The Smart

QUICK TAKE: GAS DISTRIBUTORS MAY POST STRONG SHOW “After being bullish for several months, we are

Investor
definitely becoming more cautious on the stock
BS City Gas Distribution Shares of Indraprastha Gas, Mahanagar Gas and Gujarat Gas market up at these levels... $ is so extremely
Index
have outperformed indices since mid-November. JM oversold, over-hated, and over-shorted
Financial, which is still bullish on these companies, that it all, but has to rally for a
MUMBAI | estimates them to see strong volume growth to near pre-
while at some point soon”
TUESDAY, 12 JANUARY 2021 Covid levels in Q3. Though margins may normalise for Gujarat MATT MALEY
Chief market strategist
Gas, the other two are likely to see improved profitability
Miller Tabak + Co
WWW.SMARTINVESTOR.IN FOR INFORMED DECISION MAKING <

Promoter pledging Heavyweights’ grip on Nifty loosens in Dec

Top 5 stocks contribute 42.4%, against 42.66% in November managers do not get to participate in

declines to 2-year
the stock’s outperformance if its
ASHLEY COUTINHO weighting exceeds 10 per cent.
Mumbai, 11 January NIFTY50 LEADERS “The outperformance of a few stocks
Weighting (%) n November n December can pose a challenge for fund managers
The concentration of the top five as they won’t be able to participate in

low of 11% in Dec

11.21
Nifty50 stocks reduced slightly in the uptick owing to risk diversification

11.17
10.66
10.37
December over the previous month, parameters and softer single-stock

7.64
7.61
7.23
indicating a broad basing of the index. limits. A lower stock weighting will

7.21

6.12
5.84
Market pundits believe that the mar- make it easier for fund managers to beat

4.99
5.04

4.85
ket rally this year is likely to be less con- the benchmark, and narrow the per-

5.0
centrated and that polarisation — where formance band among managers,” said

3.55
But value of pledged holding rises, buoyed by market rally

3.42

3.03
3.03
a handful of stocks outperform the index Jaideep Bhattacharya, co-founder and

2.61
— will become less pronounced in 2021. director, DEEPTAM Advisors.
SUNDAR SETHURAMAN The top five stocks contributed 42.4 Typically, fund managers can gen-
Thiruvananthapuram, 11 January per cent to the Nifty50 index, com- erate alpha by taking exposure to out-

NA
pared with 42.66 per cent in performing stocks that are not index
HDFC RIL HDFC Infosys ICICI TCS Kotak HUL ITC L&T

T
he extent of pledged November. The top four sectors — heavyweights. But in a narrow market,
promoter holding fell financial services, information tech- Bank Bank Bank this becomes a challenge, particularly
to a two-year low of 11.2 nology, oil and gas, and consumer Source: Exchange for large-cap schemes, which largely
per cent at the end of goods — formed 79.1 per cent of index focus their investments in the top 100
December 2020, according to weight as of December. weighting of 14 per cent on the Nifty50 cent. The weighting for the Nifty50 stocks in terms of market value.
data provided by primeinfo- Stocks such as Reliance Industries index as of July 31. RIL had a weighting components are computed using free- These schemes might underper-
base.com. Analysts said rising (RIL) and HDFC Bank now have a of 8.77 per cent as of March 23 and float market cap. form the indices unless market
markets drove the decline. weight of 10.66 per cent and 10.37 per nudged past 10 per cent in June. The steep run-up in RIL and its breadth improves and a sizeable
“As stock prices have risen cent, respectively, compared with 11.17 RIL was in the news in the last few weighting had posed a challenge for number of stocks start to rally. A diver-
over the last few quarters, pro- and 11.21 per cent, respectively, in months due to an investment spree in fund managers as active funds aren’t sified equity scheme typically invests
moters have been able to November. A few months ago, RIL had its digital subsidiary Jio Platforms. The permitted to hold more than 10 per cent in 45-60 stocks.
release some of the shares out touched a weighting of 15 per cent. company also hit the market with a in a single stock in a particular scheme. The pandemic is expected to tip
of pledge as the value of RIL shares have slid 19 per cent rights issue of ~53,000 crore. In addition, individual fund houses the scales further in favour of com-
pledge has gone up. Also, from the 52-week high of ~2,368 it hit RIL shares have surged 117 per cent have softer limits that prevent buying panies with higher market share and
some promoters could have in September. The stock had more than since March 23, outperforming the a stock above certain thresholds, say 5 well-entrenched businesses. It
released some of the pledged doubled from its March lows and quad- Nifty50, which gained 90 per cent. per cent or 7.5 per cent of the overall remains to be seen whether this will
shares by raising monies from rupled since December 2016, with a HDFC Bank shares have risen 91 per scheme holding. This means that fund lead to further polarisation.
other sources and repaying
lenders,” said Deepak Jasani,
head-retail research, HDFC
Securities.
Pranav Haldea, managing
ILLUSTRATION: BINAY SINHA

PLEDGED SHARES IN NSE-LISTED COMPANIES

India maintains global m-cap ranking
director, PRIME Database, India delivered the third-highest return among key and health care (12 per cent) were the top sectoral
said promoters can release a
portion of the shares as the
% of total pledged promoter holding global markets in local currency terms, with returns of
9 per cent. In US dollar terms, India’s performance was
performers, while metals (-4 per cent), power (-4 per
cent), and realty (-1 per cent) were the chief losers. Top
STATUS CHECK
margin requirement comes
14.0 more subdued with returns of 3 per cent individual gainers in the Nifty50 index Global ranking on m-cap basis
down. “Since March, there 13.0 compared with 12 per cent for the S&P include Bajaj Finance (54 per cent), Eicher
M-cap rank M-cap CAGR (%)
has been a continuous decline 500, 8 per cent for Japan, and 5 per cent Motors (35 per cent), and Bajaj Finserv (35
in promoter pledging due to for Taiwan, a report from Motilal Oswal per cent), while top losers include ONCG
CY10 CY20 ($ tr) 5 yr 10 yr
12.58 12.0
the rally in markets. If the Financial Services observed. Indian (-8 per cent) and Coal India (-8 per cent). US 1 1 42.6 13 11
market continues to rise, 11.0 markets, however, outperformed the Top gainers in BSE 200 include Astral China 5 2 10.9 9 13
pledging levels will continue 11.22 MSCI EM (1 per cent) and beat other Polytech (53 per cent) and Ajanta Pharma Japan 2 3 6.8 6 5
to come down.” 10.0 emerging markets such as China, Russia, (50 per cent), while top losers include KSK HK 4 4 6.5 10 7
Moreover, high pledge Jan 31,’19 Dec 31,’20 and Brazil, which gave negative returns. Energy (-41 per cent) and Educomp UK 3 5 3.3 -1 0
levels are typically not consid- Source: primeinfobase.com India has maintained its market Solutions (-39 per cent). France 7 6 2.9 9 5
ered a good sign by investors, capitalisation ranking at number 8 with The PSU share in the Indian market was
Canada 6 7 2.6 10 2
given that a downturn in mar- pledging has also helped reduced significantly after Sebi an m-cap of $2.5 trillion after slipping to at a two decade low at 10 per cent. The
ket price could lead to invo- reduce the decline in pro- came out with stringent guide- number 10 in 2015. China, which was at number 5 in poor showing by PSUs in 2020 is attributed to a decline India 8 8 2.5 11 4
cation and change in manage- moter pledging. lines regarding their participa- 2010, is now at number 2 with an m-cap of $10.9 in the share price of industry heavyweights such as Germany 9 9 2.5 6 5
ment. Investors tend to be In 2019, Sebi mandated tion after corporate houses trillion. The world m-cap has nearly doubled in the State Bank of India, Oil and Natural Gas Corporation, South Korea 13 10 2.1 12 7
wary of a company that promoters to disclose detailed were unable to repay loans past decade to $103 trillion. NTPC, Indian Oil Corporation, and
pledges its shares. reasons for the back in time,” Technology (13 per cent), consumer (12 per cent), Coal India. ASHLEY COUTINHO Source: Motilal Oswal Financial Services
Of the 1,684 companies encumbrance Haldea said.
listed on the NSE, 448 had at separately, if the Of the 1,684 At the end of
least some shares pledged in pledge crossed companies listed December 2020,
December 2020, down from
470 in January 2020.
20 per cent of the
company’s total
on the NSE, 448
had at least some
26 firms had
pledged 100 per
NSE launches derivatives on Acuité Group launches firm GAIL to consider dividend,
The value of pledged hold- share capital or shares pledged in cent of the pro- Nifty Financial Services Index to provide ESG ratings share buyback on Jan 15
ings, however, rose to ~2.84 50 per cent of December 2020, moter holding,
trillion, or 41 per cent, from total promoter down from 470 77 entities had The National Stock Exchange (NSE) on Monday Acuité Group has launched ESG Risk Assessments & GAIL (India) will on Friday consider buyback of shares
the end of January 2020. This holding. in January over 90 per cent launched derivatives on the Nifty Financial Insights in order to assess a company’s ESG perform- with a view to returning surplus cash to shareholders,
is the highest in two years. “Between of the promoter Services Index, which will give more flexibility to ance and assign a rating. ESG Risk AI will provide the biggest being the Government of India. In a stock
Analysts said the rise in stock 2015-2018, mutual funds were shareholding pledged, while institutional as well as retail investors to manage ESG ratings of the top 1000 Indian listed companies, exchange filing, the company said its board will meet
prices has also led to a rise in very active in the promoter 172 others had over 50 per their hedge. This is the first time that the by evaluating their performance on Environment, on January 15 to consider share buyback as also pay-
the value of promoter pledges. share pledging market. MF cent pledged. Companies exchange has made available weekly futures Social, and Governance parameters as well as their ment of interim dividend for the fiscal year ending
The Securities and houses through their credit like GMR Infrastructure, CG for stock index derivatives. The index consists reporting transparency. Its assessment approach March 2021. It did not give details. The government
Exchange Board of India’s funds were investing heavily in Power, Deepak Fertilisers of 20 stocks and is designed to reflect includes identification of relevant risks, estimation has asked at least eight state-run companies to con-
(Sebi’s) tightening of regula- papers backed by promoters’ saw a rise in the number of the behaviour and performance of the Indian of materiality and polarity of the risks, and evaluation sider share buybacks as it scours for ways of raising
tions regarding promoter shares. However, their role has shares pledged. financial market. PTI of risk management framework. BS REPORTER funds to rein in its fiscal deficit. PTI

THE COMPASS
Successful resolution of DHFL critical for banking sector
Reports suggest HAMSINI KARTHIK
potential In just about a week or so we will get to
know who emerges successful in the bid
recovery of 35% for beleaguered housing financier
from the bid Dewan Housing Finance Corporation’s
(DHFL’s) business.
process For banks leading the negotiations
with DHFL’s administrator and inter-
ested investors, the outcome of the bid
will be critical to reassure that systemic
risks, like the one that the industry went
through since September 2018, aren’t
insurmountable.
DHFL was the first to suffer the brunt
of the cost of funds which escalated after
the Infrastructure Leasing & Financial
Services (IL&FS) crisis. Since then, the
lender never got back to its feet. It is also
the only non-banking financial company
(NBFC) whose loan outstanding was
referred for restructuring under the June
7, 2019, circular issued by the Reserve
Bank of India (RBI). With no consensus
on recast, it was referred for insolvency
by the central bank in November 2019.
Abhinesh Vijayaraj of Spark Capital calls
DHFL a test case in many ways.
Also, with the share of bank loans to
NBFCs steadily on the rise, especially for
those rated ‘A’ or lower, putting in place
an established resolution plan is impor-
tant. Since the IL&FS fallout, the share
of bank loans to NBFCs’ liabilities has
risen to 31.2 per cent in September 2020,
from around 25 per cent.
On the other hand, NBFCs’ depend-
ence on market borrowings (bond market
instruments) is also increasing. The
number stood at 42.7 per cent in
September 2020, up from 41.8 per cent
in June, thanks to a slew of liquidity-
inducing measures, such as partial credit
guarantee scheme, targeted long-term
repo operations (TLTROs), and special
liquidity scheme.
Analysts say with NBFCs continuing
to replace short-term money with stable
long-term funds, the dependence on
bonds and bank facilities is set to
‘Full-blown mania’: Market
jackpot bells keep ringing
increase. Banks are also an active player
in the TLTRO segment and hence, it’s in JOANNA OSSINGER, LU WANG &
their best interest that the NBFCs evolve ELENA POPINA WRONG SIGNAL
a resolution mechanism to shield them 11 January Signal Advance (in $)
from further contingencies.
Another important aspect is that of
the quantum of recoveries. The data indi-
Like a slot machine paying off
on every pull, the stock mar-
cates that the Insolvency and Bankruptcy ket’s most reliable bets lately
Code evoked recovery, which has been have often been its riskiest.
twice more effective, compared to the Go long a company that
normal recovery process in terms of the sounds like something Elon
quantum recovered. Musk mentioned in a tweet
In DHFL’s case, while most banks (but wasn’t)? Signal Advance
have written off their exposure, the just soared 12-fold. Lend
potential recovery upon a successful bid money to a software maker to
could be a minimum of 35 per cent buy Bitcoin? A Microstrategy
going by reports, which may also be the convertible bond is up 50 per
highest recoveries so far, given the aver- cent in four weeks (its option by 10 per cent last week, rally- snapped back violently after a
age of 7 per cent. Vijayaraj feels this is in the money). ing the most in seven months. seasonal dip in the last week
could go miles in boosting sentiments Throw a dart, hit a winner, “Too much froth, too much in December, as has retail-
for the sector. so it has lately seemed. complacency,” said Matt oriented off-exchange trad-
This is why, with the pandemic hav- Emboldened by Federal Maley, the chief market strate- ing, the bank says.
ing displaced some of the smaller NBFCs, Reserve stimulus, vaccines gist at Miller Tabak + Co, who “Given the anticipation of
it’s in the system’s interest that DHFL is and the psychological con- thought last week’s spectacle further fiscal support, this
resolved successfully. ditioning that arises when no in Washington would have at force is likely to be sustained
bad patch lasts, everyone least slowed the frenzy. “After over the coming weeks,”
from retail newbies to institu- a 16 per cent rally in just two strategists led by Nikolaos

Investments in chemicals biz to boost SRF’s earnings tional managers is rushing to

Recovery in YASH UPADHYAYA
refrigerants Expectations of strong earn-
adds to ings growth over the next
two-three years, driven pri-
optimism marily by continuous capex
in its chemicals business,
recovery in the refrigerants
space, and demand momen-
tum in the packing and films
segment have boosted the
shares of specialty chemicals
maker SRF.
On Monday, the SRF stock
scaled a new high of ~6,030
intra-day on the BSE Sensex
before closing at ~5,916.6.
The chemicals business
accounts for over 40 per cent
of its revenue and has been
one of the key drivers of its
growth in the past three years.
The management sees signif-
icant growth opportunities in
this segment aided by strong
demand in the agrochemicals
and active pharmaceutical
ingredients (API) space and
new product launches. The
company is also looking to
invest ~750-1,100 crore over
the next two-three years with
a majority of the planned
capex flowing to its fluorospe-
cialities segment.
“Given the recently-
announced step-up in capex,
we believe it is possible that
SRF’s gross block in fluo-
rospecialities doubles in the
next 3-4 years, suggesting
that the company’s revenues
from this business should
also commensurately double
in the next few years,” said
Abhijit Akela, research ana-
lyst at IIFL Securities.
SRF’s refrigerants busi-
ness was severely impacted in
the first half of the current
financial year as demand
from the automobiles and
white goods industries suf-
fered, following the Covid-19
outbreak. Analysts are confi-
dent on the near-term outlook
of this business as demand
from autos and white goods
has seen a considerable
pickup and prices of refriger-
ant gases have started to rise.
Packaging films has wit-
nessed healthy growth on the
back of robust demand and
higher sales of value-added
products. Ramp up at its
recently started BOPP and
BOPET lines and new capac-
ity additions, such as the one
planned at Indore, are seen
supporting growth.
In this backdrop, analysts
at Sharekhan estimate SRF’s
net profit to grow at a com-
pound annual growth rate of
23 per cent during FY21-FY23.
On the flip side, slower-
than-anticipated pickup or
underperformance in the
specialty chemicals business,
margin pressure in packag-
ing and films business, and
input cost volatility are the
key risks cited by analysts.
Shares of the firm have
gained 34 per cent in the last
three months, compared with
20 per cent for the BSE
Sensex. Given the sharp rally,
a correction could offer a good
entry point for long-term
investors.
cash in on the 10-month-old
meltup. Predicting exactly
when such fevers will break is
a near impossible task. But
bubble warnings are starting
to blare from every corner.
“It’s a full-blown mania,
and the bull’s relative youth
doesn’t make it ‘safer’ to
climb aboard,” Doug Ramsey,
Leuthold Group’s chief invest-
ment officer, wrote in a
January 8 report to clients —
which went on to note his
firm has also been among the
buyers.
Chasing momentum is
working. Four days after end-
ing the year at almost 40x
earnings, the Nasdaq 100
Index posted its biggest rally
in two months. Hedging
against stocks, on the other
hand, has been costly. A bas-
ket of favoured manager short
positions went against them
months and a 70 per cent rally
since March, that news should
have knocked down the mar-
ket. A 10-15 per cent correction
would be normal and healthy.”
Tesla’s ability to add 25 per
cent to a market value of
almost $700 billion over five
days made headlines last
week, but for real froth, the
options market was the place
to look. Calls expiring on
January 15 with a strike price
of $1,000, the most-traded
Tesla option Friday, quintu-
pled Friday, ending the week
at $9.15 after starting at 53
cents each.
Individuals appear to be
driving the action, according
to JPMorgan Chase & Co,
which cited a proxy for NYSE
margin-account data indicat-
ing a potentially strong
pickup in December versus
previous months. Small-
trader call option buying has
Panigirtzoglou wrote in a note
Friday.
The industry has taken
notice. Cboe Global Markets
has been tailoring products to
smaller investors. It refreshed
mini S&P Index options to
enhance liquidity and pro-
vide better execution for retail
customers, after in June say-
ing it would revive a mini-VIX
product aimed at least par-
tially at smaller traders.
The firm tried to “make
some products that account
for these changes in investor
demand, which we believe is
here to stay,” Arianne Criqui,
Cboe’s head of derivatives and
global client services, said in
an interview in November.
Sundial Capital Research’s
Jason Goepfert has been rais-
ing flags since the end of
December over how big a
force retail traders exert in the
options market. BLOOMBERG