{"id":2228,"date":"2020-08-31T19:18:00","date_gmt":"2020-08-31T19:18:00","guid":{"rendered":""},"modified":"2025-05-19T18:53:19","modified_gmt":"2025-05-19T13:23:19","slug":"small-caps-on-the-rise-a-bubble","status":"publish","type":"post","link":"https:\/\/www.equentis.com\/blog\/small-caps-on-the-rise-a-bubble\/","title":{"rendered":"BSE Small Caps on The Rise: A Bubble That Is Soon Going To Burst? – Research & Ranking"},"content":{"rendered":"
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As I\u2019m writing to you, Sensex<\/a> is up by ~50% since its March lows (yes, after considering the recent fall). Barring the recent incident, this resurgence in Indian stock market<\/a> paved way to a big rally in the BSE<\/a> small caps. This reminds me to update you on the recent performance of small-cap stocks. The S&P BSE Small-Cap index dropped by approx. 4.3% on 31st Aug 2020, while Sensex plummeted by 2.1%.<\/p>\n\n\n\n

But before I talk about the saga of small-caps in 2020, here\u2019s two cents on what they are.<\/p>\n\n\n\n

As per SEBI<\/a> classification, small-cap stocks are stocks that are ranked below 250 in terms of market capitalization. Now, there\u2019s a reason why they are called small-cap stocks:<\/p>\n\n\n\n

1. Number one problem is their sheer size, which makes them riskier as compared to large-cap and mid-cap stocks. They are more likely to swing on extremes as compared to large-cap and mid-cap stocks. Means, if there is a turmoil, they would be the first ones to fall. On the other hand, if the economic engine is firing well, they have higher chances of giving better returns.<\/p>\n\n\n\n

2. Small-cap stocks, unlike large-cap, exhibit greater earnings volatility. This makes them highly risky bets.<\/p>\n\n\n\n

3. Information about these companies is difficult to procure. Hence, it is difficult for an investor to make informed decisions about such companies.<\/p>\n\n\n\n

Now, let’s take a quick dive into the subject now.<\/p>\n\n\n\n

The Background<\/strong><\/p>\n\n\n\n

In the last one year, small-caps have been underperforming the broader market due to economic slowdown affecting small-cap companies the most. While Sensex dived by 23%, S&P BSE Small-cap Index plummeted by 37%.<\/p>\n\n\n\n

This was till now…But what about this year?<\/p>\n\n\n\n

This year, many BSE small caps have delivered multibagger returns from year to date. Where the Sensex is down by 6% on Year To Date (YTD) basis, and up by 49% from its March lows; S&P BSE Small-cap Index has outpaced Sensex and is up by 5% YTD and up by 62% from its March lows.<\/p>\n\n\n\n

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 <\/p>\n\n\n\n\n\n\n\n\n
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Index<\/p>\n<\/th>\n

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31st Dec 2019<\/p>\n<\/th>\n

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Fall in Mar\\’20 since 31st Dec<\/p>\n<\/th>\n

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Recoup in Aug\\’20 (till 31st Aug 2020)<\/p>\n<\/th>\n

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YTD %<\/p>\n<\/th>\n<\/tr>\n

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Levels<\/p>\n<\/th>\n

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%<\/p>\n<\/th>\n

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Levels<\/p>\n<\/th>\n

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%<\/p>\n<\/th>\n<\/tr>\n

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S&P BSE Small Cap<\/p>\n<\/td>\n

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13,699<\/p>\n<\/td>\n

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8,872<\/p>\n<\/td>\n

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-35%<\/p>\n<\/td>\n

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14,336<\/p>\n<\/td>\n

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62%<\/p>\n<\/td>\n

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+5%<\/p>\n<\/td>\n<\/tr>\n

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S&P BSE Mid Cap<\/p>\n<\/td>\n

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14,967<\/p>\n<\/td>\n

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9,711<\/p>\n<\/td>\n

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-35%<\/p>\n<\/td>\n

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14,661<\/p>\n<\/td>\n

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51%<\/p>\n<\/td>\n

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-2%<\/p>\n<\/td>\n<\/tr>\n

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S&P BSE Large Cap<\/p>\n<\/td>\n

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4,672<\/p>\n<\/td>\n

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2,924<\/p>\n<\/td>\n

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-37%<\/p>\n<\/td>\n

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4,369<\/p>\n<\/td>\n

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49%<\/p>\n<\/td>\n

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-6%<\/p>\n<\/td>\n<\/tr>\n

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S&P BSE<\/p>\n<\/td>\n

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41,253<\/p>\n<\/td>\n

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25,981<\/p>\n<\/td>\n

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-37%<\/p>\n<\/td>\n

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38,628<\/p>\n<\/td>\n

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49%<\/p>\n<\/td>\n

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-6%<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n<\/center>\n\n\n\n

Table 1: Returns delivered by various indices in 2020<\/p>\n\n\n\n

But this is not the problem as the broad rally is welcome, given that the Indian indices Sensex and Nifty<\/a> were driven by just a select few rally in the recent times.<\/p>\n\n\n\n

The problem is:<\/p>\n\n\n\n

        1. Low quality<\/p>\n\n\n\n

        2. Frenzied buying without research<\/p>\n\n\n\n

Let me explain to you what I mean in a bit.<\/p>\n\n\n\n

As per the data released by Economic Times, about 12 lakh new investors opened demat accounts<\/a> with the Central Depository Services (CSDL) in March and April alone. So, while the large-caps led the rally initially, small-caps grabbed attention as most of these new investors entered the small-cap stocks with the greed of making quick money. Goes without saying, without understanding the underlying fundamentals of a company.<\/p>\n\n\n\n

The retail investor\u2019s excitement over small-cap stocks in India has reached to a level, where many are buying stocks without proper research or understanding the fundamentals such as sales, profits, return on capital employed, or other quantitative parameters.<\/strong><\/p>\n\n\n\n

But why this is a problem? This frenzy (I would say blind buying) is leading to surging stock prices<\/a> of companies that have posted zero revenue. These companies do not have a strong balance sheet, neither enough cash buffer. Let\u2019s take a few examples of such stocks.<\/p>\n\n\n\n

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 <\/p>\n\n\n\n\n\n\n\n\n\n\n
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Companies with zero revenue<\/p>\n<\/th>\n

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6 months returns<\/p>\n<\/th>\n<\/tr>\n

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Transglobe Foods<\/p>\n<\/td>\n

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254%<\/p>\n<\/td>\n<\/tr>\n

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Jain Studios<\/p>\n<\/td>\n

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233%<\/p>\n<\/td>\n<\/tr>\n

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Tirupati Tyres<\/p>\n<\/td>\n

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575%<\/p>\n<\/td>\n<\/tr>\n

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Integra Garments<\/p>\n<\/td>\n

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264%<\/p>\n<\/td>\n<\/tr>\n

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RattanIndia Infra<\/p>\n<\/td>\n

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266%<\/p>\n<\/td>\n<\/tr>\n

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GBL Industries<\/p>\n<\/td>\n

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611%<\/p>\n<\/td>\n<\/tr>\n

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Intl Construct<\/p>\n<\/td>\n

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471%<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n<\/center>\n\n\n\n

Source: Screener.in<\/p>\n\n\n\n

In fact, from the above list, four companies i.e. Tirupati Tyres, Integra Garments, Jain Studios and GBL Industries reported negative profits on zero revenue in the last quarter.<\/p>\n\n\n\n

So as I said before to you, the problem is:<\/p>\n\n\n\n