India leads Asian losers
Closing

Failing to recover from the strong bouts of profit booking seen since the start of the session today, the benchmark indices languished in the red and closed well below the dotted line in today’s trade. While the BSE Sensex closed lower by around 253 points (down 1.5%), the NSE Nifty lost around 87 points (down 2%). Midcap and smallcap stocks also felt the pressure and their benchmark indices shed around 2% each. Energy stocks were the only ones to gain on the back of hopes of a change in fuel pricing mechanism.

As regards global markets, most Asian indices closed lower today while European indices also opened in the negative. The rupee was trading at Rs 46.21 to the dollar at the time of writing.

In a measure to accelerate its financial inclusion drive, the RBI has requested PSU and private sector banks to offer overdraft loan facility in addition to no-frills accounts in under-banked areas.

The RBI has also sought a three-year roadmap on the extent of financial inclusion that banks plan to achieve by March 2011. The central bank has, however, clarified that it would not impose any uniform model on banks for financial inclusion but allow them to develop their own strategy in line with their competitive advantage. We believe that this would be an ideal way to ensure financial inclusion. It would not lead to banks sacrificing on their profitability and at the same time ensure sufficient inclusiveness. Profit booking was witnessed in banking stocks across the board today.

Meanwhile, Indian software industry body NASSCOM believes that the sector will take a couple of years more to recover from the global economic slump. NASSCOM has projected export revenues to grow by 13% to 15% YoY to US$ 57 bn in 2010, below the previous outlook of US$ 62 bn. The growth rate in the current fiscal would be 5.5%, within the 4-7% expansion projected earlier. NASSCOM believes that although software companies in Asia are leading the IT service exports as companies in US and Europe restart their technology spend, growth will be lower than earlier estimates. Software majors including Infosys, Wipro and TCS failed to garner investor interest today.

Cement major ACC announced its full year CY09 results today. The company reported 10% YoY growth in revenues during CY09. The growth has largely been backed by improved realizations during the past few quarters. Stable cost of operation and improved realisations led to 43% YoY growth in operating profits for the company. Despite lower other income, growth in bottomline stands at 33% YoY. This is mainly on account of good show at the operating level. Excluding extraordinary income reported in CY08, net profit growth stood at nearly 38% YoY for CY09. The stimulus package announced by the government to boost construction activity is expected to keep the company’s volume offtake consistent. However, realizations are expected to come under pressure in the medium term as more capacities come on stream.

Selling continues, mkts fall lower
01:30 pm

The Indian markets continued to languish in the red during the previous two hours of trade. Currently, selling activity is being witnessed among stocks from IT, metal and realty sectors. However, FMCG, consumer durable and oil & gas stocks are the ones managing to garner investors’ interest.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 150 points and 45 points respectively. Stocks from the midcap and small cap spaces are currently trading mixed, with the BSE-Midcap and the BSE-Smallcap indices trading down by 0.3% and up by 0.1% respectively. The rupee is trading at 46.10 to the US dollar.

As per a leading business daily, auto major Maruti, with a view to grow out of its reliance on its foreign parent’s (Suzuki) R&D capabilities, will turn its upcoming R&D facility at Rohtak into a self-reliant setup by 2012. It may be noted that this will also coincide with the introduction of its first India made small car. The company’s target is to make its R&D capability independent and self sufficient by 2012. Maruti management would like to have the development of small cars particularly for India to be done more and more in India itself. The company sees an expenditure of up to Rs 15 bn at its R&D centre over the next 3 to 4 years. The company plans to hire around 1,000 engineers this year and has set up a separate HR cell for the R&D centre, which further shows the company’s seriousness of intent. The stock of Maruti is trading marginally lower currently.

As per data released today, India's food price index rose 17.56% in the 12 months to January 23, while the fuel price index was up 5.88%. This rise in the food price index was higher than an annual rise of 17.4% in the previous week. Further, India's annual wholesale inflation (WPI) picked up to 7.31% in December 2009. This is in contrast to a much lower 4.78% in November 2009.

Industry chamber Assocham expects WPI inflation to surge to double digits by the end of FY10. It may be noted that this is much higher than RBI's projections of 8.5%. The main culprits for this are the rising prices of commodities like steel, cement and coal due to the shortage of supply.

Midcaps & Smallcaps buck the trend
11:30 am

After opening on a subdued note, the Indian markets continued to trade weak during the previous two hours of trade. Currently, selling activity is being witnessed among stocks from IT, telecom, and metal and realty sectors. Nevertheless, FMCG, consumer durables and oil & gas stocks are the ones managing to garner investors' interest.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 93 points and 26 points respectively. However, Stocks from the midcap and small cap spaces are currently trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading up by 0.1% and 0.5% respectively. The rupee is trading at 46.10 to the US dollar.

According to a leading business daily, Indian IT major HCL Technologies has signed up a strategic partnership with nMetric, a California based small IT products company specializing in solutions for production and physical logistics. The deal aims at providing intelligent shop-floor solutions for automotive manufacturers. The HCL's comprehensive automotive solution together with nMetric's expertise will be able to design solutions to help automotive manufacturers improve their operations by automating and monitoring complex factory processes.

It may be noted that HCL derives around one-fourth of its revenues from the manufacturing sector and has been lately facing trouble on account of global slowdown in the segment. We believe that this partnership will aid HCL in expanding its ability to provide innovative IT solutions to the global auto industry which has started to see some signs of recovery.

As per a leading business daily, the world's largest drug maker Pfizer has identified China, Brazil, India, Mexico, Russia and Turkey as key emerging markets for the company. Recently, the company hinted about its plans to increase its presence in these fast-growing underdeveloped markets. It expects them to eventually yield solid profits. The company is particularly upbeat about the Chinese market which is growing at the rate of 25 to 28%, much faster than the other emerging markets which are growing at 12% to 14%.

As for India, the company has forayed into branded generics in a bid to gain access to a wider market and bolster sales. It has already launched two products in this category. Pfizer is also looking to increase its reach to doctors and the focus will be more on metros and tier I, II, III and IV cities before it ventures into rural areas. Stocks from pharma space are trading in red currently.

Markets begin on a weak note
09:30 am

The Indian markets have started today's session on a weak note. The benchmark indices opened close to the breakeven mark but quickly plunged into the red. They have not managed to make any upward movement since then. Other key Asian markets are trading in the red with Hong Kong (down 1.1%) leading the pack of losers. The US markets closed lower by 0.3% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the red with metal and auto stocks bearing the brunt of selling activity. The BSE-Sensex is trading lower by around 67 points, while the NSE-Nifty is down by about 24 points. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.1% and 0.3% respectively. The Rupee is trading at 45.98 to the US dollar.

Food stocks have opened the day on a mixed note. Gainers here include Agro Tech Foods and Nestle. However, GSK Consumer is in the red. As per a leading business daily, GSK Consumer has entered the instant noodles segment. It has launched the product under the 'Horlicks' brand, named 'Foodles'. The noodles market in India is estimated to be around Rs 10 bn and has been growing at the rate of 25%. Hence, the company's interest in the segment does not come as a surprise. Foodles is expected to compete with market leader 'Maggi' from Nestle. In fact, GSK consumer expects to gain a 6% to 10% market share in the first year itself. However, in our view, it will be an uphill task for a new brand to edge out Maggi, which Nestle has maintained over the decades by a host of advertising and promotion activities.

Energy stocks have opened the day on a positive note. Gainers here include Gujarat Gas and Castrol. As per a leading business daily, the Kirit Parikh report on fuel pricing has accepted ONGC's subsidy formula. Essentially the formula talks about crude oil production from government nominated blocks to be taxed at an incremental rate as crude prices rise. This will cap the subsidy burden on the government even if crude prices escalate. It will also provide more visibility for upstream oil companies as compared to the current practice of adhoc subsidy announcements. The report departs from the recommendation of the B K Chauturvedi Committee which had suggested a 100% windfall tax on crude price above US$ 75 per barrel. In our view, the incremental tax formula is a sensible one. But a lot depends on the actual implementation. After all, there have been committees earlier too, whose suggestions have not been carried out.

Is the mid & smallcap party over?
Pre-Open

The BSE Midcap index has risen 126% in the past 12 months. During the same time, its peer comprising smaller cap stocks, the BSE Smallcap index rose 157%. With this each of them managed to trump the performance of the heavyweight index, the BSE Sensex that rose 78% since January 2009.

The growth in sales and profits of constituents of the mid and small cap indices during this period also bore similarity to a rising phoenix. Higher sales, lower cost of input as well as leverage coupled with better demand scenario made the going smoother for these lesser known entities. Raising funds for expansion became easy and cheap. There was little more that these entities could ask for. Their high double digit growth in earnings was rewarded with higher valuations. The economic slump in the developed nations seemed to be a boon in disguise. It literally was a 'honeymoon' period for the smaller companies where even petite changes in sales and cost show a magnified impact on growth and profitability.

But what comes hereon, may bring them a new set of worries. High inflation could crimp margins and tax hikes may dent demand for goods and services. The RBI's hint at monetary tightening does not go too well with their freshly leveraged books. Besides renewed demand from infrastructure and consumption sectors is set to take a backseat. The economic recovery came in amid sharp tax cuts and stimulus measures. Neither of these seem sustainable as fiscal worries loom large.

Raw material prices are on the rise after a benign 2009. As commodities get dearer, the companies will have to use their pricing power to sustain margins. In most cases the odds are heavily stacked against them. With rising interest rates and record-high food prices, consumers are prone to down trading (buying cheaper substitutes). Further, with economic recovery gaining stability, firms may once again be under pressure to hike wages, hammering away at their profit margins.

Ones that have made ambitious plans to raise equity may have more than one reason to reconsider their options. For one, the larger companies are themselves lining up in the primary market in a bid to solicit funds. They are infact competing with PSU divestments as well as the government's own debt borrowing plans. Secondly, with investors being spoilt for choice, competing in the capital market may also lead to additional equity dilution. The diluted returns in turn may hurt their valuations as well.

The surge in export demand from the beaten down developed economies may also be short-lived. For governments in those economies are getting more answerable for their fiscal opulence. The stimuli funded recovery in the developed economies may thus see an early exit. And then, exports from emerging markets could remain vulnerable to the growth and employment in the developed world. Nothing would be more impacted by such a change in global trade than the fortunes of some of the export dependant small companies in India.

Should you stay invested in them?
The question that arises here is whether you should continue to stay invested in the mid and small cap companies? We ask: why not? If you have invested in the company after being convinced about the sustainability of its business model across economic cycles and the correctness of its valuations. Companies whether they belong to the large, mid or small cap space have business models that could be vulnerable to economic cycles. However, what is important is to ensure that the business has the moat and the management skill to tide through any crisis. Firms that build up efficiencies in their processes can continue with cost cuts to sustain margins and investor returns. Further, as the legendry Buffett says, if you have purchased the business at the correct price, the time to sell is never!

So be it lower EPS, inflation, interest rate, lower GDP or stimulus withdrawal, neither should get you unduly worried about your investments in mid and small caps. Unless you have put in your money at the wrong time or without adequate homework. Even Buffett envies retail investors who can buy small stakes in undervalued lesser-known companies.