Mid- and small-cap stocks reel under selling pressure in 2013

Even on Tuesday,the smaller companies fell more than the large caps. While the bluechip indices,the Nifty and the Sensex,dropped by close to 1.7% and 1.5%,respectively,to 5,574.75 and 18,509.7,the small-cap and mid-cap indices on the BSE declined by a wider 2.1% and 1.8%.

More than one-fifth of the small-cap and 13% of the mid-cap sample declined more than 4% on Tuesday with names like Shriram City Union,Ram Kaashyap Investment,GTL Infra and Jindal Stainless losing 10% to 13%.

Traders point out that the broader trend of such companies leading the market gains when the risk appetite goes up and vice versa still stays.

However,after the market meltdowns of 2008 and 2010,the Street’s fondness of smaller companies appears to be on a decline. As a result,even as the large-cap indices are trading at a reasonable discount to their highs in 2008 and even 2012,the broader indices representing smaller companies currently stand 30% to 60% below those levels.

In general,debt-ridden companies have been detested in every correction,owing to their stressed financials in a high interest rate environment. Moreover,higher promoter pledging by such companies from the infrastructure,realty and construction space have also affected their long-term liking among traders.

“Increasing number of investors that earlier took efforts to invest in good mid-cap stocks are moving towards quality blue-chips,” said TS Harihar,head of derivatives,ICICI Securities.

Harihar expects this trend to continue in the medium term,especially if the recent market weakness prolongs with the Nifty heading towards the 5,200 mark.

Even as foreign institutional investors’ ownership in Indian companies,particularly in bluechips,stood at a multi-year high as of quarter ending December 2012,they continued to trim their stake in the troubled companies from capital-intensive infra,capital goods and real estate space for a third consecutive quarter.

For example,FIIs reduced their ownership in Indiabull real estate,Hindustan Constructions,Lanco Infratech,Pipavav Defence and GMR Infra. In the current financial year so far,their possession in these companies have come down by 8% to 1%. They have also clipped their holdings in smaller public sector banks,namely,Allahabad Bank and Indian Overseas Bank by about 3% and 1%.