Falling knives or bargains? That is the question everyone is asking as always whenever market corrects sharply. The overcrowded bull camp is viewing the fall as an opportunity to buy cheap, while the few in the bear camp see this as the first signs of a downtrend.
We will know only in a few months from now. That is because markets never rise or fall in a straight line. Bear markets have multiple relief rallies (known as sucker rallies in market parlance) before prices finally bottom out. And during these rallies, indices come close to their previous record highs giving the impression that the uptrend has resumed. Players who have seen the bear markets of 2000-01 and 2008-09 will know.
It's different
Post COVID investors will argue that this time is different because the domestic money driving the bull run, be it from EPFO or SIPs, are long term in nature. That means no need for panic selling like in the past.
But the question remains if money will continue to pour in at the same rate if valuations don't make sense.
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The bear camp is getting new members it looks like. Till recently it was only the strategists at Kotak Institutional Equities crying hoarse about excessive valuations. Now they have company in Nuvama's institutional equities team.
Strategists Prateek Parekh and Priyank Shah disagree with the common view that valuations are not in bubble territory.
Flashback 2007
"India’s valuations (absolute, breadth and relative) are at extremes, à la 2007. At such valuations, five-year returns are likely to be subpar (< 5% CAGR) with risk of large drawdowns. Decelerating earnings and weakening US labour market (recession risks?) suggest an inflection point could be near," the duo write.
Market cap to GDP is now 150 percent, like it was at the peak of the 2007-08 bull run. Median trailing Price/Book of BSE500 company is 6x with 15 percent RoE compared with 4x and 25 percent P/B in 2007. While corporate cash flows are better, this time not very different from 2007, the duo say.
And fundamentals are worsening, they warn.
"Earnings growth has decisively moderated, and a downgrade cycle has begun."
Also Read | Time to neither be greedy nor fearful
The weak link
What about the argument of strong domestic inflows?
"Domestically, flows continue to remain strong. but note that household equity exposure now stands at an all-time high and income dynamics are weakening," say Parekh and Shah.
Does that mean the market is poised for a steep correction? Hard to say.
But most fund managers agree on one thing in private. At current valuations, it is difficult to make a lot of money over the next 3 years. And for most investors who have got used to 20-30 percent compounded annual returns, a disappointment could be in store.
Hindustan Zinc (Rs 618, -5.2%)
Reported a decent set of Q1 numbers
Bull case: Highest-ever Q1 mined metal and refined metal production at 263 KT and 262 KT respectively. Commencement of Bamnia Kalan mine to raise metal concentrate capacity to 2 mtpa while 160 ktpa Debari roaster, de-bottlenecking initiatives would raise refined metal capacity to 1.2 mtpa by FY26, says broking firm Antique. Product portfolio improvement (alloy plant and fertilizer plant) could support improved margins.
Bear case: Spot zinc, lead LME prices have softened due to absence of Chinese stimulus and subdued global demand. Valuations expensive at 14.5x 1HFY27 EV/EBITDA, says Antique
Also Read | Could a rate cut by US Fed perk up markets? Here's what four leading fund managers say
Titan (Rs 3,380.85, -2.35%)
Reported earnings for the quarter ended June.
Bull Case: Management optimistic on rising demand and is expanding store count. Gross margin expanded despite higher gold prices. Cut in duty will boost demand.
Bear Case: Unorganized competitors could chip away at market share. Prolonged economic recovery could also dampen sentiment for gold. Could see potential Rs 500 crore of inventory loss, owing to the duty cut.
Dhanuka Agritech (Rs 1,764, -3.2%)
Reported Q1 earnings.
Bull Case: Increased acreages will benefit herbicide products. Dahej plant expected to break even by FY27. Company's new products - Purge, Lanevo, and MYCORe SUPER - are seeing strong market demand, exceeding expectations.
Bear Case: Global recession or prolonged downturn may impact upstream demand. Adverse rainfall could reduce demand in India. Delays in capex and new molecule commercialisation may hinder growth. Initial phases of acquisition may strain Return on Capital Employed (ROCE).
UPL (Rs 528.30, -1.7%)
Released Q1 numbers.
Bull case: After pricing pressure for the past two years, the company now expects prices to stabilise now, with recovery anticipated in H2 FY25.
Bear case: Debt levels remain high, and earnings are still under pressure. Kotak believes the stock needs to correct significantly to factor in the extent of erosion in earnings power and increase in balance sheet stress.
(With inputs from Veer, Zoya, Neeshita, and Vaibhavi)
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