Friday, May 20, 2016

Good days and peaceful nights

"Nature uses only the longest threads to weave her patterns, so that each small piece of her fabric reveals the organization of the entire tapestry."
— Richard P. Feynman (American, 1918-1988)
Word for the day
Jeremiad
A prolonged lamentation or mournful complaint.
Malice towards none
The ignominious decline of communist parties in India, at a time when income inequalities are rising at the fastest pace since independence, and a right wing party is dominating is quite intriguing.
First random thought this morning
Five key takeaways from the recently concluded assembly elections:
(1)   Time is running out faster for Congress than most anticipated. The Congress stands almost no chance in UP, PK or no PK.
(2)   BJP would need to galvanize the UP people on some issue if it wants to unseat SP. Otherwise, Akhilesh is set to come back by default.
(3)   Nitish needed crutches of Lalu and Rahul to retain Bihar. Mamata has done it on her own. She may have better claim on united opposition leadership as compared to Nitish.
(4)   The voters continue to give decisive mandate. The days of fractured mandate are gone.
(5)   BJP might want to go alone in Punjab polls.

Good days and peaceful nights

Many parts of the country are presently experiencing an intense heat wave. The mercury is breaking more records than Virat Kohli. But we have not seen many citizens complaining.
One primary reason is significantly improved electricity supply. Despite sharp rise in electricity demand, the supply has remained stable; grid is working fine; and load shedding hours are much shorter and pre-planned. Many smaller towns in UP, MP, Bihar, Maharashtra, Tamil Nadu etc. where 6-10hr load shedding was normal during summers, are facing just 0-4hr of load shedding. Delhi, Haryana, Gujarat and many other states have not reported any scheduled load shedding.
For millions of students, small businessmen, farmers, housewives, and companies making electrical appliances Achhe Din & Raat (Good days and peaceful nights) might have already arrived.
People who did not had sweat for hours every day or stand in the long queues for two litters of kerosene (for lighting) or stay awake the whole nights as their power backups failed to recharge; and the people sitting in swanky TV studios might not feel it, but it certainly is a major relief for millions of people.
The power market in India is almost a buyers' market, much like the telecom and auto. It's different from cement and steel markets, which despite being in oversupply command some pricing power due to cartelization and state protection.
The situation has been fully exploited as an investment theme. All the fruits (low hanging, high hanging and the rotten ones) have been plucked.
The appliance manufacturers who are immediate gainers of better power supply are trading at valuations that would need 5years of exponential demand growth to justify. This market may not run into supply constraints anytime soon as the planned investments more than take care of the likely demand growth. The global capacities are already underutilized. JPY, KRW, CNY devaluation will keep imports competitive for long time.
The power producers, distributors, fuel suppliers and power equipment manufacturers are struggling with surplus capacity, falling regulatory margins; materially lower merchant prices and rising competition. In absence of material pick up in industrial demand, 80-90GW additional capacity, likely to go on stream in next couple of years will only add to the pressure. In my view:
(a)   The appliance demand will explode during FY18-FY21. The high valuation currently enjoyed by the companies may sustain. I may stay invested there,  and even add some more with 3year perspective.
(b)   The power market will come to balance in FY18 as industrial and farm demand picks up and UDAY scheme is fully implemented. I will look at some producers from purely dividend yield perspective.
(c)    Equipment producers I will give a miss, except for technology innovators in T&D automation space.

The collateral benefits of stable and adequate power supply:
(a) Rise in industrial productivity, especially MSME segment.
(b) Rise in household productivity.
(c) Lower household savings as expenditure on consumer durables rises and recurring electricity expense also picks up (much like telecom).
(d) Fiscal comfort as industrial and farm production rises, power subsidies not needed.
 

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