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Catching a falling knife? Some shady smallcaps show spike in retail holdings

NEW DELHI: Market experts are cautioning investors about unfavourable risk-reward on most smallcap counters, but retail investors are still venturing out to catch the falling knife. Or, that is what shareholding data for the past two quarters seems to be suggesting.

Retail interest remained high on the buzzing stocks in the first six months of the ongoing calendar, even as select stocks fell between 30 per cent and 70 per cent.

On such stock is Ruchi Soya. Individual investors holding shares worth up to Rs 2 lakh hiked stake in this debt-ridden company to 23.7 per cent at the end of June quarter from 15.1 per cent at the end of March quarter and 13.8 per cent at the end of December quarter. This happened even as the stock slipped some 47 per cent so far this calendar. The company is up for sale and Adani Wilmar, which sells cooking oil under the Fortune brand, and Baba Ramdev’s Patanjali are in the fray to acquire the largest edible oil manufacturer.

The stock is looking oversold on the charts. There has been extreme pain and this is when selling peaks if one were to go by textbook definition.

Monnet Ispat & Energy, another debt-ridden company which is likely to be acquired by a consortium of AION Capital and JSW Steel under a debt resolution plan approved by the National Company Law Tribunal (NCLT).

Retail investors increased stake in the company to 16.7 per cent at the end of June quarter from 16.4 per cent at the end of March quarter and 8.7 per cent at the end of December quarter. The scrip is down 70 per cent on a year-to-date basis.

HCC has seen retail investors raise stake to 24.1 per cent at the end of June quarter from 21.2 per cent at the end of March quarter and 18 per cent at the end of December quarter. This company has reportedly expressed its inability to give any timeframe for the resolution of Lavasa debt. This stock is down 75 per cent.

Other troubled companies such Reliance Naval and Manpasand Beverages and depressed stocks such as Thirumalai Chemicals, Granules India and Arrow Greentech, which had performed well in the past, too have seen strong retail interest in recent times.

There are some 137 companies in the BSE smallcap index, where retail investors have increased their stake by between 100 basis points to 1,000 basis points in the first six months, data available with database Ace Equity suggests.

Small investors raised exposure to these smallcaps even as HNIs turned cautious and the entire space went through a painful correction all through past six months.

“HNIs who invest in stocks directly are fearful that midcap and smallcap stocks could come down a lot and may not recover anytime soon. The Nifty50 is back near its highest levels, and the recent rally has been narrow led by few heavyweights such as HDFC Bank and Reliance Industries,” said Rishi Kohli, CIO & MD at ProAlpha Systematic Capital.

He said the mood of HNIs is unenthusiastic. “They are investing in AIF funds, which are long-short as these have been sold as replacements for debt funds. So a lot of money has moved from liquid funds and bank FDs to the long-short AIFs,” Kohli said.

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What to look at in smallcaps?
Hiren Ved of Alchemy Capital Management believes if there are businesses that may be at an inflexion point over the next two-three years and there could be profit growth, that is where the opportunity is.

“We are looking at those opportunities where stocks have not done well but the businesses have great balance sheets, no leverage and free cash flow and the business is turning,” Ved said.

Ved said there are several stocks which have not gone anywhere in last three to four years, which means they have either been flat or ignored.

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