Short call | NFOs building narratives for stretched valuations, vast playing field for retailers; L&T Tech, LTIMindtree in focus

There has been a surge in sector specific NFOs by mutual funds in the past year.

They say to not judge a book by its cover and this seems to be apt for the narrative built by a spree of thematic NFOs by mutual funds. Jumping from one sector to another, these thematic funds have aimed at building narratives in an attempt to capture the market's attention.

"We note that narrative-driven valuation re-rating has been the primary driver of returns over the past 12-18 months. However, a few narratives of the past few months such as ‘400+ seats for NDA’, consumption or rural boost in the budget, and increase in capex allocations, especially in defence, railways, roads, and privatisation of PSUs have failed to materialise," wrote Kotak Institutional Equities.

As fund houses jump on the bandwagon, there's been a wave of sector-specific NFOs flooding the market, pumping loads of cash into these sectors without much thought for price tags. The result? Valuations flying sky-high into la-la land!

What's even more worrying is that keeping this loop going and the returns that come with it might hinge on a never-ending cycle of chasing past returns in thematic funds and new liquidity pouring in. It's like a loop that feeds itself, without a thought of how long it can last.

Fertile field for retailers to grow

International brokerage Bernstein believes that India's retail sector can unlock demand beyond the top 10 percent of the wealth pyramid and the top 40 cities in the coming time.

It argues that the spending power of India’s middle class isn’t stifled by a lack of desire, but by the need for more affordable and accessible products—pointing to a supply-side issue, not a demand one. This presents a golden growth opportunity for companies ready to step in and deliver.

The real snag in the plan is the hefty debt most retailers have racked up to acquire a diverse lineup of brands. It’s like a bone stuck in the throat, making growth a bit harder to swallow.

L&T Tech (Rs 5,678.50, 3.5%)

Recently concluded its analyst day, management launched its ‘Go deeper to Scale’ strategy and highlighted the need for LTTS 3.0.

Bull case: Based on the leaders' expectations, LTTS will record a revenue of $2 billion in the medium-term. Following this, the IT player wants each of its segments to record $1 billion in revenue each.

Bear case: Brokerages commented that expensive valuations make the firm unattractive as an investment opportunity. Rising competition in the ER&D services space, along with the loss of key customers can adversely impact the topline. Additionally, since the firm heavily depends on technology service exports, exchange rate fluctuations can impact the company.

Zydus Lifesciences (Rs 1,138 +2.2%)

Shares rose after Jefferies upgraded the stock to 'buy' call.

Bull case: Strong US pipeline with at least one launch per year along with improved growth prospects in India will help it deliver higher volumes and margins.

Bear case: High reliance on US market can pose a risk to the financials of the company in case of a drop in demand or other unforeseen circumstances.

LTIMindtree (Rs 7,215, +5.02%)

Stock surged as Kotak Securities upgraded it to 'add' from the previous 'reduce' call.

Bull case: LTIMindtree’s strong recovery in revenue growth, driven by BFSI and hi-tech sectors, positions it for significant gains. Kotak’s upgrade to an ‘Add’ rating with a target of Rs 6,200 underscores the stock’s potential for consistent EPS growth.

Bear case: Rapid technological changes, intense IT services competition, and high client concentration pose significant risks for LTIMindtree. Adverse exchange rate fluctuations could further impact profitability, making it challenging to sustain long-term growth.

(With inputs from Veer, Harshita and Zoya)