Retail investors' wealth erodes as negative news-flow dents sentiment

YES Bank, Dewan Housing Finance Corporation (DHFL), Shankara Building Products, Prabhat Dairy and Dilip Buildcon have tanked over 40 per cent since July 2018.

Retail investors have burnt their fingers and have seen their wealth erode over the past six months. An analysis of the shareholding pattern of 206 companies from the S&P BSE All-cap index where retail investors have increased their stake over 1 percentage points in past six months shows up to 86 per cent fall in stock prices during the period. The S&P BSE All-cap index accounted for 97 per cent market capitalisation of companies listed on the Bombay Stock Exchange (BSE).

YES Bank, Dewan Housing Finance Corporation (DHFL), Shankara Building Products, Prabhat Dairy, Deepak Fertilisers and Chemicals, Indiabulls Real Estate, Reliance Capital, Reliance Communications (RCom), Manpasand Beverages and Dilip Buildcon have tanked over 40 per cent since July 2018. Most of these stocks were under pressure on back of negative news-flow and weak set of financial results.

The combined market capitalisation (market-cap) of these 206 companies slipped 30 per cent to Rs 574,844 crore as on February 5, 2019. In comparison, the benchmark S&P BSE Sensex has gained 3 per cent, while the S&P BSE Mid-and small-cap indices slipped 6 per cent and 14 per cent, respectively.

“Many retail investors have seen their wealth erode due to averaging. Buying at peak levels and then trying to average or reduce the holding cost in a falling market is a bad strategy. One must look at the valuation, credibility of promoters and the business growth model before taking an investment call,” advises G Chokkalingam, founder and managing director at Equinomics Research.

Beating a retreat

RCom closed an all-time low of Rs 5.44 on Wednesday and has tanked 53 per cent in the past three days, after the company decided to opt for insolvency proceedings. Retail investors increased their stake in the company by 1.4 percentage point on a sequential basis to 22.8 per cent in December 2018 quarter. The retail shareholding in DHFL, too, has risen by 7.2 percentage point since September quarter, but the stock has tanked 81 per cent from its June 29, 2018 level on the back of negative news-flow.  The retail shareholding in both these companies at their respective record high levels in December quarter, the data shows. 

“Given the current market condition, I do not see any chance of a strong recovery in these stocks. The main aim now should be capital protection rather than lowering the holding cost or averaging at lower levels,” says A K Prabhakar, head of research at IDBI Capital.

YES Bank slipped 48 per cent since July after the Reserve Bank of India (RBI) curtailed the term of lender's founding chief executive officer (CEO) Rana Kapoor. However, with the appointment of Ravneet Gill as his replacement, analysts say the bank is on the road to recovery.

“Ravneet may be instrumental in swinging cross-border transactions and other structured product solutions on to YES Bank owing to his deep relations, which would aid profitability. We believe with Ravneet in the front seat, raising capital becomes that much easier,” wrote Nilanjan Karfa and Harshit Toshniwal of Jefferies in a recent report and maintain a buy rating on the stock with a target price of Rs 275.

As regards the small-cap segment, Karan Khanna, an analyst at Ambit Capital believes the valuation has now become attractive and there are opportunities for long-term investors. “Valuation of small-caps are now attractive – down 26 per cent versus 12 per cent for Nifty50 over the last one year. VIP Industries, Alkyl Amines, GMM Pfaudler and Gujarat Ambuja Exports our tops picks in this segment,” he says.