EQUITY WEDNESDAY Issue #3 Hello EveryFinions!
Have you heard about Ockham's razor? It is the problem-solving principle developed by the English philosopher William of Ockham. If is often paraphrased as this - Everything should be made as simple as possible, but no more simple. This concept is so powerful that it has widespread applications in physics, biology, religion and probability theory.
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IN TODAY'S EDITION
RESULTS UPDATE
We have been looking at the Q2 FY21 financial results and comparing it with how companies performed in the same quarter a year ago.
How to read this graph?
134 companies are in our coverage list as of now. Some of them are off the chart, so you won't see them all. ![]()
Stating the facts
UPCOMING RESULTS CALENDAR Havells India Ltd. Oct. 29, 2020 Hester Biosciences Oct. 31, 2020 Relaxo Footwears Ltd. Oct. 31, 2020 Cadila Healthcare Ltd. Nov. 2, 2020 Pidilite Industries Ltd. Nov. 4, 2020 TTK Prestige Ltd Nov. 10, 2020 KEY CORPORATE ANNOUNCEMENTS
THAT'S WHAT THEY SAID Soundbites from last week ![]()
TREND WATCHING (1/2) China's consumption led recovery ![]() India has been a consumption led economy – We make more, we consume more and the economy grows. But China's economy was different. Till now. For the last 40 years, economic development in China was led by export growth. Around the time the world was grappling with financial crisis, a third of the Chinese GDP growth (33%) was driven by cheap exports. But with increasing salary levels and the slow disappearance of cost arbitrage, this figure has come down to 20% – The same as it is for India today. But in spite of this reduction in exports, China’s GDP data for q3 of the calendar year 2020 showed that the economy grew by 4.9% compared to the same quarter a year ago. Imports into the country surged by 13%. Key metrics like retail sales, vehicle sales, property investments etc., gained indicating that demand was robust, and recovery was broad based across sectors. IMF said that China could be the only major economy to record positive growth this year (+1.9% projected). This is when countries like US (-4.3%), UK (-9.8%) and India (-10.3%) are expected to shrink.
![]() First things first, what is going on? The generally accepted hypothesis is that China is going the India way – Turning from an export led economy to a consumption led one. And if there is one country at all that call pull that, it is China. Consider this – Your propensity to consume is directly proportional to the amount of money you have in your bank account. Agreed? The Chinese have close to $30 Trillion in money stashed up in bank deposits. That is 2X their annual GDP. The same figure for India is 0.66X and that for US is 0.5X.
Now, if you are an astute equity investor, you are probably asking yourself, “How do I get a piece of that action?”. Turns out, it is quite simple. There are China focussed fund of funds which will allow mutual fund investors in India to get exposure to Chinese stocks. One such fund recorded 54% gains in the last 1-year period (if you look it up, you'll find out which one we are referring to in no time). The chart below shows the top 5 companies (all businesses focussed on Chinese consumption) held in the portfolio of this mutual fund and their revenue/profit growth in the most recent quarter. ![]() There are favourable tailwinds for some of these businesses. TSMC for instance is the world’s largest semi-conductor chipmaker and is expected to make a windfall on the back of strong demand for 5G phones. Alibaba owned (33%) Ant financial is expecting that its upcoming IPO will be the largest ever in the world when it lists in Hong Kong and Shanghai.
There are significant risks in the short term too, however. The growing tension between US-China has meant that Chinese tech companies and chip makers like TSMC are getting caught out in the middle. The US election could prove decisive for some of these businesses. But for an individual investor who is overwhelmingly invested in Indian equities, investment in China provides an important geographic diversification in the portfolio. TREND WATCHING (2/2) Cement companies make a come-back ![]() At least 3 cement companies have announced results so far and they are all having a field day! Sales has fully recovered, and businesses have reported record operating profits growth from the year ago period. ![]() The cement industry in India has long suffered from chronic over capacity, low utilisation, high input prices and low-pricing power amongst the players. But this has changed significantly over the last few years.
Both these factors have led to higher factory utilisations and better pricing power for the incumbents. During the recent quarter, higher sales was primarily driven by better price realisation. The country witnessed average cement price increase of 3%-5%, while the southern region witnessed price increase of 14%. Capacity utilisation at the overall industry level is now around 75% - 80%. Things are looking like they’ll improve even further.
Against this backdrop, cement stocks have made significant gains in the stock markets over the last 2 weeks. From the writer in me, to the reader in you ♥
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