Short Call: Investors in a mood to buy; paint stocks look dull; RBI action ahead; defaults loom on lenders

Action expected to be stock-specific as earnings season gains momentum.

The market continues to struggle for a direction, but more people are looking to buy on declines, rather than book profits. Action expected to be stock-specific as earnings season gains momentum. Many analysts have been flagging the fact that there have been no significant earnings upgrades in the last couple of quarters and that the trend is likely to persist in this quarter as well. Bulls respond by saying that they don’t mind paying extra since the long-term outlook looks rosy.

Shalimar Paints surged 7 percent to Rs 192 on Friday. Hella Infra, which has made an open offer to buy an additional 26 percent in the company (it already holds 25 percent) raised its open offer from Rs 165 to Rs 169.50 over the weekend after having bought 24 lakh shares through open market purchases. Rajasthan Global Securities, which is known for its special situation bets, has also picked around 3 percent in the company over the last couple of trading sessions.

Given that the stock has exceeded the open offer price, it does not seem to be an arbitrage play at this point. Things don't really look good for the paints sector at the moment. A rise in crude prices translates into a surge in the cost of raw materials. The impending entry of Grasim is also likely to shake up the market. Some pressure on profit margins for existing players looks likely, say analysts. Shalimar is not the best placed among paint companies right now, considering that it has been making losses for seven years in a row. Stands to reason that the Hella must have some game plan in mind for increasing its stake in the company.

A week back, RBI Governor Shaktikanta Das warned both banks and NBFCs to strengthen their risk management systems in the backdrop of rising unsecured loans (credit cards, personal loans, corporate deposits). Emkay analyst Anand Dama feels the RBI may not want to derail festive growth but could possibly act  post festive season unless banks and NBFCs take the hint. “If not satisfied, the RBI could increase the standard asset provisions on unsecured loans by around 50 bps or increase capital cost through a 25 percent increase in risk weight (RWA) on overall unsecured loans as of FY24E/incremental loans over FY22-FY24E,” he said in a note.

Put simply, banks and NBFCs may be required to set aside more money to cover potential losses on these unsecured loans. Alternatively, the RBI may push banks to aside 25 percent more money for each unsecured loan they give out. This could make unsecured loans costlier for banks, forcing them to cut back.

UBS believes the risk of defaults in unsecured retail loans is rising, as the share of lending to overdue borrowers (1+ days past due) jumped from 12 percent in FY19 to 23 percent in FY23. It expects the industry's credit losses from unsecured loans to rise 50-200 bps in FY25. Credit losses refer to the money that a bank or lender loses when borrowers fail to repay their loans. The difference between what was originally lent and what is eventually recovered is considered a credit loss.

The share of borrowers with more than five personal loans (PL) rose from 1 percent in 2018 to 7.7 percent in March 2023. Additionally, new personal loan disbursement to borrowers with weaker credit profiles sets the stage for a downcycle, write UBS analysts Vishal Goyal Anish Rai and Yash Agarwal. NBFCs and PSU banks have a higher share of weak personal loan borrowers than large private banks, says the UBS report.

US buyers' interest in electric vehicles is proving shallower than expected, and unsold inventory is starting to pile up for some brands, reports WSJ. Some car companies, such as Ford Motor and Toyota Motor are tempering their expectations for EVs and shifting more resources into hybrids, which are selling in bigger numbers, the report said.

Albemarle Corp, the world’s largest lithium producer, has walked away from its A$6.6-billion ($4.2 billion) takeover of Australian miner Liontown Resources, reports Bloomberg. This follows Hancock Prospecting , owned by Australia’s richest woman, mining tycoon Gina Rinehart, steadily building up a 19.9 percent stake in Liontown—making her the largest shareholder, with enough clout to potentially block a vote on the deal.

China’s rare earth exports in September fell 17.6 percent over August and 9 percent over last year as suppliers sold more domestically to meet robust demand, reports Reuters. Rare earths are used in a range of products, including lasers, military equipment, electric vehicles, wind turbines and consumer electronics. “Domestic demand improved last month thanks to a wave of restocking,” said Yang Jiawen, an analyst at Shanghai Metals Market (SMM).

As Tesla’s growth in unit sales of its cars and SUVs is flagging, some shareholders are pushing Elon Musk to spend on advertising instead of using price cuts to boost sales, reports CNBC. And Musk appears open to the idea. “I think what you are saying does have some merit and I believe in taking suggestions and we’ll try a little advertising and see how it goes,” he said.