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Multipie Weekly #16: Curated reads for investors

Hello, this week we covered how telecom companies are responding to reforms and have interpreted “the Fed-meet with our view on that”, along with some curated reads. Happy reading!

1. Market snapshot – Sensex over 60,000; Nifty near 18,000

Market cheered the move of Sensex into the 60s and now awaits Nifty breaching the 18,000 mark. Last week, Real estate was the top gainer at ~12% after Godrej Properties announced sales of 340 homes worth over INR 575 crores on the first day of launch of its Noida forest-themed project ‘Evergreen’. Hopes of revived real estate demand set the shares of top developers on fire with Godrej Properties gaining 35%, Oberoi Realty 26% and DLF 23% over the last week!

This was followed by Telecom & communications which rallied up by 3.8% as the recent reforms are expected to work in the favor of telecom companies. Energy/Oil & Gas gained 3.3% during the week.

Last 6 months: In the last 6 months, IT, Telecom, Commodities have been the top-performing sectors and have given returns of 37.6%, 35.9% and 34% respectively.

Microcaps have seen the highest gains of 41.1% in the last 6 months compared to 32.3% by smallcap, 28.5% by midcap and 25.2% by Large-cap but interestingly in the last one month, returns of each category has been in a similar range.

2. Why are Telecom stocks rallying? 

Reliance Jio Says Receiving Port Out Requests, Alleges Airtel, Vodafone  Running False Propaganda

Even after being in a necessity service basket, Telecom has been going through a rough time for a decade and the sector’s contribution in NIFTY has also declined from ~12% in FY09 to ~3% currently.

Jio and Bharti Airtel are still better placed due to sustained subscribers comparatively and better debt positioning but Vodafone has been bleeding continuously due to AGR related dues of 1.68 Lakh crs and declining subscriber base. 

Issues like not being able to increase tariffs in a price-sensitive country like India and not being able to invest in upgraded technologies i.e. 5G spectrums consistently have made it difficult for players in this space which has led the industry to move towards consolidation.

Are the dynamics changing now? 

The government has come up with reforms recently which can pull these giants up and especially help Vodafone to survive from drowning. 

  • The government has provided a Moratorium of 4 years to repay the AGR-Spectrum related dues
  • It has also provided an option to pay the interest (if opted for Moratorium) in the form of equity to the government
  • 100% FDI is allowed now which was 49% earlier.
  • Non-telecom revenue will not be considered in calculating AGR, and this reform will decline the liabilities for telecom companies.  

How are the companies responding to this?

  1. Bharti Airtel raising capital through a rights issue will be used to reduce the debt.   

2. Reliance-Jio is already on a path to become debt-free and has done the rights issue.

3. Vodafone to opt to pay the interest (due to moratorium) by equity stake to the government.

All three giants now plan to work unitedly towards tariff hikes which will lead the average ARPU for the overall sector to improve and this is the reason we can see telecom stocks buzzing in markets in the last 1-2 weeks. 
Improvement in ARPU and cash saved due to moratorium might lead to higher cash flows available towards building new infrastructure for 5G.

3. All that you need to know about the FED meet this week

Know Your Meme Newsfeed

Written by: Rajkumar Singhal

The FOMC policy announcement by FED was an anticipated event this week and it went largely on expected lines.

  • No change in interest rates as expected
  • On tapering (reducing bond purchases), Chairman Powell said that it “could come as soon as the next meeting”, which is in Nov 2021
  • On the pace of tapering – it would be “a gradual process “ that concludes around the middle of next year

Market reaction post FOMC

  • Equity markets reacted positively 
  • USD is marginally weaker
  • Commodities had a decent rally with oil, copper, metal all up

Background: what does all of this mean?

The Fed’s been working hard to keep the US economy chugging along during the pandemic. One of them is by buying bonds, thus lowering their yields and, in turn lowering the borrowing costs for households and companies. This partially fueled the rally in growth stocks, as cash flows in the future are almost equally valuable as cash flows in the immediate future.

Currently, the FED is buying $120 BN of assets. But now that the economy has started to look a little steadier on its feet, the FED is considering tapering its bond purchases. In fact, this is what they indicated in the FOMC that they will wind down the bond-buying program as soon as November. If they need to finish tapering by June 2022, they need to keep unwinding over 8 months averaging around a $15 BN reduction per month.

Multipie view

While the Fed will reduce the bond-buying pace, remember they are still buying and adding liquidity. In fact, they have added close to $1.2 Trn worth of liquidity in 2021 itself. Moreover, the first interest rate hike is not expected till the end of 2022. No surprise stocks rallied after the meeting.

We believe that this is a goldilocks situation for risk markets. Interest rate markets still believe that inflation pressures are transitory. So rate hikes will take longer and in our view rate hikes are more likely to spoil the party than tapering.

We recorded a podcast with Andrew Holland, CEO of Avendus Capital Alternate Strategies (the largest Hedge Fund in India) to understand some key aspects around tapering, commodity boom, capex cycle, etc. Do listen to understand more!

4. Visual weekly – Some interesting charts

4.1 The number of companies (out of top 500 stocks) having PE multiple>50 & >100

Source: Balaji Vaidyanath (Twitter: @nbalajiv)

The above chart seems interesting as we can see that since 2003, the number of companies trading at over 50 and 100 PE is at peak currently. Well liquidity has increased we know, but there is a lot of optimism built in here!

4.2  India Inc’s corporate profits as a % of GDP on a recovery path

In FY21, cumulative Corporate profits increased to ~5.1 lakh crs in FY21 and this as a % of GDP is at the same levels as it was in FY02 & this has been at its peak in FY08. Now, CMIE expects this to increase to ~2.7% in the next 2-3 years which is definitely a positive sign for India. 

4.3 Deposit and Credit growth at lows

India’s credit growth continues to remain weak despite several macro indicators reaching pre-pandemic levels. The credit to deposit ratio now below 70% is close to 12-year lows. Time for Banks to throw some caution to the winds and start lending.

5. Good read of the week

5.1. Laws of investing by Morgan Housel

In any field, whether it is science or investing, there are many theories and probabilities involved, which tend to evolve over a period of time but what stays constant is a “few laws which lay the foundation at the bottom”. 

Morgan Housel has illustrated the laws of investing which one needs to keep in mind and we recommend you to read this wonderful write-up as it is universal in all the different sectors across all the countries which will also stay relevant in the coming future. 

6. Company updates & news

  • Bharti Airtel has selected Tejas Networks Ltd to provide the products & services to enhance Bharti’s optical network capacity in the 5G spectrum in key metropolitan markets.
  • Amtek Auto Ltd which was known for its corporate misgovernance issues for many years is going to get delisted from the stock exchanges on 27 Sept 2021. 

Find of the week

B&K Securities has started uploading small and midcap management discussions on their Youtube channel. What’s discussed – Suven Pharma, Motherson Sumi, Ramco Cements, HDFC Bank (rural banking), Textiles. 

7. Tweets of the week

That’s all for this week. If you enjoyed reading this weekly, please subscribe at multipie.co and share with your friends 🙂 Happy weekend!

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