Short Call: ‘This time it is different’ chants getting louder, M&M, RBL Bank, Indian Hotels in focus

Over the past few days, the market has been sinking, but anecdotal evidence suggests that sentiment is much better than what it was last month.

The most important metric is not returns achieved, but returns weighed against risks incurred. Nothing should be more important than the ability to sleep soundly at night. ~ Seth Klarman

Till a month back, the market was rallying and the mood was one of cautious optimism or benign scepticism, as one would like to see it. Over the past few days, the market has been sinking, but anecdotal evidence suggests that sentiment is much better than what it was last month. That’s because there is a growing belief that the downside is likely to be limited for a variety of reasons. For one, despite concerns that stocks may have become overvalued, people are reluctant to sell.

And many PMS/advisory service providers who burnt their fingers in the midcap meltdown of 2017-18 feel that ‘it is different’ this time.

“Unlike in the previous bull market of 2017-18 or even 2007-08, you are not seeing concentrated bets in a single sector or just 2-3 sectors, money has been constantly moving across sectors,” said one such PMS fund manager. “Two, because corporate balance sheets don’t have much debt, the pain will be much lower in the event of a slowdown. Three, mutual fund investors are unlikely to redeem in panic as they have done during the previous downturns.”

Another value investor, who has been around for over three decades in the market says this is not a buyer’s market, but at the same time, there is much less leverage in the system than there used to be during previous market peaks.

“The market for loan-against-shares has shrunk considerably unlike in 2007-08 when some MNC banks would write out cheques for Rs 150-200 crore without batting an eyelid,” the investor told Short Call. “Also brokers cannot fund clients through their NBFC arms because of the new SEBI rules, so that has also reduced system leverage considerably. Corporates are not highly levered (debt on books) like before, government balance sheet is in good shape, very few HNIs are taking crazy bets….the excesses of the past are missing, and that makes the market appear much safer.”

So where is the catch?

"This is a peculiar market where investors are rushing to load up on mid and small cap stocks, but not willing to buy frontline stocks that are a play on the economy," said Shyam Sekhar, founder of Chennai-based ithought Advisory told Short Call.

"It is not the dash for trash that was seen in 2017-18, though there will always be some junk companies in every bull run. It is more like investors are over paying for decent ideas. So you may not see a sharp correction, but those buying at these prices will have to wait longer to make a good return," he said.

Mahindra & Mahindra

When valuations become expensive, any debatable decision by a company will be viewed harshly. That was seen in the way the market punished M&M shares after the auto major said it had picked up a 3.5 percent stake in RBL Bank. Some veteran players pointed out M&M’s history of poor capital allocation and worried that the company may be slipping back into old ways. Others fretted that the purchase was contradictory to its stated goal of cutting back on non-core businesses.

And here is the company now talking about possibly increasing its stake in RBL Bank to 9.99 percent (assuming the RBI green lights further purchases after the 5 percent mark). And yet another section that market reaction was just an excuse for a correction in the stock, considering it had run up a fair bit from the March lows. Why the investor angst over M&M’s decision? The company has spent Rs 417 crore on the purchase already and looks ready to spend more. This comes at a time when automakers in general are facing multiple demands on their cash flows, as they look to strike a balance between internal combustion engine, hybrids and electric vehicles. And since EV is a developing technology, it will require some serious R&D, and hence cash.

At this point, the street is not seeing this as a signal of M&M’s ambition to get into banking at some point, given RBI’s aversion to corporate ownership of banks. Some see this as a collaborative move whereby RBL Bank will be the preferred financier for M&M’s products and services in urban centres.
Interestingly, a bank that had been written off by the Street barely a year ago, is now attracting a motley set of investors. Zerodha picked up a 1.26 percent in the December quarter last year, Hydra Equity Investments, in which philanthropist Vita Dani is a director, picked up a 1.26 percent stake in the March quarter, and now Mahindra & Mahindra.

Indian Hotels

The first quarter numbers were slightly below analyst estimates, partly because of seasonal factors, but the view on the hospitality sector, in general, remains positive. Some frequent business travellers say hotels are not as packed as they were a couple of months back, and room rates too have been stable after a one-way climb over the last year. But backers of the hotel story again attribute it to seasonal factors..people are traveling less because of the rains, they say.

Despite the bullish outlook, hotel stocks have risen at a much slower pace in 2023 compared to stocks from other sectors. Hotel owners are upbeat and see scope for raising room rates further, but the stock price performance indicates that the market would rather wait to see that happen than jump the gun. The structural story may be compelling, but at the end of the day, hotels remain a cyclical business.

Jefferies on Indian Hotels: “While 1Q EBITDA was a miss and stock may remain range bound in near term, we believe IHCL is an attractive proxy to domestic macro tailwinds over medium to long term. 2HFY24 bodes well for space with occupancy boosting events.”

Target deferred

Electric vehicle is among the hottest stories in markets across the globe, but things on the ground are playing out differently. Ford Motor on Thursday pushed back production targets for its electric vehicles, saying adoption of electric vehicles was happening at a slower-than-expected pace. The auto major now aims to produce 600,000 vehicles sometime in 2024, against the previous estimate of late 2023. Also, it said it was not sure when it would hit its target of 2 million vehicles per annum, initially forecast for end 2026.

Small banks

“Shark Tank” investor Kevin O’Leary is in the camp that believes that the optimism over the US economy could be misplaced and that more regional US bank could fail if the Fed continued to raise interest rates.

“I am just predicting — and I am very cautious on this — it will break down in the regional banks, which supports 60 percent of the economy,” he told CNBC, “.. let’s wait 90 days to see what happens in the small banking arena in the United States,” O’Leary said.