Small-caps worst hit in turmoil

Some Stocks On 557-Share Index Have Plunged By Over 90%

Chennai: The smaller they were, the bigger they have fallen. With bears ruling the roost on the stock markets, small-cap companies (those with a market cap of less than Rs 2,500 crore) have been dealt the most lethal blow with the 557-share BSE Small-Cap index shedding 71% of value from its peak. On the other hand, mid-cap stocks (companies with a m-cap of between Rs 2,500 crore-Rs 10,000 crore) have fallen by 65% from their record highs hit in January. The BSE Mid-Cap index consists of 276 companies.
    New and old investors are always advised by experienced professionals to invest in mid-caps and large-caps (companies with m-cap of more than Rs 10,000 crore) as they are more likely to preserve investor wealth, on a comparative basis. For example, the sensex which consists 30 of the country's biggest firms, in terms of market capitalisation, has fallen 52%— which is actually less than the losses posted by both midcaps and small-caps. "During the peak of the bull rally, retail investors and many institutions got carried away and invested in small-cap firms. All of them must be ruing their decisions now, if they haven't yet sold off those stocks,'' the equity research head of a Mumbai-based brokerage firm said.
    An analysis of the stocks that have seen the biggest value destruction shows that it is headed by small-cap companies such as Prime Securities, Prajay Engineers, Asian Electronics, Pioneer Embroiders. All of these have lost a whopping 90% or more of their value from January. This means a sum of Rs 1 lakh invested in such firms would be worth anywhere between Rs 5,500 to Rs 6,000. If equities eventually manage to pose a comeback, then it is more likely that the rally would be more through large-caps or bigger midcap stocks, many experts feel.
    However, with valuations of small-cap companies falling by close to one-third, investors may once again feel the urge to buy apparently 'cheap' stocks. "Investors should treat the correction as a lesson, albeit a costly one at that. The urge to invest in small-cap stocks, available for Rs 10-20 a share, should be avoided. If not large-caps, investors should look towards mid-cap stocks which have also seen valuations fall by 60%,'' cautioned a senior market analyst. The value of a stock has little to do with returns, he added.