Mid, Small Caps Take a Toll

After opening the day flat, the Indian stock markets ended the day on a disappointing note as selling activity intensified in the post noon session weighed by falls in Asian and European markets. The BSE Sensex today closed lower by 318 points, while the NSE Nifty closed lower by 99 points. Midcaps and small caps fared the worst. While the S&P BSE Mid Cap index closed lower by 2.7%, the S&P BSE Small Cap index closed the day with losses of 3.1%. Losses were largely seen in power and realty stocks.

Major Asian stock markets ended lower on Friday, erasing early gains despite a positive finish from Wall Street overnight. The Shanghai Composite is down 3.55%, while Hong Kong's Hang Seng is off 1.50% and Japan's Nikkei 225 is lower by 0.54%. European shares also plunged, knocked by losses in commodity-related stocks as BHP Billiton said it would write down the value of its US shale assets by US$7.2 billion and oil fell below US$30 a barrel. The rupee was trading at 67.43 against the US$ at the time of writing.

Shares of Tata Steel plunged more than 4% in intraday trading today after global rating agency Standard & Poor's (S&P) downgraded rating of the company to 'BB-', a low investment grade rating, over persistent subdued operating performance amid subdued demand and low steel prices.

The agency lowered its long-term corporate credit rating on Tata Steel to 'BB-' from 'BB', adding that the outlook for the firm is stable. S&P also lowered its long-term corporate credit rating on Tata Steel UK Holdings to 'B+' from 'BB-' but maintained a stable outlook on the firm struggling with high debt and lower sales.

Noting that subdued demand and low steel prices have led to weak operating performance of both its domestic and Europe operations (Subscription Required), S&P expects Tata Steel's operating metric to improve only gradually, beginning fiscal 2016-17. S&P highlights that the leverage will remain high over 12-18 months due to weak cash flows and compressed profitability. In India, profitability has been hit by falling steel prices and disruptions in mining operations.

In other news, Tata Steel has reportedly sealed the deal with a London-based private equity firm for the sale of its struggling Long Products business, which includes plants at Scunthorpe in east England and Lanakrshire in Scotland.

The has been badly hit by a sharp slowdown in manufacturing around the world (Subscription Required). This has been further accentuated by the economic downturn in the world's largest producer and consumer of metals, China. This has forced the central bank of China to weaken the yuan in a desperate attempt to boost exports and support an economy that is growing at its slowest rate in a quarter century.

According to a leading economic daily, Bharat Heavy Electricals Limited (BHEL) has achieved capacity addition of 5,010 Mega Watt (MW) of utility power projects in the first three quarters of the current financial year (2015-16). Significantly, this is the highest ever capacity addition achieved by BHEL for the corresponding period in any financial year. In addition, projects aggregating to 2,270 MW have also been synchronized by BHEL during this period and are available for capacity addition.

In the same period, BHEL has also commissioned 524 MW of industrial sets and 125 MW of overseas projects, resulting in the highest ever overall capacity addition/synchronization of 7,929 MW, in the first nine months of a financial year.

BHEL has reportedly already commissioned hydro sets totaling to 730 MW till date continuing the momentum achieved in the commissioning of hydro power plants in the last year. This is almost the same as the total hydro capacity addition of 736 MW in the country during the entire financial year 2014-15. BHEL is also the market leader of power equipment in the Indian Power Sector. However, the company recently reported 3.2% YoY decline in sales (Subscription Required), and a loss of Rs 2 billion during the second quarter results for the financial year 2015-2016.

Over the last eight years, the has seen numbers ranging from an output growth of 48% YoY in one year, to a contraction of 6% YoY in another. In our recent edition of The 5 Minute WrapUp Premium, we explain what factors to take into consideration when picking an engineering company stock (Subscription Required).

Markets Trade Flat
01:30 pm

Indian indices are trading flat in the post noon trading session. Sectoral indices are trading on a mixed note with stocks from the telecom, realty and power sectors bearing the maximum brunt.

The BSE Sensex is trading lower by 31 (down 0.1%) and the NSE Nifty is trading down by 8 points (down 0.1%). The BSE Mid Cap index is trading lower by 0.4% while the BSE Small Cap index is trading down by 0.6%. Gold prices, per 10 grams, are trading at Rs 25,790 levels. Silver price, per kilogram, is trading at Rs 33,773 levels. Crude oil is trading at Rs 2,053 per barrel. The rupee is trading at 67.43 to the US$.

Automobile stocks are trading on a mixed note with Tata Motors and Bajaj Auto leading the losses. As per a leading financial daily, Mahindra & Mahindra (M&M) has tied-up with online shopping major Flipkart, CarNbike.com, an automotive micro-site and M2all, its in-house online portal to sell its small SUV 'KUV 100. The initiative is aimed at the youth and the first time car buyers. The booking for the vehicle will commence once KUV 100 is launched.

Earlier, the company had tied up with Snapdeal to offer Scorpio on sale online. The tie-up recorded 3 million hits and sold about 100 units.

With the above initiatives coupled with new product launches, the outlook for the company stands tall. As Radhika Pandit states in the result analysis report of the company (subscription required), "Although the growth of UVs has been slow, the company expects the scenario to improve going forward backed by new product launches. While the LCV segment as a whole has been de-growing, growth in certain segments within the LCV segment could ramp up (especially the 3.5 to 7T) category."

Presently the stock of M&M is trading flat.

Stocks in the energy sector are trading on a positive note with BPCL and Reliance Industries leading the gains. As per an economic daily, India's demand for fuel rose 8.3% during the month of December on a YoY (year-on-year) basis. The rise in demand was driven by higher gasoline consumption as passenger vehicles sales rose on the back of year-end deals and discounts in December.

Data from the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry showed that India consumed 15.8 million tonnes of fuel last month. Consumption of gasoil or diesel, which comprises about 40% of refined fuels used in India, rose 5.4% to 6.5 MT (million tonnes) during the period. Sales of petrol, surged 11.8% from a year earlier to 1.8 MT. This was seen as passenger car sales in the month rose nearly 13% and the fuel became cheaper on the back of plunging crude prices. Cooking gas or liquefied petroleum gas (LPG) sales increased 6.2% to 1.7 MT, while naphtha sales were 24.8% higher at 1.1 MT. Lastly, sales of bitumen, used on roads, were up 11.2%, while fuel oil use rose 12.6% during December.

Markets Give Up Early Gains
11:30 am

After opening the day on a positive note, the Indian Indices booked some losses and went on to trade in the red. Sectoral indices are trading on a mixed note with stocks from the power sector leading the losses and energy stocks leading the gains.

The BSE Sensex is trading down 41 points (down 0.2%) and the NSE Nifty is trading down 21 points (down 0.3%). The BSE Mid Cap index is trading down by 0.1% and the BSE Small Cap index is trading down 0.2%. The rupee is trading at 67.41 to the US$.

Stocks in the power space are trading on a negative note with NTPC and PTC India leading the losses. As per an article in Economic Times, the government is considering to allow power companies to index rupee debt with global currencies in order to draw cheaper long-term loans from foreign investors. The consideration comes as domestic players in the industry have demanded to allow indexing of a portion of the debt of the power plants.

Power minister Piyush Goyal is open to consider the same and had stated in Tokyo that indexing a portion of the tariff to a basket of global currency can reduce foreign risks and thereby tariffs. The minister also said that Japanese banks and corporations are willing to invest in Indian energy sectors, with existing investors such as SoftBank, which has committed US$ 20 billion, indicating to increase its investments.

One shall note that, six leading banks of Japan are going to meet the Power Minister to discuss opportunities for investing in Indian energy sector including in ultra-mega power projects, renewable energy projects, rural electrification, and transmission and distribution projects. The meetings are part of an ongoing India-Japan energy dialogue led by the Confederation of Indian Industry.

Power sector has taken a hit due to legacy issues like failure to pass on tariff hikes, power theft, infrastructure issues, over capacity etc. And companies in this sector are caught in a vicious circle of high debt and operational losses (Subscription required). All of the above efforts can be a further move to bring a turnaround in these companies.

Telecom stocks are trading on a mixed note with MTNL and Bharti Airtel leading the losses. As per a leading financial daily, Idea Cellular has launched high-speed 4G LTE services in three new telecom service areas of Madhya Pradesh & Chhattisgarh, Punjab and Haryana. With this development, the company now offers 4G services across 7 telecom service areas.

As stated by the company, Idea has 2.7 million 4G devices, nearly 4% of its subscriber base, in these 7 telecom service areas that are registered on its network. On an all India basis, the company has nearly 49.5 million customers owing 3G devices and over 6 million customers with 4G devices.

Notably, the company is further going to provide 4G across 183 towns by the end of January. The company will also roll out 4G services in three more circles by the end of March. This would be in line with the company's plan to launch 4G services in 10 circles on the 1,800 MHz band during January-June 2016.

The company has planned for a capex of Rs 60-65 billion for FY16. This is significantly higher than the capex of previous year. Also, the company is eyeing to aggressively expand its 3G coverage in 13 circles and complete the 3G roll out in Kolkata this year. This can mean a further investment by the company which can impact margins of the company. As Rahul Shah states in the result analysis report of the company (subscription required),"Idea Cellular continues to play catch up in terms of data services. We believe, investments in infrastructure, spectrum as well as marketing will increase going forward. This will adversely affect margins."

Presently the stock of Idea Cellular is trading down by 0.2%.

Positive Start to the Day
09:30 am

Major Asian stock markets have opened the day on a mixed note with stock markets in China trading down by 1.3%. However, stock markets in Indonesia and Taiwan are trading up by 0.4% each.

After a sell-off on Wall Street on Wednesday, stock markets regained with benchmark indices ending the day higher by 1.4%. However, major indices in Europe ended their previous session in red. The rupee is trading at 67.09 per US$.

Indian stock markets have opened the day on a positive note. The BSE Sensex is trading higher by 44 points (up 0.1%) and NSE Nifty is trading higher by 13 points (up 0.2%). Both BSE Mid Cap and BSE Small Cap are trading higher by 0.4% and 0.8% respectively. Major sectoral indices have opened the day in green with stocks from automobile and pharmaceutical sectors witnessing maximum buying interest.

As per an article in leading financial daily, Tata Motors, that was formerly considered as a quite strong player in developing of future infantry combat vehicle (FICV) might soon face tough time. The company was one of the leading contenders to bag the defence order in this segment. However, the recent regulatory changes, could pose some challenge for the company.

In a recent project, ten companies are in the race for the FICV project including the likes of Larsen & Toubro, Mahindra & Mahindra and Pipavav Defence. The project will be awarded on the basis of commercial assessment, emphasizing on turnover of the company.

Tata Motor's consolidated statements including Jaguar Land Rover (JLR), reported annual revenue of Rs 2636 billion, with profit Rs 139.86 billion for FY15. On this basis, the company emerged as the number one player to bag the order.

However recently, defence ministry specifically stated that annual turnover of the companies having a capital asset in India will only be included. Hence, turnover of Tata Motors JLR (exports) will not be included while evaluating the commercial considerations. On a standalone basis, Tata Motors generated an annual turnover of Rs 381.7 billion and posted a net loss of Rs 47.3 billion. Considering standalone figures, company is positioned at third place behind M&M and L&T.

As per an article in leading financial daily, Competition Commission of India (CCI) has given approval to Strides Arcolab to acquire Sun Pharmaceutical's two business divisions. The consideration for the same is pegged at Rs 1.65 billion. The agreement was entered during September 2015, however was awaiting regulatory clearance.

The two business divisions belonged to erstwhile Ranbaxy. The company was acquired by Sun Pharma around a year back. Post the acquisition of Ranbaxy, Sun Pharma is taking various steps to derive synergies from the acquired business. The divestment of these units is in line with the company's strategic plan.

Strides Arcolab stated that the acquisition of 'Solus' and 'Solus Care' divisions holds strategic significance to the growth of the company's branded business in India. Further, the company also added that the rich product portfolio and capable teams of these two divisions would help them to establish a strong footing in the fast growing 'Central Nervous System' (CNS) market in India.

Could Midcaps See a Correction?

Stability in the global economy is hard to find. The economic slowdown in various markets is doing the rounds. And stock markets are influenced in an instant with notice of these tumults. Indian stock markets are no different. They have been witnessing major volatility. A recent example can be the Chinese slowdown that took Indian Indices deep into the red. A spate of corrections began doing the rounds. Alas, investors seeking quick profits gravitated towards midcap and small cap stocks. However, will their appetite for these stocks continue? Let's note some facts to answer that.

As an article in Business Standard points out, small-cap and mid-cap shares can potentially see a serious fall if the downtrend continues. The reason for this stems from valuations. The PE multiple of the NSE Midcap 100 index is currently 23% more than the Nifty. The Nifty currently trades at a trailing 12 month PE of 20. The Midcap 100 index, on the other hand, trades at a PE of 27. This shows a shift in the paradigm since the market rally in 2014, when the Nifty traded at a 25% premium to the midcap index.

Under normal circumstances, midcaps trade at a discount to large caps in majority of the times.

However, while there could be a correction in prices, one predict this course. Things can turn out the other way around. Nevertheless, over exposure to midcap stocks at higher valuations is always a dangerous game to play.

One could play it safe by investing and focusing only on larger companies. But one cannot expect exciting returns from this segment. For that extra boost to a portfolio, we believe a certain amount of exposure to mid and smallcaps is essential. But it may be noted that this would be subjective to one's risk profile. At the end of the day, midcaps and smallcaps are higher growth but also higher risk companies. Due to the same, too much exposure to such stocks is not ideally desired as well.

To help investors with such allocation decisions, we have created an asset allocation guide. This is an effort to highlight the various factors influencing asset allocation in equities and also guide investors on how to allocate funds within the equity investments space so as to achieve optimum returns from them.