Short Call | Bull-bear stalemate on; ITC takes a BATtering, Nazara Q3 no pretty sight, downgrade weighs on Tata Chem

Given the strong liquidity in the system, prices are not correcting sharp enough.

“You have no value if you have no liquidity.” - Sam Zell

The RBI kept the benchmark rates unchanged, and it seems a cut may not be on the immediate horizon. But there are other reasons to cheer for.

From the Kotak note on the RBI credit policy:

“The MPC noted support for economic activity from (1) a recovery in rabi sowing, (2) an expected improvement in household consumption, (2) an upturn in the private capex cycle, (3) the central government’s continued capex push and (4) the healthy balance sheets of banks and corporates.”

Add to this, the supposed (and cliched) mountain of cash waiting on the sidelines, and there is a reason to feel optimistic about equities.

But the question remains: How much of it is already priced in?

The price action over the last few weeks indicates that buyers are in no mood to double down even if they are sitting on tidy profits. They will buy at maybe 10-15 percent lower. But given the strong liquidity in the system, prices are not correcting sharp enough.

ITC (Rs 414.45, -4%)

The stock fell as British American Tobacco reiterated its plan to trim stake in ITC. BAT holds 29 percent in the company, and can have management control even with 25 percent stake.

Bull argument: Cigarette volume growth steady, FMCG business scaling up. Excise duty on cigarettes expected to be stable, government also clamping down on illicit trades. Hotels demerge will unlock value.

Bear argument: FMCG margins still below other big players. The stock has already re-rate, any stake sale by BAT could increase floating stock and put pressure on the price near term

Endurance Technologies (Rs 1,950, -1.68%)

The stock fell after weak Q3 results.

Bull argument: Won new BMS order worth Rs 30 crore from RE, and SOP

would start in Jan’25. The company will continue to benefit from recovery in 2W demand.

Bear argument: Passenger vehicle volumes in EU may see slow recovery in coming quarters.

Escorts Kubota (Rs 2,935, flat)

Company’s Q3 consolidated revenue were up 8 percent and profits up 89 percent.

Bull argument: Kubota India’s trading entity’s merger with Escorts will boost the company’s presence in tractor, farm and construction equipment.

Bear argument: Tractor sales for the industry as a whole has been under pressure.

Nazara Technologies (Rs 867.95, -1.83%)

Revenue growth was flattish for the December quarter.

Bull argument: Valuations in the gaming-tech space have now corrected 65–70 percent from the peaks of early 2023, and now look attractive

Bear argument: GST of 28 percent on chance and skill game will affect revenues. Revenues from media rights is under pressure as large TV/OTT deals have been delayed due to ongoing consolidation drive within industry.

Cummins India (Rs 2575, 7.66%)

Stock gained nearly 8 percent on healthy Q3 operating numbers.

Bull argument: Healthy gains in margins, EBITDA and net profit. Record high Q3FY24

Bear argument: Global challenges could continue to have short to medium term impact. Q3 saw exports decline.

Tata Chemicals (Rs 971, -1.6%)

HSBC downgrades stock to ‘hold’, target cut 25 percent by 25 percent to Rs 1140

Bull argument: Dominant market position, strong free cash flows, and has capex lined up

Bear argument: Prices of soda ash, a key revenue driver, under pressure and the trend is likely to persist for a while.