In ‘Talking Points This Week', Niraj Shah studies how top business leaders and market makers are navigating the fast-changing financial landscape.
The short answer... pain. On stock prices, sentiment, or earnings. HUL has done well as a stock, but there is a possibility of pain in the future, as was evident in the commentary. For the rest, the pain felt by investors on the stock prices (Amazon and TV18) or on the nature of the deals (TV18 and Twitter) was evident. It left shareholders a worried lot.
For the markets in general as well, there is much to worry about – from growth to geopolitics, and from inflation to monetary policy. The question is always about the extent to which the negatives are already priced in. Difficult to judge in this very news-heavy world, where indicators are all showing fairly stark readings.
Everything from real rates, the dollar index, to the VIX are all signalling tough times for equity investors. Note that negative rates in emerging markets mean it'll take even longer before emerging economies themselves can offer investors positive real policy rates, leaving them at a disadvantage versus the U.S.
We have seen that there are chinks in the armour of the tech companies in the west, what with or Amazon's quarterly loss, Netflix subscriber loss, or Apple's caution around the near-future challenges. Lots of talking points internally, and externally.
Big Earnings Week Lives Up To Billing
Europe had its busiest reporting week with almost a third of Stoxx Europe 600 Index companies having a combined market value of €4.5 trillion ($4.9 trillion) updating on earnings. The United States had tech giants from Alphabet and Meta to Amazon and Apple releasing earnings. Back home in India as well, as much as 18% of Nifty weightage reported numbers in a single week. All of these made the expected splash for sure. Amazon tanked in after-hours trade after posting a loss, Apple shares dipped after the company warned of a possible $8 billion hit from supply constraints, and Intel was down after weak guidance for its fiscal second quarter.
In India, the scenario was slightly better, in that while Bajaj Finance and Axis Bank corrected after their earnings were out, the overarching belief on the sell-side is that the current quarter is strong for those two financiers and both are well placed for a growth revival. Life insurance majors like SBI Life and HDFC Life pleased the street with their performance on the metrics of the value of new business, and profit respectively.
Hindustan Unilever reported sales growth of 11% and EBITDA growth of 8%. Volume growth was flat, with consumers titrating consumption in an inflationary environment. While gross margin contracted 340 basis points, the EBITDA margin contraction was lower at 40 bps on lower employee cost and ad spending as a percentage of sales. In the near term, margins are likely to trend downwards due to cost inflation, even if they recover in H2FY23.
While Q4FY22 promised to be a terrible earnings season for margin performance and started off weak with the IT majors reporting sub-par earnings, what has followed has been, while not shining like gold, not too bad either. At least this far. At least in India.
The LIC IPO Is Here
The big boy of India insurance has reached the street. On a simple comparison with peers, Life Insurance Corporation of India trades cheaper than listed private players on market capitalisation or enterprise value multiples. Mind you, there can be various ways to value these companies. But then, when have PSUs traded at premiums? This week, after pricing its IPO at 902-949 per share, the LIC IPO was officially billed as the largest in the history of the capital market despite a reduction in size.
It has been estimated that in a span of three months, the expected value of what was to be the 5% stake on offer was seen to have gone down from around Rs 70,000 crore to Rs 30,000 crore. I ask, why is that a bad thing for an investor? If you getting a stock at a 55% discount, then shouldn't it should be good for you? The consideration should be whether an investor should apply for a company in the insurance sector, and if so, whether the risk-reward is favourable versus other listed players. Most brokerage notes are mixed and most private conversations seem undecided. By this time next week, there will be overt indications about whether or not the subscription can be fruitful. BloombergQuint will be there to tell you that.
M&A Rolls On
Adani Group yet again? No, I am not talking about the stock price moves this time. This is about the possibile buyer of Holcim's India operations. Multiple sources have it that the final winner could be one of Adani or JSW. This has been a strong year for M&A activity. Just on Wednesday, the Network18 group announced a fund infusion into Viacom18 by Lupa Systems, a joint venture between James Murdoch and Uday Shankar. If investment bankers feared that after a hectic FY22, and with IPO activity slowing in the January-March quarter, business would take a hit, India Inc. seems to be having other plans.
If investors had the belief that buying a stock after what appears to be a good deal is announced, the Zee-Sony deal or the Lupa-Viacom18 deal shows otherwise. The reasons may be different, and the pain inflicted on the TV18 and Network 18 stocks shows that equity markets hate opaque announcements, but the end result is that the last of the shareholders holding the bag tend to lose money, in a lot of instances, if not all.
By The Way
Twitter's deal may lead to enhanced chatter about users defecting to other social media platforms in the days to come. Alternative social media platforms were seen trending on Twitter since Monday morning when it was reported a deal was near, including newcomers CounterSocial and Truth Social. Koo may be an option for Indians, as also the old hands like Tumblr or Myspace. But these might be a small fraction of the massive userbase Twitter has, and therefore, foolhardy to write any small obituaries about the blue bird. The reverse happened as well. Even the idea that Donald Trump may be reinstated on a Musk-led Twitter was enough to rough-up the shares of Digital World Acquisition Corp., the special purpose acquisition company aiming to merge with Truth Social owner Trump Media & Technology Group. Diversity at play.
Niraj Shah is Markets Editor at BloombergQuint.
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