Yesterday’s Market Performance

Nifty: 17,691.25 I +159.20 (+0.91)
FII Buy Net: INR 860.50 Cr
DAX: 15,036.55 I -119.89 (-0.79%)

Sensex: 59,299.32 I +533.74 (+0.91%)
DII Buy Net: INR 228.06 Cr
FTSE: 7,011.01 I 16.06 (0.23%)

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In today’s issue of the Morning Toast, we discuss: 

• Trade Deficit specifics & the overall ramifications
• Federal Bank business update and strategic plan
• As always, an education concept to keep you chugging along

Divi’s Labs: 5220.70 | +388.40 (+8.04%)

• The  stock jumped over 8% after Merck’s experimental antiviral pill Molnupiravir was found to reduce the risk of hospitalisation or death by approximately 50% for those most at risk of contracting COVID-19

Adani Green: 1176.10 | +25.05 (+2.18)

• The share price was up over 2% after the firm successfully completed the acquisition of SB Energy Holdings Ltd (SB Energy India) in an all-cash deal.

The trade deficit for September 2021 reached an all-time high, what happened and what are the implications? 💪🚀

• The trade deficit touched an all-time high of USD 22.9 Bn in Sept’21 (USD 13.8 Bn in Aug’21), with oil imports growing 50% month-on-month ; Non Oil Non Gold (NONG) Imports also surged 18% (highest since May 20)

• Exports remained flat m-o-m but increased by 21.4% Y-o-Y owing to strong demand revival (esp in key sectors like engineering goods and petroleum products)

• For the period between April’21 to Sep’21, the trade deficit stood at USD 78.8 Bn, slightly lower than pre-pandemic levels of USD 88.9 Bn for the same period

• Such a large increase was seen last due to the Covid-19 pandemic in May’20.

Holddd on, explain all the jargon please! 🤔

• Simply put, a trade deficit refers to a situation where a country’s payment for imports exceeds its receipts from exports.

• While higher imports imply better quality goods in the country, it is mostly not favoured because of the pressure it puts on the external payments and the currency.

• Imports were higher by 50% when compared to Sept’19 levels, signifying the extent of normalisation from pre-pandemic levels, with the jump in oil exports reflective of both higher crude oil prices and volumes

• Gold Imports grew at an exorbitant rate of 751% YoY

• NOWG imports growth was led by Electronic Goods, Machinery & Vegetable Oils, with the category growing at 41% YoY (combined)

Got it, why is this happening? 💡

• Global economic recovery and steady vaccination progress are aiding this demand revival. Supply chain bottlenecks could however stunt the same.

• Overall, the import growth will exceed that of exports (with high losses in oil led trades). 

• Current account-to-GDP will return to a deficit of ~1.1% from a surplus of 0.9% in FY21. (Current Account = Exports – Imports)

What does it mean for India then? 🚩

• RBI has a war chest for forex reserves ready to tackle any instability in the currency.

• However, FPIs may be looking for an increased return to balance this trade risk and may not find India as attractive anymore; and taking this into consideration with Fed related actions may stifle FPI presence in emerging market economies (reducing liquidity in the process)

• A piece of potential good news could be India’s inclusion in the global bond indices thus stimulating debt flows (and we’re looking out for the same!)

Federal Bank digital adoption taking centre stage, changing product portfolio mix & driving RoAs 🤔

What’s up?

• The bank has reported a 6-quarter high gross loan growth of 10% yoy / 3% qoq to INR 1.37 Tn, which is likely on the back of improving traction in retail (housing), Commercial Vehicles & Personal Loan Segment (which are newer product initiatives launched by the bank)

• Federal has a strong CASA ratio (within Mid-Cap Banking peers), growing 1.3% qoq and touching a high of 36.2% (helping reduce Cost of Funds)

• Closure of DHFL matter (completion of acquisition by Piramal) will help in cash recovery to the tune of INR 0.3 bn, with cumulative restructured book as of Q1 touching 2% of loans

What’s the long term business plan? 👨‍💼

• The bank has adopted a digital sourcing model to reduce cost of acquisition and improve sticky cost ratios, while forming neo-banking partnerships –

  • Sourcing gold loans via Rupeek, building a PL book of INR 15 bn

  • Epifi to build asset book, Jupiter to build out liability profile & BharatPe to strengthen payment service

• The bank has built-out a strong CASA profile (retail deposits in excess of 90%), considerably reducing the cost of funds (under 4.5%), which is likely to deliver strong RoAs in the near term

• Traditionally very heavily driven by mortgages & gold loans, the bank (through neo-banking partnerships) has now diversified into higher-margin Commercial Vehicles, Micro Finance, Personal Loans & Card businesses, also significantly impacting RoAs

Interesting! Covid-19 related troubles? People related decisions? 😎

• Despite prolonged lockdowns in Kerala (base state for the bank), asset quality performance did not particularly suffer, with Gross NPAs at 3.5% of the overall loan book

• The bank has maintained a higher Provision Coverage Ratio (PCR) in comparison to older private sector banks (66% vs 45-50%), with a higher % beneficial against any possible buffers

• The incumbent MD has been given a three-year extension by the RBI, indicating stability (missing in Mid-Cap Pvt peers) and prima-facie approval of the progress made thus far

Final words?

• The stocks been up 11% in the last 6 months, and 3% in the last 5 days itself, and presently trades at 0.9x on a 1-yr forward Adjusted Book Value basis

• In comparison to other Mid-Cap & MFI banking peers, the prospect of management continuity, decreasing cost profile and strong digital capabilities, dovetailed with a changing product portfolio are interesting

In case you wish to analyse companies in a similar way, we run on a course on the Art of Stock Picking & Long Term Investing. Check it out here.

What else caught our eye? 👀

China’s Evergrande crisis becomes messier

• Evergrande has suspended trading in its stock on the Hong Kong Exchange without giving any reason
• The stock has plunged by > 80% since the beginning of the year
• To recap, the firm is faced with over 300 billion dollars in debt, and a default could lead to a crisis as disastrous as the 2008 financial crisis! (no please)

RBI to follow the Fed’s footsteps

• Benchmark rates are expected to be unchanged in the next meeting of the MPC ( just like what the Fed had decided )
• This is a welcome move considering global commodity prices and rising inflation. The economy is on a good path to recovery owing to the rapid vaccination rates.
• It is expected that any stimulus will come from the fiscal side.

LIC IPO process makes serious headway

• Life Insurance Corporation (LIC) is looking to file its draft papers with the SEBI in November for its IPO (which will be the largest in the country’s history)
• The government wishes to list the behemoth in the current fiscal year
• The amount of the government’s stake that will be divested is yet to be decided.