Smallcaps ride a bull on delivery-based buying

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The BSE Smallcap index may have outperformed the BSE Sensex and the BSE Midcap index since the recovery that began on June 15. However, the real story lies in the fact that this surge was marked by a noticeable increase in deliverable volumes indicating a buildup in a host of smallcaps.

 

This increase can be a result of bargain-hunting at lower levels, investors, who have bought these stocks at higher levels, averaging their cost of purchase by buying them at attractive valuations, managements and promoters buying their own stock to increase their shareholding making use of the creeping acquisition route and a drop in speculative action as investors keep away from smallcaps after burning their fingers during the earlier rally.

 

For all we know, these stocks could also be under the manipulators' grip, says the dealing-room head of a local brokerage house on the condition of anonymity.

 

Of the 467 stocks out of the 476 that make up the BSE Smallcap index, 414 stocks have shown a more than 50% increase in volumes marked for delivery on an average over the two-month period beginning June 15 and ending August 16.

 

"An increase in delivery-based buying indicates the entry of long-term investors," says Sumeet Rohra of Antique Stock Broking. It also indicate a drop in speculative action as day-traders punt only for the day and square off their positions by the end of the day instead of taking delivery of their positions, he explains.

 

For the same period as many as 209 of these smallcaps have outperformed their parent index by notching gains of more than 24%. The BSE Smallcap index, in turn, has performed better than the BSE Midcap index and the 30-stock bellwether Sensex.

 

Company	Closing Price (Rs) as on		Gain (%)
	16/08/2006	15/06/2006
BSE Small-Cap	5801.02	4678.57	23.99
BSE Mid-Cap	4781.48	3924.57	21.83
BSE Sensex	11448.31	9545.06	19.94

 

 

 

 

 

 

 

The top 10 price gainers (up by more than 70%) in this pack along with an increase in delivery-based volumes (up by more than 50%) include names such as Zenith Infotech , Alchemist , Standard Industries , Champagne Indage , Anuh Pharma , Venus Remedies , Goodyear India , ICSA India , Transworld Info  and Suven Life Sciences .

 

This kind of trend tells us that there was bargain hunting at lower levels in fundamentally sound smallcap stocks that had been hammered mercilessly during the recent correction, says Arun Mewawalla, Head of market research desk at K R Choksey.

 

The BSE Smallcap story began unfolding on October 20, 2005. The BSE Smallcap index then at 4990 points touched a historic high of 7872 on May 11 from when the recent bout of correction began.

 

Interestingly, on June 16 this year the BSE Smallcap index closed at 4891 thereby retracing 100% of its gains notched in the previous rally.

 

"Investors who had lost loads of money on these stocks would have seen this opportunity as a bargain hunting or may have bought these stocks to average their cost of purchase," Mewawalla adds. 

However, one should never overlook the aspect of these smallcap stocks being manipulated by market men as had happened in the past, says another expert heading the dealing room of a domestic brokerage house. He also adds that certain managements and promoters might also have been active to increase their holdings in their respective companies at lower levels.

Table of volume and price gainers on page 2