Smallcaps see the most pressure

Mon, 10 Jan 01:30 pm

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The Indian markets continued to trade well below the dotted line during the previous two hours of trade. Stocks across sectors are trading weak with those from the capital goods, consumer durables and power spaces leading the pack of losers. Amongst the top performers are stocks from the IT, metal and FMCG spaces.

The BSE-Sensex is currently trading lower by around 270 points (down 1.4%), while the NSE-Nifty is down by about 90 points (down 1.5%). Stocks form the mid and small cap spaces are also under pressure with the BSE Midcap and BSE Small cap indices down by 1.2% and 1.7% respectively.

Oil & gas stocks are trading weak with Guj State Petronet, GAIL, Essar Oil and ONGC leading the losses. State-owned explorer ONGC has demanded that the royalty it pays on crude from Cairn's oilfields in Rajasthan be added to the project cost. If that happens, profit for all stakeholders, including the government, would be calculated thereafter. ONGC has a 30% stake in the field but pays 20% royalty on the entire production. This amounts to paying for Cairn's share of royalty also. It is done due to a historic anomaly in policy, according to which the finance ministry is to compensate ONGC for bearing Cairn's burden. But the finance ministry has not kept its word, making it a losing proposition for ONGC. If the profit is calculated after adding royalty to the project cost, ONGC will get back some of its money but the government and Cairn will see their profit fall.

The move may scare off London-listed Vedanta Resources, which proposes to acquire a majority stake in Cairn India for an estimated US $10 bn. Vedanta's valuation of Cairn would have assumed the royalty exemption.

Engineering stocks are currently trading weak led by KSB Pumps, Bharat Bijlee, L&T, BHEL and Praj Industries. A leading business daily has reported that engineering and construction major L&T is vying for a Rs 50 bn monorail project in Gujarat. As per reports, the memorandum of understanding is likely to be signed at the upcoming Vibrant Gujarat 2011 Summit. If this development is true, it would be the company's second monorail project. L&T is the company that bagged India's first monorail project in Mumbai.

Despite this piece of news, the stock is currently trading lower by about 4%. In fact, the stock has been under pressure for a while now. It has fallen by about 20% from its 52-week high price of Rs 2,212. In recent times i.e. over the past week or so, L&T's stock has fallen sharply. While high valuations seem to be one reason, the company's management also recently indicated that it is planning on splitting up L&T's businesses into nine independent companies. At present, it would be difficult for one to comment on the outcome of the same given that the details have not really been divulged.