Small-Cap Stories

Small-cap stocks have a sex appeal to them. Their charm is in doubling your money in a year, or getting a 100-bagger in a few years, when the small-cap becomes a large-cap. It is a thrill to buy Zee Telefilms at Rs 100 and see it go to Rs 10,000. Add the glamour of talking about it at cocktail parties, and small-caps become irresistible.

This is not true for retail investors alone. Professional investors can bring a few extra percentage points to their returns if a small-cap stock clicks. Bull markets are times when the interest in small-caps goes up phenomenally. And, in the bull market of the past three years, we have seen mid-caps and small-caps outperforming large-caps by a huge margin.

The definition of a small-cap stock is not objective, and you will rarely find two organisations agreeing on what makes a small-cap company. At Value Research, we divide companies into four categories based on their market capitalisation (which is the product of the stock price and outstanding shares): giant-caps, large-caps, mid-caps and small-caps. Stocks that make up the top 50 per cent of the market capitalisation on BSE are classified as giant-caps. Stocks that fall in the capitalisation between 50 per cent and 70 per cent are classified as large-caps. Stocks that make up between 70 per cent and 90 per cent are classified as mid-caps. Stocks that form the bottom 10 per cent of the market capitalisation are classified as small-caps. As on August 2005, the largest capitalised company in the small-caps category was Rs 675.7 crore.

New Entrants
At such times, stocks that investors have not heard of much end up in their funds' portfolios. We took a closer look at fund portfolios to find the small caps that funds have bought in 2005. Funds have liked TASC Pharmaceuticals, Megasoft, KEI Industries and Rasandik Engineering Industries.

Tasc Pharmaceuticals: This pharmaceutical company entered fund portfolios in March 2005 when DSPML Opportunities bought into the stock. Tasc Pharma manufactures bulk pharmaceuticals and in March, it announced a merger with Glenmark Laboratories (which is different from the listed company Glenmark Pharma), a formulations player. In July 2005, Tata Mutual and LIC Mutual got interested in the stock and bought the stock in their schemes.

Megasoft: Prudential ICICI was the first AMC to buy Megasoft in three of its funds as early as February. In March HDFC Mutual bought the stock in two funds. Five Tata Mutual funds invested in June. Megasoft took a strategic decision to transition from a mid-sized IT services company to intellectual property-based technology company in late 2004. It has products for the telecom industry and a suite of clinical trials solution for the pharma industry.

KEI Industries: Sundaram SMILE discovered this stock in February, though it seems to have sold it in April. In May, ING Vysya bought it and in July, DSPML TIGER and two Tata funds bought the stock. The company manufactures cables and stainless steel wires which find applications in diverse industries including refineries, power, telecom, defence, and construction industries.

Rasandik Engineering: Reliance Mutual Fund discovered this stock in June 2005. The next month, it appeared in the portfolios of four Escorts funds. This auto ancillary company provides complete product development solutions from product moulding, engineering, design, analysis, manufacturing and delivery of sheet metal components, assemblies and aggregates.

Old Favourites
It is not as if funds have found small-caps only in 2005. There have been some hot favourites and lots of funds own these stocks. Here is a brief look at these stocks and you will know why funds find them attractive.

Subex Systems is a leading telecom software product company offering revenue assurance and fraud management products. Uniphos Enterprises, the de-merged investment arm of United Phosphorus, which is in the trading business has diversified into the seeds business. Television Eighteen, the company which owns 90 per cent in CNBC India, has found many takers in the mutual fund fraternity. Infotech Enterprises is a niche software company specialising in geospatial services and engineering design. Geometric Software is a leading product lifecycle management services provider for global mechanical design, manufacturing and industrial markets. Mastek is a software company operating in the application development with focus on clients mainly in finance and government.

IPOs
For decades, retail investors have preferred IPOs as a way of investing in equities. Funds too like to pick up stocks in IPOs. Of the small-cap issues of 2005, funds were attracted to garment manufacturer and retailer Provogue and FMCG company Emami. Some funds have stayed with their IPO holdings, whereas in some stocks, old funds have exited and new funds have entered. Provogue is a case where funds have shunned the stock. Immediately after the IPO, 55 funds were invested in Provogue, and now only three funds are invested. Among the IPO stocks, SPL Industries, a knitted fabrics and garment manufacturer, has the highest number of funds (33) invested at present. BPO player Allsech Technologies saw 12 funds investing in the IPO, which has fallen to five funds. Shringar Cinemas, a company which is setting up multiplexes in India, has also seen interest from fund managers. India Infoline, the financial dot com player, had four funds invested after the IPO, which has gone up to six now. Nectar Lifesciences, a manufacturer and exporter of sterile and oral bulk drug antibiotics, has attracted eight funds.