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Impact of changes in MF regulations on Small caps
SEBI circular on Mutual Funds could broaden market rally
SEBI has surprised all market participants with its latest circulars wherein multi-cap
mutual funds will be required to increase their exposure to mid and small caps
stocks to 25% of their AUM by January 2021. Based on our calculations Multi-cap
funds may need to decrease their exposure to large caps by `40,650 crore and
increase their exposure to mid and small cap stocks by `12,960 crore and
`27,690 crore by January 2021. While the allocation shift should not cause too
much of an issue for large and mid cap stocks given better liquidity it can lead to a
rerating for the small cap space given limited availability of quality stocks. We
believe that flows would go the most liquid names in the small cap space where
there are reasonable MF holdings rather than in smaller name with low liquidity
and fund holdings. As per our analysis the top 100 small caps stocks with relatively
large market caps and MF holdings have a free float market cap of ~`2,36,000
crore and could attract the majority of the flows (10-12% of free float on higher
side) to small caps if any. In our top picks portfolio we have six stocks which are
from the above list viz. Chalet Hotels, Hawkins Cooler, Inox Leisure, JK Lakshmi
Cement, Persistent Systems and VIP Industries. Metropolis Healthcare though not
part of the above list is part of the Nifty Smallcap 100 index and could also attract
MF flows while Zensar Technologies and Swaraj Engines are other high conviction
small cap stocks in the portfolio.
SEBI Circular could cause disruptions to existing multicap schemes
SEBI issued a circular on the 11th of September 2020 with a view to diversify the
investments of underlying investments of multi-cap funds across mid and small
caps. Under the new guidelines SEBI has proposed raising the minimum
investment in equities for Multi Cap Funds to 75% of assets from the earlier 65%
along with other proposed changes listed below:
Minimum investment of 25% of total assets in large cap companies.
Minimum investment of 25% of total assets in mid cap companies.
Minimum investment of 25% of total assets in small cap companies.
Some shift in AUM to Mid and small caps likely over bext few months
As per our calculations multi-cap funds have a total AUM of `1,46,500 crore with
almost 74% of AUM being allocated to large caps while allocation to mid and
small caps are 16.5% and 6.2% respectively. If the SEBI recommendations are
implement then there could be shift of `40,650 crore from large caps to mid and
small caps on the higher side. However the situation is still fluid and the actual shift
could be lower as MF houses are most likely to ask SEBI to reconsider the
proposal. However even if SEBI does not reconsider the proposal then fund houses
have the option of either merging it with existing large cap schemes or changing
the fund categorization to minimize the impact.
Exhibit 1: Summary of likely shift in aggregate AUM for multi-cap schemes
Scheme Profile
Amt (` Cr)
Possibility of churn
+/- (` Cr)
Large Cap
Mid Cap
Small Cap
Cash &
Equivalent
Large Cap
Mid Cap
Small Cap
Total
108,140
24,224
9,040
5,093
(40,650)
12,960
27,690
Source: Company, Angel Research
Top Picks
Company
CMP (`)
TP (`)
Auto
Endurance Technologies
1,080
1,297
Swaraj Engines
1,615
1,891
Banking/NBFC
Cholamandalam Inv.
225
280
IDFC First Bank
31
36
IT
Persistent Systems
1,011
1,276
Zensar Technologies
174
204
Pharma & Healthcare
Metropolis Healthcare
1,751
2,156
Telecom/ Others
Chalet Hotels
152
200
Hawkins cooker
4,838
5,682
Hindustan Aero.
852
1125
Inox Leisure
289
350
JK Lakshmi cement
256
328
Reliance Industries
2,319
2,543
VIP Industries
283
348
Source: Company, Angel Research
Note: Closing price as on 11
th
Sept.,2020
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Impact of changes in MF regulations on Small caps
Exhibit 2: List of top100 smallcap stocks based on market cap and MF holdings
Sr.
No
Company
Name
Free Float
Market Cap (` Cr)
Market Cap
(` Cr)
Mutual Funds
Holdings (%)
1
Multi Comm. Exc.
7928
7928
21.8
2
Indian Energy Ex
5699
5699
14.8
3
PVR
5623
6924
16.9
4
Persistent Sys
5296
7727
24.7
5
Tata Chemicals
4883
7464
17.4
6
Redington India
4334
4334
11.5
7
Strides Pharma
4321
6147
15.6
8
CESC
4149
8285
19.7
9
K E C Intl.
4033
8344
22.8
10
Chola Financial
3979
7770
24.8
11
Kajaria Ceramics
3946
7528
16.5
12
Apollo Tyres
3880
6650
17.2
13
C D S L
3727
4659
13.3
14
APL Apollo Tubes
3718
6036
10.2
15
Can Fin Homes
3646
5208
11.4
16
SKF India
3623
7641
24.0
17
VST Industries
3591
5294
13.9
18
Blue Star
3563
5818
21.3
19
JM Financial
3559
7882
7.7
20
Cyient
3199
4168
21.4
21
EIH
3149
4864
10.7
22
Natl. Aluminium
3144
6483
7.7
23
Radico Khaitan
3141
5262
13.3
24
Amber Enterp.
3112
5559
6.5
25
Finolex Inds.
2981
6271
12.9
26
ERIS Lifescience
2948
6633
10.7
27
Karur Vysya Bank
2875
2937
16.9
28
Rallis India
2868
5747
16.3
29
Carborundum Uni.
2775
4789
23.7
30
Finolex Cables
2734
4263
19.7
31
Birlasoft Ltd
2725
4601
6.6
32
J B Chem & Pharm
2724
6177
12.2
33
GE Shipping Co
2713
3828
20.2
34
V-Guard Industri
2685
7205
11.0
35
Timken India
2624
8148
10.2
36
Orient Electric
2535
4124
16.5
37
Quess Corp
2464
5511
13.1
38
Elgi Equipments
2439
3582
9.6
39
Westlife Develop
2425
5931
12.4
40
Grindwell Norton
2399
5755
15.9
Source: Company, Angel Research, Capitaline
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Impact of changes in MF regulations on Small caps
Exhibit 3: List of top100 smallcap stocks based on market cap and MF holdings Contd.
Sr.
No
Company
Name
Free Float
Market Cap (` Cr)
Market Cap
(` Cr)
Mutual Funds
Holdings (%)
41
TTK Prestige
2398
8105
11.2
42
Chambal Fert.
2390
5962
13.7
43
Vaibhav Global
2372
5716
9.0
44
Narayana Hrudaya
2364
6540
14.6
45
Sonata Software
2353
3276
12.2
46
Affle India
2344
7413
9.0
47
DCB Bank
2261
2656
27.8
48
Team Lease Serv.
2234
3725
9.9
49
Guj Pipavav Port
2198
3926
25.0
50
Ratnamani Metals
2108
5292
13.4
51
Firstsour.Solu.
2057
4461
7.8
52
Engineers India
1963
4047
17.3
53
Jyothy Labs
1954
5266
13.9
54
Bajaj Electrical
1930
5241
11.4
55
CEAT
1930
3620
6.6
56
KEI Industries
1920
3227
21.0
57
Delta Corp
1917
2862
6.6
58
Century Textiles
1879
3774
8.9
59
V I P Inds.
1861
3998
9.7
60
Galaxy Surfact.
1839
6325
12.8
61
Balrampur Chini
1817
3091
8.2
62
IRB Infra.Devl.
1785
4224
6.8
63
PNC Infratech
1774
4038
22.8
64
CCL Products
1770
3272
10.3
65
Brigade Enterpr.
1767
3322
17.9
66
Kalpataru Power
1763
3865
21.9
67
Sheela Foam
1709
6838
19.7
69
Birla Corpn.
1707
4602
10.9
70
V-Mart Retail
1676
3431
17.2
71
Vardhman Textile
1632
4318
20.3
72
JK Lakshmi Cem.
1622
3015
16.8
73
KNR Construct.
1581
3515
32.0
74
NLC India
1532
7363
8.4
75
Johnson Con. Hit
1510
5865
13.6
76
Linde India
1509
6036
10.6
77
Symphony
1459
5838
10.1
78
Cera Sanitary.
1453
3192
10.1
79
Inox Leisure
1429
2971
19.7
80
Thyrocare Tech.
1403
4132
7.9
81
ICRA
1281
2661
15.0
Source: Company, Angel Research, Capitaline
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Impact of changes in MF regulations on Small caps
Exhibit 4: List of top100 smallcap stocks based on market cap and MF holdings Contd.
Sr.
No
Company
Name
Free Float
Market Cap (` Cr)
Market Cap
(` Cr)
Mutual Funds
Holdings (%)
82
Dilip Buildcon
1258
5033
6.7
83
SpiceJet
1234
3078
9.5
84
Star Cement
1204
3623
7.5
85
BEML Ltd
1186
2579
19.8
86
eClerx Services
1180
2555
17.9
87
Cochin Shipyard
1169
4308
6.9
88
MAS FINANC SER
1166
4417
8.8
89
Hawkins Cookers
1125
2559
14.1
90
Advanced Enzyme
1078
2569
8.6
91
TCI Express
1028
3108
8.1
92
K P R Mill Ltd
986
3977
16.5
93
Mishra Dhatu Nig
979
3766
14.1
94
GE Power
970
3086
13.4
95
Century Plyboard
965
3581
6.7
96
Chalet Hotels
894
3126
18.2
97
Dhanuka Agritech
879
3516
12.8
98
Sundaram Clayton
832
3330
12.2
99
Prism Johnson
672
2675
7.9
100
GE T&D India
636
2545
12.5
Source: Company, Angel Research, Capitaline
Note: In order to arrive at stocks which are most likely to attract investments by multi-cap funds we have initially considered stocks ranked
between 250-450 in terms of market cap as of the 11
th
of September. Within the top 200 small cap stocks by market cap we have considered
100 stocks with the largest percentage of MF holdings.
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Impact of changes in MF regulations on Small caps
Exhibit 5: Rationale - Top Picks Stocks
Company
CMP (`)
TP (`)
Rationale
Auto
Endurance Technologies
1,080
1,297
Pent up demand and consumer preference for personal transportation is
positive for domestic 2W companies, which would benefit Endurance.
Swaraj Engines
1,615
1,891
Strong recovery in the tractor industry (due to robust Rabi crop, hike in MSP
& a normal monsoon) will benefit players like Swaraj Engines.
BFSI
Cholamandalam Inv.
225
280
Diversified product mix will help capture growth in LCV, tractor and 2W
segment. Adequate capital adequacy (20%+) and declined trend in Cost of
fund and strong parentage provide comfort.
IDFC First Bank
31
36
We believe efforts to built retail liability franchise, fresh capital infusion and
provision taken on the wholesale book will help to tide over this difficult
time.
IT
Persistent Systems
1,011
1,276
Company has won deals worth USD 150mn in Q1Y21 and management
has highlighted strong deal pipeline which will drive growth in H2FY21.
Zensar Technologies
174
204
We expect strong sequential growth in Q2FY21 driven by ramp up of
existing projects and limited exposure to sectors like retail and Oil & gas.
Pharma & Healthcare
Metropolis Healthcare
1,751
2,156
We are positive on the company given expected long term growth rates of
~15% CAGR, stable margins profile and moderating competitive intensity.
Telecom/ Others
Chalet Hotels
154
200
Company has posted strong sequential revpar growth in July and future
improvement is expected over next few months led by increased occupancy.
Hawkins cooker
4,838
5,682
Gaining market share with peer, strong demand post Covid-19 and
increase in penetration of cooking gas to drive higher growth.
Hindustan Aeronautics
852
1,125
Strong order book of Rs. 52,000 crore with likely order flow of Rs. 39,000
crore in FY2021 to drive growth over best few years
Inox Leisure
289
350
Share prices have corrected more than 40% as all theatres are closed down
due to covid-19 issue. Although, long term fundamentals are intact. Covid-
19 can lead to further consolidation in the industry.
JK Lakshmi Cement
256
328
It is trading at a significant discount compared to other north based cement
company such as JK Cement as well as historical valuation.
Reliance Industries
2,319
2,543
Digital and retail business to be key growth driver for the company. Spin off
and investment by strategic investor in O2C business is key monitarable.
VIP Industries
283
348
Market leader (~50%+ share) with strong brand and wide distribution
network. Recent correction provides investment opportunity in high quality
stock from long term perspective
Source: Company, Angel Research
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Impact of changes in MF regulations on Small caps
Exhibit 6: Top Picks Valuation Table
Market Cap
(` cr)
CMP
(`)
Sales
(`)
PAT
(`)
ROE
(%)
P/E
(x)
FY21
FY22
FY21
FY22
FY21
FY22
FY21
FY22
Auto
Endurance Technologies
15,186
1,080
5,884
7,465
281
608
8.7
16.2
54.0
25.0
Swaraj Engines
1,959
1,615
711
899
64
86
16.2
17.1
30.6
22.8
IT
Persistent Systems
7,727
1,011
4,159
4,756
415
488
15.4
15.9
18.6
15.8
Zensar Technologies
3,917
174
4,059
4,558
319
384
12.5
14.3
12.3
10.2
Pharma & Healthcare
Metropolis Healthcare
8,918
1,751
920
1,156
144
217
23.0
27.4
62.0
41.1
Telecom/Others
Chalet Hotels
3,126
152
484
995
(73)
83
(4.6)
4.9
NA
37.8
Hawkins cooker
2,558
4,838
575
728
51
77
32.5
42.4
50.2
33.2
Hindustan Aeronautics
28,503
852
21,293
25,552
2,961
3,791
23.3
24.0
9.6
7.5
Inox Leisure
2,971
289
628
2,153
(146)
162
NA
14.5
NA
18.3
JK Lakshmi cement
3,015
256
3,793
4,306
223
278
14.5
12.3
13.5
10.8
Reliance
15,680
2,319
3,342
4,241
264
420
5.7
8.7
59.5
37.3
VIP Industries
3,998
283
808
1,650
(136)
108
NA
19.6
NA
37.0
Source: Company, Angel Research * RIL standalone numbers (market cap, revenues & PAT in ‘00’ crore)
Exhibit 7: Top Picks Valuation Table – Banking/NBFC
Particular
Market Cap
(` Cr)
CMP
(`)
NII
(` Cr)
PAT
(` Cr)
EPS
(`)
ROE
(%)
P/BV
(x)
FY21
FY22
FY21
FY22
FY21
FY22
FY21
FY22
FY21
FY22
IDFC First Bank
17,613
31
6,939
8,121
90
1530
0.2
2.7
0.5
8.0
1.1
1.0
Cholamand. Inv. & Fin
18,400
225
3,783
3,962
987
1346
12.0
17.0
11.5
14.1
2.0
1.8
1.1
1.0
Source: Company, Angel Research
Note: CMP is Closing price as of 11
th
Sep, 2020
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Impact of changes in MF regulations on Small caps
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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Ratings (Based on expected returns Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
over 12 months investment period): Reduce (-5% to -15%) Sell (< -15)
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Impact of changes in MF regulations on Small caps