Yesterday’s Market Performance

Nifty: 15,576.20 | 1.35 (0.01%)  
FIIs net buy: 921.10 Cr
DAX: 15602.71 | 35.35 (0.23%)

Sensex: 51849.48 | 85.40 (-0.16%)
DIIs net buy: 241.76 Cr
FTSE: 7108.00 | 27.54 (0.39%)

Howdy Toasters!

In today’s issue, we discuss; the peculiar nature of the market since the economy’s shut (operating in an alternative world, right?) and how the “Long-Term” investment got in vogue, HDFC Bank seems to be feeling the heat- blame it on the tech?, Motherson Sumi’s performance and other financial news, and an educative concept to help you keep learning. Read along!

Motherson Sumi: 269.10 | 31.80  (13.40%)

• The auto ancillaries company’s consolidated profit after tax surges 289% to Rs 714 crores (YoY). The board also approved a dividend of Rs 1.50 per share.
• After a dark patch for the auto industry (2018-2020) the automotive industry giant has given over 150% returns in the last 1 year.

ITC Ltd: 209.00 | 6.25 (2.90%)

• The net PAT stood at Rs 3,748.40 crore (1.3% decline YoY). Board approved dividend worth Rs 5.75 per share.
• ITC’s Hotel segment struggled (YoY), so did the shareholders holding the stock and waiting for the rally.

Markets have been operating in an alternative world right – What’s happening duh!? 😟

• Apart from March 2020, when the pandemic hit, economies shut, the world literally came to a standstill (we were banging pots, pans, and our heads), and the market reacted in tandem to the grim reality(pretty much where it started and ended), ‘long term’ investors have been operating in a utopian reality.

• The market has risen over 100% from its lows, and has shown (relatively speaking at least) no signs of slowing down.

• What side of the coin you’re on (the signs you choose to follow & why)defines your approach to investing, and with a general bullish scenario in play, being forward-looking and assessing for a longer-term look to be in vogue.

• Profit profile for Nifty 100 stocks has grown ~42%, with very muted growth in revenue for Nifty 400 universe; with companies streamlining operations, leveraging the very altered landscape that has emerged post this pandemic.

• Data suggests that the sharpest falls also lead to the strongest rise (weird right?); the market crashed in March 2020, only to rebound by 20% in April (albeit on the back of Reliance), similar fall of 45% was seen in the 12 months during the peak of the Harshad Mehta scam but recovering entirely in the next 18 months, and finally, the dot com crash sent us back ~57% with a full recovery in the ensuing 26 months (nothing compares to Covid though right).

• There’s plenty of buoyancy in the unlisted space (with several unicorns primed to enter the public markets) thereby creating a general sense of positivity.

• VIX, which is a measure of the fear prevalent in the market was at a high of ~84 in March 2020, no guesses here for what it is now – ~17.

Okay, what’s the catch? 😏🤔

• Our GDP growth is down by ~7.3%; ~97% of Indians have become poorer in the last year alone, and our unemployment levels are at ~14%; consumption will take a backseat with people saving for a rainy day.

• Although US Bond Yields have stabilized to trade at ~1.66%, there are concerns of the 70s like US Inflation coming through, and the Fed is mindful of the liquidity in the system at present (Oil touching ~72 per barrel).

• The conversation at present is all about opening up and getting back to consumption, with some dampeners along the way, so long term investment seems to be on everyone’s tongue.

HDFC Bank seems to be feeling the heat, with a couple of issues coming to the fore at the same time🤯😨

• India’s favourite lender changed narratives within a span of 37 days (weird), highlighting growth, recovery, and technology issues that were surprisingly absent in their Q4 earnings call in April.

• Projected Loan Growth, Impact of Covid-19 and Asset Quality Issues are all dampeners on a stock that has underperformed the Nifty & Bank Nifty and just about managed to stay in the green, while Nifty has touched an all-time high (HDFC Bank has the second-highest weight in Nifty50).

• Most recently, RBI levied its highest penalty for non-compliance in the year, with deficiencies in reporting in its Auto Loan Portfolio (amounting towards ~10% of the loan book).

• The culmination of two years worth of effort has seen a switch in the mix between retail and corporate loan book, although the retail book has shown a steadily rising credit cost or impairment cost of the loan, mainly coming through from the unsecured loans business (something the bank has previously prided itself on).

• A possible explanation also alluded to by the bank’s CEO has been the increased impact of the second wave towards collections and therefore higher delinquencies, although the bank has always been top of the line in terms of the credit profile of its customers.

Tech troubles 📱

• RBI took the unprecedented move of placing an embargo on the bank and asked them to stop launching any digital business generating activities, post the banks third major outage in 2 years.

• Sourcing of new customers, building on their strong credit cards portfolio, and other businesses generating IT applications are all at a standstill, with limited information on a resolution date.

• The opportunity cost will be massive, and with other players hungry for a share in the pie, ICICI Bank, SBI Card & IDFC First have amped up their activities, sweetening the deal with increased discounts.

Banks are all about growth💸📉

• The slowdown in retail, with a change in strategy, was expected, however, a commensurate slowdown in the corporate book has meant an overall growth of 14% (a multiyear low).

• Increase profitability across companies, limited sector-wise growth, and early pre-payments has meant a reduced requirement for enhanced working capital limits (directly affecting corporate loan growth).

• Multiple issues, not helped by prevailing market conditions mean the bank seems to be fighting across the board.

What else caught our eye? 👀

NBFCs & HFCs may see increased NPAs because of the hard lockdown imposed due to the second wave

• Given the relative nature of collections, a hard lockdown in the country has had a severe impact on NPAs for NBFCs and HFCs according to ICRA.
• Close to 30% of loan collections happen through field agents, and with movement severely restricted, near term stress is expected.
• The share of field agents as a % of overall collection methodology for NBFCs is ~40% and HFCs ~10%.

Change in approach for Mercedes-Benz India

• Veering away from a current system, the brand is piloting a new go-to-market strategy.

• The current system, which requires the purchase of inventory from the parent (thereby taking on a load of working capital) and generating revenue on a margin basis, can have a heavy fiscal impact.

• The new proposed system, allows Mercedes to own the inventory, and requires the dealers to showcase a standard, transparent price, ultimately benefiting the customer and dealer (costs are limited to employee expenses & overheads); revenue fixed as a commission.

4 AC companies have faced a wash-out on sales in the last three months.

• As a result of the lockdown induced by the second wave of the pandemic, the four companies; Voltas, Blue Star, Amber Enterprises India, and Johnson Controls-Hitachi Air conditioning India have gotten their share prices fallen up to 15%.
• It looks difficult to recover lost sales, but the companies expect June to be better, albeit the consumer sentiments show no sign of picking the pace.

WPI Inflation

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