Small caps buck the trend

Fri, 4 Dec 02:30 pm

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The Indian markets ventured deep into the negative territory during the previous two hours of trade on account of rampant selling across oil & gas, banking and auto sectors. Stocks from the IT, telecom and healthcare sectors, however, are trading in the green. The overall advance to decline ratio is poised at 0.9 to 1 on the BSE.

The BSE-Sensex and the NSE-Nifty are trading lower, down by around 124 points and 41 points respectively. While the BSE-Midcap is trading in the red, lower by around 0.4%, the BSE-Smallcap is marginally up by 0.1%. The rupee is trading at 46.20 to the dollar.

According to a leading business daily, the government is considering a proposal to revise the prices of natural gas produced by ONGC. This is triggered by the huge amount of losses that PSUs like ONGC and Oil India are incurring on account of selling gas at subsidized rates. It may be noted that ONGC has to sell 97% of its gas at a price of US$ 12 per barrel while the prevailing price of the same is around US$ 80. This huge gap results in a deep cut in ONGC’s financial performance.

Natural gas is a cheaper fuel as compared to coal for generating electricity. It is also used in producing fertilizers like urea. Therefore, demand is very high as its usage results in a lot of saving in these areas. Oil & gas firms like ONGC suffer a lot on the margin front on account of the ad hoc subsidy sharing mechanism. The manner in which discounts are notified does not provide topline visibility for the company even in extremely favourable global conditions. It is high time that the government pays attention to tariff revision in the sector which is awaiting better policies on pricing. ONGC is trading in the negative.

Pharma stocks are witnessing a mixed trend currently. While Biocon and Cipla are trading firm, Ranbaxy and Sun Pharma are in the red. As per a leading business daily, the Board of Piramal Healthcare has approved raising funds to the tune of Rs 10 bn by issuing equity and equity-linked securities. This is an enabling resolution which will allow the company to raise the funds as and when required. The proceeds could primarily be used to retire debt. It must be noted that the company had a debt to equity ratio of 0.9 at the end of September 2009, which it is planning to bring down to 0.7 at the end of the year.

This debt had been taken on the books to fund the acquisition of Minrad. Infact, during 1HFY10, higher interest costs had dented profit before tax which had declined by 14% YoY. While the exact details of the equity issue as and when it takes place has not yet been divulged, it will lead to dilution of equity capital of the company.