Broader markets declined for the fourth straight session on Monday, with both the Nifty Midcap100 and Smallcap100 indices trading lower as high valuations triggered even as headline indices remained in positive territory.
The Nifty Midcap100 index slipped 1 percent during the session, taking its cumulative loss to nearly 3 percent over the last four trading sessions. Bharat Dynamics Ltd (BDL), Mazagon Dock Shipbuilders and Housing and Urban Development Corporation (HUDCO) were among the key drags.
BDL emerged as the top laggard in the midcap index, falling 4 percent to Rs 1,816.6 per share on the NSE. Mazagon Dock Shipbuilders dropped 2.67 percent, while HUDCO declined 1.97 percent.
Other losers included Vodafone Idea, IRB Infrastructure Developers, NMDC and Tata Elxsi, which fell in the range of 1–2 percent.
Pranay Aggarwal, Director and CEO of Stoxkart, noted "over the last four sessions, mid- and small-cap indices have declined by up to 5%, driven by a combination of global and domestic factors. One of the primary concerns is the rising geopolitical tensions in the Middle East, which have led to a spike in crude oil prices, denting overall market sentiment. Additionally, uncertainty around US-China trade negotiations and potential shifts in global monetary policy have made investors increasingly risk-averse."
"On the domestic front, these segments had witnessed a strong rally over the past few months, pushing valuations to elevated levels. This has prompted profit-booking by institutional investors, especially ahead of F&O expiry, adding to the pressure. The decline, therefore, appears to be a healthy correction in overheated pockets of the market, rather than panic selling. It reflects a temporary sentiment shift, influenced by global cues and valuation concerns, and may offer long-term investors an opportunity to re-enter at more reasonable price points," he added.
Meanwhile, the Nifty Smallcap100 index declined nearly 1.6 percent in intraday trade, extending its four-day loss to around 4 percent.
Tata Teleservices (Maharashtra) led the losses in the smallcap segment, slipping nearly 5 percent to Rs 68.29. IFCI and ITI followed, falling 3.51 percent and 2.63 percent, respectively.
Market participants attributed the continued selling pressure in broader markets to profit booking after the recent rally.
According to Prashanth Tapse of Mehta Equities, valuations in the broader market have significantly exceeded their longer term averages, and in some cases appear unsustainable, unless supported by strong and consistent earnings growth in coming quarters.
Currently, the one-year forward price-to-earnings (P/E) ratio for the Nifty Midcap stands at 28.7x compared to its 10-year average of 28.12x. The Nifty Smallcap trades at 25.03x, exceeding its long-term average of 21.45x, while the BSE 500 is valued at 22.44x versus its decade-long average of 21.47x.
Independent market analyst Ajay Bagga said India’s overall market valuation, especially in the mid and smallcap segments, is a concern. Many fund managers had projected 2025 to be a year favouring largecap stocks with broader indices projected to underperform due to stretched valuations.
Without a significant earnings pickup, these elevated valuations may constrain returns, as further P/E expansion appears unlikely. Nonetheless, retail investor flows remain strong in both mid and smallcap segments, fuelling sharp recoveries in previously beaten-down stocks, Bagga added.
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