Short Call | Banking story finds takers; LTI Mindtree, Som Distilleries, Amara Raja Batteries in focus

While valuations of tech companies in India have come under fire, investors are extremely bullish on the country

Indecision has probably cost investors more than bad judgment. - Arthur Zeikel

Banking stocks once again appear to have regained favour with the Street, even as the earnings announcements so far from the sector have been a mixed bag. Concerns over rising deposit rates appeared to have eased somewhat, and investors seem to be turning hopeful about corporate demand picking up.

According  to Mahindra group CEO Anish Shah, capacity utilisation across sectors is picking up. Cement and auto sector utilisation was about 80 percent, electronics 77 percent, metals 90 percent, textiles and apparel around 75 percent, he pointed out at a panel discussion on CNBC-TV18 yesterday. Sectors like hotels too were adding capacity, he said. One major problem area for banks was that corporates flush with funds had not been borrowing enough, and capacity utilisation was at a level where it did not merit further investments. The second part appears to be changing now with a pick-up in capacity utilisation.

LTI Mindtree

LTI Mindtree shares were in demand earlier this month when the stock was to be included in the Nifty. The stock rallied over 20 percent from its lows in

late April to a 52-week high of Rs 5,430. But inclusion in an index can help only so much. The fundamental side of the story will come into play now that the company has declared its first quarter earnings.

The near-term picture does not look promising, though, with the management telling analysts in the earnings call on Monday that "decision making timelines were getting extended" (meaning slower order flows), clients in Europe were assessing deals carefully, some assumptions made at the start of the year have gone awry, and that double digit growth in FY24 looks challenging. The sudden fall in the stock price last week to sub-5,000 levels indicates that the Street may have been bracing for a subdued growth outlook. Derivatives data indicates some short-covering of positions on Monday, but if the 'sell' and 'underweight' ratings from leading brokerages are any indication, then bears would be returning in full strength shortly.

Revving up?

The season of block deals does not seem to be nearing an end. While regulations bar promoters from offloading shares around the earnings season, no such restrictions apply for institutional investors. CNBC-TV18 reports that Clarios ARBL Holding LP, classified as a foreign institutional investor and holding 14 percent stake in the company, is set to sell its entire 14 percent stake in the company. The stock has been an underperformer over the last three years, barring a brief spell when it doubled from its Covid low in March 2020 to a peak of around Rs 1,006 in January 2021.

While the EV story is still hot, the battery story has not been, as can be seen in the middling performance in Amara Raja’s rival Exide as well. Over the last couple of months, majority of the stocks where block deals have taken place have seen a decent run-up in the following weeks. The challenge for a similar run-up in Amara Raja is that investors still seem to be unsure about where battery makers fit in the new order of things in the automotive world. And yet, this also happens to be a market where investors are hungry for new stories given that valuations in most sectors have become pricey. The profile of the incoming investors will be a key factor for a possible rerating.

On a high

At a time when most promoters are busy trimming stakes, Som Distilleries’ promoter group comes across as an outlier. Last week, the company’s board discussed a proposal for allotting 51.5 lakh convertible equity warrants to the promoters at Rs 275 apiece. Founder JK Arora’s faith in his business appears to be paying off well. And it once again underscores the stock market adage that a promoter buying shares is always a better indicator than promoter selling shares. Between December 2021 and June 2023, promoter holding in the Karnataka-based beer major has risen from 24.46 percent to 34.46 percent, with Arora’s stake going up from 9.6 percent to 19.56 percent.

Som had a blockbuster FY23, with revenues more than doubling and the company turning corner with a net profit of Rs 60 crore against a loss of Rs 10 crore. Earlier this month, the company said that it has managed to wrest market share from United Breweries, and yesterday it said that it had got the permission to supply beer in Rajasthan, one of the top five alcohol consuming markets in India.

The stock has been on a tear over the last year, surging four-fold to an all-time high of Rs 320. And while Arora & Co may have conviction in their story, institutional investors are not biting yet. Combined FII and DII holding in the stock is less than 1.5 percent, compared to 2 percent at the end of March 2021.

Wipro finds takers

After a struggle of several months, IT stocks have seen a newfound zeal. Though it is hard to pinpoint the reason behind this – low level buying, or market discounting recovery in demand a couple of quarters ahead – the truth is, in the last three months Nifty IT has delivered 15 percent returns.

This has led to several stocks from the sector giving breakouts. The latest in the list is among the worst performing major IT stocks in the recent past – Wipro. On July 17, the stock broke above the resistance zone that was the supply zone since last October.

Resistance zone indicated by blue line. Source: TradingView

As the resistance zone was breached, Wipro saw a massive jump in put writing. The 415 strike on Wipro saw a 31-fold jump in put contracts, meaning bulls are looking to capitalise on the break of resistance with stop loss at this level. As seen from the chart, this was also the resistance level. However, the log upper wick on the candle suggests some profit booking. The trade today will be key to determine if this will be a convincing breakout or another false breakout.

Shubham Raj contributed to this article.