Good Morning Toasters!

Hiii friends! Nifty50 was in a range yesterday staying between 16,444 and 16,610, and closing in the negative as the headline index was unable to hold the momentum. This seems to be a pattern, with the markets opening positively before FIIs come in with their selling around noon.

In today’s newsletter, we cover a small-cap stock, Cosmo Films, that recently gave a breakout above the 20-Day Simple Moving Average. The company manufactures bi-axially oriented Polypropylene Films and is engaged in the production of flexible packaging films.

The RBI released trade deficit data for the month of April’22, showing the CAD at a record high of USD 23.3 Bn, due to a mixture of crude + coal and gold + jewellery imports. Core Exports & Imports according to the data are normalising, due to an ease in global and local demand as pre-Covid activities resume.

And finally, we’ve started a rollout of our newest product, Trade:able, that aims to democratise trading, via a unique and fun learning experience. There are a bunch of amazing rewards and prizes to win. Click here to know more.

Market Watch

Nifty 50: 16,569.55 | -14.75 (-0.09%)
FII Net Sold: INR 2,397.65 crore

Sensex: 55,675.32 | -93.91 (-0.17%)
DII Net Bought: INR 1,940 crore

Technical Setup

Cosmo films going through a series of breakouts 🎬

• Cosmo Films Limited manufactures Bi-axially Oriented Polypropylene Films (BOPP) and is engaged in the production of flexible packaging films
• Analyzing Cosmo Films on a weekly time frame indicates that the stock has been trading in an uptrend making constant higher highs and higher lows
• Prices are trading between 2 rising trendlines, causing the prices to continue trading in an uptrend

Okay interesting, but what about the breakout you were talking about?

• Looking at the daily chart (see image below), prices have given a breakout above a double bottom made at the support band (1541-1626)
• This up-move also led to a breakout above the 20-day Simple Moving Average, which is also a positive sign

Financial and Company Profile?

• Cosmo Films is a small-cap with a market capitalization of ~INR 3277 crores, and operating in the packaging sector; Competitors include Polyplex, EPL and Jindal Poly films
• The stock is currently trading at a P/E of 8.24, while the industry P/E is at 12.4; FII holding going in the counter has increased from 1.98% to 6.18% in the past 2 years
• The company has delivered profit growth of ~ 37.5% CAGR over the last 5 years, while also maintaining a healthy dividend payout of 20.3%
• Sales for the quarter stood at Rs 821 crore (22.1% growth YoY), with a 5 Yr CAGR of 33.72%
• 1Y / 3Y returns for the stock are 125.7% and 708.5%, with average daily traded volumes of 97,612

Interesting! Final thoughts?

• On a weekly time frame, prices have been making continuous higher highs and higher lows between a rising channel show positivity
• On a daily time frame, prices breaking out of the 20-day SMA and a double bottom add strength
• The stocks had a stellar run over the last 3 years, does the same continue?

Keep a track?

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Around the World 🌎

• Apple’s annual affair – Monday marks the opening of Apple’s annual weeklong developer conference to highlight the company’s software prowess amidst the backdrop of slowing gadget sales, rising inflation and a resurgence of Covid-19. The pandemic had served Apple well with record sales due to the need to augment the quarantine experience. However, iPhone revenue is expected to rise 6.2% this fiscal year (vs 39% in 2021) owing to supply chain bottlenecks and other issues
• Good day for Didi – China will be lifting its ban on Didi’s acquisition of new users and concluding its year-long probe in a bid to spur economic activity. The app will also be restored on the domestic App Store (the app was removed in a data-security probe citing national-security reasons.) Apps like Full Truck Alliance Co. and Kanzhun Ltd. are also seeing similar bans being lifted
• Drama on the trading floor – Elliott Management Corp, an activist hedge fund, has sued the London Metal Exchange for more than $456 million after the latter cancelled trades the fund made and suspended trading in nickel altogether due to volatile movements in the price. A spokesperson said that the LME either exceeded its authority or was acting “unreasonably and irrationally”

Economy News

Trade Deficit at a record high, driven by strong imports; what’s up and what do you need to know? 

Definition: A trade deficit occurs when the value of a country’s imports exceeds the value of its exports OR a country is buying more goods & services than its selling

• Led by resilient sequential growth in imports, early estimates suggest that the trade deficit widened sharply to USD 23.3 Bn from USD 20.1 Bn in April’22 (just about touching an all-time high)
• Exports fell (-7.2% Month on Month), while imports increased (albeit slightly) led by gold-related demand (marriage season), coupled with energy-related purchases continuing as before (more on this below)
• As oil imports rose further, supply shortages and rising power demand led to a surge in coal imports to USD 5.3 Bn in May vs average imports of USD 2.6 Bn in FY22, akin to similar circumstances during the 2011 energy shocks (click the link below to know more)
• Exports on the other hand have remained resilient, led by strong shipments of engineering, electronic goods, petroleum products and textiles, with core exports moderating, indicative of easing global & domestic demand (more on this below)

Okay? Can I get some more information and context please? (Yess for sure)

• Indian refiners increased the arbitrage available by accessing Russian markets for cheaper crude imports, resulting in purchases increasing to 24 Mn bbl in May’22 vs only a 10 Mn bbl purchase during the whole year prior to the war
• This led to a decrease in overall oil imports by 10.1% MoM (lower absolute value of the purchase) with June’22 run-rate already at 28 Mn bbl and yet the longevity of this arbitrage is questionable (EU wouldn’t be okay with such increased purchases for too long, as the price increases for them)
• Likewise, coal imports gained 8% MoM as India grapples to meet its rising power demand, amid supply shortages globally; a similar situation played out in FY12, when crude prices surged and coal was in short supply (coal and oil imports grew by 40% and 22%, 2-Yr CAGR in FY12)
• Intrinsically, a deficit isn’t a net positive or negative for a country, with economists often differing in their views on the overall impact a large/small deficit can have on growth (see the link below for some examples of successful/unsuccessful trade deficits)

Thanks! Any final thoughts? What to expect in the future?

• The effect of the oil price shock is likely to be exacerbated by the simultaneous rise in prices of coal, natural gas, edible oils and gold (all of which account for ~40%+ of the import basket)
• Apart from a deep Current Account Deficit, global geopolitical risk reassessment, a weaker China growth perspective and tighter global financial conditions may push Foreign Portfolio Investors (FPIs) to ask for a higher Emerging Market Risk Premium (i.e. returns for investing in ‘developing economies’), including India
• This will likely directly impact FPI inflows to Indian equities (i.e. more days of seeing red in the FII column)

So more of the same going forward then?

If you wish to see some examples of past trade deficit scenarios.

What else caught our eye? 👀

Zomato has a new baby

• Top management at Zomato will be meeting on June 17 to finalise the acquisition of Blinkit at a valuation of < $700 million
• A stock swap is expected in the ratio of 1:10 – Zomato would be getting 10 shares of Blinkit for every one of its shares
• Approval from the Competition Commission of India (CCI) will also mostly not be required due to the ‘de minimise exemption, which applies to deals below a certain size

Win for Jio

• Strong sequential growth in average revenue per user (ARPU) is expected by the second fiscal quarter as its December tariff hikes will begin to impact
• The delay is because most of the users are on longer-validity plans – though it reported 10.6% growth in the last quarter driven by low-paying and inactive users
• Decent customer additions from the April-June quarter onwards are also expected as Jio clears up its inactive base

Educational Topic of the day

Capitulation

Traditionally, capitulate means “surrender.” When an investor capitulates, they “surrender” by choosing to realize a previously unrealized capital loss by selling stock rather than continuing to hold onto it due to fear of additional loss.

Edited by Raunak Karwa

Let’s connect, I always love hearing from you. Hit me up at Raunak_Karwa on Twitter or Raunak.karwa@finlearnacademy.com