US Market ends mixed amid credit jitters

Morgan Stanley shares end higher despite disappointing earnings but investors cheer Chinese investment

 

US Market witnessed another sea saw trading day for the entire day today, Wednesday, 19 December, 2007. Dow traded within 150 point range during the entire day but ultimately ended lower for the day. Nasdaq was the only index which managed to eke out some gains at the end. Among the ten economic sectors that ended in mixed fashion, Financials, Technology, Consumer Staple and Energy – each finished in positive territory.

 

The Dow Jones industrial Average ended the day with a loss of 25.2 points at 13,207.27. The Nasdaq Composite Index, finished higher by 4.98 points at 2,601.01. S&P 500 finished lower by 1.98 points at 1,453.

 

Seventeen out of thirty Dow stocks ended in red today. While IBM and Intel were a couple of the Dow winners, Walt Disney was one of the main Dow laggards.

 

Morgan Stanley reported more than expected losses for the fourth quarter. The larger than expected loss was due to $5.7 billion in additional mortgage-related write-downs. But Wall Street did not react much to this news and in fact lifted the stock as news of a $5 billion Chinese investment in the company cheered investors. News of the Chinese investment has sent the company's shares up 2.8%.

 

VSNL remains the main winner among Indian ADRs

 

Homebuilder Hovnanian reported a net loss after getting hit hard by the U.S. housing slump. On the other hand, General Mills reported strong second quarter results this morning, but included a forecast for 2008 that failed to meet analysts' expectations.

 

Among other major news, Standard & Poor's cut its rating on ACA Capital to CCC from A. The company also said it may downgrade its ratings on bond insurers Ambac Financial Group and MBIA Inc.

 

Also, the Fed announced this morning that banks have borrowed the funds for 28 days at a rate of 4.65%. The auction was one of the planned auctions the Fed announced last week on 17 December to help ease the liquidity problems hindering the financial markets.

 

Indian ADRs ended mixed today. VSNL was the top most winner gaging more than 21%.

 

Crude rises after four sessions of drop

 

After dropping for four consecutive sessions, crude oil prices rose today. Prices increased after Energy Department reported more than expected slump in crude inventories for the week ended 14 December. The drop took the inventory level to lowest level in almost three years. Crude-oil futures for light sweet crude for February delivery closed at $91.24/barrel (higher by $1.16/barrel or 1.3%) on the New York Mercantile Exchange. Futures rose as high as $92.6 earlier in the day after the Energy Department was out with the weekly inventory report. Prices are 46% higher than the year before.

 

As per the weekly inventory report by the Energy Department, U.S. crude inventories fell by 7.6 million barrels to 296.9 million barrels in the week ending 14 December, the lowest since February 2005. This was the fifth straight week of drop. U.S. refineries operated at 87.8% of their operable capacity last week, down 1% from the previous week's 88.8%.

 

Volume on the New York Stock Exchange topped 1 billion, and declining stocks outran those advancing 3 to 1. On the Nasdaq, 1.5 billion shares exchanged hands, and declining stocks edged ahead of those advancing, also by 3 to 1.

 

Tomorrow, investors will focus on economic reports to set the tone of trading. The final calculation of third quarter GDP and the weekly Jobless Claims data are due before market opens. In the post lunch hours, The Philadelphia Fed Survey is expected to offer a regional assessment of manufacturing activity.

Market may move up

The market may edge higher amid steady-to-firm Asian markets. However, a major upmove is likely as traders are unlikely to build large positions ahead of a long weekend. The market remains closed on Friday, 21 December 2007 on account of Bakri Id and also on Tuesday, 25 December 2007 on account of Christmas.

 

Volatility may remain high in the near term ahead of expiry of December 2007 derivatives contracts next Thursday, 27 December 2007. Given a slew of holidays, only four trading sessions are left for expiry of December 2007 derivatives contracts.

 

Traders are likely to start building positions towards the end of the month based on expectations of Q3 December 2007 results due next month.

 

As per provisional data, FIIs were net sellers of shares to the tune of Rs 1454.06 crore on Wednesday, 19 December 2007. Domestic funds bought shares worth a net Rs 350.60 crore on that day.

 

FIIs were net buyers to the tune of Rs 461.11 crore in the futures & options segment on Wednesday. According to data released by the NSE, FIIs were net buyers of index futures to the tune of Rs 400.23 crore and bought index options worth Rs 58.17 crore. They were net sellers of stock futures to the tune of Rs 11.78 crore and bought stock options worth Rs 14.49 crore on that day.

 

The Dow industrials and the S&P 500 declined slightly on Wednesday, 19 December 2007, in light trading on concerns about more fallout from the housing slump. The Dow Jones industrial average declined 25.20 points, or 0.19%, to end at 13,207.27. The Standard & Poor's 500 Index shed 1.98 points, or 0.14%, at 1,453.00. But the Nasdaq Composite Index edged up 4.98 points, or 0.19%, to close at 2,601.01.

 

In Asia, key benchmark indices in Hong Kong, Japan, China and South Korea, were up by between 0.06% to 1.6%. But Taiwan Weighted index was down 0.57% at 7,968.92.

Pre Market Watch

The Indian Markets today is likely to have a positive opening on the back of mixed global cues. On Wednesday, the markets closed with marginal gains after making a come back in the final trading hour of the session. The market opened on a strong note on the back of favoring cues from the global markets. Though the market opened on a firm note but unable to sustain its gains at higher levels as the profit booking across the sectoral indices scrips prevails. The BSE Sensex closed marginally up by 12.32 points at 19,091.96 and NSE Nifty closed higher by 8.85 points at 5,751.15. We expect the market to remain range bound during the trading session.

 

On Wednesday, the US market closed mixed. On Wednesday, the DJIA closed lower by 25.52 points at 13,206.95 along with S&P 500 index by 1.98 points to close at 1,453 while NASDAQ closed up by 4.98 points to close at 2,601.01.

 

Indian ADRs ended in mixed. In technology sector, Satyam grew by 0.48% along with Wipro by 0.36%, Patni computers 0.32% and Infosys 0.17%. In banking sector, HDFC bank and ICICI bank declined by (1.79%) and (0.59%) respectively. In telecommunication sector, VSNL and MTNL surged (21.69%) and (3.67%) respectively. Sterlite industries dropped by (2.24%).

 

The major stock markets in Asia are trading mixed. Japan''s Nikkei is trading up by 108.50 points at 15,139.01 while Hang Seng is trading lower by 21.58 points at 27,007.68. Taiwan weighted is also trading down by 40.88 points at 7,973.43. On Wednesday, the FIIs stood as the net seller both in equity and debt. The gross equity purchased was Rs3,446.50 Crore and the gross debt purchased was Rs2 Crore while the gross equity sold stood at Rs5,896.30 Crore and gross debt sold stood at Rs262.70Crore. Therefore, the net investment of equity reported was (Rs2,449.80 Crore) and net debt was (Rs260.70Crore).

 

Today, Nifty has support at 5,672 and resistance at 5,847 and BSE Sensex has support at 18,872 and resistance at 19,384.

Moldtek Technologies, TV18, Aurobhindo Pharma

Mold-Tek Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs215
Current market price: Rs155

 

Unlocking value

 

Key points

 

    *
      KPO business growing exponentially: Mold-Tek Technologies (MTT) has gained the critical size and required expertise in the niche area of structural engineering KPO services. The size of the opportunity in this space is huge and the company has taken inorganic initiatives to move up the value chain and establish presence in the key overseas markets. Consequently, we expect its KPO business to grow at a CAGR of around 160% over the next three years.
    *
      Expanding the plastic packaging service business: In the recent past, the company invested in modernisation and expansion of its manufacturing units in the plastic packaging business. It also bagged orders from large and reputed clients in the oil & lubricant business, further consolidating its leadership position in the segment. The plastic packaging business is likely to grow at a CAGR of over 20% in the three-year period FY2007-10.
    *
      Unlocking value in KPO business: The company has filed an application for the de-merger of its two businesses into separate entities. We believe this would result in the re-rating of the KPO business that is not only growing at an exponential rate but also enjoys much higher margins. We value the KPO business alone at Rs189 per share.
    *
      Attractive valuations: With its revenues and earnings expected to grow at CAGR of 31% and 66% respectively over FY2007-10, MTT is attractively valued at 7.6x FY2009 and 5.3x FY2010 estimated earnings (as the existing combined entity). Taking into account the de-merger ratio also (holders of 100 existing shares to get 72 shares of the plastic company and 28 shares of the KPO company), the KPO business alone is valued at Rs189 per share. We recommend a Buy call on MTT with a price target of Rs215.

 

STOCK UPDATE

 

Aurobindo Pharma
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs914
Current market price: Rs527

 

Aurobindo enters Omnicef market
Aurobindo Pharma (Aurobindo) has received approval from the US Food and Drug Administration to manufacture and market the oral suspension form of Cefdinir 125mg/ml and 250mg/ml in the USA. Cefdinir is the generic version of Abbott Laboratories' (Abbot) blockbuster product Omnicef in the USA, having a market size in excess of $850 million. Approximately $533 million of this comes from the suspension form of the product, which is used to treat a variety of ear, sinus, nose, throat and skin infections.

 

Television Eighteen India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs571
Current market price: Rs469

 

TV18 to launch a business daily
Mirroring our expectations, TV18 has announced entering the business daily space. The company has entered into a 50:50 joint venture with Jagran Prakashan for launching a Hindi business newspaper. The duo would also launch business dailies in other Indian languages. TV18 has aggressively entered print media by acquiring Infomedia India, which provided it a platform for entry and expansion in the print space. TV18 recently announced acquisition of Infomedia India a leading publisher of special interest magazines and Yellow Pages (for details refer our update "TV18 acquires Infomedia" dated December 12, 2007). The company further forged a partnership with Forbes Media, a leading global business publisher to launch a business magazine in January 2008 (refer our update "TV18 partners Forbes").

Fedders Lloyd

We recommend a buy in Fedders Lloyd Corporation at current market price. From the daily chart of Fedders Lloyd Corporation, we see that it had been on a medium-term down trend between August and November (from a high of Rs 178 to a low of Rs 120). However, the stock found support at a significant long-term support level of Rs 125 and bounced up 13 per cent on December 13. This reversal helped the stock to penetrate the medium-term down trendline. Subsequently, the stock co mmenced to move sideways. Currently, the stock is trading just above the significant long-term support level (Rs 125). The moving average convergence divergence is on the verge of entering the positive region. We note that the downside risk in this stock is limited. The immediate support for the stock is at Rs 125 and the next support is pegged at Rs 115. Short-term investors with high risk profile can buy the stock while keeping a stop-loss at Rs 120. We expect the stock to bounce up and rally to Rs 150 and beyond that to Rs 154 in the short-term.

 

Via Businessline

Precious metals end mixed

Gold ends marginally lower as dollar strengthens but silver gains as copper rallies

 

Precious metals ended mixed today after dollar gains capped gold's rise in prices. Gold prices fell today but silver prices rose today, Wednesday, 19 December, 2007. The dollar strengthened today even as US stocks slumped. Gold generally moves in the opposite direction of the U.S. currency. Gold, as a dollar-denominated commodity, suffers from dollar strength.

 

Comex Gold for February delivery fell $2 (0.2%) to close at $805.4 an ounce on the New York Mercantile Exchange today. Earlier the price fell to almost $802.2/ounce. Last week, prices rose by almost 0.3% ($2.2/ounce). On, 7 November, prices had touched $848/ounce. It was the highest price after a record $873 on 21 January, 1980.

 

Comex Silver futures for March delivery rose 5.7 cents (0.5%) to $14.222 an ounce. Silver prices climbed up as copper rallied by more than 3% today. Prices touched 26 year high on 7 November, after reaching $16.275. The metal has climbed 10% this year.

 

Gold has traditionally been used as a safe-haven asset against rising inflation. Investor sentiments are boosted by the fact that gold and silver are alternate sources of good investment in the face of declining dollar and rising energy prices. Rising crude increases inflationary pressures and vice versa. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.

 

In the currency market today, the dollar index, which tracks the performance of the greenback against a basket of other major currencies, gained 0.3% at 77.605.

 

In the energy market, oil prices rose for the first time in five sessions and ended $1.16/barrel higher at $91.24/barrel. Prices increased today after Energy Department reported more than expected slump in crude inventories for week ended 14 December.

 

Gold had climbed 25.8% this year till date as lower interest rates had sent the dollar tumbling, and crude-oil prices rose to a record. Dollar is still 8.3% down against the euro this year.

 

In 2006, silver had jumped 46% while gold gained 23%.

 

Last week on 11 December, Federal Reserve lowered the federal funds rate by a quarter-point to 4.25%. The Fed also lowered its discount rate, the interest it charges on direct loans it makes to banks, by a quarter-point to 4.75%.

 

Dollar had been witnessing a free fall since Federal Reserve cut interest rates in September. Before 11 December, Federal Reserve had cut the fed funds rate by a quarter-point to 4.50% on 31 October, 2007. Prior to that, Federal Reserve had cut interest rates by half percentage point on 19 September, 2007.

 

At the MCX, gold prices for February delivery closed lower by Rs 5 (0.05%) at Rs 10,257 per 10 grams. Prices rose to a high of Rs 10,300 per 10 grams and fell to a low of Rs 10,222 per 10 grams during the day's trading.

 

At the MCX, silver prices for March delivery closed Rs 67 (0.4%) higher at Rs 18,759/Kg. Prices opened at Rs 18,702/kg and went to a high of Rs 18,842/Kg during the day's trading.

Another choppy day in the offing

To see what is in front of one's nose needs a constant struggle.

 

The market has been on a rollercoaster ride over the past 3-4 months, primarily due to the subprime woes in the US, selling by FIIs and lack of major local triggers. The Sensex has fluctuated between 17,000 and 20,500 during this period. It went as low as 13,779 on Aug. 17 before rebounding from there to 19,977 on Oct. 29. After several attempts at crossing the 20k mark (in October and November), the Sensex finally managed to rise above the milestone on Dec. 11. Its closing high is 20,375, struck on Dec. 12 and intra-day high is 20,498, hit on Dec. 13. It started correcting again and went as low as 19,079, on Dec. 18, owing to resurfacing of subprime concerns and its fallout on the global markets. Yesterday, the Sensex shut shop at 19,091.

 

In a nutshell, though the bulls have managed to weather a lot of storms, the ride has not been smooth at all. There have been several bumps and roadblocks along the way. Volatility has increased manifold. The trend has been no different this month. After a positive start and crossing the 20k mark, the Sensex has been facing fresh selling pressure in the past couple of days on the back of weakness in the US and other global markets. FIIs have resumed their selling as well in the last few days. In fact, the trend in FII flows has been extremely unpredictable and erratic, making the main indices swing heavily. In the meantime, small- and mid-cap shares (including penny stocks) have captured the imagination of investors.

 

The picture may not change much today or over the next few days, as the near-term outlook is murky and the Indian market is dancing to the tunes of global indicators. FII selling has not been of much help either. But, despite the choppy trend, nothing is stopping investors from betting on small- and mid-cap shares. We expect the market to open on a cautious to slightly positive note, given the uncertainty prevailing in the global markets. Though the side counters (non-index stocks) may continue to hog the limelight and extend their gains, one must be careful as the rally in these shares is not real. Investors may indulge in select buying in quality stocks for long-term purpose or stay on the sidelines and wait for more signals on market direction.

 

US stocks closed mixed on Wednesday after a highly volatile session. Stocks were up in early trading as the Federal Reserve announced results for its first auction of $20bn, signaling strong demand for the plan aimed at defusing the stress in the credit markets.

 

But Morgan Stanley's $5.7bn subprime related writedown and credit market concerns brought up by Standard & Poor's warnings about bond insurers' credit ratings, dragged the markets down in the afternoon.

 

Target and Macy's led a gauge of retailers lower after ShopperTrak RCT Corp. said winter storms and rising gasoline prices hurt sales. Union Pacific, the biggest railroad, slid the most since August. Darden Restaurants posted its biggest drop ever after earnings missed analysts' estimates.

 

The S&P 500 dropped 2 points, or 0.1%, to 1,453. The Dow Jones Industrial Average lost 25 points, or 0.2%, to 13,207.27. The Nasdaq Composite Index increased 5 points, or 0.2%, to 2,601.01.

 

Market breadth was negative. About 15 stocks fell for every 14 that rose on the New York Stock Exchange.

 

Morgan Stanley posted a bigger-than-expected quarterly loss and said it would take an additional $5.7bn in writedowns on top of the $3.7bn it had already announced, due to the subprime mortgage mess. Morgan also announced that it will receive a $5bn capital investment from a Chinese state-run investment fund. Morgan shares were higher, along with other major banks including Lehman Brothers and JP Morgan.

 

In the latest bad news for the housing sector, the level of foreclosures was up 68% in November from a year ago, according to tracking service RealtyTrac. On the upside, foreclosures fell 10% from the previous month.

 

Thursday brings economic reports from the government on third quarter GDP and leading economic indicators. Also, Bear Stearns will report its earnings for the fourth quarter.

 

After the close of trade, software maker Oracle reported better-than-expected earnings and sales, giving the company's shares a boost in after hours trading.

 

Treasury prices rose, lowering the yield on the 10-year note to 4.03% from 4.14% late on Tuesday. US light crude oil for January delivery rose $1.16 cents to $91.24 on the New York Mercantile Exchange after the government's weekly report showed lower than expected crude supplies. In currency trading, the dollar gained versus the euro and the yen. COMEX gold for February delivery fell $2.00 to $805.40 an ounce.

 

European shares closed lower in another choppy session, with real estate and construction firms pacing the decline amid worries about housing markets. The pan-European Dow Jones Stoxx 600 index fell 0.5% to 358.47. The UK's FTSE 100 advanced 0.1% to 6,284.50, while the German DAX 30 slipped 0.2% to 7,837.32 and the French CAC-40 ended 0.2% lower at 5,497.42.

 

In the emerging markets, the Bovespa in Brazil gained 1% at 61,721 while the IPC index in Mexico was down 0.6% at 29,074. The RTS index in Russia declined 0.2% to 2264 and the ISE National-30 index in Turkey was down nearly 1% at 68,404.

 

Asian markets were trading mixed. The Nikkei in Tokyo was up 108 points at 15,139 while the Hang Seng in Hong Kong was almost flat at 27,023. The Kospi in Seoul was also static at 1861 and the Shanghai Composite index in china was up 37 points at 4978.

 

The MSCI Asia Pacific Index gained 0.4% at 152.58 at 11:00 a.m. in Tokyo, snapping a six-day losing streak. Stock exchanges in Singapore, Malaysia and Indonesia are closed for a public holiday.

 

The yen traded near a six-week low against the dollar on speculation that the Bank of Japan (BOJ) would leave the benchmark overnight lending rate at 0.5% today, and Governor Toshihiko Fukui will say there was no set time for raising interest rates.

 

Volatility to prevail

 

Bulls finally managed to end the day in green after struggling for four straight trading sessions. Volatility was the order of the day as benchmark Sensex and Nifty index gyrated over 500 and 160 points during the session.

 

After opening with a positive gap up, key indices erased all its gains in the afternoon trades on back of weak cues form the Asian and European markets. However, later in the day bulls fought back managing to end the day with modest gains.

 

Finally, 30-share Sensex closed flat at 19,091 hitting a intra-high of 19,397 and a low of 18,866 and Nifty closed flat at 5,751 touching an intra-day high of 5,840 and a low of 5,676.

 

Patel Integrated surged by over 15% to Rs99 after the company announced that it approved Rs1.8mn preferential share sale. The scrip touched an intra-day high of Rs102 and a low of Rs89 and recorded volumes of over 14,00,000 shares on NSE.

 

Aurobindo Pharma was down 1% to Rs526. The company announced that it secured approval for antibiotic cefdinir suspension. The scrip touched an intra-day high of Rs548 and a low of Rs523 and recorded volumes of over 2,00,000 shares on NSE.

 

India Cements advanced 2.2% to Rs301 after the company announced that would sell Rs20.8mn shares. The scrip touched an intra-day high of Rs308 and a low of Rs298 and recorded volumes of over 23,00,000 shares on NSE.

 

Kopran spurred by over at 4.5% to Rs40.20 as reports stated that the company is in talks to sell stake to domestic companies. The scrip touched an intra-day high of Rs40.45 and a low of Rs39.25 and recorded volumes of over 2,00,000 shares on NSE.

 

IOC dropped 1.2% to Rs632. Reports stated that the company had set aside US$3bn for overseas acquisition. The scrip touched an intra-day high of Rs664 and a low of Rs626 and recorded volumes of over 7,00,000 shares on NSE.

 

National Aluminum gained 3.2% to Rs427 after the company announced that they would spend Rs4.09bn to raise capacity and also declared expansion of Bauxite-mining capacity to 6.82mn tons. The scrip touched an intra-day high of Rs433 and a low of Rs419 and recorded volumes of over 3,00,000 shares on NSE.

 

DCM Shriram Industries marginally gained 0.6% to Rs126 after the company announced that they would sell 7 lac shares to founders. The scrip touched an intra-day high of Rs129 and a low of Rs120 and recorded volumes of over 18,000 shares on NSE.

 

Shringar Cinemas gained 0.5% to Rs102 after the company announced that they tied up with HDIL for multiplexes. The scrip touched an intra-day high of Rs109 and a low of Rs101 and recorded volumes of over 2,00,000 shares on NSE.

 

Suzlon Energy gained 2.5% to Rs1901 after the company announced that they would raise Rs21.83bn via share sale. The scrip has touched an intra-day high of Rs1919 and a low of Rs1875 and recorded volumes of over 9,00,000 shares on NSE.

 

L&T gained 0.6% to Rs3989 after the company declared that they secured Rs2.87bn elevated access road contract. The scrip touched an intra-day high of Rs4049 and a low of Rs3951 and recorded volumes of over 6,00,000 shares on NSE.

 

What the FIIs are doing

 

FIIs were net sellers of Rs14.54bn (provisional) in the cash segment on Wednesday while the local institutions pumped in Rs3.5bn. In the F&O segment, foreign funds were net buyers of Rs4.61bn.

 

On Tuesday, FIIs were net sellers of Rs24.5bn in the cash segment. Mutual Funds were net sellers of Rs3.81bn on the same day.

 

Stocks in News:

 

IFCI stake sale has been called off due to differences with Sterlite-Morgan Stanley consortium over management control. (ET)

 

Kingfisher and Deccan board approves merger. (ET)

 

Glenmark receives domestic patent for its asthma molecule, Oglemilast. (ET)

 

BHEL's bid to build Rs84bn electricity-generation factory gets rejected. (FE)

 

Reliance Industries (RIL) is in talks with Tata Chemicals to sell KG basin gas. (ET)

 

Tata Power eyes shipping and logistics business and plans to raise Rs40bn from domestic and international market. (BL)

 

SAIL signs a pact with Rail Vikas for transportation of 5 lakh tons of imported coking coal per year. (BL)

 

Vale, world's largest iron ore pellets manufacturer, is in talks with Tata Steel to set up a steel slab plant in Brazil. (BS)

 

Reliance Retail to enter food trading business as a part of major re-structuring of its food and grocery initiative. (ET)

 

Dabur India is planning acquisitions of an FMCG company in foods or personal care segment. (DNA)

 

Hero Honda forays into used two-wheeler trading business under the 'Hero Honda SURE!' brand. (ET)

 

Union Bank is planning to enter mutual fund business and venture capital business. (FE)

 

Welspun India buys 76% stake in Portugal-based company for Rs600mn. (ET)

 

MRF plans to spend Rs5bn towards setting up a greenfield two-wheeler and four-wheeler tyre facility in TN. (BS)

 

Rolta India plans to enter real estate business through a group company, Rolta Infrastructure. (DNA)

 

JK Tyres to hike tyre prices in next quarter. (BL)

 

EMCO promoters keen to raise stake in the company to 51%. (BS)

 

The telecom spectrum panel recommends the government to consider new allocation options, including auction. (ET)

 

Allahabad High Court asks UP Government to rework the cane state advisory price (SAP) fixed by it for purchase of sugarcane. (ET)

 

Chief Ministers of five mineral-rich states has urged the PM to make local value addition of minerals the prime objective of National Mineral Policy (NMP). (BS).

First Dubai, now China - US selling out

Morgan Stanley wrote down its subprime-infected mortgage holdings by a greater-than-expected $9.4 billion and received a $5 billion cash infusion from state- controlled China Investment Corp.

 

The second-largest U.S. securities firm rose 4.2 percent in New York Stock Exchange composite trading. The ``significant capital raise'' and writedowns may suggest to investors that Morgan Stanley has put the worst of its subprime losses behind it, Jeffery Harte, an analyst at Sandler O'Neill & Partners LP, wrote in a note today

Market Close: Still Respecting the support

Markets closed marginal in green after it opened with a 300 points gap up and overall day swing of 500 points. Indian indices had a good start following positive global cues. But, later as usual profit booking was seen and indices slipped in red. Mid caps were a bit weak but small caps once again outperformed the large caps. FMCG and Metals were among the major gainers. Profit booking witnessed across the sectors led by the Oil & gas, Pharma, Realty, Banking and Auto. Earlier on the day the support from the European Central Banks (ECB) helped the US indices end in the positive territory after ending in red for 2 consecutive trading sessions. ECB infused lend $ 500 bn to the commercial Banks and other prominent financial institutions. Markets turned choppy in late trade as as selling pressure pushed into deep red before ending with modest gains. European indices are trading in red.

 

Sensex ended up by 20 points at 19099.721.It was helped up by gains in Rel Energy (1882.6,+4 percent), ONGC (1180.5,+3 percent), ICICI Bk (1161.05,+2 percent), Infosys (1638.1,+1 percent) and TCS (1021.35,+1 percent). Restricting the gains were ACC (1030.65,-3 percent), Dr Reddys (697.15,-3 percent), HDFC (2743.6001,-2 percent), Maruti (995.3,-2 percent) and SBI (2258.3,-2 percent).

 

Gillette is the largest and legendary player for shave blades, razors and shaving products over the globe. The company has premium priced 7?O clock and mid priced Wilkinson Sword brand in the double edge blades segment. The company is also into Oral care with the brand Oral B. This includes Toothbrushes, floss etc. Portable power (Dry Cell) is the third segment and it is not a big strength for Gillette with brand 'Duracell', since its expensive than the zinc batteries. India has the second largest population in the world and around 50% of the population is below 25 yrs. This opens a huge market for FMCG products particularly with good brands. Also having the distribution backed by P&G, Gillette is well placed to leverage this opportunity. Company is set for high growth potential. Due to its premium brand the demand is set to increase from the population which its aiming at i.e Between the ages of 15-35. This is nearly 50% of the total population. We bang on this and have a positive view on the stock. We have a detailed note please do have a look at it. The stock rallied for the day.

 

Mold-Tek Technologies Ltd is one of the leaders in packaging and an emerging player in the Structural Engineering KPO Services. The company is in the process of de-merging its KPO business from its Plastic packaging business. The de-merger would result in better focused business and valuations. The demerger to bring in value unlocking. We are positive of the KPO and expect good numbers in coming years... We have a note here too.

 

Technically Speaking: Market breadth remained positive through out the day but the trend remained choppy with high volume. It made intraday high of 19,398 and days low of 18,886.Sensex churned good volume at Rs 8,004 cr. The breath was in favor of Advances, where Advances stood at 1861 and Declines at 1016. Sensex resistance seen at 19200-19375 and support lies at 18880..18515.

IFCI - no stake sale !

IFCI, India's oldest financial institution saddled with bad loans, on Wednesday called off its stake sale plan after marathon talks with the Sterlite-Morgan Stanley combine ended in disagreements over the price and management control.

 

"Compelling conditions including management control were the reason for the deal not taking place," said an IFCI source, adding that the consortium had put conditions that were tantamount to a hostile takeover.

 

A press release from IFCI said since the bid was made on the condition that the consortium would take over the management of the company, it was decided not to proceed with it.

 

According to sources close to the development, the Sterlite-Morgan Stanley consortium was offered management control at Rs 145 a share, which it did not accept.

 

IFCI then quoted Rs 111 apiece with three of the eight board seats. The bidders, however, insisted on five board seats at this price. At this point, the deal was called off.

 

There have been ample indications from IFCI and government quarters that the strategic investor, which would have had to make an offer to acquire an additional 20 per cent in the company, would not be allowed to take management control.

 

The process to induct a strategic investor began in August.

 

Sources said management control to a private player would have created uncertainties about the fate of top functionaries of IFCI. This caused the deadlock.

 

"We have made the best bid to achieve the objective set out by IFCI in its offer document. The IFCI board decided not to accept the offer. We respect it," said a Sterlite executive.

 

It is learnt that IFCI will launch a fresh exercise to get a strategic partner. Insurance behemoth Life Insurance Corporation of India, IFCI's largest shareholder with 8 per cent, may be a surprise entrant.

 

IFCI has also decided not to pursue the stake sale plan with any bidders under the current format. Two other consortiums — Shinsei Bank-Punjab National Bank-JC Flowers and Cargill Financial Services Corporation-Texas Pacific Group — had also submitted bids for the stake, but had quoted a lower price than Sterlite and Morgan Stanley.

 

However, it seems IFCI was aware of the possible complexities and, therefore, was simultaneously in talks with International Finance Corporation (IFC) and Asian Development Bank for a possible stake sale.

 

IFC may take around 10 per cent in the company.

IFCI stake sale off ...

It's official now. The IFCI board on Monday called off the sale of 26% of its equity to its only bidder — Sterlite and Morgan Stanley — over irreconcilable differences regarding the degree of management control. The way forward is still not clear for IFCI, which had planned to rope in a strategic partner to fund its future business. India's oldest development financial institution is facing a resource crunch.

 

On the future course of action, Atul Rai, CMD IFCI conceded that there is need for capital for IFCI. "There is no possibility for a re-bid in this format. There has to be a certain time lapse before the system can gear up for a re-bid. This proposition has not made sense to 10 of the best bidders in the world; it will not change substantially very soon."

 

This comes even as the Wilbur Ross consortium is understood to be making efforts to renegotiate with IFCI to put in a bid. But officials maintain, legally, IFCI cannot entertain any offers from this process. The consortium headed by Mr Ross comprised of Standard Chartered bank, Goldman Sachs and HDFC, and did not put in its bid after conducting due diligence.

 

Said Mr Rai: "There is disappointment that the entire effort that lasted six months did not translate into a deal. But the board was not agreeable to the conditional offer made by the only bidder.

 

From the perspective of the investor, they had a certain set of conditions and they are answerable to their shareholders, but it could not be accommodated by IFCI since it changed the nature of the transaction." While IFCI offered two seats on the eight-member board, the bidder wanted three. Sterlite also wanted to replace the CEO — a non-negotiable condition.

 

Sources said, Sterlite wanted far greater control for the 26% sale in return for paying more than $1 billion, at Rs 110 a share. "Rights of minority shareholders could have been jeopardised in the long term. The exclusivity of control that they sought was unacceptable to the board. If the board had spelt out these additional conditions in the Request for Proposal (RFP) stage, IFCI could have attracted more bidders at a higher price."

 

"We have made our best offer for IFCI to achieve the objective, such as making IFCI a world class institution, retaining existing talent, bringing in new talent and more expertise. We respect the government's decision not to go ahead with the strategic sale," an official statement from Sterlite said.

 

A senior government official, however, said there was no direct intervention from the government. "IFCI is a quasi-government institution and government guidelines apply to it. Under the Chief Vigilance Commission's (CVC) guideline, a single bidder with a conditional offer cannot be appointed as an investor. Several conditions made by Sterlite were non-negotiable." He also said that government was open to supporting IFCI in future.

 

The process that was kicked off earlier this year helped boost IFCI's stock price from Rs 12 in January to Rs 121 earlier this week. The sale was fraught with uncertainties till the last minute with respect to capital structure and regulatory issues, among others. Detractors were crying hoarse on the non-transparency of the process.

 

During the entire course of events, rumours were rife that the sale would never take place. Along the way, IFCI allowed creditor banks to convert their debt worth Rs 1,479 crore into equity. There was no clarity on the status of the government's loan to IFCI before the bids closed.

Post Session Commentary

The market closed with marginal gains after making a come back in the final trading hour of the session. The market opened on a strong note on the back of favoring cues from the global markets. Though the market opened on a firm note but unable to sustain its gains at higher levels as the profit booking across the sectoral indices scrips prevails. The BSE Mid cap closed lower by 13.45 points at 9,080.39 while Small cap closed higher by 97.24 points at 11,915.36. The BSE Sensex closed marginally up by 12.32 points at 19,091.96 and NSE Nifty closed higher by 8.85 points at 5,751.15. The BSE Sensex touched its intraday high of 19,397.76 and low of 18,886.40 during the trading session. Overall, the market breadth was week as 1,882 stocks are closed in green while 1030 stocks are closed in red.

 

BSE Health Care index slipped by 14.16 points to close at 4,247.16 as Opto Circuit (3.59%), Dr. Reddy (2.83%), Biocon (1.59%), Glenmark (1.50%) and Nicholas Piramal (1.02%) closed lower.

 

BSE Metal index closed higher by 124.47 points at 18,202.10. Scrips that grew are SH. Precoated (9.88%), Ispat industries (5.22%), Nalco (3.32%), Jindal Saw (3.15%), JSW Steel (2.54%).

 

BSE FMCG index closed up by 14.18 points at 2224.19. Scrips that grew are Tata Tea (2.34%), United Spirits (1.49%), ITC (0.94%), HUL (0.40%) and Nestle (0.27%).

 

BSE Realty index dropped by 51.32 points to close at 11,603.26 as Phoenix mill (8.01%), Anant Raj (6.21%), Akruti (1.18%), Omaxe (1.38%), Sobha Developers (1.38%) and Parsvnath (1.17%).

 

BSE Oil & Gas index slipped by 28.88 points to close at 12,280.80. Scrips that fell are GAIL (3.64%), Aban Offshore (1.57%), IOCL (1.52%), Reliance industries (0.88%) and RNRL (0.81%).

 

BSE Bankex index closed flat at 10,763.96 as IOB (3.57%), Union bank (2.85%), Yes bank (2.73%) closed lower while Canara bank (2.34%), ICICI bank (1.79%) and Federal bank (0.33%) closed higher.

Post Market Commentary

Market saw its initial profits evaporate as weak open in European markets triggered late selling in pharma, realty, oil & gas and several major counters. Yesterday, the European Central Bank pumped 350 billion euros in Europe's money market as a part of coordinated attempt by the world's central banks to restore confidence in global financial system. This caused domestic market open with a huge positive gap today. The Sensex opened firm at 19,255 but lost its grip and entered into the negative by afternoon. Across-the-board selling towards the close saw the Sensex plunge deep into the red to touch the day's low of 18,886. However, buying at lower levels helped the Sensex recover most of its losses and enter into the positive to end the session with a gain of 12 points at 19,092, while the Nifty added 9 points to close at 5,751.

 

Breadth of the market was positive. Of the 2,941 stocks traded on the Bombay Stock Exchange (BSE) 1,883 stocks advanced, 1,030 stocks declined and 28 stocks remained unchanged. Among sectoral indices, BSE CD index gained 1.03%, while BSE FMCG index, BSE IT index, BSE Metal index, BSE Power index, BSE PSU index and the BSE Tech index closed with moderate gains. However, BSE Auto index, BSE CG index, BSE HC index, BSE Oil & gas index and BSE Realty index closed in the red.

 

Select heavyweights edged higher on decent buying support. Reliance Energy rose 4.12% at Rs1,883, ONGC jumped 2.65% at Rs1,181, ICICI Bank advanced 1.79% at Rs1,161, Infosys added 1.09% at Rs1,638, while TCS, Tata Steel, ITC, M&M, L&T and Ranbaxy closed with marginal gains. However, select front-line stocks came under selling pressure. ACC was the major loser and dropped 3.40% at Rs1,031. Among other draggers, HDFC declined 2.44% at Rs2,744, Maruti Suzuki dropped 2.39% at Rs995 and SBI shed 1.97% at Rs2,258.

 

Over 3.73 crore Ispat Industries shares changed hands on BSE followed by IKF Technologies (2.86 crore shares), GV Films (2.60 crore shares), Himachal Futuristic Communications (2.50 crore shares) and Kashyap Technologies (1.96 crore shares).

 

Valuewise, Ispat Industries registered a turnover of Rs316 crore on BSE followed by Jyoti Laboratories (Rs289 crore), Reliance Industries (Rs289 crore), IFCI (Rs188 crore) and Reliance Energy (Rs156 crore).

Market ends flat amid volatile trade

The market staged a strong comeback in late trade after the Sensex fell below 19,000 mark in mid-afternoon trade. The market had weakened in mid-afternoon trade in what was a choppy trading session. Earlier, the market had come sharply off higher level from an initial surge. Consumer durable and metal stocks gained. Auto stocks declined. Reliance Industries declined. Reliance Energy and ONGC were major gainers from Sensex pack. European markets were trading lower. Asian indices were mixed today, 19 December 2007. US stocks rose on Tuesday, 18 December 2007.

 

The country's gross domestic product (GDP) growth can be scaled up to 10% by 2012 with the right set of policies, but the subprime crisis in the US might impact exports and capital flows, prime minister Manmohan Singh said on Wednesday, 19 December 2007, at a meeting of state chiefs and other top policymakers.

 

The 30-share BSE Sensex rose 12.32 points or 0.06% to 19,091.96. Sensex hit a low of 18,886.40 in mid-afternoon trade. At day's low, Sensex had lost 193.24 points. Sensex hit a high of 19,397.76 in early trade, a gain of 318.12 points.

 

The broader CNX S&P Nifty gained 8.85 points or 0.15% to 5,751.15

 

BSE clocked a turnover of Rs 8004 crore compared to Tuesday (18 December 2007)'s Rs 8,052.65 crore.

 

Nifty December 2007 futures were at 5800.15, at a premium of 49 points as compared to the spot closing of 5751.15.

 

The NSE's futures & options (F&O) segment turnover was Rs 79,137.15 crore, which was higher than Rs 74,579.26 crore on Tuesday, 18 December 2007.

 

The BSE Mid-Cap index was down 0.15% to 9,080.39. It underperformed Sensex. The BSE Small-Cap index was up 0.82% to 11,915.36. It outperformed Sensex.

 

BSE PSU index (up 0.15% to 9,563.01), BSE Power index (up 0.18% to 4,222.80), BSE IT index (up 0.44% to 4,181), BSE FMCG index (up 0.64% to 2224.19), BSE Metal index (up 0.69% to 18,202.10) and BSE Consumer Durables index (up 1.03% to 6,122.32) outperformed Sensex.

 

BSE Capital Goods index (down 0.02% to 18,898.17), BSE Oil & Gas index (down 0.23% to 12,280.80), BSE Health Care index (down 0.33% to 4,247.16), BSE Realty index (down 0.44% to 11,603.26) and BSE Auto index (down 0.7% to 5,525.64) underperformed Sensex.

 

The market breadth was strong. On BSE, 1,849 shares advanced as compared to 1,026 that declined. 26 shares were unchanged. 15 of the 30 Sensex stocks declined.

 

India's largest private sector firm by market capitalization & oil refiner Reliance Industries declined 0.88% to Rs 2,704.75. The stock came off session's high of Rs 2,780.

 

Reliance Energy (REL) rose 4.12% to Rs 1,882.60. The company is reportedly planning to foray into Africa. It is believed to be in talks with the governments of Botswana, Tanzania and Zambia for setting up generation capacities of over 1,000 megawatt (MW). The company's African Safari will be followed by a bid for a 1,200 MW greenfield project at Yanbu in Saudi Arabia, the reports added.

 

Metal stocks were mixed. Tata Steel (up 0.96% to Rs 824.20), National Aluminium company (up 3.32% to Rs 428.50) edged higher. Steel Authority of India (down 0.56% to Rs 258.30) and Hindalco Industries (down 0.68% to Rs 198.35) edged lower.

 

Consumer Durable stocks rose. Titan Industries (up 2.56% to Rs 1,497.05), Videocon Industries (up 4.29% to Rs 646), edged higher.

 

Gitanjali Gems rose 3.13% to Rs 418.50. The company announced during the market hours today that Gitanjali Lifestyle (GLL), a wholly subsidiary of the company is signing a memorandum of understanding (MoU) with Mariella Burani Fashion Group (MBFG) of Italy to form a joint venture in India by way of incorporation of a new company. The objective of the proposed joint venture is to significantly drive growth of MBFG's brands in emerging markets.

 

Auto stocks declined. Tata motors (down 1.59% to Rs 691.10), Bajaj Auto (down 0.66% to Rs 2,776.80) and Maruti Suzuki India (down 2.39% to Rs 995.30) edged lower.

 

Mahindra & Mahindra (up 0.86% to Rs 777.30), Hero Honda Motors (up 0.29% to Rs 704) edged higher.

 

ONGC (up 2.65% to Rs 1,180.50), ICICI Bank (up 1.79% to Rs 1,161.05) and Infosys (up 1.09% to Rs 1,638.10) edged higher.

 

HDFC (down 1.75% to Rs 2,763), Grasim Industries (down 1.68% to Rs 3,575.20), State Bank of India (down 1.97 % to Rs 2,258.30) and ACC (down 3.4% to 1,030.65) edged lower.

 

Larsen & Toubro rose 0.77% to Rs 3,998.25 after the company said it had received a contract worth Rs 287 crore to build an elevated road to Mumbai International Airport.

 

Ispat Industries clocked the highest volume of 3.73 crore shares on BSE. The stock rose 5.22% to Rs 85.60. IKF Technologies clocked the second highest volume of 2.86 crore shares on BSE. The stock rose 9.13% to Rs 14.22. G V Films clocked the third highest volume of 2.6 crore shares. The scrip rose 6.78% to Rs 11.49. Himachal Futuristic Communications clocked the fourth highest volume of 2.5 crore shares. The stock hit 5% upper circuit at Rs 42.75. Kashyap Technologies clocked fifth highest volume of 1.96 crore shares. The stock declined 4.46% to Rs 5.35.

 

Ispat Industries clocked the highest turnover of Rs 316.39 crore on BSE. Reliance Industries (Rs 289.78 crore), IFCI (Rs 188.32 crore), Reliance Energy (Rs 156.73 crore) and Reliance Petroleum (Rs 146.08 crore) were other turnover toppers in that order.

 

European markets were trading lower today. Germany's DAX (down 0.29% to 7,827.99) and UK's FTSE 100 (down 0.09% to 6,273.40) edged lower.

 

Most of the Asian indices were mixed today, 19 December 2007, tracking overnight gain in US stocks. Key benchmark indices in Hong Kong's Heng Seng (up 1.11% to 27,029.26) and Taiwan's Taiwan Weighted (up 2.65% to 8,014.34) edged higher. Japan's Nikkei 225 (down 1.17% to 15,030.51), Straits Times (down 0.36% to 3,357.34) edged lower.

 

US stocks rose on Tuesday, 18 December 2007, as investors bought beaten-down shares of technology heavyweights such as IBM and Microsoft Corp on hopes that the tech sector would weather the impact of the credit crisis. An upbeat profit forecast from design software maker Adobe Systems Inc lifted optimism in the tech sector, a day after the Nasdaq slid more than 2%.

 

The Dow Jones industrial average advanced 65.27 points, or 0.50%, to 13,232.47. The Standard & Poor's 500 Index gained 9.08 points, or 0.63%, to close at 1,454.98. The Nasdaq Composite Index jumped 21.57 points, or 0.84%, at 2,596.03, snapping a three-day losing streak. Wall Street gains were also helped by optimism on an easing of the subprime credit crunch after a cash injection by the European Central Bank as part of the effort by global central banks to shore up credit markets.

 

Volatility may remain high in the near term ahead of expiry of December 2007 derivatives contracts next Thursday, 27 December 2007. The market remains closed on Friday, 21 December 2007 on account of Bakri Id and also on Tuesday, 25 December 2007 on account of Christmas. Therefore, only four trading sessions are left for expiry of December 2007 derivatives contracts.

Spicejet

We recommend a buy in SpiceJet at current market price. From the weekly chart of SpiceJet, we note that it has been on a broad sideways consolidation between Rs 50 and Rs 65 since early June 2007.

 

On December 17, the stock broke out of this sideways consolidation and jumped up by 16 per cent, accompanied with heavy volume.

 

Breakout of the long-term resistance level of Rs 65 indicates beginning of a new uptrend. Moreover, the stock is trading well above the 21- and 50-day moving average line. The volume has been increasing in the past five trading sessions. The daily as well as weekly momentum indicators are featuring in the bullish region. The moving average convergence divergence is steadily rising in the positive region indicating bullish momentum.

 

The immediate support for the stock is pegged at Rs 55 and the next support is at Rs 50.

 

Short-term investors with high risk profile can buy the stock while maintaining the stop-loss at Rs 61. We expect the stock to move up to the immediate resistance level at Rs 80 in the short-term.

 

Via Businessline

RCF land sale

Amid spiralling realty prices, it's difficult to resist a deal when you are sitting on large tracts of unused land. But it can be a tough call when the landowner is a state-owned firm sensitive to controversies that a land deal could spark. So, what do you do? Take the first baby steps to cash in on a booming property market.

The government-controlled Rashtriya Chemicals and Fertilisers (RCF) is doing just that. The fertiliser major, which owns about 800 acres in and around Mumbai, is initially planning to develop a commercial complex over about 200,000 sq ft that will be used partially for in-house purposes while the rest will be sold commercially.

The company board has already approved the decision to build the commercial complex — to be tentatively called Priyadarshini II — and has called for a panel of architects for designing the project. RCF would develop the complex on its own and would not tie up with any developer for the complex that would come up adjacent to the company's existing office building at Chembur. It's the latest of Mumbai-based companies planning to develop surplus, unutilised land available with them to gain from firm land prices.

Sources close to the development said response to this project would be used by the company to chalk out future development plans subsequently. Although the company owns about 800 acres of land, most of it houses RCF's factory and residential areas.

Despite repeated efforts, senior officials at RCF declined comment. "The company doesn't want to go all out with the move... It would prefer to sell small parcels over a long time period," said a source. RCF owns large tracts of land as per norms for a chemical and fertiliser company. The company makes and markets a wide range of chemical fertilisers and a series of industrial chemicals through its plants at Trombay and Thal.

RCF's move is in line with the trend seen among large corporate houses who initially sold land and subsequently tied up with developers to jointly build projects. According to a real estate company, recent difficulties in tying up finances for buying land have forced developers to team up with companies owning land. The developer contributes a small equity while the land ownership remains with the company. Once the project is developed by the developer, the proceeds from the commercial sale could be divided between the two.

In the case of government-owned firms like RCF, there are also options of leasing out portions of land to manufacturing companies who are pressed for space and can't buy land due to high prices.

During the past two years, more than 25 companies, including Bata India, Indian Hume Pipe and Gulf Oil Corporation, have either sold or developed their real estate assets. "This trend is not peculiar to India. Globally, companies have done it from time-to-time. Even in India, several companies have done it in the past. The difference is, it is more visible now," said an analyst with an European brokerage. "At best, such activities would constitute 5 to 10% of the total real estate development activity," he added.

Sharp demand for houses and commercial spaces have led prices of land to double in the past two years, especially in cities such as Mumbai, where land availability is at a premium.

The market also seems to have got a whiff of RCF's proposed plans as shares of the company have already hit the upper trading limit twice in the past week. On Tuesday, RCF shares again ended 4.9% up at Rs 88.65 on the BSE.

IFCI plunges

Shares of IFCI plunged over 10 per cent in morning trade, as the board could not reach a final decision on the induction of a strategic partner for which discussions continued for the second day on Tuesday.

The IFCI scrip fell to an intra-day low of Rs 97.40 down 10.14 per cent in the morning trade, as against yesterday's close of Rs 108.40 on the Bombay Stock Exchange.

Vedanta Group company Sterlite Industries, in association with Morgan Stanley, is the front-runner for picking up a 26 per cent stake in the financial institution.

A final decision on the bidder for the 26 per cent stake sale and the price of sale is expected to be finalised today at the board meeting which is continuing from yesterday.

The scrip was trading at Rs 104.40, down 3.69 per cent at the BSE, while a total of 2.26 crore shares had changed hands at the bourse in the afternoon trade.

The other bidders included consortia of Shinsei Bank Ltd of Japan, Punjab National Bank and JC Flowers and US-based Cargill Financial with Texas Pacific Group.

However, the consortium of W L Ross, GS Capital Partners VI Fund and Standard Chartered Bank opted out of the race to acquire a strategic stake in the country's oldest financial institution.

All about stock splits

Stock splits refer to dividing the outstanding shares of a company into a larger number of shares, without affecting Stockholder's Equity or the total market value of the stock. For example, if a company declares a 2-for-1 stock split of its stock, of which has a current market value of Rs 500/share and 200,000 shares outstanding, the following results occur:

 

Pre-split:
Outstanding shares: 200,000
Market Value: Rs 500
Market capitalization: Rs 100,000,000

 

Post-split:
Outstanding shares: 400,000
Market Value: Rs 250
Market capitalization: Rs 100,000,000

 

Essentially, in the 2-for-1 stock split, the company's outstanding shares are simply doubled and the stock price is divided in half. The market capitalization, or market value of the stock, remains the same at pre- and post-split conditions. This is because stock splits have no impact on the value of a company's stock. A stock split is merely an accounting transaction in which no equity is exchanged. Companies can split their stock in any number of ways. These splits may occur in different combinations.

 

When a company declares a stock split, the price of the stock may decrease, but the number of shares will increase proportionately. A stock split has no effect on the value of what shareholders own. If the company pays a dividend, your dividends paid per share will also fall proportionately.

 

Companies often split their stock when they believe the price of their stock exceeds the amount smaller individual investors would be willing to pay for the stock. By reducing the price of the stock, companies try to make their stock more affordable to these investors.

 

Usually, stock splits have a positive affect on the stock price. Over the long term, stock splits seem to have a considerable effect on the company's stock price. Although stock splits have no direct effect on a company's equity, the event of a split does forecast hints and signs of how the company is performing.

 

Companies usually tend to split their shares when the company has an optimistic view of its future and operations. The announcement of a stock split can be a symbol that a stock has attained a certain level of success. The fact that a company has a record of multiple stock splits usually indicates that the company is among one of the faster growing firms, since their stock has been split numerous times. Generally, a company is motivated to split their stock to attract more investors with a lower share price.

 

However, some people can only buy lower priced stock because they may not have the buying power to make a larger investment. Thus, they wait till a stock splits so they can afford some shares. Just because a company declares a stock split, it does not mean that the stock price will inevitably rise in reaction. There are many other variables that influence investors' decisions in the result of a stock split including economic reports, market stability, earnings, interest rates, external conflicts, etc.

 

Companies also split their shares if they need to broaden their shareholder base and make more shares available to investors. A motivation for this could be a company's defence to a potential hostile takeover. Stock splits make the company more liquid, allowing more investors the opportunity to purchase an ownership in their company.

 

The timeline of a stock split consists of four main dates: Declaration or announcement date, Record date, Payment date, Ex-dividend date. The two key dates that are important to investors are the announcement date and the payment date. The announcement date is important because no one knows for sure if and when a company a will declare a split of their company's stock. Thus, investors speculate on whether the company will announce and when they will announce. The payment date is crucial as well because this is the day before the company actually splits its share price, after which investor activity changes as the new share price targets a different audience.

 

Moreover, there is another factor that engenders the announcement of a stock split. Companies tend to try to keep their stock within a certain price range. Therefore, when a stock hits the company's price target, the company, upon approval of the Board of Directors and the shareholders, will announce a stock split.

 

A stock split simply involves a company altering the number of its shares outstanding and proportionally adjusting the share price to compensate. This in no way affects the intrinsic value or past performance of your investment, if you happen to own shares that are splitting. With lower-priced shares, a stock's liquidity increases and making it easier to trade.

 

As a stock price rises, some people will be psychologically unwilling to pay that 'high price' so a stock split brings the shares down to a more 'attractive' level. Again, the intrinsic value has not changed, but the psychological effects may help the stock.

 

Via ET

Housing Finance Companies

Strong demand for housing loans and stable real estate prices augur well for housing finance companies. Though the stocks are not cheap, they make good long-term investments.
After last week's 25 basis point cut in the interest rate, the US Federal Reserve has slashed rates by 100 basis points in the past three months.
This rate cuts signify a benign interest rate environment worldwide once again as the US grapples to perk up its drooping economy and prevent the worsening credit crisis. India will also follow the trend of lowering interest rates over the next few months, say industry players.
Moreover, there is a belief that real estate prices, which have doubled over the past three years, seem to be stabilising now. Says Anuj Puri, chairman, Jones Lang Lasalle, "We expect prices to hold at current levels."
Given the combination of falling interest rate and stable prices, demand for housing loans will go up. While banks are slowing down their retail loan exposure which mainly comprise home loans, housing finance companies should benefit more.
Moreover, they are optimistic about maintaining or improving the key fundamental indicators such as net interest margins (NIMs) and non-performing assets (NPAs) due to improving incomes and strong recovery mechanisms.
The market seems to have recognised a lot of these factors over the past one to two months. Most housing finance companies have zipped past the Sensex and even the top two banks in housing loans namely ICICI Bank and SBI. Market experts believe that fresh investments should be considered on declines or at the current levels with a one year investment horizon.

Housing gains

In order to control inflation, the RBI has raised interest rates and adopted restrictive measures on bank advances. Bank credit, which grew at 30 per cent a year over the past three years, has slowed down to 25 per cent this year so far.
Besides, RBI has also increased provisioning for bank loans to retail and real estate sector. As a result, housing finance companies, which are more focused and understand the customer better than banks, such as HDFC, LIC Housing Finance and Dewan Housing Finance have seen their loan books and profitability improve in the first half of FY08.
For example, LIC Housing Finance's loan book jumped 36 per cent and 25 per cent in Q2 FY08 and H1 FY08 respectively compared with 21.5 per cent CAGR in FY04-FY07.
Similarly, its net profit grew at 54 per cent in trailing four quarters ending Q2 FY08 compared with 18.5 per cent over FY04-FY07. Moreover, net interest margin – a key indicator – witnessed an expansion of 50 basis points.

Demand to remain strong

Industry players are confident of achieving a loan growth of atleast 25 per cent in the medium term, which is more than what can be expected of total credit growth. The demand is likely to come more from tier-2 and tier-3 cities. This is because there is huge demand-supply mismatch in housing.
According to the Tenth Five Year Plan, there is shortage of 22 million homes. On the other hand, even disposable incomes and affordability of people are rising as salaries go up. However, possible interest rate cuts and stable property prices are expected to have a greater impact.
After a 400 basis point increase since the last few years, interest rates have remained stable. Industry experts believe that interest rates in India will follow the US Federal Reserve of downward bias in interest rates.
Says Kapil Wadhawan, vice-chairman and managing director, Dewan Housing Finance, "The liquidity situation has eased a bit and the Fed rate cut will lead to a softening in interest rates in the next six months."
In the home demand equation, property prices play a more important role than interest rates. S K Mitter, director and chief executive officer, LIC Housing Finance says interest rates were never a major deterrent considering the tax incentives and overall increase in income levels of the borrower.
Thus, according to him soft interest rates will not be a great trigger. Mitter adds: "Stability in property prices could trigger a higher demand from the user segment due to an increase in affordability." And this seems to be happening. Both DHFL's Wadhawan and Jones Lang Lasalle' Puri do not expect real estate prices to deviate much from current levels.

 

Buy on declines

Both HDFC and LIC Housing have seen a lot of buying interest from the mutual funds in the past two months. The gap between the market capitalisation (cap) of the top three housing finance companies (comparison of LIC and Dewan with industry leader HDFC) has narrowed.
A year ago HDFC's market cap was 28 times and 100 times that of LIC Housing's and Dewan Housing's, which has narrowed to 27.3 times and 78.3 times for Dewan at present. Moreover, valuations of these companies do not look cheap for FY08 and FY09 estimated price to book value even when compared with the top two banks-ICICI Bank and SBI, which are also large home loan lenders.
Thus, buying housing finance stocks makes sense for investors having more than a one-year investment horizon as it is unlikely that prices will correct much.

HDFC (Rs 3058)

Market leader HDFC trades at about 8 times and 7 times estimated price to book value for FY08 and FY09 respectively, which includes the value of its subsidiaries. But even after excluding its subsidiaries (asset management, insurance and banking), the book value is still high at 6.2 times and 4.8 times estimated FY08 and FY09 estimated book value.
Its high valuation is because of its consistent financial performance over the last several years and robust asset quality with non-existent non-performing loans.
The housing finance major's loan book and net profit have grown at a CAGR of 26 per cent and 22 per cent respectively in the last three years. Investors could buy the stock on declines given its consistent performance, market leadership and investments in banking, mutual funds, life insurance and general insurance subsidiaries.

LIC Housing Finance (Rs 376.60)

The second largest housing finance company has improved its financial performance in the recent past. For the first time in the past 15 quarters, it crossed a net interest margin (NIM) of 3 per cent in the September 2007 quarter.
This robust performance is expected to continue as the company expects a disbursement growth of 25 per cent and net NPAs below 1 per cent by FY08.
The company is raising Rs 500 crore by way of a preferential issue of shares, which will further improve its capital adequacy and help in accelerating growth. Its stake in LIC Mutual Fund is valued at Rs 12 per share. The stock trades at a reasonable valuation of 1.8 times and 1.6 times estimated book value for FY08 and FY09 respectively.

Dewan Housing Finance (Rs 180.75)

Dewan Housing Finance trades at 2.6 times and 2.2 times its estimated book value for FY08 and FY09 respectively. This looks on the higher side compared with LIC Housing Finance, which has a larger asset base.
However, the stock has positive triggers like its investments in real estate company -HDIL (Rs 45 per share), Wadhawan Retail (Rs 40 per share) and DHFL Vysya Housing Finance (Rs 11 per share).
Besides, its core business is also expected to do well in the coming years. The management has indicated a loan growth of 35 per cent, NIMs of 3 per cent and net NPAs below 1.25 per cent in this financial year. There is also a possibility of value unlocking in the event of listing of Wadhawan Retail, where it owns 20 per cent.

GIC Housing (Rs 83.35)

Despite having the smallest asset base among housing finance companies, the GIC Housing Finance stock has gained 66 per cent and 85 per cent in the past six months and one year respectively. IL&FS has given a buy rating on the stock last month with a one-year target price of Rs 110, a return of over 30 per cent.
The company's strong focus on tier-2 cities augurs well due to growing demand. Moreover, the company provides a lot of headroom for expansion due to its low gearing of 6 times in FY07, unlike its peers, which have debt-equity ratio of 8-10 times. The GIC Housing stock trades at 1.5 times and 1.2 times its estimated book value for FY08 and FY09 respectively.
The company is a good investment considering cheapest valuation among housing finance companies.

Weekly Technical Analysis

The markets scaled new peaks during the week ended December 14 after a gap of a month. The indices, however, cut their gains towards the end of the week on account of profit-booking in the last two sessions. Some of the good work done by the bulls thus got undone.

 

On the positive side, there has been no major changes in market trend so far - either in the short or the medium-term.

 

The market will test crucial support levels this week in case there is some more selling. The indices will have to hold these support levels in order to continue with the uptrend in the short-term.

 

From a low of 5,923, the Nifty soared to a fresh all-time intra-day high of 6,185 before paring gains and ending at 6,048, a gain of 73 points.

 

The Nifty has immediate support at 6,000, below which it may test 5,900 or slip further to 5,750. In order to regain the upward momentum, the index will have to cross the 6,150-mark. Till that time, the index may trade within a broad range of 5,750 and 6,150.

 

The Nifty is likely to find support around 5,950-5,915-5,885 this week and it may face resistance around 6,150-6,180-6,210.

 

The Sensex moved in a range of 664 points. From a low of 19,834, the index rallied to a new all-time intra-day high of 20,498 and finally ended with a modest gain of 65 points at 20,031.

 

The Sensex has slipped below its short-term support of 20,135. It needs to regain this level as soon as possible to resume its uptrend. The Nifty, on the other hand, stands above its short-term support of 6,000.

 

If the Sensex stays consistently below the 20,000-mark, it may test its medium-term support in the 19,500-19,350 zone. The 14-day DMA (daily moving average) for the index is around 19,700.

 

The Sensex may face resistance around 20,285-20,360-20,440 this week, while it is likely to find support around 19,780-19,700-19,620.

Tantia Constructions: Buy

Investors with a two-three year perspective can consider investing in the stock of Tantia Constructions. Strong order book, superior operating profit margins and well-entrenched presence in the eastern region are positives for this company. At the current market price, the stock trades at about 10 times its expected earnings for FY09 – after factoring in equity expansion due to conversion of FCCBs. This is at a discount to similar sized peers.

 

Tantia Constructions is primarily into building railways, roads, bridges and urban infrastructure projects. The company has also forayed into power transmission projects and airport contracts, albeit in a small way. Its current order book of Rs 1,300 crore (about 5 times revenues for FY07), not only provides visibility for earnings growth, but also reflects the company's measured way of taking up projects. For a small company such as Tantia, an order book of 8-10 times annual revenues may increase execution risks, as scaling up of resources in a short span could prove challenging.

 

Tantia's strong presence in the eastern and north-eastern region has two main advantages. There are fewer players interested in bidding in these regions due to difficult terrain. Tantia with its expertise in tunnelling has had an edge in bagging projects in this region. Further, among the various regions in the country, the eastern region holds much potential for infrastructure spending, as it has seen the least amount of development work compared to the other regions. The likelihood of improved spending is already reflected in the increasing budget allocation for the region in recent times.

 

Tantia's presence in the above geography and its strength in high margin businesses such as rail and urban infrastructure had enabled the company to maintain superior profit margins over similar sized peers. While operating profit margins have been in the 10-11 per cent range, the margin surged to 16 per cent in the September quarter. This may be the result of a revenue mix tilted in favour of high margin projects such as rails, as well as an increase in the order size (with a good number over the Rs 100 crore-mark).

 

Tantia's sales growth for the above quarter, however, remained muted and net profits took a dip. While the slowdown in sales may be due to longer duration projects in hand, the net profits largely declined due to higher interest costs, which almost doubled compared to the same quarter last year. We expect funds raised through FCCBs to ease the level of debt on the balance sheet. Nevertheless, increases in raw material and interest costs remain the key risks to earnings. Removal of tax benefits under Section 80 IA may also impact net profits in the short term.

Everest Kanto Cylinders: Buy

Investors can consider taking fresh exposure to the stock of Everest Kanto Cylinders (EKC), a leading manufacturer of high-pressure CNG (compressed natural gas) and industrial cylinders.

 

While we had earlier suggested that investors book profit on the stock, the recent spurt in oil price, combined with EKC's change in raw material sourcing strategy, presents a case for renewed investment. Besides, the shift towards high-margin products and the commencement of production in the company's Dubai and China (by early January 2008) units also underscore our changed stance.

 

At the current market price of Rs 330, the stock trades at about 20 times its likely FY09 per share earnings, assuming a full conversion of its foreign currency convertible bonds into equity. This valuation, though seemingly at a premium, is likely to be supported by the company's established market presence and capacity expansion plans that would position the company to benefit from the growing global CNG market. Investors, however, can buy the stock in lots given the volatility in broad markets.
Buoyant demand trends

 

The global demand for CNG applications is set to increase on the back of a firm oil-price outlook. This is likely to rub off positively on EKC, which derives about 68 per cent of its revenues from the CNG segment. Catering to demand from countries such as Malaysia, Thailand, Gulf countries and CIS (Commonwealth of Independent States) nations, EKC appears well placed to tap the growth potential in the CNG space in overseas markets since it has the necessary approvals from its target countries.

 

Notably, demand from the domestic market may also increase with the Supreme Court mandating the use of CNG as auto fuel for heavy vehicles in 28 highly polluted cities. The proposed extension of City Gas Distribution projects may offer an opportunity for growth.

 

In the light of such an expected ramp-up in demand, EKC's aggressive scaling of capacity appears well-timed, lending confidence regarding its ability to meet future demand. Capacity expansion across its units, setting up of greenfield project in China, introduction of new product line (Jumbo cylinders) in the Gandhidham unit and the opening of a second unit in Dubai suggest improved prospects. However, given the high gestation period, it could take a year or two before full benefits accrue from the added capacities. Concerns of excess capacities in the medium-term are also alleviated by the current high order book.
Broad-based sourcing

 

Change in raw material sourcing strategy also supports our case for investment. While there were concerns on EKC's complete dependence on Tenaris, a global manufacturer and supplier of seamless tubes for raw materials, the broad-basing of sourcing to Chinese and Japanese manufacturers appears to have de-risked the same. However, the management expects the sourcing levels to be maintained at current levels (about 65 per cent from Tenaris), since the materials sourced from Chinese players may not suit the requirements of higher capacity cylinders.
Expanding margins

 

For the half-year ended September 2007, EKC doubled its earnings on a consolidated basis and expanded its operating margins by about 3 percentage points to 25 per cent. Improved realisations for the CNG cylinders and pruning of cost can be attributed to the margin expansion.

 

Going forward, margins are likely to expand further, given EKC's plan to increase production of Jumbo Cylinders, which enjoy higher margins. Further, change in product mix tilted towards higher production of CNG cylinders over industrial ones may also add to the margins. While the overall volumes could remain at current levels, the management expects the change in product mix and improving realisations to yield better earnings in future.

 

Earnings may also get a lift from the proposed increase in export contributions from the India-based units. In this regard, the company's active hedging policy and strategy to bill both imports and exports in either dollar or Euro denominations provide comfort against forex risks.

Ipca Labs: Buy

Investors can buy the stock of Ipca Laboratories with a two-year perspective. Fully integrated operations, a strong presence in the anti-malarial segment, a growing focus on the US generics market and solid research skills are the company's positives.

 

At the current market price of Rs 645, the stock trades at a modest valuation of about nine times its expected FY-09 earnings. This is at a discount to like-sized peers such as Orchid Chemicals, Torrent Pharmaceuticals and Matrix Laboratories.

 

A diversified business strategy — both segment and geography-wise — helps Ipca achieve significant size and growth in formulations and bulk drug/intermediates.

 

Strengths in manufacturing and its low-cost advantage have helped Ipca maintain steady margins in its branded formulations business. This has given it a platform to leap into US generics through a partnership-enabled model with Ranbaxy. Under this profit-sharing alliance, Ipca is developing a number of generic prescription pharmaceutical products while Ranbaxy takes care of regulatory approvals and marketing. The duo has already received five USFDA approvals and looks set to increase this number in future.

 

Another key area that lends further earnings potential is research and development where Ipca spends four per cent of its turnover. It has entered into a collaborative-cum-licence agreement with Central Drug Research Institute for the further development of their compound 99/411, a synthetic substitute for malarial drugs. Ipca's domain knowledge in malaria underpins its R&D efforts.
Business scenario

 

Ipca, one of the top 20 domestic pharmaceutical companies, saw healthy operating profit margin of 20-22 per cent (since FY-07) after stagnating in the high teens for three years.

 

This change was driven by higher focus on diverse geographies such as Europe, Latin America and Africa; scaling up of international formulations business and a conscious foray into difficult-to-make bulk drugs. Ipca's net revenues grew by a Compounded Annual Growth Rate of 15 per cent and profits by 30 per cent, in the last six years.

 

To prevent itself from missing out on the US formulations opportunity, Ipca joined hands with Ranbaxy, identifying over 22 molecules for development. This partially contributed to the acceleration of formulation exports, which jumped by over 30 per cent in 2006-07.

 

We believe that the Ipca's US generics story is yet to unfold fully as it gains eight per cent market share for the approved drugs by 2010. In future, the company might derive a higher proportion of its revenues from high-margin formulations.

 

On the domestic front, Ipca looks good to maintain a reasonable success rate with around 20 per cent growth, driven by new launches over the past two years. Its model is much more de-risked now. Over 20 of its brands contribute 60 per cent of the domestic formulation revenues as against merely six in 2005.

 

Increase of field force (over 1,600) and new products aimed at speciality areas such as heart, lung, brain and pain-related ailments have begun to bear fruit. With an aggressive brand-building exercise initiated two years back, branded formulations is where Ipca is poised to see higher revenues as its 'focus patients' are likely shift from non-branded medicines.
Focus areas

 

In Europe, Ipca has used its strategy of forging relationships with big drug-makers such as Iceland's Actavis resulting in assured increase off-take of bulk drugs. Region-wise, this is the largest contributor to revenues.

 

Simultaneously, Ipca has submitted drug dossiers and developed region-specific medicines that it hopes will play a larger role in the next five years. In Africa, which is a 'future market', Ipca has ramped up its offering. With over 250 registered products, Africa grossed Rs 70 crore in export revenues and is expected to exceed Rs 80 crore in 2007-08.

 

The probability of acquisitions in overseas locations are higher for Ipca, which has until now grown organically. These acquisitions can lead to upsides in the stock price.

 

While Ipca raised debt of around Rs 40 crore to furnish significant capital expenditure at the end of F-Y07, its net change in cash position has improved considerably from the earlier year which will enough generate free cash flow enabling bigger acquisitions in future.

 

Ipca is also working on a number of molecules based on the Chinese herbal Artemisinin at a time when the global anti-malaria market is waiting for a new and cost-effective drug. When developed, these drugs could be breakthroughs in cost-effective management of multi-drug resistant malaria. Currently, Ipca appears best placed in this space to achieve success. This might also open up a parallel earnings stream of research-backed activities.

 

In this light, Ipca's recent open offer for 30 per cent stake in a domestic company — Tonira Pharma, assumes strategic significance. Tonira gives a rich basket of 25 bulk drugs and crucial intermediates along and the know-how to prepare polymorphs of complex chemicals.

Small cap mania - ready to join?

Is bungee jumping or a thrill-a-minute roller-coaster ride your idea of having a good time? If it is, then small-cap investing may be your preferred route to stock market riches. Unlike sedate blue-chip stocks that need to be held for several years to turn in a three-digit return, small-cap stocks can turn multi-baggers in a matter of months, especially if aided by a raging bull market (needless to say, small-caps are equally prone to nose-diving at the first sign of a ma rket reversal).

 

If you have the risk appetite to invest in them, take note that the party in small-cap stocks is already well underway. You may have to act quickly to capitalise on the recent wave of optimism towards the less-known names of India Inc.

 

Small-caps were barely ahead of their larger counterparts in the stock market rally between June 2006 and August 2007 that saw the Sensex surge by 42 per cent. But they have been the life and soul of the party in the most recent phase of the rally.

 

Since August 2007, the BSE Small-cap Index, with a return of 60 per cent, has easily trounced the Sensex (44 per cent). These index returns actually understate the case. Over 50 stocks in the BSE Small-cap index have doubled in this three-month span, while 12 have gone up three-fold or more.

 

As with large-caps, multi-baggers within the small-cap space feature several stocks with astronomical PE multiples.

 

This is a clear sign that gains in some cases have been driven by speculative froth rather than by hard fundamentals. Reliance Industrial Infrastructure, Nalwa Sons, Marksans Pharma and Walchandanagar Industries are some of the chart-toppers that fall into this category.

 

Another unusual trend in the recent small-cap rally is that stocks with high institutional interest haven't delivered better gains than those with low institutional holdings.

 

Many of the stocks from the top performers list (State Trading Corp, Reliance Industrial Infrastructure, Lloyd Steel) have marginal or nil stakes held by FIIs.

 

This reinforces the belief that the recent rally in small-cap stocks has been driven largely by individual investors, whether of the retail or high-net-worth variety, rather than by institutional buying.

 

Fundamentals do work

 

But this is not to say that selecting small-cap stocks based on their fundamentals has not been a rewarding proposition. Investors who did buy into small-caps with good businesses would have pocketed hefty gains in the past three months.

 

Companies in niche businesses such as equipment finance company — SREI Infrastructure Finance (154 per cent return), earth-moving equipment maker-TIL (149 per cent), Alphageo — a provider of seismic survey services (145 per cent) and investment bank IL&FS Investmart (128 per cent) are such examples.

 

These companies owe much of their gains to a re-rating (expansion) in their PE multiple, as investors recognised and priced in bright growth prospects for their business.

 

It is also a misconception that the small-cap basket consists only of obscure companies with an uncertain pedigree. The small-cap index is home to some companies that do occupy leading positions in their respective businesses — ICRA (rating services), Gokaldas Exports (garment exports), Rallis India (crop protection) and PVR (multiplexes) are cases in point.

 

The small-cap space also features several "sunrise" businesses — multiplexes, construction equipment, logistics, financing and broking, seen as having a high linkage to the India growth story. Some of these sectors don't find a representation in large-caps. This makes for rich pickings in this segment of the market. Companies in businesses such as metals, capital goods and financial services have been the frontrunners in the recent small-cap rally. The trend is now showing signs of expanding to engulf companies in businesses such as logistics, realty and media.
FIIs deepen exposures

 

Research apart, how can investors identify sound small-cap stocks to add to their portfolio? If safety of capital is your prime concern, institutional interest in the stock may be a good filter to apply (despite recent market trends).

 

Eight out of every ten stocks in the BSE Small-cap index featured at least a marginal holding by FIIs or mutual funds, based on their latest shareholding pattern. This suggests that only a few stocks in the small-cap space are yet to be unearthed by FIIs or domestic mutual funds. Should investors take exposures to the under-owned stocks, in the hope that they would attract institutional interest at a later date?

 

While this strategy may work quite well for large-cap stocks (which are high on the shopping list for institutions), this may not be a good approach to take to investing in small caps, for two reasons.

 

For one, institutional investors haven't sharply expanded their investment universe within the small-cap basket over the past year, despite ample opportunity; instead they have chosen to increase exposure to their existing holdings.

 

The markets have swung from 10,000 levels last June to over 20K in recent weeks. Yet, the number of small-cap stocks that have FIIs/mutual funds on board has registered a relatively small change in this period.

 

Domestic mutual funds, if anything have been even more circumspect than the FIIs, not at all entering any new small-caps in this period. On the other hand, there are several instances of companies where institutions have significantly increased their stakes.

 

These trends suggest that both FIIs and mutual funds have been cautious about adding new small-cap names to their portfolio. Instead, they have preferred to stick to businesses and stocks they are familiar with.

 

Given that the rally in small-caps has been underway for some time now and that valuations of these stocks have climbed considerably, it may be best for retail investors to stick to safe ground, when it comes to small-cap investing.

 

At this juncture, stocks that have seen a significant increase in institutional interest, either from FIIs or domestic funds, may be a good hunting ground. Logix Microsystems, Lloyd Electric, South Indian Bank, SREI Infrastructure Finance and Nitco Tiles are some of the stocks that have seen a significant accretion to FII holdings over the past year. Madhucon Projects, McNally Bharat, Subros, TV Today, Greenply Industries and TV Today have seen domestic fund managers hike their stakes significantly between last June and this September.
No pain no gain

 

While the return potential offered by small-cap stocks cannot be gainsaid, those keen to enter such stocks should also bear the following in mind:

 

Earnings disappointments from small-cap companies can lead to sharper declines in their prices than would be the case with large-caps.

 

As such, companies are typically under-researched and there are uncertainties about their prospects; their ability to sustain earnings growth from quarter to quarter thus becomes an important reference point for investors in such stocks.

 

That the recent rally in small-caps has been driven largely by re-rating (expanding PE multiple), rather than by earnings growth, makes the gainers particularly vulnerable to any disappointment.

 

As a reversal in a small-cap stock can be quite swift and accompanied by thinning volumes, investors should probably adopt a target price-based approach to taking profits in small-caps.

 

If small-cap stocks can deliver manifold returns in a matter of months, the downside can be equally swift.

 

On every occasion when the Sensex has suffered a sharp setback over the past five years, the BSE Small-cap index has taken a much sharper plunge.

 

In the stock market correction of May-June 2006 the BSE Small-cap index nose-dived by 27 per cent, when the Sensex corrected by 12 per cent.

 

Investors keen to shelter from such storms should set aside a fixed portion of their portfolio for small-cap stocks. Re-balancing at periodic intervals, to contain small-cap exposures, may be necessary.

 

Finally, the current valuation levels enjoyed by small-cap stocks as a class, also raise flags of caution. The rally between August and now has ramped up the PE multiple of the BSE Small-cap index from 16 to 25 times (on past earnings), in a matter of three months. This has substantially narrowed the valuation gap between the large caps, as represented by the Sensex, and the small-caps.

 

Given that small-caps do deserve to trade at a discount to the large-caps, this leaves limited room for further 're-rating' of the former. This suggests that the action may now be restricted more to "value" picks among small-caps.

 

It is also worth noting that the last major corrective phase in the markets (in May 2006) came about when the BSE Midcap and Smallcap indices moved into a valuation premium to the Sensex.

 

The rapid rise of some of the small-caps, heightened speculative activity, and the fact that the PE multiple of the BSE Smallcap index is now at a new high, should all be considered as warning signs by investors tempted to go overboard with small-cap investments