The money seems to be in Midcaps
Closing

Markets continued to trade volatile right till the end. In the end, they closed higher but only marginally. The BSE Sensex closed the day with gains of around 15 points (0.1%) while the NSE Nifty edged higher by a mere 4 points (0.1%). BSE Midcap and Small cap indices continued to deliver strong performances, closing the day higher by 0.7% and 0.4% respectively. On the Sensex, the advance to decline ratio was nearly evenly split with there being one gainer for every stock that declined.

As far as global markets are concerned, while most of Asia closed higher, majority of the European indices are trading in the red currently. The rupee was seen trading at Rs 45.9 to the dollar at the time of writing.

After spending the first two days of the year in the bull camp, the markets decided to take a breather today. Of course, this assessment applies to the benchmark indices of Sensex and Nifty and not the smaller ones like the BSE Midcap and BSE Smallcap indices. These continued to make merry. And the reasons may not be hard to find. With most of the large caps looking fairly valued from a medium term perspective, the attention seems to have now veered towards the Mid cap and Small cap counters.

Also, investors seemed to have become more risk taking and hence are now willing to allocate more funds to these counters. Our advice to investors would be to practice even more caution while investing in mid and small caps for they no doubt present more growth potential than large caps but at the same time are riskier as well.

FMCG majors like Dabur, GSK Consumer and Agro Tech Foods kept investors interested right till the end today. The buoyancy could be a result of the news in a leading daily that companies in the foods space would go in for either price hikes or grammage reduction exercise in order to preserve margins in wake of higher food prices. With certain key commodities like sugar, cereals, milk and pulses, getting extremely dear, companies that are heavy users of these items are facing huge pressure on their margins. Although these companies tried hard to not pass on the increase to end users by resorting to cost cutting measures in other areas, a still rising trend is making matters difficult and forcing the companies to go in for a price hike or in some cases, reduction in the size of package. This in turn is likely to put pressure on the disposable income of consumers and might also hurt demand.

With a decline of nearly 4%, Maruti emerged as biggest loser on the Sensex today. A spate of launches in the small car space has investors worried perhaps. The ongoing auto expo in New Delhi has witnessed a never before rush of small car launches by the company’s rivals and that too at very attractive price points. Since Maruti derives majority of its revenues by selling small cars, this obviously spells trouble for India’s largest carmaker. It will either have to lower the price of its existing models thus taking a hit on profitability or risk a loss of market share and lower than industry growth rate. In both the cases, its growth prospects could suffer. Although the company has countered that it is looking to maintain its current market share well into 2015 when the country’s car output could be 3 m cars, the target looks more difficult now than during any other time in the company’s recent history.

Positive news lifts Dr.Reddy's
01:30 pm

The Indian stock markets continue to remain volatile after a strong start. Healthcare and realty were leading the market while IT and telecom were trading under the dotted line on account of profit booking.

The BSE Sensex and NSE Nifty were trading in the green, albeit marginally higher. BSE Sensex was higher by 15 points while NSE Nifty was higher by 3 points. The BSE Midcap index was trading higher by 46 points while the BSE Smallcap index was trading up by 60 points. The rupee is trading at 46.15 to the dollar.

As per a leading daily, Ashok Leyland has indicated that it will hike the price of its commercial vehicles shortly. The company has cited rising steel prices, change in technology due to new emission norms and fixed price contracts with local transport bodies as some of the reasons for this hike. The quantum of this hike is expected to be around 2 - 3% across categories and is expected to happen around March. Ashok Leyland has witnessed good sales numbers in the last 2 quarters and expects to close the year with total sale of 62,000 - 63,000 units. The company expects good growth going forward despite this hike and is aiming for a double digit growth next fiscal.

Dr. Reddy was up by 3.3% at the time of writing this report. The company has pulled a first for an Indian company. Indian drug industry’s dream of coming out with its own new chemical entity (NCE) or an originally researched drug received a boost with Balaglitazone showing encouraging results in the first leg of human trials. This is an anti-diabetic drug being developed by Dr. Reddy jointly with Denmark-based Rheoscience. The companies intend to present their findings to regulators in developed markets and will take a call based on their feedback on their course of further action. Phase 3 trials are expensive as a large number of patients are involved in this. Since there is a chance of failure even at this stage, investors are advised to exercise caution.

Midcaps, small caps buck the trend
11:30 am

After witnessing a strong start today, the Indian stock markets remained somewhat choppy during the previous two hours of trade. The indices are currently trading below the dotted line on account of profit booking in the stocks from the IT, telecom, auto and metal sectors. However, stocks from banking, healthcare and consumer durables managed to garner investors' interest.

The BSE Sensex and NSE Nifty traded in the red, marginally down by 8 points and 5 points respectively. However, midcap and small cap stocks managed to buck the trend .The BSE-Midcap and BSE-Smallcap indices are trading up by 0.4% and 0.5% respectively. The rupee is trading at 46.15 to the dollar.

As per a leading business daily, BHEL, India's leading engineering PSU, has won orders worth Rs 300 bn so far in the current fiscal i.e. FY10. Out of these orders which sum up to erecting 11,700 MW of capacity, about 94% (11,200 MW) came from the independent power producers. The management has reported that the PSU is winning back private sector contracts that previously went to China. It is believed that equipment performance as well as competitiveness is aiding the PSU in strengthening its order book and wining huge private sector orders. It may be noted that until recently the public sector was the major spender on power capacity additions for whom BHEL was the invariable supplier. However, with the emergence of more private players the situation changed. Private players used to prefer Chinese equipments due to their timely delivery and lesser cost. Nevertheless, there is a shift in their behaviour now. We believe, with better performance and reasonable pricing, BHEL can continue to keep competition at bay.

According to a leading business daily, Bharti Airtel has got an approval from Bangladesh's telecom authority for its proposed acquisition of 70% stake in Warid Telecom. Airtel plans to invest US$ 300 m in Abu Dhabi Group's Warid which is the fourth largest mobile company in Bangladesh. According to the approval grant, Warid has been asked to submit a schedule of Bharti's initial investment within 30 days. The initial sum of US$ 300 m is supposed to be used in network expansion. It may be noted that Warid which started operations in Bangladesh in 2007 had a subscriber base of 2.92 m at the end of November 2009. Bangladesh brings in a lot of opportunity for the telecom sector which is growing rapidly there on the back of low penetration levels, competitive tariffs and steady economic growth. As per projections, overall subscriber base in Bangladesh is expected to reach 70 m by 2011 from the current level of 51 m. It is expected to reach 100 m by 2015. We believe that this acquisition offers Bharti a good opportunity to expand abroad in times when the Indian market is plagued by rigorous price wars triggered by rampant entry of new players. Bharti is trading in the negative.

India reflects strong Asia
09:30 am

The Indian markets have started on a strong note today. Benchmark indices opened above the breakeven mark and have managed to stay in the positive territory since then. Other Asian markets are also trading in the positive currently. The US markets closed lower by 0.1% yesterday.

Heavyweights from the BSE-Sensex are trading a mixed bag with metal and energy stocks leading the pack of gainers. However, select auto and banking majors are in the red. The BSE Sensex is trading higher by around 50 points, while the NSE Nifty is up by around 15 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE Midcap and BSE Smallcap indices are trading higher by 0.5% and 0.6% respectively. The rupee is trading at 46.15 to the US dollar.

Auto stocks have opened the day on a mixed note. Gainers here include M&M and Tata Motors. However, Maruti Suzuki is in the red. As per a leading business daily, the company is planning to increase its total production by 50% to 1.5 m units in five years. As part of the strategy, it will double the annual production capacity at its Manesar plant to 600,000 units. The capacity at its older Gurgaon plant will also be increased. The intention behind the production hike is to defend its 50% market share in India, which is now being eyed by leading global auto companies. In fact as many as six international giants - Volkswagen, General Motors, Ford, Toyota, Honda and Nissan - are set to launch their small cars in India. Clearly, this is one industry to watch out for in the days ahead.

Software stocks have opened the day on a mixed note. Gainers here include Satyam and Tech Mahindra. However, Wipro is in the red. As per reports, India plans to raise the share of nuclear power from the current level of 4% of its total power generation to 9% in the next 25 years. That is expected to throw up information technology contracts to the tune of US$ 3 bn to US$ 7 bn. The nuclear effort will create an additional 15 gigawatts of power, which translates into a requirement of as much as 226 m engineering hours. About 75% of this will be in the non-nuclear engineering segment including information technology. Little wonder, Indian IT companies are keen on bagging the deals. As per a leading business daily, companies such as TCS, Satyam and Cranes Software have shown interest in bidding for these contracts.

IPOs may burst the bubble
Pre-Open

"It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."

These words from Warren Buffett can prompt any investor looking to make a killing on an initial public offering, to rethink. IPOs are notorious for being over priced. However, over the past few months business dailies have done a good job of updating their readers on the 'red-hot' IPOs coming their way. Be it of government banks or mining companies. Or cement and steel companies getting into power. Or insurance companies debuting on the bourses.

We are not just referring to India. As per Bloomberg, this year emerging markets are expected to raise more money through IPOs than developed nations for the first time. And if you are wondering whether the dream run in stocks seen in 2009 is set to continue this year as well, here is a warning. As per Mark Mobius, the record rally in the shares may turn into a 20% decline. Mr Mobius who oversees US$ 34 bn of emerging market assets at Templeton Asset Management, has had a cautious view for long. But this time he has been very specific. And backed his concern with very good rationale.

As per Mobius, it seems to be a simple case of economics where supply will outstrip demand. The result will be that existing assets will face pressure on prices. As emerging markets have millions of new shares being offered on their bourses, the investors will be spoilt for choice. Whether they are foreign investors with higher risk appetite or conservative domestic investors. As a result, the existing stock prices will have to compete with the new offerings to retain their valuations. Stocks where the valuations have run ahead of medium term fundamentals will have few takers. And despite continued fund flows into emerging markets, a lot of money will move from secondary to primary markets.

To take a stock of IPOs scheduled this year, China will top the list. Shanghai Stock Exchange IPOs may raise more than double the funds raised last year. Chinese companies are expected to seek upto 380 bn yuan (US$ 56 billion) of IPO funding this year. For companies based in Hong Kong, the figure is HK$ 370 bn (US$ 48 billion). India may raise Rs 256 bn (US$ 5.5 billion) selling stakes in 10 state-run companies. Companies in Brazil and Russia are also warming up to seek fund for aggressive growth plans.

Investors in developed economies have little to complain. For stocks in emerging markets can offer them returns that no asset back home can fetch. However, they are unlikely to lose sight of value. If the new offerings are reasonably priced, the investors will not resist exiting from their current holdings.

Hence, Mr Mobius' concerns are not unfounded to say the least. While his prediction of 20% correction cannot be timed, its possibility cannot be ruled out.

We have so far cautioned readers about subscribing to overprices and over-rated IPOs. At times there are cases of no prior operating history or huge execution risks. But this time the risk is not just about subscribing to over-priced IPOs. It also the risk of these IPOs eroding value from your current portfolio. Hence, readers must not only be wary of the super-hyped IPOs featuring in the pink papers. They must also take a harder look at the valuations of their current holdings. Else they may be left with little solace.