Yesterday’s Market Performance

Nifty: 17111.00  I 34.70 (0.20%)
FII Buy Net: 666.66 CR
DAX: 15,824.29 I 10.80 (0.07%)

Sensex: 57331.94 I 6.27 (0.01%)
DII Sell Net: 1287.87  CR
FTSE: 7,149.84 I 30.14 (0.42%)

We’d love to hear your thoughts on our newsletter. Please take this simple survey and give us your feedback. Survey

Howdy Toasters!

Join our Discord community where we discuss all things related to finance (trading, investing, economics, data, MFs & more) + memes (of course). Join here  (promise we won’t spam, have we ever??)

In today’s issue, we discuss;

• The economy grew at 20% in the first quarter of FY22 on a low base effect.
• AU Small Finance Bank recorded the third exit in the top management team in the last 6 months. What’s cooking there? Read-Along!
• Top movers and shakers of the market, other important financial news, and an educative concept to help you keep learning. Read along!

Asian Paints: 3302.75 | +101.40 (+3.17%)

• The stock gained over 3% today after Promoter Sattva Holding and Trading created a pledge on 21.78 lakh shares.

Tata Motors: 295.25 | +7.95 (+2.77%)

• The script added over 2% today. Tata Motors sales in domestic and international markets for August 2021 stood at 57,995 vehicles compared to 36,505 vehicles in the year-ago period.

Base effects mask robust economic growth recorded in Q1FY22 🧐

• GDP (we cover the concept in the education section below) expanded by a material 20% YoY in Q1FY22, with Real GVA (Gross Value Added, measure of the goods & services sold in an area) growth at 19%

• Although optically speaking, the numbers looked enlarged due to the low comparable base from last year, most leading indicators & relatively robust corporate results indicated a decent annualized gain in growth momentum (more on this below)

• More importantly, the gap between GDP & GVA (difference between consumption & production) has finally reversed, indicating a greater push towards consumption (re-starting the process) and helped by robust net taxes collection

Interesting! Give me some more details on production & consumption?  🤔

• From a supply perspective, there was positive across the board improvement in the first quarter, including in contact-sensitive services sector (albeit moderately in comparison to others)

• Gross Value Added (GVA) growth was mainly led by manufacturing (+50%) and construction (+69%), and utility demand (think: power & fuel consumption) remaining strong, growing 15%

• Within the services space, Financial Services & Real Estate grew 4%, with government spending (public administration service) growing 6%; the usual suspects (Travel, Tourism & Trade) suffered, and yet improved in comparison to last year

• From a demand perspective, private consumption remained key, growing 20%, while government consumption contracted by 5% indicating a move towards funds transfer/subsidies as a preferred mode

Okay? A lot of data points bro. Give me some tangible takeaways please? 

• The economy is growing (don’t let the fact that the base is a small mask that), with factors like better-adapted firms & policy responses (think: increased liquidity), stable financial conditions, robust global growth spillovers creating a conducive environment for the economy to mushroom in

• Demand drivers in the form of exports (think: global demand percolating to the country) and sustained government Capex (think: policy support in the form of physical & social infra outlays) will have a large multiplier effect on jobs, pushing through momentum in growth revival (on a sustained basis)

• There is a risk that the nascent recovery recorded this year is still led partly by capital & profits (in different forms) and may not sustain (in the event the RBI Governor withdraws policy support), with that event key in the overall scheme of things

• Also, key to re-starting, and something alluded to very heavily by the Chief Economist of the IMF Gita Gopinath, is the maintenance of the continued aggression in overall vaccination efforts (see image below), with a pick-up in vaccine drive heavily aiding contact-sensitive sectors

AU Small Finance Bank seeing constant top management churn in key roles; What do we know and what does this indicate ⬇

• The SFB recorded the third exit in the Audit / Compliance / Risk team in the last 6 months (see image below), spooking the markets about a potential negative event brewing (the stock was down 13% on the day the news broke, recovering the next day to close ~2% in the green)

• Audit / Compliance / Risk (in a Bank) are extremely sensitive functions, with public market sentiment towards these positions of key importance; exit of key management personnel in these functions, in the past (think: Indiabulls, DHFL, Yes Bank) have been followed by near total collapse of the stock

• In context to AU, there are steadily rising asset quality concerns (think: rising NPAs, higher provisioning), amid Covid-19 induced lockdowns, with resignations in these functions raising investors concerns towards audit / risk management practices being adhered to by the bank

• Flow of events – the Bank replaced the previous Chief Audit Officer (hired in October-15) with a veteran (>19 years of experience) in April- 21, while hiring for another open role (Chief Risk Officer) in March-21; both recently hired candidates cited personal health as a potential reason for discontinuing in their current role (weird)

Damn! How’s the financial health of the Bank? And valuations? Tell me more? (nice q) 🤔

• The lender has strong capital adequacy ratios, and solid return ratios (>20% RoE & >2% RoA), while steadily ramping their liability profile (& decreasing cost of funds), with the current Current Account Savings Account (CASA) pool at 26%

• From an asset quality perspective, there has been steady deterioration in their asset quality (overall stressed book is now ~9.8% of AUM), with their PCR (Provisioning Coverage, providing buffer against possible writedowns) weaker in comparison to competition (see image below)

• The bank was richly valued pre the 13% drop, still retaining some of the valuation premia that is largely driven by the strong liability franchise buildout and the superior return profile; currently trades at 4.5x 2 Yr Adjusted Book Value (AbV), with little room to maneuver in case something untoward comes out
• The Bank has healthy ownership amongst the investing community, with FIIs & DIIs owning a fair chunk of the stock, building on their % holdings in the last 5 quarters (DIIs growing from 13% in June-20 to >20% in June 21)

In Summary? 😐

• It’s a precarious situation to be in (not going to lie), although the management has come out and denied all claims, going as far as indicating that Mr. Dhir (most recently resigned official) is reconsidering his resignation

• The stock closed in the positive yesterday, although any new developments would depend on the next steps as detailed by the management or during the next set of results (giving an indication of the quality of the book)

What else caught our eye? 👀

GST revenues increasing signals an economic recovery underway

• August 2021 collections stood at Rs. 1.12 lakh crore, up 30% YoY and 14% compared to August 2019 (pre-pandemic levels)

• The Finance Ministry has credited this to increased economic growth, and anti-evasion activities, and is expecting a steady collection rate in the coming months.

• The GST collection for July was similarly above the Rs. 1 lakh crore mark and experts believe this to be a signal that the economy has recovered post the lockdown imposed due to the second wave of the virus.

The Automobile sector is still waiting for some good news 

• While demand is recovering post the second wave, things look bleak on the supply side.

• Global shortage of semiconductor chips is hindering production and may have negative impacts on wholesale volumes for the upcoming month.

• This situation seems to be aggravated by the recent lockdown in Malaysia due to the increasing covid cases.

Swiggy has some big plans for the future – beyond its core food delivery category. 

• The Bengaluru based startup is looking to raise a large round that will take its valuation to $10-12B (again??)

• This optimism towards Swiggy is owed to its new bets – Swiggy Genie (a pick-up and drop service), Instamart (e-grocery service), and SuprDaily (subscription-based grocery service)

• It is also in talks to acquire Dunzo (a hyperlocal delivery services startup) – a move that may help Swiggy command an even higher valuation and establish a higher market share in the hyperlocal space.

GDP and GVA

GDP stands for “Gross Domestic Product” and represents the total monetary value of all final goods and services produced (and sold on the market) within a country in a specific time period.