Short Call | High rates and deep bites; mixed outlook for steel; HDFC AMC, Vodafone, Gujarat Gas in focus

According to Kotak Institutional Equities, ‘risk-free rates’ are expected to stay high.

“When there is a lot of dry tinder out there, you never know what will set it alight.” - Henry Paulson, ex-US Secretary of Treasury to George Bush in 2006, before the sub prime mortgage crisis broke out

Investors in the US have made peace with the realisation that the Fed will not be on an overdrive to lower the rates this year as was thought earlier. Why should we worry, ask investors in India? After all, India is a capex-driven story and not so much driven by consumption, goes the argument. At the same time, given the weakness in the rupee, the RBI is unlikely to cut rates before the Fed does. If crude prices continue to rise at the current pace, it is bound to feed into inflation. Also, there is a growing feeling that commodity prices in general are likely to inch higher. Maybe, rate cuts look unlikely, but there is a good chance that interest rates in India too stay high for a while.

According to Kotak Institutional Equities, ‘risk-free rates’ are expected to stay high. The broker expects real interest rates (nominal rates minus inflation) to be positive in the foreseeable future. Good news for savers but not so much for borrowers. From an investor’s perspective, fixed income will be a good alternative should equities fail to perform because you can earn decent returns without fretting too much.

Steel

Steel stocks have had a decent run over the last month. Whether the enthusiasm for them will sustain depends on how the market looks at the fourth quarter numbers.

The operating performance will be better compared to the December quarter, but weak when compared to the March quarter numbers last year. Steel prices are down year-on-year and coking coal prices are up.

“Overall, we expect EBITDA per tonne to contract by Rs 3,500-4,000. Primary steel producers are expected to record an 8 percent YoY decline in

topline on suppressed prices partially offset by higher volumes,” says a note by Systematix.

So what explains the bullish outlook on steel? The market is betting that the government will announce some measures to curb dumping of Chinese steel into India, which is still happening through workarounds. Two, bulls are hopeful that the Chinese government will announce some measures to revive the economy, which could (a) increase demand for steel and (b) stop China from dumping steel elsewhere.

HDFC AMC (Rs 3,734, +2.3%)

The stock gained in a volatile session when the markets were trading down.

Bull argument: According to Nuvama, the AMC had the best in class performance in parameters like active equity market share (12.6 percent, up 90 bps YoY),  market share of unique individual investors (21 percent, up 400 bps YoY).

Bear argument: Investors shifting more to ETFs and passive funds will lead to lower fees for AMCs.

Gujarat Gas (Rs 553.85, -3.3%)

Gas prices are likely to cool off, making room for margins for the company.

Bull argument: Some amount of moderation in gas prices could be beneficial, believe analysts at Prabhudas Lilladher, as it could make industrial gas competitive vis-à-vis propane.

Bear argument: Analysts remain cautious about the stock as the company continues to face competition which could impact margins going forward. Volume fell in the third quarter as more customers shifted to propane.

Vodafone Idea (Rs 12.9, -1.9%)

The debt-ridden telecom major is set to launch India's largest follow-on-public offer on April 18.

Bull argument: The FPO and the full fundraising plan could help Vodafone Idea augment its 4G and 5G network, improve near-term competitiveness, and arrest market share loss.

Bear argument: Analysts remain cautious due to continued losses, no visibility on repayment of full government dues, prevailing competition from Reliance Jio and Bharti Airtel, and equity dilution concerns. CLSA estimates annual spectrum and AGR payments of about $4 billion per annum (about Rs 33,000 crore per year) will fall due. "Vodafone Idea faces a financial crunch in FY26, unless the government converts debt principal to equity at the end of the moratorium," it said.

(With inputs from Yash, Anishaa, Ananthu)