Amid market regulator SEBI's concerns over stretched valuations in the small and mid-cap stocks, analysts were of the opinion that valuations are backed by earnings.

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However, a section of analysts expect that volatility will continue in the short run but they remain bullish on the long-term prospects of the small and mid-cap stocks.

“Given the strong fundamentals, and as long as earnings continue to grow quarter-on-quarter, markets are likely to remain robust over the long run…valuations are backed by earnings,” said Shailesh Saraf, smallcase fund manager and founder of Value Stocks.

He said expectations are backed by India's growth story and rising corporate earnings.

All NSE-listed companies continued to grow their quarterly corporate earnings, and as of the December 2023 quarter, it stood at Rs 3,62,973 crore, a Value Stock report showed.

"I remain very bullish about Public Sector Undertakings stocks have performed well. In 2023, the Nifty PSE Index soared by 77 per cent, surpassing the Nifty 50's return of 20 per cent while the PSE Index, in 2024, has given a return of 21 per cent as against the Nifty 50's return of a mere 3 per cent,” Saraf said.

There is potential for further gains due to low valuations as the Nifty PSE Index is still trading at a PE of just 10, he said.

The price-to-earnings (PE) ratio measures a company's share price relative to its earnings per share (EPS).

He advised investors to invest in themes like PSU where valuations “still remain attractive”.

The net equity inflow of Rs 26,866 crore in February 2024 marks the continuation of a positive trend, extending over 36 consecutive months, showcasing the unwavering investor confidence in the Indian equity market, Prabhudas Lilladher Investment Services Head Pankaj Shrestha.

A study by Value Stocks said that the stock market has generally responded favourably to election results, with a likelihood of some short-term volatility in the months preceding the polls.

“The near-term outlook for small and mid-cap stocks in India appears subdued, mirroring the cautious sentiment of a broader market. A modest correction of around 10 per cent is likel within the sector due to profit booking, year-end accounting adjustments, and valuation biases," brokerage platform Tradejini chief operating officer Trivesh D said.

However, the current market adjustment reflects a return to more sustainable pricing, he said.

“The correction could present opportunities for long-term investors who conduct thorough research before entering this dynamic segment,” he said.

Pawan Bharaddia, Co-founder & CIO of Portfolio Management Service firm Equitree Capital, stated that small caps have seen a decent correction and some pockets of the market are indeed experiencing higher valuations, which could suppress the broader market.

“One may use the correction to accumulate high-quality businesses in this genre as they unfold significant wealth-creating opportunities over the next couple of years,” he added.