Small and midcap stocks fall harder

Fri, 19 Feb 01:30 pm

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Persistent selling activity led the Indian market to move further into the red during the previous two hours of trade. The market sentiment seems very pessimistic currently, as the overall decline to advance ratio is poised at 3.6 to 1 on the BSE. Selling activity is currently being witnessed in stocks across sectors with those from the realty, metal and auto spaces leading the pack of losers. Stocks from the FMCG and IT spaces are amongst the least impacted.

The BSE-Sensex and the NSE-Nifty are trading lower, down by around 230 points (down 1.4%) and 75 points (down 1.6%) respectively. The BSE-Midcap and BSE-Smallcap are also trading in red, lower by around 1.8% each. The rupee is trading weak at 46.5 to the dollar.

Castrol announced its quarter and annual results (December ending company) yesterday. The company’s topline grew by about 14% YoY and 5% YoY during the quarter and year respectively. Growth during the quarter is mainly on the back of a 17% YoY rise in lubricant volumes. It is believed that the upturn in economic growth and focus on growing segments, along with the benefit of a low base of 2008, aided the robust volume growth. Castrol’s operating profits increased by a strong 72% YoY during the quarter and by 42% YoY during the year. This strong growth in operating profits was on the back of a huge expansion in operating margins during both the periods. While operating margins stood at 20.9% during 4QCY09 (13.8% during 4QCY08), the same stood at 25.1% for the full year (18.5% during CY08). This expansion in operating margins during the quarter was mainly on account of lower raw material prices, which stood at about 48.9% of net sales as against 66% during the corresponding quarter last year. Growth in net profits during 4QCY09 and CY09 stood at 72% YoY and 45% YoY respectively.

Telecom stocks are currently trading weak led by Idea Cellular, Reliance Communications and Bharti Airtel. A leading business daily has reported that the management of Bharti Airtel is mulling over a preferential allotment to Singapore Telecommunications (SingTel), which currently owns about one-third stake in the Indian telco. Funds raised from this will be utilised to partly fund its proposed acquisition of Zain's African assets. The company's management is taking this move as it wishes to avoid taking on too much debt. However, it must be noted that the net debt to equity ratio on Bharti's books currently stands at about 0.1 times, which is quite comfortable.

While there is no confirmation on the financing strategy from the company directly, it is believed that the management does not wish to go through rights issues route on the back on the response the stocks got when it announced its plans of acquiring this Zain's African assets. While this would definitely lead to a dilution in equity for retail investors, one should wait for a official statement from the company directly to jump to conclusions. Both the companies - Zain and Bharti - are currently in an exclusive discussion period till the end of March.