Mid, small-caps plunge; analysts see more pain ahead for markets

The proposal to rejig the shareholding norms hit the markets hard again on Monday, with the S&P BSE Sensex and the Nifty50 sliding nearly 2 per cent each. The pain in the mid-and small-caps was more severe with both the indices on the BSE falling 2 per cent and 2.5 per cent, respectively.

Besides the rejig of shareholding norms, the government's proposal to hike income tax surcharge on high net-worth individuals (HNIs) dented the market sentiment on concerns that foreign portfolio investors (FPI) will also face the increased taxes in India, said experts. The government's move to tax share buybacks and increase minimum public shareholding in listed companies also came in as a setback.

Analysts say the markets will continue to remain under pressure, especially the mid-and small-cap segments, till there is clarity on these proposals. Though they agree that the proposal to limit promoters’ equity stake in listed stocks at 65 per cent is a step in the right direction, however, the timing is not ripe for such a move. That apart, corporate earnings will also play a big role in shaping market direction going ahead amid subdued economic growth.

“While the demand for equity by the institutional investors are highly concentrated on about 15 large-cap stocks, the liquidity in the hands of individual investors has dried up a lot due to huge wealth erosion in the broader markets. Therefore, any compulsion to fulfill this limit within next two years could lead to supply of nearly Rs 4-trillion worth of equities in the market, which could possibly extend the weakness in the broader markets for the next two years,” said G Chokkalingam, founder and managing director at Equinomics Research.

Thus far in the calendar year 2019 (CY19), midcap and smallcap indices have slipped 6 per cent each on liquidity issues and ratings downgrade of the companies that featuring in indices. In comparison, the S&P BSE Sensex rallied 7 per cent during the period.

Among individual stocks, Bank of India, Canara Bank, Union Bank of India and Indian Bank from the state-owned lenders lost over 8 per cent each today, after Punjab National Bank reported a fraud of Rs 3,805 crore by Bhushan Power & Steel.

Analysts at Bank of America Merrill Lynch have given a thumbs-down to the budget proposals and expect the indices to move in line with their emerging market peers going ahead. For December 2019 – end, they have a Nifty50 target of 11,300 levels – down nearly 2.2 per cent from the current levels.

"This budget is not the 'catalyst' stock markets were hoping for. Little is expected to happen top down in India for the next several months. MSCI India should move in line with emerging markets. Unless growth improves, the broader market will likely remain weak given high valuations and poor earnings. Government's attempts to raise revenues will likely remain an overhang on all PSU stocks. Prefer financials, IT and industrials,” said Sanjay Mookim, India equity strategist at Bank of America Merrill Lynch in a post Budget note.

Company	Price on  BSE in Rs	% change
		1-day	YTD
BLS International	71.05	-19.8	-40.5
Mindtree	773.95	-12.8	-10.4
RattanIndia Infra	2.07	-11.5	-40.3
Punjab National Bank	72.80	-10.9	-6.8
Indiabulls Ventures	301.80	-10.3	-21.8
Bajaj Finserv	7587.50	-10.1	17.1
Vikas Ecotech	6.15	-10.0	-48.4
D B Realty	11.22	-9.9	-60.4
Bank of India	84.60	-9.9	-18.7
JP Associates	2.70	-9.7	-64.9