Equity markets traded weak on Friday, with the benchmark BSE Sensex closing at a three-week low, with shares of software services and pharma companies under selling pressure as investors remained concerned over their growth outlook. While the NSE Nifty marginally ended in the green, it also posted its first weekly loss in six weeks.
For the day, the BSE Sensex settled at 31,056.40, down 19 points or 0.1 per cent. The wider NSE Nifty50, on the other hand, closed 10 points or 0.1 per cent higher at 9,588.05 level. Over the week, the Sensex shed 0.7 per cent, while the Nifty ended 0.8 per cent lower
"Market continued to consolidate due to lack of major triggers to support the up move, while FIIs were net sellers. US Food and Drug Administration overhangs continue to impact pharma," said Vinod Nair, head of research at Geojit Financial Services.
The US Federal Reserve cutting interest rates by 25 basis points and its hawkish tome on its balance sheet reduction plan it set out this week, also weighed on investors' minds. On Friday, foreign institutional investors were net sellers in the equity market to the tune of Rs 610 crore.
Drug makers were among the biggest losers on Friday. Lupin plunged 4.4 per cent, Sun Pharma was down near 3 per cent and Cipla also declined more than 2 per cent.
The US drug regulator has increased its scrutiny of Indian pharma manufacturing plants in recent times, which coupled with pricing pressures in the world's largest healthcare market, has weighed on pharma stocks. On Thursday, Ipca Labs had said that the US FDA has barred entry of the company's products in the US because of non-compliance with good manufacturing norms at its three facilities. The stock tumbled 8 per cent on Friday.
Software exporters were also under pressure with TCS, Infosys and Wipro declining 1-2 per cent, tracking a slide in tech stocks on the US stock exchanges. Analysts have remained skeptical of earnings outlook of Indian IT companies this year, with increasing clouds of protectionism in the US and companies not able to scale up in new streams as fast as expected.
"The better-than-FY17 dollar revenue growth expectation that our peers have assumed for Tier-1 players in organic growth terms for FY18 may likely move down to being at par or even below as the year unfolds," said Girish Pai, head of research at Nirmal Bang.
This, is due to "efforts to gain a reasonable share in the new services not bearing as much fruit as was expected previously, due to weak capabilities in certain areas," he said, adding that in the traditional business, customers continue to ask for cost cuts.
India's equity markets have surged to record highs this year, backed by strong mutual fund inflows, while foreign institutional investors have also remained net buyers for the year. However, there is some weakness creeping in as wide-spread recovery in corporate earnings remains elusive and economic growth too has slowed due to government's move to ban high value currency notes last November.
"With economic growth grinding to a 10-quarter low in the fourth quarter and with earnings recovery nowhere in sight, 'hope' is the only factor supporting the current giddy levels of valuations prevalent in India," said Prashant Mittal, research analyst at Ambit Capital, this week.
The BSE Sensex is up near 17 per cent over the last one year. Mid-cap and small-cap stocks have run up even more sharply. The BSE mid-cap index has jumped more than 30 per cent, while the small-cap index has surged 37 per cent; this despite any significant recovery in earnings.
"A look at the last 12 quarters does not lead to any sort of rationale to justify the share price run up seen in the mid-cap and small-cap space," said Mittal.
Despite being sellers on Friday, since the beginning of January 2017, FIIs have invested Rs 53,759 crore in India's equity market, as per data from NSDL. Domestic asset management companies too have seen inflows of over Rs 33,500 crore in equity funds.
With valuations of India's benchmark stock indices still at expensive levels and the uncertainties looming ahead from the Goods and Services Tax that will be rolled out from July 1, analysts say some more profit booking can't be ruled out.
