No respite from selling pressure

Fri, 7 Jan Closing

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Mirroring the trend yesterday, Indian indices languished in the red throughout today’s trading session as well. Relentless selling pressure across index heavyweights ensured that the markets closed well below the dotted line. While the BSE-Sensex closed lower by around 493 points (down 2%), the NSE-Nifty lost around 144 points (down 2%). The BSE Midcap and the BSE Small cap were not spared either as they raked losses of 3% each. Losses were largely seen in metals and auto stocks.

As regards global markets, most Asian indices closed mixed today while European indices have opened in the red. The rupee was trading at Rs 45.43 to the dollar at the time of writing.

Cement stocks closed in the red today and the key losers were India Cements and Ambuja Cement. The domestic cement industry had a rough 2010. And it doesn’t seem to be over yet. The industry is gearing up for its last leg of expansion in the current down cycle. So the supply overhang may continue till FY13. India, the world’s second-largest cement industry, had an installed annual capacity of 280 m tonnes (MT) by the end of November. This is set to cross 300 MT by FY12 when the projected demand is expected to be 235-240 MT. This would result in an oversupply of 60 MT. It may be noted that the current oversupply is 30 MT with capacity utilisation at about 78%. Between 2007 and 2010, the industry supply-demand dynamics went haywire. Of the 195.8 MT added in the last 16 years, about 92 MT (47%) capacity was added during this time. So realisations will remain under pressure for a while. On the other hand, rising input costs, especially that of coal will only make matters worse.

Indian pharma stocks closed weak today with the key losers being Lupin and Wockhardt. Although the stock of Sun Pharma also closed in the red today, it did very well in 2010 to notch gains of 59%. The company’s performance during 1HFY11 was impressive with sales and profits growing by 40% YoY and 73% YoY respectively. Having said that, this performance was largely attributed to the one-time sales that the company generated from the cancer drug ‘Eloxatin’, which was distributed by Caraco in the US market. Due to a court order which banned Sun Pharma from selling the drug, there were no revenues from the same in the second quarter. The company was up against Sanofi-Aventis SA, which had appealed for barring Sun Pharma to market the generic version of the drug in the US. However, recently, a US appeals court ruled a case in favour of Sun Pharma with respect to this drug which could be one of the reasons for the interest in the stock.

The second major development that took place for Sun Pharma in 2010 was related to the Israeli firm Taro. The uncertainty surrounding the acquisition of this company came to an end when the Israeli Supreme Court ruled in Sun Pharma’s favour. Now with Taro’s financials being clubbed with that of Sun Pharma’s, the latter’s sales are expected to ramp up during FY11.

Meanwhile, India did quite well on the mergers and acquisitions (M&A) front in 2010. As per a leading business daily, M&As involving Indian companies trebled to US$ 68.3 bn in 2010 as compared to the previous year. What is more, the average deal size also increased to US$ 120 m which was more than 3 times compared to the average deal size in 2009. What led to the surge in M&A deals was easy availability of finance as well as better economic prospects. There were a lot of outbound deals especially from the oil & gas, metals and mining sectors as companies looked for assets to match India’s growing energy needs. That said, valuations now seem to be higher than what they were in 2009 and so it remains to be seen whether this momentum in M&A activity continues in 2011 as well.