Sensex Finishes Flat; Bank Stocks Tumble

Mon, 28 Nov Closing

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Indian share markets began the trading week on a flat note amid mixed global markets. At the closing bell, the BSE Sensex stood higher by 34 points, while the NSE Nifty finished up by 13 points. Meanwhile, the S&P BSE Mid Cap & the S&P BSE Small Cap finished up by 1% and 0.7% respectively. Gains were largely seen in realty and power sectors.

Banking stocks were the biggest drag today after RBI had asked banks to maintain a temporary incremental cash reserve ratio (CRR) of 100% to absorb excess liquidity from the system after the government's move to withdraw larger banknotes sparked a surge in deposits.

Asian markets finished mixed as of the most recent closing prices. The Hang Seng gained 0.47% and the Shanghai Composite rose 0.46%. The Nikkei 225 lost 0.13%. European markets edged lower in early trade with shares in France off the most. The CAC 40 is down 1.02% while Germany's DAX is off 1% and London's FTSE 100 is lower by 0.87%.

The rupee was trading at 68.72 against the US$ in the afternoon session. Oil prices were trading at US$ 45.56 at the time of writing.

Cipla's share price finished the trading day on an encouraging note (up 1.3%) after it was reported that the company is in discussions to sell Cipla Vet, its animal health division. According to an article in The Livemint, Cipla's move to sell its veterinary business comes in the backdrop of its overall plan to rationalize its markets and portfolio and exit non-core, low-profit businesses.

Cipla does not provide specific financial details for its veterinary business and classifies this segment under the 'others' category in its earnings presentation. The category reportedly accounted for 2-3% of the company's total consolidated sales of Rs 136.78 billion in 2015-16.

The company also has plans to pull out of about 30 emerging markets as part of the restructuring, of which it has already exited from 24-25 markets in terms of direct presence. Last fiscal, Cipla also changed its business model in Europe to business-to-business from direct-to-market.

Moreover, the company's British subsidiary recently sold its 16.7% stake in US-based Chase Pharmaceuticals Corp. to Allergan plc, following Allergan's acquisition of Chase Pharma. Cipla's UK arm had acquired the stake in Chase Pharma in May 2014 through a syndicated venture investment.

Cipla had said the UK subsidiary's total investment in Chase Pharma is about US$5.12 million for a 16.7% stake on a fully diluted basis.

The company has been in restructuring mode for some time. It plans to focus on core strengths and exit from areas where the returns are low.

The share price of Cipla has surged 19% in the last six months.

In another development, global banks and rating agencies, including Fitch Ratings, Deutsche Bank and DBS Bank, have downgraded India's growth in the wake of demonetisation of high-value notes. Fitch Ratings stated that demonetisation will have a "negative" impact on growth in the short run but for the full fiscal, the GDP decline would be "relatively moderate".

The ratings agency, however, expects India's GDP growth to trend higher than China's in the medium term, adding that it would accelerate next fiscal on the back of reforms and monetary policy easing.

Meanwhile, Deutsche Bank said India's real GDP growth is expected to slow to 6.5% in the current fiscal on the likely impact of demonetisation, while muted inflation may open room for additional rate cuts. Economic growth will see a moderation in the near term and would gradually recover to 7.5% in the next financial year.

It said the government is expected to increase public spending from the next fiscal year to offset the likely lingering impact of a slower growth in the informal economy. Moreover, the RBI is also likely to keep monetary policy accommodative for a prolonged period, which will help private consumption to recover once again in the next fiscal year, especially in the second half.

With 86% of the currency in circulation being swept away with the ban on Rs 500 and Rs 1,000 notes, households and businesses will experience liquidity shortages for a few months. But in the medium term, higher income declarations by way of deposits of banned notes will boost tax revenues which will support government's capital expenditure program and support fiscal consolidation.

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