Synopsis: In Q3FY25, mid and small-cap companies experienced more earnings downgrades compared to large-cap firms, primarily due to top-line and margin pressures. Despite benchmark indices like the Sensex and Nifty trading marginally higher, the broader market showed strength, with small-cap and mid-cap indices rising up to 2%.
On Wednesday, February 19, 2025, the BSE Sensex was trading at 75,987.22, a modest increase of 19.83 points or 0.03%.
The NSE Nifty rose by 18.95 points, or 0.08%, to 22,964.25.
The BSE Smallcap index surged by 2.14%, while the BSE Midcap index gained 1.25%.
This positive movement in mid and small-cap stocks suggests that investors viewed the prior sell-off as overdone.
Earnings Analysis:
Rahul Singh, CIO-Equities at Tata Asset Management, noted that mid and small-cap companies faced more downgrades in Q3FY25 compared to large caps, with many companies experiencing top-line and margin pressures.
Valuations for mid and small caps are still at a premium of 57% and 30%, respectively, against large caps.
Earnings downgrades make it challenging to sustain these valuations, even in relatively strong sectors like IT and pharma.
Sector Highlights:
Large-cap stocks such as Zomato advanced by 1.68% to Rs 227. Other gainers included Tata Steel, IndusInd Bank, Axis Bank, SBI, and Kotak Mahindra Bank, with increases up to 1.23%.
In the mid-cap segment, RVNL surged by 8.63%, while Mazagon Dock Shipbuilders, Bharat Dynamics Ltd, Cochin Shipyard Ltd, Suzlon Energy Ltd, and Thermax Ltd saw gains ranging from 5% to 8%.
Small-cap stocks like Tata Investment, Data Patterns, GRSE, Swan Energy, Minda Corp, and Anant Raj advanced between 6% and 14%.
Market Outlook:
The BSE Smallcap index has declined by 19% in 2025 so far, while the BSE Midcap index has fallen by 14% during the same period.
V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlighted India's underperformance, especially as US indices like the S&P 500 and Nasdaq are reaching new highs.
News of Chinese authorities encouraging investments has created additional headwinds for India, as Chinese stocks are trading at lower valuations and may attract significant foreign portfolio investments.
Emkay Global anticipates continued market volatility through the March quarter, with potential sharp sell-offs.
However, they expect stabilization from the June quarter, citing factors such as the potential easing of concerns around tariffs, completion of earnings downgrades, and signs of recovery in discretionary consumption demand.
They maintain a December 2025 Nifty target of 25,000 and suggest that the market becomes a compelling buy at the 22,500 level.
Their sector preferences include overweight positions in discretionary consumption, healthcare, and telecom, and underweight positions in financials, materials, and staples.
Conclusion:
While mid and small-cap stocks have shown resilience after recent sell-offs, elevated valuations and earnings downgrades present challenges.
Investors are advised to exercise caution, focusing on large-cap stocks and closely monitoring market developments.
The market is expected to remain volatile in the near term, with potential stabilization in the coming quarters as economic indicators improve.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
