Stock market crash| These low-quality smallcap stocks may get hit hard, Kotak Equities warns

Kotak on Smallcap, midcap stocks: Many low-quality stocks may still have a long way to fall, Kotak Equities warned.

Kotak Equities said that the correction in smallcap stocks, which witnessed a sharp fall putting retail investors at greater risk, does not necessarily mark a reversal of the market to fundamentals and numbers from sentiment and narratives. But many low-quality stocks may still have a long way to fall, it warned.

Smallcap, midcap stocks: Retail investors, on the other hand, have generally favoured small cap stocks.

What Kotak Equities said on smallcap stocks

"It would appear that retail investors have taken a more positive view on small-cap stocks and a more active part in the rally in smallcap stocks and are thus, more exposed to the ongoing correction," Kotak said.

It added, “The recent correction in broader markets is quite small in the context of the large returns of the past year. The Nifty Midcap 100 Index and the Nifty Smallcap 100 Index are down 5 per cent and 10 per cent in the past one month but they are still up 53 per cent and 58 per cent, respectively, in the past one year.”

Some smallcaps trading at expensive valuations on consensus estimates include: Kalyan Jewellers, MRPL, Cochin Shipyard, NBCC, Birlasoft, Cyient, Zensar Technologies, IRB Infra and KEI Industries, Global Health, Jyothy Labs, Glenmark Pharma, RITES and CESC.

Kotak Equities said that valuations of the majority of the midcap and smallcap stocks is quite expensive, especially in the context of their business models as well as their own history. A total of 61 per cent of mid cap and 63 per cent of small cap stocks have given more than 30 per cent return in the past year, as per data.