Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss

• Radico announced INR 750 Crore Capex
• Snapdeal is going public soon
• Paytm drops strong business growth
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 17,213.60 | -302.70 (-1.73%)
FII Net Sold: INR 1,157.23 crore

Sensex: 57,621.19 | -1,023.63 (-1.73%)
DII Net Sold: INR 1,376.49 crore

Company News

Radico announced INR 750 Crore Capex; What’s up and What do you need to know?

Financial Performance

• Total sales for RDCK grew by 12% to INR 7.7 Bn for the quarter, led by strong 22% growth in P&A (Prestige & Above segment) increasing its sales/volume contribution within IMFL to 55.5% / 34%
• Gross margins declined 4.6% on account of high input prices; EBITDA fell 4% with a margin decline of 2.5%, partly saved by lower selling expenses (limited discounts et al.)
• Other overheads (Admin, Head Office costs) increased by 14% during the quarter
• Debt for the company (problem area in the past) was down 47% YoY (continuing on that deleveraging story), driving a 42% decline in interest expense (nice!!)

Business Performance

• While recording strong growth in the P&A Segment (indicating market share gains), the company recorded muted growth of 3% (Sales & Volume) in the Popular Segment; Non-IMFL Segment posted 10% sales growth
• 8PM Black has crossed a monthly run-rate of 200,000 cases, while 8PM Family now sells >1.1 Mn cases per month; RDCK management indicated plans to continue focusing extensively on the P&A segment
• The company has introduced Rampur Single Malt (Premium Malt, think Glenlivet Levels) and Jaisalmer Craft Gin (another gin 😜) in CSD stores (defence canteens), receiving the first orders during Q3
• RDCK plans to introduce premium versions (mentioned above) in more markets in FY23 via increased capacity (more on this below)

Interesting! What else? Capex plans? Tell me more? (Yesss bro)

• The company announced plans to incur capital expenditure to the tune of INR 7.4 Bn or 750 crores over the next few years, primarily to meet its growing requirement for grain spirit in UP, addressing the shift to grain based country liquor and accordingly maintain its market share in the state (woah!)
• In addition, RDCK will commission a new plant in Sitapur (UP) for INR 5.5 Bn which will include grain ENA capacity of 330 KLPD (~120 Litres), malt maturation hall, gin distillation and 10 Mn cases bottling plan
• The company will utilise 40% of this capacity for in-house consumption in year 1, replacing external procurement and meeting growing demand in later years, which will be beneficial across segments, and directly reduce RM costs
• Financial impact (according to the company) is significant, with the company expecting ~ INR 1.5 Bn addition to EBITDA post the capex and generate 20%+ ROCEs

Nice! Final thoughts? Stock reaction, valuations?

• The market wasn’t best pleased with the capex announcement, with the stock down ~15% in the last 5 days, since the results & earnings call; the company has a chequered past when it comes to capex and leverage, with past mis-use of capital almost sinking the company entirely
• RDCK continues to trade at a stark valuation discount to the likes of UNSP, UBBL, and with the longer term catalysts still intact (growth in Premium segment), coupled with debt free status by FY25 (according to management), the company’s rally still has legs (we believe)
• Capex plans are to be closely watched, with capital mis-allocation a serious concern for the company, and will likely decide short term price movement

Keep a track?

Around the World 🌎

• Amazon has expressed interest in acquiring Peloton Interactive as activists have demand the latter sell due to a stock slump that caused market value to fall to $8 billion (from a year-ago high of $50 bn). For Peleton the move could help with its supply chain and logistics issues while Amazon could benefit greatly too given that it has been slowly entering the healthcare space. Shares jumped 30% post the potential acquisition news.
  
• Good news for Amazon seems to continue as it reported the largest-ever one-day gain in market value for a U.S. company adding $191 billion (breaking Apple’s record last week of $181 bn). Shares had surged 14% – their biggest one day jump in almost seven years. This seems well earned as Amazon reported nearly double profits in the holiday period. It has also managed to control labour and supply costs well.
  
• Not all giants are affected by Apple’s new privacy policy, the latest exception being Snap Inc which posted its first quarterly profit of $22.6 million as sales advanced 42% to $1.3 billion. Snap also reported a 20% Y-o-Y increase in daily active users for its app, while others like Meta reported major decline in these metrics. The stock surged 50% in after-hours trading post the spectacular results announcement.

Tech News

Snapdeal is going public soon – yeah we know we were shocked too; all the details here –

What’s working for them?

• Carving a niche – Snapdeal has become an online marketplace of low value lifestyle items (Avg order value of Rs. 447) with 80% customers from non-metro cities
• Restructuring – Founders have regained control from investors (20%); and ex top-talent has rejoined with new talent also coming in
• Unicommerce – Contributing ~ 11% to revenue the e-commerce enablement startup has high recurring revenue of 112%  and gross margin of 80%

What’s not?

• Financials – Revenue has plunged to half, and losses doubled compared to the pre-covid era with both Net Merchandise Volume (NMV) and units delivered declining
• Market – The exclusive segment of value shopping has not proven very lucrative +  bigger players can target the same audience with a huge network
• Commission Revenue – 1000 sellers account for 80% revenue and can be targeted by the bigger players – Meesho & Amazon charge nominal fees (0 to 2%) vs Snapdeal (5-25%)

(The size of the fresh issue is $167 m with a valuation of 7X NMV and 22x Revenue. All bets are on Snapdeal increasing and retaining sellers, going omnichannel and scaling up Unicommerce)

Paytm drops strong business growth, with losses widening (ofc😜); What’s up and What do you need to know?

• Despite strong business growth, and slightly better payment take rate, the company continued to report higher net loss at INR 7.8 Bn vs loss of INR 4.7 Bn due to ESOP expensing (INR 3.9 Bn) granted during IPO and continued higher marketing expenses (Paytm Karo going strong😁)
• Contribution profit margin (Op Revenue – Direct Cost) has shot up 31% vs 9% in Q3FY21 and 24% in Q2FY22 due to better net payment take-rate, and pick-up in lending business (more on this below)
• The payment take-rate (organisation wide, including UPI / Non-UPI) slipped to 0.45% due to continued higher UPI GMV contribution
• Lending business growth accelerated further due to festive cheer – No. of loans disbursed / value of disbursals were up 55% / 73% QoQ responsively, leading to improvement in average ticket size of INR 4941 vs INR 4435 in Q2
• Paytm drastically reduced BNPL share as % of overall loans, with Personal and Merchant Loans increasing (think: the CEO’s interview??)

Nice! Tell me more?

• Increasing share of UPI GMV (lower margins) and moderation in high-margin wallets business will likely lead to sustained pressure on gross take rate / revenue growth vs GMV growth in payments business
• The company will likely accelerate lending, commerce & cloud and TPD business to buildout non UPI / UPI dependence on revenue, with profitability is driven by product mix & marketing spends
• The stocks been battered (knows only one direction) for varying reasons, continued losses, poor management TV appearances (jk jk), global meltdown amongst fintechs, and rising regulatory concerns around Payment take-rates
• And still, Paytm’s trades at a premium to competition (global & local), commanding P / Bv of 6x FY24E and P / Op Revenue at 7x FY24E
• Industry-wide overhangs also remains, with the RBI expected to release a white-paper on MDR (reduce wallet take-rate), in-addition to governance related issue at competitors (*cough* PhonePe *cough*) which could have rub-off effect due to opaque organisational structure and high family influence at Paytm

Keep a track?

What else caught our eye?👀

Bank of Baroda seeing a healthy financial year

• Bank of Baroda has announced an expected loan growth of 7-10% in the current financial year and 10-12% in FY23
• Key loan products on both the corporate and retail (mainly home loans) side have seen accelerated growth especially post the second wave ended
• In the quarter ended Dec’21, the lender’s gross domestic advances grew YoY to Rs 6,54,315 crore while standalone profit doubled to Rs. 2197 Cr YoY

Zomato & Team make some new investments

• Zomato CEO Deepinder Goyal and his team have invested in Park+ a Noida based startup for car-owners
• Park+  offers various solutions to car owners ranging from parking, car insurance etc. and was last valued at $160 million
• Goyal’s personal investments (Shiprocket, Blinkit etc) have sparked controversy in the past with Goyal divesting his stake to avoid a conflict of interest if Zomato comes in as an investor

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Results Preview

Tuesday, 8th February: Bata India, Bharti Airtel, Escorts, Godrej Consumer, Gujarat Gas, IGL, Jindal Steel, NMDC, Mahanagar Gas, Endurance Tech, IRCTC

Wednesday, 9th February: ACC, Aurobindo z, Berger Paints, Bosch, Petronet LNG, Powergrid, E seer SAIL, Tata Power

Educational Topic of the day

Open Interest

Open interest is the total number of futures contracts held by market participants at the end of the trading day. It is used as an indicator to determine market sentiment and the strength behind price trends.

Unlike the total issued shares of a company, the number of outstanding futures contracts varies from day to day.

Open interest is calculated by adding all the contracts from opened trades and subtracting the contracts when a trade is closed.