Short Call | The PVR story, HNI frustration, Biocon bother, and the moral hazard

“It makes no sense for individual investors to jump in and out of the market. People who trade in that way rarely die rich, whereas the patient investor often does.” - Philip Carret

The market held up on Tuesday, as some calm returned to global markets. But the undertone remains nervous, and investors are not convinced that the problems in the US and European banking system have been fixed fully. Wealthy investors are moving a part of their money into debt instruments, more of out of frustration with the underperformance of equities.

Some dealers say this is a sign that the market may be on its way to bottoming out. FIIs are now 83 percent net short on index futures, but the massive short-covering that bulls are counting on, has turned out to be elusive so far.

PVR

Shares rose 1.5 percent after Monday’s block deal. Like the plot of some of the movies it screens, PVR’s stock price performance too has had plenty of twists and turns since the pandemic struck. It was first a victim of the pandemic, then came back strongly to rank among the mascots of the ‘reopen trade’. The merger announcement with INOX drew in more buyers, but a few flop movies later, the ‘OTT will kill multiplex viewing’ theory started doing the rounds again.

The stock has had an indifferent run of late. There is now a ‘PVR-food & beverage biz bigger than Restaurant Brands Asia’ theory as well doing the rounds, besides the dominant market share factor.

This is one stock hard to value on the traditional price-to-earnings (PE) metric, given that earnings swing to blockbusters and flops. Investors who have been holding the shares over the last 5-6 years have little to show for their patience.

The merger with INOX certainly makes PVR a formidable player in the multiplex arena, but the recent price trend suggests that investors will want to wait for some earnings surprises as well, pleasant of course. The ‘story of the season’ approach can work only so far.

Biocon

Shares have fallen more than 25 percent in less than three months. There have been two major block deals of late. Ahan - I Ltd—last week sold close to 19 million shares last week, and two weeks before that Integrated Core Strategies (Asia) picked up a little over 8 million shares.

A sustained decline in the stock price usually reflects market concerns about a company’s fundamentals. Nothing in analyst reports so far seems to indicate a dire situation, but then the near-halving of the stock price from its 52-week high shows that bargain buyers are not showing any interest so far.

From a Kotak note in February

“Generic margins were muted due to continued pricing pressure in the US in 3QFY23. However, Biocon has increasingly seen a normalizing trend in generic pricing erosion in the US. Validation of the immunosuppressant API facility at Vizag and peptide facility in Bengaluru is expected to be completed by 1HFY24. Given US FDA inspection would be required, revenues from these facilities are not expected to commence before FY2025.” 

Watch out!

JPMorgan strategist Marko Kolanovic has warned the markets could have a date with a ‘Minsky moment’ soon.

“Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators,” the JPMorgan note to clients said. Kolanovic is advising clients to use rallies to exit their positions.

What is a Minsky moment?

It is coined after the US economist Hyman Minsky, and denotes the end of an economic boom during which investors take excessive risk, borrowing more than what they could possibly repay. From that point, any disruptive incident can force investors to liquidate their assets triggering a market collapse.

Moral hazard

Treasury Secretary Janet Yellen on Tuesday said at a public function that the federal government could step in to protect depositors at other banks as well if regulators saw a risk of a run on the banking system. While this may help pacify depositors and financial markets in the short term, some feel it could encourage reckless behaviour by banks and also make depositors and investors complacent.

From the WSJ:

“Bank executives won’t have an incentive to manage conservatively if they know their deposits aren’t at risk of fleeing. Large depositors will be less likely to spread their cash across multiple banks. Deposits and risk could become more concentrated at poorly managed banks that offer more customer perks, as happened at SVB. Once regulators do something, they create the market expectation that they will do it again. And if they don’t, the ensuing market panic will invariably impel them.”