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After touching a high of 20,103 (S&P BSE Sensex) and 6,074 (Nifty) on January 25, the benchmark indices have gone into a tailspin. As compared to an 8.4 per cent fall in the benchmark indices, the S&P BSE Sensex and the Nifty, the BSE Mid-cap and BSE Small-cap indices have tanked nearly 14.5 per cent and 16 per cent, respectively, since their January highs.
At the global level, concerns regarding withdrawal of the stimulus package in the US (quantitative easing) and problems with Cyprus in the Euro zone continued to impact the markets. On the domestic front, macro-economic conditions, coupled with political developments like the withdrawal of support to the government by the DMK party rekindled concerns regarding policy paralysis and halted the liquidity-driven rally being witnessed since the second half of 2012.
Though the market has been on a downward spiral, the disappointment from mid- and small-cap stocks is more painful; they have fallen like ninepins in the past two months. Margin call fears, corporate governance issues, pledged shares, high leverage and disappointing quarterly numbers have taken a toll on most of the mid- and small-sized companies.
Steep fall
Among individual stocks, Core Education and Technologies, Aanjaneya Lifecare, Bilcare, DB Realty, A2Z Maintenance & Engineering, United Breweries Holdings, Manappuram Finance and Educomp Solutions have seen market value erosion of 50–90 per cent during this period. Most of these companies have a significant amount of pledged promoter shares and there are indications about margin-calls being triggered on these counters.
“One reason has been the disappointing earnings of the companies in this space, especially in infrastructure, real estate and capital goods. Select companies in the cement, metal and paper-related pack also disappointed. Over-ownership of stocks in the mid- and small-cap space was another reason, where certain participants which leveraged their position also crashed when there were problems relating to margin funding,” said Gaurang Shah, assistant vice-president, Geojit BNP Paribas Financial Services.
Aanjaneya Lifecare was the largest loser, skidding 89 per cent to Rs 87.80 from Rs 780 on January 25, after its lenders offloaded 1.25 million equity shares. One of its promoters, Finaventure Capital, saw its total holding in the company decline to 22.7 per cent from 32.71 per cent at the end of the December 2012 quarter, due to invocation of shares pledged by lenders and open market sale by the promoters.
Core Education and Technologies plunged 81 per cent within two months to Rs 58.10 from Rs 303, after the lenders invoked and sold pledged shares of the company in the open market. IFCI and other collective lenders offloaded 6.95 million shares, representing six per cent of the total equity capital, in February.
Bull-dozed
It’s a dilemma for investors in these group stocks with this kind of fall. Investors in these stocks are greatly disappointed and are unable to take a call on whether to remain invested or to get out by cutting huge losses.
Even the stocks owned by ace investor Rakesh Jhunjhunwala have collapsed in the current turmoil. Bilcare, A2Z Maintenance, DB Realty and Hindustan Oil Exploration have been hammered by 40–60 per cent on the Bombay Stock Exchange.
Investors have now started analysing the real worth of these stocks under a microscope. It is said that the share price of all these companies were artificially jacked up beyond the intrinsic worth and value.
Stock strategy
Most infrastructure-related companies have high debt and low return on equity, and the government has failed to push infrastructure growth aggressively, with most of their departments at loggerheads, says A K Prabhakar, senior vice-president, equity research, at Anand Rathi.
“As a stock-specific call, there will be a miracle required for companies like A2Z Maintenance to perform financially, which looks very difficult. Even metal stocks will drag along as we go forward,” says Shah of Geojit BNP. “On the other hand, the likely impetus from the government to the information technology sector and the economic recovery in the US augurs well for stocks in this space. MindTree, CMC, Persistent Systems, Tech Mahindra, Mahindra Satyam and HCL Tech should do well. YES Bank and IndusInd Bank from the banking pack are the preferred bets in the mid-cap banking space.”
“Mid-caps with weak fundamentals would not sustain the rally but the interest in quality mid-cap names is reasonably high. We would avoid companies with high stress on books and/or high level of pledging and/or poor cash flows. Here, we witness such issues in stocks like Glodyne Technoserve, HDIL or Core Education, and the damage in these stocks has been quite brutal,” said Gaurav Dua, head of research at Sharekhan.
“I am not bullish on the infrastructure space. It will be very difficult for stocks like DB Realty, A2Z Maintainence, Delta Corp and Billcare to see the January 2013 highs. On the other hand, Sintex and Hexaware can be bought,” feels Jagannadham Thunuguntla, head of research at SMC Global.
