Short Call | Mid-cap, small-cap rally in last leg; green push powers Suzlon, Thermax; showtime for PVR Inox; ITC in focus

Rally in mid-cap and small-cap stocks seems to be in the final leg.

“Earnings of most corporations pass through a life cycle which, like the human cycle, has three important phases - growth, maturity, and decadence.” - T Rowe Price

As we get closer to the end of the year, the rally in mid-caps and small-caps might be in its final leg. According to analysts at Elara, continued domestic flows and increased pressure on mutual fund houses to deploy excess cash will drive a near-term accelerated rally in these stocks. And then, the outperformance will reverse as valuation premium has closed gap, according to Dr Bino Pathiparampil, Aditya Jaiswal and Keval Shah. All eyes will then be on large-caps.

Suzlon Energy (Rs 38.8, +3.88%)

Suzlon Energy gained after it bagged an order for the development of a 100.8 MW-wind power project from a global utility company.

Bull case: Renewable energy is the next big investment theme. The company has reduced debt and mutual funds have been big buyers.

Bear case: Sales growth has been negative over the past 10 years. Promoter holding is down. Dilip Shanghvi has terminated his share pact agreement, which means there could be selling pressure. The stock has run up quite a bit, doubling investors' wealth over the last six months.

Thermax (Rs 2820, +4.25%)

The stock gained 4 percent on further investment in a wholly owned subsidiary.

Bull case: It is offering new products in renewable energy space, including bio-CNG, hydrogen and coal gasification. These have limited competition, say analysts. It recently won a Rs 500-crore order to set up five bio-CNG plants across India.

Bear case: New orders are work-in-progress and conversion it into topline growth may take time, while valuations are expensive. Return on equity has been below 10 percent over the last three years. Institutional holding has not gone up over the past one year.

PVR Inox (Rs 1775.05, +0.29%) 

Private equity funds sold 1.87 percent stake in the company, while Norges Bank picked some of it.

Bull case: Ad revenue has recovered about 90 percent versus pre-Covid levels. Mutual funds have been big buyers over the last two quarters, DII stake up 37 percent from 30 percent in March.

Bear case: Concerns about content line-up still persists. Bollywood has a few big-ticket releases in the first half of 2024, while Hollywood lineup is weak due to Writer’s Association strike.

ITC (Rs 458.55, -0.34%)\

Largest shareholder British American Tobacco is open to diluting stake in the company.

Bull case: Cigarette volume growth is strong, the company is now focusing on premiumisation. Premium valuations are justified say analysts, given the defensive nature of business.

Bear case: BAT's selling may cause some pressure on the stock, halting its dream run over the past two years. FMCG business continue to generate lower margins than peers. The government holds 7.82 percent in ITC, which is a major overhang, as it can be sold off any time.