A big day for small stocks

MUMBAI: It is party time for mid- and small-cap stocks. On Monday, as many as 373 stocks in these two categories hit their upper circuits on the Bombay Stock Exchange (BSE).

The BSE ‘S’, ‘T’, ‘TS’ and ‘Z’ groups, where all trades have to be delivery-based, stole the limelight. In the ‘T’ group, 134 stocks galloped and got locked at the upper circuit limit. It was followed by the B2 group, which saw 114 stocks hit the upper band. In the ‘S’ group, 37 stocks hit the ceiling, while 33 ‘Z’ group stocks, 29 ‘TS’ group stocks and 26 B1 group stocks also did likewise. Mirroring this, the BSE midcap index surged 2.3% during the day, while the BSE smallcap index gained 1.87%. The large-cap Sensex didn’t do too badly either, gaining 120 points during the day, closing at 11,313 .

“I see three reasons for this. First, the risk appetite of people has increased considerably with the markets gaining some stability. Secondly, the results of most mid-cap companies have been good. Third, foreign institutional investors (FIIs), have of late, stopped selling mid-cap stocks. This has generated trader interest in quite a few mid-cap stocks,” says Deepak Jasani, head of retail research at HDFC Securities.

Some insiders believe that the FIIs have not just stopped selling, but have also started switching from blue-chip shares to mid- and small-caps. “The FIIs have of late started preferring value-based, mid-cap stocks. They are booking profits in the big ones, but are very reluctant to get out of the market and are shifting to mid-caps. They feel there is a bigger upside in these stocks and the investment is also less,” says Suresh Paramar, senior associate of Darashaw Broking and Investment Banking.

“The markets have found traction in the mainline stocks. So, people who seek higher returns are switching to mid- and small-cap stocks. Retail investors, who follow the large players, are emboldened to take risks now,” says Rajesh Jain, director of Pranav Securities. Various reports released in the recent past had projected a healthy future for mid-cap stocks.

A Goldman Sachs report had recently recommended value-based investing in mid-caps. Manish Sonthalia, V-P, equity, Motilal Oswal Securities, feels that this is just a catch-up game. “The only reason (for mid-caps to rise) is that when the market crashed, most mid- and small-cap stocks got battered so badly that they were trading at very cheap valuations. The mid-caps that were trading at premium valuations to large-caps till the market crashed had started trading at a discount after the market crash. So there is a catching up that is going on,” says Sonthalia.

According to a broker, the current market movement is signalling the return of punters. “Mid- and small-cap stocks are generally punter-stocks. If the market is not doing well, everyone stays out. When the market sentiment starts growing strong, punters return to the game,” says a broker who declined to be named.