Short Call | Earnings picture hard to ignore; L&T, Dixon, Alkem, Kirloskar Ferrous in focus

Big surprises are coming from a handful of companies.

Much of the talk still is around liquidity, even as the market seems to have quietly slipped into a consolidation phase. But the earnings side of the equation cannot be ignored altogether.

Umesh Sharma of HDFC Securities makes a point. According to him, only one-third of the Nifty companies have delivered positive surprises during the December quarter. And the big surprises are coming from a handful of companies, Tata Motors and Tata Steel were two such. He sees investors being choosy as the time when you could buy anything and expect the market to be forgiving seems past. And this could be particularly true of PSU stocks, which have run up quite sharply.

From a note by Kotak Institutional Equities:

“A large number of the PSU outperformers have seen little-to-no upgrades to their FY2025/26 EPS estimates. Further, the few cases of earnings upgrades stem from non-sustainable factors, such as benign government policy on pricing of retail automotive fuels.”

Kotak strategists Sanjeev Prasad, Anindya Bhowmik and Sunita Baldawa are unsure if most PSU stocks will see meaningful earnings upgrades over the coming 12-24 months, to be able to justify the high valuations.

The stock was among the prominent losers on Monday in the small cap space and is now down around 14 percent from its record high.

Bear argument: Margins under pressure as iron ore prices have shot up following resumption of exports. The company says it has shut down blast

furnace, which may have a 20,000-tonne impact on sale. Pig iron prices have gone down sharply. Strong demand for castings from commercial vehicles and earth moving equipment partly offset by weak tractor sales.

Bull argument: The company has the highest market share of pig iron, backward integration projects give it an edge over rivals. Has been able to integrate ISMT’s operations with itself ahead of Street expectations.

Brokerage firm CLSA has rated the stock a ‘buy’.

Bull argument: Order wins have been strong. Best placed to ride the uptick in private capex. The company’s return on capital employed (RoCE) has improved significantly.

Bear argument: Market worried about slowdown in orders in the Middle East.

India Today reported that the income tax department was probing tax evasion by the company. Alkem later denied allegations of tax evasion.

Bear argument: Around 82 percent of domestic sales is dependent on acute therapy and demand will be affected by variability of season and infection. The stock may face more volatility due to the allegations. Valuations not cheap. Recently BOB Capital Markets downgraded its rating on the stock to sell, citing stretched valuations.

Bull argument: Cash generation stood at Rs 600 crore in Q3, the company said in its recent earnings call. The biosimilar business is guided to break even in FY24.  Tax rate to remain low till FY26 due to a tax holiday at the Sikkim facility.

Dixon Technologies signed a contract with Compal Smart contract for mobile phone manufacturing.

Bull argument: The management is confident of healthy revenue growth, led by increasing mobile segment demand, new product launches, and new customer additions across segments. Laptop market is import-driven and the company anticipates a shift towards local manufacturing, which could be a key driver for Dixon Technologies' growth, supported by the PLI scheme.

Bear argument: Increased capacity in the mobile segment is helping the company’s revenue visibility but coming at the cost of margins, analysts fear.