Interest in small-cap stocks on Dalal Street is starting to fade, with many now trading well below their recent highs. This change comes after a period of strong interest that pushed small-cap valuations to high levels.
Recently, small-cap stocks enjoyed significant investor enthusiasm, making them attractive for those seeking growth. However, the mood has shifted, leading many to take profits as new reasons for further gains are lacking.
Weak earnings expectations for Indian companies in the quarter ending September, along with rising geopolitical tensions and heavy selling from foreign portfolio investors (FPIs), are putting pressure on small-cap stocks.
Stocks in sectors like defense and railways, which saw major gains earlier this year, are now struggling with lower market demand. This shift has caused them to trade much lower than their recent peaks.
Concerns about the high valuations of small-cap stocks have emerged, especially since they attracted many retail investors as cheaper alternatives to large-cap stocks. Hopes for growth from rising capital expenditure (capex) also fueled their earlier momentum.
Currently, 46 stocks in the Nifty Smallcap 100 index are trading 20% to 42% below their 52-week highs, according to Trendlyne. CreditAccess Grameen has experienced the largest decline, down 42% from its peak.
In the defense sector, stocks like Garden Reach Shipbuilders, BEML, and Data Patterns (India) have fallen up to 40%. Similarly, railway stocks such as Ircon International and Titagarh Rail Systems have dropped around 39%. In the banking sector, Jammu & Kashmir Bank, UCO Bank, and RBL Bank have seen declines of up to 36%. Electric bus manufacturers like JBM Auto and Olectra Greentech are also down, by 29% and 24% respectively, from their yearly highs.
Despite a recent rebound in Angel One’s shares, the stock is still 19% lower than its peak. Overall, the Nifty Small Cap 100 index is only 3% off its October highs, showing a smaller decline compared to larger-cap stocks. This stability is due to some stocks still performing well within the index, indicating mixed sentiment and varying performances across small-cap sectors.
According to Motilal Oswal, the market capitalization-to-GDP ratio for large, mid, and small caps is still historically high, with small caps now surpassing mid caps. Axis Securities noted that, following a strong rise in mid and small caps, the safety margin in valuations for these stocks has reduced compared to large caps. They predict some corrections in certain areas of the broader market and expect more investment to flow towards large caps in the near future.
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