Why Indian Companies are Bracing for Lower Returns

(Bloomberg) -- Before the trading day starts we bring you a digest of the key news and events that are likely to move markets. Today we look at:

Good morning, this is Ashutosh Joshi, an equities reporter in Mumbai. It’s shaping up to be another down day for Indian stocks, with Nifty futures mirroring losses in Asian markets. Investor focus is on small-cap stocks’ ability to bounce back, which would slow the selling momentum. Goldman Sachs’ downgrade of local equities to neutral, citing slowing economic growth and earnings concerns, adds to caution.

Companies bracing for lower returns 

Indian companies have seen higher incremental returns from cash invested (I-CRoIC) than from revenue growth since the pandemic. However, with cost-cutting and capital optimization complete, the focus is shifting to how well they can reinvest that cash, according to Nuvama Wealth strategists. While corporates are cash-rich, they’re being cautious with reinvestment at a time when investors are fretting about high valuations, Nuvama warns. The brokerage is touting CG Power, Persistent Systems and Trent among companies that have been consistently reinvesting their capital effectively. 

Growth at risk for gold loan lenders

Gold lenders have been facing regulatory heat for a while, and now the RBI has flagged some irregular practices in the loan-against-gold space. It has asked lenders to revamp their policies and take corrective action. This can potentially impact gold loan disbursements in the near term and slow business growth, according to rating agency Crisil. Shares of major players like Manappuram Finance and Muthoot have already slumped 30% and 5%, respectively, this month.  

Tata Chemicals loses fizz on weak soda ash outlook

Tata Chemicals shares slid 4% on Tuesday, giving back almost half of the gains from the previous session after a report suggested that parent Tata Sons may have to get listed next year. Tata Chemicals owns over 2.5% of Tata Sons. Investors might recall a similar buzz back in February, when the stock jumped nearly 40% in a week, only to erase most of those gains due to a bearish outlook on soda ash prices. While the Tata Sons stake may be valuable, analysts are currently more focused on the company’s fundamentals. About 85% of them have a ‘sell’ recommendation on the stock, up from 33% at the start of the year. 

Analysts actions:

Three great reads from Bloomberg today:

And, finally.. 

After a long stretch of gains in small-cap stocks, bears are gaining the upper hand. On Tuesday, a gauge of smaller firms tumbled 3.8%, falling past its 100-day moving average for the first time since early June. Investors are reacting to weaker-than-expected earnings for the September quarter, which haven’t justified the stocks’ elevated valuations. Small caps have often been seen as a barometer of animal spirits, with their prices defying both valuation and technical indicators. But sentiment is shifting, with many investors cashing out due to a lack of catalysts for further gains. 

--With assistance from Chiranjivi Chakraborty, Alex Gabriel Simon and Kartik Goyal.

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