Drugmakers Drag India Stocks to 4-Month Low, Counter GST Gains

(Bloomberg) -- Indian stocks slid to a four-month low as healthcare companies tumbled amid a U.S. probe on producers of generic medicines, overshadowing gains in consumer companies after the government backed a multi-tier national tax regime.

The benchmark indexes capped the worst week in a month, tracking cautious global markets, and a gauge of volatility reached a one-month high as opinion polls showed a dwindling lead for Hillary Clinton before America votes on Tuesday.

“Currently the market is being driven more by foreigners than local investors as volatility has shot up before the U.S. elections next week,” R. K. Gupta, managing director at Taurus Asset Management Co., which oversees $480 million in assets, said by phone from New Delhi. “We are seeing technical selling from overheated levels.”

Foreign funds withdrew $106 million from Indian stocks so far this month, after pulling $746 million in October, amid rising expectations of the U.S. raising borrowing costs. The odds of a Federal Reserve rate increase by year-end rose to 78 percent on Thursday from 69 percent at the end of last week, futures contracts indicated.

Generic Drugs

Sun Pharmaceutical Industries Ltd. tumbled to its lowest price in 28 months, while Lupin Ltd. and Dr. Reddy’s Laboratories Ltd. were among the biggest decliners on the Sensex. An index of healthcare companies slid 4.2 percent, the most since August 2015. Indian pharmaceutical companies are collectively the second-biggest suppliers of generic medicines to the U.S.

Cigarette maker ITC Ltd. rallied 3.6 percent, the most in three months, while Hindustan Unilever Ltd. rose as much as 3.3 percent after the Goods and Services Tax Council decided on a four-tier rate structure in a breakthrough for the rollout of a national tax from April 1.

“The market is drawing comfort from the fact that the GST regime is revenue neutral and non inflationary,” said Nilesh Shah, chief executive officer of Mumbai-based Kotak Mahindra Asset Management Co., which has $9.5 billion in assets. “The U.S. probe on drugmakers could lead to litigation as companies will challenge it. That’s creating uncertainty.”

‘ITC Re-Rating’

Finance Minister Arun Jaitley said Thursday a zero tax rate would apply to half the items in the retail inflation basket to protect consumers from price rises. The new national sales tax structure will replace a welter of levies that imposed heavy burdens on commerce that crossed state borders, creating a single market of 1.3 billion people.

ITC climbed as much as 6.7 percent, the most since May 23, after the government didn’t change effective rates on cigarettes under the new tax structure. Tobacco products will continue to be taxed at 65 percent, Jaitley said. ITC has a 8.5 percent weighting in the Sensex, the third highest, data compiled by Bloomberg show.

The unchanged levy “removes the overhang of a disruptive change in taxation on cigarettes,” Credit Suisse Group AG analysts Arnab Mitra and Rohit Kadam wrote in a report today. “We expect a strong re-rating of ITC.” The stock trades at 24 times 2018 earnings, which is a 30 percent discount to domestic consumer companies, the analyst wrote.

The Sensex has climbed 4.4 percent this year and trades at 16.1 times projected 12-month earnings, compared with a five-year average of 14.4 times.

• Larsen & Toubro Ltd. retreated to more than a five-month low after government sold a 1.63 percent stake in India’s most valuable engineering company.
  
  
• Dewan Housing Finance Corp. dropped 4.1 percent; rival Bajaj Finance slid 3.7 percent and LIC Housing Finance lost 3.2 percent. Lenders have recently cut borrowing costs across segments including retail loans, which make them more competitive versus finance companies, according to Right Horizons Financial analyst Tushar Pendharkar
  
  
• Colgate-Palmolive India jumped 3.1% as its total indirect tax will reduce to 18% from about 25%-26% current rate under new national sales tax structure, Credit Suisse says
  
  
• Jewelry-maker Titan Co. dropped 2.2 after posting earnings of 1.81 billion rupees compared with an estimate of 1.92 billion rupees

To contact the reporter on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net.

To contact the editors responsible for this story: Jeff Sutherland at jsutherlan13@bloomberg.net, Ravil Shirodkar, Andrew Janes