Short Call | Navin’s commentary sparks rush for chemicals, HNI takes shine for BSE, Vedant IGL in focus

Small-caps and micro-caps continue to be in a parallel universe.

“Wall Street has set up what we believe are false expectations, and that’s what I call the “beat by a penny, missed by a penny syndrome.” ~ Chuck Akre

The US economy has shown remarkable resilience to high interest rates, but impressing rating agencies seems to be another ball game altogether. Rating agency Fitch has downgraded US’s long-term foreign currency issuer default rating from AAA to AA+, citing “steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters.” The bear camp in US market is taking heart from this development, as it strengthens their long-standing view that the economy cannot defy the adverse effects of high interest rates for long.

Back home, the India growth story continues to shine bright. While foreign investors have slowed their pace of purchases, local mutual funds are using the opportunity to deploy the cash pile they have been sitting after booking profits over the last month.

The earnings season is now in its penultimate week,

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and for all practical purposes, it has not thrown up too many nasty surprises, other than in pockets like chemicals where investors had already braced for disappointment.

Navin Flourine

The stock jumped around 7 percent on Tuesday as the street appeared to be enthused by the management commentary in the earnings call. This is in stark contrast to the indifference with which the market reacted to the announcement of the quarterly numbers on Monday afternoon.

Weak demand and China dumping have been the main talking points in the chemicals space over the last 2-3 months. So when the Navin top brass said that it was not seeing much of a downturn due to destocking, and that order flow in the specialty chemicals business continued to strengthen, it came as a morale booster to analysts starved of good news. The company also said that its contract drug manufacturing business was doing well and that it had identified several late-stage opportunities in that segment. Navin’s outlook seems to have rubbed off on shares of Atul and SRF as well. Atul and SRF shares are now trading higher than the levels when they reported their numbers. The long-term story of the chemical sector is not in doubt, but investors will be closely watching developments in the short term.

BSE

The stock hit a 52-week high on Tuesday, as the market appears to be betting on yet another margin surprise in the June quarter numbers. Gross operating margins were up sharply to 49 percent (31 percent in Q3) as the bourse managed to trim costs significantly. New BSE boss Sundararaman Ramamurthy has scrapped the incentive programme for liquidity providers in the derivatives segment from April this year, and so there will be further cost savings for the bourse. The key challenge however will be for BSE to grow its topline, even as the bourse appears to make some progress in efforts to strengthen its derivatives offering. The market share gap between the NSE and BSE is massive even now, but Asia’s oldest bourse no longer seems willing to roll over and play dead. That appears to have impressed this midcap value investor/operator with a passion for cricket, and who is also being talked about in market circles as the next RJ in the making, thanks to his appetite for risky bets. This investor and his associates are reported to have taken huge positions in the stock over the last month. Incidentally, BSE is not the only exchange that appears to have caught this investor’s fancy; he is said to have built a sizeable position in the MCX stock as well.

The red carpet treatment

What does it take to be eligible to shop for the Twamev brand launched by Vedant Fashions, and what is the company’s strategy for this brand? The recent earnings call gives some insights.

“We have brought in French consultants to design the experience in these stores to provide an atmosphere of elegance and individuality while considering the psychographics of the target group. We see that the Twamev target audience would have an annual income of Rs 3 crores to Rs 4 crore,” the management told analysts

Manyavar has always been a one-on-one experience where you have one fashion advisor catering to one client. However, in Twamev, it's a 2 on 1 experience, you have one fashion stylist along with a fashion advisor to help you with your purchase decision. And the whole idea is to only inspire you and selling is an outcome of inspiring you.  At the same time, from a hospitality perspective, we've worked a lot in terms of the kind of service levels you want to have at the store. So we brought in hospitality experts to be available at the store. We have a very good refreshment menu and sector, which has also been worked upon.”

More earnings call nuggets

One of the reasons for the yields on equity assets for asset management companies being low is that millennials appears to be in a hurry to cash in on their profits, compared to investors who have been through multiple market cycles.

“What has been coming in the last one or two years, especially the millennials, where we have been seeing some dip in margins for the industry as a whole. The old book generally, they don't redeem, they stay invested for the long term, given the fact they have gone through the cycles, the experience is good,” Birla Sunlife AMC CEO A Balasubrananian told analysts in the call to discuss the quarterly earnings.

Well, the old book also was a new book at some point in the late 90s and the noughties. They would have made the same mistakes as all new entrants to the market and learnt their lesson over time. The good part for today’s new crop of investors is that there is sufficient track record to show that having a long-term approach pays off eventually.

Gas wars

Gas prices may have cooled over the last few months, but city gas distributors are still facing stiff competition from substitutes.

From the Indraprastha Gas concall:

“Our direct competitor is LPG and propane. At this point of time, we are not competitive as many of our customers are stick to LPG and propane. In many cases, people have dual fuel and reduce the consumption of expensive fuel and shift to cheaper fuel. In winter, we’d be able to compete better. Now that we are at par with the alternate fuel as generally happens in month of September, October and during the entire winter. That will be a period when we would be more competitive.”

Volatile underperformers?

There are some stocks where traders’ position shows they are betting on a wide trading range – as much as 30 percent –thanks to their struggle to perform during the year so far and problems faced by respective companies.

For the August series, the top of the list is Gujarat Gas, which has maximum put at 400 and maximum call at 500, signifying a 21 percent expected trading range, Similarly, for Laurus Labs range comes out between 300-400. Others in the list are Zee Entertainment, Aurobindo Pharma and MCX.

A common factor in these stocks is that they have been volatile in the recent past, and the wide spreads indicate that this trend could continue. This has emboldened a section of traders to take positions in deep out-of-the-money options, as these options will give quick bucks if the stock remains volatile.

(Shubham Raj contributed to this article)