How the classification of market cap could change for mutual funds?

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When SEBI changed the methodology of classifying large cap, mid cap and small cap stocks in 2018, it marked a significant shift. The cut-off for large-caps, mid-caps and small caps was shifted from a rupee-based market cap model to a ranking based model. Under the new model proposed by SEBI in 2018, the listed companies would be ranked by market cap and the classification of large-cap, mid-cap and small cap would be done as under.

• Listed companies ranked from 1st to 100th in the market cap rankings would be classified as large cap

• Listed companies ranked from 101st to 250th in the market cap rankings would be classified as mid-cap

• All Listed companies ranked from 251st and below would be classified under the category of small cap

Now, the challenge is that the market cap keeps changing on a real time basis so quite a few classifications would also keep changing. In order to simplify the process, SEBI defined 30-Jun and 31-Dec as the two cut-off dates on which AMFI will release the new list of large caps, mid-caps and small-caps every six months. Accordingly, AMFI has released the modified list of cap-classifications as on 30-Jun and there are some major changes.

Stocks that got upgraded in the capitalization rank in Jun-21

Here is a list of stocks that got upgraded from mid-caps to large caps as well as from small caps to mid-caps during the Jun-21 reclassification.

Upgraded from Mid-Caps to Large Caps Upgraded from Small Caps to Mid-Caps
Adani Total Gas Tata Elxsi
NMDC APL Apollo Tubes
Apollo Hospitals & Enterprises Kajaria Ceramics
Cholamandalam Investment & Finance Bank of Maharashtra
Steel Authority of India (SAIL) Apollo Tyres
Bank of Baroda Indian Bank
Honeywell Automation Alkyl Amines
Linde India
Affle India
Blue Dart Express
Vaibhav Global
Data Source: AMFI

Some of the mid-cap to large cap upgrades were waiting to happen. Adani Total Gas was one of the few Adani stocks to be left out of the large cap space. NMDC has rallied sharply on the back of strong ore prices as SAIL benefited from strong steel prices. Among the financials, Chola Finance and Bank of Baroda outperformed their peer group while Apollo has been on a smart rally after the issue of pledged shares had got resolved a couple of quarters back.

Among the small caps, names like Apollo Tyres have been riding the auto boom even as stocks like Alkyl Amines benefited from the spurt in demand for specialty chemicals. Linde became a star story in the midst of the oxygen shortage while Indian Bank has remained one of the better performing banks among the PSUs. Tata Elxsi and Affle have made the best of the digital story in the recent past justifying upgrades to the mid-cap space.

In addition, there were a couple of recent IPOs, which made a direct entry into the mid-cap classification and that included stocks like IRFC, Macrotech Developers (Lodha), Sona BLW Precision Forgings and Indigo Paints.

Stocks that got downsized in the capitalization rank in Jun-21

Here is a list of stocks that got downsized from large caps to mid-caps or from mid-caps to small caps during the Jun-21 reclassification.

Downsized from Large Caps to Mid-Caps Downsized from Mid-Caps to Small Caps
PI Industries Metropolis Healthcare
Hindustan Petroleum Prestige Estates
Indraprastha Gas Ltd ITI
Petronet LNG Mahanagar Gas
Alkem Laboratories P&G Health
Hindustan Aeronautics Credit Access Grameen
Abbot India Ltd Central Bank of India
Akzo Nobel
Godrej Agrovet
Granules India
Data Source: AMFI

Some of the downsized stocks were along expected lines. Most of the hydrocarbon and gas names like HPCL, IGL and PLNG had not done well in the last few months. Also, Alkem had been among the weakest pharmaceutical stocks even in the midst of such strong industry trends, just as Abbot was one of the MNC pharma companies to underperform.

What does this capitalization shift mean?

Does this have any implication for the stocks in question? Remember, post-2018, SEBI has made it mandatory that a large cap fund should have over 80% invested in large caps and the same applies to mid-cap and small cap funds too. Here are 3 things that could follow.

a) Companies that get upgraded from mid-caps to large caps will see the maximum buying interest as large cap funds will look to buy the stock and diversify their investment.

b) Companies that get upgraded from small caps to mid-caps could see a surge in interest from mid-cap and flexi-cap (multi-cap) funds, since these are the outperformer stocks.

c) Lastly, stocks that got downsized could come under pressure of selling by funds as negative sentiments surround the counter.

Investors and mutual fund holders can surely look forward to some interesting churn in stocks post the reclassification for the June half-year end.

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