These smallcaps defied odds in bad times; will they rally further post corp tax cut?
- With a 141 per cent rally, Jump Networks emerged as chart topper, rallying to Rs 58.60 on September 20 from Rs 24.40 on January 1.
- Elara Capital recently initiated coverage on Balrampur Chini with a price target of Rs 251, which indicates over 55 per cent upside from its current market price of Rs 161
- The BSE Smallcap index has lost 10 per cent on a year-to-date (YTD) basis with nearly 550 stocks tanking up to 97 per cent till September 20
Dalal Street is on the lookout for big gainers ever since Finance Minister Nirmala Sitharaman announced a slew of measures to boost the Indian economy. This makes a case to look for smaller companies that have stayed put during the period of turmoil in the equity market.
The smallcap basket, considered the most volatile pack, has thrown up a few good wealth multipliers despite the ruthless battering. And one can count on fingertips the number of stocks that have delivered positive returns this calendar.
With a 141 per cent rally, Jump Networks emerged as chart topper, rallying to Rs 58.60 on September 20 from Rs 24.40 on January 1. It was followed by Cantabil Retail India (up 80 per cent) and Tanla Solutions (up 78 per cent).
Affordable housing finance firm Aavas Financiers is next on the list. The scrip rallied 78 per cent to Rs 1,498.20 from Rs 842.70 during the same time. Foreign institutional investors (FIIs) held over 16 per cent stake in the company as of June 30.
Brokerage Edelweiss Securities says, Aavas has all the right ingredients to scale up thanks to niche customer profiles, prescient investments, excess capital and strong execution capabilities. However, concentrated operations in just four states in west India, stiffer regulations by NHB, fewer government incentives for the housing industry and intensifying competition could affect the business.
Seamec (up 75 per cent), Garden Reach Shipbuilders (up 68 per cent), CreditAccess Grameen (up 66 per cent), Hester Biosciences (up 57 per cent) and Balrampur Chini Mills (up 56 per cent) stood among other top gainers.
Elara Capital recently initiated coverage on Balrampur Chini with a price target of Rs 251, which indicates over 55 per cent upside from its current market price of Rs 161. “The integrated business model helps derisk from the cyclicality of sugar and maximise returns,” it said.
JK Cement (up 51 per cent), Capri Global (up 50 per cent), Vadilal Industries (up 48 per cent), Procter & Gamble Health (up 47 per cent), Apollo Tricoat Tubes (up 46 per cent), PI Industries (up 44 per cent), Bata India (up 44 per cent), SRF (up 43 per cent), Dr Lal Pathlabs (up 43 per cent) and Avadh Sugar (up 42 per cent) were other top gainers on the list.
“If you are looking to invest in a smallcap, look for high-quality companies that come from sectors with growth visibility for a decade or more. The market runs on three things: earnings, quality of corporate governance and liquidity, which is regulated by investor behaviour, says Sushant Bhansali, CEO, Ambit Asset Management.
“First two things are under your control; the third is not. It is difficult to predict investor psyche. Since the beginning of 2018, the third factor has been behaving abnormally. There has been a liquidity squeeze, especially in midcaps and smallcaps, and investors are shying away from them. This is the time to invest in quality companies. Valuations of many companies took a hit because of liquidity, not because of earnings and corporate governance. These are the times when you invest in such companies for solid returns,” he said.
The BSE Smallcap index has lost 10 per cent on a year-to-date (YTD) basis with nearly 550 stocks tanking up to 97 per cent till September 20.
Even FII favourites have not been able to escape the selloff. Cox & Kings, McLeod Russel India, Mercator, Sintex Plastics and HDIL have declined 75-98 per cent YTD despite FIIs holding 10-40 per cent stake in these companies as of June 30.
Among the top smallcap perfomers owned by FIIs were Just Dial (up 35 per cent YTD), Manappuram Finance (up 38 per cent) and Redington (India). Jubilant FoodWorks, NIIT Technologies and MCX also rallied over 10 per cent during the same period.
“Look for companies that having a long listing experience in the stock market. Don’t compromise on management quality, look for least or nil leveraged players with no share pledging,” said G Chokkalingam, Founder, Equinomics Research and Advisory.
The Finance Minister on September 20 Rs 1.45 lakh crore fiscal stimulus that includes slashing corporate tax to 22 per cent from 30 per cent, cutting down the minimum alternate tax (MAT) and lowering tax to 15 per cent for companies putting fresh capital into manufacturing.
The reduced corporate tax rate of 22 per cent would apply to domestic entities that don't avail any exemptions and incentives. Also, these companies will not be required to pay any MAT. The effective tax rate, in this case, would be 25.17 per cent, including cess and surcharge.
“We are in for a significant recovery in the economy and market. After Monday’s (September 23) rally, we see another 5 per cent rally in the benchmark indices, but quality midcap and smallcap stocks should jump much more than that,” said Chokkalingam.
Smallcap stocks which rallied over 10% YTD