Mid-caps underperform, but brokers see buying opportunity

By Ravi Dutta Mishra and Rohit Vaid

Mumbai, Feb 13 (IANS) Stock-specific volatility along with caution ahead of the general election and global uncertainty have caused a sharp decline in Mid and Small Caps. However, brokers feel that low valuations have made them attractive once again.

Data from the past few trading sessions have shown a sudden and sharp decline in certain specific stocks which has hampered investor sentiment, the worst affected being the mid-caps and the small-caps. But brokers say it is a good time to buy, counting on a reversal in the trend as the domestic market stabilises by the general elections are held.

BSE Mid-Cap index has fallen 2.8 per cent over the past week alone while taking the month gone by into account the decline is up to 6.5 per cent.

BSE Small-Cap which hit a 52-week low on Tuesday too faced heavy selling losing 2.4 per cent during the last week and close to 8 per cent last month.

Vinod Nair of Geojit Financial Services said that the current valuation is below the 5-year average creating excellent opportunity to invest in mid and small caps and capture abnormal gains in the long-term.

"The current dull momentum will reverse as the broad domestic economy is expected to improve in the next two to three quarters with stability in the global market."

Similarly, Deepak Jasani of HDFC Securities said that the second half of CY19 may see Small and Mid-cap space starting to perform and beginning to make good of the under performance seen in 2018.

Analysts said that the sharp fall in stock prices of certain large corporate houses saddled with high debt added to the negativity, especially in the mid and small space.

In what could be a pattern, stocks like Sun Pharma, Zee, DHFL, and the latest being the RCom fell drastically, and pushed retail investors away. Some of them cast doubt on corporate governance which, along with the IL&FS crisis, has spooked investors.

"The emergence of corporate governance issues in large companies dampened investor sentiment, which coupled with resurfacing of the IL&FS crisis led to heightened volatility in the market, especially in the Mid and Small cap segment," said Jyoti Roy, DVP - Research, Angel Broking.

Roy said that strategic default by one of IL&FS's cash-flow generating project had scared the markets. This raised concerns that more cash flow generating SPVs (special purpose vehicle) could strategically default on their debt given that NCLAT has provided a stay order against all proceedings against the IL&FS group till final order by the NCLAT.

Pointing out that the worst affected Mid and Small Caps, Jasani said that the largest falls have happened in cases, where the promoter behaviour has not been above board - whether due to pledges, over leverage, improper capital allocation, monies diverted.

He added that the next group of stocks includes PSU banks, that are undergoing pain of NPAs, slippages and inadequate capital adequacy, NBFC space, which is still reeling under the liquidity issues since IL&FS issue broke out, commodity companies whose fortunes have turned adverse.

Besides, post-Interim Budget, the bond markets sold off over projected fiscal slippage of 30 basis points in FY20, giving another reason for worry to the investors.

However, a dovish US Federal Reserve holding rates and a 25 bps rate cut by the RBI brought some amount of stability to the bond markets and has also provided support to equities.

While Nair was of the opinion that Mid and Small Caps have also taken a beating over global uncertainties originating from trade tensions and external factors like the global slowdown in economic growth.

"Mid and Small Caps have also been impacted due to selling from Mutual Funds (MFs) and Foreign Institutional Investors. MFs had been selling due to SEBI measures which changed the definition of Mid and Small Caps impacting the proposition of such stocks in the schemes."

With regard to general elections which have historically brought volatility around it, market observers were of the view that general election is a known event and markets have been trying to factor in the outcome as and when any new event unfolded.

"This time the pre-election performance has been weak due to volatility in the global market, continuous bunch of reforms like demonetization, GST and IBC impacting the growth of domestic economy," said Nair.

(Ravi Dutta Mishra can be reached at ravidutta.m@ians.in and Rohit Vaid can be contacted at rohit.v@ians.in)