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Photo: Mint
Photo: Mint

Penny stock boom sparks gains for cos with no sales

The outperformance of retail-driven small stocks raises the risk of a pullback and some contagion to broader markets

Retail investors’ frenzy over small stocks in India has reached such extremes that shares of some companies that aren’t booking any sales, let alone profits, are going through the roof.

These include Transglobe Foods Ltd, a fruit-jam maker that has skyrocketed more than 4,300% this year, and real-estate services firm Shree Precoated Steels Ltd, which has jumped over 1,300%. Both companies reported losses on no sales in the latest fiscal year.

The prospect of risky investments turning sour raises concerns that any sudden withdrawals by small traders could wind up hurting the broader market as well. That’s due to the rapid expansion in the presence of individual investors in India’s stock market, mirroring record sign-ups seen at US brokerages including Robinhood during virus-related lockdowns.

“The outperformance of retail-driven small stocks raises the risk of a pullback and some contagion" to broader markets, said Sumeet Rohra, a fund manager at Smartsun Capital Pte in Singapore. Investors should stick with “quality stocks which have not participated, rather than chasing small caps," he said.

India allows companies with zero revenue to stay listed on exchanges as long as they meet certain other criteria based on net worth and financial performance. The stock exchanges have more than 450 companies that reported zero revenue for the latest year, according to data compiled by Bloomberg.

The recovery in smaller Indian shares has been stronger. The S&P BSE Small Cap Index has surged 70% from its March low and is now up 9.8% for the year.

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