PSU stocks weigh on markets

Tue, 17 May 01:30 pm

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The benchmark indices in the Indian stock market extended their losses in the last two hours of trade. Stocks from the Oil & Gas, PSU and auto sectors are trading weak, while those from the FMCG and consumer durables space are trading firm.

The BSE-Sensex is down 66 points while NSE-Nifty is trading 22 points below the dotted line. Both BSE Midcap and BSE Small cap indices are down 0.3% and 0.2% each. The rupee is trading at 45.07 to the US dollar.

Banking stocks are trading mixed with Bank of India, Allahabad Bank and Oriental Bank leading the pack of gainers. However, Canara Bank, Vijaya Bank and Central Bank are trading weak. As per a leading financial daily, State Bank of India (SBI) may have to postpone its rights issue to next year because the Government, which is a majority shareholder in SBI, is unable to chip in an amount of Rs 110-120 bn to keep its stake in the bank unchanged at 59%. However, as per a senior bank official, the issue is very much under consideration.

As on December 31, SBI had equity and free reserves of 9.57% of its risk weighted assets and a total capital adequacy ratio of 13.2%. While the ratio is comfortable at this stage, it will need more capital as it grows to meet stricter capital norms introduced globally post the financial meltdown. It will be costly for bank to raise money from foreign markets at 9% capital adequacy ratio. The rights issue is supposed to be the major source of a chunk of Rs 390 bn capital that bank plans to raise in five years. However, considering the tough fiscal targets for the year and cash constrained government, SBI may have to settle for less ambitious growth plans. In March 2011, the Parliament had passed the SBI Amendment Bill, through which government can bring down its stake in the bank to 51%. The move offers other fund raising options like a follow on equity issue. The option is with the Government to participate in rights issue or later put in capital to keep its stake above 51%. Unlike last rights issue of SBI, the Government will not issue bonds (instead of cash) as finance ministry has decided to avoid off budget financing. The stock of the company is trading in the red.

Pharma stocks are trading mixed as well with Strides Arcolab Natco Pharma and Torrent Pharma leading the pack of gainers. However, Ranbaxy Lab and Aurobindo Pharma are trading weak. As per a leading financial daily, Glenmark Pharmaceuticals has licensed a new biotech drug named GBR 500 to France' Sanofi. The product is still in early human trials. It is being evaluated as a treatment for Crohn's disease (chronic inflammation of bowels) and other inflammatory conditions. The drug is estimated to have the potential to generate revenues of US$613 m. Glenmark will receive US$ 50 m or 8% of the potential deal value as an upfront payment in the next three months. Half of this amount is expected to flow in June when the transaction will close. The remaining is subject to assessment of data on the drug. The entire US$50 m will be used to repay debt by Glenmark, which had about Rs 19 bn debt in FY11, with a debt to equity ratio of 0.8.

The company also stands to earn double-digit royalties on sales. Glenmark has sold marketing rights to Sanofi in North America, Europe, Japan, Argentina, Chile and Uruguay. It has retained co-marketing rights in Russia, Brazil, Australia and New Zealand and has exclusive rights in India. The earliest that the drug can reach the markets is 2017. The stock of the company is trading in the red.