Market experts suggest staying away from these for now, recommend large-caps.
It was not a good start of the week for mid-cap and small-cap stocks. Bad corporate earnings, high leverage and issues related to Foreign Currency Convertible Bonds (FCCBs) had an impact on the indices on Monday. On a day when benchmark indices lost less than half a percentage of their values, mid-cap and small-cap indices took a beating of 1.6 per cent and 1.76 per cent, respectively.
The Bombay Stock Exchange benchmark Sensex closed down 0.43 per cent at 17,118.74, while NSE Nifty declined 0.40 per cent to 5,148.35.
Shree Renuka Sugars led the decline. Its shares lost a fourth of the value in a single trading session, on the back of a loss of Rs 57.3 crore during the July-September quarter, against a net profit of Rs 11.4 crore in the previous corresponding quarter. Stocks of another sugar maker, Balrampur Chini, declined 11 per cent as the company reported a loss of close to Rs 40 crore during the period.
“The quarterly results were disappointing,” says Vetri Subramaniam, head of equity at Religare Mutual Fund. Interestingly, in some of these bleeding companies, foreign institutional investors had raised their holdings during the quarter. Likewise, Educomp Solutions reported a decline of 75 per cent in net profit at Rs 26.1 crore against Rs 75.2 crore during the previous corresponding period, which resulted in a decline of 10.3 per cent in its share price.
Way2Wealth Securities COO Ambareesh Baliga says: “There is no depth in the mid-cap space. Issues of corporate governance have also popped up in small and mid-cap spaces and questions are being raised on the balance sheets of the companies. Amid this, one does not know where the bottom is.”
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Market participants say most of these stocks are trading below their intrinsic net worth. Though some companies posted good quarterly numbers, still their stocks reacted negatively. For instance, textile major S Kumars posted better profit numbers. “But, the stock was 14 per cent down because the company is leveraged and promoters have pledged their shares,” they add.
Shares of logistics major Gati were down 20 per cent, as the company struggled with issues related with FCCBs. The stocks of Bilcare, a company into healthcare supplies, plunged the same amount.
Going forward, market experts prefer to stay away from this space, as large-cap stocks are available at fair valuations. “Though mid-cap stocks are reasonably attractive, the discounts compared with large-caps are not significant. One needs to be selective,” says Subramaniam.
Baliga agrees. He says, “Mid-cap and small-cap stocks have witnessed significant correction and few of them are available at compelling valuations. Since there is discomfort on most of them on account of high leverage, it is best avoided for the time being. I would prefer to look at large-caps.”
VIP Industries, Lovable Lingerie, Tasty Bite Eatables and Indosolar were among other companies which lost 10-15 per cent in the value of their shares. Several of the mid and small-cap stocks were trading at their 52-week low on Monday.