Mid & small caps out of favour

Thu, 9 Dec 11:30 am

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After starting today's session on a negative note, Indian indices are still lingering in the red. However, other key Asian markets are trading on a strong note. Currently, heavyweights in the Sensex are trading weak with stocks from the realty and consumer durables space bearing the brunt of investors. However, stocks from the oil & gas and IT space are trading firm.

Currently, the BSE-Sensex is trading down by around 66 points, while the NSE-Nifty is down by about 19 points. Buying interest amongst the mid and small cap stocks is muted as well with the BSE-Midcap and BSE-Smallcap indices trading lower by 1.4% and 1.8% respectively.

FMCG stocks are trading weak led by Marico and Pidilite Industries. However, Dabur and Camlin are trading strong. Despite increasing the product prices twice this fiscal, consumer goods major, Marico may consider a third round of increase as the prices of copra – a key raw material for company's Parachute hair oil - have touched an all time high. It may be noted that Marico has already been battling margin pressure due to a 15% rise in copra prices in 1HFY11. In order to counter this, the company had increased Parachute Oil's prices twice, one in June and second in November, resulting in a cumulative increase of around 13%. If the copra prices stick to the current levels it would be interesting to see whether the company absorbs the increase or passes it on to the customers. Absorbing the increase would endanger margins which are already decelerating while passing on the increase to the customers would impact sales volumes. In such a situation absorbing the increase could prove to be a better alternative rather than endangering sales volumes as the company can easily re-gain earlier margins once the copra prices settle down.

Auto stocks are trading weak led by Maruti Suzuki and TVS Motors. However, Hero Honda is trading flat. Tata Motors recently unveiled a new model, Winger Platinum (7 seater) in response to Toyota Innova and Mahindra Xylo. The move is part of Tata Motor's plan to tap the growing commercial utility vehicle segment which is divided into two segments – 6 to 7 seater and 10-13 seater. Almost 75% of the market is dominated by the former hence the decision to launch a new model in the 6-7 seater segment should bode well for the company. It may be noted that currently the utility vehicle segment is dominated by players like Toyota Innova, Mahindra Xylo and Bolero which command almost 60% of the market share. And right now, Tata Motors sells 600-700 Wingers on a monthly basis. However, with the launch of Winger Platinum, the company will be able to sell 500-600 more vehicles on a monthly basis and perhaps gain some market share as well.