India Markets Thursday Wrap-Up: Mid and Small Caps Find Favor

by: Equitymaster

Although in the positive, the Indian indices moved closer to the dotted line in the final hours and settled marginally higher today. Profit booking in index heavyweights led the indices to shed most of the early gains. While the BSE Sensex closed higher by around 32 points (up 0.2%), the NSE Nifty gained around 14 points (up 0.3%). The BSE Midcap and the BSE Smallcap indices managed to do well to notch gains of 0.8% and 1.1% respectively. Profit booking was largely seen in software, realty and oil & gas stocks.

As regards global markets, barring Indonesia most Asian indices closed in the positive today. However, European markets have also opened on a cautious note. The rupee was trading at Rs 46.78 to the dollar at the time of writing.

Indian drugmaker Sun Pharma's woes with the US drug regulator (FDA) seems to be showing no signs of reprieve. The company's US unit has received a fresh warning from the USFDA for violations of manufacturing regulations at its New Jersey manufacturing plant. During 1QFY11, the company's robust topline growth was largely due to the one-time sales that the company generated from the product 'Eloxatin', distributed by Caraco (NYSEMKT:CPD) in the US market. With the court judgement going against Sun Pharma, the distribution of this product was stopped at the end of June. And so, there will be no revenues from this product in the forthcoming quarters. In the US market, Caraco is actively working with the USFDA to take corrective action at its manufacturing plant in Detroit. Despite these issues, Sun Pharma has maintained its consolidated sales growth guidance of 18-20% YoY for FY11.

Just 7 out of 10 Indians currently have bank accounts. But being habitual savers, Indian banks together hold some of the largest numbers of low cost deposit accounts in the world. And the ones that have the maximum market share in them tend to be most profitable. For it allows them to lend cheaply without sacrificing margins and asset quality. IDBI Bank which has been a late competitor in this space due to its erstwhile DFI structure, seems to be doing a pretty good job. The bank which has the lowest net interest margin in the sector (less than 1.5%) has only one way to become more profitable. And that is enhancing its low cost deposit base at any cost. Even if that means depriving itself of some fee income. With this in mind, IDBI Bank has offered free services such as DDs and fund transfers on all kinds of savings accounts.

This, IDBI believes will help it cannibalize on the deposit base of its competitors who charge heavy fees. We believe that while such a strategy will certainly help IDBI in the short term, for the sector doing away with non fund revenues could be very risky.

Meanwhile, Shree Cement plans to invest Rs 36 bn on capital expenditure over the next 18 months. This is on the back of expectations of higher demand from the northern region. The demand is expected to partly come due to the forthcoming Commonwealth Games in addition to increased spending on infrastructure by the government and on account of ongoing construction activity. However, with several cement producers lining up capacity expansion plans either through the brownfield or greenfield expansion route, the demand supply gap is set to narrow. The Rajasthan-based cement maker expects margins to decline in FY11 but revenues to remain flat.