Mid- & small-cap crack deepens, Sensex falls 456 points

On Wednesday, the Sensex slipped 456 points, or 0.7%, after breaching the 62,000 mark in the previous session. The mid- and small-cap indices fell around 2% each.

Bulls are taking heart that declines in the broader market since late March 2020 have not lasted for long thanks to the strong flows from individual investors. But experts warn against aggressive purchases in these segments even on dips as valuations are perceived to be rich.

“It was a question of when the correction starts, even now we can’t say if a correction has started,” said independent market advisor Ambareesh Baliga. “This (two days of fall) is showing what could happen if this becomes broader, that can lead to panic as most of the new investors who have come in the last 18 months have not seen a meaningful correction.”

From the record high of 27,246.34 hit on Tuesday, the BSE Midcap index has fallen nearly 5% to close at 25,914.53.

The Smallcap index has also fallen 5% from record high of 30,416.82 hit on Tuesday. The index closed at 28,878.73 on Wednesday.

Within midcaps, the biggest decline has been seen in shares of IRCTC. The stock fell 17% on Wednesday, taking the last two days’ fall to 25%. IRCTC shares, which listed in October 2019, are up nearly 1,300% from its IPO price of ₹320 per share.

Some other laggards include Macrotech Developers which has fallen over 11% and NHPC which has fallen 8% in the last two days. Among smallcaps, Mastek, Deepak Nitrite, 5Paisa Capital, Cera Sanitaryware and MTAR technologies have fallen 9-13% in the last two days.

“The rally was one-sided and getting euphoric. We have not seen such a linear move in this space without any correction but it is difficult to predict the extent of corrections,” said Vinit Sambre, head of equities at DSP Investment Managers. “At a certain point buying will emerge again as long term investors will start looking to add value picks to their portfolios.”

Since March 24, 2020, when the stock market hit a bottom after a sharp drop at the onset of the Covid-19 pandemic, the Midcap index has gained 163% and the Smallcap index is up 225%. The Sensex is up 130% during this period.

“We have seen broader indices doing well than benchmarks and there are pockets where rally has been sharp without any meaningful correction; but till the economic buoyancy is intact, it will eventually get bought into,” said Pankaj Pandey, head of research at ICICIdirect. “Whether that buying will come after 10% or 20% is difficult to predict,” said Pandey.

The run-up has been driven by relentless purchases from individual investors —many of them first timers — who are increasingly opting for stocks over traditional fixed income instruments on account of low interest rates. Bank FDs are returning 5-6% returns annually.

The retail rush for stocks is evident in the 15.2 million addition to the investor base since April 1. The number of investor accounts surged to a record 70 million at the end of September 2021, according to NSDL and CDSL data. While retail flows into equities are not disclosed, brokers said majority of the new money has been into mid- and small-cap shares.

Analysts said the resilience of retail flows into the market could be tested if the sell-off continues for long.

“These stocks have been pushed up because of liquidity despite valuations being expensive. Somewhere if it starts trending down, it will be a rapid fall,” said Baliga.