Stock markets in India are trading higher today. Gains are largely seen in healthcare stocks and FMCG stocks. While power stocks & metal stocks are witnessing selling pressure.
The BSE Sensex is trading up by 205 points and the NSE Nifty is trading up by 56 points. Meanwhile, the BSE Mid Cap index is trading up by 0.7% while, the BSE Small Cap index is trading up by 0.5%. The rupee is trading at 67.33 to the <>US$.
In the news from the pharma sector. As per an article in a leading financial daily, Orchid Pharma has received an EU GMP (Good Manufacturing Practice) certification on its APl manufacturing facility located at SlDCO Industrial Estate, Alathur, Kancheepuram.
Reportedly, the facility was inspected in November 2017.
Orchid Pharma, due to failure to pay Rs 35 billion, has been referred to bankruptcy and is currently under Corporate Insolvency Resolution Process.
The lenders to the company rejected the resolution plan in May 2018, which may push the company toward liquidation, the reports noted.
The company has also received EIR from USFDA for Alathur facility in Tamil Nadu in September 2017.
Orchid Pharma share price was trading up by 4.9% at the time of writing.
Moving on to the news from the banking sector. With expectations of improvement in bad loans situation in the next couple of quarters, Finance Ministry Official has said that more banks are unlikely to be brought under the Reserve Bank of India's (RBI) Prompt Corrective Action (PCA) framework.
The official further noted that NPAs at banks grew during the fourth quarter of 2017-18 but in the coming months, they are expected to decline sizably, on the back of gaining strength of the debt resolution process under bankruptcy law.
Ministry Official also added that the ministry does not expect more banks to come under the PCA, since there is a clear pipeline for NPA resolution.
Besides, Finance Ministry Official is also expecting improvement in the financial health of PSBs which are on the verge of coming under the PCA, within a quarter or two and added that the recent tight prudential norms released by the RBI on February 12 have added to the woes of the lenders.
Note that, the Nifty PSU Bank index has been under pressure since a while now.
Now, there is a term in investing called Value Traps. Value traps are stocks that are trading at very cheap valuations. These stocks can trade cheap forever and never really recover in terms of stock price performance. There is a reason for this. And the reason is related to structural problems with the company.
The structural problem with public sector banks is the credit appraisal policy. In the greed of balance sheet growth and pressure from the government, these banks have lent to stressed sectors such as power and iron & steel. The result- Gross Non-Performing Assets (GNPA's) of public sector bank have shot up to 11.03% in FY17 as compared to 4.97% in FY15.
Unless such structural problems are resolved it is highly likely that some of these banks act as a value trap and continue to deliver miserable stock returns in the long run.
The returns of PSBs over the last five years have underperformed at the Sensex. Barring State Bank of India, the margin of underperformance has been huge. This is despite the recent run in their stock prices post the government's announcement of the recapitalization plan.
PSB Underperformance vis a vis Sensex
These banks have been the perfect example of a value trap. Even though valuations seemed inexpensive five years ago, it has failed to perform.
While their bad loans struggle has been going on since a decade, there are other issues that have recently cropped up adding to their pile of misery. Bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.
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