Short Call: When popular stories go awry, bulls chase telecom, CEAT, MRF, Titan, Deepak Nitrite in focus

Bulls are sure that a tariff hike is on the cards soon after the election results

Analysts are divided on what the RBI’s draft proposal on project finance means for non-bank finance companies like PFC and REC. The implications are clearer for banks, particularly PSUs: higher provision requirement is bad news.  IIFL sees the move hurting Tier 1 capital requirements of NBFCs, and hence valuation multiples. CLSA argues that both PFC and REC are well-capitalised, so investors don’t have to worry. The stocks trimmed intra-day losses, but can they completely shrug off the development? Whenever a story becomes too popular, the slightest hint of uncertainty is a bad thing. That is because investors sitting on huge profits will want to take some money off the table, and even if it does not trigger a domino effect, fresh buyers may not be forthcoming for a while. That could put the brakes on the tearaway rally in PFC and REC over the last year.

Meanwhile, telecom remains one of the crowded trades, the sell-off in Vodafone shares notwithstanding. Bulls seem to be near certain that a tariff hike is pretty much on the cards soon after the election results.

BofA Merrill’s on why tariffs could rise: companies are keen to hike (they need to recover their 5G investments), customers will take a 25-30 percent hike in their stride (no choice there really) and, the government is supportive of the sector.

The consumption story is not hot at the moment, but this could be a good time to nibble at them feels Nuvama. Its reasons: a good monsoon and the valuation gap with capital goods stocks narrowing as a deceleration in government capex and subdued private spending would taper capex growth.

CEAT (Rs 2500, -1.8%)

The company’s Q4 net profit declined year-on-year

Bear argument: Rubber prices are rising. Kotal Equities points out that CEAT has raised its product prices, but market leader MRF has not. This could lead to market share loss for CEAT.

Bull argument: Outlook on the auto sector is positive. Also, CEAT has been able to maintain margins within a band for the last five quarters.

Titan Company (Rs 3284, -7%)

Q4 net profit under pressure as interest costs shoot up.

Bull argument: Company aggressive on growth targets, adding stores rapidly.

Bear argument: Rising gold prices could hurt demand. Company seeing signs of early-stage developments in lab-grown diamonds in Europe, China, and Middle-east. Borrowing costs have ballooned.

Deepak Nitrite (Rs 2,558.35, +4.5%)

Morgan Stanley upgraded the stock to overweight and raised the target price to Rs 2,985.

Bull argument: Company’s new investment cycle of over $1 billion, its largest till date, will drive the next leg of rerating for the stock, says Morgan Stanley. Base earnings could double by 2028, the aim is to become an integrated, downstream phenolics producer.

Bear argument: Gross profit margins unlikely to return to the levels seen between FY20 and FY22. That means revenues need to grow in a big way to be able to sustain premium valuation.

 Britannia (Rs 5,057.90 +6.6 %)

Stock gained as the street reacted to Q4 numbers positively

Bull argument: Management focussed on driving top line through volume growth. Analysts estimate the company to benefit from demand uptick post elections and a good monsoon.

Bear argument: According to analysts at PL, raw material costs and costs for promotion of products could impact margins.

MRF (Rs 1,26,400, -1.7%)

India’s most expensive stock in absolute terms fell after weak Q4 earnings.

Bull argument: Company retained leadership in the domestic truck replacement segment  in the face of aggressive competition. Entry into high-end bike steel radial tyres will start showing results down the line.

Bear argument: Q4 numbers were weak, operating margin decline quarter-on-quarter  was greater than CEAT. Analysts at Motilal Oswal believes that extended producer responsibility (EPR) costs would be recurring in nature. Prices of rubber and crude are rising.