Smallcap selloff: It's not meltdown but correction, says Jefferies

While retail investors are concerned over the recent sharp slide in midcap and smallcap shares, foreign brokerage Jefferies said it is not a 'meltdown' but just another healthy correction. The foreign brokerage said this is not a repeat of the 2018 scenario, where the smallcap index had corrected over 45 per cent.

While Jefferies did not rule out more correction in the broader market given the surge in small and midcap volumes and strong inflows to mutual fund schemes, it highlighted instances where a sharp surge in the broader markets over a period was followed by a correction, CNBC TV18 reported.
 
"Fundamentally, the smallcap250 index has seen drastic improvement in earnings growth (26 per cent CAGR over FY22-24) supported by overall good economic recovery post COVID; market share gain led by formalisation of economy; and strong balance sheet improvement across sectors. In addition, policy initiatives around Make in India and PLI incentives should drive positive delta change in earnings across different sub-segments particularly in the smallcap space," Ankit Jain, Senior Fund Manager at Mirae Asset Investment Managers (India) recently told Business Today.  

Jain said Nifty Smallcap250 is trading at around 22 times EPS on 1-year forward basis, which is at 21 per cent premium to historical average and almost 50 per cent premium to valuations around March 2018 levels.

Kotak, meanwhile, expects more downside for low-quality mid and smallcap stocks. It said it the correction marks a reversal of the market to fundamentals, many low-quality stocks may still have a long way to fall, it warned. 

Kalyan Jewellers, MRPL, Cochin Shipyard, NBCC, Birlasoft, Cyient, Zensar Technologies, IRB Infra and KEI Industries are some smallcaps trading at expensive valuations on consensus estimates. Others included Global Health, Jyothy Labs, Glenmark Pharma, RITES and CESC.   These are the smallcap companies, which are covered by at least five analysts. (Source: Kotak Institutional Equities)