Sensex Finishes Deep in the Red; ITC falls 12.6%

Tue, 18 Jul Closing

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Indian share markets continued to witness selling pressure in the afternoon session amid weak international markets. At the closing bell, the BSE Sensex stood lower by 364 points, while the NSE Nifty finished down by 89 points. Meanwhile, both the S&P BSE Mid Cap & S&P BSE Small Cap indices finished down by 0.6%. Losses were largely seen in FMCG stocks, realty stocks, and oil & gas stocks.

Asian stock markets finished mixed as of the most recent closing prices. The Shanghai Composite gained 0.35% and the Hang Seng rose 0.21%. The Nikkei 225 lost 0.59%. European markets are mixed. The FTSE 100 is higher by 0.01%, while the DAX is leading the CAC 40 lower. They are down 0.53% and 0.18% respectively.

The rupee was trading at Rs 64.33 against the US$ in the afternoon session. Oil prices were trading at US$ 46.17 at the time of writing.

In view of the reduction in tax on the demerit good under the new indirect tax regime, the Goods and Services Tax (GST) Council, at its 19th meeting headed by Finance Minister Arun Jaitley, decided to increase the cess applied on certain types of cigarettes by as much as 31%. The cess on these items is over and above the 28% GST rate applied to them.

This was the only item on the agenda for the meeting. The increase in cess would bring in Rs 50 billion of additional tax revenue which otherwise would have gone to the manufacturers. However, cigarette prices will not change because of the increased cess which became effective from July 18.

As per the official statement 'In respect of cigarettes, the Fitment Committee had recommended that in line with the weighted average VAT rate (28.7%) the GST rate on cigarettes may be kept at 28%". However, this method of calibrating the compensation cess did not take into consideration the cascading of taxes. As a result, the total tax incidence on cigarettes in GST regime has come down, as compared to the total tax in pre-GST regime. Hence, it decided to increase the compensation cess on all cigarettes.

Cigarette stocks continued to plunge in today's trade with ITC share price finishing down by 12.6% while Godfrey Philips share price and VST Industries share price plunged 5.7% and 7.8% respectively.

ITC erased nearly Rs 500 billion in market value, after many brokerages downgraded the stock and cut their target prices as the government increased cess on cigarettes.

Meanwhile, LIC lost around Rs 70 billion in today's trade as insurance major held a 16.29% stake in ITC. LIC has increased its stake in ITC over past few years. The insurance giant upped the stake in ITC from 12.17% in 2013 to 14.3% in 2016.

In news from pharma sector, On the back of expectations that US$ 55 billion worth of drugs will become off-patented during 2017-19, credit rating agency, Care ratings in its latest report has said that Indian pharma export volumes to US are likely to rise in 2017-18 and will create an opportunity for Contract Research and Manufacturing Services segment.

Of the total exports of US$ 16.8 billion during the year 2016-17, majority of the exports, accounting for 40.6% were to the American continent followed by 19.7% to Europe, 19.1% to Africa and 18.8% within Asia.

The credit rating agency however reported that due to pricing pressure and stiff competition, the total pharma exports from India during April-May 2017 fell by 8.5% to US$ 2.5 billion and exports to USA decreased by 23% y-o-y to US$ 723.4 million during the same period, adding that the industry will continue to witness pricing pressure in the US generics market due to consolidation of distribution channels and increase in competition.

The report further said that the pharma industry is also likely to face competition from other countries to get ANDA approval. It noted that in domestic market, the revenue growth rate of the industry was impacted on the back of stricter enforcement of Drug Price Control Order and going forward, with implementation of GST, there will be no major change in the prices of medicines.

Moving on to news from bank stocks. SBI's subsidiary company - SBI Life Insurance Company (SBI Life) has filed a draft red herring prospectus with the Securities and Exchange Board of India (SEBI) for an Initial Public Offer (IPO).

The IPO will consist of up to 120,000,000 equity shares of face value of Rs 10 each of SBI Life, representing up to 12% of its paid-up equity share capital for cash, through an offer for sale by SBI and BNP Paribas Cardif S.A.

SBI share price finished down by 0.8% on the BSE.

Meanwhile, HDFC Standard Life Insurance Co. Ltd's board has approved a proposal to sell as much as 20% of the insurer through an initial public offering (IPO) even as it reiterated its commitment to a potential merger with Max Life Insurance Ltd at a later date.

The public issuance would be an offer for sale by HDFC Ltd, the parent company, and UK-based Standard Life, which holds 35% stake.

HNIs Bet Big on IPOs

According to rating agency ICRA, the median HNI subscription in initial public offerings (IPO) shot up to 80 times in FY17 from a mere two times in FY16. In the past one year, IPOs of Avenue Supermarkets (DMart), Thyrocare, Advanced Enzyme, and GNA Axels saw the HNI portion oversubscribed by over 200 times.

The HNIs' growing appetite in the buzzing primary market is fueling demand for IPO financing. HNIs typically invest in IPOs for listing gains. But with surging investor interest, these investors are required to make big-ticket applications to increase their chances of allotment. This in turn has given rise to the market for providing short term capital to HNI investors for funding the IPO application.

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