Nifty Smallcap 100 enters bear market on 20% crash from September peak; 63 stocks trade 30-63% below one-year highs

Indian Stock Market: Investors continued to withdraw funds from Indian small-cap stocks for the third straight session on Tuesday, January 28, causing the Nifty Smallcap 100 index to hit multi-month lows and trade with a significant drop from its recent peak.

The retail investors' favourite segment has now been under significant selling pressure as earnings reported by major companies in this space have come below street estimates, raising concerns over their rich valuations.

Investors had anticipated a rebound in earnings for the December quarter that would justify the current valuations. However, the earnings reported by companies so far have fallen short of expectations, triggering a significant sell-off.

In today's session, the Nifty Smallcap 100 index tumbled by another 3.8%, falling below the 15,000 level to reach the day's low of 15,684. Taking today’s low into account, the index entered the bear market as it corrected 20.14% from its September peak of 19,640 points. However, the index recovered from its day's low and finished the session with a drop of 1.81% at 16,008.

The index has been on a downward trend for the last five months but recorded its largest monthly drop in January since March 2020, correcting by 15%, which signals a shift in investor sentiment towards caution. At current levels, 63 index constituents are trading with declines between 30% and 63% from their respective one-year peaks. 

Retail shareholder base in small-caps expands sharply

Retail investors poured billions into acquiring ownership in small-cap stocks. They also acquired stocks through the mutual fund route, forcing fund managers to invest excessive capital in the space and pushing stock valuations to absurd levels.

Inflows into small- and mid-cap mutual funds touched record highs in December, despite concerns about the risks these segments pose. The total AUM of small-cap funds touched ₹3.29 lakh crore in December 2024, up from ₹2.3 lakh crore in December 2023, as per AMFI data. 

Alongside, the number of retail shareholders in many small-cap stocks has risen sharply in recent quarters. For instance, the retail shareholder base of Rama Steel Tubes (currently trading at ₹12 per share) has increased from 72,000 shareholders in December 2023 to 8.4 lakh shareholders in December 2024, collectively owning a 40% stake in the company. 

Likewise, Suzlon Energy saw its retail shareholders jump to 54 lakh in Q3FY25 from 34 lakh in Q3FY24, an increase of 20 lakh, or 59%, as per Trendlyne. 

Can large-caps provide safety amid market turmoil?

Despite the recent correction across the board, analysts continue to find the reward-risk balance for the Indian market quite poor. They maintain their cautious outlook for the market, given frothy valuations in most parts of the market, low scope for earnings upgrades, aggressive earnings, profitability, and volume assumptions across sectors, an uncertain global macro-environment, and likely higher-for-longer bond yields and interest rates.

Domestic brokerage firm Kotak Institutional Equities, in its latest report, said that large-cap stocks may hold up better in the next few months, while mid-cap, small-cap, and ‘narrative’ stocks could experience further severe corrections if the alignment to fundamentals and value continues.

FPIs are unlikely to view India favourably in the short term (with no new money for emerging markets, continued redemptions, and high valuations), and retail investors will increasingly contend with dwindling trailing returns, it stated.

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.