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Mint
a day ago
- Business
- Mint
Market volatility hits mid and small-caps: Are large-cap stocks a safer bet now?
The recent volatility in the Indian stock market has taken a toll on mid- and small-cap stocks, as investors grow increasingly cautious amid global uncertainty and elevated valuations, prompting them to exit these segments in search of safer bets in large-cap stocks, which are often perceived as more stable during turbulent phases. Global markets have been on edge this week, with the latest escalation between Iran and Israel adding fresh strain to an already fragile global economy—one still grappling with the effects of trade tensions and the ongoing Russia–Ukraine war. However, the Indian stock market managed to end the week with healthy gains, supported largely by strength in blue-chip stocks. Despite rising crude oil prices, prolonged trade tensions, and limited progress in negotiations between the US and its key trading partners, Indian large-cap stocks have continued to draw investor interest. Optimism around corporate earnings—buoyed by a turnaround seen in the March quarter and expectations of stronger performance in the June quarter of FY26—along with relatively reasonable valuations compared to mid- and small-cap counterparts, has led investors to shift their focus toward these more established, higher-priced stocks. Against this backdrop, both the Nifty 50 and Sensex closed with gains of nearly 2%, while the Nifty Midcap 100 and Nifty Smallcap 100 indices remained under pressure for the second consecutive week, each declining by up to 1%. Recent data also indicates a shift in retail investor preference toward large-cap stocks, as ownership in mid- and small-cap counters fell to a nine-quarter low amid a broader market sell-off during the March 2025 quarter, according to the NSE's report titled India Ownership Tracker. During the March quarter, mid- and small-cap stocks underperformed their large-cap counterparts, further amplifying valuation concerns in these segments. According to the latest analysis by domestic brokerage firm Kotak Institutional Equities, small caps led the earnings cuts, with a 6% reduction in FY2026 EPS estimates compared to a 2% cut for large caps and 3% for mid-caps. On the valuation front, the Nifty SmallCap 100 is trading at a one-year forward price-to-earnings (P/E) multiple of 27.2x—significantly higher than its long-term average and close to the Nifty MidCap 100's P/E of 28.3x. This sharp rise in valuations places the Nifty SmallCap 100 near its historical peaks, levels last seen during previous phases of overheated sentiment, such as mid-2021 and pre-2018, according to domestic brokerage firm InCred Equities. In contrast, the Nifty 50 is trading at a more reasonable 20.7x forward P/E. The narrowing valuation gap between small- and mid-cap stocks is making investors uncomfortable. Analysts believe this has prompted a shift in investor focus toward large-cap stocks. Looking ahead, analysts expect small and mid-cap stocks are likely to underperform in the short term, given their elevated valuations and absence of short-term triggers. Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, said, "The recent weakness in the broader market is likely to continue since they are excessively valued, and the ongoing risk-off can lead to further selling in this segment. Money may move from the overvalued SMIDs to the fairly valued, safe large caps in financials, industrials, autos, and real estate." 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.
Mint
4 days ago
- Business
- Mint
Indian cement stocks become dearer than some global peers
India's cement sector is not a cheap bet on an absolute or relative basis. It trades at a one-year forward price-to-earnings multiple of 34x – a steep premium to some global counterparts. The reading is higher than the sector's long-term average. The problem is that stocks of Indian cement makers have elevated valuation multiples despite subdued earnings. In fact, the Indian cement sector has seen large downgrades to consensus Ebitda and earnings per share estimates every year for the past 10 years, says Kotak Institutional Equities. So, what is keeping valuations lofty? Two key narratives seem to fuel optimism. A pick-up in government spending on infrastructure and allied activities in FY26 after a muted FY25 due to state and general elections would buoy cement demand. Additionally, the home building segment is also likely to push demand after real estate launches were weak in FY25 due to delayed approvals. Also Read | Cost pinch is coming for cement companies in Q1 Secondly, pricing discipline, which has been absent lately amid an intensifying fight for market share, will return. Consolidation in the sector, with larger companies acquiring smaller ones, is said to be at its fag end now. So, as demand outpaces supply, cement prices would recover and thus, realisations and profitability. Latest company management commentaries are upbeat, with demand and pricing outlook poised to pick up in the seasonally strong second-half of the year. But the dent in prices has been severe. Price drop According to India Ratings and Research, cement prices fell 5%-6% in FY25, the sharpest annual drop in the past 20 years. The most pronounced price contraction was in south India due to oversupply, followed by the eastern region, it said in a note dated 17 June. Also Read | Is the cement sector consolidation at its fag end? So, repairing realisations may not be easy if demand fails to improve as anticipated amid the recent spate of capacity addition. This would also keep the sector's utilisation levels capped. The return ratios have been poor. Sectors such as cement with a low fixed asset turnover ratio (long-term average of 1x) and mediocre financial returns with return on equity/cash return on capital invested modestly higher than cost of equity/weighted average cost of capital should not have a very high multiple, as per Kotak. On a one-year forward EV/Ebitda basis, the sector trades at a multiple of 21x, higher than the long-term average of 16x. Clearly, unless one of these narratives materialises and leads to earnings upgrades, valuations don't seem justified. Also Read | Cement price hikes in April ease margin fears—at least for now
Mint
5 days ago
- Business
- Mint
Iran-Israel war: Are small-cap stocks most exposed to Middle East tensions amid high valuations?
Indian stock market: Geopolitical tensions are once again flaring up in the Middle East, as hostilities between Iran and Israel continue for the fifth consecutive day, making investor sentiment jittery towards riskier assets. Global markets have been on edge, with the conflict adding fresh strain to an already fragile global economy, one that is still grappling with the effects of trade tensions and the ongoing Russia–Ukraine war. For the Indian stock market, the Iran–Israel conflict has added to existing concerns around stretched valuations. Although India does not have significant trade dependence on either country, the tensions have triggered a sharp spike in crude oil prices, dampening market sentiment. While local equities initially reacted negatively to the developments, they later rebounded sharply, with strong resilience in large-cap stocks providing much-needed support to frontline indices, helping them trade higher despite global concerns. During periods of heightened market volatility, stocks with rich valuations tend to correct more than those with reasonable valuations. Although the overall market appears stretched following a sharp rally over the last three months, analysts believe small-cap stocks may face further pain if geopolitical tensions persist, as they are more richly valued compared to large-cap counterparts. Vinod Nair, Head of Research at Geojit Financial Services, said, 'Despite ongoing geopolitical tensions between Israel and Iran, the market moved higher, supported by gains in large-cap stocks, as investors maintained their focus on long-term fundamentals during volatile times. Geopolitical developments in the Middle East are likely to influence near-term market sentiment, with any signs of de-escalation being closely monitored. Small-cap stocks are expected to underperform in the short term, given their elevated valuations and lack of immediate triggers.' Recent data also indicates a shift in retail investor preference towards large-cap stocks, with ownership in mid- and small-cap counters falling to a nine-quarter low amid a broader market sell-off during the March 2025 quarter, according to the NSE report titled 'India Ownership Tracker.' Meanwhile, allocation towards large caps has risen, reflecting a growing inclination for the relative safety of blue-chip stocks amid market turbulence. According to the domestic brokerage firm Kotak Institutional Equities, small caps witnessed the largest cuts on their FY2026 EPS estimates. The brokerage notes that continued weakness in parts of the economy has resulted in continued downgrades to consensus earnings across market caps for FY2026E/27E. However, small caps lead the EPS cuts with a 6% cut in their FY2026 EPS estimates versus 2% for large caps and 3% for mid-caps. The downward revisions have been broad-based, with consumer-facing businesses seeing larger cuts. The same can be seen in earnings cuts of individual stocks of the Nifty 500 Index, with 70% of stocks seeing downgrades versus 30% of stocks seeing upgrades over April-June 2025, noted the brokerage. The Nifty SmallCap 100 is trading at a 1-year forward price-to-earnings (P/E) multiple of 27.2x, significantly higher than its long-term average and much closer to the Nifty MidCap 100's P/E of 28.3x. The spike in Nifty small-cap-100 forward P/E valuation to near mid-caps and at a premium to Nifty-50 This is unusual, as small-cap stocks typically trade at a discount to mid-caps due to their higher risk profile and lower liquidity. The sharp rise in valuations places the index near its historical peaks, levels that were last seen during previous periods of overheated sentiment, such as mid-2021 and pre-2018, as per the analysis done by domestic brokerage firm InCred Equities. In contrast, the Nifty 50 is trading at a more reasonable 20.7x forward P/E. The narrowing gap between small- and mid-cap valuations is causing discomfort among investors, particularly in an environment of persistent global uncertainties and uneven earnings visibility. Without a strong pickup in earnings growth, such elevated valuations leave little room for upside and increase the risk of a valuation-driven correction. Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
Mint
6 days ago
- Business
- Mint
Escalation in Middle East may drive correction in overvalued Indian stocks, says Kotak's Gupta
An escalation of hostilities in the Middle East makes India vulnerable to oil price shocks and could result in a correction in stock prices, which already seem overvalued based on earnings estimates for the current fiscal, according to Pratik Gupta, chief executive officer and co-head of Kotak Institutional Equities. Gupta said this could cap market upside over the next few months but expects earnings to pick up in the second half of the current fiscal. Foreign portfolio investors acknowledge India's strong macros and resilience of domestic flows, but await a correction to make large fresh investments, he said. Edited excerpts: We expect net profits of the Nifty 50 Index to grow 12% in FY26 and 15% in FY27, following a modest 6.4% growth in FY25. Diversified financials, metals & mining, oil, gas & consumable fuels and telecom will provide the bulk of the incremental profits for FY26 of the Nifty 50 Index. The sector-wise trends for the broader Kotak coverage universe of almost 300 companies are very similar to the sector-wise trends for the Nifty 50 Index. We estimate that the metals & mining sector will account for 22% and 16% of the incremental profits of FY26 of the Nifty 50 Index and KIE coverage universe, respectively. Also read | Indian markets entering phase of subdued returns, says ICICI Pru AMC's Shah We could have said that the worst is behind us if it weren't for the latest conflict between Israel and Iran, which has the potential to escalate and result in a further spike in global crude oil prices. However, if this conflict doesn't escalate, India's macroeconomic outlook is very strong and corporate earnings should pick up in 2HFY26. Nonetheless, the Nifty is not cheap as it is still trading at 22x FY26 earnings, which is expensive relative to its own history as well as in relation to local bonds or other emerging markets. Hence, it is a bit unrealistic to expect meaningful upside to markets in the next few months, although the long-term India equities' story still remains attractive. Overall, lower interest rates will help, but that alone cannot spur corporate loan growth. Many corporates are holding back on large capex plans due to the weak demand environment, high competitive intensity, low capacity utilisation and/or global trade uncertainty. While the government cannot do much about global factors, there needs to be a fresh push for economic reforms like deregulating and improving ease of doing business (especially for SMEs), land and labour reforms, accelerating government capex on infrastructure, etc. For now, it appears that any strong growth in private sector capex is still some time away. In general, given the risks of a slowing global economy, we would prefer domestic plays versus export-oriented plays. Also, most large caps offer better risk-reward vs small/mid-caps at current valuations. In terms of sectors, we like banks, NBCFs (non-bank financial companies), life insurance, telecom, hotels, and real estate. We would avoid the consumer staples, IT services, oil marketing PSUs, chemicals, and the metals sector in general. Foreign investors have been cautious on India due to our high headline valuations (vs other emerging markets). However, they have been very surprised by the resilience of domestic flows and how Indian markets have managed to sustain high valuations despite weak earnings growth in FY25. FPIs acknowledge the strong medium-term growth prospects for India and the strong macroeconomic position of the country, especially relative to its peers, but they're largely staying away due to our relatively expensive valuations. Most FPIs are awaiting a correction in India to make large fresh investments. It's also worth noting that most FPIs invest in India from their global EM (emerging market) fund allocations, and such funds have not seen meaningful inflows this year as yet. This may change as and when money flows out of the US–possibly due to concerns over a weakening US dollar–and at that time, one may see EM funds getting strong inflows. India would also then get its fair share of strong FPI flows. Also read | If this market veteran had ₹100 now, 70% wouldn't go to equity While there have been many large transactions in the last 4-5 weeks involving the sale of shares by promoters/PE funds, this is not necessarily a negative sign across the board. In many such exits, there were company-specific reasons where the promoters needed to raise cash for some other reason, and it wasn't a reflection on the business or stock price prospects. A sale by a promoter or a PE who is typically better informed about their company's prospects may raise investor concerns, but there have been numerous instances over the years where investors have made money by buying from promoter or PE stake sales. Also, the quantum of such block deals recently (about ₹65,000 crore in the past one month) may seem like a big amount in absolute terms, but it's still small relative to our India market cap of about ₹450 lakh crore. The IPO pipeline is strong as there are many promoters or private equity funds who are looking to monetize a part of their stake given good valuations they can expect in the current environment, and/or companies need fresh equity capital to fund their growth plans. Retail investors should be very careful with any IPO, not just those priced at high multiples. Such companies don't have a public track record of profitability or of their ability to manage tough business downturns. Investing in IPOs requires a sophisticated understanding and analysis of the industry, the company and its management, which most retail investors are typically ill-equipped for. Investing in an IPO just because it is perceived to be "hot" or is trading at a premium in the grey market is a common mistake made by many retail investors. It doesn't mean that one can't make money from IPOs, as many good companies have made money for their IPO investors, and some good businesses will go public this year, too. It's just that the ordinary retail investor should be more careful and get professional advice before investing in IPOs. Also read | 'Slowing earnings growth fails to dent India's image as equity haven' For global emerging market funds, China is certainly back on the radar given that a trade deal with the U.S. is now almost finalized, given how attractive valuations are there vs those in other countries, and given that most global funds are still neutral-to-underweight China. India is seen as a very good market to invest in the long term, but EM investors have not been too keen on investing at current valuations with earnings growth that is still not showing any signs of acceleration. Given the uncertainty over Trump's economic policies, the high fiscal and current account deficits in the U.S., and the risk of a weakening dollar, some global funds have been incrementally moving money to other regions such as Europe, Japan and Asia.
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Business Standard
09-06-2025
- Business
- Business Standard
IRCON, RVNL: Disconnect between fundamentals, valuations of railway stocks
The sharp rally in the railway-related stocks thus far in fiscal 2025-26 (FY26) has been on account of an overall uptick in the stocks of mid-and small-caps and lacks fundamental support, argues a recent report by Kotak Institutional Equities, and warns of a 'large disconnect' between the fundamentals and the valuations of railway stocks. 'We see a large disconnect between the fundamentals and valuations of the railway companies. PSU railway stocks trade at several times book value (net worth) and at very rich price-earnings (P/E) multiples. The valuations are very hard to reconcile with the financials and growth prospects of the companies,' wrote Sanjeev Prasad, managing director & co-head at Kotak Institutional Equities in a recent coauthored note with Anindya Bhowmik and Sunita Baldawa. Cash and investments, the note said, accounted for 25 per cent of the book value at end-FY25 and other income accounted for 12 per cent of the pre-tax profits of the railway stocks in FY25. DETAILED VALUATION GRAPHIC HERE Thus far in FY26, most railway-related stocks have seen a sharp rally, with Railtel Corporation of India surging nearly 47 per cent during this period. Ircon International, Rites Ltd., Texmaco Rail, Rail Vikas Nigam (RVNL), Titagarh Rail Systems and Indian Railway Finance Corporation (IRFC) moved up 17 per cent to 40 per cent, ACE Equity data shows. In comparison, the Nifty 50 index has gained 6.3 per cent, while the Nifty CPSE index has moved up 6.7 per cent during this period, data shows. Midcap mania Rally in the railway stocks, the Kotak note said, is attributed to the general excitement and euphoria in the small-and midcap (SMID) stocks, which has resulted in several narratives across sectors that are dominated by SMID stocks. Market capitalization (market-cap) of the 7 railway stocks (IRFC, RailTel, IRCON, RITE, Jupiter Wagons, Titagarh Wagons and RVNL) studied by Kotak stood at Rs 3.6 trillion as on June 5 versus book value of Rs 784 billion and net profit of Rs 99 billion in FY25. "The market is clearly not making any distinction across sectors and stocks, as long as they fit into some prevailing narrative (defense, electrification, manufacturing, railways). Many of the 'narrative' stocks are largely owned by retail shareholders, which may partly explain the periodic bouts of extreme volatility in the stocks," Prasad wrote. Capex plans Going ahead, Kotak does not see a meaningful pick-up in railway capex, which could bolster the earnings of related companies and justify the steep premium they command at the bourses. Indian Railways, Prasad feels, may have largely maximized the capacity of its extant railway network with large investments in rolling stock and track over the past 10 years. Moreover, he feels there is low visibility on new projects such as a high-speed railway network on the lines of dedicated freight corridors or the upcoming Ahmedabad-Mumbai high-speed line. The outlay for railway capex stood at Rs 2,426 billion in FY24, Rs 2,519 billion in FY25 revised estimates (RE) and Rs 2,520 billion in FY26 budget estimates (BE), the Kotak note said. "The bulk of the capex of the railway sector is captured in the central government budget, with only a portion of capex pertaining to metro projects captured under a different head of government spending. Even spending on metro has not seen a meaningful pickup," the note said.
