No respite for Indian indices
Closing

Indian markets had a weak trading session today as the indices languished in the red throughout the day led by persistent selling across index heavyweights. While the BSE Sensex closed lower by around 32 points (down 0.2%), the NSE Nifty lost around 17 points (down 0.3%). Midcap and small cap stocks were not spared either as they closed lower by 0.3% and 0.1% respectively. Losses were largely seen in auto and banking stocks.

As regards global markets, most Asian indices closed mixed today. European indices have opened on a weak note. The rupee was trading at Rs 44.54 to the dollar at the time of writing.

As per a leading business daily, Tata Tea and US soft drinks giant PepsiCo are looking to explore the formation of a joint venture in ‘healthy’ non carbonated beverages. While the details of the same have yet to be finalized, the move appears to be part of Tata Tea’s strategy to transform itself from a tea and coffee company to a multi beverage company.

Not just that, Tata Tea is also planning to financially integrate its global operations. The company currently has several subsidiaries spread across the globe, involved in marketing loose and branded coffee, speciality, flavored and green tea, ready-to-drink products and mineral water. What is more, Tata Tea has stated that it aims to grow to US$ 10 bn by 2015 from the present US$ 1 bn in the next 5 years which implies a CAGR of 59%. Majority of this growth is likely to be sought through inorganic routes. The stock closed lower today.

Pharma stocks closed mixed today. While Cipla and Wockhardt found favour, Ranbaxy and Dr.Reddy's closed into the red. Indian pharma companies may have spread their wings far and wide across the globe. In many overseas markets they have managed to establish a formidable presence. But not so in China. The Chinese pharma market is beset with a slew of challenges which Indian companies are finding difficult to overcome. These include strong barriers for market access, longer time to build commercial infrastructure and difficulty in competing with Chinese players on cost.

Not just that, language is a barrier which means that the only way to gain a foothold would be through a JV with a local partner. But even that is not easy. The challenge again being finding a trustworthy partner and establishing distribution set up in the highly government regulated Chinese market. But some Indian companies are still upbeat that healthcare reforms introduced by the government would enable Indian companies to penetrate this market. One will, however, have to wait and watch.

As per a leading business daily, World Bank is of the view that India can emerge as the world's second largest economy in the year 2039, bigger than the US, if its GDP continues to grow at the rate of 8-9%. In that case, India's average per capita income would jump 22 times to US$ 22,000 around 30 years from now. We believe the key here is sustaining the 8-9% growth in GDP which seems a tall order for the next 30 years. Certainly no one can doubt the long term growth prospects of the Indian economy. But there are still many challenges that the country needs to overcome especially on the infrastructure front if such high growth rates are to be maintained.

Auto and banks lose favor
01:30 pm

Weakness in the Indian markets continued during the last 2 hours of trade with major indices trading in the red. While buying interest was seen in the IT and the consumer durable space, stocks in the oil & gas, banking and auto space weighed down the indices.

BSE-Sensex is trading lower by 32 points while NSE-Nifty is trading 15 points below the dotted line. BSE-Midcap Index is down by 0.12% while the BSE-Smallcap index is trading 0.27% above yesterday’s closing. The rupee is trading at 44.54 to the US dollar

As per a leading financial daily, Glenmark Pharmaceuticals and GlaxoSmithKline (GSK) have entered into an out of court settlement over the launch of a generic version of Malarone, an anti-malaria drug brand. Under the terms of settlement, Glenmark will be able to sell its generic tablets by paying a royalty to GSK from 2QFY11. Under this settlement, Glenmark will get an exclusivity of sale in the US market for 180 days upon the patent expiry. However, benefit for the company will be limited as the drug generated only US$ 56 m in sales in CY2009. Glenmark registered sales of approximately US$ 170 m in FY2009. In the best case scenario this drug would yield about US$ 11 - 12 m in sales, adding about 5% to the company’s topline on an annualized basis.

As per a business daily, Corporation Bank is planning to raise Rs 20 bn in FY11 to meet incremental credit growth requirements. This amount would be raised via a combination of Tier-I and Tier-II capital. The bank has estimated that it would require Rs 50 bn over the next 2 years to fuel its balance sheet growth. For the balance Rs 30 bn, the bank is considering tapping the equity market via a rights issue or a follow-on public offer. The bank is targeting a loan growth of 25% during FY11 with a net interest margin in the range of 2.5% to 2.6%. The credit growth is seen coming from real estate, infrastructure, retail and SME segments. With this capital, the bank's capital adequacy ratio will improve and the bank will have adequate cash to lend when the demand for credit picks up.

IT, engg stocks aid in reducing losses
11:30 am

After beginning the day on a weak note, the Indian markets began drifting towards the dotted line during the previous two hours of trade. However, the indices are still trading in the negative zone. Stocks from the IT, capital goods and healthcare spaces are trading firm, while those from the auto and banking spaces are leading the pack of losers.

The BSE-Sensex is trading lower by about 35 points, while the NSE-Nifty is trading lower by about 15 points. However, stocks from the midcap and smallcap space are trading higher with the BSE-Midcap and BSE-Smallcap indices up by about 0.1% and 0.3% respectively. The rupee is trading at 44.63 to the US dollar.

Steel stocks are currently trading mixed with JSW Steel and Jindal Saw trading firm, while NMDC is one of the key losers. As per a leading business daily, Tata Steel plans to start work on its proposed multi-purpose special economic zone (SEZ) project near Gopalpur in south Orissa. The project has received the approval of the commerce ministry but was facing land acquisition problems. But they are expected to be resolved soon. It may be noted that Tata Steel had initially planned a mega steel plant near Gopalpur and applied for about 3,700 acres of land. However, it was shelved due to water, railway network and land acquisition problems. However, of late there has been progress on the land acquisition front. In fact, the SEZ is likely to begin on about 2,793 acres of land. In our view, if the SEZ goes ahead it will send a positive signal to an array of projects in India that are currently stalled due to land acquisition problems.

Auto stocks are currently trading weak led by Hero Honda, M&M and Tata Motors. India’s largest two-wheeler company Hero Honda had a good last year. The company’s sales volumes grew by about 23% YoY to about 4.6 m units during FY10. Volumes sales are expected to remain strong this year as well. While this is a positive for the company the fact that the company has an installed capacity of producing about 5 m units per annum will make it face some pressure during the current year. A leading business daily has reported that the projected double-digit growth in volumes this year will put pressure on the company considering that its factories have been running close to full capacity. As of now, the company has not lined up any plans of expansion. However, it is believed to be in talks with various state governments (including Tamil Nadu, Karnataka and Gujarat) to set up new factories. While the company expects to finalize the location of the new unit in a few months any delays would definitely hamper its sales volumes during the next year. Atleast for the current fiscal i.e. FY11, it is possible that the company can work beyond it capacities. As for market share, a lot depends on how much free capacities the other key players have as well.

Infosys weak on dull guidance
09:30 am

The Indian markets have started today’s session on a negative note. The benchmark indices opened below the breakeven mark, moved into the green but soon dived back into the negative in line with rest of Asia. Other key Asian markets are trading in the red with Japan (down 1%) leading the pack of losers. The US markets closed higher by 0.1% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with auto and banking majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 70 points, while the NSE-Nifty is down by about 25 points. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.1% and 0.3% respectively. The rupee is trading at 44.66 to the US dollar.

Software stocks are trading mixed. While gains are seen in Wipro and TCS, others like Infosys and Tech Mahindra are trading weak. Infosys announced its full year FY10 results a short while ago. The company has recorded a 5% YoY growth in sales during the year, and a similar growth in net profits. The company has recommended a final dividend of Rs 15 per share. As for the current fiscal (FY11), the management expects total income to grow by around 9-11% YoY while it estimates net profits to decline by 2% YoY. This is something the markets have not taken positively, and thus the pressure on the stock price.

Energy stocks have opened the day on a negative note. Losers here include Gujarat Gas and Cairn India. As per a leading business daily, GAIL plans to invest about Rs 150 bn over the next three years in expanding its pipeline network. The new pipelines will connect cities in Uttar Pradesh, Uttarakhand, Punjab and Haryana. This is in anticipation of the robust growth in gas demand in these states. Moreover, the company is expanding its 10,700 km of cross-country pipeline network. It is laying 5,000 km of pipeline to connect gas sources on the western coast to consumption centres in the north by 2013. It is also laying pipelines to connect to Bangalore, Mangalore and Kochi. The company is also in talks with Engineers India to set up a joint venture to sell compressed natural gas to automobiles and piped natural gas to households in cities. In our view, given GAIL’s strong track record of implementing projects and the strong demand for natural gas, the capacity expansion is a positive development.

Pharma: What the future holds
Pre-Open

So, another year (FY10) has come to the close and all companies will now start releasing their full year results including pharma. For Indian pharma companies, FY10 has been a good year compared to the agonies they had faced in FY09.

What happened in FY09? The global financial crisis had a huge impact on companies across the globe and Indian pharma companies were not spared either. The scenario in that year especially worsened in the second half post the demise of Lehman Brothers and a severe credit crunch thereafter. Given that many of the domestic pharma companies have a presence across the globe, the adverse credit conditions in various overseas markets had an impact on their businesses too. As a result in certain regions such as Russia and the CIS, Indian pharma companies took the decision to focus more on receivables rather than sales. The CRAMS business especially took a big hit since many global innovator companies chose to rationalize their inventories and cut costs overall.

Not just that, volatile currency fluctuations has a huge impact on profits. Especially those companies which had taken loads of foreign currency debt on their books had to account for losses that emanated from the sharp depreciation of the rupee against the dollar. There were other problems too. Notably, delay in product approvals from the US FDA and many companies coming under the scanner of the US regulator for not complying with quality manufacturing standards.

How was it in FY10? The scenario took a turn for the better in FY10. On the forex front, there were no surprises led by the stability of the rupee as compared to the volatility in the previous two years. Business conditions improved too and most of the Indian pharma companies reported an improved performance as compared to the previous fiscal. ANDA approvals have also started picking up pace although the problem of the US FDA being understaffed continues to pose a problem. Although there was not a significant pickup yet evident in the CRAMS business, the outlook still remains favourable going forward as the case for outsourcing remains strong in the longer term.

What lies ahead? There are huge opportunities in the global generics market over the next couple of years as many drugs are scheduled to lose their patents. Having said that, as has been the case in the generics business, competition and pricing pressure will continue to be dominant factors going forward as well. Given that the domestic market has also been doing well, the outlook for Indian pharma over the next couple of years is expected to be much more robust as compared to what we witnessed in FY09 and FY10.

Concerns remain on the debt side given that many Indian pharma companies issued FCCBs to fund their expansion plans in the bull run before the crisis erupted. Since the conversion price is still way above the current price levels, redemption of these bonds seem inevitable and they will have to ensure that sufficient funds are available to redeem these bonds.

Thus, while the outlook on the pharma sector is positive, valuations of some companies have run ahead of fundamentals. As such investors should adopt a stock specific approach while investing in the sector.