Short Call: Reality check for momentum players, from defence to defensives; BEL, RITES, Lemon Tree, Coal India in focus

Investors of PSU stocks need to realise that days of rapid gains are mostly over for now.

Bulls are trying to come to terms with Tuesday’s anti-climax, and it could take a while before they regain their footing. The popular view right now is that there will be a shift to quality, PSU stocks in general could struggle, and that big buyers won’t be in a hurry to commit before the Budget. Retail investors would be tempted to buy into this market, considering that the buy-on-dips strategy has worked like a charm in the past. Also, there is the illusion of a bargain considering that many stocks have fallen as much as 20-25 percent. But the election results have a broader message for post-pandemic investors as well: what has worked well in the past can easily flop overnight.

Many of the PSU stocks in the banking, defense, cap goods and railways sectors make for credible investment bets. But like the NDA, which returned to power with a diminished majority, investors in these companies too need to realise that days of rapid gains are mostly over for now. Returns hereon are likely to be more realistic, and that too depending on how well the companies are able to execute their order books (for manufacturing companies) or how much they are able to grow their customer base and loan books (banks).

In the meantime, the so far unloved FMCG, pharma and IT stocks look set to regain favor with the Street. Many experts are recommending that investors increase exposure to these stocks as they are most likely to do well in a market when the mood has suddenly turned cautious.

Here’s Nitin Gupta of Emkay making a case for FMCG stocks:

“The shift in political climate adds another tailwind to the consumption story of India, The government has curtailed system leakages with direct benefit transfer and adopted structural initiatives that benefit with a lag. We now believe that the current majority will keep government on its toes with pro-consumption initiatives being key.”

If everybody starts buying defensives, share prices will automatically rise. At the same, most of these consumption names are not exactly cheap either. For investors used to doubling their money in months, the slow paced returns of defensives will take some getting used to.

Bharat Electronics (Rs 257.45, -19.21%)

Stock was among the big losers in the defense space on Tuesday, with trading being briefly suspended.

Bull argument: A strong order backlog of Rs 75,900 crore. Also, given the geopolitical situation, government spending on defence is likely to remain high.

Bear argument: Tet to deliver an earnings upgrade with significant margin visibility, says Nuvama. Also, delays in execution and GoI's monopoly over awarding defence contracts could hurt earnings growth.

Coal India (Rs 443, -13%)

Stock fell even as production for May rose 10.5 percent year-on-year.

Bull argument: Demand for coal will continue to rise, driven by the addition of 80 GW of thermal power plants by FY30. Company aims to increase coal supply to the power sector by 50 MT annually.

Bear argument: Fall in international coal prices could dent e-auction premiums and volumes. The shift to cleaner energy in the long term is a negative for companies like Coal India.

Lemon Tree Hotels (Rs 132 ,-5.8%)

Bull argument: Occupancies and average room revenue on the rise. Potential listing of subsidiary Fleur Hotels may improve valuation.

Bear case: Increase in renovation expenses would weigh on margins.

RITES (Rs 630, -13%)
Shares slumped even as the management recently said that the export business will likely witness an uptick in the second half of FY25.

Bear Case: Slower order wins by the company and stiff competition can hamper revenue growth and margins in the coming quarters.

Bull Case: Total export orders currently stand at Rs 1685 crore and Axis Securities sees revenues growing at 24 percent compounded over FY24-FY26. Company has been a consistent dividend payer.

(With inputs from Vaibhavi, Harshita, Lovisha and Veer)