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Indian Investors Get Reminded About Hidden Risks of Small Cap Stocks

(Bloomberg)

(Bloomberg) -- Before the trading day starts we bring you a digest of the key news and events that are likely to move markets. Today we look at:

  • Overpaying for growth
  • Risks in smallcaps
  • Defense still a pillar  

Good morning, this is Ashutosh Joshi, an equities reporter in Mumbai. Traders trudging to their desks on Christmas Eve are likely in for an unexciting day, given the thin volumes in Asian markets. Nifty futures suggest a muted opening, with large caps expected to be in favor.

Hidden dangers of small-cap stocks 

Investors just got reminded on the risks of betting on tiny companies with dubious accounting practices. First, SEBI suspending trading in Bharat Global Developers over fake disclosures. Then, BSE delayed Solar91 Cleantech’s IPO bidding after “certain queries raised by complainants in media.” Small-cap firms have always been more prone to price manipulation and accounting tricks compared to their larger peers. But as long as there was quick money to be made, many investors turned a blind eye to the risks. Now, with the exchanges and regulator stepping up the heat, the risks may no longer be worth it — especially, if trading in such shares gets suspended. 

Siemens and the perils of premium valuations

Siemens India shares closed lower for the fifth straight session, as the management’s post-earnings commentary left analysts underwhelmed. The stock has entered correction territory, having dropped 16% fall from its record high. Despite the slide, Antique has maintained a buy rating, citing ample growth opportunities driven by Siemens’ wide product portfolio. Still, the selloff is a cautionary reminder for investors about the perils of overpaying for capex-focused plays in a slowing economic environment.

Defense remains a pillar in domestic manufacturing

Shares of most defense equipment makers have entered bear territory, having declined over 20% from their recent peaks. The selloff is partly due to stretched valuations, as earnings growth has slowed compared to previous levels. However, some market participants remain optimistic about the sector’s long-term outlook, citing its expanding role in the global supply chain amid rising geopolitical tensions. Nuvama forecasts a “ballistic growth runway,” predicting a $130 billion defense opportunity over the next five years. 

Analysts actions:

  • Bharat Electronics Rated New Buy at Phillip Secs; PT 390 rupees
  • MAS Finl Rated New Buy at Anand Rathi Securities; PT 365 rupees
  • Deepak Fertilisers Rated New Add at InCred; PT 2,051 rupees

Three great reads from Bloomberg today:

  • India’s Clean Fuel Plan to Combat Toxic Farm Fires Is Stumbling
  • Singapore Pulls Ahead of Hong Kong in Race to Be Crypto Hub
  • Big Take: Interpol Under Spotlight in Suspected Asylum Scam

And, finally.. 

2024 has been a year to forget for staples stocks in India, with Nifty’s fast-moving consumer goods index trailing global peers by its widest margin since 2019. Indian units of FMCG giants Unilever and Nestle are leading the declines, as they grapple with rising input costs, weak urban demand, and a still-fragile recovery in rural areas. This is most evident in the performance of Hindustan Unilever shares, which have fallen about 12% this year, heading for their worst annual drop since 2004. 

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--With assistance from Chiranjivi Chakraborty and Kartik Goyal.

©2024 Bloomberg L.P.