Short Call | Power play at bourses, hope for IT services amid fresh crude shock; Jubilant, Voltas in focus

Power shortage in August and the spike in merchant power prices spells good news for power trading platforms like IEX.

Benchmark Sensex and Nifty have been rangebound for a while, but the rally in mid-cap and small-cap shares is tempting the resoluteness of most people who have so far resisted the temptation. Hard to be indifferent when everybody around seems to be making money hand over fist (or claiming to do so).

IEX

The stock opened firm but failed to sustain at higher levels. August total

volumes were up around 20 percent year-on-year, but were down compared to July. The extreme pessimism seen in the stock in June immediately after the government approval for market coupling in the electricity sector has abated, and there are a few broking firms like UBS which feel the concerns may be overdone. The power shortage in August and the spike in merchant power prices spells good news for power trading platforms like IEX. But regulatory uncertainty will most likely limit upside in the stock near term.

Jubilant Foodworks

Shares closed at a near nine-month high on Tuesday, backed by heavy volumes. Some brokers had cut earnings estimates after the company’s disappointing Q1 numbers. With prices of food items soaring again, the renewed enthusiasm in the stock may seem misplaced. The long term triggers are product innovation and the ability to weather competition. However, market likes simple stories in the short term. So the narrative building up here is that the festive season and the upcoming cricket world cup will drive demand for pizzas.

Voltas

The stock has gained around 16 percent since crashing to a 52-week low in mid-July. After Jefferies, Voltas has found another supporter in broking firm Motilal Oswal, which has reinstated its buy rating on the stock with a target price of Rs 1000. The street’s main concern about Voltas is the loss in market share in its mainstay room air conditioner segment.

But Motilal Oswal is betting that Voltas should be able to claw back some of its market share over the next couple of years. Also, it is bullish on the company’s electromechanical product and services (EMPS) business.  In July, Jefferies too had said that the market was ignoring the upside to Voltas’s earnings from an uptick in the company’s EMPS business in the backdrop of an improving capex cycle.

IT services

The demand environment is exhibiting some stability, although possibility of near-term demand acceleration seems low, writes Emkay Global analyst Dipesh Mehta in his report on the sector.

But wait, there is hope.

“As the US economy continues to remain resilient over the last few quarters, clients’ reluctance to spend over the fear of an impending recession may possibly recede. This can lead to H2FY24 performance being better than H1,” says the report.

Crude oil

Saudi Arabia has extended its 1-million-barrel-per-day voluntary oil production cut until the end of the year, pushing Brent crude prices to around $90 per barrel, the highest for 2023 so far. At the Qatar Economic Forum in May, Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman had warned short sellers not to bet against OPEC+, as the crude price was hovering in the mid-70s.

“I keep advising them that they will be ouching, they did ouch in April. I don’t have to show my cards I’m not a poker player... but I would just tell them watch out.” Prince Salman appears to have delivered on the threat.

Natural gas

The looming threat of strikes at Australian natural gas facilities will keep global gas markets on tenterhooks, energy analysts told CNBC, with traders fearing that a prolonged halt to production could squeeze global supplies and send European prices higher.

China diary

Why is the Chinese government not coming out with a big bang stimulus package that could fire up its struggling economy, like it has done in the past? That is the question China watchers have been asking for a while now.

According to a Bloomberg report, growth isn’t plummeting even as many macro-economic indicators lately have disappointed, and there’s still a fair chance of meeting the about 5 percent target for the year, as long as the property market doesn’t get worse.

“President Xi and his top aides are pursuing “quality” growth, rather than just focusing on the pace of economic expansion. They’ve emphasized not relying on property as a short-term stimulus tool, and on limiting the build-up of local government debt.”

China’s debt, housing, local government and consumer demand are all a mess, and there are concerns that it could face the same economic problems that Japan faced in the 90s. But there are three things working in China’s favour as an investment destination, writes James Mackintosh in WSJ: “Stocks rarely have been this cheap compared with the US; its entire weight in a global benchmark is smaller than Apple’s; and a weaker dollar might help.”