Mayhem in mid-caps continues despite Sensex scaling fresh peaks

Mumbai: While the benchmark Sensex tested fresh record highs on Wednesday, the carnage in the mid and small cap pack continues, with usual suspects PC Jeweller Ltd and Vakarangee Ltd, sliding more than 42% and more than 32% respectively so far this month, leaving analysts divided on whether there is more pain left for this pack.

Shares of PC Jeweller have plunged 87% so far this year, falling from a record closing high of ₹ 600.65 a share on 16 January, to close at ₹ 78 on BSE on Wednesday. The sharp drop eroded the company’s market capitalisation by ₹ 14,930 crore so far this year. Issues such as withdrawal of a buyback offer, links with Vakrangee, a gift of shares by promoter Padam Chand Gupta to one of his family members, hurt investor sentiment.

Vakrangee has been losing value as market regulator Securities and Exchange Board of India (Sebi) is probing the company for non-disclosure of price-sensitive information and alleged price manipulation.

On 27 April, Price Waterhouse & Co. resigned as the auditor of Vakrangee due to lack of information about its books of accounts, bullion and jewellery business.

The stock is down 89.2% year to date.

BSE mid-cap and small-cap indices are down 14.82% and 17.76%, respectively, so far in 2018, while benchmark Sensex gained 6.8%. The 30-share Sensex hit a record high of 36,747.87 points on Wednesday, before retreating at close.

For the month-to-date, 63 of 100 BSE mid-cap stocks are trading lower; while 604 of 855 BSE small cap stocks shed value so far this month.

Experts are divided on the future direction for mid-cap stocks.

“It’s not the end of the mid and small cap carnage yet. I believe there is more pain left,” said Sanjay Mookim, India equity strategist, Bank of America Merrill Lynch (BofAML).

Mookim pointed that wealthy individuals have prominent stakes in these stocks - not just through PMS (portfolio management services) but also through direct exposure.

“With India’s macro outlook deteriorating and a cautious market view, if things worsen from here on, the sell-off can intensify in mid and small caps space.” said Mookim.

Apart from stock-specific woes, there were concerns over pricey valuations for the pack too.

According to Ajay Bodke, chief executive officer and chief portfolio manager of Prabhudas Lilladher Pvt. Ltd, performance across mid-small cap stocks for two-three years prior to the correction that started in January 2018 was stunning, primarily on account of improvement in earnings and expansion of price to earnings multiples.

“This had resulted in mid and small cap valuations rising to an almost 28% premium versus large caps. Some course correction was due which is happening currently and making markets healthy from a long-term perspective,” Bodke said.

One-year forward price-to-earnings (PE) ratio of BSE Midcap is currently at 19.7 times, a premium of 12.5% over the Sensex which trades at 17.51 times, according to Bloomberg data.

However, on 1 January, mid-cap index traded at 23.65 times one-year forward P/E, a premium of 27.29% on Sensex, which traded 23.65 times.

This, after analysts slashed earnings estimates of BSE Midcap by 6.8% for this fiscal from beginning of April, the Bloomberg data showed.

Some were optimistic that the worst was over for the pack.

“Now after substantial fall, there is a very strong sense, there is value in entire midcap space. Just that one needs to be careful about which stocks they are getting into and focus on quality and growth visibility,” said Hemang Jani, senior vice-president, advisory, at brokerage Sharekhan, owned by BNP Paribas SA.

“Select consumer focused companies in this space look good, while infra and commodity-linked companies can be avoided,” pointed Jani.

A few were more optimistic.

“Earnings for midcaps are expected to be good in June quarter. Good set of numbers are likely to drive midcaps higher,” Pankaj Pandey, research head at ICICI Securities said.

There is a decent amount of liquidity in the market or savings getting channelised in the financial assets, which will fuel the rally in these stocks,” added Pandey.