Forget 2011, small stocks likely losers in the new year too
As the year 2011 draws to an end, the market metrics suggest wide under-performance by mid-cap and small-cap stocks in comparison to their large-cap peers.
New Delhi: The downslide on Dalal Street did not spare big names in 2011 but investment in mid- and small-cap companies turned out to be worse.
As the year 2011 draws to an end, the market metrics suggest wide under-performance by mid- and small-cap stocks in comparison to their large-cap peers.
Calling this a natural phenomenon, market watchers say that smaller-sized companies with less fundamental strength are bound to get hurt the most in 2011, when markets across the world were facing a crisis.
Data available with the stock exchanges shows that the mid-cap and small-cap indices have fallen about 34 percent and 42 percent, respectively, since the beginning of 2011.
The blue-chip index, the Sensex, has managed a better performance despite a significant slump of about 23 percent during the same period.
In comparison, the performance of all the three segments was almost similar in the previous year, when the mid-cap and small-cap index had gained about 16 percent each, while the Sensex fared little better by rising about 17 percent.
One of the major issues that cost mid- and small-cap stocks dearly was the burden of huge debts, as meeting these obligations became quite troublesome for them in times of economic uncertainty and a high interest rate regime.
Macroeconomic headwinds on the global and domestic front, concerns over policy reforms and currency fluctuation were some of the factors that resulted in volatile and uncertain market conditions through 2011.
Analysts said investor interest in mid- and small-cap stocks continues to wane, as large-cap shares are preferred in uncertain times.
In terms of valuation, the market capitalisation of the BSE-listed small cap companies has slumped by over Rs 1.7 lakh crore from more than Rs 4 lakh crore at the start of 2011.
Similarly, the valuation of mid-cap firms has fallen by Rs 3.8 lakh crore from about Rs 11.3 lakh crore in the start of 2011. The absolute losses for 30 Sensex blue-chip companies are much higher at about Rs 20 lakh crore, owing to their large size.
However, there was some parity among the large-cap, mid-cap and small-cap segments of the market, as the indices for all three classes fell to their lowest levels on the same day- 19 December.
"Smaller companies are quite vulnerable to the macro environment, particularly those with high debt. In a rising interest rate and high inflation environment, small companies that are working on wafer-thin margins are the most affected," saidSachin Shah , fund manager at Emkay Investment.
"In the last few months, we have had significant rupee depreciation, further deteriorating the macro environment. Therefore, investors are quite averse to invest in smaller companies with such a hazy macro outlook," Shah said.
Market observers also said that investor participation has gone down terribly in the mid-cap and small cap space, which is also hurting the valuation of these sectors.
"Retail investors were very active during 2005-2008. Post 2008, retail investors had significant wealth erosion in equity markets, particularly in mid and small-cap stocks, which hardly recovered in the last four years.
"The memory of such significant erosion of wealth continues to be an over-hang on the minds of investors to even be open to opportunities available on small-cap stocks," Shah added.
This year, some of the stocks have lost in excess of 80 percent of their value and many others also hit all-time lows. Some of the biggest losers include KS Oils, Triveni Engineering and ICSA India.
Furthermore, some stocks were also hurt due to the negative newsflow surrounding them. As a result, a host of stocks, like Dhanlaxmi Bank, Sun TV, Kingfisher Airlines, DB Realty, Everonn Education, Pipavav Defence, Crompton Greaves, GTL and GTL Infra suffered heavily.
Marketmen said that small caps are more vulnerable to the slowdown in the economy and their capability to pass through this rough environment is always lower.
"Management capability, raw material management, working capital issues and raising capital during these times becomes difficult due to the downturn," saidVinay Khattar, Head Research - Retail Capital Market at Edelweiss Securities.
"Moreover, these companies face a lot of corporate governance issues. Therefore, when people come to sell, these stocks face the brunt first, thereby impacting their share price," he added.
Experts said the reason as to why blue-chip stocks have fared better than small companies is that big companies are available at cheap valuations, which forces investors to look at these large-cap stocks with high revenue visibility, good management and strong cash flows.
It could be an uphill task for small companies to regain in 2012 as large caps could be the first to gain when the markets turn around.
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