Tag - INFLATION

The Impact of Rupee Depreciation

The rupee has been on a downward spiral since January 2022 (-6.28%) leading to negative market sentiments. It settled at a fresh low of ₹79.64 on 13th July, 34 paise away from ₹80.    Rising crude oil prices, a strengthening Dollar Index, and huge amounts of FII (Foreign Institutional Investors) outflows in Indian markets are the primary reasons for the depreciation of the rupee.

Source: Trading View

What does the depreciation of a currency exactly mean?

Currency depreciation is the loss of a currency’s value in terms of its exchange rate versus other currencies. It specifically refers to currencies with a floating exchange rate, which is a system in which the value of a currency is determined by the forex market based on supply and demand. For example, if the value of 1 USD changes from ₹75 to ₹80, the change will be termed ‘depreciation’ of the rupee.

How does this impact import?

India, as a net importer, relies heavily on imported goods to meet its needs. Imported goods become more expensive due to depreciation in the value of the rupee leading to inflationary environments. India imports 80% of its crude oil and this has a multiplier effect on the prices of fuel – diesel, petrol, and cooking gas – which are already high.

Industries like oil and gas, paints, food, and beverages that depend on imports for their raw material needs suffer when the currency depreciates. Elevated commodity prices tend to dent the profitability of these companies. Industries usually pass on these elevated prices to customers to reduce the hit on profitability.

How does this impact export?

From a revenue perspective, industries like Pharma and IT benefit when the currency depreciates as companies earn more rupees while exchanging dollars. Pharma companies with subsidiaries outside of India tend to report higher consolidated margins because higher cost inventory translates into lower operating expenses.

Current Account Deficit widens

Current Account Deficit (CAD) is a measurement where a country’s imports of goods and services exceed its exports. A depreciating currency coupled with elevated commodity prices tends to inflate the CAD due to expensive imports and force the central bank to dip into its forex reserves to finance the deficit. India’s CAD widened to a record high of $25 billion in June from $24 billion in May. On a quarterly basis, the gap increased 122.8% in the June quarter to $70 billion from $31 billion in the year-ago period.

Source: RBI Website

 How does the RBI intervene?

When the value of a country’s domestic currency tumbles, the central bank intervenes by selling its foreign reserves, causing capital outflow. This aids in curtailing the arresting in the value of the domestic currency. According to the RBI’s Weekly Statistical Supplement, the RBI sold $5 billion in foreign exchange reserves during the week of July 1, 2022, reducing the overall reserves to $588 billion.

 

Source: RBI Website

Inflation, combined with currency depreciation, has a double-whammy effect on the economy and consumers. Many Central Banks around the world, including the RBI, have raised interest rates to combat inflationary pressures in raw materials and other commodities. This is also expected to help moderate the Rupee’s value decline. The RBI has also announced a slew of policies aimed at increasing forex inflows while maintaining overall macroeconomic and financial stability.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Week in a nutshell (27June-1July)

Technical talks

NIFTY opened the week on 27th June at 15,926 and closed at 15,752 on 1st July. The lower Bollinger Band level of 15,370 might act as a support, while, on the upside, the 16,250 level might act as a resistance.

Among the sectoral indices, FMCG (+2.8%), REALTY (+1.6%), and HEALTHCARE (+1.1%) were the gainers during the week. OIL&GAS (-4.2%) was the only loser.

Weekly highlights

  • All of the major US indices ended the week on a volatile note as oil prices rose and fell throughout the week. S&P 500 closed the week marginally higher at 3,825 and Nasdaq at 11,129.
  • WTI crude oil and Brent crude closed flat at -0.3% after fears that the US economy would enter a recession, resulting in lower oil demand.
  • Accenture reported 3QFY22 earnings, with revenues exceeding expectations at US$16.2 billion. According to the leadership, cost optimization, along with growth, is now the focus area for clients. However, it lowered its fiscal forecast due to a negative foreign exchange impact and rising inflation.
  • According to official data released on June 30th, output in India’s eight core infrastructure sectors increased by 18.1% in May, compared to 16.4% the previous year. This suggests that the economy is gradually returning to normalcy.
  • Japan’s factory activity growth slowed in June, with the PMI falling from 53 to 52, as supply disruptions, exacerbated in part by China’s strict COVID-19 curbs, hurt manufacturers, keeping the economy underpowered and with few catalysts to spur a robust recovery in the short run.
  • US consumer spending data was released on June 30th, showing that US consumer spending rose less than expected in May as motor vehicles remained scarce and higher prices forced cutbacks on purchases of other goods, indicating that the early recovery in economic growth was a losings steam.
  • On June 29, India’s Cabinet approved a plan that would allow local crude producers to sell oil to private companies, boosting revenue for state-run producers such as ONGC and Oil India. The decision will take effect on Oct. 1, and existing conditions for selling crude oil to government-run companies will be waived, according to a government statement, adding that exports will be prohibited. Reliance Industries’ share price tanked more than 7% Friday after the government levied an additional tax on crude oil.
  • FII (Foreign Institutional Investors) net sold ₹ 68,350 mn and DII (Domestic Institutional Investors) were net buyers this week. DIIs bought shares worth ₹ 59,250 mn.

Things to watch out for the next week

  • On Monday the labor markets will be in the spotlight next week, with the June nonfarm payrolls report due on Friday.
  • The 1QFY23 result season kicks off with IT major TCS reporting earnings on Friday.
  • The International PMI surveys, which track business sentiment in the United Kingdom and the eurozone, will be released on Tuesday, while the meeting minutes from the FOMC’s most recent policy meeting, held in mid-June, will be available on Wednesday.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

The Fed Game!!

Fed raised interest rates and pledged a whatever-it-takes approach to fighting inflation. Let us understand the rationale behind this decision.

Around 2 years back the world was panicking due to the pandemic. Economists were worried as everyone was locked inside their houses, not purchasing things, not using many services, leading to spending going down. When spending goes down, companies’ profits go down. When profits go down, people lose their jobs. When jobs are lost, the economy slows down, people grow poorer which is not good for the economy.

A slowing economy is an economist’s nightmare. Central banks across the world were facing this problem. Business and spending are hugely driven by borrowed money that is paid back. One way central banks try to stimulate more spending is by making it easier to take loans by lowering interest rates. India did the same in CY20.

There’s one more option on top of this: print more money. India did not opt for this option but the US did. As we all know, the US is the world’s biggest economy, whatever the US does affects the rest of the globe. Low-interest rates coupled with an excess supply of money caused the effect they wanted to see.

People and businesses started borrowing money. The money supply increased leading to spending and the economy started seeing its effects. So, the question arises why don’t we just keep the rates low and keep money printing? When there’s too much money easily available to everyone, spending increases too much. This leads to too many buyers of goods and services and not enough goods suppliers and service providers. There’s a ton of demand, but not enough supply. This always leads to prices increasing, contracting the buying capacity of the consumers which leads to inflation. Low-interest rates and money printing for too long result in inflation.

The US central bank printed high amounts of money is now leading to record inflation. How do central banks deal with this situation now? The opposite of what they did to increase economic activity – increase interest rates and stop printing money.

The inflation the world is seeing right now is not just because of low-interest rates and money printing. The markets falling is also because of the inflation that we’re seeing. Due to disruptions during the pandemic, many items are in short supply. That is making this inflation worse. Oil is one such. Microchips that go in all sorts of gadgets and cars are another example.

Of course, this isn’t the first time we’re seeing inflation. It has happened in the past multiple times. Inflation isn’t hurting India as much as it is hurting the west so far.

As an investor, you should focus on real returns. Real returns are what you get once you subtract the inflation. If an investment is giving you 6% and inflation is 7%, you actually lost money at a rate of 1% per annum. If you’re able to make 15% and the inflation is, say, 9%, your real return is 6%. Needless to say, this doesn’t mean you simply invest only in high return (which are high-risk) investments. You need to diversify according to your risk-bearing capacity. But the point remains, as an investor, real returns are the only way you should think of returns.

The equity markets are impacted due to such economic activities and investors might benefit from such a situation in long term. Our team recommends value stocks and you can even benefit from these stocks which are available at cheap rates.

Happy investing!!

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Week in a Nutshell (13-17 June)

Technical talks

NIFTY opened the week on 13th June at 15,878 and closed down 4% on 17th June at 15,294. The index is trading below the lower Bollinger band and the next support is likely at 15,183. The recent high of 16,794 might act as a resistance. The RSI (14) of 36 indicates the index is nearing the oversold levels.

During the week, METAL (-9.1%), IT (-8.2%), and PSU Bank (-7.7%) led the sectoral losers. There were no sectoral gainers.

Weekly highlights

  • High inflation has investors worried in recent weeks about a toll on corporate profits and economic growth. On Monday, the S&P 500 confirmed it’s in a bear market at is now down more than 20 percent from its most recent record closing high.
  • After a selloff triggered by a series of interest rate hikes by the Federal Reserve and other major central banks, all three US indices ended in the red this week. NASDAQ and Dow Jones were down 4.8% each while S&P 500 was down 5.8%. The cosmetics company Revlon Inc surged ~80% on Friday after reports suggested Reliance Industries may be considering buying out the company.
  • The Federal Reserve raised interest rates by three-quarters of a percentage point, the most since 1994. Officials have indicated that aggressive rate hikes will continue, with severe measures being used to combat rising inflation.
  • Crude oil prices were impacted as investors worried about the global economic outlook and markets were impacted post interest rate hikes around the world. Brent Oil was down 6.9% during the week and ended at USD 113.6/barrel while Crude oil ended 8.4% lower at USD 110.4/barrel on Friday.
  • The Indian Index of Industrial Production (IIP) climbed from 2.2% in March to 7.1% in April. The April industrial growth rate of 7.1 percent is the highest in eight months, notwithstanding the benefit of a favorable base effect.
  • Wholesale price inflation soared to a record high in May due to rising food and fuel prices, posing a challenge to authorities dealing with high inflation. Wholesale prices climbed to 15.9 percent in May vs 15.1 percent in April and was, according to economists, India’s highest since September 1991.
  • Retail inflation for May was 7.04% from April’s near-eight-year high of 7.79 percent due to a favorable base effect. The fall in inflation in May is unlikely to do much to slow down the Reserve Bank of India’s (RBI) rate hike cycle.
  • Foreign institutional investors (FIIs) continued to be sellers, selling equities worth Rs 232,740 mn. Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 172,270 mn.

Things to watch out for next week

  • Major central banks followed the US Federal Reserve in raising interest rates. Rising prices and tightening monetary policies have rattled investors which dragged the equities world over.
  • S&P Global will release the flash purchasing managers indices (PMI) data for June for major economies later next week. In addition, inflation, and consumer and business climate gauges will also be released. This will provide insights into the current state of the global economy.
  • With quarterly earnings season out of the way, investors will focus on macroeconomic activities and action would be stock specific. Indian investors’ attention will be on the progress of the monsoon across the country.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This Week in a nutshell (06-10 June)

Technical talks

NIFTY opened the week on 06th June at 16,531 and closed on 10th June at 16,202. During the week, NIFTY was down 2.3%. The index has breached the 50-week moving average on the weekly chart with RSI at 43. The immediate support for the index stands at 15,845 and resistance at 16,793.

Financial Services (-3.0%), IT (-2.6%), and Media (-2.4%) were the top losers, and PSU (+1.0), and Auto (+1.0%) were the only sectoral gainers during the week.

Weekly highlights

  • US inflation accelerated to a fresh 40-year high in May, a sign that price pressures are becoming entrenched in the economy. That will likely push the Federal Reserve to extend an aggressive series of interest-rate hikes. The consumer price index increased 8.6% YoY resulting in all 3 broad-based US Indices ending in the red by 3%.
  • Despite a dip on Thursday, benchmark crude oil rates were near their 13-week highs. Brent and West Texas Intermediate futures traded above $120 a barrel each. High crude prices hurt markets such as India, which meets much of its oil demand through imports. Brent closed at $121/barrel.
  • Official data released last month showed India’s official GDP growth reading hit a four-quarter low of 1 percent on a year-on-year basis in the January-March period. Economic growth for the full year ended March 2022 came in at 8.7 percent due to a low base of the previous year, though lower than the statistics office’s estimate of 8.9 percent.
  • RBI Governor Shaktikanta Das on Wednesday announced the unanimous decision of the Monetary Policy Committee (MPC) to hike the repo rate — the key interest rate at which the central bank lends money to banks — by 50 basis points to 4.9 percent. The RBI MPC also decided to remain focused on withdrawing its ‘accommodative’ stance to ensure inflation stays within target levels while supporting growth.
  • The RBI MPC raised its forecast for retail inflation — gauged by the Consumer Price Index — by 100 basis points to 6.7 percent. The RBI Governor acknowledged that inflation has accelerated to a faster-than-estimated pace in April and May. It is expected to be higher than 6 percent by December 2022, mainly due to elevated food prices.
  • American employers added 390,000 jobs last month, the government reported Friday, a sign of a slowdown in hiring but still a better-than-expected result amid a shortage of workers. The jobless rate held steady at 3.6 percent for the third consecutive month, just a tenth of a point above the pre-pandemic level in February 2020, the Labor Department said.
  • A report showing stronger hiring last month than expected is good news for the US Economy amid worries about a possible recession. But many investors saw it keeping the Federal Reserve on its path to hiking interest rates aggressively, thereby causing weakness in US Equities, The US Federal Reserve is on track for half-point interest rate increases in June, and July, and last week’s jobs report boosted expectations of continued tightening by the US central bank.
  • Shanghai and Beijing are placed on new COVID-19 alerts. The cities imposed further lockdown restrictions on Thursday and announced a fresh round of mass testing for millions of their residents. India too reported a total of 7,584 new coronavirus infections on Friday, prompting health authorities to a high alert on a possible resurgence of a 4th Wave
  • Foreign institutional investors (FIIs) continued to be sellers, selling equities worth Rs 126,629 Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 96,100 mn.

Things to watch out for next week

  • Volatility is expected to remain high as rising global inflation forces investors to reconsider their expectations for strong earnings growth. Fears of a further rise in Interest rates by Central Banks across the world, geopolitical concerns, and oil price volatility will keep investors on edge.
  • With the inflation data released, investors are looking forward to Fed’s intended 50 bps interest rate hike in the next meeting. The United States housing market updates for May are expected next week. Consumer Price Index (CPI) inflation data will be released for key economies, indicating whether global inflation rates have peaked.
  • With Q4 earnings out of the way, stock-specific actions will be limited as indices would track macro developments and geopolitical developments.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Targeting revenues of USD 70 mn from exports – Bharat Electronics

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green at 16,170 (+0.9%). TATASTEEL (+5%), APOLLOHOSP (+5%), and JSWSTEEL (+4.5%) led the gainers while UPL (-2%), DIVISLAB (-2%) and SUNPHARMA (-1%) led the losers. Among the sectoral indices, PSU BANK (+3%), METAL (+2.7%), and BANK (+2.2%) led the gainers, while FMCG (-0.2%) was the only loser.

Excerpts of an interview with Mrs. Anandi Ramalingam, CMD, Bharat Electronics (BEL) with CNBC-TV18 on 25th May 2022: 

  • For FY23, BEL is expected to maintain a growth of about 15% YoY. EBITDA margins are expected to be in the range of 20-22% in FY23E.
  • Raw material content stood at 59.9% in FY22 and BEL is hopeful that it would come down to 56-57% because of the indigenization efforts that have been put in place.
  • BEL has guided for a lower EBITDA Margin range even though the Gross Margins are expected to expand because most of the contracts are fixed-term contracts whose prices are fixed when they are signed. But BEL has not been able to maintain this with its suppliers.
  • Many of the suppliers, post-covid, have started demanding higher prices. BEL is trying to deliver its contracts with minimal delay. It has not been able to pass on the increased input prices to its customers so even if the material content as a percentage is expected to decline, BEL is maintaining a lower EBITDA Margin guidance.
  • BEL is confident of logging in Rs 200 bn orders in FY23. Exports declined to USD 33 mn in FY22 from USD 52 mn in FY21 mainly due to the geopolitical crisis that took place in 4QFY22. Due to the crisis, logistics and financial transactions with international customers were impacted.
  • BEL received an order book of USD 179 mn in FY22 as many marketing offices have been set up in the overseas market and have started yielding results. BEL hopes to maintain the same order pipeline in FY23.
  • Revenues from exports are expected to increase as uncertainties and logistical issues have started easing out. BEL is targeting to clock in revenues worth USD 70 mn from exports.
  • BEL will be incurring a Capex of Rs 5-6 bn coupled with Rs 13bn of additional CapEx provided it gets selected for the PLI Scheme (Production-Linked Incentive).
  • The CapEx under PLI Scheme is done as a consortium with HAL (Hindustan Aeronautics Ltd) and other private companies.

Asset Multiplier Comments

  • We think BEL is well-positioned to tap the opportunities with the government’s Make in India and Atmanirbhar Bharat initiatives.
  • Looking at the healthy order book (both domestic and exports), strong export order inflows of USD 179 mn in FY22, intending to reduce dependence on defense and diversification into non-defense segments we expect good revenue growth for the next 2-3 years.

Consensus Estimates: (Source: market screener and investing.com website)

  • The closing price of Bharat Electronics Ltd was ₹ 227/- as of 26-May-2022.  It traded at 20x/ 17x the consensus earnings estimate of ₹ 11.3 / 13.2/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 242/- implies a P/E Multiple of 18x on the FY24E EPS estimate of ₹ 13.2/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

How to Deal with the Behavioural Challenges of Bear Markets

It is at times of severe market stress that investors’ worst behavioral impulses come to pass. Whilst the recent losses in the value of portfolios are undoubtedly painful; the poor decisions that investors will make as a result of the blazing environment will likely prove more damaging to their long-term outcomes.

Against such a turbulent market backdrop, which behavioral issues should investors be most concerned about?

  • Myopic Loss Aversion: Short-term losses are difficult, but they are also an inevitable feature of investing in risky assets. Indeed, the high long-term returns from equities investments are a result of their volatility and the risk of significant losses; in order to reap the benefits, investors must be willing to endure difficult periods. For most investors (particularly younger ones) it makes sense to reframe the issue – rather than markets falling steeply, they should think about the likelihood that long-term expected returns from risky assets are now materially higher.
  • Recency: Obsession with recent and salient issues means that they overwhelm one’s thinking. Whether it is wars, inflationary pressures or coronavirus. This is not to say that such issues are not important but from a long-term investment perspective, they are less vital than one thinks and feels they are at the time.  Investors should make investments such that they would have to leave them untouched and unseen for the next ten years.
  • Risk Perception: Investors are poor at judging risks.  They are prone to ignoring certain threats whilst hugely overstating others. Their judgment about the materiality of risk tends to be driven by its availability (how aware they are of it) and its emotional impact on them. The Russian invasion of Ukraine is a particularly damaging risk for investors because the magnitude of the impact is highly uncertain and it is deeply important.  Investors also need to be clear about what risks they are considering when making an investment decision – is it the risk of short-term losses, the risk of being whipsawed by volatile markets, or the risk of failing to meet their long-term objectives?
  • Narratives: Although investors should be driven by evidence, many of the investment decisions they make are founded on convincing stories.  In times of profound uncertainty, this flawed feature of one’s decision-making becomes highly problematic.  It is incredibly uncomfortable to acknowledge that investors have no clarity around a major issue such as the Russia-Ukraine war; so, they construct stories to relieve their discomfort.  These narratives help them ‘understand’ what has happened, but also, more damagingly, give them undue confidence about what will happen in the future.  It is better to admit not knowing an issue, rather than concocting a story.
  • Overconfidence: In the past three months everyone has become an expert in diplomacy and economics, despite having no previous grounding in the subject.  It is okay to have an opinion, but the vast majority of people are guessing, and nobody knows the near-term market or economic impact of the war.  Investors shouldn’t make investment decisions that suggest they do.

In these environments, making sensible long-term investment decisions is highly likely to leave one looking foolish in the short term. This doesn’t mean one should not make them.  The advantage of being able to invest for the long-term is at its greatest when it is the hardest thing to do.  The only way to benefit from this is to have a sensible investment plan that is clear about objectives and the decision-making process.  Sticking with this through tough times can provide a major behavioral edge.

Source: How to Deal with the Behavioral Challenges of Bear Markets by Joe Wiggins behaviouralinvestment.com

Asset Multiplier Comments:

  • In these uncertain times, the only thing investors can control is their investment process. So, investors should try not to get consumed by immediacy and noise.
  • One advantage of bear markets is that they allow you to buy quality stocks at high margin of safety. Fundamentally good companies tend to perform better in the long run so buying them at cheaper valuations may turn out to be advantageous.
  • Diversifying investments across various asset classes and sectors may help investors contain their portfolio risks.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Optimistic about the motor segment in the future – ICICI Lombard

Update on the Indian Equity Market:

The Indian indices opened the week in the red, reflecting global market weakness. Investors are concerned about the high inflation, which might accelerate the rate hikes. NIFTY ended 1.3% lower at 16,954 dragged by COALINDIA (-6.5%), BPCL (-6.0%), and TATASTEEL (-4.3%). BAJAJ-AUTO (+2.0%), HDFCBANK (+1.1%), and ICICIBANK (+1.0%) were some of the gainers.

Among the sectoral indices, BANK (+0.1%), and PRIVATE BANK (+0.1%) were the only gainers. REALTY (-3.8%), METAL (-2.9%), and OIL & GAS (-2.4%) led the sectoral laggards.

Excerpts of an interview with Mr. Bhargav Dasgupta, MD & CEO, ICICI Lombard (ICICIGI) published in The Economic Times on 22nd April 2022: 

  • ICICIGI announced 4Q and FY22 earnings, which include Bharti Axa business earnings. Considering the standalone numbers coupled with Bharti Axa, the profit growth for FY22 was ~5%.
  • Considering the 4QFY22 quarterly profits, the growth was much better. The Company has outgrown the market.
  • The combined ratio has increased, due to 2-3 factors. Looking at the integrated company suggests Bharti Axa’s combined ratio has always been high. ICICIGI expects to bring it under control in subsequent years. (The combined ratio is indirectly proportional to the profitability of general insurance companies).
  • The profitability of ICICIGI was impacted due to three Covid-19 losses, which were ~ Rs 270mn in 4Q and ~Rs 5,500 mn for FY22. Another impact was due to the accounting methodology for insurance policies. The entire cost has to be accounted for upfront while the revenue (premium earned) is accounted for throughout the policy. In the case of a 12-month policy with a majority of the business undertaken in March, the full cost is accounted for in March while the topline is earned over the next 12 months.
  • The CEO believes a long-term shift is on the way and health consumption behavior is going to change. The change he believes is not just due to the pandemic and digitisation but it has been a global trend for some time now. Health consumption is expected to be very personal, self-driven, and digitised in the long term.
  • Traditionally health insurance in India has focussed on just the hospitalisation costs. But healthcare is about the continuum of preventive care, wellness, fitness, hygiene, and outpatient care. ICICIGI’s approach is providing the entire continuum of care including a pure insurance policy for OPD costs and wellness (preventive, advisory, and fitness).
  • People are willing to consume health in a digital mode. Telehealth, video-based consulting, and increasingly home-based care if the ailment is not severe – there are the components ICICIGI has built on in the last 2 years and is now investing to scale up distribution.
  • With the Bharti Axa acquisition, ICICIGI has inherited some of the crop insurance business. There, most of the commitments are for a longer time so ICICIGI will stay invested in that business for that period.
  • In the previous year, the motor insurance sector has been tepid. The biggest shift that happened in FY22 was health insurance has become number one for the general insurance industry. Traditionally, the motor has been the biggest segment, but in FY22 the new vehicle sales were muted.
  • ICICIGI expects growth momentum once the chip shortage issues are sorted in the next five-six months. It expects a pickup in rural demand for two-wheelers and is optimistic about the motor segment growth in the medium term.
  • Health insurance is expected to continue to grow as it is a very underpenetrated sector.
  • The company has taken small price hikes in motor insurance. On the health side, ICICIGI is not thinking of a price increase for its retail customers as it has profits of ~Rs 40-50 bn despite paying Rs 250bn Covid-19 claims.
  • The Company is not planning an immediate price hike on the retail health portfolio as it believes there are one-off episodes that are unlikely to sustain. Healthcare inflation is a worry and ICICIGI believes there is a need for more discipline in terms of pricing. Should the healthcare providers inflate the cost of healthcare, the Company may have to increase its prices.

Asset Multiplier Comments:

  • We expect a recovery in the motor segment as new car registrations are expected to recover with the improvement in supply chain and semiconductor availability.
  • With an increase in hiring across sectors, the growth in group health premiums is expected to continue. the pandemic has boosted the demand for such policies.
  • Headwinds due to loss of market share in the individual health insurance segment, and aggression by new-age large players are expected to hurt the profitability in the short term.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of ICICIGI was ₹ 1,315/- as of 25-Apr-2022. It traded at 35x/ 28x the consensus earnings estimate of ₹ 38/47 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,556/- implies a P/E Multiple of 33x on the FY24E EPS estimate of ₹ 47/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This week in a nutshell (18th – 22th April)

Technical talks
NIFTY opened the week at 17,183 on 18th April. The index closed 1.7% lower at 17,172 on 22nd April. RSI (14) of 47 and MACD are trending upwards. On the upside, the 17,465 could act as resistance while 16,965 could act as support.

Auto (+3.1%) was the only sectoral gainer in the week. IT (-5.6%), Financial Services (-4.3%), and Media (-4.2%) led the laggards.

Weekly highlights

  • The US indices closed the week lower as the market priced in persistent inflation and US Fed’s imminent 50 bps interest rate hike. S&P 500 was down by 2.6%, Nasdaq 100 by 3.7%, and Dow Jones was down by 1.7%.
  • Q4 result season continues to be in the fray as various Nifty 50 companies reported results, increasing input costs, supply, and logistical challenges and margin pressures continue to be a persistent challenge across the board.
  • Data from the National Bureau of Statistics showed on Monday that China’s economy slowed in March as consumption, real estate, and exports were hit hard, taking the shine off faster-than-expected first-quarter growth numbers and worsening an outlook already weakened by COVID-19 curbs and the Ukraine war. Gross domestic product (GDP) expanded by 4.8 percent in the first quarter from a year earlier.
  • The International Monetary Fund (IMF) has cut its growth forecast for India for FY23 by 80 basis points to 8.2 percent, warning that Russia’s invasion of Ukraine would hurt consumption and hence, growth, by way of higher prices reflecting in part weaker domestic demand – as higher oil prices are expected to weigh on private consumption and investment – and drag from lower net exports.
  • The blockades by groups in Southern and Eastern Libya citing political demands have caused National Oil Corporation to declare force majeure on output from several major fields and ports in recent days. Libya is currently losing more than 550,000 barrels per day in oil production from blockades on major fields and export terminals, creating supply challenges in an already affected market due to the Russia-Ukraine conflict.
  • The number of Americans filing new claims for unemployment benefits fell moderately last week, still suggesting that April was another month of strong job growth. The report from the Labor Department on Thursday also showed unemployment rolls shrinking to the lowest level in 52 years in the first week of April, reinforcing the tightening labor market conditions. An acute shortage of workers is keeping layoffs low, helping to fuel inflation, and forcing the Federal Reserve to adopt a restrictive monetary policy stance.
  • Federal Reserve Chair Jerome Powell stated that a 50 bps interest rate hike is imminent when the Fed meets next on May 3rd. The Fed is expected to be aggressive in its actions going ahead as inflation in the US is running roughly three times the Fed’s 2% target.
  • Wholesale inflation in India – measured by the Wholesale Price Index (WPI) — worsened to 14.55 percent in March from 13.11 percent in the previous month, data released on Monday showed. WPI for March was the highest in four months indicating worsening inflationary challenges.
  • FII (Foreign Institutional Investors) continued to be sellers this week and sold shares worth Rs 1,84,433 mn while DII (Domestic Institutional Investors) continued to be buyers and bought shares worth Rs 1,43,943

Things to watch out for next week

  • Continuing with the Q4 results season, management commentary about demand slowdown, and cost inflation would be key things investors would be concerned with.
  • Rising Covid-19 Cases in Shanghai, China, and subsequent lockdowns will be on investors’ minds as fears of a Chinese slowdown have been impacting the securities markets over the past 2 weeks.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This week in a nutshell (11th – 13th April)

Technical talks

NIFTY opened the truncated week at 17,741 on 11th April. The index closed 1.5% lower at 17,476 on 13th April. RSI (14) of 53 is trending downwards and MACD is trending upwards. On the upside, 18,191 could act as resistance while 20DMA of 17,296 could act as support.

FMCG (+1.7%), and Metal (+0.1%) were the only sectoral indices to close the week with gains. IT (-3.0%), Realty (-2.1%), and Auto (-1.1%) led the laggards.

Weekly highlights

  • IT heavyweights TCS, and Infosys released 4QFY22 and FY22 earnings this week. While the numbers were largely in line with the street estimates, attrition continues to be a problem. While demand continues to be robust, there are headwinds of hiring, salary increments, and return of travel spending.
  • US markets ended the week in the red on Thursday. Bond rates spiked as investors worried about the prospect of aggressive policy tightening in the United States. Oher central banks around the world have started increasing interest rates. Following the release of US economic data for retail sales and jobless claims, the benchmark US government yield increased.
  • Fuel costs rose during the first full month of the Russia-Ukraine war, causing inflation in the United States to reach a 40-year high. While prices began to rise last year as the economy recovered from the Covid-19 outbreak, the most recent monthly report showed expenses for numerous items reaching record highs. According to the report, the increase may be leveling out.
  • The European Central Bank confirmed its asset purchase program will end in the third quarter. Once the bond-buying program is completed, the ECB is expected to begin interest rate hikes, following the Bank of England and the US Federal Reserve.
  • A substantial rise in automobile output in March bolstered US industrial activity for the third straight month, possibly indicating that the worst of the industry’s production woes from 2021 were passed.
  • Oil prices retreated after the release of a larger-than-expected build in the US oil stocks. Brent oil closed at USD 111/barrel while Crude oil WTI closed at USD 107/barrel on Thursday.
  • FII (Foreign Institutional Investors) continued to be sellers this week and sold shares worth Rs 63,342mn while DII (Domestic Institutional Investors) continued to be buyers and bought shares worth Rs 27,674 mn.

Things to watch out for next week

  • The markets are likely to take cues from corporate earnings, and geopolitical tensions between Russia and Ukraine amid rising inflation globally.
  • The Indian markets would react to earnings from IT companies such as Mindtree, Larsen & Toubro Infotech (LTI), and HCL Technologies. While the market leaders have alluded to higher attrition, amidst a robust demand environment, the impact of attrition on smaller companies would be something to watch for.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”