Which small caps are in the sell zone of mutual funds?

Domestic institutional investors such as mutual funds have slowly become a bigger driver of stock markets in India, overtaking foreign portfolio investors that have historically dictated the movement of the equity markets.

One segment of the stock market that is usually seen as a haven for punters looking to make a quick buck with trading opportunities and retail investors who get attracted by lower per share price is the small-cap space, or companies with market capitalisation of under Rs 5,000 crore.

This segment tends to have a high beta and tends to swing much more in volatile market conditions. Many investors and analysts try to fish for hidden gems which can be become mid-cap or large-cap stocks over the medium to long term.

Quarterly shareholding data shows that mutual fund managers cut stake in a little over 100 small-cap stocks with current market valuation of under Rs 5,000 crore in the quarter ended September 30. This is similar to the number of such small firms where foreign portfolio investors snipped their holding, but much more than the 60 small-cap companies that saw MFs push up their holding during the quarter.

Top small caps

If we consider the larger firms within the small cap space where MFs cut their stake last quarter, Harsh Goenka-led RPG Group’s tyre company Ceat is at the top of the heap.

Other larger companies in the small cap space with market value upwards of $500 million that saw domestic MFs turn bearish include Maharashtra Scooters, Cochin Shipyard, Reliance Power, Gujarat State Fertiliser, KSB, ISGEC, Nesco, Phillips Carbon, Karur Vysya Bank, HG Infra Engineering, Raymond, Rashtriya Chemicals, MOIL, Lemon Tree Hotels, Tata Coffee and Minda Corporation.

Karur Vysya Bank, Lemon Tree Hotels, Mahindra Lifespace, Minda Corporation are among the small caps that saw selling by both FIIs and MFs.

Significant sale by MFs in small cap pool

If we track stocks where local fund managers were particularly bearish, we don’t see MFs cutting stake by any significant extent in the small cap space last quarter.

As against FPIs who sold 2% or more stake last quarter in around 30 stocks, there were none such sell calls by MFs.

The maximum that MFs snipped their stake in any small cap was limited to around 0.4%. These include companies like Ceat, Phillips Carbon, Valiant Organics, Schneider Electric, Amrutanjan Health, South Indian Bank, Sandhar Technologies, Asian Granito and Kamdhenu.