Mid & smallcap indices lose steam after sharp run up since 2020

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October 21, 2021 5:00 AM

While the Nifty Midcap index lost 692.40 points to end the session at 31,478.30 points, the smallcap index settled at 11,202.10, down 278.60 points. Both the indices have fallen more than 2% on Wednesday, taking the total losses to over 4% each in the last two sessions.

In contrast, Nifty50 and Sensex have gained 50.1% and 48.5%, respectively, during the same period. Nifty50 now commands a one-year forward PE of 22.5x, against its five-year average of 18.3. (Representative image) In contrast, Nifty50 and Sensex have gained 50.1% and 48.5%, respectively, during the same period. Nifty50 now commands a one-year forward PE of 22.5x, against its five-year average of 18.3. (Representative image)

The Nifty Midcap and smallcap indices continued to slide for the second consecutive day on profit booking as valuations soared. The Nifty Midcap is currently trading at 25.5x of its one-year forward earnings, which is a whopping 35% premium of its five-year average. This is lower than the record valuation of 29.3x seen in August 2020, Bloomberg data revealed.

Both these indices, which yielded negative returns for two consecutive years before 2020, have bounced back smartly since then, with each gaining 84% and 92%, respectively. In contrast, Nifty50 and Sensex have gained 50.1% and 48.5%, respectively, during the same period. Nifty50 now commands a one-year forward PE of 22.5x, against its five-year average of 18.3.

While the Nifty Midcap index lost 692.40 points to end the session at 31,478.30 points, the smallcap index settled at 11,202.10, down 278.60 points. Both the indices have fallen more than 2% on Wednesday, taking the total losses to over 4% each in the last two sessions.

Commenting on the drop in mid-sized stocks, Sneha Poddar, AVP Research, Broking & Distribution, Motilal Oswal Financial Services, said, “Post the sharp rally in midcaps and smallcaps, profit booking is being witnessed across them as the valuations for many stocks have touched unrealistic levels. However, if we remove some of the very expensive names, then this correction do offer bottom-up opportunities, given the more relaxations being offered and pick-up in economic activities, buoyant festive mood and an improved demand backdrop.”

The balance sheets and cash flows continue to improve as corporates tightened costs and deleverage. Going ahead, Q2FY22 earnings delivery vs earnings expectation would provide further direction to the market, Poddar added.

The breadth of the market remained weak on Wednesday with over two stocks sliding for every one scrip rise. Of the 3,427 stocks traded on the BSE, 2322 stocks declined, whereas 978 rose. 127 stocks ended at the same level as previous day’s.

Some of the favourite small and midcap stocks gave up some of their gains this week. Interestingly, minutes after hitting the milestone of Rs 1 lakh crore in market capitalisation, the stock of Indian Railway Catering and Tourism Corporation (IRCTC) gave up much of its gains, having given up about a quarter of its value in two sessions.

“The company has more than doubled in the past two months, even as consensus estimates have largely remained unchanged,” wrote Balaji Subramanian, analyst at IIFL Securities in a note. He added that the government’s stake in IRCTC is now worth $7.8 billion, raising a chance of partial stake sale, which may risk a potential loss of monopoly in ticket-booking engine.

In absolute terms, IRCT lost the most in market value followed by Hindustan Zinc. While the market capitalisation of IRCTC plummeted by Rs 23,094 crore, Hindustan Zinc saw its market valuation falling by Rs 11,725 crore.

The combined market capitalisation of the Nifty Midcap index narrowed by Rs 1.56 lakh crore in the last two sessions to Rs 33.44 lakh crore.

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