EQUITY WEDNESDAY

Issue #3

Hello EveryFinions!

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IN TODAY'S EDITION

• Q2FY21 results update
• Upcoming results calendar
• Corporate announcements this week
• That's what they said - Soundbites
• Trend watching - China's consumption led recovery
• Trend watching - Cement companies make a come-back

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?

• Horizontal axis represents sales growth year on year in %
• Vertical axis represents profits growth year on year in %.
• The center point at the graph where the 4 different quadrants meet is origin (0%, 0%). By virtue of it, Quadrant A (top right) represents positive sales growth & positive profits growth. Quadrant C represents negative sales growth & negative profits growth and so on.
• The size of the bubble represents market cap. Bigger the bubble, bigger the firm.
• Companies in some industries are highlighted with different colours. 

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

• The recovery in the economy is being led by FMCG companies (yellow dots).
• Almost all automotive and ancillaries (blue dots) have posted negative sales growth. Bajaj Auto’s sales and profits declined by -7% and -21% respectively.
• With the exception of HDFC bank and ICICI Lombard, most other financial institutions (green dots) have posted negative profits growth.
• Cement companies are starting to see excellent profits growth (black dots). ACC, Heidelberg and Ambuja cements are on the chart. Sagar’s profits growth is off the chart.
• We only have 2 data points for Retail (red dots). But things haven’t worked out so well for both Avenue super marts and shoppers stop.

KEY CORPORATE ANNOUNCEMENTS

• DLF announced this week its rental arm business DLF Cyber City Developers Ltd. inked one of its largest deal in commercial real estate in 2020 for an upcoming project in Chennai with Standard Chartered bank for a period of 15 years. The deal is touted to be worth over Rs.100 Cr. Per year for DLF.
• Bajaj finance’s profits fell at its fastest pace in over 12 years and dropped -36% in quarter ended September 2020 compared to the same period a year ago. It made provisions of Rs.1635 crores compared with Rs.581 crore. India’s bad loan ratio (NPAs) are set to increase significantly this year and the country is due to take the second spot amongst comparable countries for the highest bad-loans ratio. We wrote about it last week here.
• Aurobindo pharma informed the stock exchanges this week that the company’s US subsidiary has received a warning letter from the US FDA for its oral solid manufacturing facility in New Jersey. Sadly, Indian pharma companies are yet to come up with a drug that cures USFDA-warnings-syndrome.
• Dr Reddy’s lab made an announcement to the exchanges this week that it was subject to a cyber-attack. It was reported that the attack forced the company to shut down all its global manufacturing facilities. 

THAT'S WHAT THEY SAID

Soundbites from last week

• “If the focus under Aatmanirbhar Bharat initiative is on import substitution by erecting tariffs, which we have done lot of in the last few years, then I think it is a direction we have tried before and it has failed.” Said Raghuram Rajan during a webinar this week.
• "The whole purpose of subsidiarisation is to actively look for a partner because this is a reality for all of us that a collaboration can unleash a bigger potential in the next decade" said Shailesh Chandra from Tata Motors in an interview on how the company is looking for a partner.
• “There is nothing as sacred as knowledge in this world. Those who spread knowledge, who take such noble initiatives, I commend all such great people from the core of my heart” said Prime Minister Modi during Sunday’s Mann ki Baat. He was probably talking about us 🙂
• “Empirical evidence suggests that consumption-led recoveries are shallow and short-lived.” Said RBI's Deputy Governor Michael Patra about the economic recovery we are witnessing.

TREND WATCHING (1/2)

China's consumption led recovery

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.

• Large scale consolidation driven by players like Ultratech Cement improved the competitive landscape
• Low realisations and wafer-thin industry profitability kept new entrants away

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.

• Demand is starting to increase. Kumar Mangalam Birla said this week that this increase in demand is being driven by migrant workers moving back to their hometowns. “People are now building a new home, they’re adding one more room to their existing houses out of safety — just in case they have to stay at their homes for longer,” Birla explained. In addition, government’s fiscal spending push in the infrastructure sector is slated to increase demand for cement even more.
• Prices of key raw materials used in cement production have significantly decreased over the last few quarters. Prices of crude oil, pet coke, PP granules and energy/fuel have gone down by anywhere between 5% and 55% over the last one year. This has meant that profits have grown faster than sales.

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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