Short Call | Can MCX rerate? Contrarian case for buying AMC stocks, SPAC insiders make a packet

Dealers catering to wealthy clients say an increasing number of clients are becoming receptive to buying stocks.

I buy when things are low and no one wants them. I keep them until they go up and people are crazy to get them. - Hetty Green

The Nifty managed to defend 18,600 on Tuesday, and that is giving bulls confidence that the rally has legs irrespective of what happens in the US debt ceiling negotiations. Veteran traders, however, are not taking things for granted. Two of them told Short Call that they were holding on to their long positions created at lower levels, but not looking to add to them at these prices.

The popular view: a steep fall looks unlikely, but the rise hereon is likely to be a slow grind. There are enough positive signals though — cash market volumes are picking up, market breadth continues to be positive (more gainers than losers) in May, and net purchases by foreign institutional investors. Dealers catering to wealthy clients say an increasing number of clients are becoming receptive to buying stocks, but there are still sceptics, though in a much-reduced minority.

Multi Commodity Stock Exchange

The stock rallied around 4 percent in Tuesday’s lacklustre session, and has over the last week recouped losses in the wake of its disappointing fourth quarter earnings. Trading volumes have been higher than average in the last couple of sessions. Chatter that a few HNIs have turned bullish on the stock, that has had a dismal run over the last six months since peaking at Rs 1,660 levels. The bear case for the stock has been the delay in implementation of the company’s new software platform, developed by Tata Consultancy Services.

The delay meant that it had to pay higher charges to its old software vendor 63 moons for extending support services till the new platform became operation sometime in the second quarter of the current quarter. The increased expenditure was clearly visible in the March quarter numbers, with the company reporting zero operating profits.

An added disappointment for the market was that operating revenues too were down sequentially. Players tracking the stock say that things are unlikely to get any better for the June quarter as well, but operating costs should come down significantly once the migration to the new platform is complete. There remains the question of operating revenues and margins though, a dramatic improvement in which is required if the stock has to get rerated.

To put the numbers in perspective, the company reported a topline of Rs 514 crore and an operating profit margin of 28 percent for FY23. In FY13, the company had reported a topline of Rs 514 crore and an operating profit margin of 60 percent. MCX is seeing good interest in the recently launched options contracts, but the activity is nowhere close to the frenzy see in equity options traded on the NSE.

Till there are signs of a significant pick-up in average daily trading volumes, and the bourse being able to capitalise on it through higher transaction charges, the stock may remain an opportunistic trading bet.

HDFC Asset Management

The stock has rallied 10 percent over the past week, supported by good volumes. There have been pullbacks in the recent past too, none of which have sustained. That has been the case with AMC stocks in general, even as assets under management have been steadily rising.

For some time, the popular view was mutual funds would be the automatic beneficiaries of rising retail investor interest in the stock market. That theory soon lost appeal when the market noticed that burgeoning assets under management (AUM) was not exactly translating into bumper profits for the asset management companies.

One reason has been the growing popularity of passively managed funds, where the fees are much lower than those for actively managed funds. But the bigger worry now is the threat to AMCs’ profitability because of the regulator’s drive to lower costs for unitholders.

Brokerage house Nuvama acknowledges the pain to AMCs’ bottomlines because of the proposed regulatory changes, but feels there is still a case to take a contrarian view on the sector as profitability could be set to improve.

From the Nuvama report:

“The operating landscape at large is conducive for long-term growth. First, yield decline is decelerating as legacy AUM now makes up a relatively modest 40–50 percent. Second, competitive intensity in NFOs is markedly lower—in the wake of moderating equity inflows. Lastly there are only 37.7 million unique investors in a country of 435 million PAN holders and about 58 million tax payers. Furthermore, there is no incentive for distributors to sell passive schemes.”

Coming back to HDFC, the company’s operating performance has been consistent over the last 11 quarters, but on the flipside, the bottomline has been rangebound. The AMC is slowly regaining some of its lost market share, but it faces a problem similar to that at Interglobe Aviation—a large shareholder selling stake at regular intervals. Abrdn Investment Management has halved its stake in HDFC AMC over the last couple of years, but still holds around 10 percent. This, brokers, feel could limit upside in the stock near term.

Insiders gain

Executives and early investors in companies that went public via special-purpose acquisition companies (SPAC) made a fortune—collectively $22 billion—for  themselves by selling shares before prices collapsed, according to a WSJ analysis of insider trade filings by 460 companies.

From the report:

Companies that went public this way have lost more than $100 billion in market value. At least 12 have filed for bankruptcy and more than 100 are running low on cash, battered by higher interest rates and rising costs.

“It’s easy to understand why executives at the companies went with this option,” said New York University Law School professor Michael Ohlrogge, who studies SPACs. “It wasn’t because it was a better financial technology—it was because it was just better for them.”