Which small caps have been in the sell zone of mutual funds?

The Indian stock market has entered a highly volatile territory after a sharp slide during the last few trading sessions just weeks after testing previous peak in January. High crude oil prices due to the Russia-Ukraine war and its likely impact on Indian economy, coupled with impending rate hikes, has spooked investors.

The benchmark indices, however, bounce back on Tuesday to close with gains. Stocks also jumped on Wednesday and started Thursday with an upside. While many market pundits are seeing a bottom for the slide in prices, few do consider this as a ‘dead cat bounce’ that may give a false comfort level for investors to pump in cash.

Indeed, the results of the state elections gives comfort to investors about the hold of the BJP-led central government, but the war in Europe would continue to be a risk factor as it could lead to a sharp run-up in oil prices and have a damaging impact on the manufacturing sector as well as inflation.

Most local fund managers have been voicing concerns about the state of valuations, and quarterly shareholding data shows they cut stake in several companies in the three months ended December 31, 2021.

One segment of the stock market that is usually seen as a haven for punters looking to make a quick buck with trading opportunities and retail investors who get attracted by lower per-share price is the small cap space, or companies with market capitalisation of under Rs 5,000 crore.

This segment tends to have a high beta and tends to swing much more in a volatile market. Many investors and analysts try to fish for hidden gems that can be mid or large caps over the medium to long term.

Top small-cap sell calls

If we consider the larger firms within the small-cap space where MFs cut their stake last quarter, at the top of the heap are names like Godawari Power, Edelweiss Financial, EPL, Gujarat Alkalies, JK Lakshmi Cement and Hikal.

Other companies in this pace include Tejas Networks, GHCL, Heidelberg Cement, ISGEC Heavy, Neogen Chemicals, Transport Corporation, Gujarat Pipavav Port, La Opala, KSB and Nesco.

KSB, ISGEC and Nesco were also stocks that mutual fund managers had dumped in the preceding quarter.

Significant sale by MFs in small-cap pool

If we track stocks where local fund managers were particularly bearish, we don’t see MFs cutting stake by any significant extent in the small cap space last quarter.

The maximum that MFs snipped their stake in any small cap was limited to around 0.5%. These include companies like Edelweiss Financial, GHCL, INEOS Styrolution and Mayur Uniquoters.

A notch lower, JK Lakshmi Cement, Tata Coffee, Tasty Bite Eatables, Stove Kraft, Goodyear India, LG Balakrishnan, Elecon Engineering, Genus Power, TVS Srichakra, Repco Home Finance, Chemcon Speciality, Oriental Carbon and Antony Waste Handling saw MFs cut stake by 0.4% in the three months ended December 31, 2021.