Sensex Slumps 500 Points; Rupee Continues to Slide

Tue, 11 Sep Closing

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After opening the day marginally lower, share markets in India witnessed negative trading activity throughout the day and ended the day in red. All sectoral indices traded in red, with stocks in the metal sector and stocks in the auto sector, leading the losses.

At the closing bell, the BSE Sensex stood lower by 509 points (down 1.3%) and the NSE Nifty closed down by 151 points (down 1.3%). The BSE Mid Cap index ended the day down 1.3%, while the BSE Small Cap index ended the day down 1.4%.

The rupee was trading at Rs 72.69 against the US$ in the afternoon session.

Asian stock markets finished on a mixed note. As of the most recent closing prices, the Hang Seng was down by 0.7% and the Shanghai Composite was down by 0.2%. The Nikkei 225 was up by 1.3%. Meanwhile, European markets were trading on a negative note. The FTSE 100 was down by 0.7%. The DAX was down by 0.7%, while the CAC 40 was down by 0.2%

The Indian rupee continued its slide today as it hit a new record low against the dollar. The rupee has been falling lately on the back of many factors such as rising current account deficit, rising global crude oil prices, and tepid export growth.

Talking about currency wars and the falling rupee, we did a small exercise to understand the impact of the weak rupee on the markets.

India is a net importer. This means if the rupee is weak, the cost of imports increases and value of the export decreases - resulting in a widening current account deficit.

High Imports + Weak Rupee = Widening Current Account Deficit.

A high current account deficit also impacts the government's spending power.

Also, companies which import raw material witness pressure on their margins and profitably.

So, this looks quite negative on the face of it. So, it's not surprising that markets get volatile when the currency depreciates.

Look at Indian rupee against the dollar from 1990. It has deprecated at a compounded annual rate of 5%.

Yes, the dollar has been on a winning streak from the beginning.

And despite that... the BSE Sensex has returned 14% compounded annually since 1990.

Thus, the falling rupee can bring volatility to the market in the short-term. But in the long-term, our market should be fine.

This is exactly what we keep in mind when picking stocks for Smart Money Secrets subscribers. We cut out the noise of short-term disruptions and look at the long-term picture beyond.

In the news from the pharma space, Cadila Healthcare share price is in focus today as Zydus Cadila has received tentative approval from the US health regulator to market Sitagliptin tablets, indicated for treating diabetes, in the American market.

Also, the company last week had received final approval from US Food and Drug Administration (USFDA) to market Acyclovir Sodium Injection.

With the above approval, the group now has 216 approvals in total and has so far filed over 330 ANDAs since the commencement of the filing process in FY04.

Speaking of drug approvals, note that Indian pharma companies catering to the US markets are breathing a sigh of relief. After being adversely affected by import bans and the suspension of new drug approvals from manufacturing facilities in the past three years, there has been a sharp pick-up in new drug approvals in FY17.

Even the total filings of abbreviated new drug applications (ANDAs) for generic drugs rose to 1,292 in FY17 from 852 in the previous year. Faster approvals expedite the commercialisation of product pipelines of domestic pharma companies spurring growth. At the same time, however, it has raised the intensity of competition resulting in pricing pressures. The price erosion has been further compounded by a consolidation among US distributors and the decline in the number of products going off-patent over the past few years.

In other words, acceleration in generic drug approvals is like a double-edged sword. The growth boost can be quickly offset by the ensuing pricing pressures. Pharma companies that invest in creating a pipeline of complex generics or building competencies in alternative dosage forms are better equipped to tackle the changing dynamics in the US generics market.

Therefore, despite a lot of pessimism surrounding pharma stocks on regulatory uncertainty, we have stocks in open positions in StockSelect and have remained bullish on pharma stocks in our long term service, ValuePro.

In the news from IT sector, HCL Technologies share price is in focus today as the company said that its proposed Rs 40 billion share buyback will kick off on September 18.

As per the announcement, the buyback will be done on a proportionate basis through tender offer route at Rs 1,100 apiece.

The last date and time for receipt of forms and other specified documents, including physical share certificates by the Registrar, has been fixed at October 5 and the settlement of bids on the stock exchanges will be made on or before October 12.

The company last week received final observations from the market regulator on the draft buyback proposal filed on August 21.

Speaking of buybacks, the number of buyback offers in 2017-18 were at an all-time high. Never, in the last two decades, had Indian markets seen fifty-nine companies announcing buyback plans.

But what is truly surprising is that unlike in the past, the buybacks this time seem skewed in favour of short term investors rather than long term ones.

Who Benefits from Such Buybacks?

Here's what Tanushree Banerjee, Co-head of Research at Equitymaster, wrote about it in The 5 Minute WrapUp...

• Look at the history of buybacks since 2002. Logically promoters should offer to buyback shares at a premium when the stock is undervalued. And this logic held true until recently. The number of buybacks peaked when market valuations were low. And in times of peak valuations (like 2007 and 2011), promoters refrained from doing so.
  
  But not this time. The trend of rising buybacks in the last two years, resembles the sentiment of a momentum investor. The appetite to buy shares kept rising with the rising markets. And the latest buybacks of stocks like TCS and MOIL, came at a time, when neither the broader index (Sensex) nor the stocks themselves, are undervalued.

At Equitymaster, we believe, as a shareholder in cash rich companies, you should not only be wary of expensive buybacks. But if possible use it to your advantage to rake in some cash.

As per Rahul Shah, co-head of Research, investors should not assume buybacks are always good. Here's an excerpt of what he wrote in one of the editions of The 5 Minute Wrapup:

• The reason behind the buyback must be investigated. At the end of the day, an increase in earnings should be more a function of the inherent robustness of the business, as that's what will help it continue to grow at a healthy pace.

The topic also brings us to ask: Do buy-backs offer an arbitrage opportunity for retail investors? Ankit Shah has answered this question in one of the editions of Equitymaster Insider. You can access the issue here (requires subscription).

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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