The Indian markets always correct sharply, mainly due to sentiment and FII selling. The FIIs sold shares worth Rs 1,306 crore on July 22 and, despite domestic institutions’ buying of Rs 743 crore, the markets corrected by more than 4%. The currency factor led to the pullout by FIIs, who saw the dollar holdings of their investments going down due to the sharp fall of the rupee. The rupee dropped to a low of 49.58 against the dollar, raising fears that this would push up India’s import bill and, consequently, inflation.
Though the RBI was widely perceived as being almost at the end of its monetary tightening cycle as inflation may be peaking out, the sharp depreciation in the rupee has altered the scenario. The swift price hike in petrol by public sector companies was mainly a reaction to sharp currency depreciation despite softening oil prices. The 10% fall in the value of the rupee in a single quarter has raised serious concerns about the current account deficit despite rising exports that are now seen as unsustainable.
The international scenario presents a gloomy outlook with the US Federal Open Market Committee (FOMC) mentioning “significant downside risks to the economic outlook including strains in global financial markets.” The purchasing manager indices (PMI) have been steadily deteriorating; the September manufacturing PMI for China contracted and so did that of the euro zone in both services and manufacturing – for the first time in the recent past. There is an imminent risk to the financial system in Europe with European banks likely to face potential losses of as much as E300 billion due to the sovereign debt crisis in the region. The contagion is bound to take the entire Euro zone and the US into a prolonged period of recession and low growth.
The global recession may have brought relief for India due to the softening of commodity prices but the steep depreciation in the rupee has negated those gains. The ongoing monetary tightening has not had a decisive impact on taming inflation but it has affected the growth rate, which may remain at around 7.5% for the year. The long-term growth rate may further moderate because of a host of factors like corruption and policy inaction affecting the capital investment environment in the country. India is a story not selling the way it did a couple of years ago.
The slowdown is quite evident with industrial output for July declining sharply to 3.3%. The advance tax data for the July-September quarter also suggest that corporate profit growth is considerably lower. The government is likely to slip on its budgeted revenue collection of Rs 5.33 lakh crore and, consequently, its fiscal deficit target also. Though our financial markets are dependent on what happens abroad or what the FIIs do, our real economy is fairly independent. The worst-case scenario is much better than for the rest of the world. Indian markets may be expensive when compared with others but, looking at the growth, the valuations can be described as reasonable. Retail investors are advised to use these uncertain times for picking stocks with a time frame of two-three years because you get great valuations only when the news flow is bad and there is maximum uncertainty. Yet, we have unmatched ability to bounce back.
Though our financial markets are dependent on what happens abroad or what the FIIs do, our real economy is fairly independent. The worst-case scenario is much better than for the rest of the world.
(CMP Rs 325)
Bilcare Research Ltd is the largest pharma packaging company in India with a market share of over 60%. With the acquisition of the global polymer film business of Germany-based company INEOS Corporation, Bilcare Research has emerged as one of the largest pharma packaging companies in the world. The company is an innovation-led solutions provider that partners with the global pharmaceutical and healthcare industry to improve patient healthcare outcomes. The company has a global footprint with its dedicated manufacturing facilities across three continents, viz, Asia (India and Singapore), Europe and the US.
During FY11, the company has grown at 19.8% on a standalone basis with EBITDA margin of 30.4%. It started consolidating its recently acquired INEOS business from September 1, 2010. During Q4 FY11, consolidated numbers include the contribution from the INEOS business and are not comparable on y-o-y basis. Margins at consolidated level have been under pressure due to the sharp rise in crude prices and assimilation of the new business. The net sales and profit of the company are expected to grow at 22% and 19% to Rs 3,393 crore and Rs 210 crore, respectively between 2011A and 2013E. The stock available at 0.80 of book value is trading at a forward PE of roughly 5 and 4 of its FY12E and FY13E earnings, respectively. A real gem with a huge upside potential.
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
