Indian share markets ended broadly flat on Thursday amid weak Asian markets. At the closing bell, BSE Sensexended up by 51 points, while, NSE Nifty ended up by 12 points.
Sectoral indices ended the day on a mixed note with information technology stocks and FMCG stocks leading the gainers. While, metal stocks and bank stocks ended the day in red.
Globally, Asian stock markets finished mixed as of the most recent closing prices. The Shanghai Composite gained 0.4% and the Nikkei 225 rose 0.2%. The Hang Seng lost 0.5%. European markets are higher today with shares in London leading the region. The FTSE 100 is up 0.4% while France's CAC 40 is up 0.2% and Germany's DAX is up 0.1%.
The rupee was trading at Rs 70.07 against the US$ in the afternoon session.
Reliance Industries share price today became the first company to cross Rs 8 trillion in terms of market capitalisation. The company's market capitalisation stood at Rs 8.01 trillion.
In the news from the pharma sector. As per an article in a leading financial daily, Dr. Reddy's Lab has informed that its API Srikakulam Plant (SEZ) in Andhra Pradesh has received an Establishment Inspection Report (BIR) from the United States Food and Drug Administration (USFDA).
This implies the closure of the audit at this facility. This facility had completed the USFDA audition with zero observations in June 2018.
Meanwhile, Torrent Pharmaceuticals is recalling 14 lots of tablets used for treatment of high blood pressure and heart failure from the US market due to presence of impurity.
The voluntarily recall of Valsartan/ Amlodipine/ HCTZ tablets to the consumer level is due to the detection of trace amounts of an unexpected impurity found in an active pharmaceutical ingredient (API) manufactured by Zhejiang Huahai Pharmaceuticals.
Speaking of the pharma sector, the BSE Healthcare Index has been on a roller coaster ride in the past few years. The period from 2012 to 2015 saw the index go up more than three times. Since then it has been a painful ride downwards.
Pre-2015, pharma companies enjoyed a fairytale ride in the US market. Low labor costs, good chemistry skills, along with efficiency, ensured Indian companies could copy innovator drugs to make generic drugs at a fast pace.
The generic business had lucrative margins for all major pharma players. But the party did not last long. In the quest to supply drugs quickly, they compromised on quality at their manufacturing facilities.
The regulatory issues coupled with price erosion in US markets has impacted the business of major pharma players.
Dr. Reddy's share price and Torrent Pharma's share price ended the day up by 2.3% & 1.2% respectively.
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Moving on to the news from the economy. Global rating agency, Moody's Investors Service in its latest report has said that the government's plan to provide Rs 650 billion of new capital to public sector banks (PSBs) in the year ending March 2019, will restore capital adequacy and improve loan-loss coverage at many loss-making banks, however stress will persist.
It noted that of the Rs 650 billion, the government has already allocated Rs 113 billion to five lenders in July. It added that this capital infusion comes after the capital support of Rs 900 billion in the prior year.
According to the report, a large-scale bank recapitalisation plan, which was meant to improve capital buffers and loan-loss reserves and also support sufficiently strong loan growth, will now be just enough to shore up capital ratios above regulatory requirements because the banks' capital shortfalls have grown larger than the government's initial projection.
It noted that the PSBs' external capital needs will not grow much further after fiscal 2019 because the banks' profitability will gradually improve as credit costs moderate in tandem with progress in an ongoing balance-sheet cleanup.
The rating agency further said that the capital injections would only help the lenders achieve Common Equity Tier 1 (CET1) ratios of 8% by March 2019, satisfying the 2.5% conservation buffer on top of the 5.5% minimum under Basel III norms in India.
As per the report, this would give the banks a capitalisation profile comparable to those of their similarly rated peers globally. It added that this means the government has little choice but to increase capital support if it seeks faster loan growth to support economic expansion.
PSBs have had a difficult year, to put it mildly.
PSBs Struggle Despite Government Help
This underperformance was despite the huge boost they got from the government last year. On 24 October 2017, the government announced a Rs 2.11 trillion PSB capitalisation plan. This move was aimed at reviving the PSBs from the bad loan mess.
The next day was a field day for investors in PSBs. PSB stocks went up between 30% and 47%. Despite this, the return in the year was way below average. PSBs like PNB have crashed more than 45% over the last one year.
Using recapitalisation bonds can only act as a short-term measure to the crisis afflicting Indian public sector banks today. Such a measure will not address the structural issue in the banking system, i.e. the poor standard of lending and poor governance system.
Our big picture editor, Vivek Kaul, talks about moral hazard risk arising out of recapitalization. He writes:
- "If the government bails them around this time around, the banks know that they can count on the government bailing them out the next time around as well. And this means that they can follow fairly loose standards of lending, in order to lend money quickly."
So, have we reached the bottom? Or there are more Nirav Modi stories waiting to come out?
We, at Equitymaster believe, rather than bottom fishing, one should look at banks run by strong management and a differentiated lending strategy available at reasonable valuations.
PSB stocks ended the day on a mixed note with Bank of India and Punjab & Sind Bank witnessing maximum selling pressure.
This article was originally published in English at www.equitymaster.com
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