Olympic badminton medal winner, PV Sindhu, gave her fans a mini-heart attack this week. She said, "I RETIRE". Thankfully, she wasn't saying she was retiring from the sport. But rather retiring from the current state of negativity, fear and uncertainity created by COVID-19. At least one of her fans took to twitter saying, "You give us enough heart attacks on the court. Stop doing it off the court too!" 🙂
Speaking about retirement & heart attack, insurance companies have posted excellent results in Q2FY21. SBI life recorded 22% increase in net premiums while gross premiums for HDFC life went up by 35%! Sales of COVID specific health insurance policies grew by 10X in 1 month from September to October. Have you got yours yet?
IN TODAY'S EDITION
Q2FY21 results update & upcoming results calendar
Corporate announcements this week
That's what they said - Soundbites
Trend watching - Watch the skies before investing in airlines stocks
Trend watching - Nifty PE ratio in a territory not seen in 20 years
Stock story - HDFC Asset Management Company
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.
About 300 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
With the exception of Reliance Industries, most large companies (bigger bubbles) are on the right side of the chart (quadrants A & B), indicating that sales, if not profits, is starting to recover for the bigger firms. The smaller ones however are still struggling.
FMCG companies continue to lead the way with their results.
In the BFSI space (light blue), most businesses clocked in negative profits growth with the exception of well managed banks like HDFC, Kotak Mahindra and HFCs like Can-fin homes.
Auto and auto ancillaries are showing mixed results. While OEMs themselves struggled in Q2, suppliers to these OEMs operating in niche areas like engine manufacturing, transmission components and chassis applications have all released very good results.
PVC pipe manufacturers like Finolex industries, Apollo pipes have posted excellent results. This combined with the recovery witnessed by cement companies points to a possible recovery in construction activity across the country.
Textile companies (light green) are still struggling. But at least 1 mattress manufacturer (Sheela Foam) has posted very good results. We wonder why that is 🙂
UPCOMING RESULTS CALENDAR
Berger paints India Ltd.
Nov. 5, 2020
Nov. 5, 2020
Astral Poly Technik Ltd.
Nov. 6, 2020
Divi's laboratories Ltd.
Nov. 7, 2020
Bata india Ltd.
Nov. 10, 2020
TTK Prestige Ltd
Nov. 10, 2020
KEY CORPORATE ANNOUNCEMENTS
Top 6 two-wheeler manufacturers with the excetion of Eicher motors, (Hero motocorp, Honda, Bajaj auto, TVS motor, Suzuki and Yamaha) have posted their biggest monthly sales growth this year in October. Sales went up by 17% last month for the overall industry.
In a dramatic turn of events, as if straight from the movies, what was supposed to be the world's largest IPO for Ant financial, was pulled out from Hong Kong and China by the regulatory authorities for reasons still unclear.
Cadilla healthcare this week announced to the stock exchanges that the company has filed an application for an investigational new drug to treat COVID-19. The company reported that the drug has responded well to pre-clinical trials and is now seeking permission to test it on people. Stock price appreciated by 7% at the end of trading day yesterday.
THAT'S WHAT THEY SAID
Soundbites from last week
"On the listing day, we recommend booking profit if by any chance the stock price moves higher than the issue price. However, one should hold it for a long time in case the issue lists at a discount. For fresh entry we advise not to buy on listing day," - A clueless equity research analyst in an interview with Moneycontrol about Equitas Small Finance Bank's IPO listing. The stock listed at a 6% discount on opening day trade this week.
"Manufacturing PMI in October came in at its highest level since October 2007, showing that companies are receiving a higher number of new orders and that they expect this to continue in the months ahead." - The finance minister's office on Twitter. The media however was much less gung-ho about the PMI figures.
“I would request you to direct all the internet service providers to block all online gaming, gambling and betting websites and apps from access in Andhra Pradesh,” - Andhra Pradesh Chief minister Y.S. Jagan Mohan Reddy in a letter to IT and telecom minister Ravi Shankar Prasad after banning online gambling in the state.
“When we invest, we know everything about an industry, its top five people, their personality, their weakness, their greatness, everything about them,” - Qian Yongqiang, who runs the world's most successful hedgefund of this year called QQQ capital management, after posting gains of 275% so far.
TREND WATCHING (1/2)
Watch the skies before investing in airline stocks
Richard Branson, the billionaire owner of Virgin Atlantic Airways, once said, “If you want to be a millionaire, start with a billion dollars and launch a new airline.” Here is a look at how stock prices of some of these deeply unlucky companies have changed since the beginning of this year.
Indigo’s share price is the least impacted amongst them all. What we don’t understand, is where this optimism in Indigo’s share price is coming from. The airlines which released quarterly results this week posted further losses to the tune of Rs.1,200 crores. To be fair, this figure is less than the loss they posted in the Q1 of this FY (Rs.2,850 crores). But it is still really significant. The total losses Indigo is about to incur this year will pretty much wipe out the entire profits they made over the last 4 years! Is the market seeing something we are not?
Let’s take a look at the skies. Here is a comparison of how many flights were in the Indian skies on different dates.
On Sunday 9th of August 2020 (3 months ago)
On Sunday 1st of November 2020 @ 10:53AM
Clearly the number of domestic flights in our skies have increased in the last 3 months. But that is only half of the story - They are still a long way to go to just match the number of flights we had in our skies a year ago. Take a look below.
On Sunday 3rd of November 2019 (1 year ago)
Also notice, there are a lot fewer flights above our seas - indicating that while domestic flights are coming back to life slowly, international flights are simply not.
Exacerbating the problem is this - it is not just that there are fewer flights in the skies, there are fewer people onboard these flights. Load factor for Indigo was 65% in the most recent quarter vis-à-vis 84% during the same quarter a year ago. Here is a look at the load factor for all airlines across the country.
But here are the images that terrify CEOs of airline companies the most. Alice Springs, which is in the middle of the Australian desert, has an airport with an attached aircraft storage unit. Here is an aerial image of that storage unit about a year ago in November 2019. You can hardly see any aircraft in storage.
The same aerial image shot by a satellite last week looks like this. Those crowded white dots on the image are all aeroplanes packed up and stored.
The aircraft storage business is BOOMING! And based on our cursory view, the number of aircrafts in storage has only gone up in the last 3 months and not down! Here is another image of the same place that Bloomberg published last week.
Recovery in airlines is going to take a really, really long time. Tesla car owners keep saying, “if I’d bought Tesla shares instead of the car, my money would have tripled in the same time”. I can hear airline stock investors saying, “if I’d bought a plane ticket instead of the shares, my money would have taken me to places”. Well, may be not even that.
TREND WATCHING (2/2)
NIFTY PE ratio in a territory not seen in 20 years
Price to Earnings ratio (PE ratio) is a key valuation measure of how expensive the stock market is relative to the earnings of the underlying businesses. This chart below tracks the PE ratio of the index over the last 20 years.
At the end of yesterday's trade, NIFTY50's PE ratio was a phenomenal 31.82. To put that into perspective, levels like these were never seen before in the last 20 years from 1999-2019. The median PE of NIFTY50 during this time was just 20.
Here is a frequency distribution chart showing the number of months over the last 20 years NIFTY's PE ratio spent on different levels. The average level is anywhere between 18-23. The current level is far down the right of the bell curve indicating the market is clearly extremely overvalued.
The reason this ratio is so important is that investment returns from the stock market are negatively correlated with the level of PE. Higher the PE, lower the returns.
To help you see it, this chart below shows the 5-year return on investment made over each month of the last 20 years. To help you interpret it, Rs.100 invested in January 2000 when the PE ratio was just above 25 would have returned just under 5% per year over the next 5 years.
What you should be able to see is that when the yellow line goes up, the green line goes down and vice-versa - negative correlation.
Finally, here is a chart showing the average 5-year annual returns earned on investments made at different PE levels of the market. To help you interpret this chart, an investment made when NIFTY50 PE level was between 11-12 returned close to 40% CAGR over the next 5-year period (on average).
This chart tells us that to make at least fixed deposit equivalent returns from the stock market, we have to wait till the PE ratio gets to 23-24. And for that to happen now, one of two things will need to happen
Earnings of NIFTY constituents will have to go up significantly without any corresponding price increase of stocks OR
There will need to be a massive correction in stock prices.
The asset management in India is one of the very few industries that has both grown at a sweltering pace and still remains under-penetrated. How under penetrated? Really, really under-penetrated. This infographic should drive that point home.
But before we go into the details, let’s take a step back and understand the asset management industry landscape. Mutual funds are at the heart of this industry. This is what the eco-system really looks like.
There are 42 different fund houses offering over 1700 different schemes. But, have you ever wondered why we have such a massive variety of schemes?
Before we answer that question, here’s something else for you to think about. How much was your electricity bill last month? How much was your insurance premium? You probably have a vague idea. How much fees did you pay on your mutual fund investments last month? Chances are, you don’t know. The reason is because mutual funds are in one of the most privileged positions of charging you a fee without actually sending you an invoice asking you to pay for it. They have something called an expense ratio which varies depending on the size of the scheme.
The SEBI in India publishes the rate card that mutual funds have to stick to. This rate card, also known as TER or Total Expense Ratio, is a % on the scheme’s total funds (AUM) the MF will charge you as fee. It works something like the income tax slab, except that this TER % goes down as the scheme becomes bigger. Here are the current rates.
If you are a fund house and you are given a choice between having 200 different schemes with 100 crores in AUM each and having one scheme with 20,000 crores in AUM, you should obviously prefer the first option.This, my friends, is primarily why we have such a large number of mutual fund schemes.
Now, while the number of schemes offered, and the assets managed by the industry have both increased, the number of fund houses who are in the business has not gone up at all. This graph shows how their numbers have changed over the last decade and it is more or less unchanged.
WHY IS THAT? To find out and read the rest of the stock story, tap the button below.
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