Small-Caps: The Next Big Thing Of India Inc.
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The bellwether indices of the Indian equity market are touching their lifetime highs, and many of their constituents are in close pursuit. Nonetheless, the broader market as represented by the mid-caps and small-caps are still trading significantly lower than their lifetime highs. The BSE Small-Cap index is still 57 per cent lower from its lifetime high seen in January 2008, and the index is down by 20 per cent year till date. If we look at the historical trend of the stock market and performance of the companies with different market capitalisation, we find that the small-caps are the last to react when the markets rally. This is reflected in the recent performance of the BSE Small-Cap, which has increased by one per cent month till date (as on November 27, 2013), while in the same period the Sensex is down by four per cent.
Why Invest Now In Small Companies?
If history indeed repeats itself, this will be the right opportunity to invest in small-cap stocks. If we look at the valuations of small-cap companies, they are trading at historical lows compared to the large-caps. If we compare the price-to-book value of the BSE Small-Cap index, it is trading below its book value and more than 50 per cent lower than the Sensex. Although, the near-term economic outlook does not give us much confidence and various headwinds to the economy like, inflation, lower growth, fear of tapering, etc. still persist, we believe that the current situation presents a good opportunity for long-term investors to look at small-cap stocks. Moreover, one of the simplest ways of growing one’s investment is to buy small-cap companies. This also remains one of the most passively used growth strategies for investing in small-cap companies. There is substantial empirical evidence to back this strategy, though this additional return comes with the added risk.
Rules Of Investing In Small-Caps
Investing in small-cap companies requires a lot of discipline and diversification. Since these stocks tend to be concentrated in a few sectors, you will need a much larger portfolio to be diversified with small-cap stocks. It also requires lot of research to be done by the investor as the coverage of these companies by analysts is very low. Most importantly, you need to have a long-term horizon to reap the benefits of investing in small-cap companies.
How Small-Cap Companies Have Performed In CY2013
The overall performance of the small-cap index is clearly reflected in the performance of individual stocks. Unlike large-cap indices such as BSE Sensex and Nifty, which are up from the start of the year, the small companies index is down by one-fifth in the same period. Out of the total of 804 small-cap stocks trading from the start of the year till October 31, 2013, a little over 80 per cent of stocks are trading below the price at which they traded at the start of the year. That is to say that less than 20 per cent of the stocks are up year till date. There are some companies that started the year as large-caps but are currently trading as small-caps. For example CORE Education & Technologies, which had a market cap of Rs 3600 crore on January 1, 2013, lost a whopping 94 per cent since then and currently has a market cap of only Rs 218 crore. There are also almost 100 companies that started the year as mid-cap companies but are now counted as small-caps. Many prominent companies hold this dubious distinction. This analysis leads us to the question of whether there is a particular sectoral trend among stocks that have outperformed the small-cap index.
Sectorwise Gainers & Losers
A sectoral analysis suggests that textiles have been the flavour of the year, with stocks of these companies dominating the gainers list with a presence of a little over 20 per cent. It may be argued that companies from the textile sector are also among those that did not fare well. Nonetheless, they make up just about six per cent of the losers list. Speaking of losers, the slowdown in economic growth and infra spending is impacting the companies in these sectors. The construction & contracting sector is the worst performer year till date. Out of the total of 51 companies of this sector that form part of our small–cap universe, the shares of 45 are trading below the levels that they were trading at the start of the year.
Top 5 Gainers
| Company Name | Price As On | Change (%) |
|---|
| 01-01-2013 | 01-11-2013 |
|---|
| PFL Infotech | 22.7 | 262.45 | 1056 |
| Radix Industries (India) | 28.65 | 211 | 636 |
| Pressman Advertising | 6.95 | 28.8 | 314 |
| Jayant Mercantile | 9.05 | 35.5 | 292 |
| Shalimar Productions | 1.63 | 5.01 | 207 |
Top 5 Losers
| Company Name | Price As On | Change (%) |
|---|
| 01-01-2013 | 01-11-2013 |
|---|
| KGN Enterprises | 371.3 | 32.45 | -91 |
| Tuni Textile Mills | 127.4 | 8.4 | -93 |
| CORE Education & Technologies | 315.35 | 19 | -94 |
| VKS Projects | 32.78 | 1.95 | -94 |
| Ybrant Digital | 65.15 | 2.8 | -96 |
| Sectors | No. of Companies |
|---|
| Textiles | 27 |
| Computers - Software | 16 |
| Finance & Investments | 11 |
| Auto | 9 |
Construction
& Contracting | 6 |
| Sectors | No. of Companies |
|---|
Construction
& Contracting | 45 |
| Textiles | 37 |
| Finance & Investments | 35 |
| Chemicals | 32 |
| Auto | 28 |
In terms of sectors, the Auto sector dominated the top 100 list. If we look at our small cap universe auto companies form only 6.5 per cent. This was closely followed by the Chemical sector, with nine companies.
| Industry | Number of
Companies |
|---|
| Auto | 10 |
| Chemicals | 9 |
| Pharmaceuticals | 7 |
| Textiles | 7 |
| Computers - Software | 5 |
| Plastics | 4 |
| Cement Products | 3 |
| Construction & Contracting | 3 |
| Dyes & Pigments | 3 |
| Rubber Products | 3 |
New Entrants
For the purpose of this analysis, we have covered only those companies that were listed on or before April 2008. However, there are many companies that have been listed over the past few years that have also performed well on various parameters. In the past three years, 14 companies were listed, which fit in our criterion of small-cap. We have ranked these on various parameters, and the following is the list of the top five companies.
| Rank | Company | YoY Change (%) | Operating
Margin | Net Profit
Margin | D/E |
|---|
| Sales | Net Profit | FY13 | FY13 | FY13 |
|---|
| 1 | Ujaas Energy | 615 | 2836 | 17.93 | 11.13 | 0.52 |
| 2 | MT Educare | 20 | 36 | 13.18 | 11.48 | 0 |
| 3 | Lovable Lingerie | 14 | -13 | 14.18 | 12.5 | 0.05 |
| 4 | Tara Jewels | 17 | 37 | 8.55 | 4.5 | 0.67 |
| 5 | VKS Projects | 43 | -25 | 6.09 | 2.04 | 0.55 |