, weak domestic consumption, in addition to medium-term risks such as disruption across sectors. The correction is also reflecting a ‘natural’ correction in the market from ‘high’ levels, the domestic brokerage said.
"Several midcap and smallcap stocks have seen sharp declines but the correction in their stock prices is rather puny compared to the rally witnessed in their stock prices over the past 6-7 months. We do not find value in most midcap and small cap stocks in our coverage universe, given the extent of rerating in multiples seen in the past 9-12 months despite weakening business models and eroding business moats," the brokerage
Among NSE Smallcap 100 index constituents, Suzlon Energy Ltd shares are up 289 per cent in the last six months; BSE is up 258 per cent while Kalyan Jewellers is up 190 per cent. Birlasoft, SJVN, Angel One and Cochin Shipyard have risen 85-95 per cent during the same period.
Kotak Institutional Equities said it finds valuations of the Nifty to be more reasonable at 17.5 times estimated FY2025 earnings per share (EPS) in the context of moderate earnings growth and muted performance over the past two years.
It finds decent value in a few largecap stocks and the BFSI sector only in light of rich valuations of most stocks in the consumption, investment and outsourcing sectors.
"In our view, large-cap. stocks offer better reward-risk balance given more reasonable valuations versus lofty valuations of most midcap and smallcap stocks," it said.
Earlier, the midcap index logged a breakdown from six-week consolidation while the small cap index retreated from 15 years resistance trend line drawn adjoining 2007-2021 high, indicating profit booking.
ICICI Securities in a note said small cap index falling 12-15 per cent from swing highs in a secular bull market is a common phenomenon and that the recent correction would make the broader market look healthy.
Also read: Canara Bank shares up 6% today. Where is this Jhunjhunwala PSU bank stock headed?
Also read: BCL Industries shares trade ex-split, stock jumps 5%