High crude prices, rise in lending rates take toll on small-cap stocks
In the last two weeks, the Nifty Smallcap 100 index fell 7 per cent or 1,441 points, to 17,985 points on Monday from 19,426 points on October 12
Following a meteoric rise, small-cap company stocks are now grappling with the consequences of escalating crude oil prices and the likelihood of a hike in lending rates, which are anticipated to impact their earnings growth during the second half of the fiscal year. Over the past fortnight, the Nifty 100 small-cap index has plummeted by 7 percent, or 1,441 points, to 17,985 points on Monday, down from 19,426 points on October 12.
Consequently, all indices tracking small-cap stocks have suffered sharp declines as investors liquidated positions to lock in profits. However, the Nifty small-cap 100 witnessed a brief rebound of 246 points (1.38 percent) to 17,985 on Monday, up from 17,739 on Friday.
Among the stocks that have been particularly hard hit are CreditAccess Grameen and Himadri Speciality Chemical, which have witnessed declines of 25 percent and 23 percent, respectively, trading at ₹998 and ₹512 over the last two weeks. Similarly, Deepak Fertilisers and Ola Electric Mobility have also suffered, falling by 18 percent and 17 percent, respectively, to ₹1,148 and ₹39 since October 12.
Small-cap stocks have experienced a sustained rally in recent months, buoyed by a steady influx of investments from small-cap mutual fund schemes. The net investment in small-cap mutual funds reached a record high of ₹24,779 crore in the September quarter, up from ₹17,433 crore, despite concerns raised by analysts about the potential for significant price fluctuations in small-cap company stocks.
The high valuations in large-cap stocks, coupled with stagnant earnings growth, have led investors to flock towards small-cap stocks. Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, explained that high crude oil prices fuel inflation, necessitating higher interest rates to curb it, potentially putting economic growth at risk.
"The smallcap revenue and earnings growth are contingent on the health of the global and Indian economy. Moreover, smallcaps were priced at perfection with high PE ratios," Gupta noted. Even after the recent dip, Gupta believes that valuations remain elevated, and investors may be reluctant to invest in small-cap stocks due to the risk of growth forecasts not being met.
Hitesh Tailor, Technical Research Analyst at Choice Broking, added that the recent sharp correction in the Nifty Smallcap 100 reflects heightened selling pressure following its rally to an all-time high near 20,187 points. He also stated that higher MCX crude oil November futures prices, along with elevated lending rates, could weigh on investor sentiment and maintain volatility in the small-cap segment.
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