Bernstein Research removes IEX short, adds RIL, Biocon, M&M to portfolio

Bernstein Research has added Reliance Industries Ltd, Biocon Ltd, and Mahindra and Mahindra Ltd to its portfolio and has eliminated its cash allocation and covered its short positions from IEX as it expects a market rebound in 2QCY23.

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Bernstein Research has removed Indian Energy Exchange Ltd short position and eliminated its 10 percent allocation to cash from its portfolio as it expects a market rebound in the second quarter of 2023, while adding Reliance Industries, Biocon, and Mahindra and Mahindra to its portfolio.

Over the past year, IEX’s stock has been declining steadily, with the shares falling by almost 35 percent. Recent reports indicate that the Dalmia Bharat Group plans to sell off its entire 15 percent stake in India’s primary power trading platform.

In its previous report, Bernstein expressed concerns about multiple challenges that IEX may face in the future. First, the entry of a strong competitor, PTC India, and ensuing price wars. Second, the risk of tariff ceiling, and third, the possibility of mandatory coupling if market-based economic despatch (MBED) is implemented.

This would result in the mandatory pooling of power and exchanges. The report also noted that the volumes on the exchange had fallen in the current quarter due to a lower ceiling for transactions. In addition, Bernstein expressed skepticism about the exponential growth potential of IEX and believed that the stock was overpriced.

The brokerage firm has upgraded Biocon to an ‘outperform’ rating based on positive developments in the US biosimilar market. Reliance Industries was reintroduced, while M&M has corrected due to concerns over the slowdown in rural markets caused by weaker-than-expected monsoon. The brokerage firm retained Infosys, Zomato, HDFC Bank, Axis Bank, State Bank of India, Cipla, Crompton Consumer, Ultratech and L&T to its portfolio.

It reports that a reduction in commodities is expected to support margins, and early-cycle benefits in financials and real estate are increasing the expectation of low earnings risk. The firm argues for positive returns in the near term, with Nifty heading back to 18,000-18,500.

The brokerage firm reports that while some sectors have seen downward revisions, upgrades in financials have offset these declines. A reduction in commodities is expected to support margins, and early-cycle benefits in financials and real estate are increasing the expectation of low earnings risk.

“Since we see this as more driven by the domestic economy, we highlighted sectors like financials, real estate, and cement to do well. The early cycle nature of recovery is expected to support these sectors, and we still maintain our ‘OW’ stance. We also remain a marginal OW’ on IT, healthcare, and durables. We remain ‘UW’ on staples, utilities, metals and industrials (excluding L&T, cement),” Bernstein said in its report.

The brokerage firm sees the Q3 GDP growth of 4.4 percent as the bottom, with interest rates and inflation nearing their peak and margin risks moderating due to a decline in commodities. Positive support from early cycle sectors like real estate and financials, along with a good winter cropping season, are expected to boost growth. Manufacturing growth is expected to turn positive in Q4FY23 after YoY declines in Q2/Q3FY23. Although the outlook for monsoons is unclear, recent comments from IMD suggest a normal monsoon season.