Investors rush for Z 'security'

Total Monthly Turnover Of Z Group Has
Gone Up By More Than 170% In 6 Months

Feb 03, 2007
Ashish Rukhaiyar
MUMBAI

ACCORDING to veteran traders, it is a cause for worry when mid-cap and small-cap shares start gaining faster than their large-cap counterparts. It should be even more worrying if investors start cosying up to stocks of companies that do not comply with listing norms.
According to available data, the Z group on the BSE has been witnessing a steady rise in traded turnover, even as the other groups are facing a decline. In the last six months, the total monthly turnover of the Z group has gone up by more than 170%. In the same period, the A group has witnessed a marginal decrease in its turnover. Interestingly, a similar kind of steady rise in the Z group turnover was witnessed last year when the markets had peaked in May.
Z group generally consists of companies that have not adhered to the listing requirements like submission of annual accounts or the shareholding pattern, implementation of corporate governance and redressal of investors complaints. Brokers opine that the trend can be attributed to the rise in the number of retail investors who flock to such dubious counters at a time when the markets have already peaked.
Manish Sonthalia, VP (equity strategy), Motilal Oswal Securities, says, “The recent rally has decreased the margin of safety in the frontlines and so investors are flocking to mid-caps and penny stocks. However, a rally in the Z group also signifies that the market has reached its top and has entered the blow-out phase. In other words, a spurt in Z group means we are in the last leg of the upswing rally.”
Echoing a similar view, Rakesh Choudhari, COO, Keynote Capitals, says that a typical bull run starts with a rise in the frontline stocks, then moves ahead to the mid-caps and nears an end when stocks of dubious companies catch investor fancy.
“When the sentiment is upbeat, some market players try to capitalise on it by luring ordinary investors into stocks with weak fundamentals. Investors think there is enough upside to the stock price and they will be able to make some money, which is not always the case. In a nutshell, one can say that the time has come when investors need to be cautious”, says Mr Choudhari.
In July 2006, the total monthly turnover of the Z group was pegged at Rs 23.28 crore. This has jumped to nearly Rs 63 crore in January 2007 - up more than 170%. Brokers, on conditions of anonymity, also add that circular trading occurs frequently in the stocks of lesser known companies.
A group of brokers form a syndicate and start trading among themselves, thereby creating huge volumes at the counter. High volumes are usually perceived as a sign of widespread interest in a stock by retail investors. Once retail investors start buying into these stocks, the syndicate begins offloading and move on to some other stock.
However, on a different note, investment consultant, S P Tulsian, says that the Z group also comprises many good companies, which are in the dubious group only because of minor issues like shares still lying in the physical form or dividend issues.
“Investors can always find value in the lessresearched stocks that form a part of the Z group. A rally in this group cannot always be linked to the end of the overall rally of the bourses”, he says.