Mumbai: After losing 4.01% on Budget Day as investors rushed to sell shares, India’s benchmark stock index, Sensex, staged a smart recovery and gained 1.70%. The index rose to 13,159 on Thursday, led by technology stocks but analysts say mid-cap stocks will be most hurt in coming days as interest rates rise and economy slows down.
Compared with Sensex, both mid-cap and small-cap stocks lagged behind on Thursday. The BSE Mid-cap Index and the BSE Small-cap Index made just a marginal recovery of 0.24% and 0.09%, respectively.
Since 8 February, the day BSE Sensex crossed the 14,000 mark and closed at its historic high, the BSE Mid-cap Index has lost 10%. With today’s recovery, Sensex, too, has lost 10%, but analysts feel that going forward, mid-cap stocks may not have the momentum. Also, they have not performed well since May 2006 when Sensex lost more than 30% after breaching the 12,000 level. Since then, Sensex has gone up by 7%, but the BSE Mid-cap Index is still down 6%. The fall in small-cap index is even sharper at around 14%.
Typically, companies with a market capitalization of up to Rs500 crore are classified as small. Those companies that have a market capitalization between Rs500 crore and Rs1,000 crore are classified as medium sized.
Fund managers and analysts attribute a couple of reasons for the underperformance of these stocks. “After the sharp fall in the market in May 2006, fresh money has largely gone into the large-cap stocks,” says Soumendra Lahiri, a fund manager with DSP ML Small- and Mid-cap Fund. He manages funds worth Rs1,500 crore.
Fund managers also feel that the rising interest rates is bound to hit the mid- and small-sized companies the most. “Most companies are in expansion mode and have announced huge capex plans. With the cost of bank finance rising, most of these companies may not be able to fund the capex from thier own balance sheets,” says Anoop Bhaskar, a fund manager with Sundaram BNP Select Mid-Cap Fund, which has a corpus of Rs2,022 crore.
The brokers also attribute technical reasons such as margin calls and the stock market regulator’s action against operator groups that were active in some of the frontline mid-cap stock counters for the fall in some of these stocks.
Margin calls get triggered when stock price falls. Since these companies have low-floating stocks, if the prices fall continuously, the margin calls get triggered as investors are required to make up for the difference in the price.
Some of the Budget announcements are also likely to act as a dampener for the companies in this segment. For instance, the proposal of extending service tax on rented commercial properties will hurt many of them. The hike in the excise duty on cement and withdrawal of tax benefits for construction companies are also negative factors for them.