Sensex Ends Day in Red; RCom Surges 57%
Closing

After opening the day in green share markets in India witnessed choppy trading activity and ended the day well below the dotted line. Sectoral indices ended the day mixed, with stocks in the realty sector and stocks in the consumer durables sector leading the gains, while stocks in the FMCG sector lost the most.

At the closing bell, the BSE Sensex stood lower by 239 points (down 0.7%) and the NSE Nifty closed down by 58 points (down 0.6%). The BSE Mid Cap index ended the day up 0.7%, while the BSE Small Cap index ended the day up by 0.4%.

Asian stock markets finished mixed. As of the most recent closing prices, the Hang Seng was down by 0.5% and the Shanghai Composite was down by 0.5%. The Nikkei 225 was up by 0.4%. Meanwhile, European markets, were trading in green. The FTSE 100 was up by 0.1%, The DAX, was up by 0.4% while the CAC 40 was up by 0.5%.

The rupee was trading at Rs 67.72 against the US$ in the afternoon session. Oil prices were trading at US$ 72.07 at the time of writing.

In news from stocks in the pharma sector. Divi's Lab share price is in focus today after the United States Food & Drug Administration (USFDA) completed its inspection of the company's Choutuppal, Telangana facility with no integrity or repeat observations for the unit.

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The company's unit-I at Choutuppal, Telangana had an inspection by USFDA from May 14-16.

This was a general cGMP inspection by the USFDA and the US regulator completed the inspections with no observations and cleared the plant.

Divi's lab share price ended the day flat, after surging over 3% in early trade.

Domestic Pharma Market in a Slow Lane

Is this the right time to buy pharma stocks?

There was a time when almost every stock in the pharma sector was considered to be a safe stock. You could just pick the top 5-6 companies from this sector and expect to make decent returns over time.

In fact, it was termed as defensive sector. However, in last two years things have changed a lot. There is enormous uncertainty in the industry.

Uncertainty regarding price erosion in the United States as well as hostile US FDA visits, have changed a once defensive sector into a risky sector.

Even as pharma companies reel under the regulatory crackdown in the largest export market in the US, there has been no succour from the domestic markets. The growth in the Indian pharmaceutical market almost halved to 5.5% in 2017. Only 3,932 brands were launched in 2017. This is the lowest since 2013.

The leading therapy segments in terms of brand launches were dermatology, anti-infectives, cardiology, and gastroenterology. Anti-diabetics have also been growing in double-digits for the past five years. However, with the government bringing a number of essential drugs under price control, prescription drugs are witnessing sluggish growth. Therefore, pharma companies are now focusing on the over-the-counter (OTC) medicines.

As per the Nicholas Hall 2017 report, the OTC market is expected to grow at a compounded annual growth rate of 9% and reach US$ 6.5 billion by 2026. So, medication such as dermatology, vitamins, and pain & analgesics have gained centre stage, where most brand launches are taking place.

Recently, Lupin forayed into the OTC segment after it re-launched Softovac, its more than three-decades-old brand. Torrent Pharma has acquired Unichem Lab's domestic business which has popular OTC brands such as Unienzyme. The consumer products arm of Piramal Enterprises acquired four OTC brands from Pfizer last year; and recently, it acquired a gastro-intestinal brand, Digeplex, from Shreya Lifesciences.

Thus, while pricing controls keep the operating environment tough in the domestic market, pharma companies with strong brands in the OTC category are better placed to ride the slowdown.

Moving on to news from stocks in the telecom sector. Debt ridden Reliance Communications (RCom) share price surged over 65% in today's trade after it was reported that the company has offered opt for an out of court settlement its legal battle with Ericsson.

Earlier the National Company Law Tribunal (NCLT) had admitted pleas filed by Ericsson for initiating insolvency proceedings against RCom.

This had stalled RCom's plan to sell its assets to Reliance Jio Infocomm Ltd. RCom was seeking to reduce its US$7 billion debt with this deal.

RCom shut wireless operations in late 2017, after a merger attempt with Aircel fell through. It then signed a deal in December 2017, in which Reliance Jio agreed to buy a majority of the wireless assets of RCom for an undisclosed amount. Both companies signed agreements for sale of wireless spectrum, tower, optical fibre network and media convergence node assets.

Notably, Ericsson has sought Rs 11.5 billion from RCom and two of its arms-Reliance Telecom Ltd and Reliance Infratel Ltd-after having signed a seven-year deal in 2014 to operate and manage RCom's nationwide network.

RCom share price ended the day up by 57%.

And here's a note from Profit Hunter:

Petronet LNG is among the most active stock in the market today - up 8%. Let's have a look at its chart.

The stock bottomed out at 82 in August 2015 and traded in a smooth uptrend to touch a life-time high of 200 in October 2016. It traded sideways for about five months and found resistance from the 200 level. It finally broke above this resistance level in April 2017.

After the break out, the stock found support from the 200 level (previous resistance now support) in July 2017. It continued its uptrend and touched a new life-time high of 276 in November 2017. It then corrected for a while.

Today, the stock bounced up from the 200 support level and rallied 8% with strong volumes.

So does this indicate that the stock is now ready to hit a new life-time high in the sessions to come? Let's wait and watch.

Petronet LNG Rebounded From Important Support Level
Petronet LNG Rebounded From Important Support Level 

Indian Indices Trade on a Negative Note; Sensex Down Over 150 Points
12:30 pm

After opening the day marginally higher, share markets in India witnessed selling pressure and are presently trading on a negative note. Sectoral indices are trading on a mixed note with stocks in the metal sector and banking sector witnessing maximum selling pressure.

The BSE Sensex is trading down by 152 points (down 0.4%), while the NSE Nifty is trading down by 42 points (down 0.4%). The BSE Mid Cap index is trading up by 0.4%, while the BSE Small Cap index is trading up by 0.2%.

The rupee is trading at 67.73 to the US$.

In the news from commodity space, crude oil is witnessing buying interest and is headed closer to US$ 80 per barrel mark. Gains are seen as supplies tightened and demand remained strong.

Note that crude oil prices have been witnessing a rising trend of late. Prices have been escalating due to a pick-up in global demand coupled with supply cuts by the Organisation of the Petroleum Exporting Countries (OPEC) and Russia. Even geopolitical tensions between US, Russia, North Korea and Iran have kept prices on the boil.

Rising crude oil prices is not good news from India's perspective.

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Warren Buffet was one of the biggest advocates of this secret early on in his investing career (though you won't catch him talking of it now).

Closer home, a Mrs Khanna from Chennai has been using the very same secret for the last few years…with inspiring results. You can read her story here (We think you'll find it pretty interesting).

If you'd like to learn about this secret, and how you can use it — go here to read what Rahul has to say.
------------------------------

As we wrote in a recent edition of The 5 Minute WrapUp...

  • Fiscal revenues are at risk. Particularly if the government is forced to consider a cut in fuel excise duties due to a rally in oil prices. In recent times, a sharp jump in excise collections has helped indirect tax collections. Any risk to revenues and subsequent threat to the fiscal deficit target at 3.2% of GDP would require tighter spending cuts.

    Secondly, the impact on inflation needs to be monitored. This narrowing the central bank's scope for further rate cuts.

    Lastly, low crude prices were a positive growth impetus through higher discretionary incomes for households and lower input costs for manufacturers and farmers. Part of this benefit is likely to be eroded as retail fuel costs rise. As for corporations, expansion in gross margins caused by falling commodity prices is also likely to wane, pressurising profitability.

You can read the entire article here.

What does rising crude prices mean for stock markets?

Richa Agarwal, editor of Hidden Treasure, tracks the oil and gas sector very closely. She believes the rise in crude oil prices is a bearish sign for stock markets globally. At the same time, any market correction, will throw up interesting buying opportunities in small-cap stocks.

This is what she wrote...

  • After hitting a low of US$ 30 per barrel in January 2016, prices have more than doubled to US$ 68 in April 2018.

    The recent news of Saudi Arabia wanting crude oil prices to touch US$ 100 per barrel doesn't help. The 2008 recession was preceded by crude oil touching US$ 150 per barrel. Any movement upwards can result in a possible downturn for the global market.

    While the Hidden Treasure team looks for long-term wealth creators, such macro situations can help to recommend such stocks at a bargain. The ones who keeps calm, when everyone else is losing their heads, will gain the most when the tide turns.

In other news, as per a leading financial daily, traders' body Confederation of All India Traders (CAIT) has alleged that the US$ 16 billion Flipkart-Walmart deal circumvents laws. It has also said it will seek legal recourse on the matter.

The CAIT had urged the government to conduct close scrutiny of the deal that it claimed will have greater ramifications on retail trade and the economy.

How this development pans out remains to be seen. Meanwhile, we will keep you updated on all the news from this space.

Last week, US giant Walmart signed a definitive agreement to acquire a 77% stake in India's largest e-commerce marketplace Flipkart with an investment of around US$16 billion.

The acquisition is the largest transaction in history of the online retail space not only in India but also globally.

Post the deal, Walmart will own 77% of Flipkart. The rise has been staggering for India's largest start-up which started with a modest capital of US$ 6,000 in 2007, as can be seen from the chart below:

Rise of India's Biggest Start-up

Flipkart's story resembles that of its global counterpart Amazon although at a smaller scale. Walmart's deal highlights India's increasing importance in the start-up space.

It also brings to the fore the importance of disruptors in an eco-system. Flipkart incurred losses of US$ 1.35 billion in FY17. Despite this, it is valued at a premium mainly due to its future potential.

The deal also puts focus on India's e-commerce sector, which is showing increasing signs of adoption.


Sensex Opens Marginally Higher; Consumer Durable & Realty Stocks Gain
09:30 am

Asian shares are trading on a mixed note today. The Nikkei 225 is up 0.6% while the Hang Seng is up 0.04%. Back home, India share markets opened the day marginally higher. The BSE Sensex is trading up by 50 points while the NSE Nifty is trading up by 20 points. The BSE Mid Cap index is trading up by 0.4%, while the BSE Small Cap index has opened the day up by 0.5%.

Sectoral indices have opened the day on a mixed note with consumer durables stocks and realty stocks witnessing maximum buying interest. Metal stocks have opened the day in red.

The rupee is trading at 67.63 to the US$.

In the news from the macroeconomic space, Bharatiya Janata Party's (BJP) BS Yeddyurappa will take oath as Karnataka Chief Minister today.

The development comes as Yeddyurappa's party was invited to form government, and is given 15 days to prove majority by the governor on Wednesday evening.

In response to the above move, the Congress, to ensure that does not happen, approached the Supreme Court late at night and asked for the swearing-in to be stopped.

Three judges of the Supreme Court heard the petition in an unprecedented 2 am hearing, but refused to stay the oath taking ceremony.

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What Warren Buffet and This Housewife from Chennai Have In Common...

Warren Buffet was one of the biggest advocates of this secret early on in his investing career (though you won't catch him talking of it now).

Closer home, a Mrs Khanna from Chennai has been using the very same secret for the last few years...with inspiring results. You can read her story here (We think you'll find it pretty interesting).

If you'd like to learn about this secret, and how you can use it — go here to read what Rahul has to say.
------------------------------

Earlier on Wednesday evening, the Governor met a delegation of the Congress and JD(S) leaders, who also staked claim to form government, claiming they have majority.

Note that the BJP has 105 lawmakers, including an Independent, in the 222-seat assembly and is seven seats short of majority.

There are high stakes involved as the final outcome will have a bearing on the stock markets too.

As Ankit writes in one his editions of Equitymaster Insider (requires subscription)...

  • Dalal Street logic says BJP win will give a boost to the Indian stock markets. BJP's loss would spell bearishness.

    And now that the next general elections are just a year away, politics will remain a focal point of discussion in the context of the stock markets.

    Remember that the stock markets like Mr Modi. And currently, they're pricing in a Modi victory in 2019. If this premise starts developing cracks, it may weigh negatively on your stock portfolio.

How the above decision pans out remain to be seen. Meanwhile, we'll keep a close watch on the developments in this space and keep you updated. Stay tuned.

In the news from the banking sector, as per a leading financial daily, the government is looking to impose strict deadlines on banks that are under the Reserve Bank of India's (RBI) watch to implement a turnaround plan.

The deadlines will include fixed targets for recoveries of bad loans, sale of non-core assets and a differentiated lending road map with each bank specialising in a particular area.

The finance ministry is scheduled to review the performance of around 11 banks under RBI's prompt corrective action framework today.

If implemented, the above development will come as a welcome breather for PSU banks that are reeling in the pressure of bad loans.

Note that banks, in principle, must be careful about not extending loans to borrowers with poor creditworthiness or payment track record. That too, irrespective of the size of the borrower.

However, the data from State Bank of India shows that when it comes to big corporate borrowers, our banks literally look the other way. The share of large corporates, in total advances of the banking sector, has almost remained unchanged over past three years (at an average of 55%).

However, their contribution to incremental slippages has been huge. At one point, the big corporate borrowers accounted for nearly 90% of total NPAs of the sector.

Big Borrowers Turning into Big Offenders

Therefore, according to us, banks with large corporate books (be it PSUs or private sector) deserve a lower valuation if they can't keep NPAs in check.


Of Mounting Losses at PNB, Dip in Investments for P-Notes, and Top Cues in Focus Today
Pre-Open

Share markets in India closed on a negative note yesterday. Sectoral indices ended mixed, with stocks in the realty sector and stocks in the FMCG sector leading the gains, while stocks in the oil and gas sector losing the most.

At the closing bell yesterday, the BSE Sensex stood lower by 156 points (down 0.4%) and the NSE Nifty closed down by 61 points (down 0.6%). The BSE Mid Cap index was down 0.3%, while the BSE Small Cap index was up by 0.1%.

Top Stocks in Focus Today

From the FMCG space, ITC share price will also be in focus today as the company yesterday posted a 9.9% YoY rise in profit for the quarter ended March 2018.

Hindalco share price will also be in focus today as the company reported a 25% YoY drop in its net profits for the quarter ended March 2018.

From stocks in the pharma sector, Glenmark Pharma share price will be in focus today as the company launched an asthma drug in Denmark. The pharma major launched a generic version of Seretide Accuhaler, used to treat asthma, in Denmark.

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P-Notes Investments Dip to Nearly 9-Year Low

As per an article in the Economic Times, the total investment via participatory notes (P-notes) into Indian capital markets plunged to nearly 9-year low of Rs 1 lakh crore in April.

The dip was seen amid stringent norms put in place by the stock market regulator to check misuse of these instruments.

P-Notes are derivative instruments issued by registered foreign portfolio investors (FPIs). They are issued to overseas investors to enable them to trade in Indian stocks without having to register with the regulator themselves. However, the overseas investors need to go through a proper due diligence process.

PNB Reports Rs 134 Billion Net Loss in Q4FY18

In the news from the banking sector, Punjab National Bank (PNB) share price will be in focus today. The stock of the company witnessed selling pressure yesterday as the state-run lender reported loss of Rs 134 billion for the quarter ended March 2018. This was the biggest loss ever reported by any domestic lender.

Losses at the bottomline level were seen on the back of bank's surging bad loans. With regards to provision made for the loss incurred on account of Nirav Modi fraud case, the bank said it provided for Rs 71.8 billion in the fourth quarter. This is 50% of the total amount of Rs 143 billion and the remaining amount will be covered in the three quarters of the current fiscal year.

Note that the massive fraud at Punjab National Bank in conjunction with the diamond merchant Nirav Modi, has put the spotlight on the growing bad loan problems in Indian banks.

It has brought to the fore the painful issue of willful defaulters especially after the Vijay Mallya fiasco.

Unsurprisingly, Punjab National Bank tops the list of banks with the highest number of willful defaulters.

While the bad loans struggle at PSBs has been going on since a decade, bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.

That's the reason we've been wary of PSU banks since 2014. This was well before the market had caught a whiff of the NPA problem. We've recommended just two large PSU banks in StockSelect since then...and already successfully closed both of them.

All Eyes on Governor Vajubhai Vala Post Karnataka Elections

As the Congress and allies chipped away at the BJP seats in Karnataka elections yesterday, all eyes are now on Governor Vajubhai Vala.

The Governor will have to decide whether to call BJP to try to form the government or go with the JD(S)-Congress combine, which together have a clear majority in the 224-member Assembly.

There are high stakes involved as the final outcome will have a bearing on the stock markets too.

As Ankit writes in one his editions of Equitymaster Insider (requires subscription)...

  • Dalal Street logic says BJP win will give a boost to the Indian stock markets. BJP's loss would spell bearishness.

    And now that the next general elections are just a year away, politics will remain a focal point of discussion in the context of the stock markets.

    Remember that the stock markets like Mr Modi. And currently, they're pricing in a Modi victory in 2019. If this premise starts developing cracks, it may weigh negatively on your stock portfolio.

How the above decision pans out remain to be seen. Meanwhile, we'll keep a close watch on the developments in this space and keep you updated. Stay tuned.