Oil prices slipped in thin trading on Wednesday as investors took profits from the previous session’s rally, while potential supply disruptions in the United States, Brazil and Libya curbed losses. (Reuters)

Oil prices slipped in thin trading on Wednesday as investors took profits from the previous session’s rally, while potential supply disruptions in the United States, Brazil and Libya curbed losses.

Brent futures for December delivery had fallen 4 cents to $50.50 at barrel by 0215 GMT, after ending the last session up $1.75, or 3.6 percent.

U.S. crude for December delivery dropped 2 cents to $47.88 a barrel, after closing up $1.76, or 3.8 percent. Earlier on Wednesday, it hit its highest since Oct. 13 at $48.36.

“(Investors are) taking short-term positions after a good rally,” said Michael McCarthy, chief market strategist at Sydney’s CMC Markets.

Prices were expected to slide further later in the day although they will remain range-bound, McCarthy added.

“A year-end recovery in commodity prices remains unlikely with a stronger dollar and continued weak Chinese economic data,” ANZ said in a research note on Wednesday.

While there were no major supply disruptions, a strike at Brazil’s state-run oil producer Petroleo Brasileiro SA and the closure of the Libyan oil export terminal at Zueitina provided some support to prices, McCarthy said.

The Petrobras strike, which has slowed daily oil output by around 25 percent in the world’s ninth biggest oil producer, helped fuel the rally in prices in the previous session.

But a likely build in U.S. crude inventories last week weighed on sentiment.

Crude stocks rose by an estimated 2.8 million barrels in the week to Oct. 30 to 479.9 million, data from industry group the American Petroleum Institute showed on Tuesday.

Official inventory data from the U.S. Department of Energy’s Energy Information Administration will be released later on Wednesday. {EIA/S]

Investors are also keeping an eye on manufacturing data from China, Japan and the eurozone later on Wednesday.

Crompton Greaves (CRG) reported disappointing 2QFY15 EBITDA – 13.5% below estimates. Power systems subsidiaries continue to disappoint, with management maintaining it should turn around. We remain negative on potential of a positive surprise in power systems, though potential sale of loss-making subsidiaries has given a floor to the stock. Subsidiary power systems remained EBIT negative at -1.8% v/s -0.8% in 2QFY16. We believe the segment will continue to disappoint as global pricing trends are not showing uptick signs. In 1HFY16, CRG sold their Canada operations for EV of $20 million.

The management mentioned that it is in definitive talks with a buyer to sell the remaining loss-making subsidiaries and hope to close a deal in foreseeable future. Apart from this possible positive event, fundamentally, we do not see any earnings surprise potential. We have reduced our FY16E-18E EPS by 11-55% to reflect the weak revenue and margins at the subsidiary level.

In April 2015, CRG’s promoters sold their 34.37% stake in CRG’s consumer business to PE investors for R2,000 crore (~16x PE FY17E). Proposed demerger and listing of the consumer business is expected by March 2016.

We believe if this segment does not see a sharp revenue recovery (8% YoY in 2Q), hopes of value creation through listing at a premium will also be dashed.

Indian fund houses have started answering to the queries sent by State Bank of India (SBI) on investment policies into debt funds. During the first half of October, SBI, which is largest lender of the country, sent a six-point questionnaire to around top 15 fund houses regarding their investment policies into fixed income securities.

According to senior officials in the mutual fund industry, many fund houses have already sent their answers, while a few of them will send in next few days.

“I think questions sent by SBI were very ordinary and reasonable in nature. But one question which surprised not only us, but also the entire industry was on seeking a compensation policy in case of a default,” said a person from a top fund house on condition of anonymity.

Officials in the industry said this latter was following the Rs 190-crore default by Amtek Auto which had hit investors in two schemes of JP Morgan Asset Management.

The letter sent by SBI to fund houses sought details on measures to deal with suspension of ratings, credit quality of papers and exposure of fund houses into single paper, among others. SBI invests approximately Rs 10,000 crore in debt funds with most of the money either into liquid funds or short-term funds.

“We can’t differentiate between retail investors and large corporates as we are regulated by the Securities & Exchange Board of India (Sebi). So the reply were on similar lines which are available in our offer documents. But answer to one question on the compensation policy was very clear that mutual funds are not a ‘guarantee’ products and its returns are market linked,” said the head of credit at a leading fund house.

Even people within the industry have categorically said investments into mutual funds are subject to market risks and investors need to be prepared to bear losses.

CVR Rajendran, CEO of Amfi, said: “We all know that mutual funds are just a pass through vehicle and there are very clear disclaimers. One can’t expect it to be a ‘guaranteed’ product as returns in mutual funds are market linked.”

Clearing the air
* SBI sent a six-point questionnaire to fund houses on their investment policies into fixed income securities
* Officials said the latter was following the Rs 190-crore default by Amtek Auto, badly hitting investors
* SBI invests around Rs 10,000 cr in debt funds with most of the money either into liquid funds or short-term funds

The BSE Midcap and BSE Smallcap index gained 5.89 per cent and 1.85 per cent respectively on a year-to-date basis till Nov 2. (Photo: Reuters)

Like the previous calendar year, midcap and smallcap stocks continue to outperform benchmark indices this year as well. Since the beginning of 2015, the BSE Sensex declined 3.42 per cent till November 2. On the other hand, the BSE Midcap and BSE Smallcap index gained 5.89 per cent and 1.85 per cent during the same period.

During the previous calendar year, Sensex, Smallcap index and Midcap index gained 29.89 per cent, 54.68 per cent and 69.23 per cent, respectively.

About the present market scenario, Nikhil Kamath, director, trading and risk, Zerodha, said, “Markets still continue to remain range bound. Earnings and the Bihar elections are important factors which could dictate short term momentum on the bourses. Not too many sectors have delivered and earnings are just not supporting the market. We can expect a significant number of downgrades to come out forthwith.”

Below are five stocks from the basket of midcap and smallcap indices on which market analysts are looking positive in the current market condition.

Sangam (India)
Recommended By: Sharekhan
Why Buy: Sangam (India) is an integrated textile player with its product portfolio ranging from yarn and fabrics to garments. It is a dominant player in the domestic dyed poly viscose (PV) yarn market (around 25 per cent share) and is growing strong in the highly fragmented polyester viscose fabric market. Sangam has reported a compounded annual growth rate (CAGR) of 11 per cent in its revenues and 25 per cent in its net profits over the last five years. In the same period, it has invested close to Rs 300 crore in capex (forward and backward integration) but reduced its debt/equity ratio to 1.43x in FY2015 from over 3.6x in FY2010 due to focus on cash inflows. The return ratios have also improved consistently with return on equity (RoE) and return on capital employed (RoCE) at over 15 per cent in FY2015 from less than 10 per cent in FY2010. The significant improvement and consistency in its financial performance is driven by its efforts to continuously move in backward-forward integration.

With an expected high double-digit steady growth rate in earnings over the next couple of years and increasing contribution from branded garments segment (B2C business), Sharekhan sees a potential for multiple re-rating of the stock and expect handsome gains over medium to long term. In the near term, the brokerage house believes that the initial success of its garmenting business and strong financial performance could provide 20-25 per cent returns over the next few months. On November 2, the share price of Sangam (India) was at Rs 249.80.

Relaxo Footwears
Recommended By: Sharekhan
Why Buy: In Q2FY2016, Relaxo Footwear (Relaxo)’s revenue growth of 15.7 per cent YoY was driven by both volume and premiumisation improvement in the product mix. In a muted demand environment, this double-digit growth in revenue on an increasingly higher base (Q2FY2015 revenue grew at 25.7 per cent YoY) is commendable and signifies the strong on-ground execution and brand salience efforts of the company. The growth in the revenue along with falling prices of raw materials boosted the operating profit margin by 170 basis points in Q2FY2016. Driven by a healthy operating performance and increase in the other income, the reported net earnings grew by a strong 56.2 per cent YoY. Adjusting for the one-off gain (reported in other income) on account of sale of investment in an associate company, the adjusted earnings grew by 39.2 per cent on a Y-o-Y basis.

Relaxo’s strong presence in the lucrative mid-priced footwear segment (through its top-of-the-mind recall brands like Hawaii, Flite and Sparx) along with its integrated manufacturing set-up, lean working capital requirement and vigilant management puts it in a sweet spot to cash in on the strong growth opportunity unfolding in the footwear category due to a shift from unbranded to branded products. Thus, Sharekhan is positive on the stock and believes the stock can touch Rs 635. The share price of Relaxo Foowears was at Rs 523.60 on November 2.

FAG Bearings and Timken India
Recommended By: JM Financial
Why Buy: Indian bearings sector is at the cusp of another upcycle (3rd in last 15 yrs) as JM Financial expects sector sales to double from $1.4bn to $3bn over next 5 years, led by robust growth in automotive sales, pickup in exports and moderate growth in industrial capex. The brokerage house is bullish on FAG Bearings and Timken India with 16 per cent upside in both these stocks. Share prices of FAG Bearings and Timken India were at Rs 4063.20 and Rs 592.70 on November 2.

Kitex Garments
Recommended By: Motilal Oswal
Why Buy: For the quarter ended September 30, 2015, Kitex Garments posted net profit of Rs 27.16 crore, up 40.55 per cent, against Rs 19.32 crore in the corresponding quarter a year ago. Net sales and other operating income of the company grew 4.75 per cent year-on-year (YoY) to Rs 134.25 crore. On November 2, the share price of Kitex Garments was at Rs 703.55.

Motilal Oswal expects 19 per cent revenue CAGR along with 450 basis points margin expansion over FY15-17, driving 32 per cent PAT CAGR. The brokerage house believes foray into the brand business marks Kitex’s transition from a B2B business to a B2C business, with strong room for higher markups and higher profitability per unit. Given huge scalability, strong return ratios and free cash generation, Motilal Oswal believes Kitex Garmens deserves a multiple of 26x one-year forward earnings and the share price of the company can touch Rs 950.

(Disclaimer: The stocks are recommended by the respective brokerage houses and not a recommendation from Financial Express online)