Scams spoil midcap, small cap party in 2010

Small cap stocks can sometimes surprise by yielding large returns to investors. But 2010 brought no such luck as increments were true to their name and mid-caps too took a hit on reports of stock price manipulation in some companies.

A review from December 31, 2009 to December 16, 2010 suggests that the mid-cap index and small cap index witnessed a growth of 12.65% and 9.88%, respectively, while the Bombay Stock Exchange barometer Sensex outperformed with a gain of 13.74% during the period.

Mid-cap and small cap saw a robust performance till November with both the indices hitting a 52-week high on November 11, but the game changed near the end of the year with a string of scams hammering the sector.

The mid-cap and small cap indices track the performance of companies with market capitalisation that are a fifth or tenth of that of blue chip firms.

A dip of 12.32% and 19.20% in the mid-cap and small cap index from November 11 to December 16, was primarily responsible for offsetting the gains in the rest of the year.

"Until November, the small cap and mid-cap stocks were giving fairly good returns to the investors. But, a string of scams and stocks rigging issues hit the sector badly which saw wary investors booking profit in order to thwart losses.

"...next year will be crucial for these sectors. To bring back the jolted confidence of investors in the small and medium firms it is important that the scams and negativity get over from the market," Geojit BNP Paribas Research head Alex Matthews said.

In terms of valuation, the market capitalisation (m-cap) of small cap index surged by 29,302.73 crore to 3.26 lakh crore from 2.96 lakh crore as on December 31,2009.

Similarly, the valuation of mid-cap firms grew by 1.19 lakh crore to 10.57 lakh crore as on December 16, 2010 from 9.39 lakh crore as on December 31 last year.

While the Sensex saw its market worth swelling by 3.64 lakh crore from 26.47 lakh crore (last year) to 30.11 lakh crore as on December 16.

The going was good in the mid-cap and small cap stocks but the experts feel that the reports of stock price manipulations in few companies spoiled the mood of the entire sector.

"Share prices of many small and mid-cap companies had crashed in the last few days in anticipation of a crackdown by regulators on stock market operators named in the purported IB report, which had a serious dent on the entire sector," Unicon Financial Services CEO Gajendra Nagpal said.

Negativity surrounded the market with investors getting caught in the trap of number of scams, including the controversial 2G, bribery-to-loan scam, stock rigging issue.

To name a few, companies like LIC Housing Finance, Indian Bank, Money Matters Financial Services received severe drubbing from the bribery-to-loan scam. 

News of stock price rigging was another dampener for these smaller companies. Ruchi Soya, K S Oils, IRB Infrastructure, Karuturi Global were badly hit by the price manipulation news.

Besides, shares of realty player Unitech and consumer durables major Videocon were beaten down as they were named in the CAG report for various discrepancies in their 2G licence applications.

However, in a sharp contrast, the small-cap index gave a return of as much as 115%, while the mid-cap index had gained nearly 100% last year.

Besides, the 30-share benchmark index, Sensex gave a return of 75.3% to investors in 2009.

Analysts also feel that interest of foreign institutional investors who firmly believe in the India growth story, is restricted to the blue chip stocks.

"Foreign institutional investors turned cautious after the sub-prime crisis way back in 2008. The buying sentiment was weak during the year and the trend is likely to continue next year, as these big investors prefer mostly investing in frontline stocks," CNI Research CMD Kishore P Ostwal said.

But they also insist that the new year will see the small stocks with fair valuations will grab investors' attention.

"Once the turbulence in the market would be over, the coming year should see smart performance by the quality stocks in the sector," Nagpal said.