Smallcap survivors: These sectors weathered the market correction

A staggering 30% of BSE-listed firms are down 50% or more from their 52-week high, while around a third of smallcaps are down by half or more, showed a Mint analysis of nearly 3,900 companies. Alarmingly, this collapse is widespread, with over a third of smallcaps in eight out of 19 sectors, tracked by Mint, suffering similar losses.

This market-wide correction signals a dramatic shift in investor behaviour, as they aggressively rush to divest riskier assets amid escalating macroeconomic anxieties and global uncertainties.

Bright spots

Travel and hospitality, and chemicals sectors have shown relative strength, presenting opportunities for savvy investors. Amid this turmoil, these sectors have shown resilience, with only 15% travel and hospitality stocks in the smallcap segment and 19% chemical stocks down by half or more from their 52-week highs.

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Does their relative resilience position them as appealing options for investors seeking stability amid broader market volatility?

Vikram Kasat, head of advisory at Prabhudas Lilladher’s PL Capital also noted the potential in these sectors, stating, "Sectors such as travel and hospitality, and chemicals currently stand out as promising areas where growth potential remains intact."

“The overall demand for the chemicals industry has been under pressure in the last two years. The ongoing tariff war may have a bearing on demand and prices. In our view, one needs to adopt a selective approach towards these stocks with a long-term view," said Shrikant Chouhan, head of equity research at Kotak Securities. 

“Meanwhile, in the hotel segment, the industry posted healthy performance led by an increase in average room rate, higher occupancy and favourable demand-supply situation. However, investors should prefer larger names with strong balance sheets," he added.

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Sectors bleeding the most

While pockets of resilience exist, others have been hit particularly hard. Infrastructure and engineering, consumer durables, retail, and capital goods have seen over one-third of their smallcap constituents plummet. 

Approximately 43% of infra and engineering smallcaps have fallen precipitously from their 52-week highs (more than 50%), followed closely by consumer durables at 42%. Retail and capital goods saw 40% and 37% of their smallcaps experiencing similar drastic declines. These sharp drops highlight the significant deterioration in market sentiment across key sectors.

“Infrastructure stocks have corrected due to a slowdown in government capital expenditure (capex) caused by elections and the FY26 budget, which showed no growth in central government capex estimates for certain core sectors," Chouhan explained. Limited state capex growth, driven by higher social welfare spending, has also impacted the sector, he added. 

“However, infrastructure players in renewal and green energy, transmission and distribution, water, urban infra are positive on the opportunity pipeline. In our view, the correction of certain quality stocks with strong prospects pipeline and healthy order book is in its last leg. Hence, one needs to adopt a selective approach towards stocks in the space with the long-term view."

Most of the consumer durables companies missed delivering on expectations in Q3FY25, he added. “Within the consumer durable segment, the room AC industry in India could deliver robust volume-led growth in Q4FY25 amid expected strong summer season. However, raw material inflation and rupee depreciation could be a drag on margin," he added.

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Markets ripe for a rebound?

Following a massive correction, the BSE Smallcap index now trades at a trailing price-to-earnings ratio of 25x, well below its five-year median of 30x, suggesting potential undervaluation. 

Is this the right time to enter this market territory? Chouhan advises caution in this volatile environment. 

“In the smallcap space, the exposure needs to be restricted to companies with strong business models. Long-term investors can focus on stocks that offer growth, reasonable valuation and are probably market leaders in their space. Given market uncertainties, the stock addition has to be gradual."

Sector rotation remains a powerful strategy for navigating turbulent markets, suggests Kasat. “Focus should be on riding the sector wave. Stock markets demand adaptability, and sector rotation is the key to staying ahead. By tracking economic cycles and shifting investments strategically, investors can optimize growth and avoid stagnation," he added.