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by Aakash Athawasya
Valentine’s Day came and went but not everyone felt the love. Indian airlines haven't been able to attract riders back, and some mutual funds have broken up with index-beating stocks. In the meantime, Indian Energy Exchange made some big moves.
In this week’s Analyticks we look at:
- Rising airfare, which won’t help India’s stranded airlines
- Indian Energy Exchange’s power play
- Screener: Mutual funds selling off index beating stocks
Let’s dive in.
Airlines: No clear skies yet
Last week, the Ministry of Civil Aviation announced an increase to the lower and upper price limits of domestic flights. This would increase the airfare of domestic airlines by as much as 30% till March 31, 2021. The increased airfares won’t do much for the prospects of the airline business, however, despite a short-term boost to the stock prices of listed airline companies. Investors looking to play the theme of air travel revival should exercise some caution.
The news of the increase in airfare gave a boost to the stock price of listed airlines - InterGlobe Aviation’s Indigo Airlines and SpiceJet (up by 5% each on February 11, the day of the announcement). But internal and external problems will ensure they’ll close a poor financial year on a negative note.
After India shut down air travel due to the pandemic, services resumed in May 2020, with an initial capacity restriction of 33%. By the end of the year, this increased to 70%. However, the number of passengers carried by airlines was just 45% of pre-Covid levels. This was because passengers were fearful of traveling even after the lockdown restrictions were lifted.
The airline which saw the strongest revival was Vistara, the joint venture between Tata Sons and Singapore Airlines. The premium carrier’s passenger traffic reached 53% of pre-Covid levels. Its peers - InterGlobe Aviation and SpiceJet’s -passenger traffic recovered to 47% and 43% of pre-Covid levels respectively by December 2020.
The drivers of the passenger revival in Q3 were the festive season in October - November and the deployment of a Covid-19 vaccine in December. This allowed InterGlobe Aviation and SpiceJet’s stock price to move up by 40% and 90% between October 2020 to December 2020. However, since the turn of the year, their stocks are down by 7% and 8% respectively. This is despite the Ministry of Civil Aviation increasing airlines’ capacity from 70% in December 2020 to 80% till the end of FY21.
Aviation turbine fuel (ATF) in May 2020 was priced at Rs 17,000 per kilolitre (Kl). Its price rose three times to Rs 53,000 per Kl in February 2021, as crude oil prices went up. For the quarter ended December 2020, InterGlobe Aviation and SpiceJet’s fuel expenses accounted for between 20-23% of total expenses.
For the airline industry, Q4 is a weaker quarter compared to Q3 because of the nature of traveling passengers. The majority of domestic passenger traffic in Q4 comes from the visiting friends or relatives (VFR) category. This category of passengers is more sensitive to prices than other reliable customers like corporate traffic, said ICICI Securities. The increase in airfares will discourage these passengers from traveling via air. With road and rail travel also reviving, these passengers will have other means of transit.
While both InterGlobe Aviation and SpiceJet posted a lower net loss in Q3, compared to Q2, their financials remain in turmoil. InterGlobe Aviation’s Q3 net loss stood at Rs 620 crore, against a net loss of Rs 1,195 crore in Q2. The airline’s debt has been rising consistently, while its cash balances have been reducing since FY21 began.
SpiceJet’s net loss came in at Rs 67 crore in Q3, against a net loss of Rs 105 crore in the previous quarter. However, the airline’s net loss would have been Rs 201 crore, if it had not recognized other income of Rs 140.4 crore and foreign exchange gains of Rs 10.6 crore. The other income was on account of the expected compensation the airline would receive due to the grounding of 13 of its Boeing 737 max aircraft. The airline’s auditors raised doubts on the airline’s ability to “continue as a going concern” because of its poor operational performance and the overarching Covid-19 conditions.
Indian energy exchange: Bringing back the power
A stock that is back in focus is Indian Energy Exchange (IEX). The power exchange operates with a near-monopoly in the short-term power market, especially in the day-ahead market for delivery of power on the next day. With new product offerings, catering to the evolving power needs of the Indian economy, IEX’s prospects look good.
IEX is a power trading marketplace for delivery of electricity. Its main products are electricity contracts for delivery within a day or the day-ahead market (DAM), and the term ahead market (TAM), where electricity is delivered within a maximum period of 11 days. As of December 2020, the exchange had a 96% market share in both the DAM and TAM segments.
As power demand for an even shorter time frame arose, IEX launched its real-time electricity market (RTM) in June 2020. This would allow state power distribution companies (discoms) to buy power for delivery within 60 minutes. In the first six months post the launch of RTM contracts, IEX has connected 200 power generators with 330 industrial power consumers in 28 states. It has a 99% market share in the RTM market.
The only other domestic power exchange is Power Exchange India (PXIL), with a 5% market share in the short-term market. PTC India received the approval of the Central Electricity Regulatory Commission (CERC) to set-up the third power exchange in India.
In August 2020, the exchange received approval from the Central Electricity Regulatory Commission (CERC) to launch green-term ahead contracts (GTM). These contracts will trade power sourced from renewable energy sources. This will aid the central government’s push to achieve a renewable energy capacity of 175 gigawatts (GW) by 2022. Currently, the installed renewable capacity is 88 GW. IEX has a 100% market share in the GTM market.
The strong performance of the DAM, TAM and RTM allowed IEX to clock 20.2 billion units (BU) in electricity volume in Q3FY21. This is a 62% increase on a YoY basis and a 22% increase sequentially. This was its highest ever quarterly electricity trading volume. This increase in electricity volumes was by no means limited to Q3. In January 2021, IEX’s recorded electricity volume was 7.4 BU, its highest ever in a single month, and a 47% YoY growth.
Mutual funds load up on IEX stock
In August 2020, Parag Parikh Financial Advisory Services (PPFAS) purchased 50 lakh shares taking a 4.7% stake in the company through its PPFAS Long Term Value Fund. In January 2021, the fund further raised its stake to 5% purchasing another 7 lakh shares, at a 30% higher price.
In September 2020, the cement company Dalmia Bharat, which held a 1.8% stake in IEX, purchased another 70 lakh shares representing a 2.3% stake. The cement company directly holds a 4.13% stake in IEX and an 8.18% stake through Dalmia Power (part of the Dalmia Group).
Other domestic institutional investors are also increasing their stake in IEX. In the December 2020 quarter, mutual funds held a 20% in IEX, this is up from 7.6% in the December 2019 quarter. Between April 2020 to December 2020, mutual funds purchased 2.1 crore shares in the company.
Stake sales and new products
To capitalize on the need to secure long-term power requirements, IEX is looking to introduce longer-duration contracts. Rohit Bajaj, senior vice president of IEX said the exchange will introduce long-term contracts, cross-border trade, and also derivative contracts. The inclusion of derivative contracts especially will provide a massive boost to discoms in need of a regular supply of power by locking in prices ahead of time.
In addition to this, IEX is also selling its stake in its subsidiary Indian Gas Exchange (IGX) to various power companies. In the Q3 earnings call, the management announced that Adani Total Gas and Torrent Gas each acquired a 5% stake in IGX. Last week, Gas Authority of India (GAIL) purchased a 5% stake. Reports suggest that the National Stock Exchange (NSE) is looking to acquire a 26% stake in IGX.
Screener: Mutual funds trimming stake in overvalued companies
Last week the Association of Mutual Funds in India (AMFI) reported a net outflow of Rs 9,253 crore from equity schemes in January 2021. This is the seventh consecutive month of net outflows from equity schemes. This screener lists the Nifty 500 companies that have seen mutual funds trimming their stake for three consecutive months.
There are 58 companies that saw mutual funds consistently decrease their holdings over the past three months. The most prominent industry among these companies is pharmaceuticals These are - AstraZeneca Pharma India, Abbott India, Aarti Drugs, Sanofi India, Pfizer, Divi’s Laboratories, Ipca Laboratories, Eris Lifesciences, and Aurobindo Pharma, followed by banks and non-banking financial companies (NBFCs) with 6 representatives - YES Bank, Kotak Mahindra Bank, Union Bank of India, Shriram City Union Finance, Cholamandalam Investment & Finance Company, and Bajaj Finance.
The company in which mutual funds sold the most number of shares in the past two months is Cochin Shipyard. January 2021, was the 9th consecutive month of outflows in the shipbuilder. Mutual funds trimmed their stake by 22% in Power Grid Corporation between November 2020 to January 2021, selling nearly 8 lakh shares in the power transmission company.
Out of the 58 companies that have seen consistent mutual fund disposals, 37 companies have beaten the benchmarked Nifty in the past year. This list is of 27 companies includes two Nifty 50 companies - JSW Steel and Divi’s Laboratories.
The partial exit of mutual funds and index-beating returns were accompanied by skyrocketing valuations. Out of the 27 companies that had consistent mutual fund stake sales, and greater relative performance than the Nifty 50 in one year, 17 are in the PE sell zone. This is based on the company’s trailing 12-month (TTM) price to earnings (PE) ratio exceeding the historic PE ratio for more than 75% of all trading days.
Only three Nifty 500 companies are not overvalued (PE buy zone) despite beating the benchmark Nifty in one year and mutual funds consistently trimming their stake - Info Edge, Aurobindo Pharma, and Ipca Laboratories.
You can build a screener using the parameters of your choice here.
