{"id":25586,"date":"2023-07-28T21:43:40","date_gmt":"2023-07-28T16:13:40","guid":{"rendered":"https:\/\/kuvera.in\/blog\/?p=25586"},"modified":"2023-07-29T09:33:54","modified_gmt":"2023-07-29T04:03:54","slug":"the-weekly-wrap-elephant-in-the-hotel-room","status":"publish","type":"post","link":"https:\/\/kuvera.in\/blog\/the-weekly-wrap-elephant-in-the-hotel-room\/","title":{"rendered":"The Weekly Wrap | Elephant in the (hotel) room"},"content":{"rendered":"

In this edition, we talk about ITC\u2019s plan to demerge its hotels business and Mahindra & Mahindra\u2019s surprise purchase of a stake in RBL Bank. We also talk about quarterly earnings of American tech giants and what the US Federal Reserve\u2019s latest policy decision could mean for India.<\/span><\/i>\u00a0<\/em><\/p>\r\n

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Welcome to Kuvera\u2019s weekly digest on the most critical developments related to business, finance, and the markets.<\/em> \u00a0<\/p>\r\n

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tl;dr<\/strong>\u00a0Hear the article in brief instead? \u00a0<\/p>\r\n

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If you are a long-term Indian retail investor, chances are you have a chunk of ITC Ltd shares in your direct equity portfolio. Even if you invest in the markets primarily via mutual funds, it is highly likely that you have a significant indirect exposure to the Kolkata-based company.<\/p>\r\n


Over the years, this dividend-paying diversified conglomerate has become the darling of millions of retail investors in India, some of whom say they can get by their annual expenses with ITC\u2019s dividends alone.<\/p>\r\n


But investors\u2014both the ones that love ITC and those that do not\u2014have had one question: where exactly does this company fit? Is it a tobacco company, an FMCG major, a paper manufacturer, a hotelier or an agritech firm?<\/p>\r\n


Cigarettes, you see, remain ITC\u2019s cash cow, as the tobacco business brings in a bulk of its revenue and a lion\u2019s share of its profit. But the company has been trying to change that over the last couple of decades, with some success.<\/p>\r\n


Its hotels business, for instance, operates some of the best-known luxury properties in the country. ITC has over 120 hotels across more than 70 locations and competes with Tata Group\u2019s Indian Hotels, apart from multinational brands.<\/p>\r\n

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But it is not the most profitable arm of the conglomerate. The business has contributed less than 5% to ITC\u2019s revenue and earnings before interest and taxes over the last decade.<\/p>\r\n

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In fact, between 2020 and 2022, when travel and tourism was massively disrupted owing to Covid-19 lockdowns, ITC\u2019s hotels business was in the red, impacting the company\u2019s overall balance sheet.<\/p>\r\n

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And so, over the years, the company\u2019s investors have long been asking it to hive the hotels business off, or at least de-merge it into a separate entity.<\/p>\r\n

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This week, ITC\u2019s board did just that, and approved a partial demerger of the hotels arm, which will now be a separate listed stock. The parent will continue to own 40% of it while the balance 60% will be held by the company\u2019s shareholders. Most shareholders were, however, hoping to get one share of the hotels business for each ITC share they now own, and were left slightly disappointed, leading to the counter falling nearly 4% following the announcement and another 3% the following day. The board\u2019s decision is likely to be finalised by mid-August.<\/p>\r\n

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ITC\u2019s chairman and managing director, Sanjiv Puri, explained the reason for retaining a stake in ITC Hotels. \u201cITC will stay invested in the hotels business with this holding and also draw synergies for its foods vertical from the demerged entity,\u201d he told analysts over a con-call. \u201cThe hotel entity will have a strong balance sheet and also be debt-free. It can also raise capital either through debt, equity or from strategic investors.\u201d<\/p>\r\n

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So, as a retail investor what do you make of ITC\u2019s decision? Will you remain invested in the company or go ahead and buy some shares now?<\/p>\r\n

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Bank on it. Or Not!<\/b><\/strong><\/h4>\r\n

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In a move that few had anticipated, automaker Mahindra & Mahindra (M&M) has acquired a 3.5% stake in RBL Bank for Rs 417 crore via the open market route. The company intends to raise the stake further to 9.9%, it said.<\/p>\r\n


Although the Mahindra Group does have a presence in the financial services business via its non-banking arm Mahindra Finance, analysts are confused about the intent and rationale behind this stake acquisition. Little wonder, then, that M&M\u2019s shares slumped 7% following the announcement.<\/p>\r\n

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Analysts say the only logical explanation could be that the automaker eventually wants to take control of the bank and bring it under its fold.<\/p>\r\n


So, will M&M\u2019s Anand Mahindra eventually come to own a bank? We don\u2019t know but we promise to keep you posted on everything we hear!<\/p>\r\n

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Exceeding expectations<\/b><\/strong><\/h4>\r\n

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In some good news coming out of the US, three tech giants reported quarterly earnings that topped analysts\u2019 forecasts. This is in contrast to the tepid earnings reports by Indian IT giants.<\/p>\r\n

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Meta Platforms Inc., the parent of Facebook, WhatsApp and Instagram, reported revenue of $32 billion and earnings per share of $2.98 for its second quarter. Analysts expected revenue at $31.06 billion and EPS at $2.92.<\/p>\r\n


The company, which laid off more than 20,000 employees in 2022 and 2023, forecast revenue of $32-34.5 billion for the current quarter, topping the expectations of $31.2 billion.<\/p>\r\n


Alphabet Inc., the parent of Google, reported second-quarter revenue of $74.6 billion, exceeding expectations for $72.75 billion. EPS was $1.44, higher than the $1.32 expected. Google ad revenues hit $58.14 billion while YouTube ad revenues came in at $7.66 billion. Analysts were expecting $57.5 billion and $7.41 billion, respectively.<\/p>\r\n


Windows maker Microsoft reported its fourth-quarter earnings this week, with revenue climbing 8% to $56.2 billion. Analysts had expected $55.5 billion. Net income at $2.69 per share exceeded forecasts of $2.55 a share.<\/p>\r\n


However, Microsoft’s revenue from Azure and other cloud services grew 26% for the quarter, down from 27% from the quarter prior, raising concerns of slowing growth at companies looking to cut costs amid higher interest rates.<\/p>\r\n


Microsoft CEO Satya Nadella sought to allay such concerns. \u201c[It is] still early innings of the cloud migration itself, so there\u2019s a lot there still,\u201d he said during the company’s earnings call. He also said that the \u201ccomplete new world of AI\u201d is driving a set of new workloads and that this business can have sustained high growth.<\/p>\r\n

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Not fed up yet<\/b><\/h4>\r\n

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The US tech giants aren’t the only ones that seem to be staying on course. The entire American economy, in fact, is showing positive signs.<\/p>\r\n


Data released this week showed the world’s largest economy expanded at an annualized rate of 2.4% during the April-June quarter. This is not only faster than consensus forecasts of a 1.8% growth but is also higher than the Q1 growth of 2%, which itself was revised higher than the earlier estimate of just 1.3%.<\/p>\r\n

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This is not all. Inflation in June trended to its lowest level in two years while retail spending has remained strong and jobless claims, which measures the number of people who filed for unemployment insurance, have fallen.<\/p>\r\n


These signs effectively mean that concerns of a recession in the US are easing, at least for now, and the US economic environment remains strong despite the multiple hikes in interest rates over the past year.<\/p>\r\n


Talking of interest rates, the US Federal Reserve resumed increasing policy rates this week to control inflation after hitting a pause in June. The Fed lifted the benchmark federal funds rate to 5.25% to 5.5%, the highest level since 2001. And Fed Chair Jerome Powell has indicated there could be more rate hikes in coming months.<\/p>\r\n


What does this mean for India? Well, the Reserve Bank of India’s monetary policy committee is set to meet again in the second week of August. The RBI had kept interest rates unchanged at its previous meeting in June and is expected to keep those on hold for now. But with inflation accelerating again in June, any rate cut would have to wait. So, don\u2019t expect your EMIs to come down anytime soon!<\/p>\r\n

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Market Wrap<\/b><\/h4>\r\n

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The stocks <\/a><\/span>markets cooled off a little this week from their recent record highs. The 30-share Sensex ended down about 0.8% and the 50-stock Nifty fell 0.5%.<\/span><\/p>\r\n

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The Nifty stocks that ended the week in the green included Cipla, NTPC, and Larsen & Toubro. Other counters that rose in an otherwise tepid week were GAIL India, Power Grid Corp, Dr. Reddy\u2019s Laboratories, ONGC and Sun Pharma.\u00a0<\/span><\/p>\r\n

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The stocks that lost value during the week included ITC and the two Mahindra bigwigs\u2014M&M and Tech Mahindra. Four other tech majors\u2014Infosys, Wipro, Tata Consultancy Services and HCL Technologies\u2014also ended in the red.\u00a0<\/span><\/p>\r\n

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Other counters that slipped were Hindustan Unilever, and lenders Yes Bank, Kotak Mahindra Bank and the Bajaj twins Bajaj Finance and Bajaj Finserv. Asian Paints, Reliance Industries and Bharat Petroleum were the other major losers.\u00a0<\/span><\/p>\r\n

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April-June earnings snapshot<\/b><\/h4>\r\n

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