"Leverage works both ways. More money has been lost searching for yield than at gunpoint." - Ray DeVoe
Market continues to struggle for a direction, foreign institutional investors continue to be net sellers and none of the sectors are showing any clear trend. Plenty of stock-specific activity, particularly in some of the railway names, but the sense one gets talking to market players is nobody is making serious money. Overall, a sense of gloom has been replaced by one of fatigue over the last month.
Job change
One can feel for Promeet Ghosh, the incoming MD and CEO of Crompton Greaves Consumer Electricals. News of his appointment was greeted with a 12 percent drop in the stock, which has anyway been in a downtrend since September last year. A career investment banker, Ghosh steps in following the abrupt resignation of Mathew Job, who had been with the company for the last seven-and-a-half years. Market skepticism arises from Ghosh’s lack of hands-on experience in running a consumer electricals business. This is even more worrying considering that the company has been ceding market share to rivals of late.
From a JP Morgan report:
“In our view, a lack of operational experience for the incoming CEO could be a cause of concern for investors. Given there have been multiple changes in the leadership team (previous CFO resigned in May’22, sales head resigned recently), we see uncertainty on strategic priorities and execution approach, more so in a subdued demand environment amid enhanced competitive activity (in the core fans, lighting and pumps categories) and the initial stages of Butterfly integration.”
Also, as my colleague and Dalal Street scuttlebutt Nimesh Shah of CNBCTV18 points out: “The appointment of a person with an investment banking experience has sparked chatter in the market that the stock could be in play shortly.”
Ghosh could take heart from the fact that it is easier to surprise (positively) when expectations are low, and things have reached a point from where they can only get better.
From a Goldman Sachs note:
“We believe the stock is under-appreciated, and believe there is scope for mean reversion as earnings improve from here and as the valuation difference with peers has increased. We continue to like the company’s sector-leading return profile (ROE at 20% for 2024E vs high teens for Consumer Durables peers) and exposure to the domestic growth story.”
Another thing going for Ghosh is that domestic institutional investors are heavily invested; nearly every important fund house has exposure to the stock. Ghosh’s priority will be to convince fund managers of his plans to get Crompton back into the big league. Institutional over-ownership can cut both ways. It can influence newer fund houses to invest in the company, but if the mood changes for the worse, the fall can be dramatic.
Booster shot
Biocon shares rose 2 percent on Tuesday, after Serum Institute converted its $150 million loan of Biocon Pharma into an equity investment in Biocon Biologics. The deal values Biocon’s subsidiary at $6 billion, a 22 percent increase in two years. Biocon shares took a pounding in March, falling to a five-and-a-half year low of Rs 192 after a leading institutional investor trimmed stake. The stock has gained around 15 percent from the March lows, but further upside will depend on whether investors are swayed by the subsidiary valuation story or the business outlook for the flagship.
Last month Kotak Institutional Equities retained its reduce rating on the stock and cut price target to Rs 210 from Rs 240, after Eli Lilly, Novo Nordisk, and Sanofi, the three major insulin manufacturers that control 90 percent of the US insulin market said they would drop prices 65-80 percent starting 2024. Kotak has expects a significant improvement in Biocon’s biosimilar sales trajectory, but has flagged concerns over persistent price drops and delayed approvals, which would lead to the company missing its biosimilars (excluding vaccines) sales estimate of $1.04 billion and $1.21 billion for FY2024E and FY2025E. Then there is also the issue of high debt.
Not out of the woods yet
The turmoil in the US banking sector may have been controlled, but it seems to be far from over, looking at the quarterly numbers of First Republic Bank. The stock crashed to a record low after the company’s numbers showed that the deposit outflows of over $ 100 billion in March were much higher than what the market had thought.
From the Wall Street Journal:
“The firm said Monday it was exploring “strategic options” following its disclosure that it lost around $100 billion in deposits, though analysts and investors question how much room for manoeuvre the firm actually has at this point. While First Republic’s basic business model is broken, the bank is determined to find some way to salvage what is left. Those who could aid the bank might be wary of coming to the rescue.”
Wolf of Bond Street
A hedge fund star driven by ambition, a short stint in jail for bankruptcy fraud, followed by a second birth as a mature thought leader for the rambunctious industry. Sounds like a Scorsese film, right? Eventually, perhaps.
Dan Kamensky, once ubiquitous in the US distressed debt sector, was sent to jail in 2021 for trying to corner settlement proceeds during the 2020 bankruptcy of retailer Neiman Marcus. After serving his prison sentence, instead of trying to sneak his way into the securities market like many of his peers, Kamensky has emerged almost as a conscience keeper for the sector, as per this FT profile. He has started a non-profit advocacy group for distressed debt investors, regularly speaks at industry conferences and also tweets about the malpractices in this rowdy corner of Wall Street.
A second innings worth following.
The uneaten Apple
Legendary fund manager Peter Lynch regrets not having taken a bite of the Apple stock when the rest of the investing community was doing that.
“Apple was not that hard to understand. I mean, how dumb was I?” Lynch, vice chairman of Fidelity Management & Research, said on CNBC’s Squawk Box. Apple has a nice balance sheet. I should have done some work on Apple... It’s not a complicated company, Lynch said.
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