Titagarh, IRCTC, BEML, IRCON, Bandhan, Natco, ACC shares: Midcap, smallcap Q3 results send red flags

A host of smallcap and midcap (SMID) stocks, including many PSUs, hit their fresh 52-week lows on Tuesday, as earnings growth in Q3 disappointed for the second straight quarter in a row, raising questions over as to why second-rung stocks should enjoy valuation premium over large caps.

Bandhan Bank Ltd, UCO Bank, Natco Pharma, Ircon International Ltd, Indian Railway Catering & Tourism Corporation Ltd (IRCTC), ACC Ltd, BEML Ltd, Titagarh Rail Systems Ltd and Tanla Platforms were among BSE MidSmallcap 400 companies hitting their 52-week lows today. PVR Inox, Data Patterns, Ola Electric Mobility Ltd, Shree Renuka and Swan Energy were among other 55 index constituents hitting fresh lows.

SMID profits are now undershooting that of large caps, said Nuvama adding that that is logical since domestic growth, to which SMIDs are more exposed, has slipped in FY25 so far. Weakening profits and high valuations are fuelling the SMID bear market, it said adding that a significant easing of policy is required for a reversal of such a trend.

If one removes BFSI then SMID’s profit growth has fallen sharply and is now contracting on a YoY basis for the second consecutive quarter, significantly underperforming their large cap peers, analysts said.

ICICI Securities noted that excluding financials, Nifty Smallcap 100 and Nifty Midcap 100 saw 11 per cent and 8 per cent rise in sales against Nifty's 6 per cent rise.

"With regard to margins, SMID’s profit margins are lower than large caps. Furthermore, their margins are a lot more cyclical—perhaps rightly so as they are more geared to growth than large-cap peers. Post-covid, SMIDs have enjoyed more improvement in profit margins compared with large caps, despite a similar top-line trajectory. However, given these tailwinds are reversing, SMID’s margins could see more downside than their large-cap peers," Nuvama said.

The Nifty is now trading at a 1-year forward PE of 19.3 times, near its 10-year average. The savage correction in SMIDs has derated the Nifty MidSmallcap400 Index PE to 30.1 times on trailing 12-month basis. The median PE of the SMID index has also fallen, by 8.8 per cent since September 30, 2024 to 30 times. The percentage of BSE500 stocks trading below 30 times PE (TTM) has gone up, from 30.4 per cent on September 30 to 39.4 per cent after the correction.

The consensus is still forecasting SMID profits to outperform in FY26. Nuvama said this is at risk, given the fading margin tailwinds and weak top line.

SMID profits are anyway more cyclical than large caps. If SMID’s profits continue to disappoint large caps, it poses large risks to their elevated valuation premiums, Nuvama said.

Emkay Global expects the market to stay under pressure through this quarter, but to recover from Q1FY26, as earnings stabilise and global stresses ease.

Retail investors generally drive demand for midcap and smallcap stocks. Kotak in a recent note said returns of headline indices large-cap, midcap or small-cap may may be overstating the actual returns of retail investors for two reasons - a number of investors have come to the market at higher levels and a lot more money has come ‘into’ the market at higher levels.

"Taxes and trading costs would further dent the returns of investors. The market could already be on thin ice based on the usual trailing-returns argument for investment by retail investors. 12-month trailing returns have turned weak while 3-month and 6-month returns are negative," it said.