Short Call | Market upbeat ahead of Q2 earnings; Navin Flourine, Vedanta, bank stocks in focus

The market is heading into the quarterly earnings season with renewed hopes as the June quarter was better than expected or at least not as bad as was feared.

Bulls took a breather as benchmark indices managed to get back above the 50-day moving average. The market is heading into the quarterly earnings season with renewed hopes as the June quarter was better than expected or at least not as bad as was feared. HNIs look for opportunities to book profits, especially in midcaps and smallcaps, while retail investors look for opportunities to buy cheap, meaning any stock that has corrected 10 percent from its 52-week high!

Just a couple of months back, Navin Fluorine had the Street excited when the management had nice things to say in the post-earnings commentary. It said there was much of a downturn due to customers getting rid of excess inventory, order flow in the specialty chemicals business continued to strengthen, contract drug manufacturing business was doing well and that it had identified several late-stage opportunities in that segment. But the string of senior level exits, Managing Director Radesh Welling being the latest, has rattled investors, sending the stock crashing to a 52-week low. The question is: does the sell-off present an opportunity, given the company’s track record so far?

Market reaction to the stock seems to suggest as though the company will take a while to recover from the loss of talent or that there could be some deeper problems. Exit in the senior management is somewhat like promoter selling. There could be multiple reasons, and not necessarily all bad. Players tracking the stock say senior level exits in itself is not bad news but senior level exits at a time of high valuations and cautious business environment make for a bad cocktail.

CEO/MD level exits can be unnerving for investors in the short run, but then one can look to cases like RBL Bank and more recently South Indian Bank. Both stocks have done well despite high profile CEO departures, indicating that systems and processes matter far more than individuals.

The stock rebounded strongly on Friday, but analyst commentary on the demerger is not too positive. Nuvama feels the demerger does not address the debt problem of the parent company and CLSA, while upgrading the stock has said that while the demerger may help the parent to bring in strategic investors and help ease debt burden, only an operational improvement can drive re-rating of the stock.

Quarterly business updates from Karur Vysya Bank, IndusInd Bank and Federal Bank indicate that credit growth continues to remain strong. But in all three companies, growth in deposits has been slower than growth in loans. Seems banks will have to hike deposit rates some more if they must attract savers. Market right now is not so much worried about the growth in loan book as much as it is about the pressure on net interest margins.

Rising interest rates would have shrunk the value of bonds held by US banks in the third quarter, leading to unrealised losses (marked-to-market), reports WSJ. This will add to the balance sheet strain at a time when banks are having to pay higher interest rates to retain depositors. But the situation is not as dire as was the case in March this year when three US banks -Silvergate, Silicon Valley, and Signature - collapsed because of a swift rise in interest rates.

Amid signs that the global transition to clean energy and lower carbon emissions take longer than expected, some fund managers are beginning to cut back on their ESG pledges. That’s because the shift calls for a lot of capital in addition to technological capabilities, S&P Global Vice-Chairman Dan Yergin told CNBC. “If you’re in a money management business, you do need returns,” Yergin said, adding there was a sense of realism setting in among fund managers.

Lithium prices in China have hovers on a near two-year low on concerns about demand, particularly from electric vehicle manufacturers. EV sales growth in China slowed to 37 percent on-year in the June quarter, versus a global average of 50 percent, according to consultancy Counterpoint Research. Lithium prices are down around 72 percent from their record highs seen in November last year.

Saudi’s production cut notwithstanding, OPEC’s crude oil production rose by 120,000 barrels per day (bpd) in September from August – the second monthly increase in a row – on higher output in Iran and Nigeria, according to the monthly Reuters survey.