Good Morning Toasters!

Ssup bros!! The markets are up ~10.2% in the last month. FIIs have returned in a big way, maintaining their momentum, via volumes and action. Crude & Inflation are down as well, to varying degrees. So are we back in a bull run, then?

In today’s issue, we cover everyone’s second favourite stock, Paytm. The company’s up ~51% from low in the last 3M, as its two major business verticals, Payments and Lending, tune up to deliver EBITDA profitability by Sep’23 (as per promises).

Headline CPI eased to a 5-month low, led by food, while energy inflation also seems to be trending downwards as both domestic kerosene and LPG look to take a breather. Continuing easing and repeated prints of softening inflation will likely positively impact the RBI’s decision-making (we believe).

Market Watch

Nifty 50: 17,944.25 | +119.00 (+0.67%)
FII Net Bought: INR 2,347.22 crore

Sensex: 60,260.13 | +417.92 (+0.70%)
DII Net Sold: INR 510.23  crore

Company News

Paytm looks to reward investors by reducing burn and ironing out CG / Regulatory challenges; what’s up and what do you need to know?

• Despite a rising share in the non-revenue contributing UPI business (take-rates are kept nil from customers), Paytm’s payment business has recorded a 25 Bps rise in the company’s net payment take-rates (gross take-rate – payment charges), led by a recent renegotiation on its payment charges (in Person to Merchant category, P2M)
• Indicating a need to continue keeping take-rates charged from customers MDR free (or no charges), thereby acting as a key digitization engine for the country, the MD & CEO, Mr. Sharma believes UPI will continue to act as a strong tool for customer acquisition (in the face of RBI’s embargo on Paytm Wallets)
• Likewise, given RBI’s intervention has made the UPI P2M GMV profitable, an increasing share of Paytm’s UPI business, and subsequent on-boarding / acquisition of users at reasonable costs, will likely in the long run assist in making the payment business operationally profitable (according to the MD & CEO)
• After indicating a plan to hunker down on marketing, spending for the company during Q1 was high and was attributed to the IPL, with expectations of the cost expected to taper down in the future, as objectives were met (for the longer term)

Interesting! What about the lending business?

• Having ramped up at a considerable pace (since the company IPO’d), Paytm’s lending business contributes ~16% to operating revenues and ~37% to contribution profits, significantly increasing the overall contribution margins to 43%, from 27% a year ago (indicative of the strength of a pure lending business)
• Paytm Postpaid (Buy Now Pay Later), which contributes ~61% of the total loan book, entails a customer share of 1.7% (of the overall customer base), with the expectation of growth around increases in average ticket size & absolute customer pool
• Likewise, the company’s managed efficient collection standards (a concern when growth is super-charged), and should hold the company in good stead, both from perception and longer-term growth point of view
• Payments & Lending are likely going to continue contributing toward Paytm’s bottom line, either via increased take-rates or through a growing customer pool, and that coupled with reduced operational overhead burn will likely define if Paytm will deliver on its promise to attain EBITDA (ex-ESOP Pool) profitability by Sep’23

Got it! Final thoughts? What about all those regulatory/corporate governance concerns? And any view on stock/valuations?

• The company’s been in the limelight lately (for the wrong reasons), with CG / Regulatory issues cropping up –
  • Three Proxy Advisory Firms have advised against shareholders voting for another 5-year tenure for the incumbent MD & CEO on grounds of Mr. Sharma holding a dual position of Chairman & MD, not being liable to retire, and increase in annual compensation irrespective of company/stock performance
  • The RBI has put an embargo on Paytm Payments Bank from onboarding any customers citing supervisory concerns while ordering a systems audit of the company’s IT systems
• The stock’s performance post IPO is well documented (you don’t say!!), with anchor investors choosing not to support the company either (at various points); that being said, in reaction to EBITDA profitability aims, and coupled with manageable valuations (3.6x FY22 P/AdBV vs ~10x at time of listing), the stocks up 51% in the last 3M, and 18% in the last month itself
• While recent CG and regulatory concerns have put a premature stop, any likely major next moves will be contingent on improving reputation (CG) and resolution of regulatory matters (markets love a redemption story)

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Around the World 🌎

• Hooray for Home Depot: Home Depot, the world’s largest home improvement retail company, posted impressive Q2 sales of $43.79 billion,  an increase of 6.5 % QoQ as the average amount spent per transaction rose 9.1 % (though the total number of transactions fell by 3%). High sales were recorded during the first year of the pandemic both by its DIY customers and also professional contractors. Inflation coupled with rising interest rates might have reduced spending on big-ticket items like mowers and grills, but the demand for paints and other renovation category items shows no sign of declining
• Tencent is not so fond of Meituan anymore: Shenzhen-based social media giant Tencent Holdings Ltd. is planning to sell a major portion of its 17% stake worth $ 24 billion in Meituan, one of China’s most valuable tech companies.  The latter operates a very popular app used by millions of Chinese to order food,  and groceries and make travel bookings. China has imposed a lot of regulatory curbs on its technology firms and criticized the sector for its breach in data security and business practices
• Wallets in the UK getting lighter: Contrary to the U.S. where inflation is finally easing, the U.K. recorded a 10.1 % rise in consumer prices in July, its highest ever in four decades. A more than double increase in natural gas prices (thanks to Russia) coupled with Brexit leading to a weak pound and high import costs are the main reasons for such a high rate of inflation. While the government has already announced three relief packages,  the election of the new Prime Minister in September is being awaited for new relief measures

Economy News

Another drop – but this time we celebrate. What’s up and what do you need to know –

• CPI Inflation hit 6.7% in July, its lowest in 5 months, with credit going mainly to the easing of food inflation (6.75% YoY) due to a decrease in global and domestic food prices
• Good monsoons coupled with crop sowing helped in decreasing the prices of pulses and vegetables +  edible oil also showed a downward trend
• Household expenditures to get a sigh of relief soon with prices of domestic LPG and kerosene easing ahead
• Core inflation was mostly stagnant at 6.2% with clothing and footwear (9.9% YoY, 0.8% MoM) and education (5.0% YoY, 1.4% MoM) all in acceleration mode, and transport costs showing some decline
• GST tax hikes on some goods, higher gold import duty, weaker INR, and the upcoming festive season are things to beware of, while the easing in input cost and slowing demand could ease supply-side goods inflation

Got it, what about the rest? And going forward?

• Pharma, electronic and transport equipment all recorded growth thus resulting in a 12.5 % increase in manufacturing activities through mining (7.5% YoY) and electricity (16.4% YoY) declined sequentially
• IIP grew 12.3% YoY in June with consumer durables and capital goods showing strong growth – with demand for global industrial exports easing and tighter domestic financial conditions lowering domestic demand, IIP growth may moderate
• The global situation continues to remain very volatile – Aug predictions are in the range of 6.8%, with Q2FY23E print roughly 40bps lower than the RBI’s forecast of 7.1%
• RBI’s hawkish phase appears to have ended and the repo rate should not increase beyond 5.75%

What else caught our eye? 👀

SBI to start supporting start-ups

• The State Bank of India is about to launch its first dedicated ‘state-of-the-art’ branch aimed solely to cater to the needs of start-ups in the country, where they will be provided end-to-end services
• The bank will be located in the Koramangala area of Bangalore, alongside the neighbourhoods of HSR Layout and Indiranagar – two of the biggest start-up hubs in the city, followed by Gurgaon and Hyderabad in the next six months
• SBI Chairman, Mr. Khara stated that SBI has already funded 104 start-ups aggregating ₹250 crores. He added that the bank will also cater to the requirements of Private Equity, Venture Capital funds and Alternative Investment Funds

Hinduja Leyland Finance to wed NXTDIGITAL

• Ashok Leyland’s board has approved the merger of Hinduja Leyland Finance and NXTDIGITAL, although it is still subject to shareholders and other requisite approvals
• The share swap for the merger will comprise of 23 shares of NXTDIGITAL allocated for every 10 shares of Leyland Finance
• The merger intends to integrate business operations, ensure efficiency in cash management, formulate integrated operational and marketing strategies and unlock value for shareholders

Educational Topic of the day

What is PCR?

1. It is the ratio used by options traders to find out the sentiment for a particular expiry
2. PCR value is calculated by taking the total value of Put OI divided by the total value of Call OI
3. Oi (Open interest) is the measure of money flowing into the market. Its the total number of outstanding buy or sell positions created by F&O traders
4. Usually, this value lies between 0.5 to 1.5

PCR Scenarios

• If PCR is 1, markets are neutral
• If PCR is less than 1, markets can be considered bearish
• If PCR is less than 0.5, markets are too bearish and there are chances of recovery
• If PCR is more than 1, markets can be considered bullish
• If PCR is more than 1.5, markets are too bullish and the chances of correction are high

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