Smallcaps outperform larger peers

Mon, 14 Jun 01:30 pm

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Although trading well above the dotted line, the Indian markets shed a portion of their gains during the previous hour of trade. However, the numbers of stocks that have gained far outweigh the number of losers. The advance to decline ratio is currently poised at 1.7 to 1 on the overall BSE. While stocks from the realty and healthcare spaces are amongst the few losers, IT and metal stocks are currently leading the pack of gainers.

The BSE-Sensex is trading higher by 130 points (up 0.8%), while the NSE-Nifty is trading up by 30 points (up 0.6%). While midcaps stocks have also followed suit as the BSE-Midcap index is up by 0.4%. However, it seems as though investors are more interested in smallcaps as the BSE-Smallcap Index is trading higher by about 1%. The rupee is trading at 46.63 to the US dollar.

Auto stocks are currently trading weak led by Eicher Motors, TVS Motor and Tata Motors. A leading business daily has reported that Maruti Suzuki is looking at expanding its reach by strengthening its distribution network. At present the company has over 800-plus outlets in over 500 cities. The company is targeting to increase the figure to about 1,000 outlets by the end of this fiscal. The rationale behind this is simple – to cater to the pickup in the auto sector. The company is also believed to be betting big on rural markets as nearly 17% of the sales volumes during FY10 came from there. During the preceding year i.e. FY09, the same figure stood at about 9%.

We believe this development would only strengthen Maruti's key advantage over its peers - its reach. In the recent past, a handful of new entrants have flooded the market with their many new launches, thereby giving immense choice to potential buyers. One of the key advantages that a company such as Maruti Suzuki has it to cater to areas where there very few players present. And going by the aggressive launches that are taking place mainly in urban India, Maruti would definitely need to come up with similar kinds of strategies to maintain its market share going forward.

Stocks in the healthcare space were trading mixed with Glenmark Pharma and Aurobindo Pharma trading firm while Dr. Reddy's Laboratories and Divi's Laboratories were trading weak. Dr. Reddy's Laboratories (DRL) is the biggest loser in the markets today. The company suffered a setback as a US court blocked the sale of its generic version of Sanofi-Aventis' anti-allergic drug - Allegra D24. Allegra is one of Sanofi-Aventis' largest selling drugs and had peak sales of over US$ 1.5 bn for its various versions. DRL had received approval from US Food and Drug Administration (FDA) a few months back for their generic version of the drug. In fact the company was planning to launch it at-risk in the first quarter of 2011 as patent litigation over the drug between DRL and Sanofi-Aventis is presently pending in the US courts.

According to law, if a generic drug is launched 'at-risk', the generic company (DRL in this case) will have to pay damages to the innovator (Sanofi-Adventis) if it loses the patent litigation. While DRL plans to appeal against the court's decision, this ruling means that the company cannot launch the drug as per schedule. If the company is barred from launching this drug, it could mean a big negative for the company as analysts were estimating sales from this drug at US$ 150 m in three years time.