Small, midcap indices fall for second day as profit booking continues: What lies ahead?

Midcap, smallcap indices drop

The shares of smallcap and midcap companies strongly tumbled, pushing the broader market indices into the red for the second consecutive session after a significant rally. This comes as investors continue to book profits at elevated levels.

Nifty Smallcap 100 index fell 0.7 percent to hover around 18,666, while the Nifty Midcap 100 index dropped 0.73 percent to stand at 58,955 in the afternoon. Notably, the broader market indices are continuing to underperform the benchmark indices Sensex and Nifty, after several sessions of outperforming them.

While noting that the latest fall in the stock prices may be driven by profit booking, analysts continue to flag the expensive valuations in the broader markets. Prashanth Tapse of Mehta Equities said that 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.

Tapse attributed much of the rally which was earlier seen in the broader markets to liquidity and sentiment, rather than underlying earnings growth. He cautioned that potential risks, including tariff concerns linked to US President Trump, geopolitical tensions, and uncertain US Federal Reserve policy could trigger a correction, but it may be healthy. Such a correction, or earnings catch-up, would be necessary to justify current valuations in the short term.

Ajit Mishra, SVP of Research at Religare Broking, however noted that the market breadth overall remains positive. "The dip was primarily due to profit booking triggered by overbought conditions; however, market breadth remained positive, indicating a selective decline. Going forward, participants are advised to consider booking partial profits, particularly in overbought themes or stocks, and focus on opportunities where the risk-to-reward ratio is more favorable," he said.

Sunny Agrawal, Head of Fundamental Research at SBI Securities said, "We expect many mid and small-sized businesses to deliver robust earnings growth over the next two years and they are likely to command relatively premium valuations. Going forward, the street is likely to focus on sectors/companies where there is strong growth momentum despite the ongoing global uncertainties."

Independent market analyst Ajay Bagga said India's overall market valuation, especially in the mid and smallcap segments, is a concern.

Also read: MC Market Poll finds 62% prefer large-caps over mid/small-caps

"Mid cap index have outperformed the large cap and small cap index in the last 1 year. Amid valuation concerns, the risk-reward is skewed more towards large caps," said Tata Mutual Fund in its latest report.

Paytm shares were the top loser on the midcap index, falling nearly 6 percent after the Finance Ministry issued a clarification that no merchant discount rate (MDR) will be charged on UPI transactions.

Hindustan Petroleum Corporation (HPCL) shares followed, falling nearly 5 percent on the back of rising oil prices. BSE shares fell nearly 4 percent, while Premier Energies, IGL, Phoenix Mills and Suzlon Energy shares dropped over 2 percent.

On the smallcap index, CDSL shares dropped over 4 percent to emerge as the top loser. Other notable smallcap stocks which recorded significant losses included KEC International, Angel One, CAMS, Credit Access Grameen, RITES, GRSE, IRCON and more.