Short Call: NBFCs face struggles; hospitality shines; focus on Navin Fluorine, Zomato, Wockhardt, Varun Beverages

Market At Record High

“Every once in a while, the market does something so stupid it takes your breath away.” Jim Cramer

The spreads of AAA and AA-rated corporate bonds (difference in yields between corporate and government bonds) have widened by 18-23 bps over the last year, according to an IIFL report. There are three reasons for this: higher FII flows have led to the softening of G-sec yields, more NBFCs are raising funds through corporate bonds as banking funding has reduced, and lastly, liquidity, in general, is tight. The report says this spells bad news for lower-rated NBFCs, where the spreads are already wider than those seen during the taper tantrum and IL&FS. The IIFL analysts expect the cost of funding for lower-rated NBFCs to increase more compared to their AAA-rated peers.

Also, as NBFCs diversify away from bank borrowings, loan growth for the smaller players is likely to slow down. That is because as the cost of funds rises, these NBFCs will need to generate a higher return in an already competitive market.

Hospitality

Things appear to look good for the hospitality sector though average daily rates (ADR) grew at a slower pace of late because of elections and climate issues, according to Antique Stock Broking.

From the report:

“Our checks suggest rates should improve in the second half of FY25, with a marginal scope for improvement in occupancy. Overall, for both corporate and leisure, we expect rates to bounce back strongly in the second half of FY25. During FY24, the industry witnessed a rate growth of 20% for large hotel chains such as IHCL, Marriott, and EIH in India, and the momentum is expected to remain solid on the rates front in FY25 as well.”

Zomato (Rs Rs 203.5, +1.6%)

There is chatter that the stock may be included in F&O segment, Nifty 50 index

Bull case: According to Nuvama, if Zomato enters Nifty 50 index, it could attract $491 million in passive fund buying. More people are now comfortable with the idea of ordering food online. Also, Zomato has a comfortable lead over its nearest rival, Swiggy.

Bear case: Subdued urban consumer sentiment hindering growth, high competitive intensity, and tighter regulations could affect revenues and profits. Significant consumer adoption of the ONDC network could have some negative impact on take rates, which is also a key risk.

Navin Fluorine (Rs 3624, +1.2%)

Plans to raise Rs 750 crore through a qualified institutional placement.

Bull case: The company’s margin Contract Development and Manufacturing business expects significant revenue growth in CY25E and CY26E, with orders indicating a multiplying effect over time, driven by multi-year contracts, according to broker KR Choksey.

Bear case: Gross profit margins are yet to show signs of recovery. Increase in supply of shares near term because of QIP issue. Valuations are not exactly cheap despite prolonged underperformance. While domestic funds have raised stakes recently, foreign funds have trimmed stakes.

Wockhardt (Rs 824, 20%)

The stock hit the upper end of the intra-day circuit filter. The company told CNBCTV18 last week that it had used its novel antibiotic drug WCK 5222 for compassionate use in 30 patients in India, and it was 100 percent successful.

Bull case: Company set to launch WCK 5222, or Zaynich, in India by the end of 2024-25, followed by a global launch in 2025-26. It expects no competition for this drug worldwide for at least the next 15 years as there is no other similar drug in research pipelines.

Bear case: The company still loss making will need more than one blockbuster drug to see a sustainable rerating

Varun Beverages (Rs 1,615, -0.9%)

Likely a strong June quarter for summer-specific FMCG products due to soaring temperatures and heatwaves across India.

Bull Case: Poised for 10% organic volume growth driven by strategic distribution expansion, increased market share in new territories, and a dynamic product mix that aligns with consumer trends, supported by an extensive beverage portfolio.

Bear Case: Significant risks including potential termination or non-renewal of agreements with PepsiCo India, fluctuating concentrate prices, seasonal variation exposure, changing consumption patterns, and the impact of acquisitions driving leverage higher, potentially hampering growth.

(With inputs from Harshita, Veer, and Lovisha)