Good Morning Toasters!

Hii friends!! At a USD 17 Bn loss, the LIC IPO is amongst Asia’s Top wealth losers. Markets were down 427 points yesterday, and we’re still not done for the week. The US Fed’s scheduled to meet this week, and with US Inflation at a 4 decade high, some economists are predicting a 75 Bps rate hike🤭

In today’s issue, we cover the management churn and subsequent stock price impact at RBL Bank. India’s OG Bank (RBI) has parachuted its resolution/crisis expert, and if that’s any indication of the state of affairs at RBL, we’re in for a ride.

At a time when no company would think about approaching the markets to list, Chinese markets are in the midst of a record year, raising USD 33.4 Bn in fresh capital. ~170 companies have applied to the list during the second half of CY22.

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: 15,774.40 | -427.40 (-2.64%)
FII Net Sold: INR 4,164.01 crore

Sensex: 52,846.70 | -1,456.74 (-2.68%)
DII Net Bought: INR 2,814.50 crore

Company News

RBL Bank’s down ~60% in the last year; what’s up and what do you need to know?

Background

• Circa December 2021, RBL Bank had come under RBI scrutiny due to a high concentration of unsecured heavy asset side products (MFIs + Cards – 31%), which created asset-quality risks during Covid-19
• In addition, India’s OG Bank was unhappy with RBL’s poor compliance with its directives, including risk management, governance and succession, eventually resulting in RBI’s placing the MD & CEO on extended medical leave 😉
• In response to a lack of leadership at the Bank, RBI then placed one of its CGMs on the board, to provide oversight and manage the house, till the Bank appointed an RBI approved MD & CEO
• Weirdly enough (history suggests otherwise), RBI did not provide a reason behind the outset of the MD & CEO, with the above reasons collaborated from industry participants (Source: Emkay Global)

So what’s up?

• RBI has approved the appointment of Mr. R Subramaniakumar as the MD & CEO for a period of 3 years, with the duration between the Bank recommending to RBI approving extremely short, which can be construed as the RBI being actively involved in the decision making
• Mr. Kumar comes with a reputation as a troubleshooter –
  • >4 decades of experience, most with PSBs (Punjab National, Indian Bank)
  • Was appointed to head the beleaguered Indian Overseas Bank in 2016 for a period of three years
  • RBI appointed him as DHFL administrator in 2019, where Mr. Kumar successfully resolved the case, including the sale to Piramal Finance
• That being said, appointing a Public Sector Banker, who primarily has in the recent past been parachuted by RBI to manage/mediate distressed assets, probably tells you all you need to know about the actual state of affairs at RBL (we believe)

And now? Going forward?

• Logically speaking, the new MD’s core responsibilities would be around improving asset quality, strengthening complicated / risk management architecture and stabilise the Bank (from previous management practices)
• This would / should ideally result in some amount of asset-side clean-up and therefore increased provisions, which will place the Bank under stress for the foreseeable future
• In addition to performing a clean-up job, the new MD & CEO would also be required to share an updated business strategy, including near-term growth/asset quality
• An amalgamation of these factors are likely to keep the stock under pressure for the foreseeable future and is also probably why the counter was down ~23% during trading yesterday (broader indices didn’t help, for sure)

Final thoughts?

• RBL Bank Q4 Numbers showed a conscious call to slow down growth in the unsecured portfolio, with the Board also announcing plans to build out a strong retail liability franchise, coupled with a move towards a more secured product portfolio (think: mortgages, personal loans)
• Asset quality slippages during that quarter were limited, with the Bank also including higher provisions, in order to manage for any future scenarios
• Next moves (purely in terms of stock price) will depend on the vision of the new MD & CEO, the actual clean-up job required and how the Bank will restart growth
• Till then, it’s likely the stock will remain under pressure

In case you wish to access the previous Morning Toast issue.

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Around the World 🌎

• Gloomy days ahead – Major corporations like Target and Microsoft have put out warnings that their profits will be lower than expected in the face of rising interest rates, increasing inflation, and other geopolitical factors. Target is facing dealing with changes in consumer preferences that have led to excess inventory, while Microsoft has blamed the strengthening $ for its profit decline
• Crypto oh crypto – The crypto market is seeing its worst performance in recent times with $BTC dropping below $26k due to increasing fears of a tighter monetary policy of the Fed. Celsius Network decided to pause all withdrawals, and swaps between cryptocurrencies as well as transfers between accounts “due to extreme market conditions.” Inflation stood at its 40-year high of 8.6% in May
• Apple has a new offering – Apple is offering a ‘buy now pay later option that will allow consumers who shop with Apple Pay to split purchases into four payments every two weeks. The tech giant will not only underwrite these loans but also absorb losses when borrowers fail to repay. Like most, it will rely on credit reports and FICO scores to check applicants’ financial standing

Global Markets News

China IPO market an anomaly amidst current market conditions

• In what probably typifies the actual disconnect that exists between the Chinese & world financial markets, new listings (fresh IPOs) in China are breaking records
• IPOs in China have thus far raised >USD 33.7 Bn, up from more than USD 30.4 Bn raised by Chinese companies a year ago, with this year’s figure also the highest since 2009
• In contracts, the global dollar value of IPOs fell to >USD 90 Bn over the same period, while in Hong Kong, IPO volumes have tumbled 92% from a year ago to ~USD 2.2 Bn, its lowest point since 2009 (que to what year that was😉)
• Not only are listings in contrast to global scenarios, but given that Chinese GDP Growth has fallen, while the benchmark CSI 300 Index (Nifty50 equivalent) has also fallen by ~15% this year, Chinese co. IPOs are truly an anomaly amidst prevailing market conditions

Damn! Super interesting! Share some more information?

• A key driver (vs other markets) within the Chinese ecosystem is the lengthy approval process, which results in an ‘eagerness’ of sorts to join the markets at the first opportunity (vs looking to time the markets when approvals are easier)
• Likewise, an unwritten rule is a capping of valuations (or pricing issues modestly) for new listings on China’s main boards, resulting in investors being able to find value in new companies listing
• The above, coupled with generally high trading volumes across the breadth of the markets has provided investors with the confidence of finding an exit from newly public stocks rapidly if needed (vs low volumes in the likes of Zomato, for ex.)
• Interestingly, the largest IPO this year is the USD 4.4 Bn listing of energy giant Cnooc Limited, which was until last year trading on the NYSE and Hong Kong Stock Exchange but had to delist from NYSE, due to ex-US President Trump’s investment ban on Chinese companies
• The second half of CY22 might be all about international share sales from China, with the exchange operator releasing a cumulative active application list of 170 companies that are looking to list

What else caught our eye? 👀

IPL frenzy sees a booming start

• Disney-Star India, Viacom18, Zee Entertainment Enterprises Ltd (ZEEL) and Sony Pictures Networks India (SPNI) are the four main bidders for the television and digital media rights of the Indian Premier League
• TV rights closed on the first day at ₹57 crores per match (16% above the floor price) while digital rights bids surged to ₹48 crores (up 45% from the base price)
• The media rights are divided into four packages with a combined base price of ₹32,890 crores for the next five-year cycle of the tournament (2023-27) with 410 matches

Not a good time for pharma

• While the SENSEX has only declined 4-5% YTD, the BSE Healthcare Index has fallen a worrisome 16% showing lack of investor confidence in the sector
• Cost pressures due to rising material prices are said to be the main reason behind the hit in profitability as well as the increased competitiveness which has impacted margins and earnings growth
• The energy crisis and Covid restrictions in China, as well as logistic bottlenecks caused by container availability, have led to supply disruptions that have not been aided by a decline in marketing and promotional spends

Educational Topic of the day

What is the Yield Curve?

The Yield Curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if he lends his money for a given period of time.  The graph displays a bond’s yield on the vertical axis and the time to maturity across the horizontal axis. The curve may take different shapes at different points in the economic cycle, but it is typically upward sloping.

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