The Indian equity markets had a roller coaster ride in January with the Index (NIFTY) almost touching 9000 levels and retracing back on weak corporate earnings coupled with contagion risks associated with a Greece exit and general global deflationary pressures exerted due to weak demand. We were pondering over the past few weeks whether investment decisions in the stock markets are based in a completely objective and rational manner encompassing all necessary information whether technical/Financial or fundamental. I was browsing through various articles on behavioral finance/stock market psychology which analyzes deviations from the aforesaid rational assumptions impacting decision making and pricing of stocks. In volatile times and fluctuations that the markets experience, plenty of individual investment decisions are based on emotions and perceptions and we tend to place undue weight on information which might be irrelevant. There is also the possibility of a missed out feeling if the markets have run up too fast and not able to catch the bus at the ‘Right time’. When there is exuberance and buoyancy in the markets, everyone has a opinion on the markets and the list probably gets drawn down to your local tea/tobacco vendor as well. As a relative measure with the cricket world cup just about to begin, just about everyone in India supposedly knows how a batsman should have played, how the bowler should have bowled or how the fielder should have caught the ball. Just about everyone introspects and conducts a ‘post mortem’ exercise after the match on where the team went right or probably the reasons why we lost. The same set of emotions/preferences as a parallel get played out in the stock markets especially for the investors/traders having a myopic horizon who have all sorts of explanations ready for either their MTM gains or losses.
The point we are trying to drive home are that: Keep a long term structural view on the markets and attempt not to get swayed with short term changes in sentiments/perceptions. Focus on fundamentally strong companies with good managements and effective corporate governance as such companies are bound to deliver compounded returns over a longer time frame. In short consider stock markets investments like a Test match rather than a T20 contest.
The markets structurally are looking forward to the Union Budget and the probabilities of what the Exchequer might deliver in terms of reform processes. Our opinion is that the Government shall continue pursuing the reforms agenda and would not adopt to populist measures to counter the probable measure one assumes that can come from the AAP government in Delhi. The Government in our opinion would address the supply side issues (Land, Power, Unlocking of Capex stock in Infra sector, Water) as well as demand issues to revive consumer discretionary spending. The Budget shall be keenly watched by all market participants for the potential roadmap that the Finance Minister shall draw upon for Fiscal consolidation. In a nutshell, focus areas in terms of sectors would be Infrastructure, Power, Logistics and the Manufacturing sectors with emphasis laid on the ‘Make in India’ campaign.
As we sign off, here’s wishing happy and successful investing to all the readers and hoping that we begin the world cup cricket by convincingly beating our arch rivalsThanks and regards,
Head – Equity Derivatives and Technicals.
We have witnessed in March that FII’s have formed huge long positions in index futures and rolled it over in April series, though percentage terms rollover were less then, but open interest wise rollover were quite high. What we are witnessing now is rollovers are in line with averages in percentage terms but open interest has reduced substantially in NIFTY and BANKNIFTY. This is in line with FII’s activity. They were unwinding their long index futures in second half of April series and hence open interest wise rollovers so far have been on the lower side.
Today most of the participants are talking about favourable election outcome and markets to rally from current levels. We believe markets are getting complacent as regard to this mega event. We would like to follow FII’s action and remain light in this market. We believe that event may be favourable but markets reaction to it may not be as euphoric as expected by participants and even if we get significant gap up, there would be immediate profit booking which may result into gains post election outcome as paltry compared to expectations. Needless to mention that, if outcome is even slightly less than favourable than significant downside cannot be ruled out.
For next fortnight we are not seeing meaningful upside in this market and at current levels of 6840 of Nifty unwinding of longs should be done and some shorting of May futures around 6890-6920 is advisable from one weeks perspective.
Participants who fall into investor category, we strongly recommend them to short calls of May series in the range of 7300-7500 levels taking above view into consideration.
Sun Pharmaceuticals & Ranbaxy announce merger: Sun Pharmaceutical Industries (Sun Pharma) and Ranbaxy Laboratories Ltd (Ranbaxy) announced that they have entered into definitive agreements pursuant to which Sun Pharmaceuticals will acquire 100% of Ranbaxy in an all-stock transaction. The deal value for the transaction at ~ US $4bn., puts the valuations at 1.6xFY2015E EV/sales, which is at discount to its peers, which trade at 2.0-2.5x. Thus, every shareholders of the Ranbaxy would get 0.8 shares of Sun Pharmaceuticals. The combined entity’s revenues are estimated at US $4.2bn(Pro Forma CY2013 sales).Ranbaxy has a significant presence in the Indian pharmaceutical market (21% of Ranbaxy’s sales) and in the US(29% of Ranbaxy’s sales) where it offers a broad portfolio of ANDAs and first-to-file opportunities. In high-growth emerging markets (50% of Ranbaxy’s sales), it provides a strong platform which is highly complementary to Sun Pharmaceutical strengths. Sun pharmaceutical on other hand has a strong presence in the US(60% of sales), India (23% of its sales), while the ROW( contributed 17% of sales). Thus, the combined entity would be more diversified with US, ROW and India, contributing 47%, 31% and 22% of sales respectively. In terms, of market share, the combination of Sun Pharmaceuticals and Ranbaxy creates the fifth-largest specialty generics company in the world (just behind the Teva, Sandoz, Activas and Mylan) the largest pharmaceutical company in India, with a market share of 9.2% with a sales of US $1.1bn, behind Abbott which is has a market share of 6.5%, which is huge gap in the Indian markets, which is highly fragmented. In terms of asset base, the combined entity will have operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant platform of specialty and generic products marketed globally, including 629 abbreviated new drug applications (ANDAs). On the profitability front, the company is estimated to have a combined pro forma EBDITA of US $1.2bn, thus a OPM’s of 28.6%, which is still very healthy, given that the Ranbaxy labs is currently operating at low OPM’s in its history. The company is confident of turning around the same, given its history of turning around its acquisitions in the past of the likes of the Caraco, Taro, DUSA and URL. Thus Sun Pharma is confident of turning around the acquisitions. The company expects the synergies worth US $250mn by the third year of acquisition (i.e. mostly by FY2019). Also, in connection with the transaction, Daiichi Sankyo has agreed to indemnify Sun Pharmaceuticals and Ranbaxy for, among other things, certain costs and expenses that may arise from the recent subpoena which Ranbaxy has received from the United States Attorney for the Toansa facility. Thus there could be some expenses, if any to be borne by the Sun pharma, which should not be a problem, given the strong cash on the books of the combined entity (estimated to be around Rs. 20,000cr in FY2016). The acquisition is likely to get completed by end of 2014 and thus will fully reflect in FY2016 financials. Thus, in FY2016, the Ranbaxy labs, will contribute around 37% of the combined sales (estimated to be around of Rs. 31,223cr) of the company, with Sun pharma contributing the rest. On the, operating front, the company is likely to have an OPM’s of 29.0%, with a combined net profit of Rs. 6640cr. The combined EPS of the entity would now stand at Rs. 27.5, lower form Rs. 28.8 earlier. While in near term the acquisition will dilute the reported ROE’s from 25.4% to 20.7% in FY2016, which is still healthy, given the low profitability of the acquired company and is line with most of the peers which have an ROE’s of 17-25%. However, the operating ROE,
which excludes the cash component, will still be higher at around 40%. Thus, we don’t see any significant de-rating in the stock and hence believe that given the growth opportunities and its market share, we believe that the company will continue to trade at premium to sector valuations. Thus we maintain our buy with a price target of Rs. 660. And as regards, the Ranbaxy labs shareholders, we believe that they should hold on to their investments, given the synergies and the positives emanating from the deal.
Sarabjit Kour Nangra VP Research – Pharma, Angel Broking