The Sensex crossing 6,000 made headlines. After a lull of many years, the Sensex breached 10,000. The market erupted in joy. In contrast, the current mood is subdued. Sentiments are grim with the portfolio of small investors shedding value by at least 30%.

Of the 2,821 fairly liquid stocks, 1,809 have lost one-third of their values from their 52-week or multi-year highs. Thus, out of every 100 stocks, 64 are down at least 33%. These include 26 large caps and 175 mid caps. The remaining 1,608 are small caps.

If the barrier is raised for correction, of the 2,821 fairly liquid stocks, 937 have lost half their value from the annual or multi-year highs. Thus, out of every 100 stocks, 33 are down a minimum 50%. These comprise six large caps, 45 mid caps and 886 small caps. Large caps have market capitalization over Rs 14000 crore, mid caps between Rs 2000 to Rs 14000 crore and small caps below Rs 2000 crore.

The current stock market rally is driven by a handful of stocks such as Kotak Mahindra Bank, Hindustan Unilever, Tata Consultancy Services, Reliance Industries, IndusInd Bank, Infosys, HDFC Bank, HDFC and ITC. At the current level of 37,692, the Sensex is at a striking distance to its all- time high of 37,805. The S&P BSE 500 is 257 points, or 1.7%, away from its historic peak.

On the contrary, the small- and mid-cap indices are struggling to move north. The S&P BSE Mid-Cap index needs to travel 2,073 points, or 12.8%, to breach its previous all-time peak. The S&P BSE Small-Cap is 3,284 points, or 19.4%, far from its historic high. The Mid-Cap index had reported an all-time high of 18,321 and the Small-cap index of 20,183 in January 2018.

The small- and mid-cap categories remain in an overvalued zone despite correction and underperformance in comparison with the Sensex. The Mid-Cap index is available at price to earnings (P/E) multiple of 33.3 and the Small-cap index at 103.2 compared with the Sensex's 24.1. The book value (BV) of the Mid-Cap index is 2.8 and that of the Small-cap index at 2.4. The Sensex's P/BV works out to 3.1.

There are several concerns. These challenges include US trade war with China, the sharp depreciation of the rupee against the US dollar, possibility of interest rate hikes due to spike in inflation, general elections next year and the resultant uncertainty, colossal bad assets in the banking system and slowdown in investments. Foreign portfolio investors can be seen offloading stocks. One significant upside is India is a country with over 125 crore population and continues to be the fastest growing economy in the world.

The correction in small- and mid-cap stocks can be viewed as consolidation. These stocks might recover over the near to medium term. The shedding of inflated value, therefore, presents a buying opportunity.

Investors have a wide spectrum of stocks to choose from. In a senseless bull market, there are limited options to buy quality stocks due to exuberant valuations. In a bear market, the thrashing received leaves stocks with little or no quality. When over-valued stocks skid, investors can select strong ones at lower valuation. Even stocks with higher risk owing to their weak business models and corporate governance issues are available at dirt cheap valuation.

One of the safe ways to explore stock is to follow the footsteps of domestic institutional investors. Due to stringent disclosure norms developed over the years, the portfolio of stocks in equity schemes is available in public domain. In fact, several small investors closely monitor the entry and exits of mutual funds in the small and mid-cap space. Their buying of small and mid caps with no presence earlier is also termed as discoveries.

There is no guarantee that the picks of mutual funds will deliver good returns or outperform the broader market. Still, equity schemes' portfolio churn carries significant weight for retail investors.

Mutual funds have to follow the mandate set in the offer document. Not only internal scrutiny, the portfolios are subject to scrutiny by the market regulator and public. Adventurism can backfire and spoil the goodwill for the asset management company.

Mutual funds prefer liquid stocks. They like to invest in companies whose management and promoters are accessible and keen to interact with market participants such as analysts and brokers. Fund managers stay away from companies with corporate governance issues, poor accounting practices and inadequate disclosure and transparency norms. In short, mutual fund houses are choosy while taking exposure to stocks.

Of the 2,821 fairly liquid companies, domestic institutional investors have holdings in 1,180 counters. Only 721 of these have mutual fund presence of 1% and more. The meaning is mutual funds are present in only one of four listed stocks. From another angle, they do not own any stake in 470 companies that reported profit and paid dividends in the latest financial year. Next, mutual funds do not control any shares in four large caps and 36 mid caps.

There are 294 companies that have reported a minimum 33% correction and have mutual fund ownership in excess of 1%. The number goes down to 258 stocks if minimum holding of 2% is considered.

To further narrow the list, Capital Market focused on companies with mutual fund presence of equal to or greater than 10% and correction of 33% from 52-week or multi-year highs. After applying these two filters, 64 stocks emerged. These stocks can be considered worth exploring.

Of these stocks, three belong to the large-cap category, 32 are mid caps and remaining 29 small caps. Industry-wise, the capital goods (electrical equipment and non- electrical equipment) industry dominates, with 10 companies. Other industries with prominent mutual fund ownership are cement (six companies) steel (four), construction (four) and textiles (four). It is essential to check the track record of performance, corporate policies, quality of management, industry outlook.

Established in 1978, NCC, formerly known as Nagarjuna Construction Company, undertakes civil construction in segments such as buildings, water, roads, irrigation, power, electrical, railways, metals and mining. Currently, work is going on at 120 sites. All-time high orders of Rs 25304 crore were secured in the fiscal year ended March 2018 (FY 2018) as against Rs 9226 crore in FY 2017. The cumulative order book grew 80% to Rs 32532 crore over a year ago, representing four times the FY 2018 revenues and providing significant visibility. Fresh orders were from across business segments such as buildings, water, roads and irrigation.

Revenues of Rs 11000 crore and order accretion of Rs 14000 are projected in FY 2019. Importantly, the debt-to-equity ratio declined to 0.62 times in FY 2018 compared with 0.85 times in FY 2017 and 0.97 times in FY 2016. Around Rs 550 crore were raised in January 2018 through qualified institutional placement at Rs 123 per share including premium of Rs 121.

Public sector Hindustan Petroleum Corporation is among the leading oil refining and marketing companies, with output of 18.3 million tonnes per annum (mtpa) in FY 2018. The seven exploration and production blocks and nine cross-country product pipelines supply LPG and liquid material. The distribution network consists of 15,062 retail outlets, 4849 LPG distributors, 1,638 public distribution system kerosene dealerships, 239 CNG facilities at retail outlets, 266 lube distributors and 116 clearing and forwarding agents. The highest-ever standalone profit of Rs 6357 crore was recorded in FY 2018. Bonus shares were issued in the ratio of 1:2 in May 2017.

Capital expenditure of Rs 7210 crore was incurred in FY 2018. One of the country's largest LPG plants, with a capacity of 250 tonnes per annum (tpa), was commissioned at Panagarh in West Bengal in March 2018. Capital expenditure of Rs 8425 crore is planned for FY 2019. Major projects include modernization of the Visakh refinery and expansion of the Mumbai refinery.

Greenply Industries' new medium density fiber-board (MDF) plant, with capacity of 3.60 lakh cubic meters (cum), commenced production at Chittoor in Andhra Pradesh in July 2018. A strong top-line growth is expected in the next three years. Lately, entry has been made into the lower segment of plywood through the outsourcing route and by introducing two new brands, Bharosa and Jansathi. The low-margin business is expected to improve the return on capital of the plywood business. Over the next three years, the outsourcing proportion is expected to increase to 30% from 22% at present.

The distribution network of the largest pan-India player, with 26% market share in the organized plywood market (capacity of 32.4 million square meter) and 30% market share in the domestic MDF market (capacity of 540 lakh cum), consists of distributor and stockists (1,656 for plywood and 841 for MDF) and retailers (6,000 for plywood and 4,000 MDF). There 24 branches to sell ply and 15 branches for MDF.

A deco veneer plant being set up near Rajkot in Gujarat is likely to become operational by September 2018. The balance-sheet leverage increased, with the debt-to-equity ratio at 0.70 times end FY 2018 compared with 0.52 times end FY 2017.

APL Apollo Tubes, the branded steel producer, has six manufacturing facilities, with a total capacity of 1.8 million tonnes per annum (mtpa) in operation. The multi-product offerings comprise over 500 varieties of mild steel black pipes, galvanized tubes, pre-galvanized tubes, structural electric resistance welding steel tubes and hollow sections. Users consisting of urban infrastructure, housing, irrigation, solar plants, greenhouses and engineering are covered with a three-tier distribution network of over 600 dealers across India. There are warehouses-cum-branch offices in over 20 cities. Six discrete fourier transform lines were commissioned in FY 2018 across existing facilities and another two lines will become operational in the current financial year, taking the total capacity to two mtpa.

Consolidated borrowings declined to Rs 78.2 crore in FY 2018 compared with Rs 104.9 crore a year ago. However, short-term borrowings increased to Rs 595.2 crore from Rs 464 crore.

ITD Cementation India, part of the Thailand-based Italian-Thai Development Company, with ownership interest of 46.64%, constructs marine structures, highways, bridges and flyovers, metros, airports, hydro-tunneling, dams and canals, water and waste water systems, industrial structures, buildings and specialist foundation engineering projects. The order book stood at Rs 9090.4 crore end March 2018 and is executable over the coming 30 months. A major portion pertains to urban infrastructure (Rs 4354.8 crore) and marine (Rs 3152.8 crore).

Subsidiaries, joint ventures (JVs) and associate companies are: ITD Cementation Projects India, ITD Cem Maytas Consortium and CEC-ITD Cem-TPL. Clients largely include government organizations, port authorities, public sector undertakings, large private sector companies and state boards. In the near future, the aim is to strengthen the balance sheet by reducing debt. Total debt declined to Rs 488.6 crore end December 2017 compared with Rs 765.3 crore end December 2014.

Country's largest private sector shipper Great Eastern Shipping Company's fleet includes crude carriers (16.09 deadweight tonnes or dwt), product carriers (9.87 dwt), gas carriers (2.19 dwt) and dry bulk carriers (11.59 dwt). The average age of the total fleet of 49 ships works out to 10.6 years. Offshore assets include four jack-up rigs, four platform supply vessels, eight anchor-handling-tug-cum- supply vessels, two multipurpose platform supply and support vessels and five remotely-operated vehicle support vessels. The offshore business comprising logistics and drilling is run by wholly owned subsidiary Greatship India.

There was consolidated loss of Rs 222.5 crore in FY 2018 owing to non-cash charges including provision towards impairments. Due to poor demand and pricing conditions, the offshore business continues to be a drag on overall financials.

After a sharp fall over the last three years, exploration and production (E&P) spending is expected to further decline, albeit marginally, in CY 2018. The consolidated net debt-to-equity ratio remained flat at 0.35 times in FY 2018 as against 0.34 times in FY 2017.

Eveready Industries is the country's market leader of batteries and flashlights. Annually, 1.2 billion batteries, comprising a share of 50% in the organized market, are sold. Nearly 25 million flashlights, consisting of market share of 75%, are bought. The basket of products includes Led, Led-based luminaries, general lamp shape lamps and other lighting products, packet tea and home appliances.

An extensive network of 42 distribution centers, 18 branch offices and 4,000 distributors reaches towns with 5,000 population. Apart from flagship Eveready, other brands are Tez, Lava and PowerCel.

Lately, a foray has been made in the confectionery segment under the brand Jollies, leveraging the existing distribution network.

A strategic partnership is to be entered into with group company McLeod Russel India to develop the packet tea business through a separate entity. A joint venture with Thailand-based Universal Wellbeing will enter the fast moving consumer goods (FMCG) space. Universal Wellbeing is among the leading FMCG players in South-East Asia, with presence across a wide variety of products in the fabric and household-care, personal-care, skin-care and foods and beverages segments.

Established in 1962, Cummins India is a 51% subsidiary of the US-headquartered Cummins Inc and manufactures a variety of engines operating on diesel, natural gas and dual fuel. The manufacturing capacity is of over 75,000 engines per annum. Users are various industries such as power generation and distribution, compressors, railways, mining, marine and construction.

One of India's largest exporters of engineering products derived 32% of the total revenue from exports in FY 2018. The zero-debt company at the net level had cash and liquid investments of Rs 725 crore end March 2018.

A subsidiary of Tata Steel, Tata Metaliks is one of the country's leading producers of high-quality pig iron and ductile iron (DI) pipes, with a market share of 20% in the total foundry grade pig iron market and 12% in the DI pipe market in FY 2018). There is a manufacturing plant near Kharagpur in West Bengal.

Capital expenditure of Rs 60 crore incurred in FY 2018 was funded through internal accruals. Full capacity utilization was achieved in hot metal production in FY 2018, driven by modernization of one of the blast furnaces. Also, agreement was entered into for long-term supply arrangement of coke. Along with captive sources, the supply will be sufficient to cover nearly 80% of the total requirement. Going forward, the focus will be on diversification of application, geographic expansion and augmentation of portfolio with value-added solutions.

Conclusion

Exploring stocks that have undergone a huge correction could be akin to catching a falling knife. Thus, it is better to build exposure gradually or in tranches. The debt position of the selected stocks should be assessed.

Holdings by equity schemes do not guarantee immunity against corporate governance issues. Apart from growth prospects, domestic institutional investors look for liquidity. In other words, they might ignore good quality companies that are illiquid.

Generally, stocks with significant mutual fund holding have been subjected to rigorous research and analysis. The fact provides comfort to investors.