In this briefing:
- Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months
- Z IN
- India Equity CY18 Update and Outlook for CY19
- LNG Producers Outperform as More LNG from the US Is Coming into the Market
- India: Unimpressive Data on Organised Sector Job Creation
1. Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months
On January 24’th 2019, SEMI announced that Wafer Fab Equipment (WFE) billings for North America-based manufacturers of semiconductor equipment amounted to $2.11 billion worldwide in December 2018. This represents an 8.5% MoM increase, although still lower YoY by 12.1%. December’s data marks the reversal of a six month long downtrend in monthly billings, a bullish signal that the WFE segment has bottomed and better times lie ahead.
This latest billings data coincides with WFE bellwether Lam Research (LRCX US)‘s latest earnings report which slightly exceeded guidance with revenues of $2.5 billion, up 8.7% sequentially. On the call, company executives stated that first quarter CY 2019 would mark the trough from a gross margin perspective, strongly implying that it would be the same for revenues.
LRCX shares surged 15.7% in overnight trading triggering a rising tide that lifted large swathes of semiconductor stocks, particularly those within the WFE sector. Two swallows don’t necessarily mean it’s Spring, but for now, the markets are betting that it does.
2. Z IN
In spite of a stellar quarter (Q3 FY19), we remain cautious on Zee Entertainment Enterprises (Z IN) and the prospects of broadcasters in India. Hindi GEC is consolidating, and most of the growth is likely to happen in regional channels which remain competitive. Global data suggests ad spends as a % of revenue for many broadcasters and cable operators has been disrupted and couple of year’s down the line, India should be no exception. Contrary to consensus, driven by millennials and non-affordability of second television, cord cutting in India could accelerate sooner than excepted. With an hyper competitive OTT landscape, uncertainty post TRAI Tariff implementations, in an industry suspect to easy value migration, the long term outlook for Zee Entertainment Enterprises (Z IN) and the broadcast Industry warrants attention. The only near term positive for the stock is the potential stake sale to a strategic partner, which is likely to keep the stock price buoyant but only in the near term.
3. India Equity CY18 Update and Outlook for CY19
Equity markets across emerging countries in 2018 faced significant headwinds primarily due to rising US Fed rates that led to a capital outflow as well as higher commodity prices including crude oil that affected the profitability of companies. India was no exception.
The corporate results in India were a mixed bag. While sales have finally recovered from the impact of demonetization and GST transition, the profitability was impacted due to high commodity prices and rising provisions due to higher bad loans for the banks.
On a positive note though, a number of things seem to have fallen in place in 2018 like NCLT lead NPA resolution, bank management changes, increased capacity utilization, lower inflation, falling commodity prices. If the same trend were to continue in 2019, we are confident that macros will turn more favorable and improved corporate sales can translate into better earnings growth. This we believe may augur well for Indian equities.
We examine all these factors in detail
4. LNG Producers Outperform as More LNG from the US Is Coming into the Market
On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.
Exhibit 1: LNG Producers Outperform the US Market
5. India: Unimpressive Data on Organised Sector Job Creation
One of the important ongoing debates in the country has been on the topic of Job creation. In the absence of a official household survey, the government has been releasing data on new retirement accounts with EPFO as a proxy for formal sector job creation. That data though is subject to significant limitations and is most likely over-stating job creation currently due to the ongoing tax incentives. That said, even taken at face value, the EPFO data by itself is not suggestive of strong job creation in the economy. The EPFO data at best suggests a total of 8 million jobs being created in the organised sector when the total number of jobs required to be created outside Agriculture is probably 2x of that. Thus, unless a clear assessment of the performance of the unorganised sector can be made, any rigorous assessment of the labour market cannot be made. There is a urgent need for a formal, household survey to assess the labour market. And there is no reason why a country like India cannot commission and successfully execute a survey once a quarter.
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