Sensex Opens Marginally Lower; Banking and Metal Stocks Drag

Wed, 29 May 09:30 am

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Asian share markets are lower today as Chinese and Hong Kong shares fall. The Shanghai Composite is off 0.2% while the Hang Seng is down 0.4%. The Nikkei 225 is trading down by 1.1%.

Back home, India share markets have opened the day on a negative note. The BSE Sensex is trading down by 45 points while the NSE Nifty is trading down by 9 points. The BSE Mid Cap index has opened the day down by 0.4%, while the BSE Small Cap index is trading on a flat note.

Barring IT sector and power sector, all sectoral indices have opened the day on a negative note with telecom stocks and banking stocks witnessing maximum selling pressure.

The rupee is trading at Rs 69.81 against the US$.

Speaking of Indian share markets, what should be your investing strategy be for Modi's second term?

As per Richa Agarwal, Modi's victory seems to be the inflection point for a rebound in smallcap stocks.

In the last week itself, the small cap index is up nearly 8%. And this is just the beginning...

You see, over the last one and a half year, a huge gap has emerged between smallcap index and Sensex.

Despite a lackluster performance on earnings front for both, smallcap stocks crashed...while Sensex flirted with lifetime highs.

Have a look at the chart below.

Since Jan 2018, the Sensex has gained 14% while smallcap index has lost 25%. That's a relative underperformance of 39%.

But this dichotomy cannot keep on growing forever.

As Richa writes in today's edition of The 5 Minute WrapUp...

• You see, last time the market showed a similar trend was in the year 2013...just before Modi rose to power.
  
  Between January 2013 to August 2013, the smallcap index has crashed by over 30%, while Sensex stayed put. And smallcaps were approached with the same scepticism they have witnessed over the last year.
  
  But what happened after that was even more interesting.
  
  Within a few months post August 2013, the smallcap index caught up with the Sensex. And it didn't just catch up.
  
  Under Modi's first term, until January 2018, the smallcap index rose nearly four times versus a less than 2 times gain in Sensex.

As per Richa, history is going to repeat itself.

If you are interested in riding the volatility and earning great returns in the long term, you could join Richa's small cap club and invest in these 4 solid small caps.

In the news from the engineering sector, Larsen & Toubro (L&T) on Tuesday, acquired over 3.6 lakh shares of Mindtree from open market.

After this transaction, L&T's shareholding in Mindtree stands at 28.8%. The latest stock purchase was made at Rs 980 per share.

In March, L&T had initiated a hostile takeover bid on Mindtree when it entered into a deal to buy Cafe Coffee Day owner V G Siddhartha's 20.3% stake.

After these deals, L&T was to also make an open offer to buy additional stake. The open offer has been postponed as the company is awaiting market regulator's approval.

Irrespective of the open offer, L&T will continue to purchase Mindtree shares from the public during trading hours until it finishes buying the planned 15% from the open market.

As per the reports, the combination of the two companies will help create an entity with a higher turnover of close to Rs 120 billion, closer to larger rivals such as Wipro and TCS.

While the L&T-Mindtree saga will one day disappear into the history books, the lessons will not.

One thing that we must bear in mind is that most companies in India are managed by promoters.

Hence, they are bound to protect their interest and will not relinquish control without a fight.

This means that the company launching such an attack needs to be very clear as to why it wants to go down this route.

Here's snippet from the article on hostile takeovers that Tanushree Banerjee, co-head of research wrote:

• "In mergers and acquisitions, in general, the acquiring company has to make sure that it pays a reasonable price for the target company. It needs to gauge the synergies that are likely to flow in on making the acquisition such that the payback period is not too long. Many a time, when competition for a particular target heats up, valuations soar. As a result, the company which has finally made the acquisition ends up paying a very high price."

This applies to hostile takeovers as well.

L&T share price and Mindtree share price opened the day up by 1% and 0.4%, respectively.

Moving on to the news from the pharma sector, India's largest drug maker by sales, Sun Pharma share price reported a 52% drop in net profit in the fourth quarter of FY19 as against the year-ago period.

The firm in a regulatory filing also stated that Sudhir Valia, its whole-time director, has resigned and been assigned the role of a non-executive director.

The company's net profit stood at Rs 6.4 billion as against Rs 13.4 billion in the same period last year. The company however said the result was not comparable due to the one-time impact of Rs 10.9 billion owing to a change in distribution strategy in India.

Consolidated sales grew 21% year-on-year (YoY) to Rs 81.3 billion. Revenues rose 2.3% YoY to Rs 74.5 billion.

Reports state that the past quarter saw higher employee costs as it continued to focus on building the specialty business in the US.

The company said, it is an investment phase in the US specialty business where the company has started direct-to-consumer campaigns for its psoriasis drug Ilumya.

Sales in the US were US$ 443 million for the quarter, a 20% increase over the same period last year, and accounted for 44% of total sales. For the full year FY19, sales were US$ 1,526 million, recording growth of 12%, YoY.

In US, Sun Pharma has 453 abbreviated new drug applications (ANDAs) approved, while filings for 118 ANDAs await USFDA nod, including 13 tentative approvals. For the quarter, nine ANDAs were filed and 12 approvals were received.

Speaking of drug approvals, note that Indian pharma companies catering to the US markets are breathing a sigh of relief. After being adversely affected by import bans and the suspension of new drug approvals from manufacturing facilities in the past three years, there has been a sharp pick-up in new drug approvals.

Faster approvals expedite the commercialization of product pipelines of domestic pharma companies spurring growth. At the same time, however, it has raised the intensity of competition resulting in pricing pressures.

The price erosion has been further compounded by a consolidation among US distributors and the decline in the number of products going off-patent over the past few years.

In other words, acceleration in generic drug approvals is like a double-edged sword. The growth boost can be quickly offset by the ensuing pricing pressures.

Pharma companies that invest in creating a pipeline of complex generics or building competencies in alternative dosage forms are better equipped to tackle the changing dynamics in the US generics market.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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