Small Caps Race Ahead Again As Broad Markets Crawl

• (00:00) Stories Of The Day
• (01:00) Small Caps Race Ahead Again As Broad Markets Crawl
• (05:02) IT Companies Stare At Another Slow And Worrying Year Ahead
• (07:56) RBI Cracks Down On Kotak Credit Cards
• (11:25) Reliance Industries Is A Giant Company But Where Do Its Revenues And Profits Really Come From?

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

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Small Caps Race Ahead Again

For all of the regulator’s remonstrations about small cap stocks, they are racing away as we have been pointing out here.

This reflects a degree of underlying confidence, fund flows and perhaps sheer desperation to put savings to work that we have not seen before.

In keeping with this trend, the benchmark indices were largely range-bound with some selling in information technology (IT) stocks and more of that in a bit. 

The BSE Sensex, was up 300 points intraday to cross the 74,000-mark, slipped back to close at 73,853, up 114.5 points. The Nifty50 closed at 22,402, up 34 points.

The BSE MidCap and SmallCap indices outperformed the benchmarks by settling 0.92 per cent and 0.79 per cent higher, respectively. The smallcap index even hit a fresh record high during the day.

Metal stocks were the stars in trade on Wednesday, rising 2.7% to a record high, tracking an upswing in global demand, said Reuters.

There is not much news either way. Results season so far has been viewed as mixed including weaker results from the IT services companies.

There is strong manufacturing activity, with a 14-year high which injects some optimism presumably but is not directionally great.

The rupee was stronger on Wednesday.

The Indian rupee gained on Wednesday, aided by a recovery in risk appetite that helped lift Asian currencies, while dollar-rupee forward premiums also ticked higher.

The rupee rose to a two week high at 83.27 against the U.S. dollar on Wednesday morning.

Meanwhile, in another sign of demand compression and stiff competition particularly regional, Hindustan Unilever reported a bigger-than-expected fall in fourth-quarter profit on Wednesday.

Consumer companies have also seen muted volume growth over the last 12 months due in part to sluggish rural demand and persistently high inflation, Reuters reported.

Hindustan Unilever said its profit fell to Rs 2406 billion rupees ($288.9 million) in the three months ended March 31, from Rs 25.52 billion rupees a year earlier. Analysts, on average, had expected profit of 24.44 billion rupees, according to data from LSEG.

HUL stock price has fallen 15% in the last quarter.

Sales were slow as well, rising marginally with segments like beauty and personal care declining 2.7% amid price cuts.

Prices of products could fall further, the company said.

The good news is that rains this year are expected to be good which in turn should shore up sentiments and demand all around. 

Oil Prices Rise Because of US Crude

Oil prices rose on Wednesday to reach around $88 a barrel after  industry data showed a surprise drop in U.S. crude stocks last week, reported Bloomberg.

A drop in US crude stocks is seen as a positive sign for demand.

U.S. crude inventories fell 3.2 million barrels in the week ended April 19, according to market sources citing American Petroleum Institute figures. In contrast, analysts polled by Reuters had expected a rise of 800,000 barrels.

IT Companies Are Looking At Second Year of Muted Revenue Growth

IT services are staring at a second successive year of muted revenue growth, a new report from rating agency Crisil has said.

The report is based on a study of the top 24 firms, accounting for ~55% of the ~Rs 14 lakh crore sectoral revenue last fiscal,

Importantly, hiring will be cautious and attrition will be low, it says. 

Headcount is already down 4% as per Crisil as of December 2023. It stands to reason that companies will reduce headcount further since this is the biggest cost.

Not surprisingly, attrition levels have fallen sharply after Covid when it was a wild west when it came to job switching, if not multiple jobs by the same person.

Attrition is down to 13% compared to 20% the year before.

Revenues will rise by 5-7% in fiscal 2025,  as continuing global macroeconomic headwinds lead to modest increase in technology spends in the key markets of the US and Europe, Crisil said.

Compare this with the roughly 12% compound annual growth over the decade through fiscal 2024 and you know how and why the IT services sector was doing so well and is not today.

The last fiscal was projected at 6%3 on-year growth.

Crisil said that operating margin, however, should sustain at 22-23% due to prudent management of employee costs (constitutes ~85% of total expenses and includes sub-contracting costs), through cautious hiring and with lower attrition reducing replacement cost.

Incidentally, four sectors account for ~65% of the revenue of the Indian IT services sector: banking, financial services, and insurance (BFSI; revenue share of ~30%), retail (~15%), technology (10%) and communications and media (10%). 

Technology spend in these sectors saw muted growth in low single digits in fiscal 2024, amid high interest rates and economic slowdown in key markets.

Manufacturing and healthcare segments (revenue share of ~10% each) were the only bright spots, with continued double-digit growth in tech spend, given the focus on process automation and research and development-based analytics, especially in healthcare.

The outlook is weak. Crisil Rating officials said that the slowdown in tech spend will continue this fiscal, weighing on the revenue growth of IT service providers. 

RBI Cracks Down On Kotak Cards

Kotak Bank has paid a price for growing too fast without having the systems to support the growth.

Before I describe what happened, the Core Report has argued that the RBI at least so far has been pretty consistent on two things. 

One is that it does not flinch if the perpetrator is a large entity with clout, of whichever kind and second, there is sufficient time between its first directives to erring banks or financial institutions and its final, public action.

 The second in some ways is responsible for the first.

The Reserve Bank of India has asked private sector lender Kotak Mahindra Bank not to issue new credit cards and barred new customer onboarding through the bank’s online and mobile banking channels.

The RBI said that for two consecutive years, the bank was assessed to be deficient in its IT Risk and Information Security Governance, contrary to requirements under Regulatory guidelines.

The bank was found to be significantly non-compliant with the Corrective Action Plans issued by the RBI for the years 2022 and 2023, as the compliances submitted by the bank were found to be either inadequate, incorrect or not sustained.

There were frequent outages in the bank’s core banking system and online channels in the last two years which inconvenienced the customers, the regulator said. RBI said the bank can provide services to its existing customers, including its credit card customers.

More specifically the RBI said serious deficiencies and non-compliances were observed in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity and disaster recovery rigour and drill, etc.

The regulator further said that in the absence of a robust IT infrastructure and IT Risk Management framework, the bank’s Core Banking System (CBS) and its online and digital banking channels have suffered frequent and significant outages in the last two years, the recent one being a service disruption on April 15, 2024, resulting in serious customer inconveniences.

“The bank is found to be materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth,” it said.

Credit card spends increased by 27 per cent year-on-year (Y-o-Y) to Rs 18.26 trillion in the financial year 2023-24 from nearly Rs 14 trillion in the year-ago period, according to the latest data released by the Reserve Bank of India (RBI).

In March 2024, credit card spends rose by nearly 10.07 per cent to Rs 1.64 trillion over Rs 1.49 trillion in February, driven by the financial year-end and festival sales during March.

“The festive season and the fact that March is the year-end likely drove transactions in the month on a sequential basis. The growth in credit card spending will continue, although it is likely to moderate owing to a higher base and regulatory scrutiny,” said Saurabh Bhalerao, Associate Director at CareEdge Ratings.

Reliance, Where Are The Profits Coming From?

Reliance Industries Ltd (RIL) saw net profit slip nearly 2% in the March quarter on the back of lower margins in petrochemicals business and higher tax outgo, even as its retail and telecom businesses reported steady growth.

Reliance, also India’s most valuable company, reported a consolidated profit of ₹18,951 crore. The earnings fell short of ₹19,726 crore estimated by eight analysts in a Bloomberg poll. 

RIL’s consolidated revenue for the year crossed ₹10 trillion, becoming the first Indian company to cross the mark. It also crossed the $210 billion mark.

Investment bank JP Morgan said in a note that fourth quarter EBITDA for the O2C business (Refining + petrochemicals) improved 19% QoQ and was 12% ahead of JPMe. 

But on the other hand, retail topline was noticeably weaker, said JP Morgan and refining was also weaker because of higher oil prices. 

Interestingly, one big spike came from the company’s stepped up gas production from its KGD6 basin in eastern India.

“The KG-D6 block has achieved 30 MMSCMD of production and now accounts for 30% of India’s domestic gas production," chairman Mukesh Ambani said. Mmscmd stands for million metric standard cubic metres per day.

Reliance gets revenues from traditional oil and gas, chemicals and retail and telecom are the new areas.

So what do Reliance’s revenues and profits tell us?

I reached out to Sushil Choksey, managing director of indus equity advisors and began by asking him, what he took away?

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