Hola!👋 This week, we covered the Market snapshot, RBI’s unexpected move of doing nothing in the monetary policy meeting, explained why Aluminium players are in a sweet spot currently followed by interesting chart & curated reads.
Outline
1. Market snapshot
Last week was packed with macroeconomic headlines and some mediocre results. While RBI gave a cold shoulder to inflation worries in the policy meeting, US CPI inflation came in high at 7.5% (their historical average has been 2-3%). To close the week, Russia sounded alarmed on Ukraine, saying a war-like situation can escalate anytime this week.
Not surprisingly, Indian markets closed down 1.6% for the week and ~5% for the month. Globally, the technology sector has been taking a beating this year – the Indian IT index is down 10% over the last month. The market is looking at safe havens in old economy sectors like Power, Commodities, and Oil & Gas. See details in the table below:
Drawing caution on small and microcaps which are now underperforming large-caps after 20 months of outperformance. Margin compression is clearly visible in smaller companies versus the larger players who are better positioned to wither the inflation storm.
2. Monetary policy meet: A cold shoulder to inflation or a tactical move?
Author: Rajkumar Singhal
While no one was expecting RBI to hike the policy rate which is the repo (the upper band), 70% of market participants were expecting RBI to hike the reverse repo rate( lower band), but RBI didn’t do anything. Everything was kept unchanged. A big driver for this was their projection for CPI, especially Q3 and Q4 2022-23. RBI is now projecting that CPI will be 4% in Q3 and 4.2% in Q4. Of course, markets loved it – Banks and Nifty were up, Govt bonds rallied about 20bp and USDINR was only marginally higher.
Ironically in the same evening, CPI in the US came in at 7.5% vs an expectation of 7%. This really spooked US bond markets and also caused a sell-off in US equities towards the close. Markets now pricing almost certainty of a 50bp hike in March FOMC policy and Fed funds reaching 1.75% by December 22 (currently zero).
This got me thinking about RBI. What does RBI know that none of the market participants knows? I’ll publish a detailed note around this.
3. Metals 2022: Aluminium is the chosen one 🤠
Aluminium has been in use for decades, so what’s new? Over the last 20 years, there has been a surplus supply of Aluminium due to higher production by China and this excess inventory led to flat earnings in the sector for many years.
But for the first time, we are seeing a global supply crunch in Aluminium and thus aluminium prices currently have breached the price levels of all past upcycles – 3200$+ per tonne!
Why, you ask? The answer for commodity prices always lies in the demand-supply equation. Two key reasons here:
- Tailwinds due to high-end user demand (Construction, transport, Machinery) 🏭
- Supply crunch due to persisting manufacturing challenges – Smelter closures in Europe & China due to high energy costs (China is the largest producer) For context – there is a supply deficit of $1.4 Mn in the global economy and inventories are lower than 10mn tonnes, which is the lowest in the last decade.
Due to these macro tailwinds, major aluminium players- Hindalco Industries and National aluminium Company (NALCO) are currently in a sweet spot. Share prices of these companies have made new all-time highs and have reported the highest operating & PAT margins ever in recent quarters.
For Indian players, it is not just the macro tailwinds from which they are benefitting (will continue to benefit), India being at the cusp of a fresh Capex cycle is also proving impetus to aluminium players. After significant debt reduction in the last 2 years, both the companies are now doing capital expansion.
- Nalco Capex: Total 6,400 crs which will be commissioned in Q3 FY24 and in FY23 1,800 crs will be spent.
- Hindalco capex: Already has announced 3,000 crs and it will spend Rs 825 crs by participating in PLI scheme.
Management of the company guided that they expect the aluminium prices hovering at the same levels for next 1-2 years by looking at the Supply & inventory levels. So, we expect these companies to continue to perform well in upcoming quarters too.
4. What else is trendin’?🤙🏻
✔️The quarterly result show: We have analyzed 1090 results and this covers 82% of the listed market cap. Video will be released tomorrow (tentative) on Kumar Saurabh’s Youtube channel- Scientific investing.
One observation from the results: Industries in the entertainment, travel & tourism sector have performed really well in Q3FY22. All the open trade industries are booming, saw good revenue growth and margin expansion too 🎯
✔️Consolidation beginning in US aviation industry: Currently, in the US, airline revenues are hovering ~50% of 2019 levels with very high fixed costs. 2 US airlines company- Spirit Airlines and Frontier have planned to merge at 6.6Bn$.
If India faces the same issue, we might too see this happening👀
✔️Bharti Airtel Ltd is planning to spend 1.18 lakh crs to establish 5G infrastructure.
It will also explore OTT & gaming space. Co. will be combining content from 15 OTT platforms and will be launching called “Xstream Premium”. Join the discussion on the same on Multipie.
5. Chart of the week📊
Passenger vehicle sales growth at all-time lows
India’s 3-year sales CAGR of passenger vehicles is at all-time lows! 😱 It will be interesting to see whether the sector will bounce back from current levels or not.
6. Good reads 📚
6.1 A detailed write up on “The bond market in Plain English”
6.2 Volatile times: Why markets seem so volatile?
6.3 Building resilience: An underrated superpower
6.4 An article on “How to retain what you learn”
7. Multipie Adda: Last week at Multipie 🔄
Some selected highlights:
- Preeti explains the importance of mutual funds for long-term wealth creation over a plain vanilla term insurance plan here.
- I dug a little deep in analyzing the Q3 results of Aarti Industries. Check out the findings.
- Pushpa magic is here! Regional language takes over Hindi in box office collections by a huge margin. Here is the trend of Box office share by language for the last 5 years.
- Did you check out our latest feature of the Top held Mutual Funds by the investing community on our platform? Click here.
See you next week. Until then, happy investing!
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