A short analysis of Glenmark, it’s business growth, valuation of the stock. Are fund managers liking this stock? Glenmark is not a stock to own, which stock in the Pharma sector is good to own.
Post China crisis, our stock markets have moved into correction mode. There were continuous challenges in the form of disturbances like the Volkswagen scandal, Bihar election results, attack on Paris along with the regular nuances like the FED rate hike and the selling by the Foreign Portfolio Investors (FPI) in our markets, which has almost become like a monthly issue.
In October, there was the fear of the FED hiking interest rates which got postponed to December, now the fear has come back again on the thoughts that, whether there will be a re-thinking by Yellen. And every time there is this news about the interest rate hike, it gets followed by the withdrawal of the FPI’s from our market. We have been so much at the mercy of foreign investors to support our market; a small change in their thought itself creates a downturn in our markets. As an emerging market, we have got used to this foreign investment to support our markets.
While in reality, the present situation in our markets has taken a different direction. Dependency on foreign money to move our markets are slowly coming to an end. From the data that is available it is clearly visible that the foreign support is no more required for our markets. In the April to October period, domestic institutions and retail investors have bought stocks worth 51000 Crores, on an average the domestic funds are buying stocks worth 6638 Crores or just about $1 billion, every month since May 2014 as against the FPI contribution of $787 million in the same period.
These figures show that any kind of selling by FPI’s is getting absorbed by the domestic purchase. The investment dynamics of the Indian public have had a dramatic change; SIP’s used to be about 1000 crores per month before 2014, which has now got increased to 2500 Crores per month. The beauty here is that, all this money is going into the midcaps and not the large caps. When we talk about so much inflows and the market is still weak, doubts arise as to why it is so?
The FPI’s are mostly invested in the large cap stocks, which they are liquidating, apart from the fact that the reduced interest rates will become attractive for these investors to be invested in their economies; they are realizing the mistake of wrong investments. Large cap stocks have become poor performers in the present market. The SENSEX dropped 1.48% on 18th November 2015, while the mid cap index dropped only 0.68%, the reason was FPI selling in large caps. Stocks like Larsen & Toubro, ONGC, TATA Steel etc., have been losing heavily, while their mid cap counter parts like Eicher, Page etc., are gaining big time. In the last week alone Dr. Reddy’s lost more than 25%, along with it all the frontline Pharma companies losing a large portion of their value, while stocks like Aurobindo Pharma, Cadilla, Glenmark etc., did not lose much.
Pressure of the USFDA investigations have brought down the stock prices of most of the big names in the Parma Sector. Again, this USFDA is one another issue that has been haunting our markets often. There is too much of dependency by our frontline Pharma companies for their sales from the US markets and the US is commanding, this situation will change soon. Our companies will realize that there is a similar market available in the rest of the world and with the medical facilities getting improved in India, one of the biggest economies by population, India sales itself will have a bigger contribution in the years to come.
In the first 20 days in November, FI’s have sold in our markets to the extent of 7200 Crores while the domestic institutions have bought for 17360 crores. It is close to 150% more than the sales that have happened. Most of the selling was in the frontline stocks and the buying was in the mid cap space. To some extent the selling pressure is getting absorbed by the local institutions and that is the reason we have the markets going up and down in short periods. It is like a sort of confusion and will result in a prolonged consolidation.
FPI’s are forced to re-align their portfolio if they have to make money from our markets, hence the selling pressure. Whereas the domestic funds are already loaded into mid-caps which have had a very good run and are also adding to their portfolio taking advantage of the correction in the market. Our markets witnessed an above 40% straight rally after the new government got elected, from such a steep rise, it has to get re-adjusted before it takes off again and this readjustment will take a little more time. The way the charts are formed, the bullish sentiment is pretty strong. If the next round of bullish move has to be even stronger, like the experience we had in the 2003-2008 bull market, the markets have to consolidate and re-shuffle leadership.
Last year Automobile stocks had a great run supported by good earnings from the companies, while this year, they have a kind of taken back seat. Most of them have completed their dream runs. Now the leadership position is slowly getting shifted to Pharma and NBFC stocks. September quarter results were muted, the average sales growth has been around 1.50% while the earnings growth is at 7%, which shows that companies are cutting down costs to increase profits and this cannot continue for long. Soon, we will have sales numbers showing up.
This change in leadership is going to take some time to get aligned, maybe till the 3rd quarter results are out, in which there can be some positive surprises. Till that time, the markets will not turn bearish; it will consolidate at the present levels and then break out. The longer the consolidation, so much stronger will be the next rally, while in the consolidation period; it will kill the patience of anxious investors. For those who stay with patience, the next rally will be a bigger reward. The same happened in 2014, before the 45% rally we had between March 2014 and April 2015, the markets consolidated for a full long year staying within a 15% range in 2013.
Presently the consolidation is again at 15%, the more it gets stretched, and the chances of another 45% rally are higher. In such a scenario the SENSEX should be at 43500 and the NIFTY at 13150. At present these numbers look a little too over optimistic, while it was the same when there were talks of SENSEX to reach 30000, in early 2014, hard to believe, while it did happen. The SENSEX breached 30000 in March 2015.
As I complete this writing, I myself am getting euphoric, how throwing a little light on the hindsight has given a very beautiful picture to look at in the future. For those who have missed the 2014 opportunity, there is one more chance waiting to happen, take advantage and grow your savings faster.