Sensex Remains Range bound; IT Stocks Drag

Fri, 31 Mar 01:30 pm

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After opening the day marginally lower, share markets in India have remained range bound and are trading marginally below the dotted line. Sectoral indices are trading on a mixed note with stocks in the oil and gas sector and stocks in the metal sector trading in green, while stocks in the IT sector are leading the losses.

The BSE Sensex is trading down by 70 points (down 0.3%), and the NSE Nifty is trading down by 15 points (down 0.2%). Meanwhile, the BSE Mid Cap index is trading up by 0.8%, while the BSE Small Cap index is trading up by 0.7%. The rupee is trading at 64.85 to the US$.

In news from stocks in the IPO space. Education company, CL Educate made a poor debut on the stock exchanges today. CL Educate share price opened at Rs 402, down sharply by 20% from its issue price of Rs 502 per share.

Its public issue, which was open for subscription during March 20-22, comprised of fresh issue of 2.2 million shares and offer for sale of up to 2.5 million shares.

The company's IPO (Initial Public Offer) was oversubscribed 1.90 times -- with qualified institutional buyers (QIBs) category getting oversubscribed 3.65 times and retail investors 1.63 times. That said the HNI portion went undersubscribed at 21%.

CL educate which owns the brand Career Launcher offers preparation courses for MBA, banking & SSC, engineering, medical, civil services, law and others under the brand Career Launcher. In addition, the company's publishing and content development offers test prep titles for professionals and entrance examinations under 'GK publications' brand.

The government's outlay on education -- higher education, K12 elementary and K-12 secondary - has increased at a CAGR of 6.5% from Rs 508 billion in 2010-11 to Rs 696 billion in 2015-16.

The domestic test prep market is estimated at Rs 378 billion, as of 2015-16, up 14% CAGR over 2008-09, driven by factors including escalation in income levels, increased spend on education, high competition for limited seats in quality institutes and complexity of entrance exams.

Despite these factors, the CL Educate IPO opened on the bourses to a tepid response.

Two years ago, Tanushree explained why IPO stands for 'Imaginary Profits Only'. Nothing has happened since then to make us change our mind.

In fact, just six months ago, my colleague Rohan described how the lure of quick profits has made a mockery of the entire IPO process. But he also explained how Investors can profit from IPOs.

It may have been fine if the long-terms returns were decent. But that's not the case.

Poor Returns from Big IPOs

A chart of the historical returns of the biggest IPOs is not a pretty one. We've excluded dividends but adding back the dividends won't compensate for these disastrous returns.

Mind you, these are long-term returns. These IPOs hit the market many years ago: Cairn India - December 2006, Coal India - October 2010, NHPC - August 2009, DLF - June 2007, and Reliance Power - January 2008.

The moral of this story is quite simple. A great IPO story, sold at sky high valuations, is not something to get excited about.

Moving on to news from stocks in the pharma sector. According to an article in The Economic Times, leading Indian generic drug makers, Lupin Ltd, Cipla, Cadila Healtcare and Sun Pharma, are looking to acquire the respiratory drugs portfolio of Novartis AG that the Swiss giant is seeking to divest.

The Swiss drug maker's portfolio of brands on offer could fetch as much as US$ 50 million in a sale.

The Novartis portfolio includes top-selling brand TOBI Podhaler, a drug prescribed for symptomatic relief to patients suffering from cystic fibrosis, a genetic lung disorder.

However, one must note the interest from public companies is preliminary and no firm offers have been made.

The brands are sold in as many as 60 countries by Novartis. TOBI Podhaler alone is said to have annual global sales of $300 million. The Indian companies may also face competition from a couple of large global pharmaceutical companies for the brands.

The global branded inhaler market is estimated to be over $700 million in sales and projected to touch $3.4 billion by 2024.

Indian generic makers have been looking to strengthen up their respiratory drugs portfolio in Europe and North America as pure branded and specialty products are likely to be the next big revenue generators for these companies.

Drug makers like Lupin and Cipla which have been historically strong in the respiratory drugs markets are taking strength outside their home countries.

Indian drug makers have been pursuing M&A opportunities in North America and Europe as well as acquiring brands of global pharma companies sold in India.

Acquisitions, both local and global can help Indian pharma companies currently facing regulatory headwinds.

We had recently written about the current predicament of Indian pharma companies in one of the premium editions of the 5 Minute WrapUp:

• Over the past few years, risk in the US markets has increased. The US Food and Drug Administration (FDA) has become stricter on products entering US borders. Surprise inspections have increased and companies are being issued warning letters. This has impacted the business and earnings of Indian pharma players, causing major volatility for the sector.

Give it a read to form a better understanding of the current scenario in the Indian pharma sector.

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

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