Smallcaps stay in favour

Tue, 15 Jun 11:30 am

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After starting on a positive note in the morning the Indian indices have lost their gains and are trading well below the dotted line. Key Asian markets, however, are all in the positive. Stocks from PSU and metals space are seeing strong buying interest while stocks from the banking and IT space are trading in the red.

BSE-Sensex is trading down by 51 points while NSE-Nifty is trading down by 13 points. BSE-Midcap index is up by 0.1% while BSE-Smallcap index is trading up by 0.5%. The rupee is trading at 46.64 to the US dollar.

As per a leading business daily, RCom has decided to demerge its telecom tower business - owned by Reliance Infratel. The company is in advanced discussions with various strategic and financial players to sell stake in its telecom tower subsidiary. It should be noted that RCom owns about 95% in Reliance Infratel. GTL Infrastructure is one of the prime candidates believed to be in the race for acquiring stake in the demerged entity. The consideration to be received via stake sale shall be in the form of cash and stock. Infusion of cash will help reduce debt and improve leverage ratios for RCom while equity infusion would enable participation in future growth projects. As per RCom, the independence and neutrality of the carved out independent entity will also help attract new tenants.

Reliance Infratel has 50,000 towers across the country and plans to add 25,000 more in the next two years. It has a debt of approximately Rs 150 bn. We believe demerger of the subsidiary was a wise move considering monetization of assets via IPO is a difficult proposition given the dismal market conditions. The company had already filed DRHP for an IPO earlier but was not able to go ahead with the offering due to valuation concerns.

Media stocks including Balaji Telefilms, IBN18 Broadcast and Reliance Media are trading strong. Balaji Telefilms earlier rose sharply on account of news that Star India was selling its 26% stake in the company to Reliance Big Entertainment. Reliance Big Entertainment however later stated that the reports were not true.

Inflation (WPI) has once again reared its ugly head again. And this time the culprits are commodities like iron and steel. Higher growth in demand from infrastructure and construction sectors seems to have pushed up the prices. At 10.2% in May the WPI (wholesale price index) is significantly higher than 9.6% recorded in April 2010. Liquidity has been tight lately due to high 3G license fee payments by telecom companies. Also, advance tax payments have contributed to the drying up of liquidity. With these the RBI seems to have little option but to use monetary policy tools to moderate the liquidity situation.