Sensex Trades 100 Points Lower; BSE Smallcap Index Down 2%

Tue, 5 Jun 12:30 pm

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After opening the day flat, share markets in India witnessed choppy trading activity throughout the day and are presently below the dotted line. Sectoral indices are trading on a negative with stocks in the capital sector and stocks in the realty sector leading the losses.

The BSE Sensex is down by 101 points (down 0.3%) and the NSE Nifty is trading down by 42 points (down 0.4%). Meanwhile, the BSE Mid Cap index is trading down by 1.1%, while the BSE Small Cap index is trading down by 2%. The rupee is trading at 67.25 to the US$.

In news from stocks in the smallcap space. Many high-flying smallcap stocks have come under various regulator's scrutiny in the past couple of weeks. This has not boded well for their prices, and the smallcap space as a whole.

Most recently, Deep Industries share price plunged as much as 27% in two days after the Central Bureau of Investigation (CBI) filed a case against the company's officials after a complaint was filed by state-run ONGC's vigilance department regarding a contract with the company.

The case was filed for alleged irregularities in a contract worth Rs 3.1 billion given to Deep Industries in 2014 for supplying gas dehydration units for ONGC's Rajahmundry plant in Andhra Pradesh.

Just last week, fruit juice maker - Manpasand Beverages came in focus after its long-term auditor resigned just before the company's quarterly result update, which now stands deferred.

The auditor's letter to the company said it would not be able to complete the audit of financial statements for 2017-18 since Manpasand had not provided "significant information" sought by it.

The stock has been hitting lower circuit limits ever since the auditor resigned.

Now the markets regulator and the Ministry of Corporate Affairs (MCA) have trained their lens on the company for potential lapses in disclosures.

All of this does not bode well for the smallcap space in general.

Smallcap Stocks Continue to Bleed

We are at the beginning of June. That's full five months of 2018.

While the BSE-Sensex has increased marginally so far, the mid and small cap indices have fallen between 10% and 12%.

But that's just the indices. Individual mid and small caps have fallen much more.

The steep fall in these indices is due to several reasons.

First, there has been some profit-booking in the mid and small cap space. After all, these indices were sharp outperformers in 2017.

Second, rising crude oil prices and a falling rupee have taken a toll.

And third, there is some pressure in this space due to the re-alignment of investments by mutual fund managers prompted by the recent changes in regulation.

With this correction, several good quality small caps have also corrected.

This could be a good entry point into some of them.

Richa Agarwal (Research Analyst), Editor, of our small-cap recommendation service, Hidden Treasure, is tracking what big investors and mutual funds are doing. But she's not interested in what they are buying.

She is keeping an eye on stocks they may exit.

What has triggered her interest is the unexpected ruling by the market regulator for mutual funds.

As per industry experts, over 40% of mutual fund schemes are likely to readjust portfolios to comply with this new rule.

The churning could lead to an outflow of Rs 190 billion from small cap and large cap stocks to mid-cap stocks.

This could open up a huge window to buy great small cap companies at attractive valuations. The team keeping an eye on potential opportunities and will keep Hidden Treasure subscribers updated.

You can gain access to Hidden Treasure here.

Moving on to news from the IPO space. According to a leading financial daily, IPO activity is set to pick up once again after a period of lull. As many as 6 companies are set to come out with their Initial public offerings amounting to over Rs 200 billion in the next two months.

After robust fundraising in March in which eight IPOs raised a total of Rs 150 billion - capital-raising activity had gone through a lull. There were no IPOs in April amid a sharp correction in the market, while May saw only one offering amid crash in midcap and smallcap indices.

One space which tests the investor's contrarian philosophy is the IPO space. The demand for IPO's had reached sky-high levels. Avenue was the first company this year to cross the 100 time subscription mark swiftly followed by CDSL and Dixon technologies lately.

The market euphoria was something similar to what was seen in 2007-08. When everyone around you is clamoring to get a piece of the IPO pie, it makes sitting tight difficult. And, why should you sit tight when stocks like Avenue Supermart lets you pocket a cool 100% gain from day 1 of the listing?

History suggests that these cases are few and far between. More than 70% of the IPOs listed in 2007 and 2008 are in the red, even today when the Sensex is at an all-time high.

This allows us to stay on the fence when it comes to investing in IPOs. But it doesn't make sense to completely ignore this space. For every Reliance Power - like issue, there have been issues like Maruti, TCS, and Jubilant Foodworks Ltd (with returns over 4,000%, 1,000% and 500% respectively) that have created immense wealth for shareholders.

A merit-based selection primarily including valuation, business, and management quality is the logical way to go about it. If it means going against the herd, so be it. And going by recent past, this strategy has been proven to be successful more often than not.

To know more, you can download our FREE report - How to Get Rich with IPOs. This guide will show you how to safely profit from the ongoing IPO rush.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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