Sensex Opens Flat; Dr Reddy's Slumps Owing to USFDA Observations

Thu, 9 Mar 09:30 am

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Asian equity markets are lower today as Japanese and Hong Kong shares fall. The Nikkei 225 is off 0.15%, while the Hang Seng is down 0.99%. The Shanghai Composite is trading down by 0.86%. Stock markets in the US finished their previous session on a positive note.

Meanwhile, Indian share markets have opened the day on a flat note with negative bias. The BSE Sensex is trading lower by 42 points while the NSE Nifty is trading lower by 17 points. The BSE Mid Cap index and BSE Small Cap index both have opened the day down by 0.1%.

Sectoral indices have opened the day on a mixed note with automobile stocks and realty sector leading the pack of gainers. While metal stocks and power stocks are trading in the red. The rupee is trading at 66.64 to the US$.

GAIL share price slumped 4.2% as the stock will turn ex-bonus in the decided ratio of 1:3 today. The board of directors of the company at their meeting held on 25 January 2017 had recommended the issuance of one bonus share of Rs 10 for existing three equity shares of Rs 10 each fully paid up.

Pharma stocks have opened the day on a mixed note with Elder Pharma and Natco Pharma being the most active stocks in this space. According to an article in a leading financial daily, the US Food and Drug Administration (USFDA) has made 13 observations relating to deviation from good manufacturing practices at Dr. Reddy's Laboratories Ltd's cancer formulations facility at Duvvada in Visakhapatnam.

The USFDA observations are a setback for Dr Reddy's as it was expecting a clean chit from the US drug regulator inspection. The site manufactures cytotoxic and hormonal injectables and is an important plant given Dr Reddy's focus on complex generic filings, the reports noted.

Notably, Dr Reddy's had received a warning letter from the USFDA with regard to this facility in November 2015. After the commitments made by the company as part of its response to the warning letter were completed, a re-audit of the facility was scheduled for the first quarter of 2017.

Recently, the company also got three observations from USFDA for its Miryalaguda active pharmaceutical ingredient (API) plant (subscription required) relating to violation of norms. The US contributes about half of the company's sales and has been under pressure owing to lack of new approvals and erosion of the base business.

Since some time, Indian pharma players have faced problems from global regulators relating to noncompliance of good manufacturing practices (GMP). In one of our editions of The 5 Minute WrapUp, we have spoken about the USFDA crackdowns faced by the Indian Pharma in the recent times and how they have been constantly investing towards R&D. We believe pharma companies that are upgrading and keeping facilities compliant, and have niche product pipelines in place will see sustained revenue growth.

Dr Reddy's share price opened the day down by 2.8%.

Moving on to the news from power stocks. National Thermal Power Corporation (NTPC) has announced the commissioning of 45 MW solar capacity at Bhadla in Rajasthan taking the total installed capacity of the project to 160 MW. Last month, NTPC had commissioned 115 MW capacity out of the 260 MW Bhadla solar power project.

With this, the installed capacity of Bhadla solar power project has become 160 MW and that of NTPC's solar power projects has become 520 MW.

One must note that NTPC has planned the capacity addition of about 1,000 MW through renewable resources by 2017. NTPC intends to become a 130-GW company up to 2032 with a with diversified fuel mix and a 600 billion units company in terms of generation. The company wants the share of renewable energy (including hydro) to be 28%.

Recently, the first coal rake of NTPC's Pakri-Barwadih coal mine at Hazaribagh was flagged-off making it a fully integrated company. So far in this financial year, NTPC's thermal stations clocked a plant load factor (PLF) of 77.72% as against national PLF of 59.64%.

The renewable energy sector, and especially solar, has seen their fortunes change at a rapid pace. Leaps in technology have made renewables increasingly cheaper to produce (Subscription required) relative to traditional thermal power. While thermal is still the cheapest to set up, the gap has quickly narrowed in the past few years and is now down to a whisker.

Costs of Setting Up Various Types of Power Plants

Rahul Shah, Co-head of Research, pointed out that a few of the renewable energy projects are already running into financial troubles. Can we rule out a similar fate for the other projects? In his view, investors should not get carried away by the hoopla surrounding renewable energy projects. It's a much-needed initiative to reduce the pollution levels across the country. However, investors in this space must be extremely cautious. NTPC share price began trading down by 0.5%.

In another development, the initial public offering (IPO) of D-Mart parent Avenue Supermarts to raise up to Rs 18.7 billion was fully subscribed on the first day of the offer. The supermarket operator is selling shares in a range of Rs 295-299 a share in an offer that closes on Friday.

Purely in terms of size, the D-Mart IPO does not match up to some of the big offerings in the recent past. But given its credible business model and strong operating ratios, not to mention Radhakishan Damani's stature as an investor and entrepreneur, there is a lot of excitement about the IPO.

The retail business is characterized by low profit margins and is susceptible to external factors. The similarities exist in terms of their razor-sharp focus in execution and steady expansion of footprint.

Rohan Pinto, our Research Analyst, released the Equitymaster IPO note recently. In this detailed report, Rohan not only evaluates the company's business performance but answers the crucial question about valuations.

Find the entire report here (Subscription required).

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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