Do it yourself

Household now largest borrowers

As per the latest data released by the Reserve Bank of India, the share of personal loans in total outstanding bank credit in India has grown to 27%. For the first time, the share of personal credit in the total bank credit is higher than the credit to the industry. In past 12 months, the share of personal credit has increased by 2%, from 25% in September 2020 to 27% in September 2021; whereas the share of industrial credit has declined by 1% from 27% to 26% over the same period. The share of credit to agriculture sector has remained mostly stagnant at around 12%.

The trend could be explained, inter alia, through the following three key factors:

(a)   Rising institutionalization of the personal credit due to accelerating financial inclusion and digitalization of financial transactions.

(b)   Decline in share of NBFCs in the personal credit, due to a variety of reasons.

(c)    Deleveraging of balance sheets by large corporate, due to better business conditions (primarily commodities), resolution of debt, slowdown in new capex, and better working capital management.

Personal loans growing at fastest pace

During the 12months period (September 2020 to September 2021) the personal loan category recorded the highest growth.

·         Personal loans grew 12.1% in this period, almost at twice the rate of growth in total bank credit. In the previous 12month period, the growth in personal credit was 9.2%.

·         The credit to industry grew at anemic 2.5%, though better than the previous period growth of 0.4%.

·         The growth in credit to service sector, which suffered most of the brunt of the Covid-19 pandemic induced lockdown, declined sharply to 0.8% from the 9.2% recorded in the previous period.

·         Agriculture sector credit growth remained healthy at 9.9%, as compared to 6.2% in the previous period.

Change in borrowing mix of households reflects the impact of pandemic

The change in personal loan mix during past 12months clearly indicates towards the impact of pandemic on the household finances. It highlights how the pandemic changed the circumstances, affordability and priorities of the Indian households.

Traditionally, Indian households borrowed to create assets (house, vehicle), build skills (education) or meet emergencies (medical loans). However, in past 12months vehicle, education and housing loans growth witnessed contraction.

The loans for consumer durable witnessed sharp growth. Anecdotal evidence suggests that communication devices (smartphone, laptops etc.) and household appliances may have topped the priorities of the locked up Indian households, as against borrowing for vehicles and higher education.

Institutionalization of farm credit

The total bank credit to the farm sector is about Rs16trln. Out of this, pre-harvest (only farmers) credit is Rs8trln, post-harvest is Rs5trln and agri infrastructure funding is Rs3trln.

Overall, agri credit industry is expected to grow at a CAGR of ~10+% over the next decade, as the government’s focus on materially raising the size of agri economy yields results.

In past two decades the structure of agriculture financing has witnessed remarkable changes. From mere 19% in FY01, the share of direct institutional credit to the agriculture has grown to 43% of the nominal agriculture GDP in FY21.

As per India DataHub study, “Over the past three decades, direct institutional credit (Commercial Banks and Cooperatives) to agriculture has increased more than fifty times – from Rs300bn in 1991 to Rs15,000bn as of 2021. The output from the agriculture sector has increased by less than half of this (23x) during this period. Thus, in both absolute and relative (to output) flow of institutional credit to agriculture has increased massively. Outstanding Institutional credit is now at over 40% of agriculture GDP, more than two times of what it was in the 1990s.”

FinTech gaining ground in credit market

In an industry, traditionally dominated by moneylenders, banks and cooperatives, the online lending applications (FinTech) are fast gaining ground.

As per “A review of India’s Credit Ecosystem”, a report published jointly by Experian Services India (P) Limited and Invest India –

“Fintechs have carved out their own market share by targeting customers who were earlier not eligible to borrow due to lack of credit history and lack of collateral. Improved credit evaluation processes and digitization has allowed new-age players to lend to this segment cost-effectively. This brought a whole new section of customers into the lending industry and this customer segment is far from being saturated as of now. Many financial technology companies and NBFCs have emerged solely to enable lending to the previously unbanked population, creating a niche in the industry.”

Fintechs embarked on their journey by focusing on onboarding ‘credit invisibles’ and the ‘sub-prime’ population, mostly younger generation by leveraging alternative data and advanced analytics. Customizing product portfolio as per customer’s needs and focus on small ticket size loans across the board (personal loans (PL), business loans (BL), consumer durable (CD) etc.) has proven to be game changers in driving their top line growth.”

 

 The new year of the Goddess of Wealth (Mahalakshami) has started on a rather somber note for the Indian equities. After a very strong year since Diwali of 2020, the markets appear tired and uncertain.

The tailwinds of easy money and lower borrowing cost, which were among the factors that supported strong market performance since Diwali of 2020, appear weakening; whereas the headwinds of inflation, tighter money, and slowing growth appear gaining strength.

The valuation comfort that aided investors’ sentiments last year, is no longer available. The opportunity provided by the panic reaction to the Covid-19 pandemic has been mostly exploited by investors. Most of the low hanging fruits have already been plucked. The risk reward ratio is no longer favorable at the broader levels at least.

The Covid-19 pandemic itself, and the response to the pandemic created numerous opportunities in past one and a half year. The market readily identified these opportunities, and investors positioned themselves well in time to benefit from these opportunities in next few years. There is therefore little element of positive growth surprise in most of these opportunities; to the contrary the chances of negative surprises do exist. Some of the trends where investors are well entrenched could be listed as follows:

·         Acceleration in the process of consolidation of businesses, at the expense of smaller and unorganized enterprises that started a few years ago.

·         Enhanced role of technology in business and household management. The trend is most visible in digitalization of financial services, retail selling of products and services, entertainment & socializing, and education & skill enhancement, etc.

·         Rise in public expenditure to support employment and capacity building.

·         Enhanced policy support for private enterprise for capacity building to achieve the goals of sustainability, self-reliance, employment, higher growth etc.

·         Commodity inflation due to global imbalances in demand-supply equilibrium for many commodities. The inflation could have been resulted due to logistic constraints, underinvestment in capacity enhancement in past one decade, sudden and sharp rise in localized demand due to opening of economies post pandemic caused lockdowns; and speculative positioning aided by cheap and abundant money.

There is little margin for error in the market, as evident from the recent episodes of violent market reactions to marginally below expectation results and adverse policy decisions. Significantly increased jitteriness before most routine market and policy events like scheduled policy meets, declaration of quarterly results and monthly sales numbers etc., is also indicative of the dithering investors’ confidence in the markets.

Multiple downgrades of emerging market equities in general and Indian equities in particular; acceleration in the selling by foreign investors and sharp correction in some bloated pockets of the markets in past three weeks has further added to the nervousness of the investors.

Outlook for the new Diwali year

The market outlook for next 12 months is uncertain. For the next few months, the markets will be guided by the direction of global monetary policy and consequent direction of flows. The expected slowdown in growth due to elevated commodity inflation and exhaustion of policy stimulus may also adversely impact investors’ sentiments. However, there is nothing to indicate a substantial decline in the market or a protracted phase of uncertainty. The sentiments shall improve as the time progresses and investors adjust their return expectations and asset allocations.

It is important to note that the government has very well protected the fiscal position and managed to overcome the external vulnerabilities while managing the pandemic. The twin deficits, which have traditionally bothered the Indian equity markets during the periods of slower growth and global monetary tightening, may not be matter of material concern this time around. Indian equities may therefore not witness any material sell off as the global monetary tightening cycle kicks off.

Having fully recovered from the economic contraction caused by the pandemic, the Indian economy is now faced with the challenges to find new propellers for the economic growth. The policy initiatives to accelerate growth appear promising. Substantial public outlay for infrastructure capacity building and incentives for private investment in new capacities augurs well for a strong new growth cycle which may have already taken root and show accelerated growth in FY23.

Accordingly, my outlook for the Indian equities for next 12 months is as follows.

·         For next few months, the markets may remain volatile and weak. This volatility and weakness may provide good opportunities for restructuring the portfolios and positioning for new growth drivers. Overall, benchmark indices may yield single digit returns for the new Diwali year.

·         Investors might consider moderating their return expectations and altering their asset allocation accordingly. The equity returns of past 18months were exceptions and should be seen as such only. Benchmarking portfolios to these returns and taking avoidable risk is totally unadvisable.

·         Any precipitous rise in bond yields in next few months may be a decent opportunity to increase the debt allocation.

·         While technology remains a key driver of growth, buying anything at any price might not be the best strategy for investors.

·         Real estate appears to be one of the preferred spaces for now. However, sharp rise in domestic rates could suddenly change the sentiment for real estate. The investors need to therefore tread very cautiously in this sector. For smaller investors taking leveraged bets in illiquid asset is not advisable. It is important to note that unlike the previous real estate cycle, this time the investors have an opportunity to invest in good quality real estate through liquid, affordable and dematerialized instruments, viz., REITS.

Trivia

India is a fascinating amalgam of diverse cultures and traditions. Most ethnic communities here follow a lunar calendar. However, there are many which follow a lunar/solar calendar, Some communities also follow a solar year. Accordingly, there are numerous “New Year” days in our country.

The Government of India follows two calendars - Lunar calendar based on Saka Samvat and Solar based Georgian calendar. The new financial year and academic years (mostly) follow  April-March cycle based on Georgian calendar. Most Hindu communities follow a Lunar based calendar based on Vikarm Samvat. The New Year for these communities starts with the first day new moon in Chaitra Month (March/April). Only in Gujarat and Rajasthan, Balipratipada (first day of new moon in Kartik month) is celebrated as New Year.

The fact that the stock markets in India celebrate Balipratipada as New Year, signifies the important role Gujarati and Rajasthani communities have played in the development of financial markets in the country. To some it may also imply the overwhelming influence of these communities on the financial system of the country.

Nonetheless, it is important to note that Vikarm Samvat 2078 actually started om 13 April 2021 for most of India. For the Government of India, the new year (Saka Samvat 1943) started on 22 March 2021.

(One version of this article was published at moneycontrol.com on 4 November 2021)

Stagflation is an economic environment with rapidly rising prices, a weak labor market, and low GDP growth.

The recent corporate commentary throws light on some important economic trends. These trends, which might have been developing for few years, are becoming more established on ground now.

The most discussed trend since demonetization (November 2016) and GST (July 2017) has been the transfer of market share from smaller unorganized businesses to the large organized businesses. Import substitution (Make in India) has been another trend that has gained significant currency in past 4-5 years. This has manifested most prominently in the capacity building in chemical and renewable energy space. These trends have obviously helped the larger publically traded companies to grow bigger and more profitable. The buoyancy in stock market, a representation of these larger companies, is aptly reflecting these trends.

One trend that has escaped the popular narrative and closer scrutiny is selective stagflation in the economy. We may say this is an integral part of the overall ‘K” shaped economic growth. The rising inequality and falling affordability of a larger part of the population has happened with sharp rise in prosperity in the top decile of the society.

The recent corporate commentary hints that this divergence in affordability might have started to impact their performance now.

Mass affordability worsening with rise in premiumization

As per a recent survey conducted by the brokerage firm Nomura Securities the affordability of mass segment has been adversely impacted, leading to slowdown in consumption demand. In the case of automobiles, the survey indicates that festive season sales for two-wheelers and entry segment cars have been slower whereas for premium segment (cars priced >INR 1mn, mostly SUVs) has been significantly strong as higher income segments continue to do well (SUV mix up from ~39% in FY21 to ~55% in Sep-21). The sharp price increase for vehicles since Mar-20 seems to have impacted affordability for the mass market.

In the case of Consumer segment, rural market growth for FMCG (as per Nielsen) has seen a substantial slowdown in Aug/Sep (+2.5% y-y) vs. Jan-Jul (+12.5% y-y). In contrast, urban consumption has held on much better due to the easing of restrictions. Since rural consumption is driven more by mass segments, poor affordability has likely hit the demand. On the other hand, urban consumption should benefit from re-opening-led recovery. In the case of Durables segment as well, while retail sales sustained healthy growth in July, the momentum has slowed substantially from August with likely low single-digit growth in Sept. In electricals, while housing sales have picked up, supported by a cut in stamp duty rates, they are still annualizing close to 2018-19 levels only.

The brokerage concludes that the prices of white goods/appliances have increased by ~10-15% and W&C by ~35% in the past one year. Current commodity prices (Aluminum and Copper) are further up ~20% q-q. Unless commodities/oil cool off, firms will face a difficult choice of raising prices further and risk demand impact or endure margins pressure. The brokerage believes latter is more likely.

…as consumption demand return to pre Covid levels

The brokerage firm India Infoline highlighted in a recent note that “FY22/23 sales for some consumer sectors can be higher than even previous pre-Covid estimates, as unaddressed demand, in addition to the normal demand, is fulfilled. We have seen this play out in paints, and believe that this is now unfolding in jewellery too. Further, this could also materialise, albeit to a lesser extent, in Apparel. While there is no pent-up demand in Grocery, a full normalisation is not built into the consensus estimates We believe that in QSR, though, significant normalisation is already built in.”

The note emphasizes, “Apart from market-share gains from the unorganised segment and

income impact on the target audience being lower than on the overall economy, return of unaddressed demand is a big factor in certain sectors.”

Inflation replaces the pandemic as risk in the Corporate commentary

The ongoing corporate quarterly results reporting season is progressing rather well. Most of the companies that have reported till now appear to have recovered from the Covid-19 pandemic shock. The business leaders appear to have gained market share. Balance sheets have strengthened with deleveraging and/or higher cash. The working capital management has improved sharply across businesses. This may reflect on slightly lower RoE for now. Margins are under pressure, as the companies have not been able to pass on the raw material to the customers.

Employee cost a mixed picture

The sectors like manufacturing and construction have witnessed cut in employee costs, whereas the IT Services etc. have seen rise in employee cost. Read with strong inflationary trends, this clearly indicates that a large section of population may be facing Stagflationary situation.

Rural vs Urban demand

The trends in rural demand growth vs urban demand growth are also mixed. For example, Colgate reported strong rural demand, while Nestle & HUL reported moderation in rural demand.

Market consolidation accelerates

Most market leaders emphasized focus on market share gains at the expense of profitability, while mid and small cap companies emphasized focus on protecting the profitability. Obviously, we are witnessing a shift from small to large in terms of market share.

Covid-19 no longer a key concern

The commentary for future prospects is much better this quarter, as compared to the previous 4-5 quarters. In the last quarter, most companies had highlighted the likely third wave of the pandemic as a key risk. However, in this season, the Covid-19 is not highlighted as a key risk by most of the companies which have reported so far.

Banks’ results have not shown any notable rise in stress on asset quality due to the pandemic; though credit growth remains below par.

Ecommerce and organized distribution channel growing fast

Most consumer facing companies have reported acceleration in growth in ecommerce channel.

Working capital improvement

Most companies are reporting substantial improvement in working capital due to better channel financing, efficient inventory management, internal controls, efficiency in collection, etc. This is reflecting on credit growth, especially short term borrowings from banks.

Highlights of corporate commentary

The following are some of the key results of the consumer facing companies, that are indicative of the underlying economic and industry trends.

Polycab India Limited (Wires, Cables, Home Appliances) – Earnings downgraded

The revenue for the quarter was 48% higher yoy, with cables growing 44%; Appliances growing 41% and EPC revenue was higher by 60% yoy.

Cable business, where the company is market leader, saw increased competitive intensity, as the demand environment was poor. Most of the revenue growth in cables was due to price hikes. Though the price hikes were inadequate to cover for the raw material inflation. Gross margins contracted sharply by 690bps while operating margins were down 510bps. PBT was down 7%.

The company was however able to gain market share across categories. The management emphasized that for now the focus shall remain on market share gain, rather than margin improvement. Accordingly, the management has guided for low double digit EBIDTA (11-13%) margins in the second quarter.

RoE of the company is expected to decline by 200bps in FY22 to 16.5% from 18.5% in FY21, despite marginal improvement in EPS. Working capital improved.

Havells Ltd (Wires, cables, lighting, switches, Appliances) – Earnings downgraded

Revenue grew 31% yoy, driven by (a) strong volume growth due to higher demand from real estate, industrial and infra segments; and (b) higher prices due to sharp rise in raw material cost. EBIDTA margins declined 340bps yoy, due to lag in taking price hikes to pass on the higher raw material cost. Steep cut in advertisement and promotion (A&P) cost helped in checking the sharp decline in margins.

The company reported market share gains from unorganized sector. The management expects the trend to continue. It also expects the margins to improve as price hikes are taken. Working capital improved.

Management buoyant on 2HFY22 prospects; though the rate of growth could be lower due to higher base effect.

Market feedback: Some MSME component supplier to the appliances manufacturers have reported significant order cancellations, delays in payment, and poor inventory levels at smaller and mid-sized OEMs. There are clear indications that the market consolidation trend may continue and accelerate in coming quarters.

Orient Electric (Consumer electronics) – Earnings retained

The company reported 37% yoy rise in revenue and 290bps lower EBIDTA margins. PAT was up 7%.

ECD segment margin were impacted due to steep rise in input costs, however, Lighting segment saw improvement in margins due to high growth in consumer lighting business. Discretionary spends was lower than normal, whereas expenses other than discretionary resumed to normal levels.

The management highlighted Strong recovery in B2C demand; unorganized share will shrink more with change in star rating. OEL will gain market share, backed by its strong team, brand, and distribution (increasing presence in south and rural India).

Working capital has improved due to better channel financing and internal controls.

Colgate-Palmolive (Oral Hygiene) – Earnings downgraded

Colgate reported 5% yoy rise in revenue with 4% rise in volumes. EBIDTA margin declined by 220bps due to higher raw material cost; employee cost and ad spend. The management expects the cost pressures to continue in 2HFY22.

The management apparently stays focused on market share gains rather than margins. Increased promotional intensity and new product innovation is driving volumes with lower realization.

The management does not see any pressure on rural demand, which continues to remain resilient. Market share gains continue, with strong penetration trends.

Nestle (FMCG) – Earnings downgraded

Revenue grew by 10% yoy, whereas EBIDTA grew 6% due to margin contraction of 90bps. Gross margins were down 240bps due to surge in raw material and packaging material prices. Lower employee cost checked the margin decline.

The company reported moderation in rural growth, while the urban growth remained resilient. The management stays focus on volume led sales growth with new sales channels and new capacities coming on stream.

Hindustan Unilever (FMCG) – Earnings downgraded

HUL reported a strong 11% yoy sales growth and 9% EBIDTA growth. Gross margins declined by 140bps, despite 7% price hike across portfolio. Cost savings helped cheking the margin decline, but raw material inflation is expected to continue to keep margins under pressure.

The management highlighted improving trends in urban markets, while the rural demand has moderated. The management feels that the rural demand moderation appears transient, but this could be a risk to growth ahead.

Tata Consumer Products (FMCG) – Earnings retained

Tata Consumer reported a yoy revenue growth of 9% YoY and EBITDA margin contraction of 70bp. The margins compressed mainly due to higher A&P and other expenditure.

Revenue in India Branded Beverages/Foods grew 13%/23% YoY. Revenue from Tata Starbucks grew 128% YoY.

The company managed to reduce its working capital days by 16 days in 1HFY22 as it has moved towards a cash and carry model for the general trade channel.

The company had gained market share in Tea (+190bp YoY) and Salt (+160bp YoY) in FY21. The trend continued in 1HFY22). It doubled its direct reach to 1.1m by Sep’21. The company is establishing a strong S&D channel, which would act as a key growth driver.

Jubilant Foodworks (Food) – Earnings upgraded

The company reported 37% yoy rise in revenue and 33% rise in EBIDTA. Lower staff cost helped in protecting the margins.

Delivery and takeaway continue to drive growth with 36.8% and 72.2% growth respectively vs pre-Covid levels. The Management commented that there was an initial dip in delivery as dine-in started to recover, but it still continues to be meaningfully ahead of pre-Covid levels.

Company highlighted meaningful demand uptick helped it to more than make up for lost operating hours in closed stores. Growth was seen across town classes, with stronger growth in smaller towns and non-metros; stores are now operational at ~95%.

The management highlighted that the Ticket sizes are higher compared to pre-Covid levels and company expects it to remain high due to change in channel mix (delivery mix to remain elevated even as dine-in normalizes) and increase in delivery charge. Apart, the company is also using premiumization and personalization to drive ticket sizes higher.

Kajaria Ceremic (Building material) – Earnings upgrade

The company reported a 36.6% yoy rise in revenue and 25.6% higher EBIDTA. The maker of premium tiles operated at full capacity, as unorganized players in Morbi struggled with higher gas prices and poor export demand due to higher freight cost.

The company managed to pass on the higher raw material and logistic cost; improved working capital materially.

The management commented that Demand from tier II/III/IV towns is very positive and urban demand is good owing to keenness for large premises. The company is expanding tile capacity by 12.4m sq.mtr. by Q4 FY22 at Rs2.5bn-2.75bn capex. Despite the expansion, the headcount will be the same for the next three years.

The management highlighted that Freight costs increased from $1500-2000/container to $7000-8000 for China whereas gas prices increased by 300-400% in Europe in the last 1.5 months leading to €1.5/sq.cm cost increase.

Asian paints (Building materials) – Earnings retained

Asian Paints revenue grew 32.6% yoy. The company witnessed strong growth momentum in both urban and semi urban areas. The company reported strong market share gains from both organized as well unorganized firms. It strongly expanded its ‘Rurban’ footprint by adding 40k new retail points in the past two years.

The management highlighted that Pick-up in industrial activities and housing construction have led to strong double-digit growth in the industrial coatings business and in the bath and kitchen businesses.

Margin pressure (gross margin down 966bp YoY in Q2) was high, due to sharp cost inflation (20% YoY inflation impact on raw material basket). However, if input prices remain stable, APNT is confident of improving margins in the next couple of quarters – It guided for margin normalization by Q4, led by price hikes, efficiency in raw material formulations and overhead cost savings.

The company also reported RoE contraction and working capital improvement.

Titan Company Limited (Consumer discretionary) – Earnings upgraded

Titan reported 64%.6% yoy rise in revenue and 209% rise in EBIDTA. Lower staff cost and other expenses protected the gross margins which were down 690bps.

Jewellery sales grew 65% YoY and margin was up 500bp YoY to 12.2%. Watches sales grew 71.8% YoY to INR6.9b with EBIT margin coming in at 13.1% in 2QFY22 as against -3% in 2QFY21.

The company is witnessing market share gains across every region and city according to the management. TITAN has a strong growth runway, given its market share of less than 10% and the continuing struggles faced by its unorganized and organized peers.

There are two types of investors in Indian stocks markets – (i) who own all Tata group stocks and all internet and related businesses like IRCTC, IEX, IndiaMart, InfoEdge etc.; and (ii) the others who own none of these. (It’s a Joke or Irony only time could tell.)

A survey of Indian investors indicates that presently the investor positioning and opinions are deeply and widely divided. The survey in the form of a free unstructured discussion with some professional, household and institutional investors was conducted over past two weeks.

Indian investors – A divided house

Based on the discussions, the investors in Indian equities could be divided into the following ten broad categories –

(i)    Fearful - Investors who are fully invested and are overweight in equities and/or cryptocurrencies but are uncomfortable with the current price levels and volatility. This category mostly involves High Networth households who have significantly increased their active involvement in the financial markets over past couple of years. Most of these investors have earned good return on their capital. They are moderately leveraged. Most of them have yet not defined any strategy to moderate their exposure to risk assets, though they are afraid of severe market correction and erosion in the value of their portfolios. Some of them are exploring investment in real estate by taking some money out from financial investments. They have been consistently reducing exposure to debt instruments and increasing allocation to equities and other risk assets.

(ii)   Fearless - Investors who are exclusively trading in risk assets like equities and cryptocurrencies, and are not bothered at all about the current price levels or volatility. These are mostly household investors (not necessarily high Networth) who have taken to trading in financial markets as their full time occupation in recent past. They enjoy the high volatility and are least bothered about the things like valuations, business models, sustainability etc. They have moderate to high leverage; and mostly have negligible allocation to debt securities.

(iii)  Optimistic - Investors who are deeply convinced about the “India Story”. They believe that the valuation premium for Indian equities is justified given the high growth potential, changing global supply chain landscape, increasing level of organized businesses and larger role of Indian businesses in the new economy. These are mostly professional and institutional investors. Many of these have recently increased their allocation to equities given the pressure on bond yields. Only a few of these would advise leveraged positions in equities at present level.

(iv)   Cautiously optimistic - investors, who are convinced about the long-term ‘India Story”, but find the present price levels unsustainable in the short term. These investors are a mix of professional investors, institutional investors and high networth households. They have been reducing their equity allocation for past couple of months. Paradoxically, some of these have increased the allocation to high yielding (credit risk) debt.

(v)    Hopeful - Investors, who misjudged the markets in the past 20 odd months. They either reduced their equity allocation significantly after pandemic breakout; or during the market rise in the past 6-9 months. These are mostly professional and household investors. They are overweight on debt, gold and alternatives like arbitrage funds that have yielded very poor returns over the past 20 months. These investors are sincerely hoping for a major correction in the equity prices so that they can correct their mistake by increasing their equity allocations. Ironically, many of these investors have increased their allocation to foreign equities in past one year to compensate for lower allocation to the best performing Indian equities. Their arguments for investing in Asian (mostly Chinese) and US equities are varied and mostly unconvincing. For example, a veteran investor allocated 10% of his portfolio to US Tech stocks, while vehemently arguing against the valuation of Indian IT and internet sector. Similarly, a professional investors, who listed meltdown in China as one of the key risks for the market, is invested in a global fund focused on Asian Tech sector (mainly Chinese semi conductor and internet stocks).

(vi)   Happy - Investors, who stayed composed and disciplined during the market volatility and religiously adhered to pre-determined asset allocation. These are mostly professional investors and high networth households. Many of them have changed their strategic asset allocation to increase the weight of equities in past one year; while maintaining a conservative debt profile. These investors are closely observing the markets for any lucrative opportunity, but are not perturbed by the present volatility.

(vii)  Dismissive - Investors, who have materially cut their allocation to risk assets like equities in the past 20 odd months and are regretting their decision badly. They are mostly household investors. They are regularly convincing themselves that the entire rally from March 2020 lows is farcical and the prices will correct to those levels in next one year. Though, many of these are actively looking at real estate to make up for the opportunity loss of equities. Interestingly, some of these are actively trading in commodities.

(viii) Hypocrite – Investors who are cautious and fearful in their personal capacity, but are advising others to increase the weightage of risk assets in their portfolios. These are mostly professional and institutional investors. A couple of fund manager who sounded extremely cautious in their comments, were actually seen aggressively marketing their small cap funds a few hours later.

(ix)   Explorers – investors who are consistently looking for profit making opportunities in the market, regardless of the benchmark index numbers, pockets of over exuberance and popular trends. These are mostly professional and institutional investors, who are either running ahead of the market in identifying new trends and rotating their portfolios to position for the likely emerging trends; or discovering the pockets of under valuations and positioning their portfolios with the assumptions that these pockets will soon converge with the broader market trends.

(x)    Observers – these are mostly passive or inactive investors, who observe the markets from a distance and have little position of their own. They are financially unaffected by the market movements; however many of them are very aggressive and emotionally charged about their opinions about markets. They love to express their views and offer advice to fellow investors.

While you discover what category you fall in; it might be worthwhile to also figure out- do you truly belong where you are, or you just drifted to this category unintentionally/unconsciously.

The recent visuals of the massive destruction in Uttarakhand due to rains are heart wrenching. The repetitive loss of human life due to frequent natural disasters in past decades is extremely frustrating.

The recent floods and landslides in the Himalayan state are stark reminder of the fact that no lesson has been learned from the 2013 Kedarnath tragedy. Unmindful construction in the path of rivers and rain water drains; cutting of millions of trees to build/widen roads; and unsustainable strain on the sensitive ecology due to excessive tourist flows has not only continued unabated post 2013, but has actually increased.

Since 2013, the State has witnessed multiple natural disasters almost every year. The visuals of rain water storming the Nainital town clearly indicates that the natural rain water drains have been obstructed/encroached and forest cover for the city has been denuded.

There is nothing to suggest that this fight between the Nature and our greed will stop any time soon. The development planner must understand that construction of development edifice which are directly in conflict with sustainability and core beliefs must be rejected out rightly.

Unfortunately, we have not seen any policy drive to this effect despite frequent natural disasters; though many efforts to the contrary have come forth. The major road project in the Garhwal Himalaya to connect the four sacred temples in upper reaches through a wider road network is only one example of the unsustainable development.

The stated objective of the project is to make it more convenient and safer for the pilgrims to visit these sacred temples. As a frequent visitor to the region, I can vouch that the ecology of the region is already facing serious threats. This widening of roads has not only caused cutting of numerous trees, but is also resulting in massive increase in vehicular traffic and number of pilgrims visiting the region. Rise in pollution & garbage, pressure on infrastructure, massive construction of room capacities and other conveniences is actually destroy the sanctity of the place itself; and killing the sacred rivers that originate from there.

(Image sourced from the Internet. All rights acknowledged)

There are two types of investors in Indian stocks markets – (i) who own all Tata group stocks and all internet and related businesses like IRCTC, IEX, IndiaMart, InfoEdge etc.; and (ii) the others who own none of these. (It’s a Joke or Irony only time could tell.)

A survey of Indian investors indicates that presently the investor positioning and opinions are deeply and widely divided. The survey in the form of a free unstructured discussion with some professional, household and institutional investors was conducted over past two weeks.

Indian investors – A divided house

Based on the discussions, the investors in Indian equities could be divided into the following ten broad categories –

(i)    Fearful - Investors who are fully invested and are overweight in equities and/or cryptocurrencies but are uncomfortable with the current price levels and volatility. This category mostly involves High Networth households who have significantly increased their active involvement in the financial markets over past couple of years. Most of these investors have earned good return on their capital. They are moderately leveraged. Most of them have yet not defined any strategy to moderate their exposure to risk assets, though they are afraid of severe market correction and erosion in the value of their portfolios. Some of them are exploring investment in real estate by taking some money out from financial investments. They have been consistently reducing exposure to debt instruments and increasing allocation to equities and other risk assets.

(ii)   Fearless - Investors who are exclusively trading in risk assets like equities and cryptocurrencies, and are not bothered at all about the current price levels or volatility. These are mostly household investors (not necessarily high Networth) who have taken to trading in financial markets as their full time occupation in recent past. They enjoy the high volatility and are least bothered about the things like valuations, business models, sustainability etc. They have moderate to high leverage; and mostly have negligible allocation to debt securities.

(iii)  Optimistic - Investors who are deeply convinced about the “India Story”. They believe that the valuation premium for Indian equities is justified given the high growth potential, changing global supply chain landscape, increasing level of organized businesses and larger role of Indian businesses in the new economy. These are mostly professional and institutional investors. Many of these have recently increased their allocation to equities given the pressure on bond yields. Only a few of these would advise leveraged positions in equities at present level.

(iv)   Cautiously optimistic - investors, who are convinced about the long-term ‘India Story”, but find the present price levels unsustainable in the short term. These investors are a mix of professional investors, institutional investors and high networth households. They have been reducing their equity allocation for past couple of months. Paradoxically, some of these have increased the allocation to high yielding (credit risk) debt.

(v)    Hopeful - Investors, who misjudged the markets in the past 20 odd months. They either reduced their equity allocation significantly after pandemic breakout; or during the market rise in the past 6-9 months. These are mostly professional and household investors. They are overweight on debt, gold and alternatives like arbitrage funds that have yielded very poor returns over the past 20 months. These investors are sincerely hoping for a major correction in the equity prices so that they can correct their mistake by increasing their equity allocations. Ironically, many of these investors have increased their allocation to foreign equities in past one year to compensate for lower allocation to the best performing Indian equities. Their arguments for investing in Asian (mostly Chinese) and US equities are varied and mostly unconvincing. For example, a veteran investor allocated 10% of his portfolio to US Tech stocks, while vehemently arguing against the valuation of Indian IT and internet sector. Similarly, a professional investors, who listed meltdown in China as one of the key risks for the market, is invested in a global fund focused on Asian Tech sector (mainly Chinese semi conductor and internet stocks).

(vi)   Happy - Investors, who stayed composed and disciplined during the market volatility and religiously adhered to pre-determined asset allocation. These are mostly professional investors and high networth households. Many of them have changed their strategic asset allocation to increase the weight of equities in past one year; while maintaining a conservative debt profile. These investors are closely observing the markets for any lucrative opportunity, but are not perturbed by the present volatility.

(vii)  Dismissive - Investors, who have materially cut their allocation to risk assets like equities in the past 20 odd months and are regretting their decision badly. They are mostly household investors. They are regularly convincing themselves that the entire rally from March 2020 lows is farcical and the prices will correct to those levels in next one year. Though, many of these are actively looking at real estate to make up for the opportunity loss of equities. Interestingly, some of these are actively trading in commodities.

(viii) Hypocrite – Investors who are cautious and fearful in their personal capacity, but are advising others to increase the weightage of risk assets in their portfolios. These are mostly professional and institutional investors. A couple of fund manager who sounded extremely cautious in their comments, were actually seen aggressively marketing their small cap funds a few hours later.

(ix)   Explorers – investors who are consistently looking for profit making opportunities in the market, regardless of the benchmark index numbers, pockets of over exuberance and popular trends. These are mostly professional and institutional investors, who are either running ahead of the market in identifying new trends and rotating their portfolios to position for the likely emerging trends; or discovering the pockets of under valuations and positioning their portfolios with the assumptions that these pockets will soon converge with the broader market trends.

(x)    Observers – these are mostly passive or inactive investors, who observe the markets from a distance and have little position of their own. They are financially unaffected by the market movements; however many of them are very aggressive and emotionally charged about their opinions about markets. They love to express their views and offer advice to fellow investors.

While you discover what category you fall in; it might be worthwhile to also figure out- do you truly belong where you are, or you just drifted to this category unintentionally/unconsciously.

…and how they view the market

The investors in different categories analyze the present market conditions and trends from their own vista points. Obviously, they have divergent views, opinions and outlook for the markets. The following are some of the market views that are interesting to note.

Perception versus realty

While it is fashionable to talk about the stocks from some business groups (e.g., Tata, Adani etc.), the top gainers since first lockdown (23 March 2020) and second wave (01 April 2021) amongst the NSE500 group show no clear pattern or trend.

The top 25 gainer since first lock down do have significant participation of Adani group stocks and midcap IT Services, but otherwise the stocks and sectors are diversified. An overwhelming majority of stocks are small cap and there is no large cap stock in top performers. These stocks belong to a variety of sectors like IT Services, Energy, Telecom, Textile, Specialty Chemicals, capital goods, and pharma etc.

Contrary to popular perception, specialty chemical, pharma, and metals have scant representation in this group. Internet and retail are totally absent from this group. There is only one Tata Group stock (Tata Elxsi) in top 25 list, and no metal stock, except Jindal Stainless.

The list of top 25 underperformers is also quite random and lacks any clear trend or pattern. Apparently, Banks and Microfinance Institution appear to be top under performers. But most names included in the list have company specific reasons for their underperformance and do not necessarily represent any trend.

If we look at the market trends since second wave, a similar randomness is observed. There is no clear pattern or trend visible from the top outperformers and underperformers during April-September 2021 period. No Tata, Adani, Internet, Retail, IT services, PSU dominance is visible. Auto, Consumers and Hospitality stocks are also absent from the lists.

If we observe the sector-wise trend over the two time frames April 2020 to September 2021 and April 2021 to September 2021, we do get some interesting trends. For example,

Trends and patterns since first lockdown till September 2021

(a)   More sectors have underperformed the Nifty50, then the number of sectors that have outperformed; implying that the rally since lows of March 2020 has actually been much narrower than it is perceived; even though the broader markets have outperformed the benchmark indices by wide margin.

(b)   The global trends (IT and Metals) have dominated the markets since first wave. Contrary to popular perceptions, Pharma has been an underperformer.

(c)    Financials have underperformed materially, despite significant improvement in the operating performance and asset quality.

(d)   Realty sector has outperformed though not significantly.

(e)    Small cap (123%) and Midcap (76%) have significantly outperformed the benchmark Nifty (32%).

(f)    FMCG (and hence MNCs) have been the worst performers in this period. It would need lot of explaining to rationalize the outperformance of commodities when the consumption demand and capacity utilizations are at poor level.

(a)   In post second wave period, more sectors have outperformed the benchmark Nifty than the number of sectors that underperformed. The gap between the performance of smallcap/midcap and benchmark Nifty also widened further.

(b)   The domestic sectors like Realty, Infra, PSUs, Media and power joined the list of outperformers alongwith the global sectors like IT Services and Metals.

(c)    Surprisingly, Automobile has been the worst performing sector in this phase, despite some superlative performance from auto major Tata Motors.

(d)   Financials continued to underperform, despite popular perception of PSU Banks doing very well.

(e)    Pharma and Consumers also remained notable underperformers.

(f)    Given the rise in inflation (building material), rise in bond yields and expectations of monetary tightening; the bullishness in Realty while the lenders continue to underperform and the household participation in equity market is rising sharply is also a subject for deeper analysis.

Given the total randomness of the market performance, it is difficult to draw any meaningful conclusion from the performance during April 2020 and September 2021.

So far there is little sign of any sector’s overwhelming dominance on the market. Nonetheless, there are some small pockets of over exuberance and unsustainable valuations, where the investors need to tread with extreme caution.

In particular, the themes like renewable energy, ecommerce and hyperinflation have driven prices of some stocks to levels which may be unsustainable even if we extrapolate current business trends to 20yr forward.

Indubitably, renewable energy is a paradigm shift in global economics and may be a great business opportunity; but the assumption that all renewable energy producers and their ancillary units will make enough money to justify current valuations appears mostly off the mark.

The assumptions that current commodity prices will sustain the slowing growth, tightening money, declining consumption and normalizing supply chains even for a year appear absurd.

It is therefore likely that we might see a major sectoral rotation in next 6months, while the present broad trend (broader markets outperforming the benchmark) continues.

 The Ministry of Power, Government of India, recently issued Draft Electricity (Rights of Consumers) Amendment Rules, 2021 for public comments.

The amendment seeks to stipulate the following three rules to the existing rules:

“1.   “In view of the increasing pollution level particularly in the metros and the large cities, Distribution Licensee shall ensure 24x7 uninterrupted power supply to all the consumers, so that there is no requirement of running the Diesel Generating sets.

2.    Consumers, who are using the Diesel Generating sets as essential back up power, shall endeavor to shift to cleaner technology such as RE with battery storage etc in five years from the date of the publication of this amendment or as per the timelines given by the State Commission for such replacement based on the reliability of supply by the distribution company in that city.

3.    The process of giving temporary connections to the consumers for construction activities or any temporary usage etc. shall be simplified by the distribution licensee and given on an urgent basis and not later than 48 hours. This will avoid any use of DG sets for temporary activities in the area of the distribution licensee. The temporary connection shall be through a prepayment meter only.”

The proposed amendments appear to be governed by the desire to minimize the air pollution levels in India through all means. Prima facie, this is a well-intended thought and should be welcomed. However, a careful analysis of the context and proposed measure would suggest that these rules take the zeal for ESG a little too far.

Insurance value of DG backup ignored

These rules simply ignore the “insurance” value of the power back-up provided by the power generating sets (DG Sets).

These rules also seems to be denying the modern world where there are significant number of mission critical and life-saving functions that cannot afford power outage even for few seconds. Hospitals for example cannot afford to risk power outage in ICUs and lifts. Large apartment buildings cannot afford power outage in lifts. Data centers and banks’ servers cannot afford power outages even for few seconds.

DG Sets provide insurance against power outages to these functions. The power back up that relies on nature (solar and wind) may not provide adequate insurance cover in cases of natural calamities like cyclones, prolonged sun outages due to persistent rain etc.

This is the insurance value of DG Sets that prompts use of DG Sets in cities like Mumbai, where the distribution companies are obligated to ensure 24X7 power supply for past many decades.

The rules assume that most large buildings will have enough roof top and other open space to install solar panels that would generate adequate electricity to keep the battery bank charged to support the emergency and mission critical functions. This assumption may be mostly erroneous.

Whereas the rules put onus of supplying the uninterrupted power on the distribution licenses, it does not speak about grid failures, in which case distribution companies will be helpless.

The proposed rules also seem to be disregarding the available data on sources of air pollution in large metro cities. Numerous studies have indicated that the share of DG Sets in overall air pollution in large cities may be miniscule (2%). This level will fall further significantly after implementation of CPCB-IV norms in DG Sets. It is therefore important to focus on industrial clusters and farms for pollution control (through DG Sets) rather than large cities, IT Services clusters and residential complexes.

It is pertinent to note that in past 3 years, there have been some instances of implementing ban on use of DG sets during months when pollution levels usually spike. For example, in 2018, the Supreme Court-appointed Environment Pollution (Prevention and Control) Authority (EPCA) had banned diesel generator sets only in Delhi during the Graded Response Action Plan (GRAP). The Delhi Pollution Control Committee (DPCC) had issued a large list of exemptions where DG Sets were allowed. These included DG Sets used for essential services such as medical purposed (hospitals or nursing homes or healthcare facilities) elevators or escalators, railway services or railway station, Delhi Metro Rail Corporation services including its trains and stations, airports and interstate bus terminus, lifts of housing societies, etc.

Technological evolution of DG Sets denied

While the draft amendment rules emphasis on adoption of cleaner technology, they fail to acknowledge that DG Sets are also evolving fast in cleaner technology terms. The present genre of DG Sets emits significantly lower smoke and noise as compared to the legacy DG Sets. Moreover, the technology evolution of DG Sets and diesel (as a fuel) continues as we read this. Ethanol based generating sets are already being tested and gas based generating sets are in use at some places. But given the uncertainties of supply chain of ethanol and gas, diesel continues to be the most preferred fuel for power backup systems, for now.

ESG may be crossing some redlines

These rules are not isolated instance of the whole ESG paradigm crossing the red line of pragmatism & purpose; and venturing into the realm of over zeal and activism.

There is absolutely no denying the need and importance of the consciousness about good environment, sustainability and governance practices. But these practices must be pragmatic and not suffer from dogmas.

For example, we have seen a lot of ESG conscious investors shunning companies like ITC Limited, which has been amongst the few companies with positive water and carbon emission footprint for long, and embracing largest refineries and plastic producers as fully ESG compliant.

Setting tougher emission norms for DG Sets, like BS VI for vehicles, would be far more effective than replacing these with solar powered backup. DG Sets meeting the enhanced emission norms will be used in across the country and in all sectors. Therefore, the impact on environment will be much more impressive.

The government agencies and businesses which tried to transgress the territory of the Niyamgiri Devta (an epitome of environment and sustainability) may not be taken seriously if they talk about ESG. It has to be imbibed as a way of life not a goal to be scored.