Saturday, October 23, 2022
Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He manages the All-Weather Portfolios at Rupeeting.
First, the Indian markets were decoupled with what was happening globally, and that was okay. After all, India was still growing fast, enough to support corporate earnings growth and even valuations.
And despite high inflation and rising rates, India’s growth in consumption and credit continued to inch to new highs. From FMCG sales to auto sales, India has been buying. And this isn't just driven by festivities, we’re seeing strong double-digit growth compared to last year’s festive season - strength on a comparable base.
But two recent data points raise concerns about the longevity of the current rally (+5% in October so far, +15% since the lows we hit in June 2022):
Buoyancy in the markets could be justified in times of high inflation and high growth. But high inflation and slow growth definitely make a case for different outcomes compared to what has been over the last year.
<aside> 💡 Our view: Unlike other markets, India has been faring better because while India shared the inflation problem with the world, at least it was growing fast. But any increase in risk to earnings is likely to weigh on the markets, especially at current valuations. We continue to find comfort in buying on dips, and not look at rallies as a structural change in direction.
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The ESG model has taken the investing world by storm, owing to the growing popularity of amalgamating social responsibility with profit maximisation. SRF, a favourite among our Socially Responsible Investing portfolio, is one such company.
The ozone depletion and subsequent hole in it are caused primarily by Chlorofluorocarbons (CFCs), used in aerosols and refrigeration devices. In the 1990s, the world came together on a landmark treaty, which phased out the use of CFCs and moved to HFCs instead. This gave rise to the success of SRF, which is a leader in HFCs.
For a greener future, as the world now moves from HFCs to HFO-1234yf, SRF has another leg of growth in the making. It recently set up a pilot plant to manufacture HFO-1234yf, which will make SRF one of the few developers in the world to manufacture the gas using indigenous technology. SRF intends to lead the race in being a prominent manufacturer of this chemical.
SRF’s chemicals business (42% of total revenue and 63% of profit), has been seeing unprecedented growth. In 1QFY23, its revenue grew by 55%, and EBIT by 134%, compared to last year. It's being driven by continued strength in fluorine chemicals, the movement towards specialty chemicals, and aggressive down-streaming.
<aside> 💡 Our view: SRF is a multi-year play on the evolution of fluorine-based chemicals. Its dominance in fluorine chemicals, foray into specialty chemicals, and early investments in future drivers will continue supporting the strong growth it is currently seeing.
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