Short Call: All news is good news for market; auto in low gear, ACC, Ambuja Cements, Ashok Leyland in focus

arket rallied on the hope that NDA would return to power with a massive majority and then rallied even harder despite the verdict falling way short of expectations.

Nifty and Sensex hit fresh record highs yet again (yawn) on Thursday. This a market that only wants to look at the brighter side of everything. So, any and every bad news is immediately ignored or spun into something positive. Market rallied on the hope that NDA would return to power with a massive majority and then rallied even harder despite the verdict falling way short of expectations. It was widely expected that the Budget would not tinker with the capital gains tax. Not only were the long-term and short-term capital tax gains hiked, but so was the tax on income from sale of shares in a buyback. All that has done nothing to dampen the enthusiasm of bulls.
And now the first quarter earnings season is turning out to be a damp squib. That should ideally matter because of the sky valuations that most stocks are quoting at. As the popular market adage goes, share prices are ultimately slaves to earnings, right? Wrong. For now, it seems to be the other way around.

In a recent note, Kotak Institutional Equities highlighted the tepid earnings season so far and pointed out that the market has cheered modest beats in the case of certain companies like IT services and ignored large misses of other companies. This ‘asymmetric’ response to 1QFY25 results and the FY25 union budget, according to KIE shows the irrational exuberance in most parts of the market.

“Positive developments (purported or real) are handsomely rewarded through large market cap. gains, even if the news may already be factored in analysts’ estimates and the same news were to recur a few times; capital goods, defense, electric utilities and railways are great examples and (2) negative developments are largely ignored (even real, except for banks). Valuations (and reverse valuations that give a good handle on the ‘absolute’) are largely irrelevant in such a market,” write the trio of Sanjeev Prasad, Anindya Bhowmik and Sunita Baldawa.

How long this disconnect between share prices and fundamentals can continue is anyone's guess.

Ground report

Some more sobering read and this time from Ambit’s Nitin Bhasin. This is what he and his team are picking up through their fortnightly channel checks.

From the Ambit note:

(1) Auto dealers across India are reporting flattish footfalls; discounts range at 4-5% for SUVs and 10% for small cars. (2) South cement dealers say net cement prices are decreasing towards end-July given low demand and companies giving ~Rs10/bag additional discounts. (3) A North-based Tanishq franchisee revealed YTD jewellery sales are flat YoY despite ~20% jump in Apr-May. (4) Real estate agents say buyer hesitancy has slowed sales of flats in the higher price range of Rs14-16k psf in Bengaluru.

ACC (Rs 2,485, -4.1%)

Down for third day on weak Q1 numbers.

Bull Case: Strong balance sheet and Adani Group's leadership to drive robust volume and efficiency growth.

Bear Case: Lower-than-expected demand, insufficient price hikes, and significant deviations in operating costs could undermine ACC's performance, negatively impacting earnings estimates and investor confidence.

Ambuja Cements (Rs 665, -2.2%)

Net profit, revenue decline in Q1 FY25.

Bull Case: Anticipated cost optimisation to boost margins. Strong cement demand driven by government infrastructure projects and affordable housing. Private capex and real estate activity expected to support demand.

Bear Case: Lower realisation and demand in key markets. Higher input costs may impact margins. Also, race for market share gains among key players could come at the cost of cement prices.

Ashok Leyland (Rs 250.05, -2.7%)

Reported July sales numbers.

Bull Case: Could see a pick up in demand following elections, monsoon. Truck volumes could rise as agricultural wages and rural sector improves.

Bear Case: Lower-than-expected sales numbers for the month of July, falling profit reported for the first quarter as well. Lack of sustainable demand recovery could impact profits.

(Inputs from Zoya, Harshita, and Neeshita)