Smallcaps in demand at the moment

Thu, 5 Aug 11:30 am

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The Indian markets continued to trade in a rangebound manner during the previous two hours of trade. At present, the market sentiment seems quite optimistic as the overall advance to decline ratio is poised at 1.8 to 1 on the BSE. Barring select oil & gas and power stocks, buying activity is being witnessed in stocks across sectors, led by realty, auto and IT.

The BSE-Sensex is trading up by around 55 points (up 0.3%), while the NSE-Nifty is trading higher by about 10 points (up 0.2%). Stocks from the mid and smallcap spaces are finding favour as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.5% and 0.8% respectively. The rupee is trading at 46.22 to the US dollar.

Engineering and construction stocks are currently trading firm led by KSP Pumps, Alstom Projects, Siemens and Crompton Greaves. Although trading marginally higher today, the stock of Punj Lloyd ended on a very weak note yesterday as it posted weak results for the quarter ended June 2010. During the quarter, the company reported a revenue (consolidated) decline of 42% YoY. The management has attributed this to client-related delays in execution in some of the projects. These include the large-sized orders in Libya as well. At the operating level, the company reported a 56% YoY decline in operating profits as operating expenses declined at a relatively slower pace of 40% YoY. During the quarter, Punj Lloyd’s margins stood at 7.7% as compared to 10.3% during the corresponding quarter last year. While the company did well to reduce the raw material & cost of goods sold as well as contracting charges as a percentage of revenues, the other two key expense heads - employee costs and other expenditure - increased substantially as a percentage of sales.

Punj Lloyd recorded a loss at the net level. Apart from a poor operating performance, lower other income and higher depreciation & interest charges added to the woes at the profit level. However, on the bright side, the company has an order backlog of Rs 256 bn, which is about 2.5 times its consolidated FY10 sales. This gives some indication about the revenue visibility going forward. But at the same time, one should also factor in the execution issues related to construction projects.

Consumer durable stocks are trading in the green with VIP Industries and Gitanjali Gems leading the gains. However, Blue Star and Videocon Industries are trading in the red. Voltas Ltd expects its topline to grow by 35-40% YoY in FY11. It should be noted that Voltas managed revenues of Rs 48.3 bn in FY10. Although, right now the volumes take off has been moderate because of the monsoons, it is expected to pick up soon as the festive season begins. Despite strong guidance on the topline front, the company expects margins to remain under pressure due to stiff competition and higher input cost. In order to ward off raw material price inflation, the company had taken price hikes in the range of 2-3% over the last two months. However, it was not in a position to pass on the entire hike due to stiff competition. Prices of key raw materials such as metals and chemicals have increased dramatically over the last few months. In such a scenario retaining margins could prove to be a challenge for Voltas.