L&T, Britannia, Bajaj Finance: Ambit Capital's super bloopers

Saurabh Mukherjea
Even the biggest of brokerages and the best of analysts fail in their assessment of how the markets will play out. In a note to its clients, Mumbai – based brokerage and research house, Ambit Capital, has owned up to making bloopers over the past 12 months – the biggest of them being an incorrect estimation of the impact of government’s demonetisation plan.

“Having been one of the earliest on the street to point out Modi's intent to go after black money, we then went on to say post de-mon that GDP growth would come under severe strain given India's cash driven economy. We had said that GDP growth would fall to 0.5% in H2FY17, implying 3.5% growth rate for FY17. We acknowledge humbly that the listed market and formal space coped surprisingly well with the drying up of cash,” wrote Saurabh Mukherjea, chief executive officer, Ambit Capital in a July 11 note to clients.

Also Read: Saurabh Mukherjea's last interview to Business Standard - 'There is a real risk of a significant market correction'

Ambit has also identified three stocks – Bajaj Finance, Britannia and Larsen & Toubro (L&T) – where its calls went wrong, as they have been perennial sellers in these counters. 

Here’s what Mukherjea had to say about the big three misses:

Bajaj Finance: We confess that we under-estimated the power of their cutting edge analytical prowess and their ability to launch new products continuously and successfully despite competitive pressures on existing products.

L&T: Having never been comfortable with the company’s ‘growth first’ approach and poor capital allocation, guess what we did when they announced their intent to correct their balance sheet, sell non-core businesses and increase RoEs? Yes, that’s right. We reiterated SELL. TWICE! Big learning – when the management openly announces intent to change and course correct, pay more attention please.

Britannia: This is a stock where we’ve been a seller even after an analyst change. The irony here is that the new analyst covering the stock bought it when he was on the buy side. And yet, he promptly reiterated a SELL after joining Ambit! The learning here was that in a business where long-term strength is intact, one shouldn’t get swayed by near-term headwinds to margins.

Among sectors, Mukherjea says that the big wrong was a SELL call on the BFSI (banking, finance and insurance) segment.

“Our strong negative macro views meant that we turned net sellers on BFSI. The sharp drop in bank credit growth post demonetisation furthered our conviction on our SELL thesis. Not only did stocks recover sharply from the post de-mon lows, several non-corporate lenders maintained reasonable loan growth and margins. Learning – a good business/management will find a way to adapt to bad times,” he says.

Dilip Buildcon and RBL Bank were two prominent initial public offer (IPO) calls that Ambit got wrong, the report says. However, Crompton Consumer and Maruti Suzuki were two stocks where Ambit recommended a counter-consensus SELL, which again proved the consensus was right. 

In case of Crompton Consumer, the management eventually managed drive cost efficiencies and Ambit didn’t imagine existed; and in case of Maruti Suzuki, Ambit always compared its multiple to is historical average and found it to be expensive.

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