Reliance drags market lower

Wed, 28 Jul Closing

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With markets making further inroads into the negative territory, the indices closed the day significantly in the red. The BSE Sensex lost in the region of 120 points today (down 0.7%) whereas NSE Nifty shed around 30 points (down 0.6%). BSE Midcap and Small cap indices also ended lower however the selling was not as intense as in their larger counterparts. The advance to decline ratio stood at 2:3 on the overall Sensex as 3 stocks declined for every two that gained. Among heavyweights, Reliance Industries proved to be the wrecker in chief as more than 60% of the decline in Sensex could be attributed to the energy major. While the company did post decent results, perhaps the expectations from the market were quite high given the heavy selling pressure the stock came under.

India was the only major Asian index that closed in the red today as all the others witnessed good amount of buying interest. Europe though is trading largely in the negative currently. The rupee was trading at Rs 46.7 to the dollar at the time of writing.

Newspaper majors like HT Media and Jagran Prakashan closed in the positive today. Buoyancy in the former seemed a result of its strong June quarter performance. The company has managed to grow its profits by a strong 44% on the back of a 20% growth in topline. It is the expansion at the operating margin level that made the biggest contribution to profit growth. Since most of the topline growth was price driven, thanks to the 22% jump in advertisement revenues, costs grew at a much lower pace and this led to 38% growth in operating profits. Furthermore, the company has broken even at the operating level on the radio segment although it still incurs EBITDA level losses in the internet business. Thus, while the performance was indeed heartening, we wonder whether quite a bit of it is already in the price.

Cadila Healthcare was another midcap company that announced its results recently. And even here, the bottomline growth has far exceeded the topline growth. The company has reported a 58% growth in net profits on a YoY basis during the quarter whereas its topline has grown at a lower but nonetheless an impressive rate of 26% YoY. Yet again, it was the robust improvement of 3.7% in operating margins that stole the show for the company. While the same degree of improvement in operating margins would be quite difficult to come by going forward, topline growth should remain healthy. We expect Cadila's growth to be driven by increasing scale of its US and other export formulation businesses. Further, strong performances by the consumer healthcare and custom manufacturing businesses and the JV with Hospira are also expected to contribute to Cadila's overall growth going forward. The stock closed marginally higher today.