Sensex Opens Strong; Metal and Bank Stocks Lead

Tue, 16 Apr 09:30 am

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Asian stock markets are higher today as Chinese and Hong Kong shares show gains. The Shanghai Composite and the Hang Seng are trading flat. The Nikkei 225 is trading up by 0.2%. Meanwhile, Wall Street lost ground on Monday, dragged down by financials as underwhelming bank earnings curbed investor enthusiasm. But while all three major US stock indices edged lower, the S&P 500 remained within a percent of its record high.

Back home, India share markets opened on a strong note. The BSE Sensex is trading up by 214 points while the NSE Nifty is trading up by 49 points. The BSE Mid Cap index and BSE Small Cap index opened up by 0.2% and 0.1% respectively.

Except IT stocks, all sectoral indices have opened the day in green with metal stocks and bank stocks leading the pack of gainers.

The rupee is currently trading at 69.41 against the US$.

Speaking of Indian share markets in general, how do things look on the valuations front?

The Sensex price to earnings ratio has moved over the last five years. It has mostly been in a rising trend, except some intermittent declines.

But the Sensex tells a very a selective, skewed story of just the 30 largest companies.

So, it would be worth seeing the valuation trend of a much broader index.

Ankit Shah just did that and picked the NSE 500 for his latest study.

What he found was the NSE 500 index was trading cheap before the BJP came to power at the Centre in 2014. Since then, the price to earnings ratio of the index has been trending higher, like the Sensex.

It is interesting to note that the NSE 500 index has almost doubled between February 2014 and now. The price to earnings multiple of the index has gone up almost 70% during the same period, as can be seen from the chart below.

Market Valuations - 2014 to 2019

What does all of this mean?

Here's what Ankit wrote about it in today's edition of The 5 Minute WrapUp...

• What this means is that the gains have mostly come from valuation multiple expansion and only about 30% from earnings growth.
  
  While the NSE 500 P/E ratio is down 12% from its August 2018 high of 34.5, it's still quite on the higher side.
  
  As such, I believe the key to the next bull run would be a good growth in earnings of listed Indian companies.

Whether this growth comes in, and how, remains to be seen. We will keep you updated on developments from this space.

In the news from the IPO space. Wires and cables manufacturer Polycab India will make a debut on bourses today after an overwhelming response to its public issue last week.

The final issue price is fixed at the higher end of the price band of Rs 533-538 per share.

The Rs 13.5-billion public issue saw a massive subscription of 52 times during April 5-9.

The reserved portion for qualified institutional buyers was oversubscribed 92 times and non-institutional investors 110 times while retail investors' category saw subscription of 4.7 times.

According to CRISIL Research, Polycab India is the largest manufacturer in the wires and cables industry in India, in terms of revenue from the wires and cables segment and provides one of the most extensive range of wires and cables in India.

During FY18, the company had a market share of approximately 18% of the organized wires and cables industry, and approximately 12% of the total wires and cables industry in India, estimated at Rs 525 billion based on manufacturers realization.

Polycab India manufactures and sells a diverse range of wires and cables such as power cables, control cables, instrumentation cables, solar cables, building wires, flexible cables, flexible/single multi core cables, communication cables and others including welding cables, submersible flat and round cables, rubber cables, overhead conductors, railway signaling cables, specialty cables and green wires.

To get a detailed view of the IPO, you can read Ankit Shah's latest note in the Equitymaster Insider: Polycab India IPO: All You Need to Know.

Speaking of IPOs, we at Equitymaster believe a merit-based selection, primarily including valuation, business, and management quality, is the logical way to go about investing in IPOs.

If it means going against the herd, so be it. And going by recent past, this strategy has been proven to be successful more often.

Moving on to the news from pharma sector. As per an article in a leading financial daily, Cipla has inked a pact with Pulmatrix Inc to co-develop a formulation for the treatment of allergic bronchopulmonary aspergillosis (ABPA) in patients with asthma.

Reportedly, Cipla Technologies LLC, a subsidiary of the company, and Pulmatrix Inc have inked definitive agreement for the co-development and commercialisation of Pulmazole.

Pulmazole is an inhaled formulation of the antifungal drug itraconazole for the treatment of ABPA in patients with asthma.

As per the pact, Cipla Technologies will make an upfront payment of US$22 million to Pulmatrix in exchange for assignment of all rights for Pulmazole in relation to pulmonary indications.

Thereafter, both parties will equally share costs related to the future development and commercialisation of Pulmazole, and equally share worldwide free cash flow from future sales of Pulmazole, the reports noted.

Pulmatrix will remain primarily responsible for the execution of the clinical development of Pulmazole, and Cipla Technologies will be responsible for the commercialisation of the product.

Pulmazole will be Cipla's entry into the branded respiratory space and will serve a vital unmet medical need for the treatment of ABPA, a condition that possibly impacts over 2 million patients worldwide but has no labelled drug, the reports noted.

To know more about the company, you can access to Cipla's Q3FY19 result analysis and Cipla's Stock Analysis on our website.

Cipla share price opened the day up by 0.5%.

And to know what's moving the Indian stock markets today, check out the most recent share market updates 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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