If it is any consolation, the Indian stock market has been one of the most resilient in recent months. As the chart shows, it is one of the few markets that have

HSBC Holdings Plc., in a report dated 12 September and titled The World’s Last Bulls, marvels at the fact that bulls, an endangered species elsewhere, are still to be found in plenty in India. Writes HSBC strategist Gary Evans, “We were shocked, then, to find in meeting fund managers in India this week that perhaps two-thirds are outright bullish, some extremely so, and many are puzzled as to why the Indian market has fallen at all this year and why foreigners have been net sellers."

Why the bullishness? The fall in the price of oil and commodities is just one factor. Other reasons, says the report, include new net inflows into equity funds, lower government bond yields, inflation close to peaking, strong corporate balance sheets and gross domestic product growth of around 7%, much higher than in most parts of the world. The problem, as the report points out, is that the Reserve Bank of India’s tightening efforts will slow the economy with a lag. That should lower earnings growth of companies.

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India’s Outperformance (Graphic)

More importantly, according to fund tracker EPFR Global, “So far this year, investors have removed a net $28.6 billion (Rs1.32 trillion) from emerging markets equity funds, the equivalent of some 5% of the assets those funds managed at the beginning of 2008, compared to net inflows of $10.7 billion at the same point last year."

The HSBC report says foreign investors have pulled out of India since the start of this year only 13% of the money they put in during the 2003-07 bull market, much less than they have withdrawn from other markets (for example, 19% in Taiwan, 64% in Thailand and 31% in Hong Kong and China).

The implication: since India is still relatively unaffected, any distress selling by foreign investors reacting to events in the financial sector in the West could lead to more selling in the Indian markets.

That’s not all. A few days ago, the Chinese central bank lowered its policy rate and relaxed the amount of cash that smaller banks have to keep with it. But that has had no effect whatsoever on Chinese stocks. Similarly, the RBI’s measures aimed at improving liquidity in the debt market hasn’t had much of an impact on the stock market. But perhaps that’s because the panic in the West hasn’t yet abated.

The good thing is that the RBI measures seem to have had an impact on the rupee, which may be crucial for foreign investors. Note that the MSCI India index, as on 16 September, was down 8.46% this month in rupee terms, but down only 14.22% in US dollar terms. Although it still outperformed the MSCI Emerging markets index, the extent of outperformance was much lower when adjusted for the depreciation of the rupee against the dollar.

FDA order not fully reflected in Ranbaxy stock

The shares of Ranbaxy Laboratories Ltd have fallen about 30% since news of its trouble with the US food and drug administration (FDA) first became public in July this year. Note that there’s hardly any Ranbaxy stock available in the market, since most of it has been tendered in the open offer by Japan’s Daiichi Sankyo Co. Ltd. This could have helped prop up the Indian company’s shares, since an investor who has tendered in the offer can’t sell his shares even if he wants to.

Although the open offer to Ranbaxy’s minority shareholders concluded recently, the excess shares haven’t yet been credited to shareholders’ depositary accounts. The excess shares are expected to be returned by the end of this week, i.e. 19 September. So, even if an investor wants to offload his shares, he’ll have to wait a few more days. As a result, volumes are unusually low in the spot market. Delivery-based turnover has averaged Rs16 crore since the open offer ended, a sixth of the average in the preceding three months.

But shouldn’t the futures market, where traders aren’t constrained by non-availability of stock, reflect the true value of Ranbaxy shares? There, the shares trade at Rs350, only about 7% lower than the spot price. But note that many large shareholders such as insurance companies and mutual funds either aren’t savvy using the futures segment or aren’t allowed to use them. The true value will be reflected only early next week, after shares tendered in the open offer are released. Unless the FDA reverses its order, the shares could fall further, as investors factor in the impact of lower sales to the US.

According to an analyst who did not want to be named, if the problem results in export restrictions on Ranbaxy, that can impact turnover by about 10%. The US geography contributes 25% of the company’s total revenues of about $1.6 billion (Rs7,400 crore), and the list of drugs on which the restrictions could apply account for about 40% of volumes in the US geography. The list also includes valacyclovir hydrochloride. This is the drug for which Ranbaxy had a first-to-file status in late 2009, after having reached a settlement with GlaxoSmithKline Plc. relating to its drug, Valtrex. This drug is expected to have sales of $1.5 billion by late 2009 and the six-month exclusivity for Ranbaxy could have resulted in revenues of $100 million, says an analyst. This now comes under question.

The uncertainties for Ranbaxy are galore and until the order on export restrictions is reversed, and unless the charges of fraud are dropped (a separate case), there’s little reason why shareholders may want to stay invested. It’s interesting to note, in this context, that Ranbaxy’s promoter group has managed to sell its entire stake at more than a 100% premium to current prices.

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