The latest contributor weighing down on equities is the liquidity crisis facing non-banking finance companies (NBFCs). Reports that Delhi-based real estate developer SuperTech had defaulted in repayment of debt obligations to two public sector banks, Syndicate Bank and Corporation Bank, and rumors of a potential downgrade in the debt rating of a leading Mumbai real-estate developer accelerated the offloading intensified the selling in NBFC stocks.

Earlier, a series of defaults stretching back to July by infrastructure developer and financier IL&FS had resulted in an across-the-board sell-off encompassing even banks and housing finance companies on concerns of a contagion effect. As the risk perception of NBFCs has changed dramatically, borrowing cost for the sector is likely to increase.

Though crude has come off its high of over US$ 85 a barrel, the threat of interest rates moving north persists even after the Reserve Bank of India, in a surprise move, skipped the third hike in its monetary policy meeting held in early October 2018 after ramping up the policy rate twice in the calendar year (CY) 2018.

The reason for the worry is that the Federal Reserve, after increasing its discount rate three times in CY 2018, has hinted of repeating the exercise one more time before the end of CY 2018 and thrice the next CY. Since CY 2015, the Federal Reserve has bumped up interest rates on eight occasions. Higher interest rates encourage foreign investors to pull out of the emerging economies and park their funds in the US markets.

Foreign portfolio investors offloaded equities worth Rs 18112 crore in October 2018 till 17th, notching the highest monthly sell-off over the last two years and comes on top of liquidating Rs 9623 crore of domestic equities in August. They have been reducing their exposure to detbt, too, disposing of paper worth Rs 11498 crore in October 2018 till 17th and Rs 10528 crore in September 2018. In the immediate future, the investment pattern of FPIs is going to be crucial in deciding the market's direction.

Crude oil touched a four-year high of US$ 85 per barrel in October 2018 and continues to remain firm at around US$ 80 per barrel. Cutback in production by oil producers and the US bid to isolate Iran for its nuclear ambitions are the two contributors fuelling the price rise. As India meets three-fourths of its crude requirement through imports, the higher price is inflationary and has the malignant effect of curtailing consumption of goods and services. The severity of the impact can be gauged from the fact that prices had touched a multi-year bottom of US$ 27 per barrel in January 2016.

Another overhang on the market is China. Its economic expansion, at 6.5% in the September 2018 quarter, is the slowest quarterly growth in the last 10 years. Continuation of the slowdown will hit commodity prices such as steel. Adding to the uncertainty is the trade war between the US and China. The US has called for a truce with the European Union, Canada and Mexico. However, peace is likely to be temporary.

The dollar has appreciated against all other major currencies of the world of late due to the robustness of the US economy and improvement in bond yields. The Indian rupee plunged to an all-time low of 74 per US dollar in October 2018. It has lost 15% in CY 2018 till October. Being net importer, the weakness of the domestic currency is bound to be inflationary.

An unexpected flashpoint has emerged in the form of Saudi Arabia. The world was shocked and disgusted at the cover-up and the eventual admission of the Kingdom of its involvement in the killing of native journalist Jamal Khashoggi in the country's consulate in Istanbul in Turkey. Pressure is mounting on US President Donald Trump to cut off arms' sale and on American companies to withdraw investment from the region.

The silver lining is that the sharp slide in valuations across industries and market capitalization offers investment opportunities. The correction should be seen as a good time to pick quality stocks. In fact, investors should explore large caps or frontline stocks that were commanding premium earlier.

The downside risk in investing in frontline stock is limited. These companies are of vintage breed, with an established business model. Large companies are in better shape to withstand economic and business slowdowns due to the strength of their balance sheets.

The question is can large caps be multi-baggers? Considering their large base, they tend to report lower growth in revenues. The top seven companies based on market capitalization, excluding Reliance Industries, have reported lower single- or double-digit growth: revenues of Tata Consultancy Services grew 4% in the fiscal year ended March 2018 (FY 2018), HDFC Bank 16%, Hindustan Unilever 7%, ITC 2%, Infosys 3% and Housing Development Finance Corporation 13%. RIL's sales, however, spurted 28%.

Evidently, high growth is difficult for large caps unless they opt for acquisitions. But inorganic growth carries a high risk of backfiring. Fundamentally, businesses should grow profitably for creation of wealth. Slower the business growth, poor is the wealth multiplication process. The smaller size of the profit and loss account and balance sheet of small and mid caps means growth going ahead can be massive.

The Indian economy is among the fastest growing economy in the world. The country's economy grew 7.3% in FY 2018 and 6.7% in FY 2017. It is likely to clock economic growth of 7.4% in the current financial year and 7.5% in FY 2020.

With a population of over 125 crore and favorable demographics, India is expected to witness significant consumption-led growth in the foreseeable future. Massive investment in infrastructure is required to support the growth. With growth drivers in place, the nation is set to report higher and sustainable economic growth, thereby opening up opportunities for businesses.

The high economic growth is expected to boost many small and mid caps. On the downside, these companies are vulnerable to cyclical upheavals. There is a possibility of many of them going bust in a worst-case scenario. The segment is not suitable for risk-averse investors. However, the sharp correction in these two segments, with the BSE Small-Cap and BSE Mid-Cap indices plunging to 52-week lows in October 2018 should limit the downside.

At present, the BSE Mid-Cap index is available at price-to-earnings (P/E) multiple of 29.9 compared with P/E of 47.8 at its historic peak. The price-to-book value (P/BV) of the BSE Mid-Cap index has declined from 3.15 times to 2.46 times in the last 10 months. The BSE Small-Cap index is available at P/BV of 2.08 times compared with 2.88 in January 2018, when it had hit a record high (see table: Small and mid-cap correction).

Investment in the small- and mid-cap category is a risky proposition in a declining market scenario. A calibrated and objective investment approach should help arrive at good quality stocks. For instance, there are over 100 companies with market capitalization less than Rs 5000 crore, debt-to-equity ratio less than 0.25 times and mutual fund holding in excess of 5%.

Market capitalization of less than Rs 5000 crore means these stocks are potential multi-bagger opportunities. Further, a debt-to-equity ratio of less than 0.25 times implies a strong balance sheet. Also, these companies will be able to ensure business expansion with ease. Next, mutual fund holding a minimum 5% of the equity capital is a confirmation of their growth story. Importantly, the presence of institutional investors provides comfort of reasonably good corporate governance practices.

Of these over 100 stocks, Capital Market picked growth-oriented stocks. Companies undertaking investment expenditure plans in the recent past or those planning expansion in near future were considered as they signaled the confidence of the promoters in their businesses. Also, revenue growth reported by these companies in the recent years and quarters were taken into account.

DCB Bank, promoted by the Aga Khan Fund for Economic Development and Platinum Jubilee Investments, with aggregate equity holding of 14.94% end June 2018, is an international development enterprise dedicated to encouraging entrepreneurship. The target of doubling the branch count to 300 in 24 months, announced in October 2015, was completed in October 2017. The branch count reached 328 end September 2018. Of these, 80 are located in semi-urban and 66 in rural areas. Services are also offered through 541 ATMs.

The current-account-savings-account deposits were 24% of the total deposits. Of the net advances of Rs 22069 crore end September 2018, mortgages constituted 40%, followed by corporate banking 15%, small and medium enterprises 12%, agri and inclusive banking 19% and construction vehicles 7% among others. Gross non-performing assets (NPAs) were 1.84% of the advances, net NPAs 0.70% and provision coverage 76.8%. The capital adequacy ratio stood at 15.6%, with tier I ratio of 12%,, end September 2018.

Institutional holding is high at 48.74%. Key investors include Matthews India Fund (4.09%), India Advantage Fund (4.03%), Premji Invest (3.86%), Aditya Birla Sunlife Mutual Fund (3.28%), Tano Mauritius India (3.18%) and DSP Blackrock Small Cap Fund (3.03%).

Established three decades ago, Timken India manufactures and distributes tapered roller bearings, components and accessories for the automotive sector and the railways. Maintenance contract services and refurbishment services are also provided. The primary bearing and components manufacturing plant is at Jamshedpur in Jharkhand. The gear box repairing facility at Raipur in the state provides repair and maintenance services for industrial gear boxes. Designing and developing solutions are undertaken in close cooperation with original equipment manufacturers. These services are offered through over 50 industrial and 100 automotive channel partners. Parent US-based Timken Company is one of the leading bearing and mechanical power transmission players in the world. Expansion projects at Jamshedpur involving advanced rail facility in addition to new lines for bearings and components became operational from August 2017.

In a major step, ABC Bearings, a manufacturer of tapered and cylindrical roller bearings and industrial bearings including spherical roller bearings and slewing rings, was acquired in July 2017. With sales of Rs 191.7 crore in FY 2018, ABC mainly serves the commercial vehicle and agriculture markets from manufacturing facilities in Bharuch in Gujarat and Dehradun in Uttarakhand. The acquisition provides additional capacities, a desired product portfolio, manufacturing footprint and leadership in key tapered roller bearing markets. The transaction was structured as a merger, with the shareholders of ABC Bearings received shares of the debt-free company as consideration.

On back of new product launches and aggressive marketing efforts, Cera Sanitaryware's revenues grew 18% in FY 2018, outperforming the industry growth of 10-12%. The building products player makes sanitary ware, faucets, tiles, shower products, kitchen sinks and personal care products like bath mirrors. The focus of the sanitary-ware segment is on gradually shifting to premium products. The plant to manufacture Zamac handles was recently commissioned, enabling ending imports. New designs of sanitary-ware products were launched in FY 2018.

New ranges of wellness, kitchen sinks and mirrors were introduced in the bath-ware segment. Senator by Cera, a brand aimed at the premium segment, was launched recently. Also introduced was Jeet, a sanitary-ware range for the affordable segment. New products including construction chemicals were added to the product portfolio of the home upgrade segment.

A joint venture (JV) with Anjani Tiles, to make 10,000 sq meters per days of vitrified floor tiles, was set up in Andhra Pradesh. The investment for 51% equity and 54% preference shareholding aggregated to Rs 29.3 crore. Commercial production from the JV plant started in April 2016. A showroom has been opened in Dubai, a major sanitary-ware market. A warehousing facility at Sharjah will serve the UAE market. Dealers were appointed in FY 2018.

The CK Birla group company Orient Paper & Industries commissioned the third tissue paper machine of capacity 25,000 tonnes ahead of schedule in FY 2018 and managed to achieve over 60% capacity utilization within a short time. The highest producer of tissue paper in the country due to the enhanced capacity of 50,000 tonnes per year also constructed a water reservoir of 70 million gallons capacity to take up the water storage capacity equivalent to almost five months of operations. The demerger of the electric business into Orient Electric was completed in the last fiscal year.

Full utilization of the third tissue machine capacity in FY 2019 is expected to further enrich the product-mix. Up-gradation of the pulping capacity through the installation of balancing facilities is also planned in the current financial year.

The highest-ever production and sales volumes of 87,999 tonnes and exports volumes of 16,525 tonnes were achieved in FY 2018. Writing and printing paper contributed 47%, tissue paper 33% and caustic soda and its derivatives 20% of the revenues in FY 2018. Total debt stood at Rs 90.5 crore, with a debt-to-equity ratio of 0.11 times, end FY 2018. Investments were valued Rs 297 crore. Mutual fund held 12.34% stake end September 2018 in the small cap.

Wonderla Holidays is the country's largest amusement park chain operating parks in Bangalore and at Kochi and Hyderabad. Over 2.5 million people visited its parks in FY 2018. In aggregate, three parks have 20 restaurants offering a wide variety of cuisines. The revenue pie of food & beverage (a high-margin business) in non-ticket revenues increased to 39% in FY 2018 from 24% in FY 2015.

A three-star leisure resort is attached to the amusement park in Bangalore. The resort has 84 luxury rooms and four banquet halls or conference rooms, with a combined area of 8,900 square feet, and has capacity of 800 guests and a well equipped board room. The resort is suitable for hosting wedding receptions, parties and corporate events and meetings.

New rides are added at periodic intervals. From 15 at the beginning, the park at Kochi now has 56 rides now. Similarly, the Bangalore park commenced with 46 rides and increased them to 62. The newest park at Hyderabad commenced in FY 2017 with 44 rides. The country's first space flying experience, with mission interstellar, was introduced at the Hyderbad park.

The plan is to add a park every two-three years and build a fourth park in Chennai. Already 62 acres of land has been acquired for the park in Chennai. Adequate land is available for future expansion at existing parks.

Kirloskar Oil Engines offers a range of petrol and diesel power generating sets (2-1010kVA) as power back-up for industrial, residential, commercial and also special applications such as telecommunication. Generating sets are marketed under the brands Koel Green and Koel Chhota Chilli. The 750-1010kVA generating sets were introduced in CY 2016. All the three nodes (750, 910 and 1010) have been well accepted in the market. The revenues of these nodes grew 50% in FY 2018. Other products in the portfolio include air-cooled and liquid-cooled diesel engines, pump sets and power tillers and spares.

La-Gajjar Machineries Pvt Ltd, a leading submersible and mono block pump manufacturer based in Ahmedabad in Gujarat, with established brands like Varuna and Raindrop, was acquired in August 2017. Due to the pan-India distribution setup, the strategic acquisition will strengthen the leadership position in the diesel and electric pump segment. La-Gajjar reported revenues of Rs 214 crore and net loss of Rs 8 crore for the period from 1 August 2017 to 31 March 2018. After buying 74% stake, the remaining 26% equity will be acquired over the next five years.

Johnson Controls-Hitachi Air Condition's revenues grew 14% in FY 2018. The top line has doubled in the last four years. The JV between US-based Johns on Controls and Japan-based Hitachi Appliances is one of the top three players in the domestic air conditioning market. The manufacturing facility located at Kadi in the Mehsana district of Gujarat is one of the largest single roof manufacturing facilities in the country, spread over 1,82,000 square meters.

The wide range of air-conditioning solutions include products for homes, offices and retail establishments such as commercial and residential air-conditioning systems, absorption and centrifugal chiller systems and heating and cooling systems, refrigerators and chillers among others. The products are sold under the brand Hitachi.

A strong B2C sales network consists of 9,698 selling points across 1,358 cities and towns supported by a team of over 100 sales staff. Also, there are over 500 distributors in the packaged air-conditioner segment and more than 200 distributors in the variable refrigerant flow segments to enhance B2B presence in 140 cities. The network also consists of 23 branches and eight service centers. A significant amount is spent on marketing and brand building. Advertisement and sales promotion expense increased 27% to Rs 72 crore in FY 2018.

Largest manufacturer of rubber chemicals in India Nocil primarily caters to the tyre industry and other rubber processing industries such as footwear, hoses, molded components, industrial belts among others. Revenues grew an impressive 21% in FY 2018. Around 26% of the revenue came from exports in FY 2018. Mutual funds owned 5.07% equity stake in the debt-free company.

Capital expenditure plans aggregating to about Rs 255 crore consist of expansion of production facilities of rubber chemicals including intermediates for captive consumption to manufacture rubber chemicals at Dahej in Gujarat and Navi Mumbai in Maharashtra. Commercial production is expected to start in the next financial year. The capex will be funded mainly through internal accruals. The investment is expected to have a fixed asset turnover ratio of 2x. Earlier, capital expenditure plans worth Rs 170 crore were executed including expansion at the Navi Mumbai and Dahej facilities.

Expansion is expected to dive future business considering the positive industry outlook, significant expansion plans of tyre customers and environmental and pollution control measures affecting production capabilities of Chinese competitors.

Generics agrochemicals producer Sharda Cropchem plans to continue expand the geographic presence of the existing portfolio of formulations and generic active ingredients. Opportunities will be explored in new markets of Africa, Central America and Japan. Some headway has been made in Canada. Over the years, growth was driven by the organic route. Going forward, the plan is to opt for strategic partnerships and acquisitions.

Operations are in over 80 countries. Nearly 80% of the revenues came from highly developed European and North American Free Trade Agreement (Nafta) markets. The agrochemicals business consisting of insecticides, herbicides, fungicides and biocides contributed 86.9% and the non-agrochemcials division 13.1% to the total revenues in FY 2018. Product-wise, herbicides contributed 54%, fungicides 26% and insecticides 20% to the total revenues. Revenues grew a healthy 22% in FY 2018.

Total approved registrations stood at 2,157. There was a strong line-up of new registrations, with 625 in the pipeline in the European regions, 112 in the Nafta region, 119 in Latin America and 122 in rest of the world end March 2018. Mutual funds owned 15.28% stake end September 2018 in the mid cap.

The network of Thyrocare Technologies is spread across the country through 332 aggregators, 335 service providers and 3,312 online clients. Customers are in 551 cities in 29 states and six Union territories. A total of 246 tests and 86 profiles of tests are offered to detect thyroid, growth and metabolism disorders, auto-immunity, diabetes, anaemia, cardiovascular disorders, infertility and various infectious diseases. A total of 16.33 million samples were processed and 84.27 million investigations conducted in FY 2018. Two new regional processing centers were opened at Patna and in Mumbai in FY 2018, taking the total to eight. Around 77% of the revenues came from the B2B segment and remaining 23% from B2C in FY 2018.

Wholly owned subsidiary Nueclear Healthcare operates a network of molecular imaging centers using Pet-CT (fusion imaging technology) scanners to assist in diagnosis, staging and monitoring of cancer treatment. Currently, 11 Pet-CT scanners are in operation in nine imaging centers: two in Navi Mumbai, one in Mumbai, two in New Delhi and one each at Hyderabad, Surat, Vadodra, Raipur, Jaipur and Aurangabad. The aim is to open imaging centers in Begalurus besides at Nashik and Coimbatore. The debt-free company had cash and cash equivalent of Rs 112 crore end March 2018.

Courier and logistics services provider TCI Express has outlined Rs 400-crore expansion program over five years to capitalize on the projected industry upturn. The aim is to add around 10 owned sorting centers to the existing seven and to take the overall count to 28. The capacity of sorting centers is to be doubled. Offices and sorting centers will be equipped with modern equipment and technology. The investment in expansion is expected to double revenues in four years. The Hyderabad hub was modernized with state-of-the-art facility, investment was made in fixed assets to enhance operational efficiency and almost 100 branches were commissioned to strengthen nationwide presence in FY 2018.

One of the largest express services provider operates a hub-and-spoke network through 4,500 centralized vehicles, 24 air gateways and 650 owned branches covering 40,000 locations. Nearly 704 of the 712 districts are covered and 202 countries serviced through an IATA-approved agent network. A large customer base of two lakh includes top manufacturers, small-and-medium-enterprises (SMEs) and small traders. B2C services are offered to prominent e-commerce companies. Around 95% of the revenues are derived from the B2B segment and the remaining from B2C clients. SMEs contribute 50% and the top 25 customers around 10% of the revenues.

Conclusion

Exploring small and mid caps for investment is a tough task. These companies are highly vulnerable to economic and business cycles owing to their limited financial strength. Hence, stringent screening such as debt-to-equity ratio of less than 0.25 times and minimum mutual fund holding of over 5% were applied to select the stocks. The filters can be modified depending on the risk appetite.

The sharp correction in small and mid caps is a good opportunity to explore and invest in quality stocks. Of the 21 stocks, 13 have plunged to their 52-week lows in October 2018, two in July 2018 and one in September 2018. The slide has significantly moderated valuations. Staggered investment seems sensible due to the present volatile conditions.