In this edition, we talk about some good news on the inflation front and the slowing pace of the US Fed’s rate hikes. We also talk about two big M&As in the cement and financial services industries, and finally all the IPO action.
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Ever since 2022 began, the one thing that has dominated conversations related to economics and finance the world over is inflation. The sharp rise in prices, especially after Russia’s invasion of Ukraine in February, wasn’t a matter of concern only in Europe or developed economies such as the US but also in emerging economies like India.
And then, there were mind-boggling numbers coming in from countries such as Sri Lanka, Argentina and Turkey, where inflation soared to 70-90%.
But now, inflation seems to be coming under control—at least in India and the US—thanks in part to the sustained hike in interest rates by central banks over the past few months.
Data this week showed India’s retail inflation slowed to 5.88% in November from 6.77% in October. In the US, consumer prices rose 7.1% in November from a year ago. This is down from 7.7% in October and the recent peak of 9.1% in June.
So, how good is this good news? Let’s put things in context. In India, retail inflation is now at the lowest level in 2022. More importantly, retail inflation is now within the 2-6% band of the Reserve Bank of India’s monetary policy committee. In the US, the November print showed inflation slowed for the fifth month in a row.
Okay, so all is well now? Well, of course, not. Core inflation, which excludes the volatile food and fuel prices, remains elevated at above 6%. That, the RBI has pointed out, is a key risk. Moreover, headline retail inflation could accelerate as the base affect fades and if food prices jump again—which is possible—and if fuel prices remain high.
Essentially, this means that while we can all breathe a little easy for now, central banks both in India and elsewhere will wait for a few more months to see the inflation trajectory before pausing their rate hikes.
Not yet over
The cooling off in inflation numbers—if it sustains, of course—eases the pressure on the RBI and the US Federal Reserve to raise interest rates at a quick pace. Already, the RBI’s MPC last week slowed its pace when it raised its repo rate by 35 basis points instead of 50 basis points in the previous four meetings.
And this week, the central bank of the world’s largest economy shifted its rate hike gear lower. The US Fed increased its federal funds rate by 50 basis points, its seventh rate hike this year.
The Fed has taken the benchmark US rate to the highest level in 15 years. The comforting factor, however, is that the latest hike comes after four consecutive increases of 75 basis points each. And the Fed is not done yet.
“Inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases,” Fed Chair Jerome Powell said. “But it will take substantially more evidence to have confidence that inflation is on a sustained downward path.”
The Fed’s rate hikes will yet again increase borrowing costs, and likely push the US economy into a recession next year. This, in turn, will affect India, too, especially export-focused sectors like software services.
The Fed was joined by the Bank of England this week in raising interest rates. The Bank of England increased the UK’s interest rates to their highest level in 14 years, marking the ninth hike in a row, as it attempts to cool inflation that’s trending at a 40-year high above 10%.
Dalmia’s big buy
India’s cement industry has been consolidating for the past few years. A big consolidation move came earlier this year when Adani Group acquired Holcim’s India units, ACC and Ambuja Cements, in a multi-billion-dollar transaction. Another such development happened this week.
Mumbai-listed Dalmia Bharat is acquiring clinker, cement and associated power plants from debt-laden Jaiprakash Associates at an enterprise value of Rs 5,666 crore.
In effect, Dalmia is buying cement capacity of 9.4 million tonnes, clinker capacity of 6.7 million tonnes and thermal power plants of 280 MW, located in Madhya Pradesh, Uttar Pradesh and Chhattisgarh.
So, why is the deal important? For one, it will help lenders to Jaiprakash Associates recover some of their money.
For Dalmia, currently the fourth-largest cement maker in India, the acquisition of Jaypee Cement will help it to expand its footprint into central India. This will also help Dalmia achieve its goal of becoming a pan-India cement company with a capacity of 75 million tonnes by FY27 and 110‐130 million tonnes by FY31.
Poonawalla’s big sale
While Dalmia Group bought a company to consolidate its position in the cement industry, the Poonawalla Group this week sold its mortgage lending arm to consolidate its presence in the shadow banking industry.
Poonawalla Fincorp, led by vaccine king Adar Poonawalla, agreed to sell Poonawalla Housing Finance to US-based private equity firm TPG at an equity valuation of Rs 3,900 crore.
Why is TPG buying it? Well, TPG has been looking to enter India’s growing housing finance market for quite some time. It wanted to buy ICICI Home Finance four-five years ago, but that deal didn’t go through. So, the deal for Poonawalla Housing makes up for that loss.
On the other side, the deal comes after Adar Poonawalla acquired Magma Fincorp in early 2021 and renamed it Poonawalla Fincorp to grow his financial services empire.
IPO street
India’s primary market saw a lot of action this week. The initial public offering of Sula Vineyards was covered 2.33 times at the end of bidding while luxury automobiles dealer Landmark Cars Ltd’s IPO was subscribed three times. The IPO of financial services company Abans Holding was covered just 1.1 times.
While the IPOs managed to sail through, the response from retail investors was muted. Retail investors bid for 1.65 times their quota in Sula’s Rs 960-crore IPO. The other two companies fared even worse, with their retail quota failing to get fully covered. Nonetheless, Landmark’s IPO managed to raise Rs 552 crore while Abans Holdings snagged Rs 345 crore.
Next week, KFin Technologies will open its IPO for subscription. KFin, a financial services platform, aims to raise Rs 1,500 crore through the IPO that opens December 19 and closes on December 21. However, the IPO is only an offer for sale by its promoter, private equity firm General Atlantic, and KFin itself won’t get any money.
Market Wrap
The benchmark indices ended with losses for the second week in a row. The 30-stock BSE Sensex was down by about 1.3% while the 50-share BSE Nifty slipped by nearly 1.2%.
The Nifty stocks that fell the most were Titan, Asian Paints, ICICI Bank, ITC and Nestle. Other companies that slipped this week included Kotak Mahindra Bank, Hindustan Unilever, Grasim and Infosys. In the broader market, IRCTC, Jockey licensee Page Industries and Fevicol maker Pidilite were among the losers.
The top Nifty gainers were ONGC, IndusInd Bank and Bajaj Finance. They were followed by BPCL, Divi’s Labs and Larsen & Toubro. In the broader market, wind turbine maker Suzlon and smaller lenders such as Central Bank of India, Bank of Maharashtra and CSB Bank each jumped about 15% this week.
Other headlines
- RBI to issue next tranche of sovereign gold bonds during December 19-23
- Ramkrishna Forgings to buy up to 51% stake in Tsuyo Manufacturing
- Tata Motors set to replace Dr Reddy’s in Sensex
- IL&FS says resolves debt of Rs 56,943 crore, lowers number of entities to 101
- Tata Motors to hike commercial vehicle prices by up to 2% from January
- Hyundai, Honda, Maruti Suzuki to increase car prices from January
- Merchandise exports grow 0.6% to $32 billion in November as global demand slows
- Government cuts windfall tax on crude oil and diesel
- Aditya Birla Capital looks to sell insurance brokerage unit
Until next week, happy investing!
Interested in how we think about the markets? Read more: Zen And The Art Of Investing
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