“The actual results of an investment over a long term of years seldom agree with the initial expectation.” - John Maynard Keynes
Stocks made it six in a row on Tuesday, but the lack of conviction at higher levels is evident. Global markets too are lacking direction. The last word on inflation and interest rates has not been said yet.
High rise
Godrej Properties shares rocketed 9 percent on Monday on the back of strong business update for the March quarter. With this, the stock has risen 20 percent over the last couple of weeks, outperforming peers. But then, Godrej Properties has been a sector laggard for a while, falling around 40 percent in FY23. Even after the recent rally, the stock is still quoting at half its record high price seen in October 2021. The company has surpassed its pre-sales guidance for FY23 by a mile, and that raises the question if the renewed interest in the stock signals a rerating move or if it is just a relief rally after the brutal selloff in March that almost pushed the price below the Rs 1,000 mark. The company has made losses at the operating level in 10 of the last 11 quarters.
Analysts tracking the sector blame it on the aggressive strategy pursued by the company. Initially, the market was hyper bullish on Godrej Properties also because it was considered to have better corporate governance standards compared to its rivals. FII ownership in the stock climbed from 19 percent to 30 percent between March 2020 and September 2021, as the stock rose fourfold from the pandemic lows. Since then, the stock has been struggling, as investor expectations were not matched by the operating performance.
“There was no reason for the stock to go up so much so soon, and when the market found cheaper alternatives because of the boom in the sector, Godrej was ignored ,” an HNI investor tracking the stock told Short Call.
Seen from the prism of price to earnings multiple, the stock still looks expensive. “But the medium term call would be on whether the company’s strategy is finally beginning to pay off. Realty P&Ls (profit and loss) are hard to decipher. Strong pre-sales need to be seen in the context of how much margins the company is making,” said the investor.
Low on gas
Shares of city gas distribution companies rose Monday after the government implemented changes to the pricing model of domestic natural gas as proposed by the Kirit Parikh committee. The reduction in gas prices helps city gas companies as demand had been falling for the last many months because of high gas prices. Leading brokerages reaffirmed their bullish views on the sector, but the stock price moves showed that investors were not overly enthused.
Why?
MC Pro analyst Nitin Sharma feels there could be two reasons for the guarded response by the market. One, the event was already discounted by the market when the committee had made the recommendations public. The government had little choice but to lower gas prices as part of its overall strategy to counter inflation.
Two, and more importantly, the price control will be applicable only for domestically produced gas. “Domestic gas production has been declining for the last many years. If demand is strong, you are not going to get enough gas under APM (administered pricing mechanism).
The shortfall will have to be met by buying gas at market rates, which are much higher. Also, the floor of $4 mmbtu means that gas companies can’t get prices cheaper than that. So you are not going to see the juicy profit margins of the past.”
Two-wheeler recovery
Things may be finally looking up for the two-wheeler segment, which has suffered the most since the pandemic broke out. Last week, Bajaj Auto sounded hopeful on demand recovery. Umesh Revankar, executive VC of Shriram Finance agrees with that view. In an interview to CNBCTV18, he said that demand is returning in the urban market and overall demand has been good in the last six months. Traditionally known for its expertise in commercial vehicle financing, Shriram is now stepping up its presence in the two-wheeler financing as it sees strong growth there.
Disruption ahead
Reliance Consumer Products’ ambitious foray into the FMCG market could rewrite sector rules, given the sustained disruptive pricing, and likely extension of credit to traders, writes Emkay senior analyst Nitin Gupta in a note to clients.
Gupta’s view of how it will play out:
“In the home and personal care segment, the initial thrust is on penetrating essential categories, where RCPL is looking to build its business at the mass-end (except laundry). HUL, Rohit Surfactants, Godrej Consumer, Procter & Gamble (P&G), Jyothy Labs and Reckitt Benckiser are expected to face the heat of RCPL's entry.
At this stage, Nestlé India, Colgate, Marico, Dabur and Emami are not likely to be impacted by RCPL's entry, while ITC and Tata Consumer may benefit from market development (as the market is highly unorganised).
Crude concerns
Investors are pulling money out of crude oil exchange traded funds despite the recent strength in oil prices, reports Bloomberg.
WisdomTree’s Brent Crude Oil ETF saw an outflow of $55.7 million last Thursday, the largest one-day fall since late 2019. Another fund, the ProShares Ultra Bloomberg Crude Oil ETF saw outflows of $158.5 million last week, the report said.
“There is still a large segment of the market concerned over the demand outlook and OPEC+ cuts would have likely only reinforced these concerns,” said Warren Patterson, head of commodities strategy at ING Groep NV in Singapore.
Insider trading?
Two US lawmakers traded in bank stocks last month while working on a rescue plan for Silicon Valley Bank and Signature Bank, reports Wall Street Journal.
“Nicole Malliotakis bought stock in a regional bank before a subsidiary agreed to take over Signature Bank’s deposits following its closure. Days before she bought the stock, she said she met with financial regulators to discuss the bank’s closure. Earl Blumenauer reported three trades in bank stocks as he co-sponsored legislation seeking to strengthen restrictions on financial firms in the wake of the bank failures.”
The battery war
After Japan and South Korea, it is now Indonesia. The island nation will propose a free trade agreement with the US for key minerals in the electric vehicle battery supply chain, reports website mining.com.
“Indonesia does not have a free trade agreement with the United States, but its nickel products have increasingly become important in the supply chain. It has been trying to leverage its nickel reserves, the world’s biggest, to attract investment from battery and EV makers, including US companies such as Tesla and Ford.”
Mixed picture
The US labour market is showing some signs of cooling at the aggregate level, but some industries continue to see tightness, reports the Northwest Arakansas Democrat newspaper.
Twiddy & Co, which sells property and helps homeowners rent to vacationers has sharply raised entry-level pay for seasonal workers. Owner Clark Twiddy said several companies have to treat employees as respectfully as they do customers, knowing that the best ones have ample job opportunities elsewhere.
"There's no algorithm that cleans up a bathroom or a kitchen," he said. "We have to pay more. We have to train more. We have to engage more."
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