Good Morning Toasters!

Hii friends!! Stranger Things, the hit Netflix show drew 1.3 Bn viewing hours, wild! FIIs made it 2/2, ending the day in green again as the headline index gained 180 points during trading.

Nifty FMCG is up 12.5% in the last month as news of commodities softening filters through. During the same period, HUL has risen by ~18% as India’s OG FMCG company delivered a strong quarter, led by volume & value driven growth. We look at their recent quarterly performance, including covering company forecasts.

Netflix likewise also recorded gains in trading, with the company announcing a lesser subscriber loss lesser than initially forecasted. The streaming platform has started testing some of its product-led features within the marketplace, including rolling out password protection measures in certain geographies, while mandating Microsoft to help with advertisements.

And finally, we’ve started a rollout of our newest product, Trade:able, that aims to democratise trading, via a unique and fun learning experience. There are a bunch of amazing rewards and prizes to win. Click here to know more.

Market Watch

Nifty 50: 16,520.85 | +180.30 (1.10%)
FII Net Bought: INR 1,780.94 crore

Sensex: 55,397.53 | +629.91 (1.15%)
DII Net Sold: INR -230.22 crore

Global Company News

Netflix only loses ~1 Mn subscribers; what’s up and what do you need to know?

• In somewhat good news (we guess?), Netflix over-estimated the impact of a slowing economy, rising inflation and increasing competitive environment, only losing ~970,000 subscribers in the last quarter, vs an initially estimated 2 Mn loss
• Alternatively, for the first time in their history as the OG Streaming King, Netflix has now reported two consecutive quarters of subscriber loss, and yet with a lesser than initially predicted slowdown in subscribers, shareholders were enthused enough, with the stock closing ~7.4% in the green
• The stocks had a rough 2022, losing ~two thirds of their value since the start of the year, as pandemic induced growth tapered, and valuations re-adjusted to changing consumption habits (more options of entertainment)
• In a bid to go back to adding subscribers and increase revenue growth, Netflix has initiated product changes, including limiting password sharing within family members, while introducing ad-supported plans aimed at targeting different customer sets

Damn! Okay? Tell me more?

• In addition to initiating product led changes, some of which are expected to be introduced soon, while others over the next year, Netflix is also working on reducing costs, with the company laying off ~5% of its workforce during the quarter (severage + other costs totalled USD 150 Mn)
• The company has contracted Microsoft Corp to supply technology and facilitate the placement of video ads, with Netflix indicating an aim to create an advertisement experience that is less disruptive when compared to traditional ads (think: YouTube)
• Netflix indicated the need to release a hit show every three months, to keep users engaged amidst the highly competitive environment, case in point – Stranger Things Season 4 was spread over two volumes, that ultimately released over three calendar months and two quarters, allowing the company to leverage subs + timings
• In contrast, the company was initially releasing shows over a year, often segmenting them out over multiple financial years, but with changing consumer habits, coupled with increased competitive intensity, quicker releases can likely be the norm going forward (assuming the content is ready to be published in that way)

Interesting! Final thoughts? What about global growth? And steps going forward?

• Overseas expansions, after some initial hiccups, seem to be working for Netflix, with the Asia-Pacific region softening the subscriber loss in the Americas, as the company added ~1 Mn subscribers in Asia, while losing 1.5 Mn in USA & Canada and 767,000 in MENA (the Middle East North Africa)
• The company is expected to continue spending top $$ in their quest to create world-class content, with management hoping their recently released action franchise starring Ryan Gosling & Chris Evans, which did a theatre release first, will help retain subscribers over the long term
• Likewise, while Netflix’s churn has increased (in comparison to previous quarters) when looked at in context to industry standards, the company still performs better, with most competitors running far higher churn rates (or subscriber loss periods)
• The stocks lost ~2/3rd of its value this year, and yet even with subscriber churn, and increased competitive intensity, Netflix seems best placed to ride out the current storm, amidst realigned customer expectations (we think)

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Around the World 🌎

• Amazon VS FB – Amazon.com has filed a lawsuit against the administrators of more than 10,000 Facebook groups which were used to create fake reviews of Amazon products. This practice was found occurring all over Amazon stores in U.S, U.K, France,  Italy,  and Germany and was used to increase the rating of Amazon products thus increasing their sales. Last year also the   U.K.’s antitrust regulator had made an investigation about such groups and removed one of them which had more than 43,000 members
• No redemption without payment – The Chinese authorities have come to an end of a year-long investigation involving the ride- hailing giant company Didi Global regarding its cybersecurity practices. They have decided to impose a fine of more than $1 billion which would account for almost 4% of the company’s total sales of $27.3 billion last year. This probe came just after the company was listed on the New York Exchange in June 2021 leading to an immediate 80% downfall in its price
• Good times ahead for Boeing – The Boeing Co . 787 Dreamliner program got a boost with the sale of five jets to Farnborough, England, its largest buyer for the wide-body jet. Boeing’s business has suffered in recent years because of production issues with U.S air safety regulators leading to deliveries of the jet being kept on hold and less orders for its narrow body aircraft. As air travel recovers across the globe after the pandemic,  the company expects the sale of its Dreamliner jets to increase rapidly

Company News

HUL recorded strong volume delivery amidst an inflationary environment; what’s up and what do you need to know?

Results Update

• Recording 20% YoY growth (like a startup), HUL’s topline (standalone) stood at INR 142 Bn, led by a healthy mix of volume growth (~6%) and price increases (14%) required to tame growing commodity inflation (more on this below)
• In contrast, the FMCG industry recorded a ~5% volume decline, while also seeing 6-7% price de-growth, putting HUL’s quarterly performance within the top tier, and putting in perspective the challenges faced by FMCG cos amidst a heavy inflationary environment
• Rural demand continued to be weak, with volumes down ~7%, while urban mix improved in comparison; over a three year period, CAGRs for both categories remain flat, as post covid-19 challenges have stifled growth
• The company recorded a decline in Gross Margins, down from ~50.4% in Q1FY22 to 47.4% in Q1FY23, with inflationary trends visible in margin dip at gross and EBITDA level (down to 22.8% in the current quarter from 23.9% from a year ago)

Got it! What else? Segmental Performance? Any guidance?

• The home care segment recorded revenue growth of ~30%, with fabric wash (detergent) and household recording strong double digit growth; Detergent market share gains have been a notch above the competition, continuing in the current quarter as well
• Personal Care and Food & Refreshment categories recorded broad based growth (b/w 10-20% YoY growth), with several categories within these portfolios recording strong double digit growth
• The company indicated a higher than initially anticipated Raw Material (RM) inflation for the next quarter, which is expected to be partly offset by price hikes (in a calibrated fashion), with the current cool-off in commodities likely to reflect in the December quarter
• From a topline perspective, the company envisages price led growth, with premium categories likely to grow at 2x the rest of the brand portfolio, both at a price & volume level

Interesting! Final thoughts? Stock & Sector perspective?

• FMCG stocks, including the likes of Bajaj Consumer, HUL, Godrej Consumer, Britannia, Emami, Nestle and more have all risen in the last month, anywhere between 11% to 25% on the back of news of commodity prices softening
• According to HUL, any impact of cheaper Raw Materials (RMs) will likely reflect in Q3, and growth in the interim will be dictated by price hikes; FMCG stocks have suffered from a mix of slowing growth & heavy valuations, with the last month’s change in mood expected to continue going forward?
• Nifty FMCG is up ~12.5% in the last month, while HUL is up ~19% during the same period, with the company also reacting 1.6% in the green post its results

What else caught our eye? 👀

New look for Reliance

• Reliance Retail has rebranded its former Big Bazaar stores to ‘ Smart Bazaar’
• This move is being contested by a section of minority shareholders of Future Retail Ltd. who claim that the move is an attempt to appropriate FRL’s brand value
• They have written to the government and the market regulators opposing this manoeuvre

Ambani has some big plans

• Reliance Industries will be acquiring a franchise in South Africa’s new Twenty20 tournament
• The hope is that they can leverage their expertise and depth of knowledge in the cricket ecosystem & brand Mumbai Indians to help build the team
• Reliance has always been a big ambassador for sports through sponsorship, consultancy, and athlete talent management practice

Educational Topic of the day

Coattail Investing

Coattail investing refers to an investment strategy where an investor replicates the investment style of well-known successful investors. The strategy is based on the logic that if these top investors would buy a stock for their own portfolio then it must be a great investment and hence we should buy them too.

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