BSE MidCap, SmallCap indices trade 3% down as investors rush to book profits

According to Amit Jain, who co-founded Ashika Global Family Office Services said, currently, smallcaps and microcaps seem overvalued compared to their growth potential

The BSE MidCap and SmallCap indices defied the market rally and shed around 3 percent each on September 12 amid a rush to book profits.

At 10.33am, the BSE MidCap lost 2.8 percent to 32,200 points, while BSE SmallCap fell 3.1 percent to 37,351 points. So far this year, both the indices advanced over 28 percent and rallied over 45 percent since April.

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Kotak Institutional Equities recently cautioned investors about a rally in the midcap and smallcap space, advising against a midcap portfolio due to limited stocks showing potential for a 12-month fair value increase, mainly in the BFSI sector. They attribute the sharp price surges to irrational exuberance among investors in these markets, despite deteriorating fundamentals in most companies.

According to Amit Jain, who co-founded Ashika Global Family Office Services said, currently, smallcaps and microcaps seem overvalued compared to their growth potential. For example, the Nifty Micro Cap 250 has a PE ratio of 33, while Nifty 50 has a PE of 22, and Nifty 500 has a PE of 25. This suggests that the risk-reward ratio for most microcap stocks may not be favorable. Therefore, investors seeking short-term gains in these microcaps could risk losing their capital unless they have strong confidence in the company's business model. Historically, such disparities in valuations between Nifty50 and Nifty Micro Cap 250 have led to price and time corrections in the microcap stock space.

Also read: Daily Voice | Small, microcap valuations look overly heated compared to growth potential, says this market veteran

Nirmal Bang Equities CEO Rahul Arora suggests that the market is facing a shortage of attractive investment opportunities, as many decent stocks have been bought up and are no longer available at lower prices. As a result, investors are crafting stories for stocks they wouldn't typically consider, leading to previously overlooked stocks suddenly becoming expensive.

"Smallcap and Midcap stocks have run up quite sharply and in some cases unjustifiably so. Review of asset allocation and booking some profits/raising some cash is advised", said Dhiraj Relli, MD & CEO, HDFC Securities

Meanwhile, Rushabh Sheth, co-founder and co-CIO of Karma Capital, points out that excessive speculation is mainly in small and midcap companies, with less impact on large caps. Sheth doesn't believe there's irrational exuberance in the markets currently. He suggests that potential challenges could emerge if there are shifts in fund flows, especially from retail investors. Monitoring fund flows is crucial, particularly as elections approach and in the global context. The primary concern revolves around smaller companies, which face uncertainties related to fund availability and financial stability despite high growth expectations and perfect execution valuations.