Nifty Outlook & Trading Ideas for Next 15 sessions

Nifty Outlook:

Technically, Nifty has established a weekly close above 200 DMA levels which is perched around 3450. Though, for a confirmation of this trend of sustenance of Nifty above crucial Resistance of 200 DMA, we will wait to determine a weekly close above 3500 for the upcoming truncated week.

A weekly close above Nifty 3500 levels would mean an uptrend which could stretch as high as 3850-4250 on the upside. On the downside, Nifty has a strong support at 3300 and 3120. In my previous to previous post dated April 10, 2009 following content was posted for readers on Nifty Technicals:

CURRENT MARKET TECHNICALS:

We have successfully crossed crucial levels of Nifty 3240 which acted as a strong resistance for the last 5 and half months. This level of 3240 proved resistance for 4-5 times in the last few months. Now, the next resistance is at Nifty 3450 level which incidentally is an all important 200 DMA levels.

CRUCIAL 200 DMA RESISTANCE:

Now, markets shall take a breather for some time around current levels or within a narrow Nifty range of 200-300 points lower from here as a pull back approach. Then again, markets are likely to re-test Nifty 3450 (for 1 or 2 times) to check its resistance strength. If in final analysis, markets succeed in crossing crucial Nifty 3450 level, we may well be in for a surprise rally towards Nifty 3850-4250. These ultimate targets of Nifty 3850-4250 may well be the highest point of current bear market rally, if we succeed to cross over 3500.

INTERVAL TIME FOR TRADERS:

Traders can remain cautious around Nifty 3400-3500 levels. They can book some gains around 3400 levels and wait for the volatility and pull back to fall out. They can again retain their long position if Nifty 3500 are crossed over which may engulf a new round of short-term rally. Nifty 2900-2950 should be an absolute Stop Loss for all kind of intermediate Long positions for the trading fraternity.

A 'Contra' call for traders would be to short the Nifty around 3400 levels with a Stop Loss of 3500 & book gains with initial target of 3240-3120.

As mentioned above, the markets faced resistance at Nifty 3410 and pulled back to 3310 for couple of days. Again markets have come back to re-test the crucial 200 DMA resistance and almost managed to sustain with a weekly close above it on the back of strong hold from bulls.

Nifty Traders: Traders can go Long on Nifty in around 3450-3500 range (preferably above 3500 closing) with upside Targets of 3850-4250 & observe a Strict Stop Loss of Nifty 3300 levels. Please note that the Stop Loss to be observed on Closing basis.

Stock Specific Trends:

In the same posting, i have made a narration of few more stock specific trends especially large-caps and mid-caps. Most of these stocks were predicted to have been topped out in short-term unless Nifty makes a fresh up move above its 200 DMA resistance.

SIGNS OF TIRING OUT:

These stocks are expected to take a small breather if the current rally is, in deed, to continue forward even from here: Reliance, Grasim, ONGC, Hero Honda, Bajaj Auto, Tata Steel among large-caps.

All the above stocks except Grasim (which inched a bit higher in last 1 week) seemed largely stuck to their ground as most of them had rallied sharply in the recent run up of markets as a whole. RIL continues to remain perched around Rs.1700-1800 levels, ONGC is stuck around Rs.800-900 and Hero Honda remains bound in 1000-1150 range in spite of better than expected results. Tata Steel made a high of around Rs.290 and slipped to Rs.240 odd only to recover around Rs.260.

Though, these stocks are likely to further their winning streak if Nifty manages to sustain and move forward above 3500 levels. These stocks will slowly move to make higher tops but at a slower pace than other markets laggards.

Dark Horses:

DARK-HORSES FOR SHORT-TERM RALLY:

Stocks to watch out for sharp bounce in the upcoming times are Bajaj Finserv, IDFC, LIC Hsg, Patel Engineering, I.Bull Finance, Videocon Industries, A.B.Nuvo, Thermax, R.Comm, SBI & BHEL. This mix of large-cap & mid-cap stocks have not moved up appreciably as compared to other stocks. And there is every possibility that they move faster to catch-up with their lag against the market on the back of their buoyant fundamentals.

The above writing has presence in my same posting dated April 10, 2009. Bajaj Finserv, LIC Hsg, Thermax, Rcom, SBI and BHEL have moved at a faster clip in the last 15 days of market movement. While SBI has graduated from Rs.1000 to Rs.1300, Bajaj Finserv has rised from Rs.150 levels to Rs.230 levels. LIC Hsg Finance has moved exuberantly from Rs.230 to Rs.340 at yesterday's closing. IDFC has witnessed a sharp run up from Rs.50 to Rs.75 during the period.

In my previous post dated April 15, 2009 on Implication of Satyam Acquisition, a clear cut Sell call was given for Tech Mahindra around Rs.370-380 zone. The stock had slumped to Rs.310 levels before recovering to Rs.340 along with markets.

Trading Ideas for Upcoming 15 sessions:

1) IDFC: This company from NBFC space has run up smartly from Rs.60 to reach Rs.75-78 range. If IDFC manages to conquer Rs.82 levels as a weekly close, it will graduate swiftly to its next target of Rs.95-109 in a quick period of time on the back of break-out on the upside. CMP Rs.75.

2) BHEL: Heavy Engineering major BHEL can be bought around Rs.1550-1630 with a Target of 1800-1950. Strict Stop Loss of 1500 is a must for trading in this Power Equipment major. CMP Rs.1639.

3) Videocon Industries: Buy Videocn in the range of Rs.105-120 with a quick target of Rs.150-160 with in few sessions. Strict Stop loss for this diversified conglomerate should be placed at Rs.90. CMP Rs.122.

4) Power Finance Corporation: If this Power Finance company sustains above Rs.160 for 2 consecutive days it will witness a break out for Targets of Rs.185-195. Stop loss for this stock can be observed around Rs.140-145. CMP Rs.157.

5) Power Grid Corporation: Power Transmission major PGCIL would witness a break out if it manages to sustain above Rs.105 for next week closing. The stock can later on soar to Rs.120-130 without much patience. Stop Loss Rs.90. CMP Rs.100.

6) L&T: This E&C giant is most likely to cross Rs.1000 & touch Rs.1050-1100 if Nifty manages to sustain above 3500 for next week.The stock will lead the rally along with other heavy weights to prop up the markets from here.

7) Investment Idea: Long-term investors can grab Gitanjali Gems if it falls back in the range of Rs.35-55 for some reason. It is a leading mid-cap from Gems & Jewellery space with bright prospects from long-term horizon.

NOTE: Readers are requested to keep any eye on break-out signal levels wherever mentioned specifically in above Trading calls. Like for IDFC, PFC & PGCIL levels to watch out for are Rs.82, Rs.160 & Rs.105 respectively, above which those stocks should witness a break-out. So, short-term trade should be executed only if such signal levels are crossed over.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Satyam Acquisition: Implications on Stakeholders of Satyam, Tech Mahindra and Larsen & Toubro

Although Tech Mahindra was supposed to be an underdog in the race to acquire fraud-hit Satyam as against the heavy weight L&T, the company went away with the trophy with highest bid of Rs.58 per share from the three bidders. The list of other two edged out bidders include L&T and Wilbur Ross with their respective bid at Rs.45.90 and Rs.20 per share. With this deal Tech Mahindra catapults into 4th largest IT Company in India after TCS, Infosys and Wipro.

Below I am discussing the implication of Satyam acquisition by Tech Mahindra and its effects on various stakeholders of Satyam, Tech Mahindra and Larsen & Toubro.


Implications for Satyam Stakeholders:

1) Cost of Satyam shareholders who bought the stock during the initial phase of bull phase is estimated to be around Rs.300-350 per share.

2) Likely Open Offer from Tech Mahindra would come at paltry Rs.58/- per share. Though, the bid turned out to be the highest bid among the 3 bids received, the amount is too small to compensate long-term investors who have invested in the outsourcing giant Satyam even before the time of euphoria of bull run 5 years back around Rs.300-350 per share. However, the fundamentals are no more the same as then, after the being fruad-hit.

3) In the final analysis, the genuine long-term shareholders would continue to remain the ultimate losers even after finding a new owner for their company. Though, over a period of next 2-3 months as more certainty prevails over the stock's fortune related with its actual re-stated accounts, the stock may witness revival from the current depressing levels.

4) Uncertain prospects for 45000 odd Satyam employees what with the deal not binding Tech Mahindra to retain majority of the employees.

5) Positive for Satyam clients as now there would be more clarity and certainty. Clients would be in more comforting position with a new owner on the anvil.


Implications for Tech Mahindra Stakeholders:

1) Tech Mahindra cannot strip the company nor can it sell Satyam through a piecemeal approach.

2) Tech Mahindra to acquire Satyam at approximately Rs.2900 crore for a 51% stake. On the other hand, the company hardly has Rs.500-700 on its books.

3) The remaining amount to be raised through raising debt. This could be from NBFCs or even an equity offering at a later stage.

4) Almost 60% of the Tech Mahindra’s revenues comes from British Telecom which incidentally also holds 31% stake in Tech Mahindra. The company’s big part of operations is concentrated in Telecom outsourcing.

5) With Satyam acquisition, Tech Mahindra gets hold on diversified services ranging from ERP to Engineering services.

6) Problems of integrating the diverse business of both the companies. Lower expertise of Mahindra’s in areas other than Telecom outsourcing Vertical.

7) Increasing uncertainty regarding re-stated accounts and class action lawsuit liabilities.

8) With a quick process of bailing out Satyam, Tech Mahindra may be able to control flight of clients to other outsourcing majors.


Implication for L&T Stakeholders:

1) L&T lost out to acquiring fraud-hit Satyam Computers in view of strategic importance to Infotech arm.

2) L&T’s current cost of 12% stake in Satyam is pegged at around Rs.80-90 per share.

3) The company is not be allowed to sell its holding in Satyam for next 6 months.

4) I feel that L&T shall not sell its stake in Satyam at any less than Rs.125-175 per share in farther future.

5) L&T shareholders are content as of now on failing to acquire fraud-hit Satyam and likely strains on its Balance sheet, uncertainty on re-stated accounts and implications of lawsuits filed abroad.

6) But, shareholders should understand that, as a preliminary affair, the stock price was initially battered on account that L&T holds stake in Satyam and the company is fraud-hit leading to slump in its stock price. The shareholders gave thumbs down to L&T on account of mark-to-mark losses that L&T may have to suffer for its stake in Satyam. This loss-making stake continues to remain unchanged even with changed ownership till date.


MY CONCLUSION:

For Tech Mahindra Share holders:

Though Tech Mahindra has managed to acquire Satyam and catapult the combined entity in the top league of Indian IT firms, the company holds only to the extent of Rs.500-700 crore on its books and the remaining amount needed for acquisition of Satyam may need to be funded via raising debt through financial institutions or offering equity at a later stage.

Add to this leveraged buy-out, the high uncertainty of the current standing of Satyam on the back of delay in producing re-stated accounts and a series of lawsuits filed abroad on account of fraud.

Also, Tech Mahindra has gone on to bid for the company without having a detailed view on Satyam’s financial position and carried on basing expectations with this regard, is a matter of concern. Integration of new diversified services that has been acquired by Tech Mahindra form Satyam needs to be balanced out what with the acquiring company having limited exposure and experience in fileds other than Telecom outsourcing vertical.

For long-term shareholders of Tech Mahindra, I would recommend exiting from this company and rather prefer to shift to other Large-cap companies like Infosys or TCS which are more of CASH RICH companies with superior record of performance over years. Also the stock price of Tech Mahindra has rised appreciably from a trough of Rs.200 to Rs.365 in a short span of 1 month. Whereas other large-cap IT companies have not witnessed such a strong rally in the same period under contention.

This decision to prompt me to recommend an exit from Tech Mahindra, is more so after looking at the leverage buy-out that the company may have to make & stifling speculation factor of which the company would be a part of unless existing liabilities & re-stated account positions of Satyam Computers is not clearly known.


For Satyam Computer Share holders:

For Satyam shareholders with high cost of acquisition can keep holding their stock with a medium to longer horizon. They need not supply their stock in the likely Open Offer from Tech Mahindra at Rs.58 per share. As more clarity on Satyam’s accounting standing and liability whereabouts come out, the stock shall eventually rise if such numbers and liabilities tend to be better than market expectations.

Now, the shareholders should not be too concerned about the Satyam shares re-testing those trough levels as now it has a new and a recognized owner to its support. Though, the recommendation to hold Satyam is not long-term call but a medium-term view.


Short to Medium Term Call: Hold Satyam Computers
Medium to Long Term Call: Sell Tech Mahindra
Short to Long Term Call: Hold L&T

Note: The above views on calls related to Tech Mahindra, Satyam and L&T are my personal views views and suggestions for the respective stocks. Investors/Traders should do their own research & due-diligence. They should act as per their suitability, trading strategy & knowledge.


Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Market Review: Stock Specific Winners & Laggards

In the 'Comments' Section of my previous posting on Small-caps, Mr.Antriksh Patel has raised a query on status of Stock Specific Trends in selected Large-caps & Mid-caps. He has asked for predictions for individual stocks regarding their trend and whether they have bottomed out or not. Which stocks are likely to re-visit their lows and which stocks would out-perform markets as a whole.

Dear Viral,

"You have been posting wonderful articles, and they are a great help to me and hope the same for all others who are here as well. I think now the bottoms of the majority of large caps like Larsen and Tubro, RIL, Tata Steel, Sterlite Industries and Sesa Goa will change. How about predicting them. I tried to do that but could not.

Moreover the stocks where FII holding is quite high viz. Jain Irrigation, Educomp, Financial Technologies they might revisit to the same (earlier) bottoms. I would like to have some insight onto this."


As such it is difficult to predict whether individual stocks, large-caps and mid-caps, have bottomed out or not. More so, unless there is absolute defiance from fundamentals, most of the stocks are likely to re-visit their lows or somewhat near-by, when market tries to re-test its lows, if at all. That is why we should adhere to staggering our buying decisions so as to not attempt to Time the market.

In this post, i will be comparing the STOCK TREND of a few large-cap stocks and mid-caps stocks since Sensex touched 8000 levels just 20-25 days back. Since then, some stocks have shown largely bullish trend yet somewhat tiring out over a period of certain percentage of rally.

On the other hand, some stocks are found to be late movers in the current bullish momentum, but they’re gradually picking up steam and are gearing up for substantial rally even from here. While some stocks from Large-caps segment have moved promptly along with market rally, they may already be somewhere around the ‘Fair Value’ zone.


'LIKELY' BOTTOMED-OUT LARGE-CAPS:

Few stocks that looked as bottomed-out to me during the recent market testing of Sensex 8000 levels are Reliance Industries, BHEL, ACC, Grasim, Infosys, ONGC, NTPC, BEL, Power Grid, Cairn, Sterlite Industries & most of the Auto stocks especially two-wheelers.

Most of these stocks smartly remained away from re-testing or coming even near to their lows witnessed in October 2008. This even as stock indices re-tested the lows established in October 2008. While Grasim has almost doubled since its October lows, the stock of Reliance Industries gained significant support on the down side on the back of commencement of production of Gas from its KG-D6 block. The stock found support at Rs.1200 way before Rs.950 odd tested during October 2008.

On the other hand, Sterlite Industries was a clear out-performer in the Metals pack on the back of robust cash position and minimal debt-equity ratio in the current slowing times. Both the Power utility majors NTPC and Power Grid showed significant support on the downside on the back of robust business prospects in the power sector. None of the two utility companies were even near to their 52 week lows.


WEAKER LARGE-CAPS:

On the other hand, some stocks which seemed weak were HDFC, HDFC Bank, Reliance Communication, Bharti Airtel, ICICI, SBI, DLF, Reliance Capital, TCS, L&T, Sun Pharma, Ranbaxy and Axis Bank.

Most of the Banking and Finance stocks have got the mention in the above list of laggards. Not even public sector banks were spared in the recent draught of liquidity towards journey to Sensex 8000 including government owned SBI. Even both the Telecom majors- Rcom and Bharti Airtel- showed surprising bit of weakness as compared to the stocks from other sectors where slowdown is more pronounced than fast growing Telecommunications space. Real-estate major DLF was not spared either. In fact, all interest rate sensitive stocks except Automobile stocks fared worst in the recent meltdown to Nifty 2600 a month ago.

Understandably, L&T showed weakness on the back of huge stake in fraud-hit Satyam Computers & Ranabxy’s stocks was adversely effected due to the set back from non-approval from US FDA of some drugs from Poanta Sahib plant.


MID-CAP MANIA:

Strong examples of bottomed out stocks from Mid-cap were Tata Comm, IVRCL Infra. Suzlon seemed to be re-testing its bottoms but revived at the right time along with market rally. Stocks that looked weak were IDFC, Videocon, Punj Llyod, Indian Hotels, HCC, I. Bulls Finance & Parsvnath Developers.

The stock that lagged during the recent meltdown & rally from there to 10500 levels is Indian Hotels. The hotel major from Tata Group continued to be a loser on the back of recent terrorist attack on its Mumbai based Taj hotel and also on the back of sharp slowdown across the globe which directly affects its client base mostly from abroad. Parsvnath Developers continue to feel cash crunch even as Indian stock market recovers in last one month.


PROMPT BOUNCE BACK:

Some stocks showed tendency of prompt bounce back, taking cues from markets were LIC Hsg, FT, Educomp, I-Flex. These stocks showed tendency to swing along with markets either based on news, niche sector of operation or underlying fundamentals of the stock.

I-Flex stock started rallying even before markets touched the trough of Nifty 2600 on the back of rumours of Open offer from the parent company Oracle. LIC Housing Finance seems to be the only stock to have led the recover amongst the Banking & Finance sector while the markets lifted itself from the recent lows of Sensex 8000 levels. Educomp continues to be the best pick for betting on the Online education sector but valuations quite a bit of concern at current high levels.


SLOWLY PICKING UP STEAM:

While some stocks which under-performed during the initial phase of market rally, they larter on picked up steam & participated actively ongoing rally during the last 8-10 sessions, are Reliance Communication, IDFC, Videocon, Torrent Power, Adlabs.

In the recent run up from Nifty 2600 to 3400, the large-caps were front runners only to taper down the advantage of rally to front line mid-caps in last one week. Some laggards of the recent 2800 point Sensex rally have started to take signals from the current bear market upturn. These stock are slowly picking up steam and have showed signs of recovery before they rally even more from here.


SIGNS OF TIRING OUT:

These stocks are expected to take a small breather if the current rally is, in deed, to continue forward even from here: Reliance, Grasim, ONGC, Hero Honda, Bajaj Auto, Tata Steel among large-caps.

Reliance Industries has advanced very smartly from the recent lows of Rs.1200 to around Rs.1700, a whooping 40-45% increase in a matter of 25 days as a major index stock. Cement and Viscose major Grasim Industries has clearly doubled from its trough of October lows of around Rs.831 to current price of Rs.1593. Two-wheeler majors Hero Honda and Bajaj Auto have led the recent rally even before four-wheelers come into the picture. However, Hero Honda has proved to be a ‘DEFENSIVE’ stock in the current bear market which is already more than 12 months old.

Tata Steel has rallied from the lows of Rs.150 to Thursday’s closing levels of Rs.260. The stock was a laggard in the metal space on the back of high debt-equity ratio on acquisition of Corus. The stock with high debt ratio may not have too much wings to move ahead from here, especially, after witnessing a whooping 70% rally from its recent lows.


DARK-HORSES FOR SHORT-TERM RALLY:

Stocks to watch out for sharp bounce in the upcoming times are Bajaj Finserv, IDFC, LIC Hsg, Patel Engineering, I.Bull Finance, Videocon Industries, A.B.Nuvo, Thermax, R.Comm, SBI & BHEL.

This mix of large-cap & mid-cap stocks have not moved up appreciably as compared to other stocks. And there is every possiblity that they move faster to catch-up with their lag against the market on the back of their buoyant fundamentals.

BHEL was a market out-performer in the initial 1000 points of Sensex recovery from 8000 levels. But, since its annual result announcement the stock has remained an under-performer in the later part of the current market momentum. The stock may positively participate in the rally if 200 DMA on market indices is taken out.

Some mid-caps that may fire up from here are Videocon, Indian Bull Finance & Thermax. Any incremental rally that may need support to move forwards may find push from large-caps like Reliance communications, SBI and BHEL.


CURRENT MARKET TECHNICALS:

We have successfully crossed crucial levels of Nifty 3240 which acted as a strong resistance for the last 5 and half months. This level of 3240 proved resistance for 4-5 times in the last few months. Now, the next resistance is at Nifty 3450 level which incidentally is an all important 200 DMA levels.

CRUCIAL 200 DMA RESISTENCE:

Now, markets shall take a breather for some time around current levels or within a narrow Nifty range of 200-300 points lower from here as a pull back approach. Then again, markets are likely to re-test Nifty 3450 (for 1 or 2 times) to check its resistance strength. If in final analysis, markets succeed in crossing crucial Nifty 3450 level, we may well be in for a surprise rally towards Nifty 3850-4250. These ultimate targets of Nifty 3850-4250 may well be the highest point of current bear market rally, if we succeed to cross over 3500.

INTERVAL TIME FOR TRADERS:

Traders can remain cautious around Nifty 3400-3500 levels. They can book some gains around 3400 levels and wait for the volatility and pull back to fall out. They can again retain their long position if Nifty 3500 are crossed over which may engulf a new round of short-term rally. Nifty 2900-2950 should be an absolute Stop Loss for all kind of intermediate Long positions for the trading fraternity.

A 'Contra' call for traders would be to short the Nifty around 3400 levels with a Stop Loss of 3500 & book gains with initial target of 3240-3120.


A Request to Readers:
Readers are requested to post their view/query/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive Comments section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.


Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Small-cap Stocks: Analysis of Risk-Reward Ratio

Quote of the Day: "A small-cap stock may bloom into a multi-bagger, but all multi-baggers need not necessarily be from small-cap space" (by Myself).

Like, for example, if you buy a mid-cap or for that matter even a large-cap stock at the fag end of the bear market and sell it at the peak of the next bull phase, the stock can give as astonishing a returns as any small-cap, albeit with an assured degree of certainty. But is it possible to time market entry and exit in such a manner? Not really!

Small Cap stocks are nothing but stocks with small market capitalization levels, say, for example, stocks with Market cap of Rs.500 crore & lower than that. Though, this can not serve as a strict reference for classifying stocks on the basis of current market capitalization levels, as market capitalization levels of such stocks tend to depict sharp changes in different phases of stock markets. Like, for example, a small-cap stock can soar into a mid-cap during a scorching bull phase. Likewise, even a good mid-cap stock can meltdown into small market capitalization levels during times of extreme distress like the current bear phase.

So, some times such classification references serve only as a ‘relative’ factor based on market conditions. But, one can carry on with the classification of stocks based on the size (or net worth)of their business and market capitalization both, to arrive at a clearer market position of the company.


PECULIAR FEATURE OF SMALL-CAP STOCKS:

One peculiar feature about stocks from small-cap category is that they tend to provide multi-bagger returns over a period of time, especially, during bull phases. On the other hand, it takes a relatively very long period of time for such buzzing returns from large-cap counters unless such stocks are bought at depressingly low valuations at the fag end of the bear phase and are held until the peak of the next bull phase, which is very tough to do as it amounts to accurately predicting and attempting to TIME the market entry and exit.

But, the selection of such multi-bagger stocks is one of the toughest decisions to make as it involves researching and studying hard into various factors like fundamentals of the company, virginity level of the stock visibility, liquidity levels of the stock on the bourses, coverage of the stocks by the analyst fraternity, prospects of the company fundamentals in the light of globalizing economy and fiercely competitive business scenario, financial position of the company and adaptability of constantly changing business environment among various other analyzing aspects.

SAILING AGAINST THE TIDE:

Smaller companies can be classified into two categories viz. one which has established new business venture having dynamic growth prospects and the other one being those who are involved in niche business operations with some degree of monopoly in market share. But, they may not be financially as sound and strong as large-caps. Most of such small companies, often, face one or multiple set of problems like weak cash flow, low market reach, talent crunch, intense competition, lower linkages to sources of funds, etc.

The real test of such small-cap companies come during such extreme periods of slowdown and recession. Liquidity crunch, high attrition levels, high cost of borrowing, drying of order flow and lower credit rating among other aspects are a true test of sustainability for such companies in such times.

STORY OF HIGH RISK & HIGH RETURNS:

Small–caps are often considered as virgin stocks with little visibility among general investors and most of the other market participants. Due to this very reason, these stocks largely trade at lower valuations and sometimes even under-valued with respect to their business potential. But, at the same time, Investments in small-cap stocks are fraught with HIGH RISK and corresponding high returns if your bet falls true.Prices of such stocks sometimes tend to swing irrespective of fundamentals & news flow, especially, during bullish times. Similarly, these stocks are the first on the boat to witness a sharp meltdown during times of distress.

LACK OF INTEREST FROM INSTITUTIONS:

Small-Cap stocks are often characterized by lower levels of interest & indulgence of markets participants in it, especially, QIB & Institutional investors. Even mutual funds have certain limitations in holding stakes in Small-cap stocks. Usually, fund houses concentrate on highly liquid large-cap & Mid-cap stocks in their portfolio. Retail investors are, often, the scapegoat of holding this kind of high risk investments. But, on the other hand, if the bet holds out fruitful, that there is every likely possibility that the retail investor also acquires the first mover advantage of buying this stock at its nascent stage of evolution

Such investors from bulge bracket category often resort to bulk trading which demands high liquidity in the counter so as to allow them swift entry and exit at their convenience. Suppose, a fund house has researched into a small-cap stock and based on its fundamentals want to buy a stake in a small-cap company for as much as 3-4% of its own portfolio, they may have to defer their purchasing transactions over a period of few weeks due to dearth of sellers.

But, again retail investors holding such stocks with low on supply volumes provides opportunity of gaining returns circuit on circuit on the bourses for such small counters with high demand. Though, the same theory also works on the downside when there is over-shoot in supply of paper and there are no buyers willing to buy during times of crisis or bear phases.

ONLY FOR STRONG HEARTED:

It is highly recommendable for Low risk and medium risk investors to stay away from these sort of volatile investment destinations. In fact, even High risk investors should not indulge in such small-cap stocks with uncertain future for more than 10-15% of one's over-all portfolio.

Many a times, it so happens that even after critical evaluation some small-cap stock remain dwarfed and are never able to graduate into mid-cap category. During such times, even the critical analysis and research of the past goes haywire as some of the analyzing aspect does not bear expected fruits. Even management of the company plays a vital role in seeing the company at the next stage which may not fructify in case of low ambitious & autocratic top management views and thoughts.

PIECEMEAL APPROACH FOR DIVERSIFICATION OF SMALL-CAP PORTFOLIO:

While investing in small-cap stocks do not rely or bet on concentrated list of companies. The future prospects of small-caps are fraught with uncertainty and fragile in nature. The stock price movement may not necessarily move in synch with market condition unless there is a certain degree of confirmation of the business potential of the company. So, it is always better to diversify the small-cap sector portfolio to ride through the volatility of the stocks in the sector more swiftly.

Spread the small-cap portfolio amongst 3-6 companies depending upon the amount you are willing to invest in such stocks. Even if a couple of stocks are stagnant or under-performing the markets, the other rising stocks can make up for the loss of opportunity in the former couple of stocks. Small-cap stocks need not necessarily provide returns in a short span of time. A long wait out may be needed, even during the bull phases. Sometimes, the fortunes of some small-cap stocks may turn at the last stage of bull phase and hence it often depends on your patience, perseverance and confidence in the company’s ability and prospects to determine the potential returns for your hard earned money.

MULTI-BAGGER RETURNS DURING BULL PHASE:

At the same time, the chances of finding multi-baggers in one of these stocks can also not be ruled out. Such stocks may provide regarding returns in terms of 'Number of Times' instead of 'Small Percentage Gains'. The only requisite being your bet should fall true & you should have patience to remain invested in them & wait for the next bull run to see sharp rallies in such stocks.I've recommended a few stocks under the section of 'DARK HORSES' most of which are Small-caps or even little bigger in size. Hence these stocks can not be strictly termed as Small-cap stocks. But, it is better to bet on such smaller stocks, with some sort of known & clear fundamentals, business prospect and operations in Niche segments of their respective industry, rather than relying completely on absolutely unknown & fragile stocks.

DARK HORSE LIST:

1) Kalindee Rail
2) Bartronics
3) Time Technoplast
4) Ess-Dee Alluminium

All the above stocks can not be clipped strictly under Small-cap category. But some of these small companies operating in Niche businesses have potential to graduate into big mid-caps stocks over a period of time.

SOME MORE SMALL-CAP STOCKS:

Below is the list of some other companies from Small-cap category. These lists of stocks are not recommendation by any means. So, do not fall in to it without your own sound research and due diligence:

1) SREI Infra
2) MIC Electronics
3) Rajesh Exports
4) Spice Jet
5) Mysore Cements
6) Electrotherm (India)
7) Suven Life Sciences
8) Aegis Logistics
9) Venky's India
10) Hitachi Home
11) Manugraph India
12) Zicom Electronic
13) Compact Disc
14) Piramal Life Sciences
15) Temptation Foods


WHETHER TO INVEST IN SMALL-CAPS AT THE PREVAILING STAGE OF BEAR PHASE:

There is also another side to the story of high risk attached with small-caps. History suggests that small-cap investments are subject to high risk and volatility. But, some analysts of small-cap counters suggest that even most of large-caps have melted down by over 50% in current bear phase and not to mention 80-90% slump in the stock prices of some of the most prominent and favourite mid-caps of investor fraternity.

So, isn’t investment in small-caps more fruitful as they have capability to provide multi-bagger returns, whereas the difference between risk ratios involved in small-caps & mid-caps being almost negligible?

Indian stock market indices have corrected more than 50% from its peak levels of Sensex 21000 during the last 1 year. There is a global recession going on led by leading western countries and slowdown in most of the fast emerging Asian countries led by China and India.

Usually, markets tend to factor in the worst way before the economy bottoms out. Indian markets have also witnessed a sharp slowdown and a substantial slump in its leading stock indices. Same is the fate for all categories of counters right from small-caps to large-caps. Though, stock prices of large-caps have depreciated lesser as compared to mid-caps and small-caps based on their sound fundamentals and market leadership.

If investors feel that the worst for the Indian markets may have been somewhat factored in, they can proceed further with investing their money in small-caps subject to proper understanding of the risk-reward ratio in such counters and their own investment and income profile. The above is just a list of indicative stocks from small-cap category from my side. Investors should carry out their own due-diligence and research analysis before investing in any of the above stocks.

NOTE FOR SMALL-CAP INVESTORS: As per past trends in equity markets, small-caps usually bloom somewhat during the peak of the bull markets. As the bear market phase is up for wraps, the rally is largely led by large-cap counters only to be followed by mid-cap space. Small-caps take part of the rally, only if the sanguine market scenario is sustainable for a longer duration.

Going by that, we are still somewhat at the bottom or the fag end of the bear phase. Markets will certainly show lots of consolidation and range bound movements marked by profit booking at regular interval. This would mean, investing in small-caps at current juncture would not provide an instant opportunity of making quick and smart gains in near to medium term. But, most of such stocks may be quoting at attractive valuations. So, only long investors are recommendable to indulge in small-cap counters who have stomach to ride out the volatility and fluctuation (or rather stagnation) in such space for times to come.


A Request to Readers:
Readers are requested to post their views on Small-cap stocks in the below given 'Comments' section. They can also share their list of favourite small-cap stocks which they feel can provide Multi-bagger returns going forward. Make this topic on small-caps more interactive and interesting by sharing your thoughts on stocks from small-cap category.

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