Short Call | Is the smallcap, midcap correction just the beginning? Tata Motors, Bajaj Finance in focus

Short call weaves niche topics on equity markets and news developments around stocks

The BSE400 small and midcap (SMID) index, which tracks smaller yet high-growth companies, is bracing for its fifth 20 percent-plus correction since the global financial crisis. The burning question: is this just a temporary stumble or the prelude to a prolonged bear market?

Historically, corrections have fallen into two camps—quick blips (2015–16, 2021–22) or grinding bear markets (2011–13, 2018–19). What separates the two? Analysts at Nuvama Institutional Equities point to three decisive factors: domestic growth, liquidity, and valuations.

If domestic demand remains resilient during a global deflationary phase, SMIDs tend to bounce back swiftly. However, if local credit tightens and demand falters, a brief dip can morph into a sustained downturn. Additionally, five-year performance trends offer crucial clues—blips typically follow a moderate 10–15 percent CAGR, whereas a scorching 20 percent-plus growth rate has historically signaled deeper trouble ahead.

Right now, the warning lights are blinking red. Analysts note that domestic credit is slowing, SMID earnings (excluding BFSI) have slipped into contraction, and liquidity has turned scarce. The US dollar’s volatility is hampering RBI’s ability to stabilise the situation, while valuations, even post-correction, remain elevated with five-year returns still at 25 percent. Without decisive policy intervention, more turbulence could be in store.

Tata Motors (Rs 697, -7.3%)

Shares tanked after the company's weak Q3 earnings and outlook.

Bear Case: Expectations contined weakness in demand from China will hurt sales and margin contribution from JLR. JLR’s China volume contribute ~21 percent to sales, meaning that a decline on this front will have an incremental impact on the company's earnings growth. Domestic demand also remains sluggish, further aggravting the pain.

Bull Case: Some recovery can be seen in CV demand in FY26, given favorable base of FY25, along with higher infrastructure spending and government capex expectations. Announcement of supportive policies to boost the EV segment may also help mitigate some risks from prevailing headwinds for the automaker.

Bajaj Finance (Rs 7,925, +2.13%)

Reported Q3 earnings that beat the Street's expectations

Base Case: Bajaj Finance has added ~13.5 million customers in 9MFY25 & has already revised its new customer addition target to ~17 million (from ~15 million) for FY25F. "We believe the company’s constant greed to outgrow the system, while keeping risk & profitability at the front-end seen in its intention to integrate artificial intelligence or AI across all its processes to improve customer engagement & enhance productivity, along with a diversified product rollout & dominant reach, will set the stage for accelerated growth," said InCred Equities.

Bear Case: Bajaj Finance's asset quality witnessed blips with elevated credit costs as two-wheelers, business and professional loans and rural B2C segments remained pain-points with caution on business expansion here.

(with inputs from Vaibhavi and Zoya)

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