Sensex Opens Firm; Capital Goods & Realty Stocks Gain

Thu, 15 Feb 09:30 am

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Asian stocks were trading in green in the early trade, taking cues from the rally on Wall Street. Shares in Hong Kong are higher today as the Hang Seng gains 1.72%. While Nikkei 225 is trading up by 1.31%. US stocks rose sharply on Wednesday, notching a four-day winning streak as banks and tech carried major indices higher. They rose despite a jump in bond yields.

Back home, India share markets opened on a firm note. The BSE Sensex is trading higher by 120 points while the NSE Nifty is trading higher by 25 points. The BSE Mid Cap index and BSE Small Cap index opened the day up by 0.3% & 0.2% respectively.

Sectoral indices have opened the day on a mixed note with capital goods stocks and realty stocks witnessing maximum buying interest. While, PSU stocks and bank stocks have opened the day in red. The rupee is trading at 64.13 to the US$.

Punjab National Bank share price slumped over 7.9% after the bank on Wednesday revealed that it has detected a US$1.77 billion (about Rs 114 billion) scam where billionaire jeweller Nirav Modi allegedly acquired fraudulent letters of undertaking from a branch in Mumbai to secure overseas credit from other Indian lenders.

Pharma stocks opened the day on a mixed note with Aarti Drugs & Panacea Biotech leading the gainers. Sun Pharma share price opened the day on a negative note after the company reported a 75% plunge in third-quarter net profit on Wednesday. The drop comes on the back of pricing pressures in the United States, its biggest market, hit sales.

One shall note that, Sun Pharma, along with other Indian pharmaceutical companies has been battling increased competition in the generics market and greater pricing scrutiny in the United States.

The drugmaker has also struggled as some of its products were banned from sale in the United States because the factories that made them did not meet US quality standards.

It was also hit by adjustments for US tax reforms in the third quarter.

Its net profit of Rs 3.65 billion (US$57 million) for the October-December quarter was its smallest profit in over two and a half years.

The company's US sales slumped 35% to US$328 million in the quarter, hurt by lower sales of generic versions of cancer drug imatinib and olmesartan, which is used in the treatment of high blood pressure.

US sales accounted for nearly a third of the company's total sales, which fell 14% to 65.9 billion rupees.

The company said its profit was also hit by a one-off deferred tax adjustment of Rs 5.13 billion on account of tax reforms in the United States.

The BSE healthcare index was the worst performing sector in 2017. In fact, the sector has underperformed over the past three years. While 2018 earnings of pharma companies are expected to be better considering the low earnings base in 2017, certain challenges still remain.

The valuations of the top five companies by market capitalization on BSE healthcare tell a different story though. Average Price to Earnings Ratio of the top five companies stands at 36. Considering the headwinds these companies are facing, it certainly seems rich.

Valuations of Top Pharma Companies Still High

An improved earnings performance in 2017 will certainly get these valuations to reasonable levels, provided the share price remains the same. But, the headwinds for the sector still exists.

The top generic companies are trying to move toward low competition drugs, which can be seen by their R&D expenditure towards complex generics. This though will take time and substantial expenditure. It might also mean muted earnings in the next couple of years, before the drugs are distributed into the market.

2018 looks likely to be another challenging year for the sector. The uncertainties make it important to be stock specific in the sector. Focus on value and the underlying fundamentals of the business.

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Moving on to the news from FMCG sector. Nestle India Limited on Wednesday posted a 59.6% rise in fourth-quarter net profit, boosted by higher domestic sales.

Profit rose to Rs 3.1 billion (US$ 48.7 million) in the quarter ended 31 December, from Rs 1.95 billion a year earlier.

Domestic sales rose 10.8% to Rs 24 billion in the quarter and grew about 11.8% on a comparable basis.

The company follows the January-December period as the fiscal year. Nestle India also said that the financial results for the quarter and the year ended 31 December 2017 are not comparable because of the introduction of Goods and Services Tax (GST) with effect from 1 July 2017.

For full year 2017, the company's net profit grew 22.3% to Rs 12.3 billion, from Rs 10 billion in 2016. The company posted total sales of Rs 101.4 billion, up 7.7% compared to the year ago period.

The company said the growth of total sales and domestic sales for the full year period were adversely impacted due to lower reported sales on account of the change in structure of indirect taxes and reduction in realisations to pass on the GST benefits.

Nestle share price opened the day up by 3.1%.

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