Profit booking and valuation issues lead to a sell-off in small- and mid-cap stocks

Indian equity indices are one of the best performers in the world this year as both benchmarks – S&P BSE Sensex and Nifty – are up in the range of 28-30% each and are hitting new highs almost daily.

Additionally, many of the stocks that are part of the benchmarks are also hovering around their all-time highs.

While this has largely been a one-way rally for benchmarks in the recent past, recent trading sessions have also witnessed a bearish trend in the vast universe of sideways counters or the mid and small cap segment.

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Looking at the last five trading sessions through Wednesday, the BSE Smallcap Index is down more than three percent – 3.12 percent to be precise – while the BSE Midcap is down 1 .90 percent. This even as the benchmark Sensex gained just over one percent while the wider Nifty was up exactly one percent.

“After the strong rally in mid and small caps, profit booking is seen as valuations for many stocks have reached unrealistic levels,” said Sneha Poddar, AVP Research, Broking & Distribution, Motilal Oswal Financial Services.

Incidentally, many of the well-known side counters have witnessed heavy selling pressure in the recent past.

Laurus Labs, for example, has lost almost 6% over the past five trading sessions. Aarti Industries is down almost 10% over the same period. Dalmia Bharat lost more than 4.5% while Deepak Nitrate fell nearly 11%. Atul Limited also lost 10.50% in just five sessions.

Stocks like Jubilant Foodworks, Apollo Hospitals Enterprise, SRF, Voltas and Godrej Properties, among others, have also lost ground in the past five sessions.

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Rahul Sharma, co-founder of Equity99, believes the market is likely to be volatile in the short term and investors would be better off focusing on quality stocks and buying them during dips with strict stop losses.

The market is likely to correct further with significant profit bookings seen in mid and small caps, he added.

However, market participants also believe that long-term growth is still intact and investors may be looking at intermittent dips in buying opportunities as the holiday season coupled with pent-up demand is expected to boost both the top and the bottom. -line of these companies.

“If we remove some of the very expensive names, this correction offers upward opportunities, given the easing and resumption of economic activities, the dynamic festive atmosphere and an improved demand environment. Balance sheets and flows of cash flow continue to improve as companies tighten costs and deleverage Going forward, Q2FY22 earnings delivery against earnings expectations would provide new direction to the market,” Poddar said.