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Multipie Weekly #18: Curated reads for investors

Hello, this week we discuss the big meeting between the Rakesh Jhunjhunwala and ministries, explain the key developments in the RBI policy meet, key new developments for the power sector and how this impacts IEX, share our three favorite charts of the week, company updates and some curated reads. Happy reading!

1. Market snapshot 

Last week Energy/Oil Gas continue to gain the most i.e. 5.3% as global coal shortages still persist followed by other sectors like Consumer Discretionary and IT which gained 4.8% and 4.7%.

As you can see, while microcaps perform well over short cycles in a bull market, large caps have a better CAGR over long periods. One might consider shifting focus towards larger companies from here.

2. The big meeting – more than just “small talk”

Author: Abhishek Murarka

One high-profile meeting was the talk of the town this week – the big bull a.k.a. Rakesh Jhunjhunwala’s meeting with the Prime Minister and Finance Ministry, the photo-ops of which were splashed on social media with a lot of fanfare.

There are enough cues that the meeting was more than just small talk. Let’s explore some possibilities:

i. The big upcoming IPO and the impending PSU divestments

The Sensex has been on a roar despite major economic uncertainties over the last 18 months, soaring over 180% from the lows of March 2020. One key contributor has been global liquidity that found its way to emerging markets, especially India. Now with signs of FED nearing a taper, interest rates seem set to move higher, which will likely drain out some of the excess liquidity from the equity markets. 

Meanwhile, the Government is nearing two key events to bolster its finances – IPO of the behemoth LIC (the largest ever – also the most complicated) and privatization/ divestment of PSUs (BPCL, BEML, SCI, etc). Also, the big bull has his eyes on the airline business, a heavily regulated segment.

In this light, the high-profile meetings on consecutive days imply that the meetings were not courtesy calls and meant business. It just seems to imply that the government is very well “watching the markets” and the meeting might have been a consultation on sentiments, valuations and the messaging to the market to keep its bullishness alive, at least till the big eLephant is out of the room.

ii. On reviving valuation of PSU assets

Despite a raging bull market, most PSU stocks have been laggards and are still trading a significant discount to book value. There aren’t many market participants who are keen on this segment citing decades of inefficiency. Incidentally, RJ has shown interest in this ignored space, picking up stakes in PSU Banks (SBI and Canara Bank) and PSU metal stocks such as SAIL. One can expect this meeting to be a sweetener for interest in PSU stocks.

iii. Discussion and market feedback on economic reforms

Both the government and RJ seem to concur on economic reforms. The big bull called the planned Power reforms as bigger than 1991 reforms. There are many measures at different stages and feedback on how the capital markets are perceiving them could well have been on the table.

Whatever be the reason, there are some fine lines that the market will try to decipher over the next few weeks and months. With Air India privatization cleared this week, PSU Banks might see fresh interest. What do you think? Let us know.

3. Opportunities to widen for IEX after new developments

Indian energy exchange (IEX) is the marketplace that provides the trading platform for power & renewables. There are 3 types of contracts available on IEX through which discoms procure power – Real-Time Market (contract allowed every 15 minutes), Day-Ahead Market (contracts allowed a day before power is needed) and Term Ahead Market (Contract allowed 2-11 days before power is needed).

New developments last week

Last week there were 2 big approvals given by CERC which will pave a path of the Indian power sector’s ecosystem towards getting more efficient: 

  1. Long Duration Contract (LDC) is approved by CERC

LDC will give a choice to discoms to enter into longer-term contracts (forward contracts) which can range from 1 to 12 months. Also, this will allow exchanges to introduce new financial products like electricity futures, allowing discoms to hedge their risk against their forward contracts.

  1. Phase 1 implementation of Market Based Economic Dispatch (MBED) has been approved for the Day Ahead Market (DAM) horizon

    MBED will help in reducing the power procurement cost for Discoms as earlier discoms used to buy power from gencos via PPAs. Post the implementation of MBED, these PPAs can be shifted to power exchange and discoms can select to buy power from the lowest cost genco. 

Implications:

  • LDC will help discoms to plan for buying long term contracts & fix power prices by entering into a contract if they expect power prices to go up in the coming future 
  • MBED will lead to an increase in participation in exchanges making the power sector’s ecosystem more efficient.

IEX is expected to benefit significantly from both the developments as it will help the company to increase its offerings with more discoms & gencos coming on its platform. Eventually, these approvals will lead the company to expand its market share. The big Q remains how much is factored in.

4. Highlights of the RBI Monetary Policy 

Author: Rajkumar Singhal

The RBI Monetary policy committee (MPC) concluded this week. There were expectations that RBI will start normalizing its accommodative stance that was started post-Covid. Apart from liquidity normalisation measures, there were also expectations that RBI might raise the reverse repo rate to reduce the spread between repo and reverse repo rate (currently this spread is at 65bp vs 25bp in normal times). However, the meeting concluded with the status quo. Key announcements:

  • No change in repo rate (4.0%) or reverse repo (3.35%). RBI clearly wants Banks to dip into the surplus liquidity in the system (Rr 12 lakh crore) and start lending
  • The stance was maintained as accommodative. 5-1 members voted in favour of the stance (expectation was for 4-2)
  • GDP growth forecast maintained at 9.5% for 2021-22, as in the last meeting
  • CPI projection was lowered to 5.3% for 2021-22 as against 5.7%. But CPI projection for Q1 FY23 was raised by 10 bps to 5.2%
  • G-Sec acquisition program was halted after it added liquidity to the tune to Rs. 2.37 lakh crore in the first half. However, RBI can restart it as and when needed

Overall, the MPC continued with its accommodative stance, more dovish than what the market expected.

5. Visual weekly – Some interesting charts

5.1 India’s share in the world market capitalization

India’s share in the world market cap now stands at 2.9% – well above its historical average of 2.4% and the highest since Dec’18.

In the last 12 months, the global market cap has increased 31.5% (by US$ 27.9 trillion) and India’s market cap has risen 65.5%.

5.2 Cyclical earnings as a % of Nominal GDP

Cyclical earnings contribution to Nominal GDP in FY20 was at all-time lows ~0.9% but it bounced back really well ~1.6% in FY21 and it is expected to increase in the next 2 years as well. 

6. Good reads & company updates

6.1 Importance of rebalancing a portfolio during a crash

In Marcellus’s Newsletter, they have brilliantly illustrated different options available with the investor during a crash. They have also explained why rebalancing a portfolio during a crash/stock dislocations is beneficial with some dummy examples. Here’s is the summary of the same:

There are 3 choices for an investor regarding share price dislocation- 

  1. Pre-emptive timing: Waiting for the market to crash to invest
  2. Ride the tide: Stay invested in the stock market and do nothing during a crash
  3. Post-facto rebalancing: Stay invested and rebalance the dislocated portfolio during a crash

Marcellus’s preferred method is to rebalance the portfolio during drawdowns, by selling off some proportion from companies that have not seen a drawdown and allocate to companies that are majorly impacted. Provided the fundamentals of the company facing the drawdown have not changed and the expected share price dislocation i.e. expected gain is higher than the transaction costs, capital gain taxes etc.

This approach helps in: 

  • Generating additional returns
  • Lower the contribution of luck in investment (as the portfolio is rebalanced only after the share prices are dislocated without trying to time the market) 
  • Reduces the risk of being left with uninvested cash & declines the risk of the timing of the entry-exists in the portfolio.

6.2 Mold Tek Packaging Ltd. announced in AGM that it is entering into a new segment- Injection Blow Moulding (IBM) technology by incurring a Capex of Rs200crs to cater Pharma, FMCG & cosmetic segments.

6.3 JSW Energy Ltd signed a contract with GE renewable energy (a leading manufacturer of turbines). This will help in adding up the supply of 810 MW towards their renewable projects in India. 

That’s all for this week. Please share with your peers if you found this helpful and subscribe to start receiving the weekly digest in your mail! Happy weekend!

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