Yesterday’s Market Performance

Nifty: 16,985.20 | -263.20 (-1.53%)
FII Net Sold: INR 2,069.90 crore

Sensex:  57,011.74 | -899.40 (-1.54%)
DII Net Bought: INR 1,478.52 crore

Howdy Toasters!

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

• Accenture results read through indicate a strong demand environment
• RBI playing spoilt-sport with NBFCs
• An education concept to keep you chugging along

Accenture results read through indicate a strong demand environment; What’s up and What do you need to know? 🤑

Quarterly Numbers 

• Accenture’s (ACN) revenues rose 27% YoY to USD ~15 Bn, well ahead of the upper end of the guided range of USD 13.9 – 14.35 Bn, with the company recording strong broad based demand, across industries, services & geographies
• All three services lines – Strategy & Consulting, Technology and Operations reported strong double-digit growth during the quarter, & new bookings were at a record high of USD 16.8 Bn (30% YoY), spread evenly across vertical & services lines
• From an operating efficiency perspective, margins improved by 0.2% YoY to 16.3%; most importantly, quarterly annualised attrition moderated to 17% (from 19%) in Q4FY21 (different accounting periods), after consecutive periods of high employee churn

Interesting! Tell me more? Earnings call takeaways, guidance going forward? 🧐

• ACN revised its FY22 revenue growth guidance upward (ofc) to 19-22% from 12-15% guided earlier on the back of consistent superior revenue performance & robust demand trends
• The company signed deals (>100 Mn) with ~20 clients in Q1FY22 vs 18 such deals during Q4FY21, indicating a strong demand environment as cos embark on multi year digital transformation journeys
• Doubling down on M&A, ACN has already spent USD 1.7Bn, and has planned an outlay of USD 4bn for FY22, with revenue guidance assuming ~5% contribution from acquisitions (increased multifold vs previous years)
• At a broad level, the management indicated that given only ~30% of payload has moved to cloud, opportunity for growth remains large, via speed & compressed deployment of solutions (across industries)

Nice! How does this play out for listed Indian IT players? (Yess, let’s get to the good part) 🙄

• ACN’s revenue beat, strong upward revision indicate a robust demand environment (duh!), and coupled with strong outsourcing order book (17.6% YoY in Q1, on the back of 21% in FY21) augurs very well
• Likewise, with ACN revising guidance in the outsourcing business (double digit growth vs earlier high single digit to low double digit), Indian IT players are likely to be major beneficiaries (with large % of revenue derived)
• Attrition remains a challenge, although via commentary, the company highlighted a growing improvement in pricing, allowing for more efficient management of large scale churn

Stocks & Performance

• The Nifty IT Index has been on a roll, rising 1%/27%/58% in the last 3M/6M/12M vs -2.2%/9%/26% for Nifty, with all likelihood of such a demand environment (& deliver) likely able to sustain expensive valuations (we believe)
• Some names, across Large & Mid Caps include the Big 4 (Infy, TCS, HCL & Wipro) and Persistent, First Source, MindTree, BirlaSoft & e-Clerx (not recos my man, not our style at FinLearn)

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RBI playing spoilt-sport with NBFCs; What’s up and what do you need to know? 😧

• RBI has rejected the plea put forth by NBFCs for easing norms on income recognition, asset classification and provisioning, with India’s OG lender wanting to establish uniform prudential asset quality norms for all lending institutions
• The stricter rules will likely swell NPAs (or bad loans) at these NBFCs by 300 basis points, albeit with limited P&L impact (source: Emkay Global)
• The RBI in November directed all lenders (including NBFCs) to recognise bad loans if overdue for more than 90 days and upgrade such accounts only after the full overdue amount is cleared (legally, NBFCs are allowed to upgrade even if they receive partial payments)

Damn, so how bad is the situation? 🙄

• Total NPAs in the NBFC sector were at 6.4% of their exposure at the end of FY21 (the sector’s total loans and advances at ₹17.3 lakh crore), with the top 30 NBFCs accounting for ~ ₹84,000 crore at the end of September
• Higher NPAs may make many non-bank lenders ineligible for paying dividends, which could turn away investors

But hold on, that’s not all 🧐

• The RBI also introduced the Prompt Corrective Action (PCA) framework that sets strict benchmarks on capital requirement, non-performing assets (NPAs), and asset quality.
• This means that they will be subject to almost the same regulation & supervision as banks, with the framework likely to come into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022
• There will be three risk thresholds (measuring the capital adequacy ratio, tier-1 capital ratio, and net NPA ratio) – and regulatory action will be triggered as a NBFC breaches a level
• Dividend distributions restrictions + capital infusion & leverage reduction by promoters will follow a breach of the first risk threshold, with second and third risk thresholds preventing NBFCs from opening more branches, and performing capital expenditure (limited growth opportunities)

Why the vendetta? (Jk jk, we won’t be this dramatic :PP) 😅

• The main objective is said to be to ‘enable supervisory intervention at appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health’
• Recent events of payment defaults by Infrastructure Leasing & Financial Services (ILFS) as well as Dewan Housing Finance Corporation (DHFL) and Altico Capital are said to have been major trigger points, promoting RBI to release stricter regulations

What else caught our eye? 👀

Flipkart has its eyes elsewhere

• Flipkart (owned by Walmart) will go for an initial public offering (IPO) in the last part of next year
• It is considering listing overseas, and raising a pre-round in Q4 of FY22
• The CEO added that scaling the grocery business will be a critical part of the journey towards the listing

India not satisfied with its telecom sector 

• The GoI wants to overhaul the telecom sector – and is looking for ways to allow companies to merge, expand and operate without multiple bureaucratic approvals
• A big reason is the need for a competent telecom industry to cater to its huge market as well as maintain its position in the global competitive landscape
• Currently the situation is not ideal with the price war that started with Jio as well as the litigations faced by the older players

Amazon deserves an apology

• Not only has the Competition Comission temporarily suspended Amazon’s deal with the Future Group but has also imposed a Rs. 200 cr penalty on the former
• This is being done as Amazon did not discole certain commercial arrangements as part of the original deal in 2019
• This will make it much easier for Reliance to acquire its biggest competitior in the retail space

Effective Annual Interest Rate

Effective annual rate (EAR) is an interest rate that reflects the true return on an investment or the true amount of interest due on a credit card or loan.

Simply put, the effective annual interest rate is the rate of interest that an investor can earn (or pay) in a year after taking into consideration compounding.

The equation for calculating EAR is:

EAR = (1 + i/n)n – 1

• i: the stated interest rate (APR)
• n: the number of compounding periods