Good Morning Toasters!

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

• Noble gas shortage to accentuate pain in the Automobile sector
• High volatility in the metal sector
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 16,245.35 | -252.70 (-1.53%)
FII Net Sold: INR -7,631.02 crore

Sensex: 54,333.81 | -768.87 (-1.40%)
DII Net Bought: INR 4,738.99 crore

Deep Dive

Noble gas shortage to accentuate pain in the Automobile sector

• Ukraine is a major exporter of noble gases – neon and krypton accounting for 70% and 30% of the global supply respectively
• Market prices for the same have soared with the suspension of trade activities, including the service halt by some large shipping companies in major port Odessa
• The price of neon gas in China’s domestic market is now > 1,650 yuan ($261.5) per cubic meter, an increase of 65% from the beginning of the year (it has quadrupled from a low in Oct’21)

Can we get some info on this commodity?

• Neon Gas is critical for semiconductor production – it powers the lasers that etch patterns into chips – and a supply issue could adversely affect global production
• The neon has to be refined to a 99.999% purity – a niche process that very few plants in the world carry out and Ukraine is expert at producing it at reasonable costs
• While both China and the US have some facilities that can meet the requirements, further, ramp-up is not possible immediately + manufacturers are reluctant to invest in new capacity since the supply interruption is most likely temporary (we hope)

Tell us more! 

• Companies in China have seen daily orders jump 5-6x but many are not able to fulfill due to a production ceiling (a capacity expansion will take time)
• All hope is not lost – the upstream of the chip foundry has a relatively long supply chain and so even if the upstream supply of some noble gases is short, it will take a certain amount of time for it to be transmitted to the downstream
• Most semiconductor manufacturers are actively adapting and minimizing the effects either through stockpiling, process innovation, or sourcing from new suppliers
• In conclusion, in the near-term, the adverse impact on semiconductor production would depend on the duration of the Russia-Ukraine conflict but the overall verdict is that industry will come out of this conflict unscathed
• Commodity prices have been a challenge for automobile manufacturers, a new issue with semiconductors, was the last thing automobile manufacturers wanted

Around the World

Results are out, so let’s see how some major companies performed this past year!

• Kroger Co. (NASDAQ: KR) did not disappoint with identical sales up 15% compared to pre-virus times. Consumers have been eating more at home due to affordability as well as health concerns. Quarterly profit was $566 million, or 75 cents a share (vs a loss of 10 cents a share a year earlier) in spite of inflation in food prices and other supply chain challenges. Digital sales doubled in the latest quarter from two years ago
• Grab Holdings Limited (NASDAQ: GRAB) also saw 2021 as being one of their best years ever with GMV growing by 29% YoY to hit $16.1 billion and revenue  (net of consumer, merchant and driver-partner incentives) increased by 44% You to $675 million. Loss for 2021 was $3.6 billion. 2022 is expected to be a watershed year, especially with the launch of the digibank in Singapore
• Costco Wholesale Corporation (NASDAQ: COST) announced that net sales for the last quarter increased 16.1% to $50.94 billion, from $43.89 billion last year. Net income for the quarter was $1,299 million or $2.92 per diluted share (vs $2.14 per diluted share last year)

Technical Setup

High volatility in the metal sector?

• Looking at Nifty Metal on a daily time-frame, we get an indication that the index has been trading within a range (5250-6360) in the last 6 months. The current chart shows negative development as prices faced resistance along the stiff supply zone (6360)
• Looking at such development gives us a good opportunity to look at other metal stocks which might correct with the index

Stocks

TATA Steel

• Analysing Tata Steel on a daily time-frame, prices faced resistance around 1325 which turns out to be a supply zone for the metal giant
• An evening star candle pattern increases the chances of correction from current levels. If the stock undergoes a deep correction, it might take support along 1070 (See image below)

APL Apollo Tubes 

• On a daily time-frame. Prices have tested the support (800) multiple times making it weak
• The stock is also facing resistance along a falling trendline, thus making a descending triangle pattern; a breakdown below the support might lead to a deeper correction (downtrend)

Interesting! Final thoughts?

• Stocks make indices, hence we can predict prices of stocks in a certain sector by looking at the sectoral index
• Metal stocks might be under pressure with the Nifty Metal chart showing weakness

Keep a track?

What else caught our eye?

Indian airlines in a fix

• Oil prices are at all-time highs (Brent crude was up 84% annually) but airlines may not be able to pass on this to the price-sensitive Indian passenger
• Airlines are also competing against the significantly improved railways and road services and demand has just started recovering after the third wave
• The domestic aviation industry will report a net loss of about ₹25k – ₹26k crores during FY22 according to a report by ICRA

Huawei in a soup with the GoI

• Huawei (China-based telecom gear maker) has allegedly tried to evade taxes in India by manipulating its books and reducing taxable income over several years
• Various expenses that lack financial rationale was discovered during last month’s tax searches at the company’s premises
• Income of INR 4 billion ($52 million) is missing while expenses of INR 4.8 billion are not justified – more investigations are in the process

Educational Topic of the day

Convergence Trade

Convergence trade is the practice of buying a security with a future delivery date for a low price and selling a similar security, also with a future delivery date, for a higher price. The aim is for the prices of the securities to converge, resulting in a profit.