Mumbai: Small-cap stocks, or the stocks of companies with relatively low market capitalization, have outperformed large-cap stocks as well as the overall market because of increased flow of domestic capital, which typically targets such stocks, into the market.
The small-cap index of the Bombay Stock Exchange (BSE) has rallied more than 27% during the past one month even as the Sensex, the bellwether index of Indian equity markets, reported a sluggish 3% growth.
More than 50 stocks that are part of the BSE Small-cap Index posted above 50% growth during the past one month, and the price of seven such stocks went up more than 100%.
The BSE Small-cap Index closed at 13,908.87 on Wednesday’s trade, up 1.5%, while the Sensex added just 0.8% or 164 points to end at 20,465.30.
“The valuation gap between the blue-chip (large-cap) stocks and the smaller stocks will continue to narrow in future,” says Lalit Thakker, director, equity research at domestic brokerage Angel Securities Ltd.
The price-earnings (P-E) multiple of the 30-stock Sensex on Wednesday’s prices stands at 27.85, while the small-cap index was trading at 22.9 times the annual earnings of its constituents.
According to other analysts, the main reason behind this is the continuous flow of domestic capital, both retail and institutional, to smaller stocks. “On the other hand, foreign institutional investors (FIIs), who are big buyers of the large-cap stocks, have been net sellers in the past two months,” says one fund manager who does not wish to be identified.
FIIs have been net sellers of Indian stocks in the last three months of 2007 after stock market regulator Sebi enforced curbs on participatory notes, a popular vehicle for their international clients to invest in India.
Since the end of September, FIIs have been net sellers to the tune of around $600 million (Rs2,364 crore). In the year to December, however, they were net investors to the tune of $17.2 billion.
“New mutual fund schemes that recently raised money for focused-investments in small and mid-sized companies has also supported the rally in small-cap index,” says Anita Gandhi, head of institutional business at Mumbai-based Arihant Capital Markets Ltd.
The big gainers in the small-cap index include Jindal South West Holdings Ltd, a non-banking financial company, whose stock price went up above 150% in the past one month; Everonn Systems Ltd, the Chennai-based integrated education and learning solutions provider, and Krishna Lifestyle Technologies Ltd, a stock valued less than Rs5, saw their stock prices growing more than 140%; and textile manufacturers Rajasthan Spinning and Weaving Mills Ltd and Arrow Webtex Ltd posted over 115% gains.