Short Call: Time to book profits in capex? Morgan's bull case for cement, D-Mart, Varun Bev, HCL Tech, Nestle in focus

Numbers from TCS and HCL Tech indicate improving prospects, which the market is discounting now.

On the face of it, the party in capex, infra and construction looks set to continue. Thanks to the higher-than-expected dividend payout from the RBI, the government’s fiscal books are in a much better shape than they were at the time of the interim Budget. That means more headroom to spend on capex. And given the government's bias for investment-driven growth, the Street is betting that the Finance Minister may positively surprise when it comes to allocations for defence, housing, railways, roads, and urban infrastructure.

At the same time, it is hard to deny that valuations of stocks in these sectors have little margin of safety following the massive rally over the past few months. Going by the adage, buy on rumours, sell on news, some market veterans are of the view the Budget could well mark the medium-term peak for some of the fancied sectors.

IT

Numbers from TCS and HCL Tech indicate improving prospects, which the market is discounting now. But with managements still sticking to a cautious tone, the growth projections of IT companies remain low, leaving limited room for a sharp restart from the present levels, writes VK Vijayakumar of Geojit Financial Services.

Cement
The near term picture for cement does not look too promising, given the pressure on cement prices. But Morgan Stanley is of the view that demand remains strong and that at some point will result in better profitability for the sector.

Avenue Supermarts (Rs 4989, +1%)

Bull argument: Five-year compounded growth in revenues at 18.9%, broadly in line with previous quarters, says Antique Stock Broking. Recovery in general merchandise & apparels for the second consecutive quarter.

Bear argument: Sales of superior margin general merchandise & apparels, recovery in mature stores needs to be much stronger to support expensive valuations.

Nestle India (Rs 2,605.10, flat)

Released annual report for FY24

Bull case: Increasing contribution of premium products, foray into nutraceutical brands through JV with Dr Reddy's and launch of new Maggi flavours seen as growth engines as per Nuvama Institutional Equities.

Bear case: Sharp rise in prices of key raw materials can significantly hamper the company's margin profile. Increasing competition from ITC and Patanjali in the noodles category may moderate Maggi's growth.

Varun Beverages (Rs 1,624, +2.6%)

Snack portfolio expansion in Zimbabwe and Zambia

Bull case: Snack food portfolio contributes to nearly 60 percent of revenue, so the tie-up with Dubai-based Premier Nutrition Trading to sell its products in Zimbabwe and Zambia will further boost topline. Also, acquisition of a beverage company in South Africa enhances global presence.

Bear case: Expensive valuations and heavy dependence on strategic alliances with PepsiCo. If these agreements terminate or get renewed under less favourable terms, profits will drop. Changes in consumer preferences due to demographic shifts, nutritional concerns associated with products can impact demand.

HCL Tech (Rs 1,568, +0.5%)

Reported a soft Q1, but net profit better than expected

Bull Case: Growth expected to rebound in Q2. Management maintained FY25 revenue and margin guidance. New deal wins totaling $1.96 billion. Balanced portfolio of software, ER&D, and IT Services businesses optimised to improve market share.

Bear Case: IT services declined 1.5 percent QoQ due to increased offshoring by one of the BFSI clients. ER&D performance was weak, affected by challenges in the manufacturing and medtech verticals.

(With inputs from Lovisha, Vaibhavi, and Neeshita)