Small-caps made the big gains in 2017 rally

80% of stocks that zoomed over 50% belonged to the segment; but there were big losers too

In the raging bull market of 2017, small stocks have roared the loudest. The BSE S&P Small Cap index has rallied about 50 per cent over the past year, double the 25 per cent gain in the benchmark Sensex. But that just gives a hint of the mega-gains made by several small-cap stocks (that is, stocks with a market capitalisation of less than ₹5,000 crore).

More than 80 per cent of the 861 stocks that gained over 50 per cent in 2017 are small-caps, which also dominate the multi-bagger list.

The prices of 420 stocks — about 18 per cent of the 2,353 scrips quoted on the BSE — have doubled or more. Ninety per cent of these, or 369 stocks, are small-caps. And of the 111 stocks that have tripled or more, 98, or 9 in every 10, are small-caps. Also, 45 of the 52 stocks that have quadrupled are small-caps.

In pole position in 2017 is graphite electrodes producer HEG, whose price sky-rocketed nearly 13 times, to ₹1,900 as on December 14. Next on the list is securities and commodity broker Indiabulls Ventures, followed by Chennai-based software company California Software and trading firm SORIL Holdings and Ventures, earlier known as Indiabulls Wholesale Services. Another graphic electrodes producer, Graphite India, is also among the top five, with the stock gaining nearly nine times over the year.

Not just the prices, the valuations of many of these stocks have zoomed too. Indiabulls Ventures, for instance, trades at about 65 times its trailing 12-month earnings. Graphite India’s price-to-earnings (PE) ratio is 178, while that of Goa Carbon and Weizzmann Forex is 76-78. With some stocks, the rally seems sustained by good earnings growth and healthy prospects. For instance, HEG and Graphite India posted strong profit growth in the half year ended September 2017. These companies are reported to be set for strong profit growth owing to favourable global industry dynamics, including consolidations and capacity shutdowns in China, which are expected to benefit Indian companies. Indiabulls Ventures’ profit rose 38 per cent in 2016-17 and nearly tripled in the half year ended September 2017.

However, many of the stocks don’t seem to be on a sound foooting. California Software had no sales revenue in 2016-17; in the half year ended September 2017, the company had no sales revenue again and posted losses. SORIL Holdings and Ventures posted losses in both 2016-17 and in the half year ended September 2017.

Overall, the S&P BSE Small-Cap index trades at a PE ratio of 147 times, compared with the Sensex’s 24 times. Small-cap stocks on the rampage point to an overheated market. Fundamentally weak small stocks typically get hammered when the market tide turns. Also, many of these small stocks have been assigned the risk group ‘T’ or ‘XT’ by the BSE, indicating higher attention from a regulatory due-diligence and monitoring standpoint.

But several small-caps also figure at the bottom of the heap. Some 83 stocks, almost all of them small-caps, lost 50 per cent or more over the past year. These include Nitin Fire Protection, Lanco Infratech, Videocon Industries and Sri Adhikari Brothers. These steep dips point to the key danger in small-caps: the higher they go, the sharper they fall. Some mid-caps such as Reliance Communications also got relegated to small-cap status with sharp erosion in value over the year.

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