A bearish market trend as well as rising instance of pledging activity has taken its toll on the share price performance of midcap companies. From the peak of market valuations, BSE midcap index has underperformed the Sensex returns. Since November 4, while BSE midcap index declined 30%, it Sensex saw 23% correction.
However, if one were to look at returns on a calendar-year basis, 2011 so far saw a 20% decline in BSE midcap, which was in line with the year to date decline for Sensex. More than half of the 278 constituents of the midcap index have underperformed the market with as many as 28 stocks (or 10%) having lost more than 50% of their value during the period.
?It is generally observed that in a bearish phase the midcaps tend to correct more than largecaps, as investors become wary of the financial performance of these companies, which in turn tend to easily get affected by sluggish economic activity,? says Piyush Garg of ICICI securities However, he also points out that by and large the corporate governance issues intensify the fall in such stocks as investors get rid off risky assets during a bearish market phase. ? A lot of midcap companies pledge their shares to meet their financing needs. Hence, in a falling market, due to a rise in margin calls, the decline in share price on some counters gets aggravated,? he added.
Not surprisingly, stock prices of companies like GTL and GTL infra, have lost 75% to 90% of their values in 2011 on reports of a rise in pledging activity. Experts point out that the swings in midcaps aren?t unusual with such stocks in general outperforming the market in a bull run while trailing the market in a bearish scenario.
Says a leading fund manager, ?The market has an on and off love affair with mid-caps; when traders are ready to take risk they prefer mid-caps and when their risk appetite shrinks they swiftly exit from mid-caps. In last one year we have seen the street at large shying away from mid-caps. As a result mid-caps have under-performed hugely and now they are available at a steep discount to large-cap valuations.?
In a difficult economic scenario depicted by higher interest rates and subdued demand growth, companies from the midcap space increasingly find it difficult to do business. In general, mid and small size companies that broadly have to raise capital at a higher interest rate, see a decline in their net profits in a high interest rate environment. The increase in working capital requirement further jacks up their interest cost compared to large-caps.
However, not all midcap stocks have remained under pressure as high as 47% of the 278 BSE midcap companies have managed to outperform the market. Some of the best performer from the midcap space, which gave in the range of 25% to 100% returns for the year till date belongs to the consumer space. These include companies like VIP Industries, Marico, Gitanjali Gems, Jubilant food works, Page Industries, TTK prestige and Bata India.