Of Fall in SmallCap Stocks, Infosys Announcing Bonus Issue and Surge in Retail Inflation

Mon, 16 Jul Pre-Open

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The carnage in the BSE Smallcap Index continued as the index fell by 1.3% yesterday. After posting rocket gains of 58% in calendar year 2017, the index is down 16% since the beginning of 2018.

While corporate earnings remained depressed on account of disruptions by demonetization and goods and service tax, the sharp rally in 2017 was driven purely by expansion in the price/earnings (PE) multiples.

Rallies driven by PE expansion are not sustainable. And this is being witnessed in the recent correction. Expensive valuations coupled with unimpressive increase in corporate earnings has led to the hefty correction.

Even just a quick look at the Smallcap index and its 776 listed companies throws up some eye-popping data. The median correction in these stocks from their 52 week high is a massive 38%.

After two years of depressed earnings, hopes of a trend reversal are high. If the recovery in earnings does not happen as expected, there could be further pain in the offering.

One would agree that a 38% median correction is huge.

And it's has unlocked some great buying opportunities in fundamentally strong companies which were earlier trading at expensive valuations.

On the flipside, there has been some corrections in the stocks that you might be holding. I urge you not to panic and view this correction as an opportunity to add exposure to the quality smallcaps. Most importantly, to focus on the long term.

Our Smallcap team Hidden Treasure, have released a fresh actionable recommendation on a drug company last Friday. Click here to access it.

Infosys Announces Bonus Issue in the Ratio of 1:1

In the news from the IT sector, Infosys share price will be in focus today. The company reported 3.7% YoY rise in profit at Rs 36.1 billion for the quarter ended June 2018.

Revenues for the firm stood 12% higher on a YoY basis at Rs 191.2 billion. In dollar terms, revenue rose 6.8% YoY.

The company maintained its FY19 revenue guidance in constant currency at 6-8%, and the guidance for operating margin at 22-24%.

As per the announcement, the IT company added four clients in US$100 million plus region during Q1.

The company also approved a bonus issue of one equity share for every equity share held and a stock dividend of one American Depository Share (ADS) for every ADS held, as on a record date to be determined.

Retail Inflation Surges to a Five Month High

India's retail inflation surged to a 5-month high of 5% in June on the back of rising fuel prices.

Based on Consumer Price Index (CPI), retail inflation was at 5% in June. Inflation had fallen to a low of 1.46% in June last year, adding an adverse base effect.

Data released by the Central Statistics Office (CSO) showed that the rate of price rise in the consumer food segment was creeping higher at 5% in June, as against 4.87% in the previous month.

Inflation in vegetables was 7.8% last month, down from 8% in May, and for fruits it was 10.1% (as against 12.3% a month ago).

Fuel inflation grew at 7.1% in June from 5.8% in May. Transportation and communication costs grew 6.2% in June from 5.3% a month ago, mainly due to higher petrol, diesel prices.

Retail inflation, measured by Consumer Price Index (CPI) is the main price gauge that the Reserve Bank of India (RBI) tracks. June's data is an indication that prices are at a slowly inching towards the apex bank's upper tolerance level of inflation at 6%.

Last month, the RBI's Monetary Policy Committee (MPC) upped CPI inflation estimates for 2018-19 and projected it at 4.8-4.9% in April-September, and at 4.7% in the second half of the year, including the house rent allowance (HRA) impact for central government employees.

Factoring in this uptick in inflation, the monetary policy committee raised the central bank's benchmark repo rate by 25 basis points to 6.25%.

Inflation for the month of June keeps the chances alive of a further rate hike in the month August, according to economists. The RBI governor headed Monetary Policy Committee will be meeting later this month to review interest rate regime.

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