IT mid-caps, drug cos near lows

IT mid-caps, drug cos near lows
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First Published: Sat, Oct 06 2007. 12 34 AM IST

Updated: Sat, Oct 06 2007. 12 34 AM IST
While the market has been hitting new highs practically every day since the Fed rate cut, there are quite a few stocks which are trading close to their 52-week lows. Not surprisingly, the list includes mid-cap IT shares. Mindtree Consulting Ltd, Subex Azure Ltd, Geometric Software Solutions Co., Kale Consultants Ltd and Megasoft Ltd are all less than 2% away from their 52-week lows.
Most IT analysts had downgraded mid-cap IT shares last month on fears of a slowdown in the US. In a report last month, JPMorgan Chase pointed out that mid-cap IT firms would have a higher negative impact in the event of a US slowdown, essentially because large-sized companies enjoy better bargaining power, have more diversified service offerings and have superior relationships at the boards of clients.
With the rupee appreciating further in the past month, the situation has only worsened for mid-cap IT shares. Most of these companies have operating margins of less than 20%, unlike their large-cap counterparts. Thus, the drop in margin owing to the appreciating rupee leads to a higher drop in their profit. In the September quarter, the rupee appreciated by 13% over the year-ago quarter. Every percentage rise in the rupee hits margins by roughly 50 basis points, which essentially means a hit of 650 basis points.
For a company with an operating margin of 13%, profit would halve owing to the 6.5% hit (assuming all other factors remain the same). But for someone like Infosys Technologies Ltd, which has margins of 26%, profits would fall only by a quarter.
Interestingly, the list also includes some pharma companies such as Aventis Pharma Ltd, Merck Ltd, Unichem Laboratories Ltd and Cadila Healthcare Ltd. Pharma analysts say that there isn’t anything inherently wrong with the sector, but it’s just that it’s not hot enough for the markets currently. Unlike industries such as infrastructure where large capex and huge order wins are a routine affair, the pharma industry is too low-key to attract the markets’ fancy. Most companies in the sector are expected to grow earnings by over 20%, but earnings growth or fundamentals aren’t the issue.
It’s just a lack of preference, or “sentiment”, as market participants put it.
Another sector that has lost favour is retail. Pantaloon Retail India Ltd’s shares have done well lately because of its plans to sell shares in its subsidiary companies and unlock value for shareholders. But both Trent Ltd and Shoppers’ Stop Ltd are less than 5% away from their year’s lows. The market’s lack of interest in these companies reflects the concerns about increasing competition. Pantaloon recently reported that core profit (before tax) halved to Rs10.5 crore in the June quarter which, according to analysts, was primarily because of higher competition.
Auto component shares such as Sundram Fasteners have also underperformed, which is not surprising given the drop in auto sales lately. But what’s surprising is that auto stocks themselves are at least 25% higher compared with their lows. Analysts say that while auto component shares are reflecting the underlying realities in the auto space, shares like Tata Motors Ltd and Bajaj Auto Ltd are being propped up because of high trader interest, especially in the derivatives segment.
FIIs finally go short
After taking long positions worth Rs25,975 crore in the cash and futures segments in just 10 trading sessions, foreign institutional investors took net short positions for the first time since the Fed rate cut. On Thursday, their net short positions in the futures segment amounted to Rs2,411 crore, more than offsetting the net purchases worth Rs575 crore in the cash segment. Foreign institutional investors also do arbitrage trades on the cash and futures segments, so it makes sense to look the net long positions being taken. The net short position on Thursday explains why the market ended its record 11-day winning streak. While it’s early to see whether FIIs applied the brakes, it does look as if their exuberance over Indian stocks would be tempered. The share of index derivatives in total turnover has risen to 34% in the past three trading sessions, from a low of 25% in the preceding two sessions. The increasing volatility in the markets seems to have caused traders to look at hedging their market positions. It also points to the fact that fewer people now expect the markets to be a one-way street.
Write to us at marktomarket@livemint.com
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First Published: Sat, Oct 06 2007. 12 34 AM IST
More Topics: Sensex | Stocks | mid-caps | Infosys | IT |