After opening the day in green share markets in India witnessed choppy trading activity and are presently trading above the dotted line. Sectoral indices are trading on a mixed note, with stocks in the banking sector and stocks in the PSU sector witnessing maximum buying interest. While stocks in the capital goods sector are leading the losses.
The BSE Sensex is trading up by 65 points (up 0.2%) and the NSE Nifty is trading up by 15 points (up 0.1%). Meanwhile, the BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading up by 0.3%. The rupee is trading at 67.05 to the US$.
In news from stocks in the banking sector. ICICI Bank share price is among the top gainers today after the company declared results for the March 2018 quarter.
ICICI Bank, India's largest private sector lender by assets reported 49.6% YoY drop in standalone profit at Rs 10.2 billion for the March quarter on sharp rise in provisions for the bad loans.
Provisions for the quarter went up by 129% to Rs 66 billion from Rs 28.9 billion in the same period a year ago.
The bank's board declared a dividend of Rs 1.5 per equity share. The board, however, stayed mum on the controversy surrounding its chief executive officer Chanda Kochhar on allegations of conflict of interest with respect to loans made to the Videocon Group.
While provisions jumped exponentially in the quarter, it is viewed as a positive sign for the bank because while it may cause short-term pain, it helps with the recognition and accounting of bad loans plaguing the banking sector.
The result announcement led to a surge in ICICI bank's share price, its biggest gain seen since October 2017.
At the time of writing, ICICI Bank share price was trading up by 8%.
NPAs Set to Rise Further with New RBI Rules
The Reserve Bank of India (RBI) tightened the bad debt resolution framework by scrapping numerous loan restructuring programs. This includes the likes of strategic debt restructuring scheme (SDR), Joint Lenders' Forum (JLF), Corporate Debt Restructuring Scheme, and Scheme for Sustainable Structuring of Stressed Assets (S4A) that's prevalent among banks to restructure defaulted loans. The RBI replaced all these schemes by the Insolvency & Bankruptcy Code (IBC).
With this, a loan worth over Rs 2.8 trillion, with payments outstanding for 60-90 days, carry the risk of slipping into the category of non-performing assets (NPA). This will result in a surge in NPAs and may put additional pressure on the banks to make provisions.
The new framework specifies that banks must report defaults on a weekly basis in the case of borrowers with more than Rs 50 million in bank debt. Further, for accounts with an exposure of Rs 20 billion or more, banks will have to put a resolution plan in place within 180 days after a default has been noted. If the resolution plan is not implemented within 180 days, the account must be referred to the IBC within 15 days.
The strict timelines could mean that a larger number of accounts will go into insolvency. Haircuts that banks may need to take and the probability of liquidation in some accounts may also rise. Similarly, under the new scenario, corporate lenders, which have already been under pressure due to rising bad loans and increased provisions, could take another hit.
The new framework is expected to help with early recognition and resolution of bad loans. While this may be positive for the banking sector in the long run, in the short run, banks may come under additional pressure.
Moving on to news from stocks in the pharma sector. Lupin share price is in focus today after it was reported that the company received a ANDA (abbreviated new drug application) approval from the United States Food & Drug Administration (USFDA) for Clobetasol Propionate Ointment.
The drug is a generic version of Fougera Pharmaceuticals Inc's Temovate Ointment, and is indicated for treatment of inflammation and itching caused by a number of skin conditions.
According to MAT sales data, the Clobetasol Propionate ointment had annual sales of around US$120 million in the US.
At the time of writing, Lupin share price was up by 0.3%.
Indian pharma companies catering to the US markets are breathing a sigh of relief. After being adversely affected by import bans and the suspension of new drug approvals from manufacturing facilities in the past three years, there has been a sharp pick-up in new drug approvals in FY17.
However, note that USFDA alerts on Indian pharma companies have increased over the past few years. Regulators used to visit the plants every two years. Now they come every eight months. Increasing inspections have led to a total of 41 import alerts in the past eight years - 33 of them (80%) in just the last four years (2013-16). This clearly signifies increased USFDA scrutiny on Indian pharma firms. If that wasn't enough, increasing pricing pressure in the generics segment has dented realisations.
However, the recent development of USFDA expediting the drug approval process can bring some respite for Indian pharma companies. This comes as drug approvals for Indian companies have gone up 50% in the period from January to June 2017 compared to the same period last year.
While short-term pain is expected, companies with strong R&D capabilities and compliant plants will do well over the long term. The uncertainties make it important to be stock specific in the sector. It is important to look for companies that have the competence and staying power to overcome the challenges.
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