India leads the Asian rally

Indian markets gained today, led by buying in stocks from the realty and metal sectors. Stocks from the oil & gas and pharma sectors however, closed weak. On the broader BSE, two stocks gained for one that closed in the negative.

The BSE Sensex and NSE Nifty closed with gains of around 145 points (0.8%) and 45 points (0.9%) respectively. Midcap and smallcap stocks followed suit, as the BSE Midcap and BSE Smallcap indices closed up by around 1.2% and 1.4% respectively. The rupee was trading at 46.1 to the US dollar at the time of writing this.

The Indian markets were in fact the best performer in Asia today. Among other key Asian markets, China and Hong Kong closed up by 0.5% and 0.6% respectively, while weakness was seen in Japan (down 0.7%).

Realty stocks closed strong today, led by gains in Sobha Developers, Unitech, and DLF. Today's gains mark the continuation of a rally in these stocks after the weakness witnessed in the first half of this year. Fears of rising interest rates had spooked these stocks during the first six months of 2010. These fears seem to have receded since then, largely owing to the RBI's stance of going slow in hiking rates. Realty companies have also seen a revival in their business, with the same having grown both in volume and value terms during the first quarter of FY11. DLF, for instance, had recently reported a 23% YoY growth in 1QFY11 sales. Also the fact that the country has seen a couple of large realty deals indicates the revival of interest in the realty sector. Investors must however note that this euphoria can be detrimental to their interests given that real estate companies have been known to over-do things in the past. And this time could be no different.

Auto stocks also gained strongly today. Stocks like TVS Motor, Tata Motors, and Maruti led the gainers' pack. Gains in these stocks were seemingly on the back of good sales numbers for the month of July 2010, which were announced earlier today. As reported, car sales grew by 38% YoY during the month, driven by improved customer sentiment on expectations of a strong economic growth. The overall automobile sales have grown by 35% YoY during the first four months of this fiscal (April-July 2010). This indicates that the recovery in demand has been broad based and has not been restricted to just cars. As we see from here on, capacity constraints and higher interest rates can spoil the party for Indian auto companies.

Stocks from the software sector closed mixed today. While gains were seen in TCS and HCL Tech, selling pressure marked trading in Mahindra Satyam and Oracle Fin. Services. Earlier, as was reported in a leading business daily, Indian IT companies are getting optimistic on getting over the European crisis. This, the companies expect to happen owing to a recovery in demand from their largest market, the US. Some of the large IT companies have seen pressure on their business from the European region during the recently concluded quarter. And it was not just about the business volumes. Even the sharp depreciation in the Euro against the Rupee impacted the receivables from this region. These companies are thus counting on revival in US offshoring demand and reduced exposure to Europe to get over the weak revenue and profit growth in the coming quarters.

Realty, metals take markets higher
01:30 pm

The Indian markets continued to move upwards on the back of persistent buying activity during the previous two hours of trade. Currently stocks from the realty, consumer durables and metal spaces are leading the pack of gainers while those from the oil and gas and IT spaces are trading weak.

The BSE-Sensex is trading higher by about 105 points (up 0.6%), while the NSE-Nifty is up by around 35 points (up 0.6%). However, it seems investors are preferring stocks from the mid and smallcap spaces as the BSE-Midcap and BSE-Smallcap indices are trading higher by 1.1% and 1.4% respectively. The rupee is trading at 46.07 to the US dollar

Healthcare stocks are currently trading mixed with Cadila Healthcare, Elder Pharma and Ranbaxy trading firm, while Indoco Remedies, Biocon and Cipla are trading weak. Aurobindo Pharma announced its results for the quarter ended June 2010 recently. The company reported a revenue growth of 8% YoY during the quarter. However, this is considered as a subdued performance as revenues from the US formulations and penicillin API businesses declined on a year on year basis. However, the overall formulations business grew by 5% YoY. On the other hand, revenues from Europe grew by 60% YoY on the back of a lower base. The company's API business, reported a growth of 15% YoY. At the operating level, the company witnessed some pressure as it operating margins contracted by 4.3% YoY to 18.6%. Operating profits for the quarter declined by 12% YoY. This was mainly on account of an increase in staff costs and other expenditure (as percentage of sales). Aurobindo's profits fell by 69% YoY, largely due to forex losses of Rs 418 m during the quarter (as against forex gains of Rs 575 m in 1QFY10). On excluding this forex items, net profits declined by 14% YoY on account of poor operating performance.

Steel stocks are currently trading firm led by JSW Steel, Tata Steel and SAIL. A leading business daily recently reported that steel major, SAIL is looking at investing Rs 15 bn to develop its domestic coking coal mines. This move would help it reduce its dependence on commodity, which has been the key reason behind the volatile steel prices. It is believed that SAIL will be able to produce nearly 5 m tonnes of coking coal from its mines in Jharkhand, allowing it to reduce import by at least one-fifth. SAIL consumes nearly 14 m tonnes of coking coal. But about 30% of its requirements are sourced from domestic markets (including its captive mines), while the balance is imported. The entire Rs 15 bn investment will go towards developing its two mines in Jharkhand - Tasra and Sitanalla.

IT puts a dampener on markets
11:30 am

After starting today's session on a flat note, Indian indices have started to move into the positive territory. Other key Asian markets are trading in the negative with Japan and Singapore well in the red. Stocks from realty and consumer durables space are finding investor favour at the moment. However, stocks from IT and oil & gas sectors are in the red.

The BSE-Sensex is trading up by around 65 points, while the NSE-Nifty is up by around 20 points. Strong buying interest is being witnessed amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.8% and 1.3% respectively. The rupee is trading at 46.08 to the US dollar

IT stocks are trading mixed with Aptech and NIIT leading the gains. HCL Technologies and Oracle Financial Services (ofs)-what-does-it-mean?utm_campaign=SEO-K'>OFS) were however at the receiving end. OFS recently declared its 1QFY11 results. Sales for the company fell by 14% QoQ due to a sharp decline in license fees, that led to a decline in product related revenues. The company's IT products business (comprising 61% of consolidated sales) declined by 26% QoQ during the quarter. This contributed to a 79% QoQ decline in license revenues. Its IT services business saw some growth, with a 16% increase QoQ. But, this could not offset the decline in the products business.

Operating margins declined by 10.1% QoQ during the quarter due to a decline in sales and an increase in operating expenses. Net profits however, grew by 24% QoQ during the quarter. This was driven by higher interest and other income compared to a negative figure during the last quarter. Lower tax outlay also helped boost the net income. The company added 11 new customers during this quarter, and signed new licenses of US$ 7.2 m. This was however down 77% QoQ.

As per leading news daily, RBI has endorsed a view that banks need to exercise caution while lending to micro finance institutions (MFIs). The directive to several banks came in after the successful IPO of SKS Microfinance - flagging concerns regarding the business model of several players in the MFI segment. RBI is of the view that worsening credit quality and risk of default can persist if inadvertent lending continues in the MFI ecosystem.

Under the current regulations, bank lending to MFIs falls under the purview of priority sector lending. This allows banks to keep lesser provisions on the same. As a result MFIs can access funds at cheaper rates which enables them to lend at higher rates factoring in margins in excess of 15%. However, this pushes up the interest rates for the end borrowers to about 30% defeating the essence of MFI lending. However, as MFIs have the scale and can outreach poor people they cannot be ignored altogether. Thus, RBI is of the view that these MFIs need to be monitored more closely in order to avoid overheating in the financial system.

Energy stocks lead markets higher
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened below the breakeven mark but soon moved into the positive territory. They have managed to stay in the positive since then. Other key Asian markets are in the green with Taiwan (up 1%) leading the pack of gainers. The US markets closed lower by 0.2% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with energy majors finding investors' favour. The BSE-Sensex is trading higher by around 29 points, while the NSE-Nifty is up by about 12 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.7% and 1% respectively. The rupee is trading at 46.05 to the US dollar.

Financial stocks have opened the day on a strong note. Gainers here include CRISIL and ICRA. As per a leading business daily, REC plans to issue up to Rs 30 bn worth of infrastructure bonds in October this year as part of its fund-raising efforts at cheaper costs. It has got in-principle approval to issue the infrastructure bonds from the Reserve Bank of India (RBI). Once the institution gets the non banking finance company-infrastructure finance company (NBFC-IFC) status, it will approach RBI again for final approval. REC expects to get the NBFC-IFC status by the end of this week. It may be noted that after Power Finance Corporation, it will be the second company in the power sector to get this status. Besides the first trance of up to Rs 30 bn, REC may also issue a second tranche of infrastructure bonds in February, 2011.

Power stocks have opened the day on a positive note. Gainers here include Power Grid Corporation and Voltamp Transformers. As per a leading business daily, NTPC plans to expand its 3,000 mega watt (MW) Kaniha power plant by another 500 MW. It may be noted that it is already the second largest power plant in India. It is part of the massive capacity addition underway by the power major. It plans to add 4,150 MW this year and another 5,000 MW next year. Together, that will help the company come close to the capacity addition target of 17,000 MW in the current Five Year Plan. NTPC will not be able to fully meet the target as the proposed North Karnapura and Barh power plants could not come up. The company presently has a power generation capacity of 31,000 MW. Work on another 18,000 MW is in progress. Moreover, it has issued notices inviting tender for projects to the tune of another 30,000 MW.

Is it right time to invest in these stocks?

Mid and small cap stocks are having a good FY11. This is given that these stocks in general have outperformed their large cap peers since the start of April 2010. Against the BSE-Sensex's gains of a mere 3%, the BSE-Midcap index has risen by 9% during this period. As for the BSE-Smallcap index, it is up 10% since March end.

Data Source: BSE

Mid and small cap stocks in fact have been outperformers since the bull run started in March 2009. This is after the big declines these stocks had seen in 2008. As we stand now, these two categories of stocks aren't looking cheap anymore. Not even if one factors in a good growth in corporate earnings over the next 2-3 years. As such, following the momentum and buying these stocks (just because they are rising) is highly risky.

So, should mid and small caps be a strict 'no-no'?
Well, the answer is - it depends on your long-term needs and risk appetite. But purely as a matter of prudence, one looking to build a portfolio from a 10 to 15 years perspective can allocate 10-15% each to mid and small caps...and quality stocks in each of these categories.

Treat this allocation towards mid and small caps as just a guide and, we repeat, allocate your equity portion using your understanding of different kinds of companies across different levels of market caps.

Overall, the opportunities to buy good companies at low valuations are still not available in plenty. In such a scenario, the better thing to do will be to make a list of good quality mid and small cap stocks - well-managed simple businesses - that will be worth buying if the markets crack.