Short Call | Promoters selling back, rates crawling up, SBI contrarian, RBL Bank, shareholder’s Spiderman suggestion

Both Sensex and Nifty shed nearly 1.5 percent each in August.

“History has shown over and over, that bull markets can go well beyond rational valuation levels as long as outlook for future earnings is positive.” - Peter Bernstein

After a brief lull, the sale of shares by promoters has resumed with vigour. Over a billion dollars worth of stock have been offloaded since the window for insider sales reopened for companies that have reported their earnings. The Street is divided on this trend. The arguments for and against insider selling remains the same. Veterans say that promoter selling is not as reliable an indicator of the stock being overvalued as much as promoter buying is an indicator of the shares being undervalued.

Besides, the supply of shares has been absorbed without a hiccup, pointing to strong appetite among investors — both institutional and retail. There is merit in this argument. But what about the fact that so many promoters have been selling their shares at the same time.

One theory doing the round is that promoters are aware that their shares are no longer cheap after the recent run-up. Also, they feel the market could

move into a consolidation phase shortly as speculation over the outcome of the general elections could hold many investors back from making big purchases. At this point, the odds are heavily in favour of the NDA returning to power though views vary on the margin of victory. To that extent, the market already appears to be pricing in political stability and continuity of the existing policies.

So, election results may not necessarily be the key trigger to take the market to the next orbit: An NDA victory seems almost a given as far as Dalal Street is concerned. So, the focus will once again shift to earnings and execution. In many cases, the market appears to have priced in earnings two years ahead.

Considering these factors, it may not be a bad idea to take some money off the table, promoters feel, since share prices are unlikely to rise at the same pace in the near future, as they have been over the last year.

And, here is something that the new investors may not be aware of, but old investors would only know too well. While many mid and small cap companies have suddenly become stock market darlings, it is during a bull run that you see the earnings at their best. That is also because promoters realise it is worth showing all the profits on the books as the market will reward them with a higher market capitalisation.

Interest rates

Even as the market bets on the RBI cutting interest rates by the end of 2023, looks like borrowers may have to put up with rising rates for a while. Karur Vysya Bank has hiked the lending rates by 25 basis points across tenures with effect from August 7. Over the last month, three banks — SBI, Bank of India and South Indian Bank — have raised the lending rates by 5-10 basis points across tenures.

Higher for longer

In the US, too, yield on the benchmark 10-year Treasury note is close to its highest level in over a decade as investors bet that the economy will continue to strengthen even as the interest rates stay high. This is bad news for home-owners looking to refinance their mortgages, and also those in the queue to buy a home. At the same time, it is good news for risk-averse savers and to pension funds that have been forced for years to take greater risks to meet return targets.

SBI contrarian

Most analysts have retained their bullish ratings on SBI after the first quarter earnings. An exception to the trend is HSBC, which has downgraded its rating to ‘hold’ from ‘buy’ earlier.

Analysts Abhishek Murraka, Rahil Shah and Priyesh Jain feel the bank will hurt from a double whammy of rising deposit costs and a highly competitive environment in which demand for corporate loans is low, forcing banks to offer highly attractive rates.

“Incrementally, we believe it will be difficult for SBI to prevent net interest margin (NIM) compression. In an environment where NIM and operating costs are both under pressure, fees become an important lever. However, SBI’s fee/assets remain low at 48 bps (annualised) in the quarter. Given credit costs likely to normalise as well, we believe earnings growth will likely remain lacklustre for SBI over FY24-25,” the trio write, adding that SBI’s earnings growth will be slower relative to peers.

RBL Bank

After drawing flak for its investment in RBL Bank, Mahindra and Mahindra has promised investors and analysts that it will maintain a disciplined approach towards capital allocation, primarily focusing on its core areas – auto, farm, financial services, IT services, and selected growth areas within the group. It has now said it won’t buy more shares of RBL Bank in the foreseeable future and it will add to its stake “only if it makes sense strategically”. This contrasts with its stance a couple of weeks back when the auto major hinted that it was open to raising its stake in the bank up to the maximum permitted 10 percent.

Bulls appear to be retreating from RBL Bank for the time being as a safety net to the stock price has vanished with M&M’s latest statement.

Cummins India

Cummins India shares took a beating on Friday after first quarter earnings. The market was betting that the company would gain from advance purchases by customers looking to beat the Central Pollution Control Board IV deadline. But there has been a slight change in the plot.

“The dilution of Central Pollution Control Board IV timelines would make Cummins run parallel operations of old and new nodes of its powergen products. The majority of its powergen demand for this year should come from old nodes, deferring the discovery of demand, pricing and margins for the new nodes,” said a note by Kotak Institutional Equities.

Tailpiece

The otherwise humdrum proceedings at the Indian Hume Pipe AGM was enlivened briefly when one of the shareholders asked the CMD of the company as to why the company was not being more aggressive. As if to drive home his point, the shareholder remarked the CMD should take a leaf from book of Marvel superhero Spiderman who did not shy from taking risks. The shareholder’s other suggestion was that the CMD should smile more often while addressing shareholders.