US Inflation Touches 13-year High, What Does it Mean for India?
For the month of September 2021, US inflation touched 5.4%, largely driven by a spike in food and housing inflation. This is the highest level of retail inflation in the US in the last 13 years, and this level was last seen during the peak of the global financial crisis. On a MoM basis, the inflation was up 0.4% while even core inflation was up 0.2% MoM.
The recent Fed statement made it amply clear that high inflation was a reality and here to stay. Jerome Powell, the Fed Chair, kept repeating that the high inflation was caused by supply chain bottlenecks. Powell has now turned to the narrative that high inflation may stay put for much longer than originally anticipated.
Spike in US inflation is representative of the problem that most countries, including India, are facing.
Demand for consumer goods has spurted in the last few months in tandem with the economic recovery. However, supply could not keep pace either because raw materials were just not available or too pricey to make economic sense. This demand supply gap has given a free run to inflation.
Check:- Drop in Retail Inflation, IMF Bullish on Indian Markets
Economists are veering around to the view, that irrespective of the cockiness shown by Jerome Powell, there is only so long he can put off a rate hike. The Fed’s original inflation upper end target was 2% and it is a full 340 bps above that threshold. In terms of policy, the Fed taper could start in November and rate hikes probably in the first half of 2022 itself.
What does this US inflation number mean for India? Firstly, it is a signal that the supply chain constraints are not going away soon. India’s 4.35% inflation in September may be more of base effect, but overall inflation would still trend higher. This could have implications for cost of funds as is already evident in the rising 10-year bond yields.
The other implication is for RBI monetary policy. Over the last 10 years, the RBI has tried to align its monetary policy with the US. If the Fed gets hawkish, it is unlikely that the Monetary Policy Committee will maintain its dovish stance. Liquidity could be the first casualty, impacting Indian stocks that are largely liquidity driven.
The bigger risk is that RBI may be forced to hike rates to keep Indian bonds competitive in risk adjusted terms. That would be a bigger challenge to contend with.
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Aluminium Companies May be Hit by Supply of Coal Shortage
When the coal crisis came to the fore, threatening a virtual blackout in many states, it looked like the power sector was the worst affect. However, now the downstream impact is being felt. One such instance is of aluminium companies, which is an extremely power intensive and coal-intensive operation. That has pushed the sector into a major crisis.
The shortage of coal for aluminium producers has become acute in the last few days after the government ordered coal supplies to be urgently diverted to the power plants to help them replenish their inventory. Most power plants were down to 1-2 days of inventory. That diversion meant that a key consumer of coal like aluminium got hurt the most.
This has put aluminium producers like Hindalco and Nalco in a fix. Indian aluminium plants generally rely on captive power plants since their business is very power intensive. However, this needs a steady supply of coal. Currently, domestic coal supplies are stretched and global coal supplies from Indonesia and Australia are almost unaffordable after the 4X price rally.
India’s aluminium industry has repeatedly complained to the government about the lack of coal supply to their captive power plants. Aluminium manufacturers have demanded secure linkages for sustainable operations. The Federation of Indian Mineral Industries has warned the Coal ministry that the coal shortage could lead to factory closures in aluminium industry.
The problem is aggravated for the aluminium industry due to the skewed cost structure of the sector. For example, currently, coal accounts for almost 40% of the production cost of 1 tonne of aluminium. Since the power intensity of aluminium is too high, the focus of captive power has helped to reduce the dependency on the grid. Therein lies the real problem.
Currently, around 9,000 MW of captive power plants have been established to meet their critical power supply needs for the aluminium industry. However, without coal these captive power plants cannot be operated, and most of the captive plants of aluminium companies are running very low on coal stocks. The fear is that if the coal situation does not improve in the next few days, aluminium output cuts could be the only option.
Adani Wilmar and Star Health Get SEBI Approval for IPO
With a slew of IPOs already slated to hit the primary market in the last week of October, there are more big IPOs getting lined up. Two more companies got SEBI approval for their proposed IPOs and can now seriously start actioning the IPO process.
Adani Wilmar IPO
Adani Wilmar, the FMCG company and a joint venture between Adani Group and Wilmar of Singapore, has got approval for its proposed Rs.4,500 crore IPO. The entire IPO will be a fresh issue of shares. The Adani Wilmar joint venture proposes to use the fresh funds to expand the business organically and inorganically as well as to build its brand.
Adani Wilmar will become the seventh listed company from the Adani fold, once the IPO is through and the stock gets listed. Adani Wilmar (of Fortune edible oil brand fame) has plans to become India’s largest food-based FMCG company by 2027. Apart from being a food retailer, Adani Wilmar will target to own the entire food ecosystem from farm to fork.
The IPO price band is yet to be decided but it is reported to value Adani Wilmar at around Rs.45,000 crore to begin with. Since, Adani Enterprises owns 50% in the joint venture, the company will see value discovery to the tune of Rs.22,500 crore due to the IPO. However, there will not be any OFS component in the Adani Wilmar IPO.
Star Health Insurance IPO
The Star Health Insurance IPO of Rs.5,500 crore will be a combination of fresh issue and an offer for sale. The fresh issue component will be worth Rs.2,000 crore. The balance Rs.3,500 crore approximately will be accounted for by the OFS of 6.01 crore shares in an indicative price band of Rs.580 to Rs.600.
The biggest seller in the OFS will be Safecrop Investments selling close to 3.07 crore shares. The rest will be sold by other early investors in the company as well as some early promoters. Incidentally, Rakesh Jhunjhunwala is one of the early investors in the company, although he is reportedly not participating in the OFS.
Check - Rakesh Jhunjhunwala's Portfolio
The fresh issue proceeds will be used by Star Health to create a capital cushion and for maintaining solvency levels. Star Health is the largest private sector player in the health insurance space with 15.8% market share.
Why Reliance walked in and walked out of the Zee Deal
In the midst of the ongoing fracas between Invesco Fund and the Zee management, led by Punit Goenka, it emerges that Reliance walked in and then walked out of the deal to buy a strategic stake in Zee Entertainment. The Reliance group has confirmed that the deal fell through as they were uncomfortable with the tiff between Invesco and Punit Goenka.
Punit Goenka, son of Subhash Chandra, is the MD & CEO of Zee Entertainment. However, the Subhash Chandra family has just 3.44% in Zee Entertainment while Invesco Fund is the largest stakeholder in Zee with 17.88%. The tiff arose as Invesco felt that the promoter family was exercising clout disproportionate to its holdings.
Check - Invesco wants EGM to Replace Punit Goenka from the Post of MD & CEO
Invesco, on its part, confirmed that it had just tried to facilitate the deal between Reliance and Zee, which needed a big fund infusion. Meanwhile, Punit Goenka has accused Invesco of working at the behest of large media interests to take over Zee. In the process, RIL did not want to get embroiled in a deal what was seen as anti-promoter.
The Zee side of the story is that they were uncomfortable since Invesco was trying to push the deal very hard, which was not what they expected from a large investor. Zee also felt that the offer of Rs.220 per share and valuation of Rs.21,130 crore for Zee was not in the largest interests of small shareholders of Zee.
Invesco has a different story. Apparently, they tried to facilitate the deal and negotiations happened between Reliance and Chandra family. However, Invesco did not accept that the Chandra family should get a stake of 4% in the merged entity and Punit Goenka continues as the MD and CEO. Invesco did not want any special shareholder preferences.
Check - Subhash Chandra Takes Up a Good Deal on his Zee Stake
In a way, this is also roiling the Zee-Sony deal. Invesco is uncomfortable with Sony deal as post-merger, its own stake will be down to 8.4% while Zee promoters will have 4% in the merged entity due to the non-compete fee of 2% stake paid by Sony. Invesco feels there was no question of non-compete fee when Punit Goenka will be CEO for next 5 years.
For now any deal looks like Catch-22 with the largest institutional investor and the original promoter family not seeing eye to eye.
Route Mobile gets Board Approval to Raise Rs.2,000 CR
In its latest meeting of shareholders, the board has approved the raising of funds to the tune of Rs.2,000 crore via the issue of securities. This could be via the issue of equity shares or other securities. The amount is likely to be raised in tranches through the year and this is more of a blanket approval from the board for the fund raising plans.
The shareholder meeting had two main items in its agenda. The first was to raise funds via issue of securities to the tune of Rs.2,000 crore. The other item on the agenda was to enhance the investment limit for foreign portfolio investors or FPIs considering the elevated levels of interest that the QIBs had been showing in new technology companies in India.
As per the scrutinizer report, more than 95% of the votes of shareholders were in favour of raising the Rs.2,000 crore funding. The public institutional shareholders did not share that enthusiasm as nearly a quarter of them voted against the fund raising. However, on the vote for raising FPI stake in Route Mobile, the mandate was more decisive at over 99% favourable votes.
Route Mobile offers comprehensive enterprise communication solutions and offers what is called the CPAAS (communication platform as a service). This is something akin to the logic of SAAS. The CPAAS global market is expected to grow from the current $8.7 billion to $34.2 billion by 2026, which is an exponential growth market for Route Mobile in the next 5 years.
For FY21, Route Mobile reported Rs,1,406 crore by way of revenues and Rs.176 crore as EBITDA. The company also has a solid ROCE of 34.4% and ROE of 30.8% as of FY21. In the next few years, Route Mobile is looking to organically and inorganically expand its CPAAS platform to offer better customer experience. That will be capital intensive.
One question that does arise is whether Route Mobile really requires funds just one year after a mega IPO that was oversubscribed nearly 74 times? But, then as the old saying in the stock market goes, it is always advisable to raise funds when the iron is hot, so that funds are available when you actually need it.
Air India Accumulated Losses Stare at Rs.78,000 Crore
Just a week after the government announced that Air India was being sold to the Tata group, Air India has come out with numbers. It just underlines that the bleeding of the national carrier continues almost relentlessly. This comes just a week after the Tatas won the bid for Air India for a total consideration of Rs.18,000 crore consisting of a cash payment of Rs.3,700 crore and the balance by way of assumption of debt.
For the fiscal year ended March 2021, Air India reported losses of Rs.7,017 crore, better than the loss of Rs.7,765 crore in FY20. However, this loss took the total accumulated loss of Air India to Rs.77,953 crore. Since Air India and Indian Airlines were merged in 2007, the company has been consistently making losses each year.
The lower losses in FY21 compared to FY20 was largely on account of a sharp fall in expenses by 47.4% to Rs.19,083 crore. The fall in expenses is attributed to cut in variable costs as airlines remained out of operations for long periods of time due to COVID. However, it also meant that fixed costs could not be adequately absorbed in FY21.
Apart from the big losses in FY21 and FY20, Air India also reported net loss of Rs.8,556 crore in FY19 and Rs.5,348 crore in FY17. The result of all this years of losses has been that the net liabilities of Air India exceed its assets by Rs.58,316 crore. In addition, the government has been sinking Rs.20 crore of public money each day to keep the airline afloat.
This only underlines the huge task ahead of the Tata group as they look to integrate Air India into their larger aviation plan and eventually make the airline profitable. Tatas also have extraneous challenges like the COVID lag effect, high ATF prices etc. In the midst of all this, there have been allegations of the government selling Air India too cheap. Looking at the financials, it appears good enough that the government saves Rs.20 crore per day.