“Historically, many companies that have had terrible times have come back, or many of them do. A decline doesn’t mean it’s the end.” – Walter Schloss
The earnings season is progressing well, there has been no bad news from the US economy, and FIIs continue to load up on Indian equities. That, in short, is the big picture story on Dalal Street playing right now. There are no clear sectoral winners at this point as investors are constantly churning their portfolios to jump on to the next hot story in the small and midcap space.
There are a few spots of concern though: June exports have fallen sharply, inflation has inched up, and big investors are trimming long-term stakes in companies. For the time being, these are not deal breakers as liquidity continues to be strong and investors don’t mind paying premium valuations.
Polycab
The wire and cables maker’s first-quarter numbers have been well received by the Street. The stock has rallied over 33 percent from its March lows, as investors appear to be comfortable paying premium valuations. The stock is a play on government spending on infrastructure, revival in private capex and pick-up in real estate and infra activities. Easing commodity prices too have helped margins. Quite a few brokerages had turned bullish on the stock in the last couple of weeks. But at the current price, the stock is close to the target that bullish analysts have set for it.
Also, a word of caution from CD Equisearch: “Polycab is investing in new high-voltage extra high-voltage products which will help garner demand emanating from projects related to new smart cities. Its much talked about fast moving electric goods (FMEG) business has barely scaled and thus appears to have limited means to lend velocity to overall sales. Despite ambitious infra targets of the GoI, nerve-wracking targets of bottlenecks in project execution could lend perceptible friction to sustainable demand.”
Havells
Investors appear to be warming up to Havells of late, after a muted commentary after Q4 earnings left the Street disappointed. The company is yet to declare its first-quarter earnings, but ‘buy’ calls are trickling in. So far this week, UBS and Motilal Oswal have come out with positive ratings on the stock. Havells had underperformed its rival Polycab in the recent rally, and it will be interesting to see if it can narrow the gap.
Like Polycab, Havells too will benefit from easing commodity prices. But it is the turnaround in the Lloyd operations that can be a true game-changer. UBS is betting on a faster-than-expected turnaround at Lloyd, and Motilal Oswal is counting on the huge available market and Havells’ diverse product portfolio.
From the UBS note:
“Lloyd is likely to turn around in the next 12-24 months as capacity expansion in South India should not only make Lloyd one of the largest manufacturers of room ACs but also impart competitive cost-based pricing ability which a select few of its peers have. Inflation normalisation, and a sharper focus on branding and distribution should enable Lloyd to hone its competitive edge.”
Contra view on EVs
Helios founder Samir Arora belongs to the minority camp which does not believe that the transition to electric vehicles spells a boom for auto companies. According to him, the sales numbers for auto companies will not change because consumers will now buy electric vehicles instead of the ICE (internal combustion engine) vehicles. And automobile companies have little choice but to invest in EVs because that’s the only way they can stay in business. According to Arora, it is tough to recover investments in the EV space. So, how does an investor play the EV them? Go for the companies that supply to electric vehicle makers, says the veteran fund manager.
Paying for the sin
Those betting on the government to soften its stand on the 28 percent tax on the deposit value of online games and casinos may have to wait longer. The finance ministry is unlikely to consider a review of the GST Council’s decision on the matter, reports CNBC-TV18, citing sources. The council members are of the view that real money gaming should be taxed as a sin good like tobacco and alcohol. And while it does not happen too often, the states appear to have chosen social considerations over revenues, as there were concerns about gaming having a negative influence on the society at large, the youth in particular.
But gaming companies and investors in them may still have a ray of hope. High tax on sin goods has not really curbed the demand for those. Look at ITC and stocks of liquor companies. Will gamers and gamblers find a workaround and adapt to the new reality? That is the question that investors in stocks like Delta Corp and Nazarat technologies should try and figure out.
Stop! Go… Stop! Go…
Paytm shares have had a good run so far in 2023, rallying around 60 percent as the company has been consistently growing its topline and narrowing its losses over the last few quarters. But there is one factor that is putting the brakes on the rally at regular intervals: pre-IPO investors booking profits. Paytm’s two-session rally came to a screeching halt yesterday after reports emerged that SoftBank has sold another 2 percent stake in the digital services firm.
SoftBank has been offloading shares regularly over the last month in small tranches through open market transactions and largely at a profit as Paytm’s share price has been above Rs 830 during the period, which was the cost price for the Japanese investor, people aware of the matter told Moneycontrol. This is the first time that the Japanese investor managed to sell shares of Paytm at a profit since the fintech got listed in November 2021.
A re-rating (if it can be called so) of the stock will hinge on the pace at which the company is able to narrow its losses and match analyst estimates of a breakeven at the operating level by mid-FY25. If the company is able to do that, periodic selling by pre-IPO investors should not be a problem. A near term headwind for incumbents in the financials space, is Reliance Jio’s entry. That is something investors will be keeping a close eye on.
Forced diversification
Only two things are soaring these days – summer temperatures in the US and Europe, and stock markets globally. While regulators don’t have any solution for the first problem, they have come down cracking against the second situation. Many of the largest US investment funds are being blocked from buying more shares in popular stocks due to diversification rules, reports FT.
The S&P 500 has added 18 percent so far this year, but just seven large tech stocks have accounted for the majority of the gains. To take some steam off this lopsided rally, strict regulatory limits have been imposed on major asset managers and mutual fund specialists such as Fidelity, BlackRock, JPMorgan Asset Management, American Century and Morgan Stanley Investment Management regarding their “diversified” funds. Mutual funds that register with the Securities and Exchange Commission as “diversified” cannot put more than 25 per cent of their assets into large holdings —defined as a stock that represented more than 5 per cent of the fund’s portfolio at the time of investment.
This comes on the back of Nasdaq 100 rebalancing to reduce the dominance of the largest groups such as Apple, Microsoft and Nvidia.
Iceberg ahead
Most outsourced programmers in India will see their jobs wiped out in the next year or two because of generative AI, Stability AI CEO Emad Mostaque said during a call with UBS analysts, reports CNBC. But the disruptive impact of AI will be much lower on countries with stronger labour laws, he said. In India, Mostaque said, “Outsourced coders up to level three programmers will be gone in the next year or two, whereas in France, you’ll never fire a developer.”
Abhishek Mukherjee contributed to this article.