Good Morning Toasters!
Hii friends! Happy weekend! Hope you’re able to rest and reset before the markets open next week. Two of our favourite companies drop their numbers on Monday, i.e. ITC and Zomato, making for a nice start to the week. ITC has been strong in the recent past, while the less we say about Zomato, the better?
In today’s issue, we cover Yes Bank’s Board approval for the investment of USD 900 Mn by PE giants Advent and The Carlyle Group. The RBI has intimated plans to release the bank from the reconstruction group earlier than expected, with the stock also up ~14.5% in the last 1M.
In other news, we look at global oil giants, Chevron, Shell and Exxon reported >USD 46 Bn in combined profits for the recently concluded quarter on the back of soaring crude prices and super high refining margins. Oil’s the OG sector, and this feels like a classic throwback, especially after March 2020, when oil crashed and companies started burning cash to survive.
Nifty 50: 17,158.25 | +228.65 (+1.35%)
FII Net Bought: INR 1.046.32 crore
Sensex: 57,570.25 | +712.46 (+1.25%)
DII Net Sold: INR 0.91 crore
Global Industry News
Oil giants post USD 46 Bn+ in quarterly profits
- In a throwback to the OG sector, the three largest Western Oil Companies, Shell, Chevron and Exxon reported a combined quarterly profit of USD 46 Bn, fuelled (no pun intended) by the highest energy prices (in a decade) and super high oil refining margins
- In a dramatic turnaround since the pandemic began, when oil companies began burning through cash, suffering massive losses as the price of brent/crude collapsed, oil/energy sectors have provided cover for investors from the tech bloodbath
- Exxon, the largest US oil company, posted a quarterly profit of USD 17.9 Bn, which is its highest ever and also ~4x from the period last year; likewise, its rival Chevron, recorded a ~3x increase in its quarterly profit (from the same period last year), as they increased production by 6.5% on the back of high demand
- At the onset of the pandemic, with increased losses & reduced demand, Exxon got booted from the Dow Jones Industrial Average, with the cumulative % contribution from energy sector companies dropping to 2.5%, a # which post consecutive quarter of strong performance has returned to 4%
Damn! What else? Tell me more?
- Oil & Gas shares have outperformed the broader index (S&P 500) this year, with the energy index up ~35% YTD, while the S&P 500 is down ~15%; likewise, stocks of Exxon and Chevron are both up 46% and 25% respectively, in stark contrast to Tech stocks which have had a troubled 2022, on the back of slowing growth & lofty valuations
- Taken into context of the consecutive quarters of GDP de-growth reported by the US Economy, and coupled with the highest CPI # in 41 years, back-to-back quarters of strong performance by Oil & Energy giants seem all the more impressive, with productions still intact (by the looks of it)
- Demand has also soared due to a global reopening of economies post the pandemic, and coupled in no short measure with Russia’s invasion of Ukraine and subsequent sanctions imposed on their energy sales, with Western companies happy beneficiaries of these actions
- Brent Crude has known only a single direction in the last year, rising from ~USD 60 per barrel to its current price of USD 105 per barrel, while touching a high of USD 120, as the OPEC+ curtailed production, instead of increasing demand
Got it! Any India perspective?
- The Indian Government, in reaction to a high amount of exports (as Russian sanctions played out), had imposed a windfall gains tax on Petrol / Diesel that was exported, which was retracted on 20th July (in differing proportions), and would therefore positively upstream / exporting oil companies
- The likes of Reliance / IOCL have been reported to be buying Russian produced oil from third party intermediaries, at high discounts, and then subsequently exporting it to ports over the world, likely to positively impact their numbers
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Around the World 🌎
- Spirit Airlines finally in Jet Star’s pocket: The lengthy bidding battle between Jet Blue and Frontier Group Holdings finally came to an end with Jet Blue agreeing to buy Spirit Airlines for $3.8 billion thus creating the fifth largest low fare high quality U.S carrier. The deal drew a positive response from the market with shares of Spirit rising 5.6 % in a day. However, the deal will be complete only once the antitrust regulators give their approval
- Amazon reports net loss again: Amazon reported a disappointing net loss of $2 billion in the second quarter mainly on account of a decrease in sales because of the pandemic. The loss can partly also be attributed to its investment in EV maker Rivian Automobile whose valuation has also come down. The company is now planning to increase Capex in its more profitable cloud computing business
- EY Split held up by debt issues: The proposed merger of the Audit and Consulting businesses at one of the largest Big 4’s stuck cause of the firm’s multibillion dollar debts. Recording USD 45 Bn in topline, a growth of 13% from the previous year, the company is struggling to convince its 300,000+ partner pool that the split is for the overall good, as concerns over branding, splitting of divisions and labour delay the de-merger
Yes Bank turns over a new leaf
- In what can be termed a new lease of life, the board of the much beleaguered Yes Bank finally approved the INR 8898 crore investment from PE groups Advent International and The Carlyle Group after months of negotiations
- Throwback 1: Yes Bank was pretty close to a run-on-the-bank, with the previous founder, Rana Kapoor accused of siphoning funds, colluding with known defaulters and approving questionable loans
- Throwback 2: In an 11th-hour rescue package devised by the Ministry of Finance, SBI & a clutch of other private banking institutions infused INR 10,000 crores into the bank to maintain its capital adequacy ratio & continue operations, following it up via a Follow-On public issue, and infusing INR 15,000 crores, cumulatively adding INR 25,000 crores to the bank’s BS to maintain adequacy
- Throwback 3: The Bank’s board was dissolved, with a new working group constituted and spearheaded by ex- SBI Banker/resolution expert; the new board in 2021 approved a proposal for an additional fund-raise, initially by the end of 2021, which was later extended to 2022
Got it! Deal contours? And what about post resolution performance at Yes Bank?
- The investment is expected in two tranches, with the initial 59% via an upfront payment, followed by the remainder issued via warrants that will get converted into equity in the next 18 months; the bank’s expected to receive an upfront payment of INR 6044 crores
- Upon conversion of all warrants, Advent International and The Carlyle Group will both receive a 9.99% stake in the bank, with subsequent board seats, basis RBI approvals
- The Bank’s stock ended trading on Friday up 2.5%, with a market capitalisation of INR 37,432 Crores, having appreciated 14.5% in the last month in anticipation of the news
- Yes Bank’s been on a path to revival, initially via the RBI’s announcement of the bank exiting the reconstruction scheme 8 months before the mandated 3 Yr tenure, which will result in the 11th-hour board being dissolved and a new one picked
- Likewise, the quarterly performance was also healthy, as the Bank has cleaned up its book, fresh provisions were down 60% YoY, formed an Asset Reconstruction Company and sold INR 48,000 crores worth of NPAs recently
Keep a track?
What else caught our eye? 👀
Ethanol promoted as an alternative fuel
- The Indian government is largely promoting the production of ethanol from sugar, bamboo and grains as an alternative fuel for vehicles
- In the Mint Mobility Enclave, the Union Minister for roads, transport and Highways said that this will also greatly reduce the cost of bio-aviation fuel
- This will offer much relief to the highly distressed aviation industry suffering from high fuel costs
Adani Capital ready with its IPO
- Adani Capital, the NBFC arm of the Gautam Adani Group is a fintech company offering business loans to MSME and is into retail and rural financing
- It now has plans to launch its IPO in early 2024 to raise ₹1500 crores ( $188 million)
- The company which uses the DTC model is planning to double its loan book every year
Saturday, 30th July: Bank of Baroda, IDFC First Bank, Indian Bank
Monday, 1st August: Escorts Kubota, ITC, Max Financial, Ramco Cements, UPL, VBL, Zomato
Educational Topic of the day
This types of strategy allow investors to buy stocks of companies at the time of a down market. This strategy focuses on buying at low and selling at high.
However, investors shouldn’t just buy stocks of any company during downtime. They should look out for companies that have the capacity to build up value and have a branding that prevents access to their competition.
Edited by Raunak Karwa