Large-cap companies having stronger fundamentals are cheaper now on the bourses compared to small-cap firms with poor business performance.
Price-to-earnings (P/E) ratios reveal such a picture of the current market. A P/E ratio indicates a stock price relative to the earnings per share (EPS) of the company.
Among large-cap companies, the P/E ratio of Premier Bank was 3.1 on the Dhaka Stock Exchange on December 30 while it was a whopping 880 for Hakkani Pulp & Paper Mills on the very same day.
That means an investor paid Tk 3.1 against Premier Bank's income of Tk 1. The lender witnessed a gradual profit growth in the four years to 2023 and secured a 6 per cent year-on-year growth between 2022 and 2023 to Tk 4.15 billion.
On the other hand, investors paid Tk 880 against the income of each Tk 1 of Hakkani Pulp & Paper Mills. The company incurred losses in FY21-FY22, earned a profit of Tk 16.91 million in FY23 and then its income plunged to Tk 0.78 million in FY24.
"P/E ratios of small-cap companies are usually higher compared to large-cap ones. Nevertheless, the [current] data shows that small-cap companies are overvalued compared to large-cap good performers," said Tanay Kumar Roy, head of Equity Research at IDLC Securities.
Mr Roy finds a correlation between the rise in interest rates and lower participation in large-cap companies.
When the market is buoyant, large amounts of cash are injected into large-cap stocks. Similarly, such companies face a blow following any withdrawal of substantial amounts of funds from the market, added Mr Roy.
"These organisations again are likely to see investors return to them after a decline in interest rates and with normalcy restored in the economy."
Market experts say many large-cap good performers are "fair valued" at the moment while some are even "under-valued".
The companies have failed to see much appreciation on the bourses for many reasons, including the impact of floor price, liquidity crisis, and macroeconomic worries. Rumour-driven investment is another major factor behind poor valuation of large-cap companies.
Manipulators are able to drive prices up of small-cap stocks with limited cash as they have fewer free float shares.
Due to artificial rallies, some loss-making companies outstripped many companies, with strong fundamentals and a profit growth, in terms of market value.
Khan Brothers PP Woven Bag Industries is one of them. Its stock surged 23 times between April 2023 and February 2024 though the company incurred losses for the four years through FY23.
The higher P/E ratios of small-cap companies indicate that investors concentrated their investment on them. The average P/E ratio of 13.3 of mid-cap companies is also a sign that investors have been more inclined to put money in small-cap rather than mid-cap firms.
However, P/E ratios show what the market is willing to pay today for a stock based on its past or future earnings.
Md. Ashequr Rahman, managing director of Midway Securities, said lower P/E ratio indicates good forward earnings. "That's why investors were supposed to take positions in large-cap companies as their growth and accounting standards are much better than small-cap companies."
But the impact of floor price changed the investment cycle in the secondary market.
The market failed to see a turnover above Tk 6 billion in most of the sessions in the 12 months to October last year.
"Large-cap companies fail to see good participation when the turnover declines significantly," Mr Rahman said. The trend changes only when the turnover increases significantly.
For example, following a change in the political regime, the market featured turnovers of Tk 10 billion to Tk 20 billion between August 8 and August 14 last year. At the time, the market was mainly driven by large-cap companies, including Grameenphone and Square Pharmaceuticals. Small-cap companies remained cornered despite their preceding rallies.
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