Selective buying hurts smaller stocks

Of 497 stocks trading below their face value in B, S, T and Z categories, only 47 have benefited from the current rally.

The Bombay Stock Exchange (BSE) Sensitive Index, Sensex, is closing in on its historical high. But many midcap and smallcap stocks seem to have escaped the rally.

Only 47 stocks trading below their face value have risen in the index’s current rally. In comparison, during the last market rally – from August 2007 to January 8, 2008 – when the Sensex reached a high of 20,873.33, 256 of the 455 stocks trading below their face value had closed higher.

BSE classifies stocks into categories A, B1, B2, S, T, TS and Z on the basis of factors like market capitalisation, trading volume and numbers, track record, profit, dividend, shareholding pattern, besides some qualitative aspects.

Clearly, buying has been selective, and largely fuelled by inflows from foreign institutional investors (FIIs). According to data available at both BSE and the National Stock Exchange (NSE), the year-to-date inflows from FIIs were Rs 40,611 crore till September 28, while domestic institutional investors (DIIs) sold shares worth Rs 10,030 crore.

In the latest rally, that started from August 31, while FIIs have invested Rs 21,116 crore, DIIs have been net sellers, withdrawing Rs 11,399 crore from the market. Deena Mehta, managing director, Asit C Mehta brokerage house, said, “The money is coming from FIIs who are sticking with the big stocks This rally has not yet positively impacted midcap and smallcap stocks.”

According to a study by the Business Standard Research Bureau, 497 stocks in B, S, T and Z groups were trading below their face value. Of these, only 47 closed above their face value on September 24.

“The study brings out a very relevant characteristic of this bull run, in which stocks with shaky corporate governance standards or weak fundamentals have not performed well,” said Vaibhav Agrawal, vice-president, research, Angel Broking.

Selective action has been observed even in the A-group, where stocks of companies with high return on earnings (RoEs) and good track record of business and promoters have been favoured.

Said Dilip Bang, director, Nirmal Bang, a brokerage firm,“ At present, only 80 per cent A-group stocks are being traded. Even among them, money is flowing into specific sectors like banking. So, it comes as no surprise that smaller stocks have few takers.” When the Sensex breached 19,000 on September 13, more than 50 per cent stocks declined at both BSE and NSE.

While more FII money is expected to flow into the Indian market on strong fundamentals, lack of active participation from domestic players and retail investors are likely to drag the indices.

Even the FII mood is not very gung-ho. Ridham Desai, managing director, Morgan Stanley, said, “At present, there is skepticism even among FIIs. The traditional FIIs are waiting for a correction.”

Market experts reckon that a correction is in the offing. According to Amisha Vohra, joint managing director of Prabhudas Lilladher, “Given the rise the index has witnessed, we expect a five-six per cent correction in October. For ones who have not participated in the recent rally, it could be a good time to enter.”

Importantly, for stocks that have not been able to attract investors’ attention, a broader rally with more retail participation will help matters.