Sensex Trades Strong; Pharma Stocks Shine

Mon, 11 Dec 01:30 pm

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After opening the day marginally higher, share markets in India have continued to remain strong and are trading above the dotted line. Sectoral indices are trading on a mixed note with stocks in the pharma sector and stocks in the FMCG sector trading in green, while stocks in the power sector are leading the losses.

The BSE Sensex is trading up by 105 points (up 0.3%), and the NSE Nifty is up by 29 points (up 0.3%). Meanwhile, the BSE Mid Cap index is trading up by 0.2%, while the BSE Small Cap index is trading up by 0.4%. The rupee is trading at 64.36 to the US$.

In news from stocks in the aviation sector. According to an article in Livemint, in a bid to increase the number of eligible companies for selling off Air India, the government is likely to change rules to allow foreign airlines to bid for Air India Ltd as long as they have a local joint venture with an Indian partner.

Existing rules allow foreign airlines to own as much as 49% in an Indian airline, with the exception of Air India.

With the change in rules, the government expects to make the sale of Air India, which has drawn interest from companies including the Tata group and InterGlobe Aviation Ltd (IndiGo), more competitive.

To ensure Air India does not face any issues, the government will retain a clause that says Air India cannot be 100% foreign-owned (even though foreign entities can own 100% of a private Indian airline, stakes of foreign airlines are capped at 49%). This, the aviation ministry believes, will allow "effective control" to be retained in India as the majority ownership will be with an Indian entity.

The move comes at a time when India's aviation industry is on a high-growth trajectory. India's domestic air passenger traffic has almost doubled in the past six years. This is on the back of strong economic growth and emergence of low-fare airlines. Indian carriers have now set their sights on International traffic. Indian carriers have been slowly increasing their market share. It is important to note that foreign carriers still dominate international traffic to and from India.

Domestic Airlines Fly High in Foreign Skies

As per the report by rating agency ICRA, the share of domestic airlines in India's international traffic increased from 30.1% in FY14 to 35.1% in FY17. In the coming years, this share is expected to increase as the government replaced the 5/20 rule with 0/20 rule. The 5/20 rule mandates that airlines need to fly at least 5 years domestically and should possess 20 aircraft. The new 0/20 rule does away with the five-year requirement, but carriers will still need to demonstrate a fleet of 20 aircraft.

It is important to note that certain industries have relatively dull economics compared to others. And investors would do well to keep this in mind, particularly in the case of aviation. Investors need to understand the industry dynamics before buying up aviation stocks.

As Tanushree point out in a recent edition of the 5 Minute Wrapup:

• Airlines is an industry that lures investors in with its glitz, glamour and growth potential. But what glitters ain't always gold, my dear reader. The industry's costs are massive. So is debt. Competition is intense. And fortunes change with the winds of international developments. And after all that altitude, there is not a landing strip in sight - many report losses and the return on capital is extremely poor.
  
  So when returns from capital-intensive, debt-heavy companies start nosediving, and stock prices fall, dear investor, remember my safety-first rule, dump these gruesome stocks, and head for safer ground.

In news from stocks in the pharma sector. Lupin share price and Cadila Healthcare share price is in focus after the pharma majors recalled drugs in the US market.

Lupin and Cadila are recalling 110,000 units of Duloxetine delayed release capsules and 19,812 bottles of Paroxetine tablets respectively.

Lupin initiated the recall on account of failed dissolution specification, the US Food and Drug Administration said in its latest Enforcement Report. The drug was manufactured by Lupin's Goa facility. The ongoing recall is a class III recall.

As per the US health regulator, a class III recall is initiated in a "a situation in which use of or exposure to a violative product is not likely to cause adverse health consequences. Market withdrawal: occurs when a product has a minor violation that would not be subject to USFDA legal action".

Meanwhile, Zydus Pharmaceuticals USA Inc, arm of Cadila Healthcare, is recalling the drugs as presence of foreign tablets/capsules: Risperidone tablets were found in bottle of Paroxetine tablets.

At the time of writing, Lupin share price is up by 2.1% while Cadila Healthchare share price is up by 1.1%.

The Indian pharmaceutical industry has come under a lot of regulatory pressure in the past few years.

The sector has faced great volatility over the years.

We had written about the current predicament of Indian pharma companies in one of the premium editions of the 5 Minute WrapUp:

• Over the past few years, risk in the US markets has increased. The US Food and Drug Administration has become stricter on products entering US borders. Surprise inspections have increased and companies are being issued warning letters. This has impacted the business and earnings of Indian pharma players, causing major volatility for the sector.

The list of pharma sector woes is long. So, is there light at the end of the tunnel? Girish Shetty, our research analyst thinks there is.

As per him, it doesn't make sense to paint all pharma stocks with the same brush. The leaders of the industry will certainly survive this phase. There are interesting, niche pharma stocks that are worth your attention.

Facing pricing pressures in the domestic and export markets, currency fluctuations, as well as manufacturing issues related to their plant, there is a transformation happening in the overall sector as to how business is done and will be done in the future.

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

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