Focus shifts to smallcaps

Wed, 29 Sep 01:30 pm

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Indian indices languished in the red as profit booking in heavy weights continued over the previous two hours of trade. Stocks from the auto and healthcare sector are trading firm while stocks from the metal and FMCG space are trading weak.

The BSE-Sensex is trading down by 82 points while NSE-Nifty is trading 20 points below the dotted line. BSE-Midcap is trading flat while BSE-Smallcap index is trading 0.2% above yesterday's closing. The rupee is trading at 44.92 to the US dollar.

Power stocks are trading lower led by Torrent Power and Reliance Infra. As per a leading financial daily, Power Grid Corporation (PGC) has stated that its follow-on public offer (FPO) would hit the market in the second week of November. The company through this FPO aims to raise about Rs 86 bn. As the government would be divesting 10% of its stake in the company, it would receive Rs 43 bn while the remaining money from the FPO would go to the company. The proceeds from this FPO would be used by the company to fund projects in the remaining period of the eleventh plan and as the initial investment in the twelfth plan project. It may be noted that in FY10, PGC's debt to equity ratio was 2.1.

Hotel stocks are currently trading weak led by Hotel Leelaventure, Indian Hotels and Taj GVK. A leading business daily has reported that cigarette to hotel major ITC Limited is looking at combining its hotel business with that of hotel major EIH Limited. The latter operates hotels under the Oberoi and Trident brands. While not much information has been divulged, it has been reported that the plan would result in a three-way venture between the two companies and Reliance Industries (RIL). RIL recently entered the hospitality by acquiring a significant share in EIH Limited. It has been reported that ITC will demerge its hotel business to form this venture. It has been reported that the two companies are looking to combine and emerge as the country's largest hotel chain company (by revenues). Currently, the Tata Group's hotel arm, Indian Hotels is the biggest hotel chain in the country.

It may be noted that ITC has however, declined this piece of news. The hotels business forms a small portion (nearly 4%) of ITC's revenues. Further, this business segment is not as profitable as its cigarettes and paper businesses. During the quarter ended June 2010, the hotels business recorded EBIT margins of 18.3%, while the overall EBIT margins stood at approximately 27%. A large part of the company earnings are derived from the high volumes and high margins (about 53% EBIT margins) cigarette business.