IT, FMCG drag markets down

Wed, 7 Apr 01:30 pm

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Profit booking took its toll on the Indian markets as they dropped sharply towards the dotted during the previous hour of trade. Stocks that are currently under pressure include those form the IT, FMCG, and banking spaces. Those from the oil & gas and auto spaces are leading the pack of gainers.

While the BSE-Sensex is trading marginally higher, the NSE-Nifty is trading marginally lower. However, stocks from the midcap and smallcap space continue to see interest as the BSE-Midcap and BSE-Smallcap indices are trading higher by about 0.3% and 0.6% respectively. The rupee is trading at 44.49 to the US dollar.

Over the past few days, small cap stocks have been seeing some interest by the investing community. In fact there have been quite a few articles and write ups in business dailies in recent times suggesting that investors consider investing in mid and small caps stocks at present levels. It must be noted that the returns from the BSE-Midcap and BSE-Smallcap indices have been much higher as compared to the returns of the BSE-Sensex. While the BSE-Sensex has moved up by nearly 81% over the last year, the BSE-Midcap and BSE-Smallcap indices have moved up by nearly 130% and 162%. With this upsurge, the valuations have moved up significantly as well. As of yesterday's closing prices, the BSE-Sensex was valued at a price to earnings multiple of about 21.8 times, which by any means is not attractive. The valuations of the BSE-Midcap and BSE-Smallcap indices stood at 19.2 times and 16.3 times respectively.

While on the face of it, the valuations look more attractive, it must be noted that midcaps and smallcaps are relatively much more riskier stocks to invest in as compared to their larger peers. This is on the back of lesser availability of information as well as their size. Looking at the historical valuations of these indices, we believe that valuations are anything but attractive. This is especially when compared to the valuation of their larger peers.

Real estate stocks are currently trading firm led by Orbit Corporation, Ackruti City and DLF. A leading business daily has reported that real estate major Unitech is planning to hive off its non-core businesses such as telecom, SEZs, and list them by issuing shares to its existing shareholders. As per the management, the company will be setting up a restructuring committee to explore and evaluate opportunities for potential merger of subsidiaries, demerger and other forms of restructuring. The management plans to do the same because it believes that the non-core businesses are not really valued in its current market cap which stands at nearly Rs 183 bn. Just for example is the company's stake in its telecom venture Uninor, which is valued at about Rs 40 bn.