“You can only know so many companies. If you’re managing 50 or 100 positions, the chances that you can add value are much, much lower.” - Lou Simpson
At the start of this earnings season, banks were the clear favourites. Even after accounting for slightly lower net interest margins because of rising deposit rates, they remained one of the best stories on the Street. That view has changed over the last few weeks, with analysts and investors now fretting about the pressure on NIMs.
That’s surprising because the pressure on NIMs was expected, and banks had hinted as much while announcing their March quarter numbers. The view gaining ground is that the banks are fairly valued at current levels, though some of the good public sector names are offering a better risk-reward ratio. Over the last year, strong credit growth has been a major driver of the banking story. The rethink on banking stocks could mean that the Street is not sure if credit growth will be as strong this year as well. If demand for credit remains strong, then margin pressures should not be too much of a worry. But if credit growth falters for whatever reason, the disappointment could be acute considering that institutional investors have a much higher exposure to the sector than they did a year ago.
Analysts say that much of the floating rate loan book has been repriced higher, and gains on that front are likely to be limited. At the same, investments in branch and technology could keep profit margins in check.
Kabhi Khushi Abhi Gum
A decent set of June quarter numbers from adhesive maker Pidilite if one were to focus on margins (up 450 basis points year-on-year) and the bottomline (up 32.5 percent YoY). The market responded by pushing the stock 2.5 percent lower at close. One explanation for the weakness in the stock could be that the Street is disappointed with the muted topline growth (up 5.6 percent).
The Pidilite management need not be dejected. Richly valued stocks in general are not finding takers in this market. And Pidilite is quoting over 90
times trailing one-year earnings. Look at how stocks like Asian Paints, Titan and Asian Paints have been faring of late. While announcing the March quarter numbers, the Pidilite management had said that it was looking ahead with cautious optimism even as it maintained its double digit volume growth with 20-24 percent margin guidance for FY24. Investors would be waiting to hear the company’s guidance after the latest performance, before firming up their view.
Falling raw material prices come as a relief to Pidilite’s margins, but as my colleague Sachin Pal from the Moneycontrol Pro team points out, it also strengthens the hand of unorganised player, which then start snapping at the heels of the established players. Also, the market will now watch the incremental returns from capital deployment in new businesses.
“When you have an outsized share of the key market you operate in (adhesives in the case of Pidilite), further returns are limited. That explains why market leaders Asian Paints, Astral and Pidilite are now diversifying into other areas. But the returns from the new businesses will be slow to come,” Pal told Short Call.
Berger Paints
For all the hand-wringing over rising competition in the paint industry because of Grasim’s entry and the JSW Paints upping its gains, Berger Paints has not fared too badly. The June quarter numbers have been better than expected, the company has improved its market share in the decorative paints business, and is expanding its distribution network aggressively. The shares are near their 52-week high, but the Street appears to be divided.
The issue seems to have more to do with valuations. At 70 times trailing earnings, analysts feel the stock is reasonably valued. To be able to earn a higher valuation multiple, investors will want proof that the June quarter numbers were not a one-off and that Berger can sustain the performance in the face of rising competition from both Asian Paints and Grasim.
HSBC is among the bulls on the stock with a 'buy' rating and a target price of Rs 790. Nomura and Morgan Stanley have lauded the June quarter performance, but have a neutral rating on the stock.
Dr Copper
China’s largest private copper producer Nanfang Nonferrous is expected to commission its new smelter capacity by October, earlier than expected, Reuters reports, quoting unnamed sources. Nanfang’s new copper plant will more than double its total copper production capacity to 700,000 tonnes a year from 300,000 tonnes.
So what?
Rising domestic copper smelting capacity in China means local miners will respond by stepping up extraction and process more raw copper ore. This in turn means less appetite for buying refined copper from foreign companies.
China stimulus
With another major Chinese property developer in trouble, global investors are waiting to see if China will come up with a stimulus package for the real estate sector. But even if the government were to announce one, would that be effective?
From Bloomberg:
Massive oversupply of housing means it will take a while for any property stimulus to flow through to actual construction, if it does at all. With a shrinking population and slowing urbanization, there are fewer structural factors driving housing demand in China as well.
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