Mumbai: Large-cap stocks are not the only beneficiaries of the current run-up on the Bombay Stock Exchange (BSE), which many investment analysts have already started terming the start of another bull market.
Mid-cap and small-cap stocks, too, have had an extended rally as investors bought into them on lower valuations, according to a Mint analysis of 1,543 stocks listed in BSE’s so-called “B” group.
About one of every four firms in these categories has posted at least a 50% rise over the 40 days since the rally started.
“These stocks were beaten that much more,” said Vetri Subramaniam, head of equity assets at Religare Asset Management Co. Pvt Ltd, which manages stocks worth some Rs6,000 crore. “They are recovering from that hit.”
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The Sensex fell 52% in 2008 as foreign institutional investors, or FIIs, pulled out money aggressively in a flight to safer assets as stock markets the world over tumbled. Mid-cap and small-cap stocks fared worse. The BSE’s mid-cap index declined 67% and the small-cap index fell 72.4%.
This time around, small and medium stocks are faring marginally better than large-cap Sensex stocks. Compared to the 35.08% returns for the Sensex in the current rally, the mid-cap index has posted 35.99% returns and the small-cap index 37.84%.
“This is a good omen as it means the so-called bear market rally is broad-based and not confined to the Sensex and Nifty stocks,” said the head of a Mumbai-based brokerage. He did not want to be identified.
The Sensex is a basket of 30 stocks and Nifty, 50 stocks, but except for one, all Sensex stocks are also constituents of the Nifty.
Valuations of many small and medium stocks had plummeted to near lifetime lows by the first week of March when the Sensex dropped to 8,427.29, a three-year low.
In the beginning of the rally on 9 March, the price-earnings multiple for the Sensex was 11.6. In comparison, the same valuation measure for the mid-cap index was 8.69 and the small-cap index 5.94. Price-earnings multiple is calculated by dividing the price of a stock by its per-share earnings. The higher the multiple, the costlier is the stock.
“They were priced as if the business was going to die,” said Deven Sangoi, head of equity at ICICI Prudential Asset Management Co. Ltd, the third largest mutual fund house in India, with Rs51,432 crore worth of assets under management. “In some cases, the market capitalization was equivalent to cash in hand.”
At the height of the financial crisis, valuations were pummelled because there were concerns on whether these companies will be able to sell their products, get credit, and whether their business was strong enough to handle the economic environment, Sangoi added.
But with risk appetite returning to the market, riding partly on economic stimulus measures unveiled by the government and the central bank, these stocks have bounced back sharply.
“The gap between the valuation widened more in favour of mid-cap stocks,” said A. Balasubramanian, who manages assets worth around Rs47,000 crore as chief investment officer at Birla Sun Life Asset Management Co. Ltd. “As stability emerged in the global markets, volumes started picking up at the lowest prices. The excess cash people have is being deployed back.”
Balasubramanian said that cash as a percentage of equity assets under management in his mid-cap fund was down to about 8% compared with 20% a few months ago. For funds that invest mainly in large-cap stocks, the comparable figure is 12%.
Indeed, FIIs and domestic institutional investors have voraciously bought Indian stocks in recent days. Since 9 March, FIIs have bought some $1.47 billion (Rs7,305.9 crore) of Indian equities. Local mutual funds and insurers have bought some Rs1,508.14 crore of shares during the same period.
Still, there are some fund managers such as M. Venugopal of Tata Asset Management Co. Ltd who caution that too much shouldn’t be read into this as mid-caps and small-caps are generally illiquid stocks.
“Mid-caps have poorer volumes. They have very little floating stock, so even limited trading can result in a big swing,” said Venugopal. Tata Asset Management has some Rs17,000 crore of assets under management.
According to fund managers and analysts, the sustainability of this rally will depend on capital flows. They don’t think that earnings for the fourth quarter ended March will have much impact, unless surprises are in store.
“It appears that investors have assumed that the worst for earnings has been plugged into estimates and hence share prices (are going up),” wrote Ridham Desai and Sheela Rathi of Morgan Stanley India Co. Pvt. Ltd in a 17 April report.
One major factor that has differentiated this rally from previous ones is that all stocks are rising or falling in tandem.
According to Sangoi of ICICI Prudential, “the difference (in share price movements) will occur after the quarterly numbers are announced. The good business will differentiate as we move along and it will be based on financial performance.”
The list of 373 firms that have posted at least a 50% rise in value in the past five weeks includes seven banks, 40 information technology firms, 30 realty companies, 21 engineering goods makers, 33 that provide financial services and 12 drug makers.
The top gainer among these are engineering projects firm Reliance Industrial Infrastructure Ltd with a 215% gain, financial services provider JPT Securities Ltd with a 172% advance and textile maker Indian Acrylics Ltd with a 150% jump.
Mahindra Lifespace Developers Ltd surged 127%, KPIT Cummins Infosystems Ltd advanced 102% and S Kumars Nationwide Ltd gained 113%.
Graphics by Ahmed Raza Khan / Mint