Money flows back into mid and small-cap counters

Valuations in the segment are getting stretched to the breaking point.

Last week's market correction, especially in the mid- and small-cap segment seems to have no impact on the buying interest in these counters.

Foreign and domestic funds seem to have taken the fall in their stride, which has not prevented them from buying into select counters.

For instance, Reliance Mutual Fund was a buyer at the Aptech counter, while Fidelity bought the Mahindra Gesco stock. Oppenheimer AMC (Mather Platt Pumps) and SBI Mutual Fund (India Cements) were also among the prominent buyers at the mid-cap counters.

The mid and small cap segment took a terrible beating as the markets crashed last week. While the Sensex lost 1.89 per cent last week ending 23rd September, 2005, the corresponding losses in BSE Mid Cap index and BSE Small Cap index were 6.54 per cent and 11.19 per cent.

While the current rally has seen a sustained rise in the mid and small cap segment, last week's losses have bought the focus back in to the higher risk these segments carry. However, none of these seems to have dampened the interest of foreign and domestic funds.

Many analysts agree that the valuation in the mid and small cap segment are getting stretched to breaking point. While the Sensex P/E (trailing) is currently at 18 times, that of CNX Midcap index is above 20 times.

However, they note that a generalisation is not possible considering the number of stocks in the segment.

Though mid and small-caps faced the major brunt of the corrective sentiment that pervaded the market on Thursday, brokers still vouch for the potential of some scrips in these categories.

According to Suresh Parmar, senior equity dealer at Darashaw Broking and Investment Banking, "companies with strong fundamentals will perform well in the long run irrespective of the market going up or down by a 1000 points."

Select stocks in the mid-cap segment have bounced back following last week's meltdown, indicating renewed buying interest at these counters. For instance, the Mro-Tek scrip which was down in the previous three trading sessions, moved up smartly by 3.84 per cent to close at Rs 67.59 yesterday.

Tera Software was also among those scrips which suffered the setbacks of the market fall, falling for three consecutive sessions.

However, like Mro-Tek, Tera Software also bounced back to close at Rs 57.70, 3 per cent higher than its previous close. Bharat Bijlee, Amtek Auto, Super Spinning were also among the stocks which suffered during the correction but have shown resilience since then.

Analysts note that these stocks are fundamentally strong to withstand short-term corrections, which are unlikely to hurt in the long-term.

"Such companies have a really good growth strategy and strong base to get affected by such short-term volatility in the market," says Parmar.

Ambareesh Baliga, vice president of Karvy Stock Broking says, "the market for sometime now has been overshadowed by greed than logic. It is the scrips in the mid and small-cap index which does not have strong fundamentals and are driven by small investors and operators, which cannot sustain in this corrective phase."

However, he feels that in scrips like Tata Teleservices, Mphasis BFL, and Mro-Tek, the fundamentals are strongly inbuilt to discount the negatives in the market.