Month: November 2021

Last few days sees relentless selling pressure by FPIs

Relentless selling pressure, is there more exit likely?

The selling pressure has been relentless and many Foreign Portfolio Investors like Blackrock Ind recently said that China looks much better than the Indian markets in terms of valuations.

According to a Bloomberg Report, Blackrock Inc. is trimming its investments in Indian equities and becoming more optimistic on China on attractive valuations amid expectations that policy hurdles will ease next year.

“Valuations are key right now,” Belinda Boa, head of active investments for Asia Pacific at the world’s biggest asset manager, said at a briefing. “Because of the outperformance we’ve seen in India this year, on a relative basis, we are starting to take profits and becoming more positive on Chinese growth stocks,” she said.

Recently, Goldman Sachs too downgraded Indian Equities citing expensive valuations. According to Goldman Sachs, the Indian equity market is trading near peak 12-month forward PE valuations of 23 times, which is at a record 60% premium to the Asia Pacific ex-Japan region. Morgan Stanley also cut India’s rating, citing expensive valuations.

US easing, inflation worries add to concerns for emerging market stocks

The US Fed has decided to trim its bond purchase programme, thus pulling back liquidity. On the other hand bond yields in the US have surged to 1.68%. Each time bond yields rise, they make emerging market stocks even less attractive.

It’s clear that bond yields across the globe are set to rise, aggravated by rising inflation. This may lead to a sharp pull back in equities going ahead. What is keeping the Indian markets afloat is the huge amount of liquidity that is flowing into domestic mutual funds. This trend is likely to continue in the future and this may lend some support to the domestic market. So far, domestic investors have bought shares worth Rs 16,000 crores. However, if we see mutual fund holdings, most of them are barely sitting on any cash. We expect the markets to continue to exhibit volatility and it is a good idea to now look at debt, if interest rates rise.

According to Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services Ltd the markets are likely to continue with consolidation given weak global cues, persistent FII selling and premium valuation.

“In the absence of any fresh trigger and subdued sentiments, investors would await for the fundamentals to catch up with valuations. Market could take direction from the US economic data and fears the pace of tapering to be accelerated which could prepone the interest rate hike cycle. It would also track the Covid situation in Europe which could impact the global economic activities. Monthly F&O expiry tomorrow could add to the volatility,” he says.

Q2FY22 results of ITC Ltd.

HDFC Securities has stated in its research report that “ITC delivered in-line revenue growth, with a few positives in key segments. Revenue was up 12% YoY with cigarettes/FMCG/hotels/agri/paper growing 11/3/254/-7/25% YoY. Cigarette revenue growth was 10%, with a volume growth of 9.5%. Given the positive growth rate for cigarette volumes and potential for price hikes, we expect a sustainable cigarette recovery in H2FY22. Cigarette EBIT growth was at 10%. FMCG business registered steady 6% growth and clocked 11% two-year CAGR. FMCG EBITDA margin was at 10% (+30bps YoY, >300bps in Q2FY20) despite commodity headwinds.”

The brokerage has also added that “The discretionary/OOH categories recorded strong YoY and sequential growth due to increased mobility. Staples and convenience foods growth remained moderate on a high base and saw a sequential pick-up this quarter as well. The company performed well across all channels, including MT, eCommerce (7% revenue share) and rural. It increased its market coverage/direct outlet servicing by 1.4/1.1x YoY. Hotel occupancy improved 3x over Q2FY21 and ARRs improved as well. Hotels saw strong cost control but reported an EBIT loss of INR 480mn (vs IRs 1.8bn in Q2FY21) due to negative operating leverage. The agri business exports saw strong growth in wheat, rice, leaf tobacco, aqua and spices. The paper business clocked 25% YoY growth, led by value-added products and demand revival. The paper margin improved, led by higher realisations, investments in pulp import substitution and cost-competitive fibre chain.”

Buy ITC Ltd With A Target Price of Rs. 272

The brokerage has claimed in its research report that “ITC stock has underperformed the sector and benchmarks over past few years due to concerns, including environment social and governance (ESG) norms (leading to outflow of FPI money), regulatory/competitive challenges in the core cigarette business, and concerns over capital allocation. Doing a deep-dive into financials, we found that ~60% of ITC’s cash flows have been paid as dividends, while only 15% has been utilized to scale up capacities across segments, with the majority deployed in the promising FMCG business, followed by hotels and paper & packaging business. The remaining portion is held as non-core investments. Paper/agri businesses are generating healthy ROCE and are capable of self-funding CAPEX needs but hotel segment is playing a spoilsport.”

“However, the company has developed a sizeable footprint in hotels and the management has noted that it will henceforth go asset-light for hotels, where the focus would now be on managed properties. In the FMCG business, with significant front-end investment already done to build capacities, we expect a material decline in annual organic CAPEX here. Financial re-engineering (apart from a recent increase in dividend payout ratio to 80-85%) can unlock value: de-merger of capital guzzling and low-return-generating hotels business – since incremental expansion is expected to happen through management contract route and hence may not require cash infusion from parents, and listing of ITC InfoTech – revenue of Rs 2445 Cr in FY21 – since it is completely unrelated to core cigarettes business. Cross synergies and ITC’s big ambitions for FMCG may restrict any demergers here but the scaling up of the FMCG business could provide another strong FCF generating business” HDFC Securities has clarified.

According to the brokerage’s call “Strong recovery in cigarettes business, focus on profitable growth in FMCG business – With the resumption of normalcy and higher mobility, we expect demand trends to improve to achieve cigarette recovery. A gradual FMCG business turnaround with improving profitability remains another important catalyst for stock outperformance over the medium term. At 14.3x Sept’23 EPS, ITC trades at a steep discount to the FMCG sector. At these valuations, there is limited downside risk, and the risk-reward ratio in the current market scenario is favorable for ITC. We feel investors can buy the stock in Rs 229-234 band (14.3x Sept’FY23E EPS) and add more on dips in Rs 204-209 band with a base case target of Rs.257 (18x Sept’FY23E EPS) and a bull case target of Rs.272 (19x Sept’23E EPS).”

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.