Good Morning Toasters!

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

• Bharti Airtel purchases additional stake in IndusTowers IN
• BFSI highly dependent on positive FPI flows
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty:16,793.90 | +135.50 (+0.81%)
FII Net Sold: INR 3,948.47 crore

Sensex: 56,247.28 | +388.76 (+0.70%)
DII Net Bought: INR 4,142.82 crore

Company News

Bharti Airtel purchases additional stake in IndusTowers IN; what’s up and what do you need to know?

Indus Towers Limited is an independently managed company offering passive infrastructure services to telecom operators and other wireless services providers (broadband). IndusTowers has been promoted under a JV between entities of Bharti Airtel and Vodafone Idea Limited, since 2006.

Deal Background

• Following up on its ~5% stake increase in Indus Towers (Dec’20), Bharti Airtel has announced an additional 4.7% stake purchase from Vodafone PLC; the transaction is contingent to Vodafone PLC infusing these proceeds into IDEA IN to clear past dues of IndusTowers;
• While Dec’21 stake increase was motivated by dividend from IndusTowers (INR 20 Bn) the current transaction and stake increase is being done to receive dividend after IDEA IN (VIL) clears the past dues to Indus
• IndusTowers has struggled in the recent past, with their receivables now at an all time high of INR 74 Bn in Q3FY22; the company has not generated any cash, with its outstanding cash + investments at INR 3.9 Bn, indicating that until VIL clears its past dues, IndusTowers will be unable to pay dividend to its shareholders
• In order to get a dividend, Bharti seems to have bailed out Vodafone PLC; this transaction will likely cost the company INR 8 Bn after netting off the potential dividend (INR 15.5/share) that Indus will pay in FY22; post completion of this tranche (likely in a few days), Bharti’s stake in IndusTowers will stand at ~46.4%;

Rationale

• Bharti management acquired the Dec’20 stake at INR 216/share, on the pretext of deep value in IndusTowers, which remains unchanged 14 months in (current stake increase is at same price, ex of dividend)
• Vodafone Idea Limited has been in a bit of tough spot (Yes bro, we know 🙄), with a stake sale in IndusTower one of multiple monetisation ideas mooted by the company; unfortunately, those plans haven’t amounted to much, leading to Bharti (for all practical purposes) bailing them out, given they’re at present the largest shareholder in the company
• With a great % stake, Bharti (theoretically) has a bigger say in all matters pertaining to tower rentals (and so forth); likewise, given VIL has had limited headwind in terms of fund-infusion, which will mean a gradual scale down in operations, Bharti can control rental expenses, capping costs even through utilisation will likely decrease going forward (one lesser player)

Stock Information? How did the markets react and what’s the longer-term plan?

• The expectation is post-closure of this transaction, IndusTower will announce an interim dividend (we believe); IndusTowers at INR 214 / share, trades at a 7% dividend yield
• From a longer-term perspective, Vodafone PLC has earmarked a sale of it’s ~21% stake, which will likely be an overhang on the stock; not to mention, with VIL scaling down its operations, demand for its towers will likely to be majorly dependent on Bharti (which increases concentration risk)
• Bharti has shown in the past that it’s a price maker (through multiple tariff hikes), with that aspect likely to continue, the company has continued to add subscribers, generate strong Free Cash Flow and maintain a healthy balance sheet
• This transaction sort of dampens the mood, with past doubts on capital allocation resurfacing; the markets weren’t enthused, with the stock down ~2% in the last 5 days

Interesting! Final thoughts?

• There are some unanswered questions, most notably –
  • In case Vodafone PLC is unable to find a buyer, does Bharti buy the remaining stake?
  • As a large part of the tenancy expansion plan for Indus is supported by Bharti, does the rent escalation get myopic in nature and is heavily influenced by Bharti aka the largest shareholder? (Leaving little scope for growth in Indus)
  • In case a new investor is on-boarded, what are the contours of working with Bharti & how does that impact operating expenditure for Bharti Airtel?
• While obtaining dividend income (in the interim), and the increasing stake will likely have short-term benefits for Bharti Airtel, the longer-term impact of such a move is questionable (for lack of a better word)

• Bharti has suffered in the past, due to poor capital allocation, and having raised sufficient amounts in the recent past, those fears may re-appear if the street isn’t convinced on the longer-term play

Keep a track?

Around the World 🌎

WW3 doesn’t seem to be off the books with turmoil spreading across the globe – here’s everything that’s happening:

• Supply chains across industries are bearing the brunt of war after already being battered by a pandemic. Airways and land routes both have been severed and the cost of cargo has increased dramatically since Russia closed off airspace making many routes commercially unviable. Major industries affected include car manufacturing plagued by a semiconductor crisis that includes Russian-made components of neon gas and palladium
• The world is ready to retaliate against this Russian invasion and has blocked some Russian banks from the Swift global financial messaging system. This move will majorly affect cross-border financing including trade, foreign investment, remittances, and the central bank’s management of the economy. Efforts are being made to keep channels open to buy Russian oil and natural gas as well as account for the $121 bn that Russian based entities owe foreign banks. Russia meanwhile is building workarounds including its own payments system
• The war meanwhile is causing prices to soar across the globe. Crude prices reached a steep $100 a barrel last week after eight years ending the week at $97 bringing its climb over the past year to nearly 50%. Food will also be hit majorly since both countries account for 29% of global wheat exports. Food prices, in general, have climbed 49% since May’20 and are at their highest since 2011

Deep Dive 🤿

BFSI highly dependent on positive FPI flows to turn-around continued underperformance

Background 

• Bank Nifty and its constituents have consistently underperformed the index in the recent past (1M / 3M);
• This has taken place on the back of a consensus bullishness on the sector across individual & institutional investors, amidst a strong set of results in both Large & Mid Public / Private players
• Most players have reported healthy mid-teen profit expansion, strong growth in fresh advances, reduced NPA numbers, and clawback of Covid-19 contingency measures

Let’s run some numbers (ugh🤦🏻♂️)

BFSI Sector

• The aggregate market capitalisation of all the banks in Bank Nifty is ~26 Lakh Crores (😳); most players are void of promoter family type structure, and would therefore have ~70-80% float (~20 Lakh Crores), providing ample liquidity
• Likewise, lets also consider NBFCs & Insurance cos, that make-up the BFSI pack — aggregate market cap of these two sub-sectors would amount to the tune of ~17 Lakh crores, with a free flow of >50%, i.e. ~9 Lakh Crores
• Adding the free-float across all constituents of BFSI space, we arrive at a number of ~25-30 Lakh crores

Mutual Fund Industry 

• According to AMFI (Industry regulatory body), the total Equity AUM across all MFs in the country is ~INR 13.5 Lakh crore; across multiple categories –
  • Total AUM across Large, Mid, Multi-Cap, Flexi-Cap and Tax Saver categories if ~INR 10.25 Lakh Crore
  • AUMs of ETFs is INR 3 Lakh crore
• Mutual Fund Holdings in Nifty50 stocks is ~INR 11.5 Lakh Crores, of which BFSI holdings are ~INR 4.82 Lakh Crores, which translates into a weight of 42% vs. index weight of 36% (all BFSI constituent weightage aggregate)
• Likewise, MF Holdings in top 100 stocks (large caps) is INR 13.1 Lakh crores, of which BFSI holdings are INR 5.05 Lakh crores, which translates into a weight of 39% vs index weight of 34%
• There is a clear over-ownership of ~10-15% by the MFs for this sector (across categories)

Foreign Portfolio Investors (animal in the room🙄)

• FPIs hold ~INR 15.25 Lakh crores in total financial services, out of their total India ownership of INR 50.9 Lakh crores, which translates into a weight of 30% vs MSCI weight of 22.6%
• However, if you consider the Top 250 stocks (which also includes HDFC Limited) the ownership drops below the BFSI weight of ~31%, implying an under-ownership of INR 21,800 crores

And? Can you get to the point please? (Yess my friend)

• Domestic MFs & Insurance institutions are over-weight across the different indices mentioned above, and yet are unable to ascend the slide the BFSI sector has undergone (the maths just doesn’t add up in their favor)

• FPIs meanwhile, when compared to MSCI are overweight the index, and yet this is during a time when inflows have been meager (to say the least);

• If FPI flows were to turn positive, and they retain their overweight stance, there is a likelihood of meaningful price out-performance over the rest of the market
• BFSI as a sector is technically on a multi-year strong growth story, with significant domestic ownership; yet when compared to the animal in the room, for a reversal in trend, FPIs need to re-enter the party

What else caught our eye?👀

Grover not getting any relief

• Ashneer Grover (BharatPe CEO) has lost an arbitration case in the Singapore International Arbitration Centre (SIAC) and was denied a single relief
• He had claimed that the company’s investigation against him was illegal because it was in violation of shareholder agreement and articles of association
• He also claimed that the whole process was opaque and he was given no chance to present his case; he can challenge this decision in the High Court

The end for Future

• Future Retail has suspended most of its online and offline operations after Reliance has taken over its flagship supermarkets due to missed lease payments
• Reliance will rebrand 200 Big Bazaar stores and has offered store staff jobs on existing terms
• Reliance had earlier transferred leases of some debt-laden store to its books and sublet them to Future, but is now taking over as Future did not make payments

Educational Topic of the day

Floating Stock

Floating stock is described as the aggregate shares of a company’s stock that are available in the open market. It represents the number of outstanding stock or shares available to the public for trading and does not include closely-held shares or restricted stock.