Expert Analysis of the Global Macro Events & News affecting the Indian Markets

Is the RBI done raising rates – given pardonable inflation? 

In an interview with CNN, the RBI governor mentioned they are taking a breather, but not pivoting. Meaning – they are waiting for data from banks, economic data, and flashing indicators to evaluate what these last 6 meetings of interest rate hikes have done to the economy. Has it caused havoc to the economy, or they have stumped inflation while keeping the economy stable?

Brevity with depth. This is a brilliant clip from CNN wherein the governor says why India stands out, and how resilient our banking system is compared to the West. Source – Link

I wanted to explain WPI and CPI inflation at length, but it wouldn’t be very productive for this newsletter, I can plug you into another source if you’d like to learn about it. 

Here’s what’s happening: The RBI or any other central bank for that matter has two main mandates, keep your inflation under check and secondly, ensure maximum employment. However counterintuitive that may sound (because if everyone is employed, everyone has spending power, and that would automatically create demand, which increases prices, which drives inflation higher). 

And now, inflation has cooled down and is below the tolerance band (2-6%), which is great news for the markets! Food prices are still a concern, prices of cereal and spices are up by 15% and 18% year-on-year. As boring as it may sound, food prices affect inflation, inflation affects interest rates, and interest rates affect the stocks you hold. To reinforce this point, I am attaching a wonderful chart, so simple, yet undiscovered…

IT Stocks – The Elephant in the Room 

They say markets are forward looking and based on expectations. What we have seen with IT stocks during these past few days is markets being punished for over expecting – and expectations hurt.

Firstly, we have zero exposure to IT in our ‘Smallcap Compounder’ and ‘High Quality Right Price’ Smallcase. Don’t get me wrong, we see a future for IT, but the headwinds they are facing are critical. Here’s an interesting fact – in FY22, only 3.75% of revenues for TCS and Infosys combined came from India, the rest of the revenues were primarily from the Americas (56%). I leave it at that. 

The results of Infosys have been a disappointing when you consider what markets were expecting. Revenue, number of new deals, margins and profits turned out to be disappointing. The no. of new deals was the lowest since COVID-19 first hit. 

Here’s what’s interesting, yet painful: Infosys is already facing severe headwinds, despite the US economy being in a strong position, and now when things worsen (as forecasted by nearly all institutions and the FED), Infosys would be in a further difficult position.

Aarti Drugs Limited – Update on the Portfolio Companies

This week, we would be discussing Aarti drugs, a company that has gained 28% in the past month. Part of the famous Aarti group, Aarti Drugs, primarily has 3 segments- API, Specialty Chemicals and Formulations. It is one of the leading producers of Metformin in the world. 

Let’s have a look at the numbers first. Aarti Drugs has a robust presence in the API (Active Pharmaceutical Ingredients) segment, which accounts for a significant portion of the company’s overall revenue. contributing 80% to the total revenues. With an EBITDA margin of 10.8% in Q3 FY23, the company took a hit in the margins due to high raw material cost in the initial quarters of this financial year but this is temporary. With the cooling off of raw material prices, ADL would soon start seeing improvement in margins. Why not in Q3 you ask? It’s because of the inventory pile up, a phenomenon almost every company is going through!

If we take an economic view of the API segment, India imports 70% of its API requirements from China, and in some cases it’s more than 90% for life saving drugs. But with the growing popularity of China+1 and the government’s efforts through PLI, this dependence may reduce by 25% in the coming 4-5 years. Anti dumping duties on certain drugs to protect domestic manufacturers is another major step in this direction. 

Our conviction in Aarti Drugs is not just backed by impressive numbers but also by the capital expenditure that company is incurring. Ongoing greenfield and brownfield projects in specialty chemicals paired with backward integration will lead to cost synergies and is going to drive their growth further with an expected asset turnover of around 2.5x. Expansion in the booming sectors like Dermatology and Oncology is cherry on the cake.

Here’s an interesting fact. Did you know that one in every three drugs consumed by the USA and one in every four drugs consumed by the UK are manufactured in India? Not only this but India ranks third in the world in pharmaceutical production by volume. 

Given the adequate correction post-Covid-19, the strong revenue guidance of Rs. 4,500 crores in the next 4-5 years, and the company’s strong fundamentals, Aarti Drugs appears to be a high conviction stock.

Terms you might want to know:
API- In simple terms, APIs are raw material used in medicines. These are the biological active ingredients used in drugs to produce the desired active component. It’s like using baking soda to make a cake.

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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent an investment advice or a recommendation or a solicitation to buy any securities.