The earnings season has just begun, and the one key difference this time is that market is betting on more positive surprises than negative ones.
Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it ~ Peter Lynch
Benchmark indices struggled for direction on Thursday, but the overall mood is still upbeat. The earnings season has just begun, and the one key difference this time is that market is betting on more positive surprises than negative ones.
For signs that retail exuberance is missing in this round of the market rally, look at broking Angel One’s first quarter numbers. Net profit and revenues for the June quarter were up year-on-year, but are down compared to the March quarter numbers. This has been the case for another discount brokerage 5paisa Capital as well, which announced its quarterly numbers a few days back. Broking stocks have rallied sharply from the lows of March, but are yet to take out the record highs seen in 2021-22. If you think the current rally can sustain and attract more people to the stock market, then broking is a good place to be in. If you think the rally is a bubble and will not sustain, then look elsewhere.
The stock was among the star performers in the banking space in 2022, but has been struggling for the last six months as the earnings does not appear to be keeping pace with the high expectations that the market had from the bank. The stock was among the worst performers on Thursday, falling over 5 percent, as the fall in net interest margin was sharper than what analysts were expecting. The company plans to raise to Rs 4000 crore shortly. When the outlook is positive, fund raising is seen as growth capital by the market. But when the outlook is far from rosy, fund raising is seen as equity dilution.
The wave of broker downgrades is yet to subside, so it appears. JP Morgan is the latest to trim the price target for the stock, and now has assigned a price of Rs 3050, down from Rs 3650 earlier. Bears are making two key arguments against Eicher: a) Market share will erode quickly and b) the company will have to take price cuts to compete against the likes of Hero-Harley and Bajaj-Triumph. The stock appears to be stabilising around Rs 3100 levels, but it may be too early to call a bottom for the stock considering that there are plenty of other promising stories for fund managers.
The stock appears to be in the midst of rerating going by the rise in price and volumes over the last few weeks. The stake sale in CDSL has got the market excited, but a sustained rerating will still depend on the bourse’s ability to show a consistent improvement in its core earnings. So far there, there has been no signs of that.
The company on Thursday said it has got a letter of award for an NHAI project valued around Rs 808 crore. Market has been cool to the stock of late following reports that RVNL’s joint venture (JV) with Russian transportation giant Transmashholding (TNH) to manufacture Vande Bharat Express train sets has run into problems. The company has denied any problems, but the stock price is telling another story. Till this issue is sorted, bulls are likely to tread with caution considering that valuations are not exactly cheap after the recent run up in stock price.
Only sellers in the Patanjali Foods stock on Thursday after the company’s offer for sale issue was priced at a 19 percent discount to market price. Market chatter was that the company had been dragging its feet on the OFS because it was not getting the valuation it was hoping for. And the steep discount in the OFS pricing appears to validate that. Just goes to show that irrespective of the upbeat mood in the stock, fund managers are careful about how much they pay even for the best of stories.
Offense, best form of defense
It is a phase of the market where anything and everything to do with arms and ammunition is having its day in the sun. Shares of Zen Technologies zoomed to a 52-week high on Thursday, and have now risen 40 percent in the last three sessions on the back of big order wins, including from the Government of India. Zen designs, develops and manufactures Combat Training Solutions (Simulators) for the training of defence and security forces worldwide. The stock, which has doubled in so far in 2023, is undergoing a rerating of its PE multiple. Revenues for FY23 were up around 14 percent, but net profit fell around 22 percent. The sudden craze for the stock seems to suggest that bulls are betting on a bumper year. Traditionally, defence stocks have not traded at high PE multiples because of execution risks and delay in getting payment from government for the work done. But at this point, nobody wants to talk about possible downside.
New King on The Block
How times change. Saudi Arabia, which has for long lorded over OPEC+, is set to fall below Russia as the largest oil producer in the cartel, reports WSJ. The Gulf kingdom has in the recent months slashed its oil output, sacrificing its market share in an attempt to prop up crude prices. Analysts estimate Riyadh needs oil prices of around $80 a barrel to balance its state budget and fund lavish infrastructure projects. Riyadh’s latest 1-million-barrel-a-day production cut is set to begin this month and extend into August, taking its output to a two-year low of nine million barrels a day.
The yield curve in US treasury bonds remains inverted, but it is not as bad as it looked till a few weeks ago. The yield on the 2-year Treasury bond is now 0.88 percentage points higher than the 10-year yield, down from 1.1 percentage point in late June. The narrowing reflects market expectations that the Fed will soon stop raising rates because inflation has begun to cool and then gradually start cutting rates. But much still depends on the strength in the labour market, which has so far defied high interest rates. The Fed is worried that if the labour market continues to remain strong, inflation is unlikely to fall anytime soon.
(Abhishek Mukherjee contributed to this article)