Small is painful

Small and mid caps outperformed their larger peers, but only just

The Sensex and Nifty fell 2.2 per cent and 2.5 per cent, respectively, on Thursday, which was not very different from markets across the world.

MSCI's Asia-Pacific index fell 2.3 per cent, while national indexes across Western Europe also fell on fears that economic growth may slow in the US.

Back home, much of the correction was in large cap stocks, indicating that selling could mainly be from foreign institutional investors. BSE's mid cap and small cap indexes fell at a lower rate of 1.7 per cent and 1.5 per cent respectively.

This is in stark contrast to the previous sharp correction on September 22, when small and mid cap stocks had fallen at a much faster pace. Also, the advance-declines ratio was the worst among large cap stocks, identified as 'A' group stocks on the BSE.

According to BSE data, only 15.5 per cent of all 'A' group stocks made gains on Thursday. For the rest of the market, which was mainly made up of small and mid cap stocks, advances accounted for 23.3 per cent of traded stocks.

In fact, in the infamous 'Z' and 'T' (trade-to-trade) categories, the ratio was the best. 26 per cent of 'T' group stocks advanced, while about 24.7 per cent of 'Z' group stocks advanced.

But that doesn't mean that everything was rosy for small and mid cap stocks on Thursday. These stocks continue to be the most volatile. Among 'A' group stocks, the maximum loss in a stock was about 5.6 per cent, while in the other segments losses were in double-digits, the highest being an 18 per cent drop. Besides, a large number of small cap stocks were stuck at the lower end of the circuit filter.

In summary, although large caps dominated in terms of index performance, it's the fall in certain small and mid cap stocks that's worrying. Going forward, stocks in these categories are expected to correct at a faster pace given their relatively higher valuations.

ICICI Bank

The announcement of an equity issue from ICICI Bank has come a little earlier than expected, which is probably why the stock lost nearly 5 per cent after the news hit the market. However, given the pace at which its assets are growing "" asset growth in Q1 was 44 per cent "" the announcement is not entirely surprising.

The bank's capital adequacy as at the end of June was 12.4 per cent, but its Tier-I capital was just 7.6 per cent and so could fall short of the bank's needs to capitalise its international and insurance subsidiaries.

With the markets on a roll, the timing could not have been better. The issue is likely to be priced at current levels or even at a discount because at least a third of it will have to be made in the local market. That's because FIIs already hold 45 per cent and the overall foreign shareholding is around 73 per cent (close to the 74 per cent cap).

At current levels of Rs 540, if the bank raises around Rs 6,500 crore (which is what analysts are expecting), the dilution should be around 15-16 per cent.

While that would boost the book value and should not be earnings dilutive, the RoE would fall post-issue to 13-14 per cent which would be disappointing for investors. At Rs 540, the stock is trading at 2.9 times its expected FY06 book value.

However, at this price, the post-issue multiple would drop to around 2.2. The stock has been an outperformer given its good operating performance and cleaner balance sheet "" net NPLs were down to 1.96 per cent as at the end of June from 2.73 per cent a year back.

Cement industry

Despatches of the top four cement companies dropped 3.92 per cent on a year-on-year basis to 42.12 lakh tonne last month. The lacklustre figures resulted in a significant drop in growth rates for the September quarter compared with the June quarter. Despatches grew a mere 2.96 per cent to 128.72 lakh tonne last quarter compared with an almost 10 per cent y-o-y growth in the June quarter.

The drop in growth rates last quarter is attributed to heavy rainfall across the country in both September and late July, coupled with the transporters' strike in Himachal Pradesh during the latter half of the quarter.

On the positive side, all-India cement prices were about 3 per cent higher on a y-o-y basis in the September quarter, according to analysts. Nevertheless, like earlier quarters, there continues to be a concern that operating margins could be under pressure owing to rising input costs.

For instance, cement companies would be facing another quarter of rising freight charges thanks to the recent hike in fuel prices. In the case of ACC, the company had reported a 36.22 per cent y-o-y growth to Rs 173.74 crore in the outward freight cost in the June quarter. Also, power and fuel costs are expected to rise owing to high coal prices.

Analysts, therefore, expect top players such as ACC and Gujarat Ambuja to report an EBITDA growth of only about 2 to 3 per cent in the September quarter.

Cement stocks, however, have fared much better than the market last quarter. Business Standard's Cement Index rose about 33.5 per cent last quarter compared with a 19.6 per cent gain in the Sensex.

Contributions from Amriteshwar Mathur and Shobhana Subramanian