Pharma, auto stocks cut market's gains

Tue, 20 Jul 01:30 pm

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Although trading in the positive, the Indian markets shed a portion of their gains during the previous hour of trade. At present, the overall advance to decline ratio is poised at 1.3 to 1 on the BSE, indicating some optimism in the overall markets. As for the performance of the sectoral indices, stocks from the realty and metal spaces are amongst the top gainers with the BSE-Realty and BSE-Metal indices trading higher by 1.5% and 0.9% respectively. Stocks from the auto and healthcare spaces are the only losers as of now. While the BSE-Healthcare Index is trading lower by 0.4%, the BSE-Auto Index is down by about 0.1%.

The BSE-Sensex is trading higher by about 40 points (up 0.2%), while the NSE-Nifty is up by about 10 points (up 0.2%). Some buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.3% and 0.4% respectively. The rupee is trading at 47.17 to the US dollar.

Stocks of MNC pharmaceutical companies are currently trading weak led by Merck, GSK Pharma and Abbott India. The stocks of Aventis Pharma is also part of the losers list today. The company recently announced its 2QCY10 and 1HCY10 (December ending company) results. During the quarter ending June 2010, it reported a revenue growth of 9% YoY. Growth was led by its domestic sales business, which grew by 15% YoY. On the other hand, its exports business (contributing to about 20% of revenues) declined by 12% YoY. Further, the company's operating margins contracted by a sharp 4.7% to 21.5% during the quarter. This was on the back of a rise in raw material as well as staff and other expenditure (as a percentage of sales). This resulted in operating profits to decline by about 11% YoY. Aventis reported a 10% YoY decline in profits during the quarter. While this may seem to be in line with the decline in operating profits, it may be noted that the company also reported a 21% YoY fall in other income. However, lower tax outgo aided the company on the bottomline front.

As for the company's performance during the half year period, revenues rose by 8% YoY, while profits declined by 10% YoY. Operating margins during the period decline by 4.7% YoY as well.

Engineering stocks are trading mixed with BHEL and L&T trading firm, while Alstom Projects and Siemens are trading weak. As per a leading financial daily, L&T General Insurance Company (L&TGIC) has got the final approval from the insurance regulators to start its general insurance business. The company which is a 100% subsidiary of engineering major, L&T will commence operation with a capital of Rs 1.75 bn. L&TGIC already has employee strength of 100 and will be increasing this to 200 by the end of the fiscal. The company plans to launch its products in the next 60-80 days and commence operations with a network of 10 branches. The company gradually plans to extend its reach to tier-II and tier-III cities. As an effort to lower its operational costs, L&TGIC will be investing heavily to build up its information technology infrastructure. While the company will eventually have its own health claim management team, it will outsource claims to a third party till its infrastructure is in place.

L&T already has a large base to tap for its non-life venture. As per the L&T's Director and CFO, to start with L&TGIC will tap into the "entire L&T ecosystem" to generate business. So for example, the company will be able to tap corporate customers of L&T, the borrowers of L&T finance and investors in L&T mutual fund. However, we remain skeptical of the company's diversifications into businesses which are not related to its core engineering business.