Short Call: FIIs’ flip flop, RBI kicker for cap goods, GE T&D, Sun Pharma, Cochin Shipyard in focus

Private sector capex is still not showing any signs of a strong uptick

A sudden burst of buying from foreign funds lifted indices to fresh highs on Thursday, but the overall trend remains as confusing as ever. That’s because foreign funds have been net sellers for so long that one wonders what prompted to suddenly load up on stocks ahead of a high risk event like the election result. One explanation could be that the purchases could be part of a multi-leg derivative strategy and need not necessarily reflect a bullish view.

The other theory is that RBI’s heft dividend to the government is a big positive from a macro-economic perspective and this could have got many foreign investors excited. Why? The higher-than-expected dividend will reduce the need for the government to borrow from the bond market. This in turn could reduce bond yields and bring down the cost of borrowing in the economy.

There are other reasons to cheer as well.

From a Kotak Institutional Equities report:

“Adhering to the fiscal consolidation path is now relatively easier, as there is space to alter the budgeted receipts and/or expenditure. The government can continue with its capex thrust by increasing allocations to roads, railways and defense.”

On the face of it, this is a major positive for capital goods companies. But then again, valuations are risen to a point where even some of the die-hard bulls of the sector are wondering if there is money to made by buying at these prices.

Also, private sector capex is still not showing any signs of a strong uptick. That raises the question: how long can the government do all the heavy lifting?

GE T&D (Rs 1363, -4.7%) Reported a strong set of Q4 earnings earlier this week.

Bull argument: Order book jumped 53 percent year-on-year to over Rs 13 billion in the March quarter. Total order book now stands at over Rs 57 billion. Analysts see the better than expected profit for the March quarter as a sign of timely execution of order book. Outlook on the power sector remains positive.

Bear argument: Although GE T&D has outperformed expectations over the last couple of quarters, valuations remain premium for the company, says Antique Stock Broking. The broker has raised price target and earnings estimates but is of the view that investors should await a better entry point to play the T&D capex cycle theme. Institutional investors have not been buyers despite the steep run up in price over the last one year.

Stock jumped ahead of Q4 earnings

Bull argument: Order pipeline remains healthy in defence and commercial ship-building and ship-repair segments including exports, ICICI Securities analysts noted in a recent report.

Bear argument: Delays in execution could be a challenge. The stock has gained nearly 7x in one year.

Reported Q4 earnings

Bull Argument: Shifting mix towards more complex drugs than generics. Ramp up of high-margin, low competition specialty drugs and increased investments for the segment to ensure industry leadership in the long-term. The company is way ahead of peers in its specialty offering, providing it growth visibility.

Bear argument: Increased R&D expenses towards expanding its specialty segment could weigh on margins near term.