Short Call | Buffett alarm, Nifty charm: Is the DII camel about to buck? Vodafone, Godfrey Phillips in focus

Stock markets are notorious for going up in steps, and coming down through the elevator. What will be the final straw that breaks the DII camel’s back?

Indian markets are riding a wave of euphoria. It's a classic tale of optimism on the brink of misguided euphoria, with greed driving prices into dangerous territory. Kotak Institutional Equities recently remarked that some sectors highlight the robust, long-term growth of the Indian economy, while others reflect "extreme euphoria driven by unfounded narratives.

The Nifty's 12-month trailing P/E ratio, sitting at 24x, is well above its long-term average of 22.5x. More than half of Nifty 50 stocks are trading above a 30x P/E, and the Buffett Indicator—measuring market cap to GDP—is soaring at a hefty 143%, signalling market froth. Yet, domestic institutional investors (DIIs) continue driving markets higher.

The Buffett Indicator’s red alert hasn’t gone unnoticed, with the Economic Survey 2023-24 also flagging growing overconfidence and speculation.

"A high market cap-to-GDP ratio doesn’t always indicate progress... Financial assets are claims on real goods and services. When equity market claims significantly outpace the real economy, it signals instability, not resilience," cautioned the survey. But does this mean a crash is on the horizon?

Experts argue that using the Buffett Indicator as a foolproof signal of an imminent crash can be misleading since it compares m-cap based on future expectations with GDP, a backwards-looking measure of past economic performance. The indicator was also originally tailored for US markets, making it less reliable for India, where stock market participation is still much lower.

Some analysts also argue that valuations are high but can be justified. For now, it seems for every argument, there is a counter argument and investors seem to be pouring in money directly and through mutual funds offering DIIs buying power to create higher floors for at every step of the way.

It’s both good and bad, again, for stock markets are notorious for going up in steps, and coming down through the elevator. What will be the final straw that breaks the camel’s back?

Jubilant Ingrevia (Rs 714, -3.27%)

Nuvama ups target stock, retains buy rating

Bull Case: The company's global leadership in niche specialty chemicals, driven by its lowest-cost pyridine manufacturing, provides a strong competitive edge. With a backward-integrated model that stabilizes raw material costs, the company benefits from robust demand in pharma and agrochemicals, driving consistent growth.

Bear Case: The company faces risks from acetic acid price volatility, impacting its key chemical intermediates segment, which contributes significantly to earnings. Regulatory bans on certain products and increased competition in new segments, like diketene chemistries, could threaten its market position and profitability.

Vodafone Idea (Rs 13.4, -11%)

Goldman Sachs has a 'Sell' rating on the stock and a target price of Rs 2.5, which indicates an 83 percent downside.

Bull Case: The company plans to raise Rs 25,000 crore in debt, though the timeline for this is not specified. Cumulative EBITDA is expected to reach Rs 41,200 crore by FY27, assuming annual tariff increases continue for at least the next two years.

Bear Case: The Company's recent capital raise is incrementally positive but inadequate to halt market share erosion. Peers are expected to spend 50 percent more on capex, leading to a 300 bps share loss for Vodafone Idea over the next 3-4 years. Average revenue per user (ARPUs) needs to rise by Rs 200-270 for sustainable free cash flow neutrality, a low probability in the medium term.

Godfrey Phillips (Rs 7,115, +11%)

To consider an issue of bonus shares in the ratio 2:1 in the upcoming AGM. Bina Modi has also been reappointed as Managing Director. Also recently sold 24Seven, its retail arm.

Bull Case: While the bonus issue doesn't move the needle on the firm's market capitalisation, it is sentimentally positive for investors.

Bear Case: The series of updates could impact the volatility in Godfrey Phillips stock, which is already under the long-term ASM framework. Additionally, over the past five years, the compounded sales growth for the company has remained in the high single digits only.

(With inputs from Neeshita, Harshita and Zoya)

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