Short Call | Risks of bulls running extra miles, Voltas contrarian, and mute OPEC bluster

better the earnings growth rates seen over the last couple of quarters. Right now, the rising stock prices are driving investors to possible risks that could arise in the not-so-distant future. In this context, a report by Kotak Institutional Equities makes for a sobering read.

The note, put together by Sanjeev Prasad, Anindya Bhowmik and Sunita Baldawa makes the point that eventual outcomes can be different from market expectations when you buy stocks at expensive valuations. The trio has cited the performance of two wheeler stocks, Maruti Suzuki and Voltas over the last five years to support the argument.

Two-wheeler stocks were the toast of the Street five years back as the market was betting that strong growth in volumes would continue. However, with the exception of TVS Motor Co, they have underperformed for a variety of reasons such as Covid-19, price increases due to environmental factors, and high commodity prices hurting affordability, shift to electric vehicles, competition and market saturation.

In case of Maruti, its stock has returned just 11 percent over the past five years. Reason: Consumer preference shifted from hatchbacks and sedans to SUVs, and Maruti struggled to adapt to the new market reality.

Likewise, Voltas shares have gained only 45 percent in the last five years (not much higher than what a bank FD would have given). Competition in the AC industry spiked sharply, eroding Voltas’ market share and profit margins. The Kotak team sees more challenges for Voltas because the competitive intensity is unlikely to abate any time soon.

The broader point Prasad & Co are trying to make: “Current rich valuations across consumption, investment and outsourcing sectors suggest similar high expectations. The low margin of safety is pertinent in light of growing disruption risks across sectors.”

Voltas

The stock has had a miserable run so far this year, but in the latest round of downtrend, it did not go below the 52-week low of Rs 737 seen in February. That is leading some technical analysts to bet that the stock has made a double bottom, and is unlikely to fall much from current levels. But what about the fundamental side of the story?

Majority of the analysts are bearish on the stock, given the pressure on margins and inability to grow market share. But the stock has a supporter in broking firm Jefferies, which feels that all the bad news is now reflecting in the price. According to Jefferies analyst Lavina Quadros, the market is ignoring the upside to Voltas’s earnings from an uptick in the company’s MEP (mechanical, electrical, plumbing) business order as the capex cycle revives.

The price target has been trimmed to Rs 950 from Rs 1,090 earlier, but the buying rating stays. Investors though will have to be patient though, Quadros says, as the returns could be back ended.

No problem whatsoever!

Whenever there are talks of oil production cuts by OPEC, usually oil marketing companies take a knock as higher oil prices hurt their margins. But on Monday, the trend was different , but it was an unusual day for them yesterday when all of them rallied.

Option data also showed optimism with heavy put writings in downstream stocks such as Hindustan Petroleum and gas distribution companies such as Mahanagar Gas and Gujarat Gas.

Saudi Arabia on Monday said it would extend its voluntary cut of one million barrels per day (bpd) from output to August, The cuts amount to 1.5 percent of global supply.

This contradictory behaviour was likely because oil prices did not react much after the Gulf nation announced the cut. Prices of crude futures in global markets indicates that traders don’t expect crude prices to rise much despite the production cut. That could be making the supporters of OMCs hopeful. One trader pointed out that bulls were not active early on in the day, but got emboldened as the session progressed.

Shubham Raj contributed to this article