BIG Bang in Small Stocks
Outlook Money|July 2021
Stock markets are upbeat with mid-cap and small-cap stocks on a rally that looks sustainable given the macroeconomic factors but, there are some ‘cats and dogs’ on the prowl
Yagnesh Kansara

Stock markets are pathologically pragmatic. They see a lot of sun even when dark clouds swirl on the horizon. It is perhaps this inherent positivity that keeps the markets going.

The second Covid wave has phased out and a third wave is feared round the corner, but the markets are looking forward to an impressive earnings growth, despite the mounting uncertainties. The main reason for this market dynamics stems from the fact that investors are rushing inexorably for equities in the absence of high-yielding investment avenues and a low-interest rate regime. Stocks are known to beat inflationary pressures.

India VIX, a volatility index based on the Nifty index option prices, has fallen from its highs of 80 in early 2020s to as low as 15. It indicates a receding fear among investors. Similar trend of one-way growth has been seen in the small-cap and midcap space since April last year.

More than a year later, investors wonder if the small-cap and mid-cap space is still left with some fire in it.

“These small and mid-cap stocks were pressured for long. There was scanty growth. But the picture has changed now. Cost-cutting measures adopted by these companies during the pandemic pushed their bottomlines up,” points out S Ranganathan, Head of Research at LKP Securities. “Markets are poised to scale new highs. The broader markets will continue to outperform the benchmark Nifty and Sensex.”

Direct exposure to equities increased several times as more and more people began trying their luck in the stock market in search of a parallel income. The need for additional financial assistance precipitated more severely in the aftermath of the Corona-induced lockdowns when job losses and pay cuts became normal. This was evident in the spurt of new dematerialisation accounts from smaller cities over the last 15 months.

According to data released by markets regulator Securities and Exchange Board of India (Sebi), new demat account additions scaled a record high of 10.7 million between April 2020 and January 2021. This was more than double the 4.7 million new accounts opened in 2020-21.

Most of these new accounts have gone to Central Depository Services (India) Ltd, one of the two depositories promoted by the Bombay Stock Exchange (BSE). The BSE stock zoomed on the back of an increase in income and also because of its hefty stake in CDSL. The other depository, the National Stock Exchange (NSE)promoted NSDL, has also garnered an increasingly bigger slice of the market pie. It will grow further as NSE gears up to go public with a market capitalisation (M-Cap) of ₹50,000 crore.

The pipeline of public issues is quite long and strong, which will test the appetite of these new investors. The next two-three quarters will see a deluge of public issues from start-ups backed by private equity players, and central PSUs like LIC of India in the second half of this fiscal.

Mobile wallet company Paytm is planning to float the country’s biggest initial public offering (IPO) of ₹12,000 crore. The news sent the Paytm share to ₹35,000 apiece in the grey market. Some more start-ups like Zomato and Pharm Easy also have plans to tap the market.

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