Short Call | Rising prices whet risk appetite in bulls; Whirlpool, Coal India, PowerGrid, Marico in focus

As the market continues to scale new highs, fence-sitters are jumping into the fray.

“Liquidity does not exist unless someone else is willing to give you cash in exchange for the piece of paper you want to sell.” - Peter Bernstein

One of the paradoxes of the stock market is that it is probably the only market where rising prices lead to higher demand. As the market continues to scale new highs, fence-sitters are jumping into the fray, not wanting to miss out on the action.

As for HNIs, Short Call learns the appetite for risk in many of them is increasing in proportion to their paper wealth. A typical argument runs something like this: “My stock has gone up from Rs 100 to Rs 120. Even if it were to correct 10 percent, it will still be at Rs 108. So, let me buy some more.”

The assumption here is that the HNI will be able to get out of the fresh positions nimbly enough if sentiment suddenly turns for the worse. Veteran brokers say that while rising prices encourage more risk taking, it also induces a sense of complacency and so many large investors/traders are unable to exit in time. The argument runs something like this: “I am still sitting on 2x profits, I can afford to wait it out for some more time till prices recover.”

Coal India (Rs 447.80, -2.86%)

The stock fell nearly 3 percent after the management said E-auction premiums had dropped to around 38 percent in February 2024 around 48-50 percent in January 2024.

Bull argument: Analysts believe that strong volume growth should offset the decline in e-auction premium. Demand from the power sector continues to remain strong.

Bear argument: If the decline in e-auction premium continues, it could impact margins which, in turn, would affect the multiples that the market is willing to pay for the stock.

Whirlpool (Rs 1,287.7, -3.2%)

The stock fell after promoter Whirlpool Mauritius sold a 24 percent stake worth Rs 3,880 crore in the company.

Bull argument: The company expects to use proceeds to reduce debt, which will enhance balance sheet flexibility. Going ahead, Whirlpool is planning to

use additional warranty as a differentiating factor. Many mutual funds have bought into the stock.

Bear argument: Steep competition, covid and higher commodity prices have impacted Whirlpool India’s performance in the past three years.

Power Grid (Rs 288.4, +4.36%)

The stock rallied after Bernstein rated the stock an outperformer with a target price of Rs 315.

Bull argument: A low beta stock, meaning less volatile, and at the same time one with an 18 percent Return on Equity and 8 percent net profit growth. Interstate transmissions, batteries and smart meters are new areas of growth for the company.

Bear argument: The stock may consolidate gains near term after having doubled in the last five months. There is also a risk of increased competition in tariff-based competitive bidding (TBCB).

Marico (Rs 536.55, +1.91%)

The company is considering a second interim dividend on February 27 for fiscal 2023-24.

Bull argument: The company is focusing on its food portfolio and moving away from its edible oil segment.  New product launches and brand investments would improve volume recovery and profitable growth, say analysts.

Bear argument: Growth in rural markets, mass category and general trade is yet to pick up. This is dampening volume growth in the bottom of the pyramid markets.