Telecom Stocks Lead the Gains

Wed, 6 Apr 11:30 am

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After opening the day on a positive note, the Indian Markets witnessed volatility and are presently trading above the dotted line. Sectoral indices are trading on a positive note with stocks from the telecom, metal, and auto sectors leading the gains.

The BSE Sensex is trading up by 75 points (up 0.3%) and the NSE Nifty is trading up by 28 points (up 0.4%). The BSE Mid Cap index is trading up by 0.1% and the BSE Small Cap index is trading up by 0.5%. The rupee is trading at 66.44 to the US$.

As per an article in The Times of India, home loans and other borrowings are set to get cheaper by at least half a percentage point in the coming months following Reserve Bank of India's (RBI) decision to cut rates by 0.25%.

In its monetary policy yesterday, the RBI cut repo rate (rate at which banks borrow money from the RBI) by 0.25%. Post this reduction, the repo rate now stands at 6.5%. This is a five-year low.

Further, the RBI said it would maintain an 'accommodative stance' on monetary policy, meaning it was open to more rate cuts in the future depending on macroeconomic conditions.

The above announcements have surely signaled banks to reduce their rates. However, the question is will this happen? From past experience, the answer can be a clear 'NO'. The past experience shows that the direct correlation between RBI cutting the repo rate and banks passing on that cut at the same rate in the form of lower lending rates is rather weak.

As RBI governor Raghuram Rajan states, "Since the rate reduction cycle that commenced in January [2015], less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base lending rate has declined only by 60 basis points."

So, the chances of banks cutting lending rates are limited. However, the reality will be seen in the coming days.

Our recent premium edition of The 5 Minute WrapUp titled 'How Important is the RBI Rate Cut?' has shared some views on what will be the impact of RBI rate cut on Indian companies. You can read it here (subscription required).

As per a leading financial daily, Cipla is going to build a pipeline of specialty drugs in the US. This comes as the company is planning to deploy more funds for R&D (research and development) in respiratory, dermatology, neurology and oncology segments and is looking for its first commercial launch in the US around 2020.

The company also stated that it is scouting for in-licensing opportunities to jumpstart work, which clocked over US$ 2 billion in global sales last year.

The above developments are aimed at shortening the gap with fellow drug makers such as Sun Pharma, Dr. Reddy's Laboratories and Lupin. While Cipla had partnered with leading generic companies such as Teva, it has remained on the sidelines in the US.

The company now expects its research budget to spiral up to 8% of sales from 6% at present. Further, the management is of the view that the company may revise its forecasts of achieving 20% sales from the US market to about 30% by 2020.

We believe that the above plans, if executed properly, will help the company set-up a strong footing on the global front and drive its growth in the long-term perspective. As we had stated in our result analysis report of the company, 'Going forward, exports and the domestic business will drive Cipla's growth. Cipla is taking various steps to transform its business model. On the international front, the company has made several investments right from in house R&D to acquisitions. The recent acquisitions of Invagen and Exelan are expected to help the company establish front end presence.'

To know our view on the stock of the company, you can read the entire result analysis report here (subscription required).

Presently the stock of Cipla is trading down by 1% on the BSE.

By the way, April 2016 is a very special month for us at Equitymaster. We complete 20 years of service to millions of readers and subscribers.

That's why we're in a celebratory mood.

Not only are we celebrating the success of The Equitymaster Way but also our success in earning the trust of subscribers who've been with us throughout this two-decade journey. And as the countdown to our anniversary begins, we would like to invite you to share some of your experiences with us over the years. You can do the same by posting your experiences here.

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

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