Yesterday’s Market Performance

Nifty: 16931.00 I 225.80 (1.35%)
FII Buy Net: 8408.62 CR
DAX: 15,887.31 I 35.56 (0.22%)

Sensex: 56889.76  I 765.04 (1.36%)
DII Buy Net: 6678.62  CR
FTSE: 7,148.01 I 23.03 (0.32%)

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In today’s issue, we discuss;

• Bharti Airtel to raise ₹21,000 crores by way of rights issue at ₹535 per share.
• Google Pay ties up with Equitas Small Finance Bank to let its users open FDs on its platform.
• Top movers and shakers of the market, other important financial news, and an educative concept to help you keep learning. Read along!

Bharti Airtel: 620.45 | +25.30 (+4.25)

• The stock jumped over 5% after the telecom major said its Board of Directors had given the nod to raise up to Rs 21,000 crore by issuing equity shares of the face value of Rs 5 each

Ramkrishna Forgings: 1026.40 | +93.40 (+10.01%)

• The stock jumped over 10% after the firm bagged LoI for its warm-forging business worth Rs 120 million per annum from a major global axle manufacturer located in India.

Bharti Airtel announces rights issue worth INR 210 Bn, concluding it’s 4th equity fund-raise in the last 24 months; what do we know and what does this indicate 🧐

We covered the stock in detail post the Q1FY22 results, making a case for you to track. Click here to know more.

• The company announced a fund-raise via rights issue (we cover the concept in detail in education section below) upto INR 210 Bn, at a price of INR 535, with a 1:14 ratio (1 share for every 14 equity shares held by eligible shareholders as on record date)

• The Promoter Group (Bharti + Singtel) of the company will collectively subscribe to the full extent of their aggregate rights entitlement, while also subscribing to any unsubscribed shares of the issue (similar to you know who, RIL)

• This is the 4th equity fund-raise for the company in the last 24 months, and will have raised a total of INR 673 Bn post this announcement (see table below)

Why why? Can you share some reasoning for this one? (good q) 🤔

• We covered this in our previous issue (referenced above)- prima facie, on the back of the recent tariff hike, the company is well poised to deliver strong free cash flow (with the potential of further tariff hikes in the postpaid segment), while maintaining it’s relatively comfortable leverage (debt) position

• However, in case Vi folds up sooner than expected, or continues for longer (manages to raise funds / postpone AGR dues), Bharti would require additional capital to manage the quality of service with the  influx of new customers and / or continue the current aggressive approach in acquiring customers from Vi

• Moreover, a capital raise now (on the back of a + tariff hike) allows Bharti to prepare for 5G auctions, expected in CY22

Interesting! Stock has been range-bound though right? What’s up with that?

Let’s look global to get a sense on local; analysing 24 companies across 12 markets (source: Emkay Global Research),

• >60% of these companies have relatively under-performed their respective global indices; out of 9 companies that outperformed over 10 year period, only 2 did so over a 2-10 year period as well, indicating weak investor interest in this sector

• Underperformance can be attributed to low-single digit revenue & EBITDA growth (over a 10 year period), high capex cycles due to constant technology upgrades, extremely high competitive intensity (think Jio running Vi to the ground), and convoluted capital allocation strategies

• Analyzing FII & DII ownership in Bharti gives a good indication of how the stock is likely to react; over a 10 year period, in quarters wherein the FII ownership was Overweight (in relation to the Nifty) or was relatively less underweight (on a qoq basis), the stock has given healthy returns (see image below)

Similarly, DII ownership has been a consistent theme (even though the stock has underperformed by ~26% vs the Sensex), domestic mutual funds (& more) have been OW on the name since Q4FY16, building momentum and significantly increasing their holding Q1FY21 onwards (see image below)

• FII involvement is key, especially for a very public name like Bharti (duh!!), with the stock poised for a breakout only when both FIIs & DIIs are party to the rally

• Major indicators that would help the stock (in our opinion) would include tariff hike in the postpaid segment (supreme importance to free cash generation), strict control over capex & capital allocation and decreasing vulnerability to Jio’s tariff aggression (elephant in the room :P)

• Investors have remained cautious on the space (& we believe will continue to do so), especially with repeated aggressive intentions by Jio (space is pretty much a duopoly now), with the tide turning only once there is semblance of ‘normal business practices’ (whatever that is)

  Takeaway: Keep a track of FII flows in this name for trading opportunities, instead of a  structural long term play (although, you make your own opinion yeah bro🤠)

Google Pay ties up with Equitas SFB to push time-bound deposit products to its customer base; what do we know and what does this indicate for the larger listed banking space 🧐

• Google Pay (Alphabet owned) & Phone Pe (Walmart owned) control ~85% of the payments landscape, with the two wallets being used to transfer INR 5 Trillion / USD 70 Bn last month (this in a market that contains over 50 payment application, many from Banks)

• As a means to monetize this large transaction/customer base, Google Pay has tied up with Equitas Small Finance Bank to extend time deposit products (6.85% interest on one-year funds) as part of a ‘branded commercial experience’ on its platform

• You need not be an Equitas SFB customer to avail the service, and chances are that you will never be one, with the money flowing in & out of the Equitas Account without you purchasing another product from the bank

• Building out a strong CASA (Current Account Savings Account) ratio is key for a bank, especially one that is new to the party, with a limited branch/distribution network (think: IDFC First giving ~7% in Savings Rate to attract customers, vs HDFC Bank giving a meagre 3%), while decreasing the cost of funds (build out a health liability franchise)

• Challenger Banks (think: State run lenders, new age private banks, deposit taking NBFCs), could begin leveraging platform businesses (think: E-Commerce, Payment, Communication) with million of customers, utilising their reach to target customers through innovative, fee driven products

Damn!! Super Interesting! Tell me more? Implications, Global Examples, Players? 😎

• This one’s huge; if it works, the likes of Amazon, Facebook and Walmart backed Flipkart can get into similar arrangements with banks & other financial institutions, including them on their platforms in return for a processing fee (& more?)

• Institutions (think: those with deposit taking abilities) might be on the right side (when it comes to regulations), but would eventually become dependent on platform businesses like these to efficiently reach the end customer; not to mention, the customer centricity that percolates because of an approach like this; comes down to $$ and which institution is giving the best deal

• It’s all about distribution, with big-tech solving for this through Data-Network-Activity or DNA Loop (nomenclature at the Bank for International Settlements), allowing banking & other financial institutions to underwrite customers through non-traditional means (think: going beyond CIBIL et al.)

• This one has large scale ramifications, although we’re at the start of this journey, keep a track (and probably avail of the service as well?) to see it mushroom

What else caught our eye? 👀

Powell doesn’t reveal much on inflation at the Jackson Hole convention 

• Fed Chairman Jerome Powell kept his cards close to his chest, releasing very little with respect to tapering timelines, with commentary instead along similar lines as last week’s FOMC minutes

• Although what did come out was super interesting – Mr. Powell was not part of the group that argued for CY22 start to tapering, indicating a longer time frame before we see a pullback to the asset-buying program

• Likewise, a reiterated his opinion (for almost 2/3rds of the speech) that inflation in its present form looks to be transitory in nature and will largely ease out with greater vaccination & resumption of normal business activities

TATA Sons to form holding company and include multiple Airline Businesses 

• The group is likely to create a holding company, that will bid for Air India, while also including low-cost airline AirAsia, as well as the JV with Vistara (much longer timeline)

• The government intends to complete the privatization of Air India by December of this year, with the contours of the transaction (in the press) indicating a 15% of EV being transferred to the government, with the remainder being used to retire/repay the debt

• TATA Group has a ~80+% stake in Air Asia and 51% in Vistara (with Singapore Airlines owning the balance)

Maruti Suzuki expected to raise prices in September 

• The country’s largest carmaker announced plans to raise prices (across models) in September to offset input costs

• This will be the company’s third price for the year (in their attempt to manage commodity inflation)

Right Issue

A rights issue is one way for a cash-strapped company to raise capital often to pay down debt. This helps all shareholders to buy more shares on a discount for that certain period of time. After the rights issue, new shares are issued which dilutes the stock price resulting in it slumping in most cases.

For example: Let’s Consider the L&T Finance Holdings Rights issue that was open between 1st Feb 2021 and 15th Feb 2021. Let’s say you held 740 shares of L&T Finance Holdings Ltd. The company is in financial trouble and needs to raise cash to cover its debt obligations. The company, therefore, announces a rights offering through which it plans to raise Rs 2998.61 Crore by issuing 46,13,25,021 equity shares for cash at a price of Rs 65 each (including a premium of Rs 55 per equity share). The equity shares will be issued in the ratio (17:74) of 17 shares for every 74 shares held by equity shareholders of the L&T Finance Holdings

For more click here