Small, midcaps steal the show

Mon, 23 Aug Closing

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The rollercoaster ride continued well into the closing stages with the markets dipping towards the breakeven line and managing to end the day barely above the same. Thus, while the Sensex edged higher by around 10 points (almost unchanged), gains on the Nifty came in at around 13 points (up 0.2%). BSE Midcap and Smallcap indices however managed to put their larger counterparts to shade as they notched up gains of around 1% each. Nearly two stocks declined for every one that gained on the Sensex today.

Yet again it was that pattern that has become so very prevalent these days. Small and midcaps once again outperformed their larger peers. Blame it on the stretched valuations of the latter. With most large caps now looking fairly valued from a medium term perspective, attention seems to have shifted towards the (smaller companies). While such companies provide good opportunities for achieving above par returns in a short span of time, their business models need to be taken into even more serious account while contemplating investments in them. Smaller companies do not tend to be as fundamentally strong as their larger counterparts and hence, there is a greater chance of a permanent loss of capital in them. Thus, it would be wise to seek a larger margin of safety in stocks of these companies and not give into the buoyant sentiment that is surrounding such stocks these days.

In a move that will mark the second successful merger of associates for the country’s largest bank, SBI is set to merge State Bank of Indore (98% subsidiary) with itself. For this SBI will issue 30 shares for ebvery 100 shares of State Bank of Indore. This merger follows the merger with State Bank of Saurashtra last fiscal. The acquisition of State Bank of Indore added 470 branches to SBI's existing network of over 12,000 branches. Although very small in terms of balance sheet size the merger will enhance SBI’s reach and help improve its cost structure. Additionally State Bank of Indore has a high low cost deposit base of 30% and reasonable net NPAs at close to 1% of advances. The stock closed 1% higher today.

Stocks of oil marketing companies (OMCs) soared today, led by BPCL and HPCL. Gains in these stocks followed some reports that the government is contemplating a fuel price hike. This comes part of the process that started in June 2010 when the government deregulated petrol prices. The OMCs had then decided to carry out monthly review of oil prices before announcing any change in the same. Now given that crude price have shot up since the start of this month, these companies are seen raising the retail prices of their products. Today’s gains in these stocks were also fueled by the release of subsidies by the government for the last financial year. As per reports, the government has released Rs 140 bn in cash compensation as subsidies to these companies for under-pricing their products in FY10.