Smallcaps shine in a dull session

Tue, 5 Oct Closing

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The Indian markets had a mixed day today with the benchmark indices oscillating between the positive and negative several times during the day’s session. At close, stocks from the power and auto sectors led the gainers’ pack. Banking and FMCG stocks ended as the biggest losers. The overall market breadth was positive as there was more than one gainer for every stock that closed in the negative.

BSE Sensex and NSE Nifty closed with losses of around 70 points (0.4%) and 20 points (0.3%) respectively. Mid and small-cap stocks however bucked the pressure, as the BSE Midcap and BSE Smallcap indices closed stronger by 0.8% and 1.1% respectively. The rupee was trading at 44.63 against the US dollar at the time of writing this.

While large caps represented by the Sensex were volatile today, strong gains were seen in the smallcaps. The BSE-Smallcap index’s overall breadth was positive with two stocks gaining for every stock that closed in the negative. Stocks like Reliance Media, Swaraj Engines, Karuturi Global, and Aarti Industries closed with over 10% gains. Smallcaps have been among the front runners over the past few weeks. This has brought the BSE-Smallcap index’s P/E ratio to around 18 times, which makes the category fairly priced. So you may ask - "How will smallcaps perform in the future?" Well, we do not have an answer to it. But we know for a fact that buying small-cap stocks just because they are rising fast will not lead you to anywhere but poor performance in the future.

Software stocks closed mixed today. While gains were seen in Infosys and Mphasis, selling pressure marked trading in Mahindra Satyam, Wipro, and TCS. Selling in Wipro followed reports that the embezzlement charges reported at the company earlier this year are now hinting at the involvement of multiple officials and units within its financial department. As a matter of fact, the fraud came to light in December 2009 after a banker to the firm alerted Wipro about one of its finance department employees embezzling US$ 4 m. The company has however indicated that it is too early to draw any conclusions given that the investigations are still on.

Stocks from the engineering sector also closed mixed. Praj, Havells, and BHEL closed in the positive. However, losses were seen in Crompton Greaves and Voltas, and Suzlon. A leading business daily has reported that the wind-power equipment major Suzlon is not planning to sell its stake in its Belgian subsidiary Hansen Transmissions despite pressure on it to reduce its debt. In fact, the company’s management has indicated its comfort with the company’s current net debt level which currently stands at a whopping Rs 100 bn. Suzlon’s gross debt to equity ratio is also high at around 1.4 times, and thus we find the management’s comfort with the same as intriguing. This is also given that the company has not really seen a meaningful improvement in its operating performance and continues to post big losses at the net level.