Short Call | Inflation a spoilsport; bulletproof fluorochems; Voltas, Abbot, Bata, Vedanta in focus

India’s macro-economic position still appears reasonable but has worsened in the recent weeks.

"Information is not knowledge, knowledge is not wisdom." - Frank Zappa

For a long time, the market’s pet gripe was that the economy’s consumption engine was firing, but industrial demand was weak. The situation has now reversed, perhaps a reminder that investors can’t always get everything at the same time.

Kotak strategists Sanjeev Prasad, Anindya Bhowmik, Sunita Baldawa are cautioning investors that India’s relatively strong macro-economic position cannot be taken for granted. Reasons: rising food prices, rising crude oil prices, weak tax collections and inflation likely to stay elevated.

India’s macro-economic position still appears reasonable but has worsened in the recent weeks, the trio write. “The improvement in India’s macro-economic position in 2HFY23 had partly contributed to the excitement around the Indian stock market.”

Gujarat Fluorochemicals

Chemical shares had a good run on Wednesday. Possibly a relief rally considering that the overhang of China dumping and weak demand in key

markets persists. But within the chemicals space, investors appear to be willing to give fluorochemical companies the benefit of doubt. SRF and Navi Fluorine shares have recouped their losses over tepid first quarter showing and are now trading higher. This despite the SRF management’s cautious sounding outlook in the earnings call. The Navin management sounded more optimistic, and the market seemed convinced. Gujarat Fluorochemicals is the latest in the pack to report average earnings for the June quarter, but the stock is holding up well. The picture does not look exactly rosy, going by this ICICI Securities note.

“The company has stalled capex by a few quarters for new fluoropolymers and PTFE on weak demand and modular capex flexibility,” write I-Sec analysts Sanjesh Jain, Akash Kumar and Ashvik Jain. But there is cause for hope as well. “The company expects fluoropolymers volumes to normalise in Q4FY24 and ref-gas revenue to recover in H2FY24 on revival of R-125 exports to the US.” The net result is a cut in earnings estimates, and price target but the buy rating stays.

Abbot India

A good set of June quarter numbers by one of the underrated names in the phama sector with a strong domestic focus: net profit was up 40 percent year-on-year and 13.4 percent rise in revenue. Heavy activity in put options of 22,000 strike were seen, with open interest in the said contract almost trebling. On the face of it, activity in put options seems to suggest a bearish outlook. But it could equally as well be a case of bulls hedging their bets, and there being enough other bulls who are confident that the price won’t drop below Rs 22,000 near term.

Vedanta

The stock appears to be stabilising after a sell-off in the wake of promoters selling shares to reduce debt. But the stock appears to be high up on the menu of bears, looking at the open positions in the NSE’s securities borrowing and lending (SLB) window. Short sellers have borrowed around 2.5 crore shares.

Voltas

The stock has made a quiet comeback over the last one month, climbing around 13 percent. The company is yet to announce its first quarter numbers, and market expectations are low, considering it has not been a great summer for air conditioner firms in general because of unseasonal rains. Voltas currently does not have too many backers among analysts at this point, as worries persist over intense competition and margin pressure. The stock has had a poor run over the last year, but heavy volumes in the 780-825 range consistently could suggest that value buyers may be seeing a bargain. Late June, Jefferies had come out with a buy report on the stock, saying that most negatives were already priced in and that the market was ignoring possible upsides in its engineering business.

India Cements

It seems to have become a familiar story over the last few quarters. The company consistently disappoints with its quarterly performance, but the stock moves up after that as bears cover their short positions. Open interest in futures fell over 18 percent on Wednesday. But another consistent pattern in the stock has been that rallies driven by short covering have been short lived, as bears start preparing for the next set of weak quarterly numbers.

Bata India

The stock fell over 3 percent as the net profit declined 10 percent and the topline growth too was not much to write home about. The stock has been among the high-profile laggards over the last year. The stock provides ammunition for those who argue that promoter selling is a good indicator of a stock being overvalued. In June last year, Bata promoters sold 2.8 percent at Rs 1850 share. The stock stayed above that level barely for three months, and since then has been struggling.

Eager beaver

At the Pricol AGM yesterday, the MD promised  to plant one tree on behalf every shareholder who spoke at the event, as part of the company’s efforts to reduce global warming. One enthusiastic shareholder liked the idea so much that he offered to fly down from Mumbai to Coimbatore to plant the sapling himself, as a token of solidarity with the company’s efforts to reduce carbon footprint!! Naturally, the suggestion left many in the audience (and the management) amused.

Bonds don’t lie

Always trust what the bond markets are saying more than what the equity markets are, is one of the time-tested adages in financial markets . And the bonds of regional banks in the US have been indicating for a while that bondholders are not fully convinced that their troubles are well and truly behind, reports WSJ. And the latest slew of downgrades by rating agency Moody’s seems to have only strengthened that argument.