Good Morning Toasters!

Ssup bros!! India’s first ever 5G spectrum auction ended yesterday, with the GoI netting a cumulative INR 1.5 Lakh crores, as Reliance Jio bid aggressively, followed by Bharti Airtel and Vi. Adani bid for 5G networks in the 26 GHz category, specifically for private usage. More details are awaited!

In today’s issue, we look at FII #s from the last 16 odd months, or when they decided to begin selling in anticipation of a bear rally. Cumulatively, FIIs have withdrawn/sold INR 4.4 Lakh crores or INR 1300 crores daily. In contrast, Indian retail investors via SIPs and direct investments have partially made-up the shortfall, and likely limiting the impact.

Westlife Development, the master franchise holder for McDonald’s in West & South India dropped their numbers last week, recording their best every quarterly topline ever, as the company fires on all cylinders. Gourmet burgers / fried chicken and a ~80% rollout of McCafe’s across their stores are likely going to keep SSG at 8% odd for the foreseeable future.

Market Watch

Nifty 50: 17,340.05 | +180.80 (+1.06%)
FII Net Bought: INR 2,320.61 crore

Sensex: 58,115.50 | +545.25 (+0.95%)
DII Net Sold: INR 822.23 crore

Market News

FII % holding across Nifty500 touches a multi-quarter low

• In a sign of changing times, Foreign Institutional Investors (or the bread & butter of Indian Financial Markets) have withdrawn (or sold) a cumulative total of INR 4.4 Lakh crores or ~INR 1300 crores per day since April 1, 2021 (or the height of the bull market rally)
• This sustained selling has resulted in FII shareholding in Nifty500 stocks at a multi-quarter low of ~17%, with Financial Services & IT Stocks facing the major brunt of selling, as FIIs have re-jigged their portfolios
• Enormous as it may appear, INR 4.4 Lakh Crores is just ~5% of their total holding within the Indian Financial Markets, indicative of the ability of ‘FIIs’ to make/break the rally (if there is one)
• Pushed by a quantitive tightening (QT) undertaken by major central banks globally, which was initiated after the US economy began reporting high inflation numbers (not transitory), FIIs began diverting capital from emerging economies (like India) into US Bond Yields, which have grown from 1.27% in July’21 to 3.3% in April’22

Interesting! But the markets didn’t fall by equal proportions? Tell me more?

• An indication of the growing financialisation of the Indian economy has been the continued participation of the average retail investor, purchasing equities to the tune of INR 3.68 Lakh Crores in the last 16 months, partially filling the vacuum
• A sizeable chunk has come via Mutual Fund Investors, who amidst a changing market scenario has persisted with Systematic Investment Plans, contributing ~INR 1.24 Lakh Crores in FY22
• Likewise, ~INR 70,000 crores have flown via direct stock investments (IPOs & more), as Retail Investors have taken advantage of the ease of opening a Demat account and/or undertaking investing / trading
• The Nifty50 and broader indices have corrected (you don’t say), and now trade at 17.5 1x FWD Earnings, which when looked at over a larger time period is at a discount to mean valuations during the same period

Got it! And going forward?

• The US Federal Reserve stuck to a consensus last week, raising interest rates by 75 bps as CPI Inflation in the US Economy touched a 41-year high, with the expectation amongst economics of a similar hike in the next quarterly cycle
• Likewise, India’s OG Bank, the RBI is scheduled to meet towards the end of this week, amidst a different backdrop, with MoM inflation #s in India softening, with the RBI Governor expected to raise rates by 25 Bps, while waiting for multiple reads of stable inflation
• A stable US economy, with downward trending inflation #s and reduced rate hikes, will most likely reverse bond yields, thus making India (and other emerging economies) attractive bets for FIIs, and be required to reverse the selling trend witnessed
• When is probably a million $ question, with the US Economy reporting consecutive months of negative growth, and the US Government in an effort to control the narrative, now proceeding to alter the official definition of recessions (hehe)

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Around the World 🌎

• New travel agent in the making – JP Morgan Chase & Co., the nation’s biggest bank is planning to launch a full-fledged travel service which will include air ticket bookings, safari experiences, spa bookings and their own airport lounges. It aims to capture booking of $15 billion by 2025, thus making it the third largest travel agent in the company, next only to the parent co. of booking com and Expedia. According to its data, customers love to redeem their rewards on travel spending as proved by their premium credit card Sapphire Reserve
• Some good news on the inflation front – The covid19 pandemic coupled with the Russia- Ukraine war led to a massive increase in global food prices since both countries combined account for 28% of global wheat exports, and 15% of corn exports and a major chunk of sunflower oil supply. However, commodity prices have cooled down in recent months thus bringing down global inflation. Economists though see this as a short-term phenomenon and warn that markets are still volatile due to supply shortages
• The worst phase for China’s economy is not yet over – Both the manufacturing and property sectors in China continue to show dismal performances in the month of July adding to the worries of an already struggling global economy. Lockdown restrictions in Beijing led to weak demand in housing markets while only 10/21 of industries in the manufacturing sector showed any growth. Fed interest rate hikes to combat inflation coupled with a decline in exports have further shattered any hope of a post-pandemic economic recovery

Company News

McDonald’s master franchise Westlife Development achieves best ever topline; what’s up and what do you need to know?

Westlife Development (ticker: WLDL) is the master franchise for McDonald’s in West & South India

• In continuation of its strong operating performance, Westlife Development recorded its best ever topline quarter, achieving a 3 Yr CAGR of 12%, led by a 9% Revenue / Store CAGR and 3% new store addition CAGR
• The company attributed its strong growth trends to the improved presence in the meals category via gourmet burgers / fried chicken, including sustained momentum (post covid) in convenience sales (29% CAGR) and a strong pick-up in dine-in sales (4% CAGR)
• WLDL has rolled out gourmet burgers across all stores, while fried chicken is available across all southern outfits, with 5-10 store pilot in west India; McCafé’s are now present in 80% of stores, with the management indicating the opportunity to double store contribution from McCafé’s by expanding the Menu
• The company opened 5 new stores during the quarter, which when looked at in comparison to the previous quarter and/or vs commentary is on the slower side, with the management indicating plans to continue with the store expansion pace indicated previously (more on this below)

Interesting! Tell me more? Margins, Price Hikes, Store Expansion Plans et al?

• WLDL recorded a 5% increase in EBITDA % to 13%, touching pre-Covid margins for the first time, with the company also undertaking price hikes towards the end of the quarter (~5%), which should reflect Q2 onwards
• Likewise, the company has stuck to initial commentary pertaining to new store additions, targeting 35 new stores in FY23, and 200+ in the next 3-4 years; the company presently operates ~331 stores in 48 cities, a # which has largely remained stable since Q1FY21 (320 stores in 42 cities)

Got it! What about stock performance, valuations and going forward?

• The company has guided for a softening in commodity prices (much like other consumer cos), and coupled with increased operating leverage, WLDL will likely report consistent gains in their margin profile (we think)
• Likewise, the company has recorded 8%+ Same Store Sales growth and has guided for a similar # in the future, on the back of improved menu offering in McCafé, the rollout of fried chicken across all outlets and continued pickup in gourmet burgers
• The stock currently trades at 20.1x 2 YR FWD EV / EBITDA (see image below), which when taking into consideration peer valuation profile, growth outlook (across top/bottom line) and large penetration opportunity augurs well for the company

What else caught our eye? 👀

HDFC Bank to raise money to pay off HDFC Ltd’s loans

• According to Indian rules, HDFC Bank will have to repay all the loans taken by its parent NBFC, HDFC Ltd, before its merger with the latter
• To fill this funding gap, it plans to raise around ₹2.2  trillion from long-term public deposits and corporate bonds and another ₹ 50,000 crores to fund its SLR
• It will take another 12-18 months for the ongoing merger to be completed

Will RBI follow its peers and raise the repo rate?

• After the European Bank and Federal Reserve,  it is highly likely that RBI will also raise the benchmark repo rate by up to 35-50 bps this week
• This increase is necessary to raise the borrowing costs to cool down inflation
• Though most economists believe that inflation has peaked, it is necessary to offset the increasing pressure on the rupee and save it from external sector risks

Results Preview:

Tuesday, 2nd August: Bank of India, Bosch, Deepak Nitrite, Godrej Properties, Gujarat Gas, Indus Towers, Siemens, Voltas, Adani Green Energy

Wednesday, 3rd August: Godrej Consumer, Lupin, PI Industries, Adani Transmission, Interglobe Aviation, AB Capital

Educational Topic of the day

Trailing P/E Ratio

The trailing P/E ratio accounts for a company’s actual earnings instead of its projected earnings. It is considered one of the most accurate ways of determining how valuable a company (or its stock) is; it offers – in a perfect market – a fair valuation of a stock.

Trailing P/E Ratio= Current share price/Historical earnings per share (EPS)

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