Markets likely to open weak tomorrow and remain listless

The dip we were anticipating has come about. The BSE Sensex ended the day at 17,411points, 167 points lower than the previous close and the Nifty fell 1.09% to close at 5,205 points. The market opened with a big gap following the hike in repo rates by the Reserve Bank of India on Friday evening. It had recovered somewhat in morning trade, but weakened again during the mid-day session and did not recover from there. The central bank surprised the market with an increase in the repo and reverse repo rates to curb inflationary pressures before the scheduled April annual policy meeting.

The Indian government has said that it expects the economy to expand by 7.2% in the current fiscal year and by 8.5% in the next year. The RBI expects the prices of food and petroleum to start coming down once the effect of the interest rate hike comes into effect. The RBI and the government will sit together on 29th March to get a fix on the government’s borrowing programme for the first half of FY 2010-11.

The rate hike took its toll on auto and realty stocks which are rate-sensitive sectors. Among the big losers were Reliance Industries (down Rs16), Housing Development Finance Corporation (down Rs67), ICICI Bank (down Rs19), Infosys Technologies (down Rs18) and Tata Steel (down Rs14). There were a few gainers as well: Reliance Communications (Rs3), Bharti Airtel (Rs4), HDFC Bank (Rs20) and Tata Consultancy Services (up Rs5).

Asian markets were mostly down. The key benchmark indices in Hong Kong, Indonesia, South Korea, Singapore and Taiwan fell by 0.72%-2.05%. US stocks were also down last Friday. The Dow Jones Industrial Average dropped 52 points (down 0.49%) to 10,726 points, interrupting the eight-session winning streak. The S&P 500 index dropped 6.93 points (down 0.59%) to 1,158.91. The Nasdaq Composite Index dropped 19.67 points (down 0.82%) to 2,371.61. All European markets were in the red on renewed concerns over the Greek debt crisis. Dow Futures is trading down 57. We expect the market to open weak tomorrow and remain listless. There will be no immediate uptrend.

Piramal Diagnostic wants to grow by snapping up smaller firms. But this strategy has not succeeded in India so far

Piramal Diagnostic Services Pvt Ltd (PDSL), the diagnostics service unit of Piramal Healthcare Ltd, is talking of acquiring small diagnostics labs across India in its quest for growth. However, the strategy of buying a large number of smaller players (called ‘roll-ups’ in the US) has not succeeded in India. PDSL may not be an exception. There are several problems with roll-ups in general and PDSL in particular.

The company made its last acquisitions in the year 2007-2008 and has been incurring heavy losses for the past three years. After that, the company has not shown any interest in expansion or acquisitions. In its annual report of 2007-2008, it had mentioned that it had acquired 16 new laboratories and completed a three-way merger between Rana Diagnostics, Dr Phadke’s Laboratories and PDSL.

PDSL thinks that there are 10 pathology labs across the country which fit in with its business model, and are ideal acquisitions to look at. It is betting at a minimum turnover of Rs5 crore through this route. Currently it has 135 service centres in the country. We will be surprised if the company succeeds in acquiring at least four out of these 10 that it is targeting.

“In the last two years, the company did not look at any acquisition because it wanted to consolidate its diagnostics business. It is now focusing on buying regional players,” said Sapna Jhawar, research analyst (pharmaceuticals), ShareKhan. “Currently, the company has acquired 20 path labs across the country. In the last two years, the company has not shown keen interest in buying the path labs. Ten is a big number for the company,” she added.

It may be recalled that Piramal tried to acquire Dr Lal’s Path Labs some years back but the deal did not work out. Indeed, Metropolis, the fastest-growing player in the diagnostics segment, is growing by continuously setting up its own laboratories in different parts of the country and even overseas. Metropolis started its operations in 1981 and has 50 plus state of–the-art laboratories across the globe. It is present in places like the UAE, Seychelles, Sri Lanka, Thailand and South Africa. According to various media reports, it is planning to add five more labs this year. Although it recently acquired a majority stake in Bengaluru-based RV Diagnostic Laboratory, Metropolis has grown primarily through its own new labs. It has made only 12 acquisitions in the past five years including a recent one.

There are several reasons roll-ups don’t work in India. First, there are often no sellers. A large nationwide player may believe that it has to only dangle cash in front of tiny players but very often, the tiny player may simply not like to sell out, because the business is not just a question of money but a life occupation.

Second, when a bigger player is looking at buying out a smaller unit, the cost of the property is also a major factor. A more preferred route is a franchise model, but that will yield lower profits for the bigger player.

Interestingly, while PDSL is talking of acquisitions, the business is running at large losses for the last three years. The losses it has incurred over the past three years were Rs3.54 crore (2007), which increased to Rs4.20 crore and Rs3.71 crore in 2008 and 2009, respectively.