Smaller companies feel the pain of market rout

Every second small-cap stock off over 30% from yearly high

The recent fall in benchmark indices hides the extent of pain in the broader market. There has been a virtual rout in the small-cap segment, with every second stock down 30 per cent or more from its yearly high. Many of these have lost more than three-fourths of their values in the last three months.

For instance, information technology (IT) exporter Helios Matheson is down 85 per cent and steel maker Bhushan Steel 88 per cent from their 52-week highs.

Though the small-cap index is down only 9.37 per cent from its yearly high and has outperformed the benchmark indices (the National Stock Exchange Nifty and the BSE Sensex are down only about 10 per cent from their highs, reached in early March) analysts say that gives a skewed picture. And that’s because only five per cent of the total stocks (33) held up the small-cap index. These include Jubilant Food, Alembic Pharma, SKF India and Voltas. For the rest, it was a virtual bloodbath.

In comparison, 2014 was the year of small-caps, as these outperformed the benchmark indices. The BSE SmallCap index rallied 63 per cent last year, while the Sensex and Nifty rose about 30 per cent each.

The analysis is based on the 587 stocks that are part of BSE SmallCap.  

Many analysts blame the rout on the unrealistic expectations of investors. “The market was expecting too much. This is a reality check. Several stocks have run ahead of their near-term fundamentals,” said Gautam Chhaochharia, head of India research, UBS. “We have a neutral rating on the Indian market, as we believe the growth recovery will take time. Earnings estimates are still high. They need to be tempered down further.”

That the recovery will happen even if slowly is, however, little solace for domestic retail investors, many of whom are staring at huge losses following this rout.

“Last year’s rally attracted hordes of domestic retail money into second- and third-tier stocks. Many of these investors are now staring at huge losses, with little visibility of a reversal, given poor market sentiment apart from stock-specific issues,” said G Chokkalingam, founder and chief executive, Equiniomics Research and Advisory.

Analysts said some of these stocks fell because of governance issues, while others — the quality ones — corrected owing to a mismatch between valuations and earnings. “It will be near impossible for investors to recoup their investment from tainted stocks and [take] years to make money in the latter if they had invested at the market peak,” said Chokkalingam.

There could be more pain in store if the economic recovery gets delayed. “Stocks are getting re-priced to the fundamentals. Until recently, there were no doubts over the recovery in the economy and corporate earnings. Now, investors doubt whether there will be a recovery at all. This has led to readjustment of prices of companies,” said Piyush Garg, executive vice-president and chief investment officer, ICICI Securities Stocks.

 

Decline in small and mid-cap stocks
Small Cap Index	587
>50%	22.3%
>30%	49.2%
Mid-Cap Index	77
>50%	8.0%
>30%	24.7%
Total                                                                         664
>50%	20.6%
>30%	47.3%

 

Indices performance in calendar year 2014 and YTD 2015
Index	2014	YTD 2015*
S&P BSE SENSEX INDEX	29.89	-2.49
NSE CNX NIFTY INDEX	31.39	-1.84
S&P BSE MidCap	46.42	2.10
S&P BSE SmallCap	62.91	-2.98

*As close of trade on June 04, 2015    
Source Bloomberg. Compiled by BS Research Bureau