Indian Indices Open Lower; IT & FMCG Stocks Drag

Tue, 25 Jun 09:30 am

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Asian share markets are lower today as Chinese and Hong Kong shares fall. The Shanghai Composite is off 1.8% while the Hang Seng is down 1.3%. The Nikkei 225 is trading lower by 0.2%.

Back home, India share markets have opened the day on a negative note. The BSE Sensex is trading down by 133 points while the NSE Nifty is trading lower by 45 points. The BSE Mid Cap index and BSE Small Cap index have opened the day on a flat note.

Sectoral indices opened on a mixed note with stocks in the IT sector and FMCG sector witnessing selling pressure, while oil & gas stocks and realty stocks are witnessing buying interest.

The rupee is currently trading at Rs 69.32 against the US$.

Speaking of Indian share markets, what should be your investing strategy be for Modi's second term?

As per Richa Agarwal, Modi's victory seems to be the inflection point for a rebound in smallcap stocks.

You see, over the last one and a half year, a huge gap has emerged between smallcap index and Sensex.

Despite a lackluster performance on earnings front for both, smallcap stocks crashed...while Sensex flirted with lifetime highs.

Have a look at the chart below.

Since Jan 2018, the Sensex has gained 14% while smallcap index has lost 25%. That's a relative underperformance of 39%.

But this dichotomy cannot keep on growing forever.

As Richa writes in a recent edition of The 5 Minute WrapUp...

• You see, last time the market showed a similar trend was in the year 2013...just before Modi rose to power.
  
  Between January 2013 to August 2013, the smallcap index has crashed by over 30%, while Sensex stayed put. And smallcaps were approached with the same scepticism they have witnessed over the last year.
  
  But what happened after that was even more interesting.
  
  Within a few months post August 2013, the smallcap index caught up with the Sensex. And it didn't just catch up.
  
  Under Modi's first term, until January 2018, the smallcap index rose nearly four times versus a less than 2 times gain in Sensex.

As per Richa, history is going to repeat itself.

If you are interested in riding the volatility and earning great returns in the long term, you could join Richa's small cap club and invest in these 4 solid small caps.

In the news from the engineering sector, Larsen & Toubro (L&T) share price is in focus today. The founders of Mindtree on Monday lost their last line of defence against L&T's takeover bid as Nalanda Capital sold its entire 10.6% stake to the engineering major.

Sources said after putting up a stiff resistance, Nalanda Capital, which was so far seen as a supporter of founder's stance, tendered its shares in the open offer on Monday.

Multiple sources also said that apart from Nalanda Capital, Singapore-based Arohi Asset Management has also offloaded its 1.2% stake.

According to data available on exchanges, L&T's holding in Mindtree has crossed 45% mark by Monday. As of June 24, the engineering major has received 17.5% stake in Mindtree through the open offer.

The process of open offer for acquiring 31% stake in the IT firm is going on, which will be completed on June 28.

According to reports, Nalanda's exit from Mindtree could be linked to the fact that some investors had complained against the fund house to be acting in concert without market regulator's approval, along with alleged attempt to influence other investors for not tendering their shares.

Last week, Mindtree's board approved induction of five new directors into the company's board, which will come for shareholders' approval in its next annual general meeting on July 16.

The appointment includes L&T's Chief Executive Officer (CEO) and Managing Director S N Subrahmanyan and its Chief Financial Officer (CFO) Ramamurthi Shankar Raman. Apart from this, Jayant Damodar Patil, whole time director and senior executive vice-president for L&T's defence business, will also be part of the firm's board.

In March, L&T had initiated a hostile takeover bid on Mindtree when it entered into a deal to buy Cafe Coffee Day owner V G Siddhartha's 20.3% stake.

As per the reports, the combination of the two companies will help create an entity with a higher turnover of close to Rs 120 billion, closer to larger rivals such as Wipro and TCS.

While the L&T-Mindtree saga will one day disappear into the history books, the lessons will not.

One thing that we must bear in mind is that most companies in India are managed by promoters.

Hence, they are bound to protect their interest and will not relinquish control without a fight.

This means that the company launching such an attack needs to be very clear as to why it wants to go down this route. Here's snippet from the article on hostile takeovers that Tanushree Banerjee, co-head of research wrote:

• "In mergers and acquisitions, in general, the acquiring company has to make sure that it pays a reasonable price for the target company. It needs to gauge the synergies that are likely to flow in on making the acquisition such that the payback period is not too long. Many a time, when competition for a particular target heats up, valuations soar. As a result, the company which has finally made the acquisition ends up paying a very high price."

This applies to hostile takeovers as well.

Moving on to the news from the IT sector, Tata Consultancy Services (TCS) has increased it stake by 15% in TCS Japan, its joint venture (JV) with Mitsubishi Corporation (MC), with an investment of US$ 32.6 million.

Following the stake hike, TCS will hold 66% equity in TCS Japan, up from 51%, and Mitsubishi will hold 34%. Current governance of operations and management will remain unchanged by the share acquisition.

CEO and President of TCS Japan, Amur S Lakshminarayanan said, "we are pleased to note that Mitsubishi Corporation is now more assured of the partnership, having experienced TCS' services as a customer over the past five years, and that both companies continue their strong collaboration to grow the business together,"

TCS share price is presently trading down by 0.6%.

To know more about the company, you can read the TCS' latest result analysis and TCS' FY19 annual report analysis on our website.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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