Short Call | Small NBFCs face bumpy ride, retail booking profits; Triveni Turbines, JSPL, Interglobe, Dr Lal Path in focus

Purchases exceed Rs 5,000 crore on March 26, 2024.

“As history has taught us, most of the time, most of the crowd moves long after the optimum time to have moved is passed. So it is with investment trends, which start with the belief of a few and end with the conviction of the many.” - Arthur Zeikel

Massive net purchases by domestic institutions (over Rs 5,000 crore) could not lift sentiment on Tuesday. Surprising enough, foreign investors were not net sellers. The most likely explanation for this could be that high net-worth individuals and retail investors are taking some money off the table and waiting for the weather to clear before jumping back in. In the meantime, large blocks of shares continue come into the market, sparing fund managers the risk of driving up prices through open market purchases.

In sectoral trend, IIFL Securities sees tough times for small NBFCs in the short term because of widening bond spreads, which is the excess over government bond yields that private sector borrowers have to pay.

According to IIFL, bond spreads have widened 11 bps to 78 bps in the last three months for non-AAA/non-corporate-backed NBFCs. This is higher than the long-term average of normal times and even higher than 65 bps seen during taper tantrum or during the IL&FS crisis.

Besides this, there is also the slowdown in unsecured loans, tighter compliance and need to reduce dependence on bank borrowings, and a delay in interest rate cuts by the RBI. At the same time, the woes of the smaller NBFCs can turn out to be a blessing in disguise for the larger and well-diversified NBFCs.

Triveni Turbines (Rs 320, flat)

The company recently set up a subsidiary in the US to cater to offer aftermarket services for third party OEMs and own turbines.

Bull argument: According to Ambit, US is the largest market for industrial turbines and the move could add anywhere between $75-150 million to Triveni’s topline over the next decade.

Bear argument: In the near term, the setting up of the subsidiary would be margin dilutive, Ambit has cautioned. Domestic orders from the ethanol sector for the nine months ending December 31 have grown only 2.7 percent due to uncertainty over the proposed move away from sugarcane.

Jindal Steel and Power (Rs 837, flat)

Broking firm Nuvama has rated the stock a buy, citing a swifter-than-expected ramp-up of the recently expanded cost-saving/value-additive facilities.

Bull argument: Nuvama expects the company to sustain EBITDA/t of

INR15k-plus FY25 onwards through operating efficiencies even if steel prices stay at the same level.

Bear argument: Global recession leading to lower demand in India, higher-than-expected fall in steel prices, continuous fall in real estate demand and lower infra demand in China and higher steel exports from China

Dr Lal Path Labs (Rs 2,259.2, +6.13%)

The stock rallied after Kotak Institutional Equities upgraded the stock to add from sell and increased raised fair value (FV) to Rs 2,360 from Rs 1,975.

Bull argument: The brokerage has factored in increased growth estimates beyond FY26 due to lower competitive intensity. Kotak said there is improvement in pricing trends for diagnostic players, gathered from a pricing exercise the brokerage conducted across 7 cities.

Bear argument: Pathology is more vulnerable to pricing pressures, compared to radiology as the patients will need to visit the diagnostic centre.

InterGlobe Aviation (Rs 3,482.2, +5.94%)

The stock made a fresh all-time high at Rs 3,507.95 after a slew of brokerages rolled out strong growth forecasts for the low-cost carrier after its analysts meet.

Bull argument: On-time performance remains best among the top 9 airlines in the world, with the lowest rate of cancellations. An unparalleled network coupled with a duopoly-like industry structure will drive its profitability, according to Nuvama.

Bear argument:  “The competition in the sector is expected to intensify with the resurgence of Air India and the entry of a new player.  We believe that Indigo would have to navigate through various challenges in the near to medium term,” said analysts at Motilal Oswal Financial Services.

IIFL (Rs 321, -3.7%)

Shares of IIFL fell nearly 4 percent after the RBI announced a special audit for IIFL and JM Financial.

Bull argument: The company has been consistently reporting strong growth in earnings. The dispute with RBI is of a technical nature over the interpretation of the Loan to Value rules. Once it is resolved, things should start looking up as demand for loans remains strong.

Bear argument: There is no saying how soon the matter will be resolved. Also, there is uncertainty of what the audit process can throw up.