Given a 10% chance of a 100 times payoff, you should take that bet every time ~ Jeff Bezos
Equity indices paused for a breather on Wednesday, but appetite for mid and small cap stocks, as well as small cap equity schemes of mutual fund schemes remains quite strong. Second line stocks have clearly been the star performers since the market began rallying in late March this year. Given the run up in stock prices, veteran market players feel a sense of euphoria is slowly building up, and that is usually a precursor to a sell-off. Of course this trend is not restricted to India alone. In the US, retirees are throwing caution to the wind and investing in stocks as if they were 30. And WSJ columnist James Macintosh writes there is a kind of ‘dash for trash’ happening in the US market right now where retail investors are loading up on stocks of small companies with weak balance sheets and ignoring companies with strong balance sheets.
So what does it look for the mid and small cap story in India? Two indicators flagged by broking firm Jefferies, comparing the current bull run with the historical ones shows that the mood may not yet be euphoric. For instance, the share of trading volumes of individual investors is around 73 percent of the total volume right now (the average of the past one month). This was as high as over 85 percent during the peak of the bull market of 2021 and 2008. Also, the share of volumes of second line shares as a percentage of Nifty volumes is around 30 percent. This was 45 percent in 2021 and over 40 percent during 2017-18 when a raging bull market in mid and small cap stocks was underway.
And yet, irrespective of what quantitative indicators may suggest, retail investors need to remember one thing: the big money in mid and small cap stocks is made by getting into them when they are unloved and ignored, not when everybody is talking about them.
Suzlon
The stock fell around 5 percent on Wednesday as the company is considering another round of fund raise at its board meet on Friday. In October last year, the company had raised Rs 1200 crore through a rights issue, which saw enthusiastic participation from some of the reputed HNIs who did not have a prior exposure to the stock. The renewables story has plenty of takers in this market, but frequent equity dilution can be a bit disconcerting. The stock has nearly trebled in value over the last year, and as the equity expands, the pace of rise could slow. That may have prompted some of the early birds to take some money off the table for now.
Angel One
The stock extended gains after a strong business update for June and has gained nearly 80 percent from its low in early March this year. While the broker continues to add clients at a steady rate, interestingly the number of orders were down 1 percent month-on-month. Angel has been an outlier among broking stocks, which have fallen out of favour with the market over the last year. The two big concerns that investors have about broking stocks in general are: a) tighter regulators could make it harder brokers to grow their bottomlines and b) the growth in new customer additions could be slower hereon as the market is not as underpenetrated as it was pre-COVID.
Eicher Motors
The stock extended losses on Wednesday, falling close to 3 percent after Bajaj Auto launched the Speed 400 and Scrambler 400X bikes, in partnership with Triumph. More competition for Eicher, as this comes just a day after Hero MotoCorp launched the HD X 440 in partnership with Harley Davidson. Interestingly, derivatives positions in Eicher Motors shows that a good chunk of the short positions built on Tuesday may have been squared off. July futures, that were quoting at a discount to the spot, are now again quoting at a premium. This could reflect a thinking among investors that the market for premium bikes has enough potential for growth, and that Eicher will be able to fight back. According to Basudeb Banerjee of ICICI Securities, the 350cc plus segment has an 8 percent share in the motorcycle segment, compared to a 15-16 percent share in the developed markets. What is working against Eicher though at this point is that valuations may not have fully factored in the competitive intensity, players say.
Hero Motocorp
The stock extended gains on Wednesday, and long term investors must be hoping that a rerating may be on the cards. The bet right now that the rural market is on the cusp of a recovery, which should help Hero Motocorp since that segment accounts for a big chunk of the company’s sales. Also, the company now has a toehold in the premium bike segment, something which it lacked so far. If both engines fire, the stock could have a shot at regaining its hero number 1 position in the two-wheeler market.
Shining bright
In December 2022, the Colgate India management met up with analysts and presented its game plan. Most of the analysts returned unenthused, terming the targets as too aggressive. After all, the market for tooth paste is more or less saturated with limited growth avenues, they argued.
In its annual report, Colgate said: “There is also an opportunity for premium and innovative products in metros and urban cities in the space of family health, therapeutic toothpaste and oral beauty. There is also significant room to expand the penetration of oral care adjuncts like Floss and mouthwash.”
This time the market appears to be taking note. The stock hit a 52-week high on Wednesday and has now gained a little over 20 percent since late February. But it is not very far from the levels in December 2022 when the management had made its presentation. So is the stock playing catch up with its fair valuation or is the market of the view that it should be valued higher.
Broker Nuvama sees market share gains for the company in the oral care category. Derivative traders also seem to agree with the point, at least going by the surge in open interest in the counter. For instance, 1900 strike saw a surge in call writing by 210 times! Put writers were not behind, with 1700 seeing 8 times rise in open interest. This shows there are both believers and sceptics taking positions, the former believing that there is an opportunity in the market while the latter believing that market may be hoping for too much.
No cheer
Steel stocks, the darling of the market at the start of 2023, have been among the laggards in the recent rally. According to broking firm CLSA, a strong stimulus in China’s real estate sector, driving up steel demand, will be the key factor to watch for profitability of the sector in the near term.
The near term picture for steel stocks does not look too promising though, according to the broker.
“We see downside risk to domestic steel prices given they are trading at a premium to import parity. Moreover, the benefits of lower input costs (coking coal, iron ore) are likely to be lower for Indian mills. Domestic demand has been robust but exports have been soft on weak global demand. Given dependence on exports and weak global demand, we believe this (premium to import parity) is unjustified.”
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