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Suresh Krishnamurthy

The `S' group of stocks, formed to allow smaller companies greater access to the capital market, has notched up strong gains in just four months. This is good if it means investors have been enabled to discover these stocks. But both the investors and the authorities need to watch out for speculative activity.

AT A TIME when stock prices are falling and pessimism seems to prevail, stocks in the `S' group seem to be more resilient than the rest of the market. The average price change in this group has been only marginally negative after the correction that set in since March 9, which has shaved off nearly 12 per cent from the leading indices.

Since its creation in January 2005, a number of stocks from this group have also notched up spectacular gains. There may be a fundamental rationale for the price performance of these stocks. Investors may need to take greater note of the stocks shifted to the `S' Group and those likely to be shifted.

The `S' group was formed to allow smaller companies listed on the BSE and 20 other regional exchanges greater access to the capital market. The move was also aimed at infusing liquidity into these stocks. Investor response to the introduction of this platform, christened BSE IndoNext, has been favourable till now. The onus is, however, on the stock exchanges to ensure that the momentum is maintained without compromising, in any way, the interests of the smaller investors.

Trading statistics: The total trading turnover of the IndoNext group of stocks has risen sharply since its introduction to occupy the third position, after A and B1 group. Starting with a volume of less than Rs 50 crore a day, average daily turnover in the `S' group had risen to more than Rs 100 crore by end-March. Average shares traded daily have also risen to about two crore shares a day.

What catches the eye, however, is the high percentage of delivery-based trades. At 68 per cent for March, delivery-based trades in the `S' group outstrip such trades in the three other major groups — A, B1 and B2. These statistics are encouraging and augur well for small-cap investing, even though the choppy market in April led to a sharp decline in trading volumes in all the groups, including `S'.

Price performance: The improved trade statistics are also reflected in the superior price performance of stocks in this group. Between end-January and now, the market capitalisation of the `S' group stocks grew about 8 per cent. In contrast, the market cap of the `A' and `B1' groups did not rise as much, though a number of new stocks were listed in `A' and `B1' group.

In terms of average returns, too, the price performance since March 9 has been favourable. The average returns of the 400-odd stocks listed in the `S' group has been a negative 1 per cent or so. In contrast, the Nifty is down 12 per cent and the Junior Nifty down 13 per cent. The CNX Midcap 200, which represents small-cap stocks, is down nearly 4 per cent. That `S' group stocks have bettered the Midcap 200 is also a positive.

Neglected stock effect: The superior performance can be attributable to the neglected stock effect. Given the constraints, institutional investors focus on large-cap stocks. Smaller investors, who typically tail the larger ones, consequently neglect smaller-cap stocks even if their performance on the earnings front is good.

The `S' group platform may have allowed investors to discover such stocks. If this is the reason behind the superior performance of these stocks, then the development since January augurs well.

On the other hand, it may well be that a trading platform for downright speculation may have been introduced. This may have enthused a set of investors, leading to the momentum seen in the stocks of this group. It is too early to make that call. Investors need to be cautious that their hard-earned savings are not lost in a vortex of speculative activity.

Vigilance is required on the part of the exchange authorities as well. Given the smaller size of companies, participation by small retail investors is likely to be high. If the stock exchanges succeed in reining in the unscrupulous elements and ensure that the experience for small retail investors is not negative, it could then lead to the emergence of a platform for trading small-cap stocks. That could be a wonderful development for both investors and smaller companies.

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