Massacre on Dalal Street

Wed, 27 Jan Closing

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Intense pain continued on Dalal Street as stocks across the board took a severe beating today. Investors’ fears regarding rising inflation and the possibility of higher interest rates rocked sentiment today. Cut-down in China’s lending and other weak global data also continued to spook the markets. Today’s worst performers came from sectors like realty, metal, and auto - the heroes of last year’s bull-run. On the broader BSE, just one stock gained today for every seven that closed in the red.

The BSE Sensex and NSE Nifty closed with losses of around 490 points (2.9%) and 155 points (3.1%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed down by 4.3% and 5.5% respectively. Worst performers among the Sensex heavyweights included Tata Steel, DLF, Tata Motors, Wipro, and Maruti.

Indian markets were in fact the worst performer amongst all key Asian markets. China (down 1%) and Japan (down 0.7%) were the next to follow. European markets have also opened in the red.

Realty stocks closed deep in the red today. DLF and Unitech closed with big losses. Fear of a rise in interest rates seems to have stung investors in these stocks. This comes even as realty companies are just about to get over their liquidity issues after the last crisis that engulfed them in 2008 and the first half of 2009. Now if one were to go by the comments from Mr. K.P. Singh, the founder promoter of DLF, several small realty companies will soon have to shut shop as consolidation intensifies within the sector. The sector is reeling under oversupply, especially in the commercial real estate space. Now if interest rates were to rise from here on, which they are most likely to, it will act as a nail in the coffin for players that still have stretched balance sheets.

Metal stocks were the second biggest losers amongst BSE’s sectoral indices. Intensive selling pressure was seen in heavyweights like Hindalco, Tata Steel, and SAIL. Pressure on SAIL was despite a robust set of numbers announced by the company. The company has recorded a 99% YoY growth in its net profits during 3QFY10. This came on the back of a 12% YoY growth in net sales and margin expansion. Operating margins moved to 26.1% in 3QFY10 as against 12.8% in 3QFY09. Lower raw material and employee costs led to this sharp improvement in margins. The company sees a further improvement in its production and sales volumes during the current quarter (4QFY10). This is apart from its expectation of a rise in steel prices on the back of rising prices of key raw materials.

Small-cap stocks as a category were the worst hit today. While the BSE Smallcap index lost around 5.5%, stock specific losses ranged from 3% to 8%. In fact, around 30% of the stocks from the index closed with losses over 5%. Small caps, as is widely known, have been the biggest gainers in the bull-run that started in March last year. Even after the latest fall, the index is up around 190% up from its lows of last year. The index’s P/E currently stands at around 18 times, as compared to around 6 times at the start of the run up.

In short, small caps in general aren’t cheap anymore. And then there are several stocks that have run up to now trade at their multi year highs despite not much change in their fundamentals over the past year. We maintain a cautious view on small caps in general. Though one can still study hard and find some wonderful long term opportunities from within the space. But then, the question on top of one’s mind must be - what to buy as the markets correct?