Small and midcaps buck the trend

Thu, 25 Mar 11:30 am

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The Indian markets continued to remain extremely volatile, with the benchmark BSE Sensex hovering below the dotted line during the previous two hours of trade. The benchmark indices pared their opening gains on account of selling activity across stocks from the auto, metal, capital goods and oil & gas sector. Nevertheless, stocks from FMCG, telecom, healthcare and IT sectors are managing to garner investors' interest.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 42 points and 12 points respectively. Stocks from the midcap and small cap spaces are currently trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading higher by 0.04% and 0.15% respectively. The rupee is trading at 45.68 to the US dollar.

The stock of Indian IT major Tech Mahindra is out of favour today. According to a leading business daily, American telecom major AT&T has acquired 8% stake in the company. It may be noted that AT&T has been an important client for Tech Mahindra since long. According to a long term contract signed between the companies in 2005, AT&T had an option to buy 10 m shares of Tech Mahindra at a pre-determined price of US$ 34.5 m. As this option was due to expire in April 2010, AT&T decided to exercise the option as the proposed 8% stake in Tech Mahindra share stood much higher in terms of market value. At the current market value of US$ 200 m the stake is a lucrative bargain for AT&T. To this end, it bought 8% stake in Tech Mahindra from one of the promoter companies, MBT Mauritius.

This appears a positive for the company as it might get more secured long term revenues from AT&T which already contributes around 10% of company's topline. This will help Tech Mahindra is reducing its dependence on recession-hit British telecom giant, BT (British Telecom) which contributed over 40% of company's revenues. However, given the uncertainties around the company's business from its largest customer BT as well as disclosure of actual financial situation at Mahindra Satyam, one must keep a close eye on the stock.

According to a leading business daily, Shree Cement, the largest cement manufacturer in north India has got government approval to get into power trading. According to Central Electricity Regulatory Commission's (CERC) approval, the cement company is allowed to start inter-state power trading business for the power it produces at its merchant plant. It may be noted that the company already has an installed capacity of 260 MW, with additional merchant capacity of 300 MW to be installed by the end of FY10.

Shree Cement has strategically ventured into power business which currently contributes over 15% to the topline. Over the next two years the company plans to increase share of power revenues gradually to one third. Over the long run, the company foresees to generate revenues from power business at par with cement. We believe that power trading business will insulate it from cyclicality of cement business which is witnessing rising costs and softening realisations.