Weekly Wrap Up: FAANG Craze Over ???
Today we are covering: FAANG Euphoria over, India Inc. is not for a bargain, May the Fourth be with LIC, Holcim Exits – Bidding War Cemented, and much more.
Indian indices are finally in green again helped by positive global cues. Back home biggies like Reliance, HUL, L&T, and Infosys have contributed to the rally. The small caps have been falling consistently, pushing investments towards large and mid-caps. The markets on the rise have however not helped take our minds off the sweltering heat!
Market movement this week
FAANG craze over? ??
What happened - FB aka Meta came out with muted earnings this week. It had already reported a “first-ever dip in daily users (thanks to Tik Tok) in 4Q ’21. Last quarter, although the user base went up by a tad 4%, revenues increased just 7% (20% in the previous q), the slowest sales growth in a decade. Meta blamed Apple’s iOS privacy update for sagging ad sales (ads = 90% of its revenue). Profits fell for the second quarter in a row, as Zuckerberg continues to spend billions every year on his META ambition. Payoff still looks many years away. Why stock price was up? Wall Street had already pared down expectations so a little surprise in profits attracted the investors back. Otherwise, the stock has been hammered and is still down 40% YTD!
Not alone - Meta is not the only big techie to be slowing down. Last week, Netflix shocked Wall Street when it announced that it lost 200k subscribers and expects to lose millions more.
This week, Google also reported slowing sales growth while profits dropped 8% YoY. The slowdown in YouTube ad revenues was the main reason, another Tik Tok victim here. Apple too may not see the same pandemic growth when ppl stuck at home loaded up on iPhones, Macs, and iPads. Sales may grow just 8% this year.?
Euphoria over? - Investing in FAANG had been a dominant investment strategy of the past decade. It reflected the infinite optimism in these 5 tech companies, to grow at blitzkrieg speed and make huge money for their shareholders. Pandemic further boosted their share prices as screen time increased manyfold.
But tastes have evolved, preferences changed and there appear cracks in this band. All the 5 cos have been major drags, FAANGs plus Microsoft account for less than 25% of S&P 500 value but contributed more than half its decline this year.
Bottom line – Diversification is going to be key. As the existing businesses are losing their moat against changing consumer preferences, it will be too risky to rely on one $$ stream. Netflix opened its door to ads, Meta also decided to copy Tik Tok to counter Tik Tok, Google’s revenue from growth?in cloud, hardware, and services helped counter ads slowdown.
P.S. FAANG is still worth owning, if not for growth but for strong balance sheets and stock buyback potential.?
India Inc. is not for a bargain ??
What happened - Interesting data points from NSE’s quarterly report this week. FII holdings in the December quarter dropped to a 9-year low, falling for the 4th consecutive quarter! Holdings stood at 20.9% in NIFTY 500. Outflows are highest in the financial sector. FIIs are underweight on consumption theme as well as materials and industrials but positive on energy.?
?Retail the hero - Holdings in the Nifty 50, Nifty 500 and NSE-listed companies have all increased, hitting a 14-year high.?
?MFs remain next in line - Domestic Mutual Funds’ (DMF) share in Nifty 50 companies has hit a two-decade high by 2021 end. Thanks to passive index-based exchange-traded funds (ETFs). SIPs for the win!
They are overweight on financials and energy but high inflation has made them bearish on Indian consumer staples and discretionary space here too. IT also lost its magic due to earnings and guidance disappointment.?
?The biggest silver lining?- Indian promoters have stayed active in these markets too. For the 4th consecutive quarter, Indian private promoters have increased their share to a 16-year high, standing at 35.8% in NSE 500 universe. That speaks volumes about their faith in India’s growth prospect.
?Indian retail, MFs, and promoters all remain upbeat on India despite FIIs pulling out, pretty much why we have not seen a very big fall in markets in the last 6 months, down less than 4% compared to a fall of 18% in Nasdaq. Imagine the impact when FIIs come back again!
May the Fourth Be With LIC ??
What happened? After a wait of almost a year, LIC IPO is finally here - slated for 4-9 May. The price band of 902-949 and the total value of IPO pegged at 21,000 crores. LICs valuation is almost half of what was originally planned and IPO size is also ~20,000 cr less. Russian war, inflation, and FIIs pulling out have been the main culprits for this. Given global uncertainty, this was the only choice left to govt.?
?Not subscription but gains post listing an issue Media reports suggest Rs. 13,000 cr worth of commitment already sealed from anchor investors. So LIC IPO subscription may not be a problem. BUT, govt. is only selling 3.5% which means it may dilute its stake further to meet fiscal deficit targets. Moreover, LIC, despite being a leader in the insurance biz, operates like a traditional PSU and losing market share to Pvt players.?
?Final thoughts: Lowered valuation does leave scope for some listing gains, but the stock’s performance, in the long run, will depend upon how it can transform from a typical PSU to a more agile player in this cutthroat space.???
?Holcim Exit? - Bidding War Cemented ?
Rumors are around that after a long 17 yrs stint, Holcim is looking to exit the Indian cement market. Holcim has stakes in Ambuja Cement and ACC where it owns 63.1% and 4.48% resp. A fierce battle is reported to be underway. On one hand, smaller cement guys like JSW Cement and Adani looking to establish themselves as 2nd largest, and Ultratech on the other side-eyeing a monopoly.?
?Why move out? As per Long term Strategy, Co. is looking to reduce cement revenue share from 60% in 2020 to ~35% by 2025 and raise its “greener products” portfolio to 30%. Recent acquisitions in building solutions and products, and divesting its stake in Asian countries as well as Russia and Brazil reinforce this strategy.??
?How will it change the current cement landscape? M&As have been common in the domestic cement sector given the long gestation period and to speed up growth. UltraTech reached the market leader position after roping in Binani, Century Cement, JPA. Birla Corp and Dalmia Bharat also grew through small acquisitions.
?What is on offer?
?The acquirer has to have deep pockets as the deal value could be $10 billion (Adani comes to mind!). Ultratech’s chance looks weak as a CCI approval will be required if the deal goes through.
?Final thoughts: Such megadeals often get caught in regulatory approvals leading to a slowdown in strategy decisions or Capex plans. Also, the new owner would have to expand aggressively to protect market share loss. Should you sell or stay onboard will depend on how the new owner will ride the growth path but volatility may remain until something concrete emerges.?
Another Oil War????
What happened? As if there were not enough problems around crude oil, India faced the threat of another oil embargo. This time it is Palm Oil. Indonesia which produces more than 60% of the global crop decided to ban exports to cool down domestic prices. India is - the biggest importer of palm oil and is dependent on Indonesia for more than half of its monthly take of 700,000 tons. This crisis is surely a crude reminder for India to strengthen its domestic production.?
?Why does India not source elsewhere? It jolly well can’t. Palm oil is a tropical crop, mainly produced in Malaysia, Indonesia, and Brazil. With Indonesia's ban, supply is already short and India cannot ask Malaysia for supply due to a diplomatic crisis which led to a 4-month import ban for Malaysia. While Brazil is still an option, yields are poor and not enough to meet demand.
?How deep will be the impact??Palm oil is the cheapest of all and is widely used in the FMCG industry as well as surfactants, lubricants, and grease. Good news for Navbharat and Ruchi Soya but painful for FMCG cos like HUL, P&G, and Nestle. Inflation is already hurting and this will further put a hole in consumer wallets. At least a Rs.10 hike in edible oil prices is in the offing. Hopefully, the ban will be temporary as Indonesia cannot consume or store the palm oil produced for long.
Twitter Sells Out???
This space has been blowing up since the day Musk decided to make an offer to buy Twitter, after multiple statements, Plan Bs, and a Poison pill. Musk actually managed to buy the company for $44 billion.?
?Musk’s motivation: According to statements by the billionaire, he wants to make Twitter a place for freedom, he wishes to remove all censorship and edits and wants to give it an open space algorithm. The world thinks differently, Musk may be doing this for control over public sentiment and opinion, he is no stranger to controversy after all. Remember the Cryptocrash?
?Choppy waters? Musk has already decided to abuse his powers and has managed to break his agreement with Twitter already, after he called out two lawyers publicly, slandering them. It is to be seen how this acquisition works out. Power to the rich has always been the capitalist agenda. While the Twitter board still exists, we will see if they can stop things from getting too MUSKY!
What else made the news?
Mask Up-?Mumbai and Delhi log 1000+ cases overnight. Schools slowly closing due in several cities across the country.
Stay Hydrated, Use Sunscreen-?IMD has issued warnings for several cities like Delhi and Kolkata that will experience intense heatwaves with extremely high UV indexes and offers advice to stay in.
The future is here-?Tata Motors wins 5000 Cr EV bus deal
Air India Flies High-Air India to commence 4 airline takeover with buying 100% Stake in Air Asia.
World Bank to the rescue-?has offered $600 million to Sri Lanka to help ease the financial pressure amid the crisis.
Meme of the week
People asking Musk to buy out firms ??
What Tavaga Tribe has been up to this week?
Reading: Think and Grow Rich by Napolean Hill- giving real-life examples of pioneers this book talks about methods to augment wealth while nourishing the soul and talking about values we must live by.
Listening: Podcast – The Disciplined Investor- hosted by Andrew Horowitz this podcast talks about the dos and don’ts of investing. Focusing on technology-enhanced investments and the principles of diversification, this has been an incredible listen.
Key insights from our Research Team
Hope you have a great weekend!
Cheers,
Ruchi Mehta
Tavaga
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2 年just when you thought FAANG will be the next wealth builder, it came down..!!??