Vijay Kumar Gaba

 I had an opportunity to e-meet the promoter of a decent sized enterprise yesterday. His company manufactures some auto parts mostly for replacement market. The business of this company had been doing extremely well for past more than a decade, before it hit a small bump last year. It recovered from the fumble in two quarters and was about to regain its pre Covid trajectory in 1QFY22. The intense second wave has however derailed the business from recovery path. The promoter now expects the business to normalize not before summer of 2022. Even for that he is not very confident. I have known this gentleman for past 17years. It was for the first time I found the gleam in his eyes missing. A driblet of sweat on the temple was also rather conspicuous.

He is not only worried about his business. The worries are in fact emanating from a variety of factors. For example,

·         Having lost couple of senior family members to Covid, the family is terribly shaken. They are insisting they the family migrates to a “better place” to live. He has faced this situation earlier also and was able to manage it well. But this time his resistance is weak. He is finding it hard to convince his US educated children to stay back and work for the betterment of the country.

·         His working capital requirements have increased materially, as many of his customers (mostly traders) have failed to pay in time. He is staring at significant losses from irrecoverable debts. His raw material cost has also increased and he is in no position to pass it on completely. Therefore, he has to cut production. He is contemplating retrenching at least 20% workers in two weeks.

·         He faces serious threat from the larger peers who mostly produce for OEMs. Some of them have already started servicing the replacement market due to slowdown in OEM demand.

·         Many of his workers are turning violent generally. Many of them have faced hardship in treating their family members. He finds that workers’ belief in system is materially diminished. Some of them have turned cynical and get easily provoked. Their chances of becoming non-compliant are far higher now.

·         He expects his bankers to soon downgrade his credit facilities, which will further raise his credit cost. Though he has the wherewithal to withstand tough conditions for next 3-4years, a prolonged phase of uncertainty could precipitate the fall.

This gentleman is quite convinced that any hopes of normalization in 2021 are terribly misplaced. He feels it will be at least 15-18 months process to normalization. From his workers he understands that unlike the first wave which spared the hinterlands, the impact of this second wave is deep and wide. It has seriously damaged socio-economic fabric of the country. Many households’ finances have been damaged structurally, pushing them into vicious cycle of debt and poverty.

He agrees that the pandemic has fully exposed the inadequacies of our social infrastructure and disaster management capabilities and significant improvements must be expected in next few years. Nonetheless, surviving these next few years could be quite challenging for a significant proportion of the population.

India is presently passing through the worst phase of the pandemic. The scenes at hospitals, crematoriums, pathological labs, and in homes are heart-wrenching. Many young lives are being lost for want of basic facilities like medical oxygen and ventilators. Distressed and anguished citizens are begging for help, but to little avail.

It is distressing to find that there is no dearth of people who are trying to take advantage of this calamity by hoarding and black marketing essential drugs and medical equipment. The worst part is to find that many highly educated and influential people, who have developed symptoms of the disease, not getting themselves tested or not disclosing it to their contacts; and thereby accelerating the spread. Many people with symptoms have traveled in public transport risking the lives of co-passengers and adding to the alacrity of spread.

Last year we all had seen disturbing visuals of pandemic aftermath from developed countries like US, UK, Spain, Italy, etc. We had seen how the pandemic had exposed the fault lines of the healthcare system in those countries.

The most unfortunate part is that despite getting more than nine months of lead time (since the second intense wave hit the developed world) we failed to develop inadequate basic health infrastructure to handle the emergency. Rather, at many places the infrastructure already built last year to manage the crisis was either diluted or completely dismantled. Citizens had also lowered their guard. Norms were being flouted with impunity.

Anyways, we have this situation to survive and learn our lessons. In my view, the following could be the key learnings for this crisis:

(a)   First of all, we need to introduce Ethics as a main subject at primary and secondary level. The ease with which educated, uneducated, rich and poor break compliance rules, endanger others’ lives with selfish motives, is despicable. No society or country can expect to develop with this tendency.

Recently, I had an opportunity to look at the language books of primary and higher secondary classes. I was aghast to note that none of the books contained any story from Panchtantra or Jataka tales, indubitably amongst the best treasures in ethics and wisdom. In my view, Panchtantra alone may suffice as literature book for primary classes (standard 1 to 5).

(b)   We need to build a robust healthcare infrastructure in private public partnership. The CSR spending of corporate sector must exclusively dedicated to health and education at least for next one decade.

(c)    Physical activity (NCC, Sports, Yoga) must be actually made a compulsory subject till graduation level. Many young people are struggling with weak lungs, respiratory issues, weak immunity etc. It is extremely important to inculcate healthy life style and develop strong immunity from very young age. This must be strictly implemented, unlike the present system, where physical education period is usually free time for students.

(d)    The graduation program must include at least 500hrs of compulsory social service (CSS) for all streams. Each college must affiliate at least five recognized NGOs and students must be assigned to these NGOs for completion of CSS. Any cheating in this must result is total disqualification of the student.

 With each report announcing further success in the endeavors of developing an effective vaccine for SRAS-CoV-2 (previously termed Covid-19) infection, the level of anxiety amongst the stock market traders and investors is rising disproportionately. Most of them appear anxious to find the best trade for the “normalization”. The fact that in past two years, the returns on investment for most of the investors and traders have been sub optimal, is further fuelling the anxiety. Most of them appear to believe that first mover will make extra ordinary gains, while the slow movers will miss this once in a decade opportunity.

Recent discussion with market participants in India, US and Singapore, indicates that they are exploring a variety of ideas that could give extra ordinary return in next one year. Some of the common ideas include technology, healthcare and reflation. Logistics also appears to be fast emerging as one of the favored ideas.

The following are the arguments I have heard from market participants in support of their favorite ideas:

Healthcare: The outbreak of pandemic has drawn attention of global community towards the lacunae present in the global healthcare system. A significant added emphasis shall be given to preventive healthcare; and building of capacities to handle subsequent outbreak of novel viruses. The endeavor to develop vaccine for SARS-CoV-2 pandemic shall provide new dynamics to the collaborative research in the field of pharmaceutical. And of course, the vaccine for novel corona virus does hold material profit opportunity for developers in next many years.

In view of these, the healthcare sector as a whole present material business and investment opportunity for next many years. Personal hygiene, nutrition, supplements, testing, vaccination, medical equipment (for new capacity building as well as upgrade of existing facilities) are some specific opportunities that are being talked about by investors.

Traders are however more interested in “the vaccine” for SARS-CoV-2 that will give immediate revenue to the developers and distributors.

I am inclined towards the investing opportunity in the healthcare sector, but I am not sure about the trading opportunity. In my view, pandemic is a highly sensitive political issue globally. Profiteering from vaccine will be difficult. In Indian context for example, the government has already indicated free vaccine shots for citizens. This means that the procurement of vaccine will be on government tender basis. Making extra ordinary profit in such a scenario will be difficult in my view.

Technology: The pandemic has definitely changed the way we live, work, and travel. Much of these changes may stay. Changes in technology platforms to incorporate the new digital protocols, consolidation of businesses and integration of processes, working from remote locations, need for higher security of data and IPR, in addition to the ongoing shift towards AI and digital, has created tremendous investing opportunity in technology sector.

Again, I am inclined towards investing opportunity in the technology sector, especially IT services; but given the fact that most of the low hanging fruits have already been plucked, I am not sure about the trading opportunities.

I have already written about my views on the so called reflation trade (see Hyperinflation - Highly improbable and Rush to gold as safeguard from hyperinflation could be quixotic

Logistics is a tricky area. I need to explore this a bit more. I shall share my thoughts on this in some later post.