It was the spring of the year 2006. Prime Minister Manmohan Singh and President of the United States George W. Bush (Jr.) signed a historic civil nuclear cooperation deal on 06 March 2006 at New Delhi. The markets were obviously very excited about this new chapter in the strategic relationship between the two largest democracies in the world. The benchmark Nifty would rise ~17% (3185-3750) within 10 weeks of signing the deal. However, Nifty fell 30% (3750-2647) in the following five weeks as the deal faced strong opposition from the left parties that were part of the ruling UPA-1 alliance, as well as the opposition parties like right-wing BJP, etc. Eventually, the deal was signed in August 2007, after the prime minister won a no-confidence motion in the parliament on this issue.
After the deal was signed, the government fixed a target to install 20GW of nuclear power generation capacity in India by the year 2018. Presently, there are 22 nuclear reactors operating in India with a total power generation capacity of 6.8GW. Interestingly, only 3 reactors (2.2GW) have been added in the fifteen years after the civil nuclear deal with the US.
The pertinent point to note however is that the euphoria created by the ‘deal’ in the equity markets led to a hyperbolic rise in stock prices of many companies that were directly or remotely related to the construction of nuclear power plants. Most of these stocks corrected sharply in the following years, as none of them got the business the market was anticipating.
The market reaction to the successful launch of India’s latest moon mission is giving me a sense of déjà vu. Many random stocks that have some remote connection with ISRO projects have run up 20% to 80%. A project that costs under US$100m, including wages, IPR, and logistics costs, has seen the market capitalization of vendors rise by over US$10bn. The analysts and traders have started building an astronomical rise in their order books and profitability. The arguments are running wild. For example, a prominent market participant advanced a theory that global space agencies will now engage Indian vendors who have demonstrated good quality products at very economical costs.
I am sure most Indian vendors engaged by ISRO are indubitably very competitive in terms of quality and costs. The questions however are:
· How many of these companies have a scalable business? Would additional capex requirements merely for space programs justify their current valuations?
· Whether 500 space missions by ISRO and other space agencies that would like to source material from India, in the next 10 years yield enough profit to justify the current valuations of most of these companies? Remember, countries like Russia and China usually do not source material from outside for their space missions. Private agencies operating space missions, like Elon Musk’s SpaceX, are very few and may not justify the revenue and profitability assumptions being made by the market participants.
Space is a very big and lucrative business opportunity. It is therefore major story for investment. However, investors who want to make money must be focused on technology innovators, IPR holders who supply mission critical equipment. Investing in steel, nut bolts, plastic pipes, fuel tanks, and fan blade suppliers could lead you only in one direction - that is down. It would, therefore, be advisable that investors who are over the moon, return to the Earth and do some basic numbers.
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