Good Morning Toasters!

Hii friends!! Uber Eats, a surprise anchor investor in Zomato exited the company via a block deal, selling its entire stake of ~7.8%, probably a by-product of the global quantitative tightening, even as Uber US reported bumper results, breaking revenue records.

In today’s newsletter, we preview the MPC meeting, which is ongoing and is scheduled to conclude on Friday, 5th August. A poll across major Economists points to a 25-35 Bps rate hike by the RBI Governor, even as inflation continues to print sub-6%.

India’s largest domestic airline, Indigo operator Interglobe dropped their results, recording a 3x jump in their EBITDA numbers, as a seasonally strong quarter lived up to expectations. The company recorded its best ever topline, growing 60% QoQ and >300% YoY, as travel returned in a big way.

Market Watch

Nifty 50: 17,388.15 | +42.70 (+0.25%)
FII Net Bought: INR 765.17 crore

Sensex: 58,350.53 | +214.17 (+0.37%)
DII Net Sold: INR 518.42 crore

Economy Preview

RBI MPC to maintain a broader outlook; what’s up and what do you need to know?

• The RBI Monetary Policy Committee, headed by the Governor, is meeting this week (3rd to 5th August) in an attempt to ascertain the next rate hike (?) to be undertaken in the backdrop of nearing peak inflation and evolving macroeconomic scenarios
• Since the June MPC meeting, the global macroeconomic scenario has remained more or less the same, as the US Federal Reserve has undertaken two consecutive hikes of 75 Bps, as inflation has moved from being transitory to here, now and not going anywhere (hehe)
• That being said, the markets (both locally & globally) have now somewhat gotten accustomed to anticipating near peak-inflation and global Fed hawkishness (or raising rates to curb inflation) for the foreseeable future, adjusting expectations & taking stock calls accordingly
• Thus there still appears a valid reason for the RBI to front-load its rate hike, albeit in a more measured manner (no impromptu meetings et al.), with a 25 – 35 bps rate hike the major consensus range amongst economists

Got it! What about inflation in India? And any INR vs USD considerations at play? Tell me more?

• Q1FY23 inflation surprised everyone (RBI, Markets, GoI) coming in ~0.2% less than RBI forecasts, and yet the miss is on the modest side of things, as various components (food, fuel etc) still feature around the 6%+ levels
• While there has been a fall in global commodity prices, a complete pass-through across manufacturers is still to playout, while the actual inflation print will depend more on WPI vs CPI print
• That being said, assuming the current inflation trend + global commodity softening continues, economists expect exit FY23 inflation to come around 5%, as the RBI cumulatively raises real rates by 75 bps during the current financial year
• INR has fallen >5% since the beginning of the current calendar year, and yet having recovered from touching INR 80 against USD, currency pressures appear modest against a backdrop of continuous FPI outflows and current account pressures, as the RBI via FX operations has managed to stem the slide

Interesting! Final thoughts?

• With recession fears gathering globally, the reaction function of central banks, including RBI will likely start weighing the growth vs inflation trade-off (remember this?), especially after multiple months of inflation prints trending downwards
• Global externalities and financial conditions have incrementally become better, as near-peak inflation and Fed-Hawkishness turn into a reality, with market participants re-adjusting expectations for the foreseeable future
• The likelihood of the RBI MPC continuing the current trade by raising rates is high (we believe), with consensus across economists between the 25 – 35 bps range

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Around the World 🌎

• Batgirl will not see the light of the day: Warner Bros Discovery movie Batgirl has become the most expensive cinema project ever to be cancelled with the decision to not release it either in theatres or on HBO Max in spite of shooting being complete and the movie being in post production stage. The film starring Leslie Grace, Michael Keaton and Brendan  Fraser was not found up to the mark in early test screenings. Ever since Warren Bros merged with Discovery, its CEO David Zaslar has been concentrating on cutting costs and giving preference to theatrical films over streaming projects
• More troubles for Robinhood: Robinhood, a leading free stock trading online brokerage platform saw its fortune reach the heights during Covid 19 pandemic with more than 21 million active users. However, with downturns in the market and recession in the overall economy,  tables have turned and the company has had to lay off 23% of its full time staff in the second round of layoffs to cut costs as revenue in the last quarter dropped 55% to $202 million. To add to its worries,  it has been fined $ 30 million on its cryptocurrency trading unit for violating cybersecurity regulations and anti money laundering practices
• Faulty credit scores land Equifax in trouble: Equifax, which maintains credit reports of more than 200 million Americans thus determining their credit scores, made a major blunder in a three week period in early 2022 when it sent inaccurate credit scores of millions of people to lenders. This resulted in their loans and credit cards being rejected altogether or higher interest rates. The co. Chief Executive Mr Mark Begor however defended themselves by saying that it was a tech coding glitch which has been rectified. In 2017 also the company suffered because of a hacker who exposed the sensitive personal information of nearly 150 million Americans

Company News

Indigo records a 3x EBITDA jump

• India’s largest domestic aviation company (sorry Air India) reported revenue growth of ~60% QoQ to INR 128.5 Bn, which when looked at on a YoY basis grew by 327.5%, albeit with the same quarter last year affected by covid-led disruptions
• In a clear indication of travel & movement returning to full flow, the company recorded a Revenue per Available Seat Km (RASK) growth of 18% QoQ and a 72.2% increase on a YoY basis
• In contrast, while revenues grew and touched the highest ever levels for the company, cost pressures continued as fuel and adverse foreign exchange impacted the bottom line, which ideally under ‘normal’ conditions would have resulted in strong net profitability, but instead recorded a narrowing losses (on a QoQ basis)
• The company increased its domestic destination count by ~11% YoY, taking its tally to 73 cities in the country, while international destinations remained the same; refraining from committing any major capital towards fleet expansion, Indigo added 6 new aircraft during the quarter

Interesting! Tell me more?

• Profit After Tax (PAT) was positive at INR 3.6 Bn, if forex loss due to adverse INR movement is excluded, as the company turned operationally profitable after 8 quarters on the back of strong Available Seat Per Km (ASK) growth of 35% QoQ
• Total Cost Per Available Seat Km (CASK) rose by 8.1% YoY, on the back of rising fuel prices, while CASK excluding fuel rose 35.1% YoY, as fuel prices increased by 95.5% from INR 63.1 Per Litre to INR 123.3 Per Litre
• Yield, which is defined as Passenger Ticket Revenue / Revenue Passenger Km increased by 18% QoQ, which should augur well for the company going forward, as demand for travel returned
• The company plans to increase Available Seat Per Km by 70-80% by the second quarter of FY23, when compared to the similar period in FY22, indicating plans to expand the fleet and widen the scope of offerings

Got it! Final thoughts?

• Q1 is a high season month (summer vacations et al.), with strong numbers indicative of a return of demand, regardless of the inflationary scenario with the company confident of a longer-term playout of this trend
• That being said, weak seasonality will likely impact the company in the coming quarter, probably resulting in losses continuing amidst a high inflationary & adverse INR environment

What else caught our eye? 👀

Rice production in India declines due to weak monsoons

• After wheat and corn, the supply of rice could be a cause of concern for global food supply as India, the world’s largest exporter of rice suffers due to weak monsoons
• The plantation area has declined by 13% this year, especially in states like Uttar Pradesh and West Bengal which account for almost 25% of total Indian production
• This will lead to a further increase in food inflation thus adding to the worries of millions of people and also an increase in export prices

Uber will no longer be ordering in

• In January 2020, Uber Technologies received ~ 10% in Zomato in exchange for its UberEats’ India operations
• After suffering continuous losses for 2 years in its investment, Uber has decided to sell its stake in a block deal of a value of ₹3,300 crores at ₹48-₹54 apiece
• According to Mr. Deepinder Goyal, co-founder and Chief Executive of Zomato, the company’s main focus is now on profitability and hitting the adjusted EBITDA breakeven point

Results Preview:

Thursday, 4th August: BKT, Berger Paints, Britannia Industries, Container Corporation of India, Dabur, GAIL, Gujarat State Petronet, HPCL, LIC Housing Finance, Manappuram Finance, REC, Dalmia Bharat

Friday, 5th August: M&M, Petronet LNG, Titan, Alkem Labs, One97 Communications

Educational Topic of the day

Accumulation Phase

The accumulation phase refers to the time in the life cycle of an investment when an individual or an investor builds up the value of their annuity or investment. It is the second phase in the process of investing.

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