Short Call: Why sell-on-rise makes sense, Fed rate cuts won’t boost IT; ONGC, Devyani in focus

The popular narrative right now is that when the Fed cuts rates shortly, IT stocks will get re-rated.

Things aren't looking good on the global front. And that’s making many investors wonder if domestic inflows alone can shield India from the turmoil in world markets. But retail investors too can't be taken for granted. Mutual fund industry people harp on how individual investors have become smarter post-COVID. If that is truly the case, it would be obvious to a section of these investors that it may not be a bad idea to take some money off the table, considering that valuations in many cases have reached unsustainable levels. Should that happen, prices will stall and this in turn may prompt more people to pull out money.

As my colleagues Mahalakshmi and Harshita point out in this piece, sharp single-day falls in the last four years may have turned out to be buying opportunities in hindsight, markets are staring at tepid growth and high valuations this time around.

And the wise men too are being cautious.

Jefferies' Chris Woods has said that given the chance, he would invest one third of $100 in India, and sit on the remaining money, as valuations are pricey.

Many retail investors still feel that this is a 'buy-on-dip' market, but a section of smart investors are said to have begun taking a 'sell-on-rise' approach.

The IT story

The popular narrative right now is that when the Fed cuts rates shortly, IT stocks will get re-rated. Many have already started loading up on IT stocks in anticipation of the rate cuts. Ambit analyst Ashwin Mehta debunks this theory.

"IT sector has of late re-rated on narratives/flow without conclusive support from numbers. Actually, over the past 17 years, CNXIT valuations/tier-1 IT US growth had a low correlation of 12%/21% with US 10-yr yields," Mehta writes.

On the contrary, he says, both CNXIT valuations and tier-1 IT US growth dipped when interest rates fell in US and vice versa. The main reason being that rate cut scenarios coincide with US growth weakening, which outweighs valuation impact of lower rates, according to Mehta.

ONGC (Rs 329.10, +7.5%)

Released Q1 numbers.

Bull case: Geopolitical tensions in the Middle East leave room open for a spike in oil prices, thereby lifting refining margins. Jefferies also views the ONGC's valuation as favourable.
Bear case: Despite plans to raise production from the KG Basin in Q3, the company’s poor execution track record implies that execution will remain crucial, according to Investec

Deyvani International (Rs 177, -1.8%)

Market disappointed with Q1 performance

Bear case: Weak demand in India and incremental competition in pizza quick service restaurants pose short-term challenges, writes Centrum

Bull case: Antique is the of view that Devyani will continue to outperform peers driven by aggressive store addition and superior execution.

(With inputs from Vaibhavi Ranjan)