Good Morning Toasters!

Hii friends!! Users are getting annoyed with Instagram’s algorithm changes, as the ubiquitous social media company tries too hard to become like TikTok. All we ever wanted was a photo sharing application, right?

In today’s newsletter, we cover Auto numbers from Maruti Suzuki and TATA Motors, as they manage operations amidst commodity inflation, semiconductor chip shortage, and increased demand. JLR sales are a drag on TATA Motor’s consolidated numbers as the company’s unable to ramp-up production of the new Range Rover models.

Microsoft + Alphabet dropped their numbers sometime yesterday, with both companies recording strong Cloud growth, while non-cloud businesses suffered a slowdown. Alphabet’s advertising revenue grew slowest since 2020, as companies re-aligned priorities and reduced spending.

Market Watch

Nifty 50: 16,641.80 | +157.95 (0.96%)
FII Net Sold: INR 436.81 crore

Sensex: 55,816.32 | +547.83 (+0.99%)
DII Net Bought: INR  712.03 crore

Industry News

Maruti Suzuki + TaMO feel supply side pain; what’s up and what do you need to know?

Maruti Suzuki

• India’s foremost automobile company and everyone’s first vehicle (ever), reported another weak quarter of results, as revenue declined 1% QoQ (3 Yr CAGR of 10%), volumes declined and realizations grew by 4% (each)
• Likewise, EBITDA declined by 21% to INR 19.3 Bn, 14% lower than Bloomberg Consensus Estimates (Average of expectations), due to higher-than-expected commodity inflation impact, growing employee costs and increased sales promotion costs (discounts), resulting in an EBITDA % decline by 1.9% to 7.2%
• According to the company, a shortage of electronic components resulted in the non-production of ~51,000 vehicles during the quarter, with pending customer orders to the tune of ~280,000 as the company deals with supply chain bottlenecks
• Maruti undertook calibrated price hikes during the quarter, in an effort to pass on increased commodity prices, as delivery volume stood at 467,931 units vs 353,614 in the comparative period a year ago

Tata Motors

• Along similar lines, TaMo reported a consolidated (TATA PV + CV + JLR) revenue decline of 8% QoQ, due to low realisations at JLR and revenue decline in the India Commercial Vehicle Business (down 14% QoQ)
• In contrast, India Passenger Vehicles revenue grew by 10% QoQ to INR 116 Bn, as the company’s PV portfolio continued to perform strongly, amidst a mix of traditional ICE and new-age CV
• JLR’s performance was a drag on overall profitability for the company, as EBITDA declined by 64% to INR 31.8 Bn, 58% lower than the Bloomberg Consensus Estimates, as JLR gross margins & deliveries were heavily impacted during the quarter
• Likewise, JLR revenues also struggled due to continued chip shortages which impacted the ramp-up of the newly launched Range Rover & Range Rover Sport, while lockdowns in China also affected production

Got it! So challenges galore? Tell me more?

• Supply side challenges (semiconductor chip shortages) aren’t a new phenomenon, with an average waiting period for vehicles often exceeding months, and clearly visible in quarterly numbers
• That being said, Passenger Vehicles production has seen a ramp-up in the last month, as the semiconductor chip shortage has shown initial signs of cooling off, with Tata Motors, Maruti Suzuki & Mahindra all reporting positive Month on Month growth numbers
• Tata Motors expect a ramp-up in production of the new Range Rover models in FY23, as semiconductors and geopolitical issues abate, as demand for the products continues
• Maruti Suzuki on the other hand is expected to retain the pole position (>45% market share) within the Indian Passenger Vehicle space via a strong pipeline of products while cooling commodity prices should help in margins (and limited price hikes)

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Around the World 🌎

• Is Instagram losing its charm? – The head of Instagram Adam Mosseri clarified in a video that Instagram has updated its algorithm to reward users who post short videos and reels over posts with photos. This came in response to a post by ‘gram user Illuminati who had appealed “Make Instagram Instagram again ” which soon went viral and had 1.6 million supporters, most notably Kim Kardashian and Kylie Jenner
• Will Elon Musk be forced to buy Twitter? – Twitter has appealed for “specific performance ” meaning that Elon Musk would be forced to acquire Twitter after he declined to honour his commitment. He had opted out of the deal because of a lack of trust in the company since he feels that the company’s estimate of only 5% of its accounts being fake or spam is too low. Shareholders have been invited to vote on the deal in a meeting on September 13 with most of them expected to vote in its favour
• Can Credit Suisse find a way out? – The Swiss Bank Credit Suisse has been in deep trouble due to lesser investment and reduction in debt by wealthy clients coupled with scandals and financial losses. Moreover,  the second quarterly results were dismal with a net loss of $1.65 billion and revenue declining 29% Y-O-Y. As Mr. Ulrich Korner replaces Mr. Thomas Gottstein as the CEO, the bank aims to make a fresh start to reduce overall costs and integrate better with wealth management

Global Industry News

Microsoft + Alphabet report slowing sales; what’s up and what do you need to know?

Microsoft

• The OG Technology company recorded revenues of USD 51.9 Bn during the quarter, translating to 12% YoY growth, led by commercial cloud revenues (Azure) growing by 28% during the quarter which were driven by an increase in the # of larger, long term Azure contracts secured by Microsoft
• In contrast, Microsoft suffered its worst ever decline in the PC business, with slowing sales in China and decreased overall demand leading to an absolute decline of USD 300 Mn in sales
• Another business suffering from reduced absolute purchases was the video gaming division, which recorded a 7% drop in sales (YoY) as Xbox hardware sales decreased by 11%, while content & subscriptions revenue also dipped by 6% as user engagement decreased
• Likewise, a super strong US Dollar has meant revenues accrued from global operations have suffered, as the currency effect resulted in a whopping USD 529 Mn hit on the company’s topline

Alphabet

• Much like Microsoft’s non cloud businesses, Google parent Alphabet reported its slowest quarter in over 2 years, recording a ~13% You growth in sales, touching USD 69.69 Bn
• Alphabet, which has a dominant market share within the internet search, navigation and streaming space, and is often considered a torchbearer of the online advertising space, is recording similar slowdowns as the ones witnessed at SNAP and Twitter in the last week
• Google’s ubiquitous streaming platform, YouTube recorded sales of USD 7.3 Bn during the quarter, and continuing a slowdown in numbers at TikTok continued to pull rank & users
• And along similar lines as Microsoft’s cloud businesses, Alphabet recorded ~36% growth (YoY) in their cloud business as corporations continued on their multi-year post covid technology transformation journeys

Got it! Final thoughts? Slowing sales, so what to expect going forward?

• Twitter + SNAP results last week, with slowing advertising sales and commentary on a general slowdown, had prepared the markets in terms of expectations, with similar kind of results (non-cloud businesses) reported by Microsoft + Alphabet
• Microsoft & Alphabet were both up in post-market hours trading, as the markets were aligned with the set of results; both companies have guided for a slowdown in advertising spending in the near term

What else caught our eye? 👀

Can Pune become the next Silicon Valley?

• To show support for the government’s AatmaNirbhar Bharat scheme, Vedanta along with its partner Foxconn has proposed an investment of ₹1.6 lakh crore in Pune for the manufacturing of semiconductors and a display fabrication plant
• It is estimated that the project will generate a cumulative of 2,00,000 direct and indirect jobs
• The company will greatly benefit from the available skilled manpower and the  10,000-acre hi-tech electronics manufacturing ecosystem in Pune

Tata Steel still bullish on steel

• The giant steelmaker Tata Steel has planned a CAPEX of  ₹12000 crores and they will not reduce it despite a decrease in demand for the alloy
• In fact, the company is aiming at doubling its steel production capacity by 2030, concentrating on brownfield expansions
• OG Narendran is of the belief that since India has high reserves of iron-ore, it should export steel to exploit the advantages of cost and scale

Results Preview:

Thursday, 28th July: Bajaj Finserv, Bajaj Holdings, Dr Reddy’s, Jubilant FoodWorks, M&M, Nestle India, PNB, Shree Cement, Shriram Transport Finance, TVS Motor, Dr. Lal PathLabs, SBI Life Insurance, Nippon Life AMC, SBI Cards, Sona Blw Precision

Friday, 29th July: Ashok Leyland, Cholamandalam Investment, Cipla, DLF, Emami, Exide Industries, HDFC, IOC, NTPC, Piramal Enterprise, Sun Pharma, Torrent Pharma

Educational Topic of the day

Discounted Cash Flow Analysis

Discounted cash flow analysis is an intrinsic valuation method used to estimate the value of an investment based on its forecasted cash flows. It establishes a rate of return or discount rate by looking at dividends, earnings, operating cash flow or free cash flow that is then used to establish the value of the business outside of other market considerations.

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