Short Call: Street still loves small, mid caps; is the EV story souring? Aarti, Escorts, Nykaa in focus

High net-worth individuals are piling on to stocks with renewed gusto.

"People seeking answers to why markets plunged usually emphasise immediate events that precipitated selling, when in fact those are minor symptoms of underlying problems." - Seth Klarman

The sell-off seen a couple of weeks back seems to have become a distant memory. High net-worth individuals are piling on to stocks with renewed gusto. The narrative right now is that midcaps and smallcaps have broadly justified the investor's faith with the second quarter earnings and the show is likely to continue in this quarter as well. The much talked about shift from second lien stocks to largecaps does not appear to be happening.

'Off-track' speculation

A couple of months ago, the market was abuzz with chatter that Escorts Kubota is planning to sell its railway business. The company maintains that any such talk is speculative. The tractor major’s Q2 numbers were soft. CFO Bharat Madan attributed this to a shift in the festive season and sounded confident that November will be better. Still, he expects the tractor industry to be flat in Q3. He is more bullish on the company’s construction equipment business which sees good demand. The stock is up over 60 percent in the last six months, despite an average performance by the tractor segment, which is the company’s core business. The question is: what is the market paying premium valuation multiples for.

Aarti Industries

The stock rose nearly 11 percent on Monday. The second-quarter numbers were better than what the market was expecting. Short-covering of

positions or a sustainable turnaround? Too early to say. The company said volumes in several products were strong during the quarter. At the same time, the management also spoke about demand pressure, which should ease by FY25. The stock has not made money for investors holding shares for three years, and the price is down 50 percent from the record high seen in October. A rerating could still be a gradual affair for two reasons: One, outlook on the chemical sector remains cautious and, two, some of the investors holding the stock for a long time may be itching to switch to something else.

Nykaa

One of the nasty jokes about Nykaa doing the rounds on social media recently was that those who missed the Nykaa experience could have a taste of it in the Mamaearth IPO. Nykaa’s second-quarter numbers were slightly ahead of analyst estimates. That is the good news. The not-so-good news is that valuations are still pricey at over 2,000 times 12-month earnings. And, unlike some of its new-age business peers, it has not been able to show in any dramatic improvement in operating metrics.

FSN E-Commerce Ventures, which operates Nykaa, reported a 50 percent surge in net profit to Rs 7.8 crore in Q2FY24. However, its consolidated revenue from operations grew 22.4 percent, it's slowest year-on-year percentage growth since the company went public in November 2021. According to Reuters, revenue growth was muted due to a delay in the festive season, which started in October as opposed to September a year ago, pushing sales and traffic to the current quarter for a number of retailers. Investor sentiment seems positive, as the stock ended 5 percent up ahead of the results announcement.

Out of charge

The trio of electric vehicle battery ingredients—nickel, cobalt, lithium—is now among the worst-performing in the commodity universe, reports Bloomberg. The reasons: slowing sales growth for electric vehicles as well as supply increases coming out of China, Indonesia and the Democratic Republic of the Congo. The turnaround in fortunes is a reminder that the path to cleaner fuels is unlikely to be a smooth one.

The wrong frequency

Car rental agency Hertz missed the operating profit margin estimates in Q3, despite strong demand and higher utilisation of its vehicles. CEO Stephen Scherr blamed margin pressure on damage costs on electric vehicles running about twice as high as comparable gasoline vehicles. Depreciation was higher because Tesla price cuts have lowered EV residual values. Hertz now plans to slow down the pace of addition of EVs to its fleet.

Tesla’s Nano moment?

Elon Musk-led Tesla plans to build an affordable 25,000-euro ($26,838) car at its factory near Berlin. The steep price tag of electric cars – retailing at an average of 65,000 euros in Europe - is one of the several factors holding back the uptake of the technology among consumers. Musk had long planned to make a more affordable electric car, but said in 2022 he had not yet mastered the technology and thus shelved the plan.

Red flag

China recorded its first-ever quarterly deficit in foreign direct investment (FDI), showing Beijing’s difficulty in attracting foreign businesses due to tensions with the West. Direct investment liabilities - a broad measure of FDI that includes foreign companies' retained earnings in China - were a deficit of $11.8 billion during the July-September period, according to preliminary balance of payments data.

The name’s bond

Investors looking to lock in higher yields are turning to a lesser known type of bond fund in the US, reports WSJ. Defined-maturity exchange-traded funds, as their name suggests, mature and liquidate on a specific date, similar to how an individual bond pays back its principal. BlackRock and Invesco are the two major providers of the funds, which allow investors to tap the advantages of buying a single bond —namely reducing interest-rate risk—while still allowing for diversification and easy trading.

With inputs from Abhishek, Anishaa, Ananthu and Yash. Edited by Santosh Nair