Short Call | Mid, small-caps may struggle; Tata Chem rides Tata Sons IPO story, J Kumar, JM Financial, Mahanagar Gas, REC in focus

There are talks that fund managers of smallcap funds are booking profits to increase the cash in their portfolios.

“The actual results of an investment over a long term of years very seldom agree with the initial expectation.” - John Maynard Keynes

The Nifty may have made a record high on Wednesday, but the advances-to-declines ratio clearly reflects the nervousness in the market. On the BSE, 3,000 stocks ended lower, compared to 855 that gained. This has happened a few times in the recent past too, but what is different this time is that Sebi and RBI have joined hands to check the froth building in the market.

RBI’s back-to-back actions against IIFL Finance and JM Financial have the market wondering on which NBFC could find itself next in the central bank’s cross-hairs. Such concerns could impact the positions built in the market using borrowed funds. It is a common practice in bull markets for many NBFCs to interpret some of the rules loosely, to be able to lend more to high net-worth individuals (HNIs). The NBFCs would now be wary of doing that.

Also, there are talks that fund managers of smallcap funds are booking profits to increase the cash in their portfolios, lest a sudden wave of redemption is unleashed. This, plus the perception that largecaps appear cheaper in comparison to mid and small caps could result in a flight to safe havens in the short term.

Tata Chemicals: (Rs 1178, +11%)

The stock surged on the narrative that Tata Sons' impending IPO in 2025 could spell a bonanza for the stock because of its holding in Tata Sons.

Bull argument: The value of its holding in Tata Sons is almost equal to its (Tata Chemical’s) present market cap.

Bear argument: Outlook for the main business hazy at the moment as soda ash prices are under pressure.

J Kumar Infraprojects (Rs 637, -1.5%)

The company has got a Letter of Award for a project worth Rs 912.3 crore from CIDCO for coastal road at Ulwe Navi Mumbai.

Bull argument: The order book is projected at Rs 17,000 crore to 18,000 crore for FY24, up from the earlier estimate of Rs 15,000-16,000 crore, according to the company. The management is aiming to improve the operating

margin to 15-16 percent over the next six quarters, against 14-15 percent at present.

Bear argument: The stock has run up sharply over the last year. The market may not be factoring in the execution risks.

REC (Rs 469.65, + 1%)

The stock held firm  amid a selloff in the broader market.

Bull argument: The company will consider the third interim dividend next week. It makes the stock a decent dividend yield play as well. The outlook on the power sector remains bullish. REC should benefit from that.

Bear argument: Valuations appear expensive, compared to historical averages. As health of power discoms improves, more lenders will enter the fray, hurting REC’s competitive edge.

Mahanagar Gas (Rs 1,324.7, -15.38)

The stock fell sharply after the company cut prices of compressed natural gas (CNG) by Rs 2.5 a kg.

Bear argument: Citi downgraded the stock to ‘sell’ from ‘buy’ over concerns about exclusivity and margins. Oil Minister Hardeep Puri said benefits of natural gas sector reforms hasn't reached end-customers and the government will try and enforce compliance by city gas companies for affordable rates.

Bull argument: Nuvama says the price cut enhances CNG’s competitiveness on petrol/diesel rises to 50 percent/35 percent (from 48 percent/33 percent), which should boost volumes further.

JM Financial (Rs 85.50, -10.4%)

The stock fell 10 percent after the RBI imposed restrictions on the company financing against shares and debentures on grounds of serious deficiencies.

Bear argument: Delay in resolution and final findings from the RBI could impact sentiment and earnings given the ongoing boom in the stock market.

Bull argument: The company says IPO financing accounts for a tiny portion of its overall revenues and maintains that it has not flouted any RBI rule.