Prime Minister Narendra Modi announced the Vehicle Scrappage Policy or National Automobile Scrappage Policy at the Investor Summit at Gujarat in August 2021. There are plenty of old vehicles in the country, which is not only a safety hazard but also contribute to pollution. The policy aims to discard old vehicles that are not fit to operate on roads. At the same time, it encourages consumers to buy new vehicles, giving a boost to the automobile industry.
What Is The Vehicle Scrappage Policy?
Fitness Testing
Private vehicles older than 20 years and commercial vehicles older than 15 years will have to undergo a fitness test at government-registered ‘Automated Fitness Centres’. In the fitness test, various systems of the vehicle will be tested. If the vehicle passes the test, the owner can re-register the vehicle with a hefty fee. If the vehicle fails the fitness test, it will be deemed as End Of Life Vehicle (ELV) and will be scrapped at an Authorised Vehicle Scrapping Facility (AVSF). The entire initiative will be set up under a Public-Private Partnership (PPP) Model.
The Union Road and Transport Ministry has issued rules for scrapping facilities, their registration, their powers, and scrapping methods to be followed.
Incentives and Disincentives
If an owner chooses to scrap the vehicle, they will be given a scrappage value of 4-6% of the ex-showroom price of the vehicle.
A rebate of up to 25% for Passenger Vehicles and 15% on Commercial Vehicles will be given in Road Tax.
A discount of 5% will be given on a new vehicle’s ex-showroom price by the auto-manufacturer.
No registration fees for the new vehicle will be charged.
What Is The Significance Of The Vehicle Scrappage Policy?
With this policy, the government aims to:
Incentivize scrapping old vehicles and buying new ones.
Ensure that the vehicles plying on road are safe to use, thereby reducing road accidents.
Increase its revenue by charging people who wish to use old vehicles.
Scrapping old metals and spares provides cheap raw materials, which means auto-manufacturers can reduce the cost of production.
Reduce pollution caused by old vehicles.
Vehicles that are not fit to ply on roads are a safety hazard and a leading cause of pollution. India has plenty of such old vehicles. According to a speech made by Transport Minister Nitin Gadkari in Parliament, there are close to 51 lakh Light Motor Vehicles (LMVs) that are above 20 years old and 34 lakh LMVs more than 15 years old. This policy is expected to garner Rs 10,000 crore in investments and create up to 35,000 jobs in the sector, creating a ‘circular economy’.
Recycling such cars will help reduce the import of Aluminium, Copper, Steel, Iron, and more. This will even boost demand as unfit vehicles will be replaced with better, newer vehicles. This could eventually drive demand for electric vehicles (EVs) as recycled spares could even be used over there too.
As per the reports, IndiGo is planning to buy engines when the Covid-19 has paralysed the aviation sector globally. India’s biggest airline, IndiGo, is betting on a robust future of the industry. They are in talks with Pratt & Whitney and CFM International Inc. to buy its next batch of engines.
Pratt & Whitney and CFM International Inc. are two rival manufacturers. Reportedly, the new set of order for jet engines power around 150 new Airbus SE A320neo jets. This new deal could be worth around $10.7 billion. There is no given timeline up to which this deal can conclude.
Rumours of this big investment by an airline are surprising in these times. Last year, IndiGo placed a $20 billion (Rs 1.4 lakh crore) order for LEAP-1A engines. This was the largest ever single-engine order in history which covered 280 planes. Airline and tourism industry are the two most severely hit industries during the pandemic. Several airlines around the globe have either deferred or cancelled hundreds of plane orders due to the Coronavirus slump. To understand how badly the aviation sector has been hit by Covid-19, click here. Yet, IndiGo is rumoured to make another big investment. Is that feasible for the company?
Why now?
Any airlines investing such heavily during the pandemic does raise the question “why now?” The fears of coronavirus are still present, if not more than earlier. Governments are easing restrictions but with rising cases, another shutdown like that in Europe cannot be ruled out. IndiGo, like every other airline, has been impacted massively. Yet, India’s biggest airline wants to take this opportunity and solidify its dominance in the Indian market.
All of Indigo’s competitors are equally hurt, if not more badly. Overall market conditions also give them an opportunity to buy materials at a lower cost. Thus, IndiGo has no reason to shy away from any lucrative deal. India has one of the world’s fastest-growing aviation market. A low-cost carrier like IndiGo competes on a pricing model to attract more customers. A higher passenger load factor helps them to improve their top and bottom line. As compared to other Indian airlines, IndiGo has robust cash support. In their Q2 FY21 results, the airline reported a $2.4 billion (~Rs 18,000 crores) of cash and cash equivalents. This number was higher than $1.9 billion they reported in the same quarter previous year.
Are People Confident with Flying Again?
Indian government suspended domestic and international flight operations in the last week of March. From the last week of May, a limited number of domestic airlines were given a nod to operate. But again, with several restrictions from both the central and state governments. According to DGCA (Directorate General of Civil Aviation), air traffic plummeted by 85% year-on-year in June 2020.
Like other airlines, IndiGo has to announce a pay cut to restrict their expenses. In June, the airline asked some of its staff to take mandatory leave without pay (LWP) for 1.5 to 5 days.Next month, pilots were told to take an additional 5.5 days of LWP. They also laid off 10% of staff and cut the salaries of its senior employees. With the recent uptick in demand for air travel, Indigo has reduced the 10 days of LWP in July to 3 days in November.
The data of DGCA for September showed 39.4 lakh people taking the air route for domestic travel. It was a significant increase from 28.3 lakh people reported in August. Keeping the change in the mind, the government has also airlines to operate at 65% of their capacity. Earlier, they were restricted to operate at a mere 45% of their capacity.
Even in the pre-Covid times, IndiGo had a substantial market share in the domestic segment. The September data showed that their grip became stronger in the domestic market. They had a market share of 48.1% by the end of March 2020. Currently, they have a market share of 58.8%. At the same time, Air India, Air Asia, Vistara and SpiceJet all have faced a reduction in market share.
In these tricky times, do you think IndiGo should invest in their growth or should they be more cautious and focus on just survival?
India’s biggest pharmaceutical Initial Public Offer will hit the primary market on 9th November. Hyderabad-based Gland Pharma has received the (SEBI) Securities and Exchange Board of India’s approval to launch its Rs 6,000 crore IPO. This will give birth to India’s largest IPO in the pharmaceutical sector to date. This IPO will include a fresh issue of Rs 1,250 crore. The company filed its draft red herring prospectus with SEBI in July 2020. You can find it here.
About Gland Pharma
Gland Pharma was founded in 1978 to manufacture and market Heparin injection for the domestic market. It entered the US market in 2007. In 2013, its Oncology formulations facility at Visakhapatnam received USFDA acceptance which is very crucial for pharmaceutical companies.
Gland Pharma has seven manufacturing facilities in India. Out of the seven, four facilities are for finished formulations and the rest three are Active Pharmaceutical Ingredient (API) facilities. The company is present in sterile injectables, oncology and ophthalmic segments.
It follows a business-to-business model (B2B) and is present in over 60 countries such as the US, India, Russia, etc. It has a portfolio of products across various therapeutic divisions such as anti-malaria, anti-diabetic, anti-infectives and more.
Strong fundamentals
66% of the company’s presence is in the US market and only 18% of the total revenue comes from the Indian market. The company looks fundamentally robust. The following images tell you the growth story of the company.
Source: Annual Report
Gland Pharma’s revenue from operations increased by 28.81% to Rs 2,633.24 crores in FY20. This rise was driven by 51 new product launches in the United States, Europe, Canada and Australia. Higher revenues boosted their bottom line. Their profit after tax (PAT) increased by 71.02% to Rs 772.95 crores in FY20. The company EBITDA Margin has increased from 34.9% to 40% in two years.
Company net worth has increased by more than 1.5 times in the last two years. This shows that the company is fundamentally sound and can be a great opportunity for investors. The money generated from the primary market will be used to fund capital expenditure and an increase in working capital. This is another signal that the pharma company has more plans to expand in the near future.
Source: Annual Report
About the IPO
Investors have a keen eye on this company because it is one of the first companies with a Chinese parent to go for a public listing. It is majority-owned by China’s Shanghai Fosun Pharma. In 2017, private equity firm KKR got an amazing opportunity to exit from Gland Pharma. They sold their stake to Shanghai Fosun Pharmaceutical Group for over $1.2 billion. In return, Fosun Pharma acquired around 74% of the total stake in Gland Pharma.
The factor of a Chinese parent in the Pharma company is important to discuss because of two reasons. Firstly, this IPO is talked about at a time when there is huge uncertainty in Indo-China relations. Both the neighbouring countries were involved in the military standoff at the borders which led to casualties on both sides. India followed their stance with a digital strike by banning 250 Chinese apps.
Secondly, the pharma sector has seen large investments during Covid times. The companies are supported with good valuations due to the optimistic future of the industry. We have already seen a bunch of companies launching their IPOs this year. But no pharma companies have taken this road in 2020. Gland Pharma will be the first pharma company in India to take the primary market route this year.
The Details
IPO Date
Nov 9, 2020 – Nov 11, 2020
Price Band
Rs 1,490-1,500 per share
Issue Size
Aggregating up to Rs 6,479.55 crore
Issue Type
Book Built Issue IPO
Offer for Sale
Aggregating up to Rs 5,229.55 crore
Fresh Issue
Aggregating up to Rs 1,250.00 crore
Face Value
Rs 1 per equity share
Market Lot
10 shares
Listing At
NSE, BSE
Kotak Mahindra Capital, Citi, Nomura and Haitong Securities are the book running lead managers for the issue.
Probably, the most eagerly awaited results came out late on Friday night. Mukesh Ambani led Reliance Industries reported a 15.05% year-on-year (YoY) drop in consolidated net profit at Rs 9,567 crore. This number was at Rs 11,262 crore for the corresponding quarter last year. The consolidated revenue from operations also fell by 24% to Rs 1,16,000 crore from Rs 1,53,000 crore reported a year ago.
Mukesh Ambani, Chairman and Managing Director of RIL, said: “We delivered strong overall operational and financial performance compared to the previous quarter with recovery in petrochemicals and retail segment and sustained growth in the digital services business. Domestic demand has sharply recovered across our O2C business and is now near the pre-Covid level for most products.”
Let’s have a deeper look at each segment.
Refining & Marketing (R&M)
Economic activity in the R&M segment was highly impacted by Covid-19. EBITDA fell by 50% YoY and 21% QoQ to Rs 3,002 crore. This was because the Gross refining margins (GRM) fell to $5.7/bbl from $9.4/bbl from the same quarter last year. (GRM refers to the earning on turning every barrel of crude oil into fuel.)
Due to the easing of lockdown & preference for personal travel rising, demand for refined oil products like jet fuel saw an increase. The company is positive that the demand for fuels like gasoline and jet fuels will further increase in the third quarter. Even with lower margins, Reliance was able to outperform in the Asia Pacific and European refining margins in the challenging business environment. But with negative global sentiments in the oil market which leads to low GRM, the company might struggle in the longer run.
Reliance Jio
The telecom arm of Reliance reported another dominant result. Their market share in India’s mobile market reached 35.03%. Reliance Jio declared a 13% quarter-on-quarter (QoQ) and 185% year-on-year (YoY) rise in net profit. EBITDA rose by 8.7% QoQ to reach at Rs 7,971 crore.
Amidst the pandemic, Jio became the first mobile service provider to cross the 40-crore customer mark in India. According to the Telecom Regulatory Authority of India (TRAI), Jio added over 35 lakh subscribers which helped it cross the 40 crore mark. As of September 30, 2020, their total customer base stood at 40.56 crores which 1.8% higher than the previous quarter. Their total wireless traffic also grew by 1.5% and amassed to 1,442 crore GB.
ARPU or Average Revenue per User is an important metric for telecom companies. It helps them to get an idea of how much they are earning from a customer on an average. Jio’s ARPU touched Rs 145 per month this quarter. Last quarter, this metric was at Rs 140 per month. Also, there has been a constant uptrend in Jio’s ARPU from the past four quarters.
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
120
128
130.6
140.3
145
(Jio’s ARPU in rupees over the quarters)
Without a doubt, Reliance Jio has been a constant driver for RIL as a whole. Thus, it tells how Reliance wants to position itself as a tech player in the future.
Reliance Retail
The retail segment of the company rebounded sharply in the second quarter after a huge slump in Q1 due to lockdown. Revenue from operations rose by 30% QoQ to reach at Rs 36,566 crore. Last quarter was marred by the shutdown of retail shops and fears of people venturing out of their home.
In Q1FY20, Reliance Retail reported an EBITDA of Rs 1,079 crores. This quarter, EBITDA has increased by a whopping 86% to Rs 2,006 crores. When compared to last year, the operating profit of the segment fell by 14% as normalcy is yet to be achieved during these COVID times. With easing restrictions, Reliance Retail was able to operate 85% of its stores.
A huge jump in the revenue was noticed in the consumer electronics products. Revenue increased by 2X over the last quarter. The apparel segment of Reliance Retail also registered amazing growth. Revenue from Fashion & Lifestyle was almost at 3X over the previous quarter.
“Increased footfall and store openings have contributed to the rebound in retail revenues, with 85% of stores now open,” V. Srikanth, the joint chief financial officer of RIL.
Apart from the results, RIL has seen some huge investments in their retail arm. Around 8% of the stake has been sold to prominent global investors like Silver Lake, General Atlantic, KKR, Mubadala and a few more. The total investment is amassed to Rs 37,710 crore. At the same time, Reliance Retail has acquired companies like Netmeds, Grab, Nowfloats, C-Square and Shopsense (Fynd).
Petrochemical
The petrochemical segment experienced a resurgence in the second quarter. EBITDA reported a rise of 35% QoQ to Rs 5,964. This is still significantly below than Rs 8,964 crore what the company recorded in the same quarter last year.
The overall increase in household spending helped the company to record a 17.8% growth in the total revenue. Q2’s segment revenue stood at Rs 29,665 crore as compared to Q1’s Rs 25,192 crore.
The sequential rise can be attributed to an increase in demand in the agriculture, auto and FMCG sector. The lockdown forced many labours to lose their jobs. This raised the presence of labours in the market, thus, driving the wages expectations lower. It helped the Indian textile industry to get cheaper labour and cut their cost of production.
To sum up
The company showed a strong rebound in its performance when compared to the previous quarter. Yet, it was below what they produced in the same quarter previous year. But that was expected due to Covid-19, right?
Reliance Jio performed better than what the market estimated. Reliance Retail also contributed to give a positive outlook to the market. Petrochemicals displayed a robust fight to give good numbers. But two of the core segments of the company, refining & marketing and oil & gas (upstream), have struggled for another quarter. Main reason? Lockdowns all over the world due to Covid-19.
On one hand, Covid-19 has raised the demand of digitalization which has aided the Jio segment. On the other side, the core business of Reliance, oil & gas continues to struggle. Reliance owns the largest refinery in the world in Jamnagar. It was their oil & gas business which helped them become what it is today. This quarter, the EBITDA through the oil & gas sector (upstream segment) was reported to be – Rs 194 crore. This is way below than Rs 128 crore EBITDA recorded in the same quarter previous year. This has led to some serious concerns on the oil & gas segment of Reliance.
A few days back, Mukesh Ambani displayed his desire to spearhead India’s fight towards renewable energy. How often have you heard a company dealing with crude oil talking about a move to renewable energy at such a massive scale? Mukesh Ambani insisted that shifting towards renewable energy does not mean leaving the oil & gas business completely. But, is it so easy to make such a large shift? You can read more about this here.
Halloween Horror Show! Why Did Reliance Fall?
Halloween is celebrated each year on October 31. Seems like it came on 2nd November for Reliance. You can find how the market performed today here. Reliance’s share price fell by a massive 8.69% to close at Rs 1876. This fall of Rs 178.50 in one day took Reliance on their lowest share price in the past three months. What were the reasons behind such a fall that eroded more than Rs 1 lakh crore of market capitalization?
We can understand three possible reasons behind this. Firstly, negative sentiments due to holding off of Reliance-Future Retail deal. The big bull Amazon has insisted that the deal between the two cannot go ahead as it violates Future’s commitment towards them. Read about this war here. The deal with Future group has huge importance for Reliance to take the next step in the retail segment. If this deal collapses, the speed of growth for Reliance Retail in that sector will be hugely affected.
Secondly, unsatisfactory results. Reliance’s oil business is really struggling due to COVID-19. Demand for oil is struggling to revive. Yesterday, the UK government announced that the second wave of infections has been increasing rapidly. To contain the spread, the UK government has declared another four-week lockdown. Before them, Spain and France have also announced lockdowns in their country. With an increase in cases worldwide and no vaccine as of now, the oil & gas companies may find themselves in a very bad situation once again.
Thirdly, profit booking kicking in. Reliance has been on a relentless upside rally from the past 7 months. With every major announcement of investment, Reliance has gone up rapidly. But this pattern stopped in the previous month when major investments in the Retail segment failed to boost up the price. Thus, there might be a feeling among the investors that Reliance won’t be going up so easily now.
With a subdued performance in a few segments this quarter, people might have just booked their profits rather than hoping that Mukesh Ambani can turn around again. Also, Rs 2,000, being a round number, was a very solid support for investors. As soon as the stock went below it, many stop losses would have been triggered which created a panic among the shareholders to sell the stock.
There are also rumours floating around about Ambani’s health. While this has not been verified, stock prices may crash further if this is verified. It will be very interesting to see where Reliance goes from here. Any negative news will be forcing another big fall in its share price. But can Mukesh Ambani do his magic again?
Private sector lender Kotak Mahindra Bank Ltd, on Tuesday (26th October), came out with their results which defeated all the street estimates. They declared a 26.3% year-on-year (YoY) rise in standalone net profit for the September quarter 2021. Their Net Interest Income (NII) also gained 17% YoY for this quarter.
These are spectacular numbers. The previous week, HDFC Bank came out with 18% year-on-year (YoY) rise in net profits which gave birth to a lot of positive sentiments in the market. But, Kotak has left the number one bank behind and reported even better performance this quarter. Let’s have a closer look at their quarterly performance.
Robust Revenue Generation
NII is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors. Higher the spread between the two interest rates, more profitable it is for the banks.
In the same quarter previous year, Kotak declared a net interest income of Rs 3,350 crore. This quarter, it increased by 17% to Rs 3,913 crore. This 17% increase is constant for the bank since the previous three quarters. NII for the bank has increased by 18%, 17% and 17% in the previous three quarters. This shows that even amidst the pandemic, the bank has done really well to maintain its revenue growth.
Digitally Advanced
We have discussed several times how being digital is pivotal for any company in any industry, let alone the banks. Kotak has put consistent efforts to digitally transform itself. They have stressed on a paperless transaction for Home Loans and Loans Against Property (LAP) for some time now. And now this has given the bank good business, as paperless transactions became a necessity during the times of Covid-19.
Other than this, tractor, retail commercial vehicle/infrastructure loans were also available on Kotak Mobile App. As we know, tractor sales have been booming over the last few months. They have one of the most user-friendly mobile applications in the industry. Transaction volume and value of mobile banking went 81% and 56% above annually during the quarter. Also, Kotak became the 1st Bank in the country to launch Video KYC for Account Opening.
85% of the total Fixed Deposits were booked through Digital channels in Q2. 86% of all Credit Cards and 30% of the total personal loans were again carried with the help of digital channels in this quarter. All of this cumulated to 73% (YoY) growth in Digital Payments volumes.
So this digital push by Kotak Bank helped them maintain good business when most customers were staying at home.
A glance at their Asset Quality
Kotak Bank’s gross non-performing asset ratio (GNPA) fell to 2.55% this quarter. This ratio was reported as 2.7% in the preceding quarter. Also, their Net NPA ratio fell to 0.64% from 0.84% during the same period.
Due to the interim order of the Supreme Court, they didn’t recognise any NPAs since August 31, 2020. This could have given a false image of non-performing assets. But the bank was quick to discard this concern. Even if they had not considered the Supreme Court’s decision, the gross NPA would have been 2.70% and NNPA 0.74%. This is only a marginal increase from the reported values. Thus, one can conclude that Kotak has a very stable asset quality.
Market Reaction
The market sentiments were negative on the day Kotak Bank was due to announce the results. Nifty 50 and Bank Nifty closed 1.36% and 1.65% down. Yet, Kotak Bank emerged as one of the top gainers to close at Rs 1410.90, up by 2.01%. The day after the results were announced, the share price of Kotak Bank rocketed up even in the presence of the bearish global sentiments. It closed 11.70% higher at Rs 1582.70 to become the top gainer of the day. There were also reports that America’s Morgan Stanley was going to pump in funds to the stock, as covered here.
The Way Forward
The banking sector has been in the news ever since the lockdown. The 6-month moratorium on repayment of loans ended on 31st August. On 3rd October, the government of India announced that interest-on-interest for loans up to Rs 2 crore will be waived off for the borrowers. At the same time, to prevent banks from facing huge losses, the amount waived off will be paid to the banks by the government. This news was welcomed by the market as there is huge pressure on banks to maintain their asset quality. To read more on the interest waiver scheme, click here.
The Q2 results of the banks have been great so far! Especially big banks like HDFC Bank and Kotak Mahindra Bank which operate all over India. Will this trend continue? Will all the banks come out with positive results? Where are the high NPA rates predicted by The Reserve Bank? Will Public-Sector Banks be the worst affected? Let’s wait and watch.
The upcoming quarter will be very important for the banks. This will be the quarter in which the government will implement its strategies to aid banks. The moratorium was lifted less than 30 days before the September quarter-end. The loans being defaulted and turning into sub-standard assets will be only seen in the October-December financial results. Thus, a more clear picture of NPAs will be seen in the third quarterly reports of banks and NBFCs. Keep tracking all the updates with marketfeed to follow more of this story.
When we talk about industries suffering from COVID-19 pandemic, the airline industry and tourism industry hits our minds. We often forget how catastrophic this pandemic has been to the cinema chains. The central government of India announced a lockdown in March. Since then, theatres around the country have been forced to stay shut. According to an estimate, film exhibitors have already lost revenue of around Rs 9,000 crores.
After nearly 7 months of closure, the government of India has given a green light to open the theatres from October 15. This comes during a time when India is reporting more than 60,000 positive cases daily. Even though the central government has given its nod, state governments will take the final decision. Maharashtra, Kerala, Telangana, Tamil Nadu and few other states are yet to allow the cinema halls and multiplexes to reopen.
The cinemas are allowed to open but several guidelines force them to operate within a very limited space. The Ministry of Information and Broadcasting (I&B) released Standard Operating Procedures (SOPs) which the cinema halls and multiplexes are obliged to follow. The most adverse restriction is on the capacity of people to be allowed to enter. All the halls are ordered to run at a capacity of not more than 50%.How will this impact their business? In one of our articles earlier, we explained to you how the Indian airlines realize its profits by getting more passengers on board. Higher the passengers they have in one flight, more profit they can derive due to lower variable cost. You can read the article here.
Similarly, what cinema halls offer is one screen to all the viewers. No matter, if there are 100 attendees or 10 attendees, screen, ACs and projector, will incur the same cost. Thus, the cost will remain on the same level but revenue will fall. It will further decrease the profit which they can realize.
Apart from this, due to the pandemic situation, cinema halls and multiplexes have to ensure that regular sanitizing of auditorium takes place. Every alternate seat will be marked with a tab or floor fluorescent so that no one occupies those seats. Thermal screening at the time of entry and touchless transaction during any time inside the halls will only increase the expenses.
The Fall in Numbers
“Never in our history of 21 long years have cinemas closed down fully. Like any other business, we have gone through ups and downs in terms of revenues but we had never imagined our revenue will read zero.” – Gautam Dutta, CEO of PVR Cinemas.
PVR Cinemas is the largest cinema chain in India. It has 845 screens which offer 182 thousand seats all over the nation. But due to the lockdown, all the cinema halls were shut. This led to zero revenue from its core business, that is income from the sale of movie tickets. Income from Food & Beverages were also a very high margin business for these cinema halls.
People were aware of how PVR’s Q1 FY21 results will look like. But, it hits you only when you really see it. Below is the snapshot of their performance in the quarter hit by COVID-19. EBITDA, EBIT, PBT, PAT and EPS, all the financial metrics were in negatives. As Gautam Dutta said, this was one scenario, they could have never imagined. The only income they were able to derive included interest income, gain on redemption of MF/investments, convenience fee and other non-operating income.
The only good thing to see in their results was the lower expenses. That is understandable, right? Lower electricity and water bills, no rent and lesser payment to maintain common areas helped the company to reduce its expenses by almost 80%.
If you think, only PVR faced these humongous losses then let’s look at INOX. INOX Leisure Limited is one of India’s largest multiplex chains in the country. Here a snapshot of their Q1 FY21 results.
Again, the revenue generated from the sale of movie tickets was zero. This was the impact on all the cinema chains all over the nation from the past 7 months.
Where is the Content?
Cinema halls are allowed to open but what will they show? All the new movies which have released in recent months have been forced to launch on online streaming websites like Hotstar, Netflix and Amazon. The movies which were near to complete their shoot are witnessing delay in film completion. This will further delay their launch dates.
To begin with, cinema chains are planning to bring old classics at cheaper ticket prices. This phase one will be used to attract footfalls by tapping on the emotional quotient of the customers. In remembrance of late actors Rishi Kapoor or Irrfan Khan, people will be invited to watch their older films at a cheaper price.
The management of cinema chains is optimistic that this can trigger the customers to leave their houses and visit halls slowly. They are ready to offer low prices until new content comes on the screens. Once the new movies are launched, prices are expected to go back to pre-covid levels. Big movies of 2020 like Laxmmi Bomb, Sooryavanshi, ’83’ are yet to be launched. Once these movies are ready with a date, people are expected to walk back to the theatres.
Will people come back?
One issue is content, another issue is the desire of customers. Two obstacles in cinema chains’ way to attract customers are 1) Online Streaming Websites 2) Safety concerns.
If the theatre halls are showing old content until new movies are released, why would a person want to leave the comfort of his/her sofa and pay money to watch the same content in the halls? Cinema chains vs digital platforms have always been a topic of debate. But these COVID times have made the latter highly popular.
People have already taken subscriptions of different digital platforms. Going to theatres will only increase their luxury expenses. Indian audiences do like to visit the theatres but digital platforms have given them a lot of benefits. Wide arrays of options of movies/ TV shows to watch is just one of them. Also, they can easily skip a scene and jump ahead or go back and revisit the scene they loved. Theatres don’t offer this facility.
Cinemas survived the era of DVDs. Many speculated that the arrival of DVDs could end the theatre’s existence. But, that didn’t happen. Instead, cinema chains thrived in recent years. What fight these classic cinema halls bring against digital platforms will be seen in the next few months.
Today, people are moving out of their houses only for compulsory purposes. Will they trust the halls and multiplexes to ensure their safety in these vulnerable times? PVR and INOX are targeting to build customer confidence with an ‘Evangelism’ phase. Here, evangelism means to let the people experience its enhanced safety features first-hand. They believe that if they offer security, then the customers who have visited them can go out and talk about all the good measures taken by them.
The Way Forward
The initial 6 weeks will be very challenging for the film exhibitors. The month of November and December might see one or two big movie releases. Before that, it will be interesting to see if the cinema chains can lure back their customers. PVR has already stated that they are opening only 50%-60% of its total screens.They have also kept two teams on standby in every city. In case there is an issue with any of the employees (eg:if anyone gets diagnosed with Covid), the whole team working at that centre will be replaced.
Another issue which the business will face in the third quarter is rent payments. After two-quarters of zero revenue, it is obvious that the companies will have less cash with them. On top of that, they have to pay rent or common area maintenance (CAM) fee after the re-opening.
Multiplex companies are urging the mall owners to grant full rent waiver but that seems unlikely. Running a mall is very costly. A multiplex cinema normally takes more than one-tenth of the total area. If the full rent waiver is granted, malls will find it very difficult to run its fixed cost. Thus, until the business recovers for the cinema chains, a revenue-sharing approach is most suitable for the multiplex. This will help both the parties to bear losses equally rather than one taking the bullet for the other.
Due to the pandemic, small movie theatres in cities would have maybe closed due to lack of funds. It is a sad reality that this will help the big media houses like PVR and Inox get better margins and maybe survive these tough times.
To sum up, the short-term future of cinema chains is looking very bleak. If social distancing norms are not followed, a chance for COVID-19 outbreak will increase. Currently, cinema chains should aim to get used to these protocols. They should hope for better Q3 performance and aim to gather momentum before they step in Q4. Indeed, it is a very difficult time for the sector. It will be interesting to see how they fight this dual battle against COVID-19 and the popularity of the digital platforms.
Satyam Computer Services Limited was one of the biggest IT companies in India during the 2000s. It was started by Ramalinga Raju in 1987. Satyam used to offer various products and services related to software development, business intelligence and data warehousing, consulting and enterprise solutions. Rapidly, the organisation moved from being a domestic IT services company to a global IT firm.
The IT company got listed in the Bombay stock exchange in 1991. With the positive outlook of the firm and the industry atmosphere, the shares of the company were oversubscribed by 17 times. In 2001, Satyam Computers made a debut on the New York Stock Exchange (NYSE).
Two years before that, Satyam Infoway (Sify), the internet subsidiary of Satyam Computers got listed on the Nasdaq. The company and the promoters got numerous accolades for their achievements. In 2006, revenues of the company crossed $1 billion. Next year, Ramalinga Raju was named as the ‘Ernest and Youngest Entrepreneur of the Year’.
Interest in Real Estate
When you look at all the fraud stories in the world, none of the fraud which is conducted is done with an intention to get caught. Fraudsters always have a plan which they think can fool everyone. In the Satyam scam case, Ramalinga Raju had an amazing plan to outdo the whole system.
In the early 2000s, the real estate market was witnessing a boom. To earn more, Ramalinga Raju’s greed made him turn his attention to this market. Due to the industrial development happening in Hyderabad, prices of land was on a continuous rise. According to the estimates, the land prices were destined to rise exponentially within a few years.
Maytas infrastructures and Maytas properties were the companies which were owned by Ramalinga Raju and his family members. If you spell Satyam backwards, you will get Maytas! Raju aggressively started buying lands and properties in Hyderabad and other near places. To evade any doubts, the properties were brought on the names of Maytas infrastructures, Maytas properties and his other family members.
When he fell short of the money to buy lands, he started manipulating the financial statements of Satyam Computers. The total revenues and profits for the company in quarterly and annual reports were massively inflated. This gave a false image to the shareholders and other market participants that the company was doing exceptionally well. Rapid growth and strong financials lured the investors to buy Satyam’s shares in the market.
The Plan A
The fast increase in demand led to the Satyam’s share price shooting up. At these increased share prices, Ramalinga Raju and his brother started selling their shares to book higher capital appreciation. They also used their shares in Satyam as a collateral to get loans from the bank. The money came from these two routes were invested to buy more properties. He opened 365 companies on whose names he used to buy properties. It was also alleged that Raju had the map of the proposed metro route of Hyderabad. He used to buy lands near these metro routes so that he can sell the lands at higher prices in the coming years.
He planned to put some part of the money profited from the land back into Satyam’s financials. This would decrease the gap between the actual and fake figures of revenues and profits.
It was later disclosed that to show fake sales in the financial statements, Raju made 7,500 fake invoices. This helped him to back the fake figures of total revenues of the company. But as the revenue increases, profits and the cash reserves of the company should also increase, right? To cover up for fake profits, Raju made fake bank statements saying that the profits are kept in banks in the form of fixed deposits. In reality, these fixed deposits never existed!
This process continues for many years. All this while, the share price of the Satyam Computers kept on increasing. The promoters of the organisation were also happy to sell their shares at these higher prices. In 1999, promoter’s held 24% of the stake in the company. By 2008, this stake dropped to 5%!
The 2008 Recession
Future is unknown to everyone and it is highly uncertain. No one can plan anything perfectly.
Raju’s plan lost its plot due to the 2008 financial crisis. The global financial crisis of the US had an effect all around the globe. The real estate sector which was booming suddenly collapsed. There were no buyers and the sellers were forced to decrease their land prices. This recession crashed Raju’s dream to sell the property at higher prices and cover up the fake figures of Satyam Computers. But he didn’t stop there. He had another plan to cover up all the mess, without the world even getting a hint of it.
The Plan B
Ramalinga Raju knew that he has to cover up the fake financials which he has issued out for so many years. The plan B was that Satyam Computers will buy 100% and 51% stake of Maytas Infrastructure and Maytas Properties. This money which will be invested by Satyam Computers will go to Maytas’ promoters.And, who were Maytas promoters? Ramalinga Raju himself and his other family members. This deal would show that the difference in amount between the actual figures and fake figures is used to buy the two Maytas firms. But in reality, no cash transaction would take place. Another soundproof plan!
On 16th December 2008, the board directors of the company gave the green light to go through the two deals. Remember that promoters had only 5% stake left in the Satyam Computers? Thus, it was pivotal for Raju to get approval from institutional investors, who had a significant stake in the company, before making any acquisitions.
To Raju’s dismay, institutional investors were not in favour of this deal. When this news broke out, the share price of the company started falling quickly. One of the investors in the US even filed a lawsuit against Satyam Computers. The share prices of the company nose-dived at both Indian and the US exchange. Under the humongous pressure, the company was forced to cancel the acquisition of both the Maytas companies.
The Ultimate Confession and Aftermath
After seeing the failure of both of his plans, on 7th January 2009, he confessed about all his wrongdoings in front of the exchanges and SEBI. He disclosed the Rs 7,000-crore accounting fraud in the company’s financial statements about cash which never existed. Multiple government bodies were put to investigate everything about this scam. Several fingers were raised on the role of independent directors and Satyam’s auditors. Investors questioned how the auditors failed to do their job for so many years. PricewaterhouseCoopers (PwC) was Satyam’s auditor for all these years. It was later found that Satyam Computers were used to pay a lot more fees to PwC as compared to what other IT companies used to pay.
After two days of confession, Ramalinga Raju and his brother were arrested. The same day, the Central Government disbanded Satyam board and appointed its own 10 directors. Satyam Computers had become a big brand by that time with a huge number of employees. To save the company from dying, the government sold the company’s majority of the stakes to Tech Mahindra. The entity was later called as Mahindra Satyam. Later, this entity got merged with Tech Mahindra. On 10th April 2015, Ramalinga Raju, his brother and few other accused were imprisoned for 7 years.
That is all about the Satyam scandal. One simple learning opportunity for all the investors from this case is to always research on why the promoters of a company are selling their shares.
Wipro is a leading Indian multinational corporation that provides global information technology, consulting and business process services. The company was incorporated in 1945 as a manufacturer of vegetable and refined oils. In 1970-80, ‘Western India Palm Refined Oil Limited’ (now known as Wipro) shifted its focus towards the Indian IT industry. Under the leadership of Azim Premji, Wipro reached new heights, not only domestically but globally. Today, the company stands as the 4th largest IT company in India based on market capitalisation.
Decoding Q2 FY21 results
Wipro announced their Q2 FY21 results just after the market hours on 13th October 2020. There was a sense of optimism in the market that the company is going to declare good numbers. And, this is what exactly happened! Wipro reported a decline of 3.4% YoY in net profits. At the same time, their net profits increased by 3.2% as compared to the previous quarter.
The revenues and net profits amassed for this quarter are Rs 15,114.50 crore and Rs 2,465.70 crore respectively. These numbers defeated a few market estimates and were on par with the others. Next day after the result, Wipro’s share price dropped by 7.06% to close at Rs 349.40. This could have happened as the investors look to book profits when the core reason for the rally is achieved. You must have heard the saying, “buy on rumours sell on news”. We believe this is what occurred today with Wipro in the market.
Due to fewer business projects during the pandemic, many big companies are laying off their employees. This leads to a negative sentiment among the market participants. Wipro has done exactly opposite to this! They have hired 12,000 employees including the onboarding of 3,000 employees in the second quarter itself. This speaks how the business of Wipro is expanding even in these testing times.
Operating revenue and profit tells how much a company is able to earn from their core business. If a company’s core business is not performing well, then it’s a red signal for the investors. Wipro’s operating profits have risen by 5.2% YoY and 4.4% QoQ. These are amazing numbers considering how the companies are trying to do business during the COVID-19 times.
Big News!
The major announcement which everyone was waiting for was of the share buyback. And yes! Wipro did officially declare a share buyback of 23.75 million equity share for Rs 400/ share. On 13th October 2020, Wipro closed at Rs 375.75. It means that promoters will buy the shares back at a premium of 6.45%. With this, Wipro became the second IT company to announce a share buyback after TCS in this quarter.
Why does share buyback have this hype? A company conducts a share buyback only when they believe that they are financially stable. This step shows the investors that the company is bullish about the company’s growth. They are willing to buy the shares at a higher price than the market price and are confident enough to take it even higher. Any company cannot be in a position to buy back shares until it has huge cash reserves. Wipro has registered an amazing 37.5% YoY rise in their operating cash flows. To know more about share buyback, click here.
The Price Uptrend
When the fear of coronavirus became real in March, Wipro’s share price faced a steep fall in the market. On 4th March, their share price was trading at Rs 229.70. On March 19, prices dropped to its 52-week low at Rs 162.35. Since then, Wipro’s share price has witnessed a constant rise.
On 13th October, their share price was last traded at Rs 375.20. Two days back when the rumours of Wipro’s share buyback was heard in the market, their share price touched it’s all-time high at Rs 381.70. You can see the upward movement in the chart below.
(Wipro’s share price making new highs after collapsing from Covid crash)
In the past week itself, Wipro’s price has risen more than 12%! This shows how bullish people are with the stock. If you are followingThe Stock Market Showon Youtube, you would have realized how Nifty IT has been aiding Nifty 50 to rally upwards. Wipro has been one of the most important players to force that rally. As we mentioned above, post-result a significant fall in the share price was noticed. Yet, we believe that a company like Wipro which is fundamentally very strong will contribute immensely to the future of Indian IT industry.
Expectation in future
Wipro’s board is confident that the company will continue to climb the ladder in the coming future as well. They expect next quarter’s revenue from IT services to be between $2,022 million (Rs 14,815 crore) to $2,062 million (Rs 15,108 crore). That will cumulate to be a QoQ growth of 1.5%-3.5%.
“I am very excited about the opportunities that are ahead of us and encouraged by the acceleration in business momentum we have seen this quarter. Our strategy is to focus on growth in prioritised sectors and markets led by vertical solution offerings.” – Thierry Delaporte, CEO of Wipro.
The company also announced the acquisition of engineering services company Eximius Design for Rs 586.3 crore. Eximius Design provides end-to-end solutions and services using modern technological tools like Artificial intelligence, Cloud, IoT etc. They are into Product Engineering services, Design & Development services, Maintenance & Value Engineering and System Validation & Test Automation.
This acquisition will help Wipro to expand into newer market segments and strengthen market leadership in VLSI (Very Large Scale Integration) and systems design services. They would be able to enhance their client’s experience of using new-age technologies. The IT sector is one of the very few sectors which is flourishing during these dismal times. Unlike other jobs, people working in IT companies are able to operate from home easily. This helps the companies to save their fixed cost and invest in technological expansion.
During the pandemic, local lockdowns are very frequent. Due to this, most of the non-IT company depends on the services offered by IT companies like Wipro. This is why the IT stocks are giving huge capital appreciation returns to the investors in the market right now. How long will this trend continue? Also don’t forget that in the 21st century, large cap companies can give you multibagger returns in the long run. You can read Wipro’s press release here.
We had talked about Majesco on The Stock Market Show, earlier this week. While going through the fundamentals of the company, we found some very interesting things. So let’s discuss!
Share Price of Majesco Limited
27th March 2020: Rs 218.75
7th October 2020: Rs 844.90
Within 6 months, Majesco Ltd. has given a staggering return, as shown above. This makes us wonder why this stock is not catching much attention. We bring you everything you should know before you choose to invest in this stock.
(Disclaimer: We are not advising you to buy or sell any stock. This is only for educational purposes only.)
About Majesco Ltd
Majesco provides insurance software solutions, consulting and other technology-related services for the existing insurance companies. The company was incorporated as Minefields Computers Private Limited on 27th June 2013. Later, the name was changed to Majesco Ltd. Interestingly, the company is listed on the US Stock Exchange NASDAQ, as well.
The company masters in services related to cloud-computing, microservices-based and API-enabled services. They are one of the first companies to move to the cloud. Thus, giving them a headstart for the future. It offers insurance software solutions for General Insurance, Life, Annuities (L&A), and Pensions & Group or Employee Benefits providers. Majesco is present in several countries like India, Malaysia, Thailand, Canada, Singapore, New Zealand, The United States and more.
On a global level, the company offers its services to more than 190 insurance carriers. Few of its clients are Religare Life Insurance, AON, Burns & Wilcox, Erie Insurance, Hansard Global PLC, IDBI Federal Life Insurance, Sun Life Malaysia, US Assure and many more.
Business Strategy
Majesco projects itself as an InsurTech partner. InsurTech means involvement of technology in the insurance industry. It provides insights to insurance companies to help them accelerate their digital transformation. With the help of Machine Learning, Robotic automation, AI and IoT (Internet of Things) company aim to improve its efficiency and reduce costs.
As mentioned before, Majesco provides cloud-based solutions to its clients. Total cloud revenue from P&C (Property and Casualty insurance) amassed to Rs 302.82 crores. Similarly, Total cloud revenue from L&A (Life and Annuities) amassed to Rs 116.82 crores. In the last one year, the company has witnessed a revenue increase of 35.6% in its cloud subscription business.
Financial Performance
FY19-20 was a year of dominance for the company. Global and Indian economy had been volatile before the pandemic, yet the company continued its upward trajectory. They saw robust growth in their top line (revenue) as well as in the bottom line(net profits). Majesco’s total revenue saw a modest rise of 5% from Rs 1,016.20 crores to Rs 1,040.48 crores last year. But, their profits increased by more than 25%. Their net profit at the end of FY18-19 was Rs 71.74 crores. It increased to Rs 90.22 crores in FY19-20.
(Source: Annual Report 2019-20)
(Source: Annual Report 2019-20)
By digging deep into the company’s financials, we got great insights. Majesco registered an increase in their expenses from Rs 916.14 crores to Rs 959.87 crores. This increase was chiefly due to a 5% increase in employee benefit expenses. It shows that the company is further looking to invest in its human capital and aims to keep its employees happy. At the same time, the company’s finance cost has been decreasing. This is again a positive sign because a company is paying less interest on its debt. Thus, the company is managing its liabilities well.
Earnings per share is an important metric to check how much a shareholder is gaining from an investment. It shows the company’s total profitability. To further know more about the EPS, click here. In just one year, Majesco’s EPS has grown by more than 26%. Last year, the company’s EPS was 19.14 which rose to 24.28 by FY19-20. With the proposed share buyback, EPS will rise even further.
Strong Cash Position
Liquidity is very important for any company to remain stable. The most liquid asset is Cash. The amount of cash within a company’s cash flow statements explains how well the company is doing. Majesco’s cash position in the last year has shown exceptional growth. Total cash and cash equivalents at the end of FY18-19 was Rs 109.86 crores. This has grown 3X times to Rs 342.95 crores in FY19-20.
(Source: Annual Report 2019-20)
In an age where companies are borrowing to expand, Majesco’s non-current liabilities have actually decreased by 20%. Last year, this amount was amassed to be Rs 71.95 crores which has fallen to Rs 56.58 crores.
Two possibilities arise when a company has a good amount of cash with themselves. Firstly, they either look to invest for further expansion and secondly, they can go for a share buyback. The second option gives the promoters a stronger hold on their company. They become more flexible in making decisions. A share buyback also signals the positive confidence of promoters in their organisation.
Majesco Limited is currently exploring the path of utilizing the cash to buy back the shares. On October 8, the company’s board approved the proposal to buyback up to 74,70,540 fully paid equity shares at Rs 845/share. Shares of Majesco are currently trading above Rs 870. You can go through the company’s annual report or through its investor presentation to find out more.
