Moneycontrol
Aug 11, 2017 12:29 PM IST | Source: Moneycontrol.com

Is it August curse playing on D-St? Top 10 smallcap stocks which slip 20-30% from highs

The S&P BSE Sensex closed at 32,514 on 31 July and since then it fell in one straight line to 31,531.33 on 10 August which translates into a fall of nearly 1000 points.

The S&P BSE Sensex has fallen nearly 1,000 points in just 9 trading session of August while the carnage was seen more in small and midcap space which fell 20-30 percent in a matter of days after hitting record highs last month.

History suggests that the index has given flat to negative returns in six out of last 10 years. The S&P BSE Sensex recorded a cut of nearly 9 percent in the year 2011, followed by 2015 when it slipped 6.7 percent, and in the year 2013, it dropped by 3.6 percent.

The S&P BSE Sensex closed at 32,514 on 31 July and since then it fell in one straight line to 31,531.33 on 10 August which translates into a fall of nearly 1000 points.

The S&P BSE Smallcap index was no different, it saw a decline of over 5 percent in the same period while the S&P BSE Midcap index plunged over 4 percent.

Everything was going fine until July when both benchmark indices hit their respective record highs. The S&P BSE Sensex hit a lifetime high of 32,686.48 while the Nifty50 climbed Mount 10K to hit a record high of 10,137.85.

But, things turned cautious in the month of August when the Securities and Exchange Board of India (SEBI) on Monday placed trading curbs on 331 stocks of firms suspected to be shell companies.

Of these, 162 are actively traded while 169 had already been suspended for various violations of the listing agreements.

If we look at the companies listed by SEBI in the circular, most of them are small and penny stocks barring few which were actively traded on the exchanges. Following the SEBI order, dealers asked investors to cut down their leverage bets in the small and midcap space which led to further decline in the market.

Stocks which saw a decline of over 20 percent include names like Monte Carlo, VST Industries, Hester Bios, Kanoria Chemicals, Plastiblends, Deepak Nitrate, Mahindra Holiday, Triveni Turbine, Himatsingka Seide, and Siyaram Silk, Capitaline data showed.

All the above stocks recorded their all-time highs in the month of July, but since then, all of them have corrected more than 20 percent. Monte Carlo suffered a fall of 28 percent, followed by VST Industries which fell 25 percent.

In the midcap space, Biocon suffered a crack of 19 percent, followed by Godrej Industries which plunged 14 percent, and UPL fell 8 percent from its record highs.

august

More than SEBI circular it is the geopolitical tensions which is hurting the market most. And, the fall is seen across global markets. Investors are advised to stay with quality names because they have to bounce back with force.

The July rally seen in Nifty was to a certain extent due to short covering. The recent Geo-political tension between the USA & N.Korea and that of India & China is leading to selling pressure in the market, suggest experts.

“Market lacks any positive trigger as most of them have played out, the last being the RBI rate cut. The majority of the mid & small caps earnings are below expectations, mainly due to the impact of GST implementation,” Rusmik Oza, Head – Midcaps, Kotak Securities told Moneycontrol.

“With more than 20 percent correction in stocks prices, margin calls get triggered leading to unwinding of position. To support loss making positions clients are forced to exit in stronger companies that lead to a cascading effect across the market, he said.

Oza further added that in any sharp fall stocks look weak on technical charts triggering stop loss levels. Hence stocks end up falling further. These times brokers turn more cautious and suggest clients prune their trading positions.

Should you buy small & midcaps on declines?

It is evident from the market behaviour that select mid cap & small caps stocks that had risen sharply are seeing a sharper correction. The first reason is valuation and the other is excess liquidity.

Generally, small companies have seen rally much in excess of large cap indices and stocks. But, a 20 percent fall from highs could make a case for investment but in only those companies which are showing signs of growth.

“Every company is different. Therefore, one has to take company specific view on small and midcaps. Correction of 15-20% is a good point to start scouting for value buys,” Rakesh Tarway, Head of Research, Reliance Securities told Moneycontrol.

Correction in select stocks is also a function of either poor results or the recent appreciation of the INR against the USD (i.e. export driven stocks), say experts.

Based on Bloomberg data the forward PE of the Mid Cap Index had gone to 19.8x Vs. that of 18.25x of Nifty.

Oza of Kotak Securities added that whenever the valuations of midcaps surpass that of the large cap with a wide margin the correction in them is also 2x of that of Nifty.
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