Yesterday’s Market Performance

Nifty: 18,255.75 | -2.05 (-0.01%)
FII Net Sold: INR 1,598.20 crore

Sensex:  61,223.03 | -12.27 (-0.02%)
DII Net Bought: INR 371.41 crore

Howdy Toasters!

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

• Inflation worries continue to linger
• Time to celebrate for TCNS Clothing
• Technical Corner: Tata Motors, HDFC Bank, ICICI Securities
• An education concept to keep you chugging along

Inflation worries continue to linger; what’s up and what do you need to know? 😓

• As food inflation started to moderate in Dec’21, headline CPI inflation rose to 5.6% (from 4.9% in Nov’21) due to an unfavorable base effect
• While vegetable prices will continue to fall, imported food products might not follow suit
• Core inflation eased mildly to 6.15% as the impact of the telecom tariff hike was offset by the tax cut-led decline in motor fuels

Let’s get some depth? 🧐

• A broad-based weakness was seen sequentially in the food segment even as the base effect led to a higher annualized print of 4.5% YoY
• While prices of vegetables (led by seasonality), edible oil (led by tax cuts) and some of protein-complex (pulses, meat and fish) eased, prices of components like cereals, egg and milk rose
• High-frequency mandi prices suggest a further sharp decline in vegetable prices, led by tomatoes and oilseeds

More! 🙄

• Core inflation (which excludes food, fuel and intoxicants) moderated to 6.16% (from 6.30%)
• Personal care & effects, healthcare and education eased moderately while housing rentals declined
• Firms may choose to pass on higher input costs given the stage of recovery thus maintaining core inflation at a healthy level

Anything else? 🙄

• IIP Growth (Index of Industrial Production) grew by only 1.4% in Nov’21 implying a decline in output again to slightly below pre-Covid levels
• Manufacturing hardly grew (0.9% YoY, contracting 4.8% MoM) contributing to a broad-based weakness
• Use-based, capital goods (-3.7% YoY) and consumer durables (-5.6% YoY) contracted, while growth was seen in Infra (3.8%), primary goods (3.5%), intermediate goods (2.5%) and non-durables (0.8%)

Implications? 😏

• Things to watch out for  1) volatility in vegetable prices, 2) some correction in global commodity prices, 3) early signs of easing supply chains globally (and a possible reversal of the same amid Omicron’s spread), 4) contained household inflation expectations, and 5) the impending demand revival
• The biggest factor to watch out for however is the Fed’s response which could guide the RBI’s stance in a big way

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Time to celebrate for TCNS Clothing; what’s up and what do you need to know?💃

What’s Up? 

• Recovery in physical channels is likely to have improved significantly to ~90% in Q3 vs. ~65% in H2FY21/Q2FY22 (Source: Emkay Global Financial Services)
• Recovery is aided by an increase in addressable market size, via introduction of accessories / plus-sized options, which have been launched in ~100 W Stores (~10% sales contribution), higher marketing investments in ‘Alia for Aurelia’, introduction of plus-size campaigns and traction in footwear segment
• Continued traction in the online channel has also helped (~10% CAGR over pre-Covid levels) and should lead to an overall recovery of ~95% in Q3

Interesting! Give some background? 🤩

• Business was severely affected due to restrictions on weddings & other social gathering having a direct effect on its ethnic category, coupled with the company focusing on profitability with lower discounts during its End of Season Sale, leading to slower recovery (in comparison to peers)
• But unlike its peers who posted huge losses & raised significant capital, TCNS did not see any operating cash loss in the last 18 months
• So overall yes – recovery has been slow (lagging behind western peers by 10-15%) but they seem to have pulled through with a healthy balance sheet, unlike others who have raised significant capital during the pandemic (see image below)

Nice! Final thoughts? Valuations, Stock Price et al. 🧐

• TCNS should leverage the scope for penetration improvement, a robust supply chain and build a strong online presence to maintain earnings growth beyond FY24
• There is a wide valuation gap at present (30-75%) with peers, with the markets likely rewarding companies for registering growth during the pandemic
• By leveraging current scale of operations, doubling down on product portfolio and build-out of online presence, TCNS is well poised to deliver health earnings CAGR in the coming years (we believe)

Keep a track?

What else caught our eye? 👀

Vodafone may look elsewhere for some cash 

• Vodafone Idea is considering an overseas convertible bond issue to raise between $750 million (around ₹5,550 crore) and $1 billion (around ₹7,400 crore) at the earliest
• Key reasons include repayment of loan and vendor dues, as well as funding of capex plans
• Vi’s management has previously stated plans increase capex four times to $2 billion in the next fiscal year starting April.

Pepperfry Ltd. to IPO soon?

• Pepperfry may file its IPO to raise $250-300 million and may file its prospectus in Q1FY23 itself.
• Revenue drop was reported at 10% at around Rs. 220 crore due to the pandemic in fiscal year 2021; recovery however is expected at 40-45% in revenue growth this year
• Pepperfry was last valued around $500 million when it raised funds in 2020

Saturday, 15th January: HDFC Bank

Monday, 17th January: HFCL, Hathway Cables, Sonata Software, Tata Steel, Ultratech Cement, Angel One

Free Cash Flow

Free cash flow (FCF) is the cash that remains after a company pays to support its operations and makes any capital expenditures (purchases of physical assets such as property and equipment).

The formula to calculate FCF:

Free cash flow = Net cash from operating activities-Capital expenditures