Small, midcap stocks sink further to log their biggest fall in two years

Analysts said elevated valuations in the small and mid-cap segment have been a concern for a while, but the strong message and the recent action by the regulator intensified the selling pressure

The selloff in the broader markets worsened on Wednesday, with the benchmark gauges for the small and midcap stocks dropping the most in two years amid valuation concerns raised by the Securities and Exchange Board of India (Sebi).
 

The Nifty Smallcap 100 index plunged 5.3 per cent, while the Nifty Midcap 100 dropped 4.4 per cent in what was their biggest single-day fall in nearly two years.
 

After dropping nearly 2 per cent, the National Stock Exchange (NSE) benchmark Nifty recouped some losses — as investors moved to the safety of largecaps — to end at 21,998, down 338 points, or 1.5 per cent. The BSE Sensex, after dropping 1,152 points, or 1.6 per cent, closed at 72,762, down 906 points, or 1.23 per cent. Only 350 stocks ended with gains, while 3,569 fell on the BSE, with Rs 13.5 trillion worth of market capitalisation getting shaved off.

Analysts said elevated valuations in the small and midcap segments had been a concern for a while, but the strong message and the recent action by the regulator intensified the selling pressure. Over 200 stocks in the smallcap space have declined by more than 20 per cent since Sebi first flagged the risk of “froth” in this segment. The Sebi chief, Madhabi Puri Buch, on Monday reiterated concerns over stretched valuations.    

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She said there were pockets of froth in the market, and it might not be appropriate to allow that froth to build up.
 

There was also nervousness ahead of the stress-test reports on mid and smallcap schemes which mutual funds (MFs) are supposed to submit by the end of this week. Stress tests of MF schemes help assess if the portfolios are liquid enough to meet a sudden surge in redemptions. Market players said some fund managers were churning their holdings, exerting selling pressure, particularly in stocks with relatively low float. Further, the raids against Dubai-based trader Hari Shankar Tibrewala led to a selloff in the smallcap stocks where he has exposure, market players added.

“These small and midcap stocks held by MFs will not be a very large number. Now, all these are not very liquid. They were made available by savvy investors to MFs as institutional backing helps them jack up prices. And if these funds want to sell these stocks, the impact cost will be high because there may not be too many buyers. And that's why stress may not be an exciting prospect," said U R Bhat, co-founder of Alphaniti Fintech.

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Bhat said there was fear that MFs might hold some of the stocks held by Tibrewala.

The Nifty Smallcap 100 index has fallen 14 per cent from its record high of 16,566 on February 7, while the Nifty Midcap 100 index has come off 7 per cent. Analysts said there could be more pain in the offing for small and midcap stocks.

“Small and midcap stocks are trading at a much higher valuation than largecaps, and that is not sustainable. Therefore, it has to give way. In the medium term, there is no scope for upside if they don't produce some surprise in earnings,” said Bhat.

Andrew Holland, chief executive of Avendus Capital Alternate Strategies, said the uncertainty around regulatory oversight now was greater than it was after the recent RBI and Sebi actions.

“Everything got tarred with the same brush on the way up, and now everything is getting tarred with the same brush on the way down. There is no new trigger globally or locally to move stocks. It may just be that profits are being taken off the table,” said Holland.