Investors prefer mid and smallcaps

Fri, 3 Sep 01:30 pm

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The Indian markets traded in the neutral zone as the Sensex flirted with the dotted line during the previous two hours of trade. Stocks from the realty, auto and healthcare spaces are leading the pack of gainers, while those from the metal and oil & gas space are trading weak.

Currently, the BSE-Sensex is trading up by around 10 points (up 0.1%), while the NSE-Nifty is trading flat. Stocks from the mid and smallcap space seem to be in favour at the moment, as the BSE-Midcap and BSE-Smallcap indices are trading up by 1% and 0.9% respectively. The rupee is trading at 46.68 to the US dollar.

Auto stocks are currently trading firm led by Hero Honda, M&M and Ashok Leyland. The stock of Ashok Leyland is trading at its 52-week high on the back the company reporting a strong 56% YoY increase in volumes during the month of August 2010. The company sold 7,480 units during the month. On a month on month basis, sales are higher by 10%, which is a strong growth number. Sales volumes growth was led by the company's medium and heavy CVs (good carriers) which grew by 63% YoY to 5,233 units. Domestic volumes stood at 4,796 units while the balance accounted for exports (up 35% YoY). The company's M&HCV buses segment saw a sales growth of 47% YoY to 2,193 units. Growth here was led by higher domestic sales (up 45% YoY) to 1,856 units. On an overall basis, exports formed about 10% of volumes as compared to 11.5% during the same month last year.

At the current levels, the stock is trading at a multiple of 18.6 times its trailing 12-month earnings, which seems to be a bit on the expensive side. However, the key factor going forward for the company would be to keep up its good financial performance and maintain margins, which stood at about 10% during the quarter ended June 2010. During FY10, the company's operating margins stood at 7.8%.

Hotel stocks are currently trading firm led by Hotel Leelaventure, Indian Hotel and EIH. On the back of tourism in India showing signs of revival, premium hotels companies recently have announced that they plan on increasing the tariff rates. However, according to a report published by a leading business daily, these companies would not be easily able do the same considering that there is an expected surge in supply of hotel rooms which would increase competition. Hotel chains such as Indian Hotels, EIH and Royal Orchid Hotels are all looking at increasing capacity as well as planning on raising tariffs to the tune of 8 to 15%.

But since other major hotel players such as Starwood Hotels & Resorts, Marriot International and Hyatt Hotels are looking to get their share of the Indian hospitality sector, competition is likely to heat up. These factors are in turn putting pressure on hotels' operating margins.