Mid-cap: Mid-cap & small-cap fall raises volatility, margin call concerns

Mumbai: Mid- and small-cap stocks tumbled on Monday as heightened concerns that the recent run-up in several of them – especially public sector companies – has been excessive, and prompted investors to aggressively cut their bets. If the decline in share prices continues, it could result in margin calls by brokers – a situation where clients are asked to top-up their collateral on account of the losses in trading positions boosted by loans. The inability to bring in fresh margins could force brokers to sell stocks bought on loans, deepening the panic in them.

On Monday, Nifty’s Midcap 100 index fell 2.5% – its biggest single-day fall since January 23, and the Small Cap 100 index slumped 4% – its biggest fall in a day since September 12 last year. The Nifty Microcap 250 declined 3.9%. The Sensex and Nifty shed 0.7-0.8% each Monday. On Friday, the small-cap and mid-cap indices fell between 2% and 3%.

PSUs contributed the most to the drop in smaller shares on Monday. “The main reason for correction in mid- and small-caps was the major moves in PSUs in recent weeks,” said Apurva Sheth, head of research at Samco Securities. “Several PSU stocks, like SJVN and UCO Bank, have extremely low floats. The prices of these had been driven up even though the fundamentals didn’t match and now we are seeing profit booking in the segment.”

Nifty’s Volatility Index – a fear gauge – rose 4% to 16.06, suggesting traders see more near-term risk in the market. Analysts foresee a 2.4% decline in the Nifty Midcap 100, and a 4% drop in the Smallcap 100 index in the near term.

The key support for the Midcap 100 index is at 46,550 and at 15,000 for the Nifty Smallcap 100 index, said Dharmesh Shah, head of technicals at ICICI Securities

The Nifty Midcap 100 index closed at 47,675 on Monday and the Small Cap 100 index closed at 15,617.Brokers said they haven’t asked for fresh collateral in margin trades in a big way yet, but further declines could force them to ask for it. “There may still be margin positions in the small- and mid-cap segment and they haven’t been squared off yet,” said Ajay Kejriwal, CEO, Choice Equity Broking. “We may still wait for 1-2 more days before squaring off the margin calls.”MIXED VIEW
Some technical analysts are yet to entirely write off small- and mid-cap stocks. “The indices were in the overbought zone and saw some profit booking, which is likely to continue for the next few days,” said Shah. “However, traders should not consider this negative and use a buy-on-dips strategy in quality small- and mid-cap stocks.”

Sheth expects small-cap to underperform blue-chip stocks in 2024.

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