Midcaps Falter As Markets Weigh Rising Risks

Mid- and small-cap stocks seem to be in the midst of a reality check as both skyrocketing valuations and the new GST regime that kicks in July which means that small companies need a quick upgrade of systems are seeing many a quick upgrade of systems to reflect the new GST transactions.

Indian stock markets are seeing a mini selloff in small and mid-sized stocks. The S&P BSE Mid-cap index tumbled -1.56 percent while many stocks in the index lost up to 8.36 per cent. Even a minor recovery towards the end of the day was sold into later on showing that the markets are really weak.

In fact, the S&P BSE Mid-cap and S&P BSE Small cap index have been facing a losing streak since May 17 last week.

The S&P BSE Small-cap index, too, lost 1.89 percent during the day, and some of the stocks comprising the index have lost up to 20 percent.

Investors have been booking gains from the market due to the steep run up in mid- and small-cap stocks over the past couple of months.

Experts point out that the markets are in the midst of a reality check not only on the mid-cap valuations, but also on the fact that the new GST rates are set to be implemented from July 1, and most mid- and small-cap companies have yet to set upgrade their systems to the new GST regime.

Market men point out that as there might some disruption in the near term due to teething troubles mid- and small companies will have to invest heavily in new IT systems to upgrade their systems to the new regime.

GST is also likely to drive market share to the organized players and experts point out that the small and mid-sized companies have less time to set up their new systems, and the markets are taking cognizance of these facts in the current sell-off.

Some of the sectors that are expected to benefit the most and drive business to the organized players are paints, FMCG, batteries, tyres, sanitary ware, among others even as there is a huge unorganized market in these segments.

Mid-cap valuations have also raced through the roof in recent times. The S&P BSE Mid-cap and the S&P BSE Small cap index are trading at a PE of 33 and 65 times as compared to the much lower trading BSE Sensex PE, which hovers around the 23 mark.

International news coming from the Korean peninsula has dented the enthusiasm of the markets towards the fag-end of the trading range.