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Midcaps, smallcaps worst hit in ongoing selloff

PSUs along with companies under regulatory scrutiny witnessed the biggest falls.

ET Bureau|
Last Updated: Oct 05, 2018, 07.56 AM IST
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“The current sell-off has battered all the stocks irrespective of size and sector. As a result, several good quality stocks have also seen steep falls,”said G Chokkalingam, founder, Equinomics Research.
By Pavan Burugula

Investors with exposure to mid- and small-cap stocks are feeling the maximum pain in the ongoing broad market sell-off with several of them slipping deeper into a bear phase. In the mid-cap index, 82 of the 105 stocks have fallen at least 20 per cent from their peaks, a reflection of the deep-rooted bearishness. The popular definition of a bear market is when broader indices fall over 20 per cent from their last peaks.

The situation of small-caps looks even worse as 825 stocks of the 869-member BSE Small-Cap index have witnessed over 20 per cent fall from their peaks. Of these, 352 stocks have seen their values erode by over 50 per cent, data compiled from Bloomberg showed.

Public sector undertakings (PSUs) along with companies under regulatory scrutiny witnessed the biggest falls. Shares of stateowned Union Bank, Bank of India, NBCC and Central Bank of India have all seen a 60 per cent plus fall. Shares of companies that have been in the midst of controversies such as PC Jewellers, Jaypee Infratech, Rolta India and 8K Miles Software Services have also seen their values erodes by over 80 per cent from their peal The BSE mid- and small-cap indices have fallen 21 per cent and 30 per cent from their January peaks, respectively. In contrast, the blue-chip Sensex has only lost 9.5 per cent from its peak in late August.

Midcap snip 2

“We could expect more selling in the mid and small-cap stocks. The segment was looking considerably overvalued and was only being supported by strong domestic and foreign institution buying. However, the flows also seem to be drying out now,” said Dhananjay Sinha, head of institutional research of brokerage Emkay Global.

Mid- and small-cap shares have been the best performers since end-2013 helped by sharp flows from domestic investors. The appetite had driven valuations of these shares to levels last seen in 2007. In the absence of an earnings recovery, most of these shares were unable to justify the elevated valuations.

The earnings growth in most of these companies has remained insipid in the absence of a delay in the much-awaited economic recovery, introduction of Goods and Services Tax (GST) and demonetisation. At their peak in January, the Price to Earnings Ratio of the BSE MidCap index was double that of the Sensex, an indication that these shares had run up too fast.

“The current sell-off has battered all the stocks irrespective of size and sector. As a result, several good quality stocks have also seen steep falls,”said G Chokkalingam, founder, Equinomics Research. “Investors should use this correction to accumulate stocks with clean governance structures and high dividend yields, he pointed out.”

The optimism in the mid-cap and small-cap stocks started fading in January 2018, when the broader markets touched their last peak. The recent trading curbs imposed by market regulator the Securities and Exchange Board of India (Sebi) through Additional Surveillance Mechanism (ASM) and Graded Surveillance Mechanism (GSM) also spooked the investor sentiment by squeezing out liquidity, say experts.


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