Short Call | Mankind Pharma, Lupin, Mahanagar Gas, perma bear Kolanovic, and midcap sell-off to rule markets

Word on the street is that this is just a bull market correction and that HNIs are still upbeat on small and midcap shares.

Some of the fancied midcap shares took a pounding on Tuesday as benchmark indices closed flat. Word on the street is that this is just a bull market correction and that HNIs are still upbeat on small and midcap shares. That said, there were only sellers in some of the stocks, and tapering volumes over the last few days indicate a ‘distribution pattern’, meaning that smart money may have cashed out for now.

Mankind Pharma

A giant leap for Mankind Pharma shares on Tuesday as they close at a 32 percent premium to the IPO price. The listing day performance came as a surprise to many in the market, because there was not much buzz around the IPO in the retail and HNI circles. The common view till a couple of weeks ago was that Mankind promoters had shot themselves in the foot by asking for a hefty valuation given the largely domestic nature of its revenues.

So what changed? Overall market sentiment for one. Appetite for risk among HNIs has gone up with the Nifty now within sight of a record. The

matter of expensive valuation remains though. How much higher from here after a blockbuster listing is the question. Macquarie’s target price of Rs 1,400 for the stock has already been crossed even as the broker is sanguine about Mankind’s prospects.

From the Macquarie report: “The company’s net profit could double (>2x) in the next three years, driven by: a) continued sales outperformance relative to Indian pharma market (IPM), b) mix shift towards chronic therapies, and c) unlocking of meaningful operating leverage as salesforce productivity improves.”

Lupin 

Lupin shares continue to climb steadily even as risks from an Official Action Indication classification from the USFDA for its Pithampur plant looms. OAI means that violations found during the inspection could potentially compromise the safety, efficacy, or quality of products manufactured there, and broker Nuvama in a note last month said three of the 10 observations were serious.

The stock gained 1.8 percent in a lacklustre market on Tuesday, and is now less than 5 percent from making a 52-week high. The earnings growth story appears to be playing out well, with the bottomline improving for the fourth quarter in a row. There is also chatter about some announcement on the launch of the generic version of anti-asthma drug Spiriva, though a section of the market feels that is already discounted in the current price.

The stock still needs a massive re-rating to go anywhere close to the Rs 1,230 levels seen two years ago. This looks more a long term story if Lupin gets its act right, since possible FDA strictures could be a drag in the near future.

Mahanagar Gas

Are things finally turning corner for city gas distribution companies now that gas prices are easing? Mahanagar Gas shares surged 7 percent in a lacklustre session on Tuesday as fourth-quarter operating margins came in way ahead of what market was expecting. CLSA and JP Morgan have raised their price targets for the stock to Rs 1,330 and Rs 1,240. If you believe them, there is still a 20-25 percent upside left.

CLSA feels the Q4 performance performance will sustain in Q1 as well since input costs as stabilising, and JP Morgan’s view is that the stock is still quoting at a discount to peers like IGL and Gujarat Gas. The stock is up 50 percent from its July lows, but with utility companies, investors are better off tempering their return expections.

The perma bear

JPMorgan Chase strategist Marko Kolanovic maintains that the worst is not yet over for US equities, even as sentiment for equities has improved significantly over the last couple of months. According to Kolanovic, investors are ignoring recession risks and that US equities will struggle for the rest of 2023 as the full impact of the recent hikes feeds into the system and corporate margins start shrinking. Last month Kolanovic had said that even a mild recession could cause equities to tumble 15 percent.

Banking woes

Germany’s financial regulator BaFin on Tuesday warned that the country’s banking system was undergoing a real-life stress test amid the current volatility, and predicted significant weakness for the commercial property sector. Like the US, German banks too are facing the heat of rising interest rates. President Mark Branson told CNBC that there was no crisis at this point, but “we have a nervous time and a kind of real life stress test for parts of the system.”

Ground realty

The impact of rising rates are being felt in the US property market, with home prices declining in 31 percent of the 221 metro areas tracked by the National Association of Realtors.

From the Wall Street Journal:

“Home sales have fallen nationwide over the past year because higher mortgage rates have weighed on home-buying demand and supply has been limited. The effect on home prices has been mixed, but the number of places where prices are falling has risen. Prices declined on an annual basis in 31 percent of the 221 metro areas tracked by NAR, the highest percentage in 11 years.”

Recycled

Global mining major Glencore Plc along with Li-Cycle Holdings Corp. is planning to build a plant to recycle battery metals like lithium, nickel and cobalt, reports Financial Post. This plant in Sardinia, Italia to be commissioned by late 2026 or early 2027 would have the capacity to process 50,000 to 70,000 tonnes a year of pre-treated scrap product known as black mass, making it the largest such plant in Europe.

From Financial Post:

“Shortages are likely to persist well into the next decade while the industry waits for early EV models to hit junk yards in big numbers, and by 2025 scrap supply may only satisfy a third of recycling capacity, according to industry consultancy Circular Energy Storage.”