Short Call: Smart investors encash some of the paper profits, bear case for defense, Havells, Infosys, L&T Finance in focus

The popular view is that the Budget may not have any negative surprises in store.

Dalal Street bulls appear to be developing cold feet ahead of the Budget. On Friday, benchmark indices fell the most in a month-and-a-half. The India volatility index climbed to its highest level in over a month, reflecting anxiety among investors.

The popular view is that the Budget may not have any negative surprises in store. But a section of smart investors, sitting on huge paper profits, are taking some money off the table. It may not be a bad idea.

Emkay Global strategist Seshadri Sen is of the view that there is a risk of a 5-10 correction in the headline indices, and an even sharper fall in small and midcap stocks. Nifty valuations are already stretched at over 21 times one year forward earnings, a positive budget is now in the price, and there no additional positive catalysts.

The question is whether the massive liquidity in the system can continue to act as a cushion against a steep fall. After all, the buy-on-dips strategy has worked like a charm so far.

For a change, foreign investors have been net buyers of shares post the election verdict.

If the recent trend of a weaker dollar and lower bond yields continues, FPIs are likely to maintain their buying momentum, says VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Indefensible

Broking firm Nirmal Bang has downgraded its rating on the defense sector to ‘sell’. According to Bang analysts, the exuberance built around strong order books ignores factors like fair value, cyclicality, profitability, and efficiency. The valuations do not account for potential execution hiccups, rising raw material costs, competitive pressures, and challenges in cash flow generation. The smart thing to do is to stay on the sidelines until valuations return to more reasonable levels, say the analysts.

Havells (Rs 1,765.85, -5.2%)

Reported first quarter earnings.

Bull Case: Improving price realisation and reduced costs will boost margins. Overall inventory is lower due to surge in demand.

Bear Case: Moderating demand amid price hikes puts the industry in a conundrum of preserving margin vs. affecting consumer demand, said Centrum Broking.

L&T Finance (Rs 175.29, -5%)

Net profit rose 29 percent on-year rise for the Juen quarter.

Bull Case: The management is confident of gaining demand momentum, supported by robust deal wins across sectors. From a long-term perspective, the company is well-placed with multiple long duration contracts with big brand names.

Bear Case: The demand environment is uncertain, driven by the potential threat of a recession in the world’s largest economies. Additionally, rising subcontracting costs and cross-currency headwinds may negatively impact the company’s operating margins.

Infosys (Rs 1,789.35, +1.8%)

Delivered better-than-expected Q1 results.

Bull case: Rebound in the sector to disproportionately support growth for the company just like how it suffered more with the industry headwinds, writes Nuvama. Green shoots of recovery hinting at a revival in demand.

Bear case: Slower-than-expected recovery in discretionary spends. A depreciation of the Indian rupee against the dollar, pound and euro may also hamper growth.

(With inputs from Zoya, Veer, and Vaibhavi)