Tilak Finance’s inclusion into MSCI index sheds spotlight on small-cap stocks – Economic Times

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MUMBAI: Late last week, when little-known Tilak Finance made it to the MSCI Small Cap index, it stunned many on Dalal Street. The company’s turnover for the year ended March 31, 2014 was Rs 6.42 crore, while its market capitalisation — value of outstanding shares — was Rs 3,861 crore on Friday. The company’s only asset is the 19.2 lakh shares, worth Rs 86 lakh, it owns in Esaar India (not Essar Group).

The inclusion of Tilak Finance along with a couple of others into the MSCI index has put the spotlight on small-cap stocks — many of which are trading at eye-popping valuations. Market watchers said the abnormal values of these stocks suggest operators are active in many of them.

According to an ET study, the market capitalisation-to-sales ratio of nearly 250 actively-traded small-cap stocks is between 50 and 500 times. M-cap-to-sales ratio — one of the several popular valuation matrices — evaluates a stock’s performance vis-a-vis the company’s actual performance. Broadly, a stock with a marketcap-to-sales ratio of less than one can be considered undervalued. But this ratio varies from sector to sector. For instance, the market cap-to-sales of the IT index is 4.2 times; 5 times for fast-moving consumer goods, 1.6 times for capital goods and 0.6 times for oil and gas.

Tilak Finance's inclusion into MSCI index sheds spotlight on small-cap stocks

“Almost in all these stocks promoter holding is minimal, which makes it easy for the operators to manipulate their stock prices,” said Arun Kejriwal, founder and CEO of KRIS Research.

After a long hiatus, activity in mid- and small-cap stocks revived in February, sparked by the election euphoria. The heightened activity in this category of shares in the last few months is the lengthiest since 2007. For instance, MC Fincorp (formerly Priti Mercantile) has surged over 331% since January 1. The company with a turnover of Rs 10 crore and net profit of Rs 1.28 crore as on March 31, 2014 is currently valued about Rs 5,000 crore in market cap, which is more than the value of more established companies such as Pfizer, IL&FS Transport, JK Lakshmi Cement or Sobha Developers. CCL International, with a net profit of just Rs 99 lakh, is trading at a market cap of Rs 4,906 crore. The stock found place in the recent revamp of MSCI Smallcap Index.

Several companies like Goldline International, Sulabh Engineers & Services, Pine Animation, Surabhi Chemicals & Investments and Mangalam Industrial Finance, among others, with a sales of few crores and profits of a few lakhs traded with a market cap of over Rs 2,000 crore. Officials at larger brokerages said operators are luring retail investors to buy these stocks by sending text message alerts, Whatsapp messages and emails though it is not as rampant as it was in 2006 and 2007.

While capital market regulator Sebi has strengthened its surveillance in recent years, market watchers believe more could be done in the small-cap space. “The stocks that are trading at unreasonable valuations without any reason warrant an investigation for the price manipulations,” said Shriram Subramanian, founder and MD, InGovern Research Services.

Tilak Finance’s inclusion into MSCI index sheds spotlight on small-cap stocks – Economic Times}