Short Call: Chola the new Raja among NBFCs? IEX rebound, HNIs’ Dubai option, broking wars, and gold

The south-based non-bank lender is the hot favourite in the NBFC space at the moment, with the stock up nearly 40 percent in just over a month. Strong March quarter earnings is further fuelling the frenzy, as leading foreign brokerages like JP Morgan, CLSA, Macquarie and Jefferies have raised the earning estimates and price targets for the stock.

The company has been trying to diversify beyond its mainstay vehicle finance operations, and the latest quarterly numbers show that the new businesses are beginning to bloom. Most analysts have been positive on the stock for over a year now, but that has not translated into a big change in

institutional shareholding in the company, which has stayed around 40 percent over the last four quarters. Foreign funds increased their stake by a couple of percentage points, but domestic funds cut their exposure by the same number. The spectacular run-up in stock price over the last year (+66 percent) means that the undervaluation argument may no longer hold at roughly six times trailing book value. Also, the stock is now quoting close to the price targets set by brokers bullish on it.

The market is upbeat on Chola’s new business lines—consumer loans, secured business loans, personal loans, SME financing. But as broker Prabhudas Lilladher points out, the NBFC also needs to show that it can maintain the asset quality of the new loans. “Re-rating can happen once asset quality holds up, as the book of new business verticals mature,” says the PL note.

Indian Energy Exchange

Shares of Indian Energy Exchange defied the bearish trend on Friday to close at their highest level in over six months. The stock has now gained around 25 percent from the lows of early April when chatter about the Dalmia Group looking to sell its stake in the company triggered a sell-off. Talk of the stake sale has died down for now. But the operating performance is yet to show signs of a turnaround. Volumes traded on the exchange have been flattish for the last few months. April volumes were up 6 percent year-on-year, but down month-on-month. While power tariffs have cooled from the recent peaks, much of the action is happening in the day ahead market (DAM) rather than the more lucrative term ahead market (TAM) from IEX’s perspective. That’s because buyers of power feel prices could fall further given declining coal prices.

Arbitrage opportunity

Derivative market traders say big money is pouring into the futures and options (F&O) segment through the Gift City route. A lion’s share of it is coming from Dubai-based NRIs who are entrusting their money to algo trading firms on an assured return or profit sharing arrangement. This apart, a lot of money is also said to be flowing out from Indian shores to Dubai and then finding its way into the F&O market.

Given the tax exemptions offered by the Gift City, many HNIs based in India are finding this an easy way to juice up their returns. Dubai is turning out to be an attractive destination for many wealthy Indians looking to invest their money. According to a report in The Economist newspaper last week, Indians were buyers of $4.5 billion (over Rs 35,000 crore) worth of Dubai realty in 2022. To put that number in context, sales of the top five listed Indian realty companies in FY23 was barely Rs 15,000 crore.

Broking wars

Just when one thought that broking rates have hit the rock bottom, a fresh price war appears to be in the offing. Stock Edge founder Vivek Bajaj last week took aim at discount brokers charging a flat rate per trade when he tweeted: “Per order brokerage is a trap for small traders. When anyone wants to trade One lot, the overall cost looks higher as the natural tendency is to trade more lots with the same cost. This increases the quantity, hence risk. Especially for scalping.”

The market saw this as a barb against brokers like Zerodha and Angel, among others, which charge a flat fee of Rs 20 per trade. Bajaj was quick to respond with another tweet that he was not against Zerodha and that Nithin Kamath has been an inspiration for the industry in general. But the damage appears to have been done. Already many low profile brokers are offering zero charges to high volume algo traders for whom brokerage matters a lot, (literally speaking) because of the sheer number of trades they execute.

Many brokers have also slashed the brokerage charged as per lot after the NSE reduced the lot size of Bank Nifty. Will be interesting to see how the big players respond. Watch this space.

Double-edged sword

On Friday, JP Morgan Chase upgraded its ratings on regional bank stocks Western Alliance, Zions Bancorp and Comerica to ‘overweight,’ saying market concerns about the health of these banks were exaggerated. This triggered a rally in shares of regional banks across the board. But that still does not mean the worst is over for regional banks, according to CNBC.com’s Daily Open.

“If stocks can swing so drastically in one direction on the back of a note, they can do so in the other at the faintest whisper of trouble. What we’re seeing isn’t renewed confidence, but continued volatility.”

Don’t bank on Fed

For those hoping that interest rates will start coming down in the not-so-distant future, here is a nugget from US-based investment manager BlackRock’s weekly newsletter suggesting why that is unlikely.

"Policy rates used to fall quickly as an economic downturn struck, pushing yields lower –but we think sticky inflation makes that unlikely. That’s why we think long-term government bonds’ ability to offset selloffs in risk assets will be less now: We don’t see major central banks coming to the rescue of the economy with rate cuts this year. We see the Federal Reserve and European Central Bank hiking rates again this week even as growth takes a hit."