Investors don't favour smallcaps

Tue, 16 Nov 01:30 pm

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The Indian markets dropped deeper as selling activity intensified during the previous two hours of trade. Currently, stocks from the metal, capital goods and realty spaces are the top losers. Those from the healthcare, FMCG and consumer durables spaces are the top performers at the moment.

The BSE-Sensex is down by 330 points (down 1.6%) while NSE-Nifty is trading lower by 110 points (down 1.8%). The BSE-Midcap Index is trading lower by 1.5%, while BSE-Smallcap Index trading lower by 2.1%. The rupee is trading at 45.32 to the US dollar.

Bank stocks are trading in the red with Canara Bank, Bank of India, Union Bank of India (UBI) and SBI leading the pack of losers. UBI declared its results for the quarter ended September 2010 recently. The bank reported a 73% YoY growth in net interest income. However, net profits dropped by 40% YoY due to higher provisioning. Interest income grew by 20% YoY in 1HFY11 on the back of 27% YoY growth in advances. Other income fell by 13% YoY due to lower treasury income. Net interest margin improved from 2.4% in 1HFY10 to 3.2% in 1HFY11 due to re-pricing of assets. The bank maintained capital adequacy ratio at 12.5% as per Basel II at the end of 1HFY11. Net NPA ratio was higher at 1.2% in 1HFY11 from 0.2% in 1HFY10. In order to hedge the slowdown in the growth of retail and agriculture segments, the bank tapped SME clients. The higher proportion of CASA enabled the banks to get back to its long term average NIMs that were impacted by the bulk deposit rates in FY10. Re-pricing the corporate loans as per the base rate also helped the bank improve margins.

Although UBI does have a lot of catching up to do with its peers in fee income, the same have shown signs of improvement over the past few quarters. The bank’s fee income has grown by 9% YoY in 1HFY11. Nevertheless, it formed merely 5% of the bank’s total income in 1HFY11. The fall in other income has been due to foreign exchange related losses and lower treasury gains.

Power stocks are currently trading weak led by Tata Power, Reliance Power and CESC. A leading business daily has reported that power major, NTPC is looking at going solo for its cement venture after failing to attract suitable partners. This, the company will be doing through its subsidiary, NTPC Vidyut Vyapar Nigam. It is believed that during the month of March this year, the company had invited expression of interest (EoI) for cement manufacturers to form a 26:74 joint venture for setting up cement plants at its coal-fired units. However, despite extending the final dates twice, it did not manage to find suitable partners. As per the company’s management, the venture could however, have a technology partner for which an exercise will be started soon.

This diversification for the company will be helpful as it would be able to utilise the fly ash that is generated after burning coal in power projects for manufacturing cement, concrete, bricks and tiles. NTPC is believed to produce nearly 60 m tonnes per annum of fly ash, of which nearly half is sold to cement units, amongst others. The balance fly ash is dumped at various sites identified by the company. It is believed that cement manufactured using fly ash is usually cheaper than the one based on clinker, or powdered cement. As per the management, this method will help the company save around 10 to 15% of the cost in cement manufacturing as well as provide an alternate way of disposing the ash.