Tag - INFLATION

17 Apr

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.”

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05 Mar

This Week in a Nutshell (28Feb-4 March)

Technical talks

NIFTY opened the truncated week on 28th February at 16,482 and ended at 16,245 on 4th March. Amid the geopolitical tensions, the Indian benchmark index extended in the red for a fourth consecutive week. The index lost 1.4% during the week. The next support and resistance levels for the index would be 16,134 and 16,937 respectively. The RSI (14) of 35 indicates the index is in the oversold zone.

Among the sectoral indices, METAL (+7.0%), and IT (+2.1%) were the only gainers during the week. AUTO (-9.2%), FINANCIAL SERVICES (-5.6%), and BANK (-5.6%) led the losers.

Weekly highlights

  • Investors’ appetite was rattled by the intensifying Russia-Ukraine conflict, which obscured a much better-than-expected monthly jobs data in the USA. After Russia seized a Ukrainian nuclear plant and expanded its attack on numerous cities on Friday, all three major US indices — the Nasdaq 100, Dow Jones, and S&P 500 – closed the week in the red. As a result, investors shifted their portfolios away from risky assets and toward bonds and gold.
  • Oil prices soared to multi-year highs as Russia’s invasion of Ukraine escalated and buyers shied away from supplies from the world’s second-largest crude exporter. Brent Crude and West Texas Intermediate finished the week at USD 118 and 115 a barrel, up 20.5 percent and 25.6 percent, respectively.
  • For the month of February-22, the auto OEMs reported monthly volumes. With the easing of supply chain limitations and fresh launches, the demand for passenger vehicles (PVs) has remained strong. The market for 2Ws was muted, but premium 2Ws are seeing increased demand as chip availability improves. A modest increase in CV demand is being aided by robust demand from the infrastructure and construction sectors. Due to a high base and an extended rain that damaged the Kharif crop, tractor sales were hurt. In the medium term, the auto sector may benefit from improved rural sentiment and a healthy Rabi season.
  • Chairman of the Federal Reserve, Jerome Powell, informed the US Congress on Wednesday that he intends to propose a quarter-point interest rate rise at the Fed meeting on 16th He hinted that, depending on the effects of the Ukraine war and other circumstances, the Fed may be willing to raise rates even further.
  • The Indian manufacturing sector’s Purchasing Managers’ Index (PMI) rose to 54.9 in February from 54 in January. A reading above 50 is indicative of expansion in activities. Though there has been an improvement in manufacturing activity in February, input cost pressures remain a concern. Indians are facing the prospect of higher petrol and diesel prices once voting for the state election concludes.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 225,630 mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 167,430

Things to watch out for next week

  • The report on US inflation, which is due on Thursday, will be closely watched by investors. Consumer prices increased at the quickest rate in over four decades from January to February. The future for US markets is clouded by geopolitical tensions, as Russia’s invasion of Ukraine has moderated expectations for how swiftly the Federal Reserve will tighten monetary policy in the months ahead.
  • Continuing FII selling, increasing prices of oil, food grains, and metals, and declining Rupee are leading Indian equity markets down. On Monday evening, polls for five states will close. We expect retail prices of petrol to increase substantially immediately. Exit polls on state elections may drive the sentiments in the markets before the results are announced on 10th March.

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.”

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03 Mar

What to do in these times?

As Indian markets continue to fall along with most other international markers, investors are wondering if this is the time to buy their favorite stocks. The latest trigger for the decline was the Russia – Ukraine conflict. The situation keeps changing every day but the impact on commodities – oil, sunflower oil, metals such as aluminum, copper and nickel, corn, wheat – prices have been immediate. The auto industry would be specifically affected as Russia is also a significant supplier of palladium a key component in semiconductor chips. Natural gas prices are already on the rise and Russia’s ejection from the global swift system could cause a lag in trade payments affecting balance sheets. The best outcome from investors’ perspective would be the cessation of hostilities and the world going back to its previous way of working. The possibility of this happening is fairly low.

Indian investors have to worry about three more developments in early March. We expect oil prices to be increased any time after 7th March (the last date of polling in UP). Credit rating agency ICRA points out that “While it is difficult to pinpoint the exact amount of lagged revision in RSPs (retail selling prices) of MS (motor spirit) and HSD (high-speed diesel) that is warranted by the surge in crude oil prices to the current levels, we expect it to be in a range of Rs 6-8/litre, i.e., similar to the cushion offered by potential excise reversion to pre-Covid rates,” its Chief Economist Aditi Nayar said in a report.

The international crude oil price, in Indian basket terms, surpassed the USD 100 per barrel mark on February 24 for the first time since September 4, 2014, the report said. The price of the Indian crude oil basket has averaged USD 93.1 per barrel so far in February 2022, a 10.5 percent surge relative to USD 84.2 per barrel in January 2022, it added.

Another development to watch out for is the results of five state assembly polls that will be announced on 10th March. Global investors are watching Fed action on interest rates to be announced on 16th March. This may bring some volatility to asset prices in emerging markets such as India.

The third development to watch will be the IPO of Life Insurance Corporation. The timing and size of the issue have not been announced yet. This could be a very large issue and reduce the liquidity in the market. Investors may sell other holdings to invest in this IPO. This could lead to a decline in share prices around the time of the IPO.

Another development to watch out for would be the conclusion of the Winter Olympics in China, which had affected the supply of key raw materials, especially heavy metals and pharma companies, due to Beijing’s determination to reduce pollution. We can expect the supply chain woes dependent on Chinese raw materials to ease, lowering the pressure on costs.

Should we add defensive sectors to the portfolio?

In uncertain economic times, investors have preferred to invest in defensive sectors like software services, pharma, and the consumer sector in the past. Is it time to do that again now?

We think the demand outlook for these sectors might not get impacted in the short term but high commodity prices will keep the margins under pressure for longer than anticipated. Companies will struggle to protect their margins and juggle between passing the inflation to consumers and cost-cutting. This may impact profit outlook adversely for the medium term eventually impacting the share prices. Industries getting impacted due to the shortage/inflation of RM and energy prices will have to cut down their discretionary spending. Companies may have to restrict ad and IT budgets to protect their margins. This may slow down the growth of Media and Entertainment and software companies in the medium term.

In summary, we think that investors should be patient with their investments before any clarity emerges on the prevailing economic issues- how the war and Indian elections affect the oil prices and Fed’s meeting on 15th March.

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.”

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03 Mar

Price hikes make sense when loss ratios are moving up- Bajaj Allianz General Insurance


Update on the Indian Equity Market:

On Thursday, NIFTY closed in the red at 16,498 (-0.6%). Among the sectoral indices, OIL & GAS(+1.5%), IT (+1.2%), and METAL (+1.2%) closed higher while AUTO (-2.3%), CONSUMER DURABLES (-1.3%), OIL & FINANCIAL SERVICES 25/50 (-1.3%) closed lower. Among the stocks, ONGC (+4.6%), UPL (+4.5%), and POWERGRID (+2.8%) were the top gainers while ULTRACEMCO (-6.7%), ASIANPAINT (-5.2%), and HDFCLIFE (-5%) were among the top losers.

Excerpts from an interview of Mr. Tapan Singhel, MD & CEO of Bajaj Allianz General Insurance (BAGIC) in Business Standard dated 3rd March 2022:

  • During the third wave in January 2022, claims moved up 241 percent compared to December 2021 but the severity and hospitalization were low as compared to the second wave. The claim ratio did move up but not as much as it did in the second wave.
  • COVID claims contributed 20% to the overall claim ratio. The company has settled COVID-related claims of over Rs 8,000 mn since April 2020.
  • There was a 20 percent movement in BAGIC’s loss ratios. They were the only ones to make underwriting profits in CY21 but COVID-19 still impacted the profitability of the business. There was some relief in the motor segment as the claim ratios declined during the pandemic.
  • BAGIC would have considered increasing its premiums had COVID-19 been a regular phenomenon.
  • Mr. Singhel worries about the rising medical inflation which has gone up 30-45 percent in the last three years from a typical range of 10-15 percent. He also pointed out the need to have regulators for hospitals to control hospital bill inflation and a reduction in GST of 18% on premiums.
  • The premiums on group health policies have gone up due to price hikes taken to manage increasing loss ratios in that segment. In retail health, companies can take price hikes only after three years. During the pandemic, many consumers purchased covid- related products. Overall, on a base effect, growth in retail seems lower.
  • The insurance industry has a direct correlation with the volumes of vehicles being sold. The semiconductor shortage has caused sales volumes to decline resulting in muted growth in motor insurance premiums.
  • Hikes in motor third-party premiums will be taken when loss ratios start moving up in this segment. The industry seems comfortable with the existing situation.
  • As infrastructure is the main focus of our country, Mr. Singhel believes there should be solutions to provide funding to contractors and free up their capital. He believes surety bonds to be a very good move by the regulator and the government and that BAGIC will be keeping an eye on this business. The idea is to not replace bank guarantees entirely.
  • BAGIC is sure that any acquisition they do would be adding value to the company, in terms of distribution or processes.

Asset Multiplier comments:

  • We expect the health claims ratio to moderate from its peak levels that were observed during the pandemic.
  • With economic activities picking up, we believe BAGIC is well placed to maintain its combined ratio at pre-covid levels over FY23 and 24.
  • Improvements in operating efficiencies and moderation in claims ratio are expected to improve BAGIC’s profitability over the subsequent quarters.

Consensus Estimate: (Source: Market screener website)

  • BAGIC is a subsidiary of Bajaj Finserv Ltd. The closing price of Bajaj FInserv was ₹ 15,704 as of 3-March-2022. It traded at 6.4x/5.5x/4.7x the consensus book value per share estimate of ₹ 2,452/ 2,848/ 3,326/ for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 16,341/- which implies a PE per share multiple of 4.9x on FY24E BVPS of ₹ 3,326/-.

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.”

By Bajaj General Insurance, Insurance , , 0 Comments Read more...
14 Feb

Commodity price inflation? Not much of a worry for Hindalco

Update on the Indian Equity Market:

On Monday, Nifty ended at 16,843 (-3%), a fall of 531 points due to fear of rising inflation, oil prices and aggravating geopolitical uncertainties among Russia & Ukraine. Among the sectoral indices, PSU BANK (-6.0%), REALTY (-5.3%), METAL (-5.1%) were the top losers. In NIFTY 50, except TCS (+0.9%) all the other 49 stocks fell with JSWSTEEL (-6.5%), HDFCLIFE (-6.4%) & TATASTEEL (-5.7%) being the top losers.

Hindalco released its 3QFY22 results on 10th February. Following are the excerpts from an interview with Mr. Satish Pai, MD of Hindalco Industries (HINDALCO) with The Economic Times on 11th February 2022:

  • On a standalone basis, Hindalco Industries’ India Aluminium business reported its highest ever EBITDA of Rs. 33,640mn and 41% EBITDA margin.
  • On the back of favorable macros, with commodity price inflation affecting it in both ways, the price of aluminum has been higher and the input cost inflation was kept under control by holding inventory and doing upfront procurement.
  • In 4QFY22, the company expects to maintain the margins as the aluminum prices are already at $3,000 per tonne, up from about $2,670 per tonne in Q3. Furthermore, the company expects cost inflation to flatten out in the second half of CY2022.
  • The company expects the prices of aluminum and copper to remain at the existing elevated levels at least for this calendar year. This is largely due to the European energy crisis driving up gas prices further resulting in a rise in aluminum prices.
  • On the demand side, the growth drivers for aluminum and copper will be electric vehicles, solar panels, the housing sector, packaging. Looking at the stronger demand, the company is planning to ramp up capacity. Novelis, the American subsidiary, which is in the business of aluminum, volumes will be around 4mn tons per year. India will be producing about 1.3mn tons of aluminum and about 500,000 tons of copper.
  • The company significantly reduced its consolidated debt from Rs.538bn last year to Rs.437bn as of December 2021 end. The company is not planning for further deleveraging, after the repayment of Rs.6bn worth of bonds in 1QFY23. It is focused on putting the cash to use by doing organic capex projects.

Asset Multiplier Comments

  • The price of aluminum is likely to remain elevated from a short supply due to carbon emission-related concerns in China and smelter disruptions. But a quick resolution to the European crisis may lead to a major correction in aluminum prices as a result of correction in energy prices in Europe.
  • Looking beyond the short-term uncertainties, the medium to longer-term structural demand for aluminum will remain strong on the back of good demand for aluminum automotive sheets, aluminum beverage cans, and pent-up demand from the aviation industry.
  • Hindalco being the largest secondary aluminum producer and the largest aluminum recycling company in the world, is likely to be better positioned to digest the input cost inflation without taking a substantial hit on the margins.

Consensus Estimate (Source: Marketscreener & TIKR websites):

  • The closing price of HINDALCO was Rs. 520/- as of 14-February-2022. It traded at 9.8x/9.1x/8.8x the consensus earnings estimates of ₹ 53/57/59 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 640/- implies a P/E Multiple of 10.8x on FY24E EPS estimate of ₹ 59/-

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.”

 

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10 Nov

Demand recovery expected to continue – Bata India

Update on the Indian Equity Market:

On Wednesday, Indian benchmarks declined for the second consecutive session with NIFTY closing at 18,017 (-0.2%). Among the sectoral indices, OIL & GAS (+0.8%), AUTO (+0.5%), and PHARMA (+0.2%) were the only gainers. PSU BANK (-2.4%), METAL (-1.8%), and REALTY (-1.4%) led the laggards. Among the stocks, UPL (+3.4%), BHARTIARTL (+3.3%), and M&M (+3.0%) led the gainers, while HINDALCO (-3.4%), INDUSINDBK (-3.3%), and TATASTEEL (-2.9%) led the laggards.

Excerpts of an interview with Mr. Gunjan Shah, CEO, Bata India (Bata) with CNBC-TV18 on 8th  November 2021:

  • Bata had a tough time the last 18 months due to the 2 lockdowns. With things opening up, the company is seeing some recovery.
  • In 2QFY22, the company has seen a MoM recovery. He believes that with more stores opening up, recovery is sustainable in the medium term in terms of consumer demand perspective.
  • The immediate priority is getting the company back to pre-pandemic performance levels. Going forward, the portfolio is in line with consumer demand, towards casuals and sneakers. The company is seeing initial progress in this direction but there is a long way to go in that segment.
  • To leverage the Bata brand equity, it is looking for a franchise model in tier 3-5 towns or through multi-brand outlets. The distribution expansion is one of the big areas they are working on.
  • They are also focusing on the digital footprint. The current omnichannel strategy contributed in teens to the revenue in 2QFY22 and the company wants to increase it.
  • The company has taken significant steps towards cost reduction during the pandemic. Some of these are expected to sustain. With business coming back to normal, the quantum of cost savings may not be similar as seen during the pandemic months.
  • Sneakers are used not just for sports but also for other occasions. There is a longer-term trend that consumers will prefer to the extent the comfortable footwear usage once lockdowns are lifted.
  • Casual ranges such as Power, North Star are seeing 40% growth in demand, and the company wants to improve that further. Bata has expanded its merchandise, in casual footwear and launched open footwear.
  • It is ensuring customers connect with the Bata merchandise. For this, they have piloted a big initiative, Sneaker Studio which ensures the entire sneaker range is displayed in a cohesive form in the stores. While this initiative is currently rolled out in major metros, the Company is expanding it in the next 12 months.
  • To conserve cash, Bata had reduced its ad spend during the pandemic period. With the demand recovery, it has started investing in ad campaigns.
  • The company will witness the highest ever addition in franchise stores in FY22. It sees strong penetration potential in Tier 3-5 towns, championed through the franchise model.
  • The next stage of expansion is planned through multi-brand outlets. The company’s coverage has increased from 450 towns to over 900 towns in the last 2 years. It plans to add another 500 towns in FY23 and expects a 20% contribution to the topline from multi-brand outlets.
  • Raw material inflation is witnessed especially in synthetics and plastics. About 25-30% of the portfolio has a significant amount of synthetics and plastics which go into it, where there is significant pricing pressure.
  • It is also focusing on the premiumization story, where realizations are better.

 

Asset Multiplier Comments

  • With Bata’s revenue recovery rate reaching 85% of pre-Covid levels in 2QFY22, we are confident of the company’s performance. We think Bata’s new strategies and focus on cost reduction, omni channel, change in product mix (higher proportion of casual footwear) and calibrated expansion of retail network through asset light franchisee route would aid in providing thrust to revenue growth.
  • We expect the company to benefit from market share gains on account of store expansion in lower-tier cities where the unorganized segment is dominant and who would face pressure on passing on RM inflation through price hikes.
  • We believe a strong balance sheet with healthy cash on books and efficient working capital should support Bata through these testing times.

Consensus Estimate (Source: market screener and investing.com websites)

  •  The closing price of Bata India was ₹ 2,182/- as of 10-November-21. It traded at 182x/ 61x/ 50x the consensus EPS estimate of ₹ 12/ 36/ 44 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,808/- implies a PE multiple of 41x on FY24E EPS of ₹ 44/-.

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.”

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30 Oct

This Week in a nutshell (25th Oct to 29th Oct)

Technical talks

NIFTY opened the week on 25th October at 18,299 and closed on 29th October at 17671 during the week, the index lost 2.5%. Nifty is trading at an RSI of 43, with support at 17,565 and resistance at 18,158.

Among sectors top losers were Nifty Private bank (-3.6%), BANK (-3.0%), and IT (-2.8%). PSU Bank (+0.1%) was the only sectoral gainer in the week.

Weekly highlights

  • This week was a tumultuous one for stock prices as they reacted to this week’s results.
  • China’s Evergrande Group has stated plans to prioritise the expansion of its electric car sector over the main real estate businesses. Evergrande chairman Hui Ka Yan stated that the company’s new electric car initiative will be its major business, rather than real estate, during the next ten years.
  • The third-quarter earnings season resumed with results from US IT behemoths Apple, Tesla, Amazon, Facebook, Microsoft, and Google. Companies are indicating increased labor costs and operational disruptions impacting earnings.
  • The US budget deficit for 2021 totaled USD 2.77 trillion, the second biggest on record but a decrease from the all-time high of USD 3.13 trillion in 2020. Both years’ deficits represent trillions of dollars in government expenditure to mitigate the terrible effects of a worldwide epidemic.
  • Profits at China’s industrial firms rose at a faster pace in September even as surging raw material prices and supply bottlenecks squeezed margins and weighed on factory activity.
  • According to a CRISIL Ratings analysis of India’s top three PV original equipment makers (OEMs or vehicle makers) with a combined market share of 71%, a global shortage of semiconductors will moderate India’s passenger vehicle (PV) sales to 11-13 percent this fiscal, around 400-600 basis points (bps) lower than what could have been without the scarcity.
  • Last week, the number of Americans asking for unemployment benefits fell to a pandemic low of 281,000, indicating that the labour market and economy are still recovering from last year’s coronavirus slump.
  • Indian equities were downgraded this week by major foreign brokerages- Morgan Stanley, UBS, Nomura.
  • The foreign institutional investors (FII) continued selling Indian equities and sold shares worth Rs 1,57,023 mn. Domestic institutional investors (DIIs) turned buyers this week and bought equities worth of Rs 94,272mn.

 

Things to watch out for next week:

  • US Fed tapering expected, with an increase in interest rates. The central bank is largely anticipated to declare that it will begin unwinding its $120 bn monthly bond purchases, with the scheme expected to end entirely by the middle of FY23.
  • Several earnings reports are expected next week  including those from pharmaceutical giants such as Pfizer and Moderna in the US. In India, companies such as HDFC, Tata Motors, and Sun Pharma are set to announce earnings.
  • The next week will be a truncated one for Indian equity markets due to Diwali. 

 

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.”

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