Bearish Streak: Nifty Midcap and Smallcap indices plunge up to 5.5% in just 3 days

Indian Stock Market: Investors continued to withdraw funds from mid -and small-cap stocks for the third consecutive trading session on Friday, January 13, as reflected by significant declines in both the Nifty Midcap 100 and Nifty Smallcap 100 indices, which dropped 2.5% today.

This recent sell-off in stocks follows concerns that Q3FY25 could be another quarter of modest performance for Indian Inc. The market had anticipated a strong recovery from corporate India in Q3, but recent business updates released by companies have shown moderate growth in their numbers. This has raised fears that EPS downgrades and cuts in target multiples could persist.

Weaker-than-expected numbers in Q2FY25 dragged the markets during the last quarter of CY2024, and elevated valuations further damaged investor sentiment. A majority of analysts believe this trend could continue in January, as they expect modest performance from corporate India in the December quarter.

Amid these concerns, mid- and small-cap stocks have been witnessing heavy selling pressure on Dalal Street in recent sessions, resulting in a sharp correction across the majority of counters. To put this into perspective, the Nifty Smallcap 100 index tumbled another 2.68% in today’s trade, reaching a six-week low of 17,632.

Today marked the third straight day of decline for the index, resulting in a cumulative drop of 5.60%. From its January peak of 19,224, it has corrected by 8.2%. Similarly, the Nifty Midcap 100 index extended its losing streak to a third straight day on Friday, falling another 2% to 54,622.

Over the last three trading sessions, the index has corrected by 4%, and from its January peak, it is down by 5.71% to date. Notably, both indices have corrected by up to 10.6% from their respective December peaks.

Over 35 smallcap and 20 midcap stocks lose up to 20% in a week

In terms of individual stocks, 36 stocks from the Nifty Smallcap 100 basket have lost between 10% and 19% of their value over the past week, with KEC International emerging as the top laggard, followed by Inox Wind, Aditya Birla Real Estate, Five-Star Business Finance, Go Digit General Insurance, and PVR INOX.

Similarly, 23 constituents of the Nifty Midcap 100 index have declined between 10% and 20% in the last week, with Kalyan Jewellers India leading the losses with a drop of 20%. It was was followed by other notable stocks, including PB Fintech, Godrej Properties, Paytm, Aurobindo Pharma, and CG Power and Industrial Solutions.

Selling frenzy strikes again

The expectation of moderate earnings is also dampening overseas investor sentiment, as they have resumed their selling streak in Indian equities in the new year. They pulled out ₹7,170 crore through exchanges during Thursday’s trading session, taking their total selling figure to ₹19,102 crore so far this month, as per the Trendlyne data. 

Other factors, such as concerns over a slowdown in the Indian economy, lower-than-anticipated Fed rate cuts in 2025, an expected uptick in global inflation due to Donald Trump’s trade policies, a strong dollar crushing emerging market currencies, and a spike in crude oil prices, are weighing on investors.

49% of companies face downside risk of EPS cuts

According to an analysis by domestic brokerage firm JM Financial, there are risks of EPS cuts for 49% of the companies in its coverage universe in Q3FY25.

“While some of these companies have already seen EPS cuts following the release of business updates for the quarter, consensus expectations for the remaining companies appear overly optimistic,” the brokerage noted.

The brokerage analysis highlights that in 17 out of 32 sub-sectors, 50% or more of the companies face downside risks of EPS cuts. Sub-sectors where 75% or more companies have downside risks include PSU banks, consumer staples, auto and auto components, cement, sugar, and city gas distribution.

Conversely, the brokerage identified diagnostics and consumer durables as the only 2 sectors where no EPS cuts are expected, with estimates either remaining largely unchanged or showing slight growth.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.