Small caps out of favour

Mon, 6 Dec 01:30 pm

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Indian indices remained buoyant during the last two hours of trade as metal stocks retained their heavy gains. Stocks from the oil & gas and power sector are also trading firm. However, stocks from the banking space are trading weak.

The BSE-Sensex is up by 172 points while NSE-Nifty is trading 54 points above the dotted line. BSE-Midcap is trading up by 0.6% while BSE-Smallcap index is trading 0.1% above Friday’s closing. The rupee is trading at 44.88 to the US dollar.

Steel companies are trading strong with JSW Steel, Bhushan Steel, Ispat Inds, Jindal Steel& Power and Tata Steel posting substantial gains. With Essar Steel finalising plans to commission 10 m tonnes capacity at Hazira by the first quarter of 2011, and JSW Steel and Tata Steel also gearing up to commission similar sized capacities, it is estimated that about 20 m tonnes of brownfield steelmaking capacity would be added over the next one year. In sharp contrast, there is very little addition to greenfield steel capacities in recent times by domestic players and even global steel majors like ArcelorMittal and Posco. Tata Steel has planned three new projects of 22 m tonnes capacity across Jharkhand, Chhattisgarh and Orissa but like most other new steel projects in greenfield locations, the schedule for this expansion is uncertain. The company has been facing land acquisition problems in Chhattisgarh, and in Orissa, where some of the land owners are yet to move from the site. This is likely to lead to a shortfall of 10 to 20 m tonnes in planned capacity addition in the steel sector. Regulatory delays and problems in acquiring land were cited as the two main reasons for the failure of greenfield projects to take off.

Engineering stocks are currently trading firm led by Suzlon Energy, Siemens, Punj Lloyd and BHEL. The stock of Suzlon Energy is amongst the top gainers in stocks forming part of the BSE-100 Index. Gains in the stock are seemingly on the back of news of the company announcing its plans of acquiring the tower business of Suzlon Towers and Structures Limited and the operations and maintenance unit of Suzlon Infrastructure Services Limited. These companies are wholly owned subsidiaries of Suzlon Energy. It has further reported that its board has approved the proposal of these acquisitions and that these are subject to regulatory approvals. As per the company, this development will facilitate reduction in costs and offer advantage in procuring materials and services.

Suzlon Energy’s financial performance has been very poor in the year till date. During 1HFY11, consolidated revenues were lower by 31% YoY, while the company recorded an operating loss of Rs 4.5 bn. This was on the back of the company not being able to reduce its expenses in line with the decrease in sales. Net loss during this period stood at Rs 12.9 bn. This development may come in as good news for the company as it is aimed at containing costs. However, it must be noted that the company has not provided any details relating to the plan going forward as well as the merger terms.