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Sensex Opens 145 Points Up; Sun Pharma Rallies on Strong Earnings
Mon, 28 May 09:30 am | Rini Mehta, TM Team

Asian share markets are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is flat while the Hang Seng is up 0.7%. The Shanghai Composite is trading up by 0.2%. Over the weekend, US stocks closed mostly lower.

Back home, India share markets opened the day on a firm note. The BSE Sensex is trading up by 145 points while the NSE Nifty is trading up by 58 points. The BSE Mid Cap index and BSE Small Cap index both opened the day up by 0.7%.

Barring IT stocks and consumer durables stocks, all sectoral indices have opened the day in green with energy stocks and PSU stocks witnessing maximum buying interest. The rupee is trading at 68.26 to the US$.

Sun Pharma share price surged 4.4% after its consolidated net profit rose 6.9% year-on-year (YoY) to Rs 13.1 billion in the fourth quarter ended March.

Bank stocks opened the day on a mixed note with Corporation Bank & Oriental Bank leading the gainers. State lenders IDBI Bank and Bank of Baroda have reported huge losses at the end of the Q4 due to higher provisioning for mounting bad loans following stricter central bank rules on containing ill-effects of NPAs.

Bank of Baroda whose provisions for bad loans jumped to Rs 70.5 billion in the March quarter, from Rs 24.3 billion in the same period of 2016-17, reported a net loss of Rs 31 billion for this quarter in 2017-18.

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The total income of the third-biggest among state-run lenders also witnessed a sharp drop as it nose-dived to Rs 127.4 billion in the last quarter of 2017-18 from Rs 128.5 billion on a Year-on-Year (YoY) basis.

In brief, asset quality of the bank dipped - as gross non-performing assets (NPAs) surged to 12.3% of gross advances as on 31 March 2018, as against 10.5% as on 31 March 2017.

In absolute value, gross NPAs stood at Rs 564.8 billion, up from Rs 427.2 billion a year ago.

Net NPAs were at 5.5% (Rs 234.8 billion) as of March 2018, against 4.7% (Rs 180.8 billion) in the year-ago period. Worth noting is, the third-biggest among State-run lenders by assets, had registered a net profit of Rs 1.6 billion in the corresponding quarter of 2016-17.

Meanwhile, in the wake of increased provisioning for bad loans, IDBI Bank, which has the worst bad-loan ratio among all Indian lenders, reported a net loss of Rs 56.6 billion in the three months ended 31 March, against Rs 32 billion during the same quarter in the previous year.

IDBI Bank's gross NPAs as a percentage of total loans stood at 27.95% at end-March, compared with 24.7% in the previous quarter.

Bank of Baroda share price opened up by 0.3% while IDBI Bank share price opened down by 0.7%.

Public Sector Banks (PSBs) have had a difficult year, to put it mildly.

PSBs Struggle Despite Government Help

After the euphoria of recapitalisation, bad loans have come to haunt them. Post the Gitanjali Gems fiasco, PSBs are yet to fully recover from its impact.

This underperformance was despite the huge boost they got from the government last year. On 24 October 2017, the government announced a Rs 2.11 trillion public sector bank (PSB) capitalisation plan. This move was aimed at reviving the PSBs from the bad loan mess.

The next day was a field day for investors in PSBs. PSB stocks went up between 30% and 47%. Despite this, the return in the year was way below average. PSBs like Punjab National Bank (PNB) have crashed more than 45% over the last one year.

Have we reached the bottom? Or there are more Nirav Modi stories waiting to come out?

We at Equitymaster believe, rather than bottom fishing, one should look at banks run by strong management and a differentiated lending strategy available at reasonable valuations.

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Moving on to the news from the pharma sector. As per an article in a leading financial daily, Dr Reddy's Laboratories' subsidiary Promius Pharma LLC, has filed a patent infringement lawsuit in a US court against Perrigo UK Finco Limited Partnership, Perrigo Israel Pharmaceuticals Ltd. and Taro Pharmaceuticals, Inc over its topical spray Sernivo.

Reportedly, the case was filed in the United States District Court for Eastern District of Texas against the three companies in response to two paragraph-IV notice letters received for its twice daily topical spray Sernivo (betamethasone dipropionate, 0.05%) product.

A notice under Paragrap IV will be issued to a patent holder when a generic company wants to make a similar drug. Promius anticipates this lawsuit will trigger a 30 month stay of Food and Drug Administration approval of Perrigo's and Taro's Abbreviated New Drug Application (ANDA).

Sernivo spray is protected by six Orange Book patents that expire in 2030. The publication Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as Orange Book) identifies drug products approved on the basis of safety and effectiveness by FDA under the Federal Food, Drug, and Cosmetic Act (the Act) and related patent and exclusivity information.

One must note that, innovators in the pharmaceutical industry make use of patents largely. They make heavy use of patents whenever they create a new drug. In one of the articles, we have spoken everything that you need to know about patented drugs, its advantages and its implications. Here's a snippet:

  • "That's how the innovators in the pharmaceutical industry work. They make heavy use of patents whenever they create a new drug. The patent allows them to recoup the high capital expenditure that goes into the research and development (R&D) of new drugs. Companies that have a patent on a particular product are immune from competition for the duration of the patent."

Notably, a number of patent infringement cases have been filed against leading Indian pharma companies and their counterparts in other countries over the last few years.

Dr. Reddy's Lab share price opened the day up by 0.4%.

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