India's mid and small-cap stocks risk abrupt corrections, warn analysts

A roaring rally in mid- and small-cap stocks listed on Indian bourses could see abrupt corrections, as many of them trade at near or record highs even though overall consumption demand remains sluggish, at least six analysts said.

A roaring rally in mid- and small-cap stocks listed on Indian bourses could see abrupt corrections, as many of them trade at near or record highs even though overall consumption demand remains sluggish, at least six analysts said.

The Nifty mid-cap 100 index has hit fresh all-time highs in each of the previous seven sessions, gaining 19% so far in fiscal year 2024, while the small-cap index touched new 52-week highs over the last seven sessions and added 20% year to date.

In contrast, the benchmark BSE Sensex and the NSE Nifty have gained 7.7% and 8.6% in the same period, respectively.

“The sharp rally in mid and small caps seem to be bordering on euphoria as consumption demand remains sluggish and valuations have reached unrealistic levels in most cases,” analysts at Kotak Institutional Equities wrote on Monday.

Growth in the Indian economy is seen slowing to 6.5% in the current financial year compared to 7.2% last year. In the Jan-March quarter--the latest data available--private consumption grew just 2.8% even as government spending boosted the broader economy. Weaker demand could weigh on company earnings.

Others warned of erratic monsoons, which can impact India's largely agriculture-based economy.

“Nothing is cheap right now, so investors have to be very, very selective on midcaps,” said Avinash Gorakshakar, head - research at Profitmart Securities. “If monsoon is not as per expectations, we could witness a temporary halt in the rally.”