Profit booking, valuation woes lead to selloff in smallcap, midcap stocks

The Indian equity indices are one of the best performing globally this year as both the benchmarks - S&P BSE Sensex and Nifty - are up in the range of 28-30 per cent each and hitting new record highs almost on a daily basis. 

Further, many of the stocks that are part of the benchmark indices are also hovering around their record levels. 

While it has been largely a one-way rally for the benchmarks in the recent past, the last few trading sessions have also been witnessing a bearish trend in the vast universe of side counters or the midcap and smallcap segment. 

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If one takes into account the last five trading sessions till Wednesday, the BSE Smallcap index has lost over three per cent - 3.12 per cent to be precise - while the BSE Midcap is down 1.90 per cent. This even as the benchmark Sensex gained a little over one per cent while the broader Nifty is up exactly one per cent. 

"Post the sharp rally in midcaps and smallcaps, profit booking is being witnessed as the valuations for many stocks have touched unrealistic levels," said Sneha Poddar, AVP Research, Broking & Distribution, Motilal Oswal Financial Services. 

Incidentally, many of the well-known side counters have been witnessing a lot of selling pressure in the recent past. 

Laurus Labs, for instance, has lost nearly six per cent in the last five trading sessions. Aarti Industries is down nearly 10 per cent during the same period. Dalmia Bharat has lost over 4.5 per cent while Deepak Nitrate has fallen nearly 11 per cent. Atul Limited has also lost 10.50 per cent in just five sessions. 

Stocks like Jubilant Foodworks, Apollo Hospitals Enterprise, SRF, Voltas and Godrej Properties, among others have also lost ground in the last five sessions. 

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Rahul Sharma, Co-Founder, Equity99 believes the market is expected to be volatile in the short term and it would be best for investors to focus on quality stocks and buy those during the dips with strict stop losses. 

The market is expected to correct further with major profit bookings seen in midcaps and smallcap space, he added. 

Market participants, however, also believe that the long-term growth story is still intact, and investors could look at intermittent dips in buying opportunities as the festive season coupled with the pent-up demand is expected to boost both the top-line and bottom-line of these companies. 

"If we remove some of the very expensive names, then this correction does 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 deleveraged. Going ahead, Q2FY22 earnings delivery vs earnings expectation would provide further direction to the market," said Poddar.