BSE Small-cap index hits seven-year high; up over 10% in six days

However, investors should consider the company's balance sheet strength and promoter pledging before investing

Even as the markets recovered lost ground over the past few weeks, stocks of small-cap companies have outperformed their larger peers, with the S&P BSE small-cap index closing on a seven–year high on Wednesday.

The S&P small-cap index rallied to 11,635 , its highest closing level since January 18, 2008. In comparison, the S&P BSE Sensex and S&P BSE mid-cap index moved up less than one per cent.

In the past six trading sessions, the S&P small-cap index has surged 11.4 per cent, outperforming the S&P BSE Sensex (up 4.5 per cent) and S&P BSE Mid-cap index (up 6.4 per cent). The CNX small-cap index, too, gained 10 per cent during the period.

Analysts co-relate the performance of the stocks in this segment to the way mid-caps performed last year. People have started investing in this segment as they are now willing to take more risk, they say. More, a lot of stocks in the large-cap and mid-cap are fairly priced, which leaves stocks in the small-cap segment, where investors see opportunity.

“Another reason for small-caps garnering attention is  increased liquidity in the system. Investors who made money in large-cap and  mid-cap segments are now reinvesting in the small-cap segment, in the hope that they’ll make good return. On a fundamental basis, select companies are attracting fresh money from PE (private equity) investors, especially after the restructuring exercise. With an improvement in the economy, their fortunes will also change for the better as the balance sheet stress reduces, which was the main reason for their fall earlier,” said Deven Choksey, managing director and chief executive, K R Choksey Securities.

Outperformance
Of the 471 actively traded stocks from the S&P BSE small-cap index, 158 stocks have outperformed the market by appreciating more than 15 per cent; 107 stocks gained between 10 per cent and 15 per cent and 98 scrips gained between five per cent and nine per cent in the past six trading sessions.

Foreign institutional investors (FIIs), meanwhile, have invested Rs 2,697 crore in the Indian markets, while mutual funds invested net amount of Rs 824 crore between March 30 and April 7, according to the Securities and Exchange Board of India (Sebi) data.

Among individual stocks, Kitex Garments, Panacea Biotec, Ess Dee Aluminium, R S Software India, Amtek India, Zen Technologies, Himadri Chemicals & Industries and Aurionpro Solutions have rallied over 40 per cent on the BSE.

Rally in some of these stocks has also been driven by expectations of a healthy financial performance in the March 2015 quarter.

Marico Kaya Enterprises, for instance, touched a record high of Rs 2,144 on Wednesday and finally settled seven per cent higher at Rs 2,071. In the past six trading sessions, the stock has gained 40 per cent from Rs 1,481 on March 27, 2015. The company posted a consolidated net profit of Rs 25.3 crore in the first nine months of FY15 against a loss of Rs 5.5 crore.

Outlook
Despite the rally and the expectation of an improvement in financial performance, one needs to be very selective in this segment, advises Choksey. He likes and holds select media companies in the mid-cap and the small-cap segment in his portfolio, besides some Gujarat-based fertiliser companies.

Jagannadham Thunuguntla, head of fundamental research at Karvy, suggests investors should consider quality of the company, balance sheet strength and check promoter pledging before investing in small caps.

Rikesh Parikh, vice-president for market strategy at Motilal Oswal Financial Services, says the S&P BSE small-cap index has recovered fully from the fall seen last month and could trend higher for the next few weeks. The index typically does well in the month of April, historical evidence suggests, he says. However, he advises fresh investment should be made selectively, given the run – up and the coming results season.