Do it yourself

 In a press release issued last week, the Indian Meteorological Department (IMD) cautioned that during the upcoming hot weather season (March to May (MAM), above normal maximum temperatures are likely over most parts of northeast India, east and central India and some parts of north west India. Normal to below normal maximum temperatures are most likely over remaining parts of the country. IMD forecasts show an enhanced probability for the occurrence of heat wave over many regions of northwest and central India. As per the latest forecast of IMD, the currently prevailing La Nina conditions are likely to weaken and turn into a o El Nino Southern Oscillation (ENSO) neutral condition during the pre-monsoon season.

It is pertinent to note that La Nina conditions are known to cause normal to above normal rains in India, while El Nino conditions are known to cause rain deficiency in India. Neutral ENSO conditions help a normal (+ 10% of long term average) monsoon.

In India La Nina conditions have prevailed during the past three monsoon seasons (2020-2022), resulting in good overall rains; though spatial (regional) and temporal (time wise) distribution of the rains was erratic causing floods in some regions and drought in some other regions. The most populated Gangetic plains are suffering from severe drought conditions since last summer.

Kharif (monsoon) crop sowing suffered due to delayed or deficient rains in many parts of the country. Besides, the 2022-23 Rabi season has witnessed deficient rainfall in most parts of the country (see here).

Even though so far El Nino conditions have not developed for India, some professional forecasters have predicted development of these conditions as early as June 2023, resulting in deficient monsoon rains in India. For example, the US government weather agency, National Oceanic and Atmospheric Administration (NOAA), has said that El Niño is expected to begin within the next couple of months and persist through the Northern Hemisphere spring and early summer.

Skymet Weather has said that “El Nino threat during the Indian monsoon 2023 is growing big.” It further said, “El Nino projection based on initial conditions of Feb 2023 is finding semblance with Feb 2018. Both are evolving El Nino, albeit 2023 appears to be stronger than 2018.  El Nino share starts with 30% in June, reaches 50% by July and climbs to >/= 60% during 2^nd half of the season.”

Admittedly, it may still be early to conclude about a deficient monsoon this year. Nonetheless, the erratic weather pattern and early onset of summers across north, central and western India is indicating prevalence of unusual weather conditions over the next few months. Obviously, this will have implications for the economy and therefore financial markets.

Economy and monsoon

Over the past seven decades the share of agriculture and allied activities in the overall GDP of India has consistently declined. Agriculture and allied services accounted for almost two third of India’s GDP at the time of independence; and now it accounts for less than one sixth. The proportion of population relying on agriculture and allied activities for their livelihood has also declined from about three fourth to two fifth. The declining importance of the agriculture sector in the overall economy has resulted in under investment in the sector over the past 3 decades in particular.

The importance of monsoon for the Indian agriculture sector has seen a steady decline. Self-sufficiency in the area of food grains broadly means that impact of a deficient monsoon is mostly limited to (i) temporary food inflation; (ii) financial stress for small and marginal farmers’; (iii) additional burden on fiscal condition (loan waiver and food subsidy); and (iv) consumption demand of the affected population. Adequate food grain stock and an effective public distribution system minimises the cases of starvation in case of drought.

Besides, in the past seven decades the crop area fully dependent on rains for irrigation has fallen from ~80% to 50%. Out of a total of 141 million hectare net sown area, only about 70million hectare is rain fed; the rest of the area uses water supplied by irrigation channels. (see Under the Shadow of Development: Rainfed Agriculture and Droughts in Agricultural Development of India, R. S. Deshpande, NABARD)

Regardless, drought can hurt some areas and some crops disproportionately. For example, in the state of Maharashtra still over 81% agriculture area is rain fed. Besides, rain-fed areas produce nearly 90% of millets, 80% of oilseeds and pulses, 60% of cotton and support 60% of our livestock.

Adequate water in reservoirs

As per the latest bulletin of the Central Water Commission (CWC) as on 02 March 2023, , the live storage available in 143 reservoirs is 93% of the live storage of corresponding period of last year and 116% of storage of average of last ten years. States of Odisha (-20%), Bihar (-38%), UP (-21%) and West Bengal (-44%) have water availability in reservoirs which is below normal range; while most other states have large surplus.

Regardless, the current storage is significantly lower than the total reservoir capacity in all the regions. Thus in case of a severe drought the hydro power generation as well as area irrigated through channels could also suffer.

 

I would like to review my investment strategy in light of the probability of a poor monsoon. I shall share my thoughts on this coming Tuesday.

3QFY23 GDP: Slowdown in private consumption alarming (MOFSL)

Real GDP expanded by 4.4% YoY in 3QFY23: Real GDP/GVA grew 4.4%/4.6% YoY in 3QFY23 (v/s our forecasts of 4.5%/4.1% and the Bloomberg consensus of 4.7%/4.6%). It implies that real GDP/GVA rose 7.7%/7.2% in 9MFY23. Importantly, there were upward revisions in FY21/FY22 growth to -5.8%/9.1% from -6.6%/8.7% earlier.

The CSO expects 5.1% YoY growth in 4QFY23, which means full-year growth of 7% in FY23. Anything between 4.7% and 4.9% in 4QFY23 implies 6.9% growth in FY23 and 4.6% or below implies 6.8%. We believe that real GDP growth could be ~4.5% in 4QFY23, implying full-year growth of 6.8% in FY23. We maintain our forecast of 5.2% growth in FY24, led by weak consumption and some moderation in investments.

Consumption growth collapsed, though investments grew decently: Details suggest that total consumption growth weakened to just 1.7% YoY in 3QFY23, dragged down by much weaker-than-expected growth of 2.1% YoY in PFCE and the second consecutive contraction in GFCE. In contrast, real investments (GFCF + change in inventories) grew 8.1% YoY in 3Q. External trade deducted only 0.2pp from real GDP growth in 3QFY23, compared to more than 3pp each in the previous two quarters.

Domestic savings fall sharply: India’s investments fell to 28.4% of GDP in 3QFY23, the lowest in more than a decade, except in 1QFY21. However, net imports of goods & services were still elevated at 4% of GDP. It suggests that implied GDS declined to 24.3% of GDP, lower than 25% of GDP in 3QFY22 and the lowest in more than a decade (except in 1QFY21).

Infrastructure: Project awarding accelerates after Nov’22 (MOFSL)

Project awarding activity has picked up pace after Nov’22, with 4,290km of projects awarded till date in FY23 (v/s only 1,549km awarded in the first eight months of FY23). Road construction by NHAI till date in FY23 stood at ~3,150 km. With a target of 6,500 Kms in FY23, the remaining part of FY23 would require further acceleration in project awarding to achieve the targets.

Toll collections have been improving, with FASTag-based toll collections of INR444b as of Jan’23 with a daily run rate of ~INR1.5b.

Asset monetization is the key focus area for NHAI to raise funds outside of budgetary resources. The National Highways Infra Investment trust (NHAI InVIT) is planning to raise up to INR80b in the third tranche of asset monetization by Mar’23. NHAI InVIT successfully raised INR14.3b in the second tranche to partly fund three road assets stretching 246km. Additionally, NHAI InvIT raised INR15b from the issuance of non-convertible debentures (NCDs) in Oct’22.

NHAI has prepared a pipeline to monetize 1,750km of assets in FY23, but a faster execution is required to meet the monetization target.

DFCCIL has revised the timeline for Dedicated Freight Corridor projects and they are now expected to be completed by mid-2024.

Farm Input & chemicals: Challenges visible across pockets (IIFL Securities)

Domestic agchems saw limited revenue growth, owing to excess inventory in channel. While Rabi acreages progressed steadily, inventory liquidation would be critical for the ease of working capital. SRF, NFIL, PI and ANURAS are seeing tailwinds from buoyancy in global agchems.

Fertiliser companies witnessed elevated finance costs as subsidy receipts are lagging behind. As anticipated, several chemical companies reported sluggish 3Q earnings at the outset of 2023. Comments offered by several companies reiterate our cautious view on the sector, with a prolonged recovery.

Rabi season a flop show: Despite remunerative crop prices and higher wheat sowing, excess channel inventory affected agchem volumes. Few companies took price hikes to pass elevated input costs. Domestic growth was the strongest for BESTAGRO, CHMB and UPL (includes Advanta Seeds). Domestic businesses of RALI and PI were muted during the quarter. The exports of ANURAS and PI grew significantly YoY. ASTEL and CRIN saw challenges in exports.

Mixed quarter for Chemicals: SRF’s Chemicals business, NFIL (driven by CDMO), AETHER and NEOGEN were outperformers in 3Q. However, FINEORG and bulk chemical companies like TTCH (India business) and DFPC experienced moderation in profitability. Despite this, global supplies for refrigerants (SRF, NFIL, FLUOROCH) and soda ash (TTCH) remain tight. Re-opening of China would be critical for PVC (CHEMPLAS), caprolactam (GSFC) and phenol (DN).

Capex slips into FY24: Ongoing projects for ATLP, DN, PI, FINEORG, TTCH and GNFC are lagging, and appear to be distant from their original timelines. This could possibly lead to downgrades for the expected growth pegged in FY24/25. Nevertheless, several companies are scouting new land parcels to safeguard future requirements. New projects announced in 3Q: SRF – specialty fluoropolymers, DN - polycarbonates complex, CHEMPLAS – CSM capex, and NEOGEN - greenfield unit for electrolytes.

Monsoon fear looms amid good rabi (Nuvama)

Domestic agri input industry to benefit from bumper rabi crop (output up by 6% YoY) coupled with stable crop prices (wheat up 20% YoY) leading to strong cash flows for farmers. However, fear of poor monsoon looms, emanating from El-Nino conditions, while the industry is focused on collections offering attractive cash discounts. We remain cautious on domestic agrochemicals players given concern on monsoon and increasing competitive intensity with new players targeting to gain market share. Domestic fertiliser players to continue gaining momentum while global agrochem players witness strong growth.

Textile #QFY23 hit by higher input costs (Elara Capital)

The Textile value chain was hit by volatility in cotton prices, which corrected significantly in Q3FY23. Use of older high-cost inventory in the quarter led to margin strain, as input costs remained high for most of these players whereas output was pushed at corrected spot prices.

Going ahead, expect the cost structure to turn favorable with exhaustion of older inventory and with companies cautiously procuring raw material in batches at lower prices. We expect cotton prices to remain firm this season, led by expected demand improvement, downward revision in cotton production in key countries (India and the US) and weaker arrivals. We opine that a mild recession is already priced in cotton prices and prices can correct in a scenario of severe global recession.

Demand from the export market was muted for large part of Q3, with signs of improvement towards the end, led by subsiding inventory pile-up. Most retailers reduced inventory positions through promotional/discounting sales in Q3 but inventory was still elevated. Expect the benefit of such reductions to reflect in Q4, with order flow improvement. However, any aggressive buying is unlikely as the stance remains cautious.

Despite inflationary pressure squeezing consumer pockets, overall domestic sentiment improved in the first half of the quarter, led by festival/wedding season. However, sales were muted post the festive season amid delayed winters and lesser number of wedding days in Q3FY23. Domestic brands/retailers launched ‘end of season’ sale earlier than normal to retain the shopping momentum and reduce higher-cost inventory. Thus, expect Q4FY23 to be stronger as the wedding season is falling predominantly in Q4, which will likely revive demand.

Revisiting Developer Valuations (Jefferies Equity Research)

A potentially delayed pause in the rate hike cycle and risk-off sentiments, particularly for leveraged cos has led to significant property stock underperformance. We find the 40% valuation contraction since late'21 is already near past cycle levels. Valuations are now at pre-RERA reform levels; ignoring the much improved sector discipline and also the strong housing cycle. Developers with valuations at/below average include Lodha, GPL, PEPL and DLF.

Observations from past rate-cycles: Even though we have seen limited evidence of mortgage rates impacting physical property sales (link); the property stock valuations demonstrate a reasonably high correlation (0.7 correlation coefficient over pas 14 years) with the mortgage rates. Higher mortgage rates of ~225bps over the last 12-mths have led to the residential heavy developers (Lodha, GPL, Sobha) decline by 18-32%; and the average valuations (Price-to-book basis) of the developers with long history having declined by ~33% to 2.2x. Past rising mortgage rate cycles (2011/12 & 2013/14) also coincided with a de-rating of property stocks; although the broader property cycle conditions were much different (late-cycle) during those periods.

Derating already near prior risk-off episodes: General periods of risk-aversion / low-liquidity have also seen property stocks correct significantly. The 2018 NBFC crisis and partly the 2013/14 EM risk-off / sharp INR depreciation period was also derating event for realty sector. Overall, peak-to trough derating in the current episode (~40%) has already reached levels similar to the ones in prior (~45%).

Cement: EBITDA fall Arrested; sector awaiting growth (Jefferies Equity Research)

3QFY23 saw sharp moderation in total EBITDA (YoY) decline to single digit (-3% YoY vs est -6%) for coverage vs 20-40%+ decline in past 4 qtrs. Unit EBITDA/T (avg) improved Rs190/T QoQ, on px hike, cost decline and Vol led oplev. Improving trends should continue in 4Q with small QoQ price inc in 4QTD, better FC absorption coupled with lower fuel cost. While recent slump in Coal costs is comforting, +ve pricing action in next 3-months critical to meet FY24 estimates.

Double-digit volume growth again: Aggregate volumes grew ~11% YoY in 3Q (9MFY23 growth at ~12% YoY). 3-yr/5-yr Cagr for 3Q is 5-6%. Most of the players indicated that a strong pickup in government projects is driving volume growth for the industry; few players indicated increase in share of non-trade segment; urban housing and rural housing also showing reasonable growth. Most of the players expect strong volume growth to sustain in 4QFY23 and extend for FY24.

Ebitda/T improves QoQ: Aggregate Ebitda/T (coverage) for 3Q was at ~Rs780 (JEFe Rs760) a decline of Rs120 YoY and inc of Rs190 QoQ. YoY fall in Ebitda/T was driven by continuing lag in passing cost inc by industry. Highest QoQ uptick in EBITDA/T was reported by ACEM/ ACC (on profit normalization), DALBHARA and TRCL. JKCE and HEIM reported QoQ decline.

Trends in IT Services (Kotak Securities)

Slowdown for sure but with no incremental pockets of weakness: The demand environment has stabilized with weakness in mortgages, capital markets (some segments), discretionary retail, hi-tech, medical devices and some segments of telecom. Possibility of outlasting the inflationary environment with just a slowdown/mild recession and continuous prioritization of tech spending has led to optimistic outlook on tech spending by some clients even in the current weak macro. Growth is likely to be back-ended.

Expect considerable growth divergence in FY2024:  Gap between leaders and laggards will widen in FY2024. Among Tier 1, TCS and Infosys offer a full suite of services, robust delivery and excellence in multiple digital competencies. Both are well-positioned in cost take-out deals and will likely emerge net gainers in vendor consolidation exercises. HCLT is confident of industry-leading services growth in FY2024 aided by healthy deal win and a good order book. We expect TCS, Infosys and HCLT (services) to perform better than industry growth in FY2024. Wipro and TM are vulnerable.

Cost take-out deals entering pipeline; both mid-tier and Tier 1 have plays: Discretionary spend is slowing down and so is the flow of smaller projects that was a key driver of growth for the industry in FY2022 and FY2023. Cost take-out deals are increasing in the deal pipeline but they tend to have a higher tenure, longer deal cycles and longer time to ramp up – essentially slower revenue conversion. Mid-tier IT can address a few cost take-out themes ranging from simple offshoring to complex IT operating model transformation deals in areas where they have strong domain understanding, capabilities and client relationships. Tier 1 IT is better-positioned in larger and more broad-based cost take-out programs that require strength in multiple domains and services, a global delivery model and ability to offer competitive pricing across a whole range of competencies. A deep recession can see more such deals being signed but that is not the base case currently.

White goods & durables (ICICI Securities)

Steady increase in copper prices: Copper, a key raw material (>35% of raw material cost) is back in inflation zone after remaining in deflation zone over July’22-Dec’22. While it is likely to affect the entire sector, we expect white goods to get impacted the most. Cable and wire companies have raised the prices to pass on the impact.

Other raw materials are still in deflation zone: Other key raw material prices such as aluminium, steel and HDPE have remained in deflation zone. Prices of aluminium, steel and HDPE have declined 16.3%, 1.3% and 7%, respectively YoY in Feb’23.

Margins to inch upwards steadily: We model gross and EBITDA margins to inch upwards YoY as well as QoQ in Q4FY23 with correction in input prices. Freight prices have also corrected with reduction in fuel prices. While we model most companies to increase ad-spend YoY, we believe there is a strong scope to see EBITDA margin expansion of 100-300bps YoY in Q4FY23.

 Indubitably, broader economic growth - involving improvement in physical infrastructure, favorable macroeconomic indicators, stronger geopolitical positioning, greater global acceptability etc., is most desirable for a developing economy like India. However, the importance of improvement in social indicators, quality of life and sustainability cannot be disregarded as less important. In fact, if someone asks me to choose between a more equitable, just and sustainable society and a rich but unequal and unjust society pursuing an unsustainable path of development, I would definitely choose the former over the latter, without giving it a second thought.

India has seen consistent improvement in many social, quality of life and sustainability parameters in the past three decades particularly. All the governments have focused on improvement in factors like literacy, infant mortality, primary education, gender equality, poverty alleviation, regional equality etc. Several mission level programs National Literacy Mission, Rural Health Mission, Cleanliness Mission, Midday Meal program, National Food Security Mission, National Livelihood Mission, etc. have been successfully run. Several entitlement measures like right to employment (MNREGA), right to education (RTE), right to basic income (PM Kissan), etc. have been implemented, and these have shown tremendous results. Besides, a number of empowerment schemes like right to unique identity (Aadhar), financial inclusion (e.g., Jan Dhan), right to information (RTI), etc., have also made substantial contributions in improvement of qualitative parameters.

Nonetheless, there is still a lot of ground to be covered to make quality of life and sustainability parameters in India commensurate with the overall economic growth and development. For that the governments must reassess the speed and direction of economic growth and fine tune it to make it just, equitable and sustainable.

In this context, it may be pertinent to highlight some of the findings of the National Family and Health Survey (NFHS) -5, conducted by the International Institute of Population Sciences, designated nodal agency by Ministry of Health and Family Welfare (MoHFW), Government of India.

NFHS is conducted to collect data on health and family welfare, as well as data on emerging issues in these areas, such as levels of fertility, infant and child mortality, maternal and child health, and other health and family welfare indicators by background characteristics at the national and state levels. The survey also provides information on several emerging issues including perinatal mortality, high-risk sexual behaviour, safe injections, tuberculosis, non-communicable diseases, and the use of emergency contraception.

The information collected through NFHS assists policymakers and programme managers in setting benchmarks and examining progress over time in India’s health sector. Besides providing evidence on the effectiveness of ongoing programmes, NFHS data also helps in identifying the need for new programmes in specific health areas.

The following are some of the key findings of NFHS-5:

Positive

·         Drinking water: 96% of households use an improved source of drinking water.

·         Access to sanitation: 83% of households have access to a toilet facility.

·         Electricity: 97% of households have electricity (95% of rural households and 99% of urban households).

·         Aadhaar card: 90% of the household population have an Aadhaar card.

·         Bank or post office account: 96% of households have a bank or post office account.

·         Total Fertility rate: The total fertility rate (TFR) in India is 2.0 children per woman, which is slightly lower than the replacement level of fertility of 2.1 children per woman. Women in rural areas have higher fertility, on average, than women in urban areas (TFR of 2.1 versus 1.6 children).

·         Vaccination: 77% of all children age 12-23 months have received all basic vaccinations. Between 2015-16 and 2019-21, this percentage increased more in rural areas (from 61% to 77%) than in urban areas (from 64% to 76%). Only 4% children received no vaccination.

Need improvement

·         Cooking fuel: Only 59% of households use clean fuel for cooking.

·         Birth registration: 89% of children under age five had their birth registered.

·         School attendance: The net attendance ratio falls from 83% in primary school to 71% in middle, secondary, and higher secondary school. The main reason given for not attending school was that the child is not interested in studies (36% for male children and 21% for female children).

·         Tobacco and alcohol use: 38% of men and 9 percent of women age 15 and over currently use any tobacco products.

·         Drinking water: 49% of rural households rely on tube wells or boreholes for drinking water.

·         Sanitation: 26% rural households are still using open defecation.

·         Wealth inequality: 71% of the population in scheduled tribe households and 49% of the population in scheduled caste households are in the two lowest wealth quintiles.

·         Education: Educational attainment increases with household wealth. Females in the lowest wealth quintile have completed a median of 0.4 years of schooling, compared with a median of 9.3 years for females in the highest wealth quintile. The median number of years of schooling was 3.7 years among males in the lowest wealth quintile and 10.0 years among those in the highest quintile.

The percentage of the household population with no schooling is higher in rural areas than urban areas (33% versus 17% for females and 16% versus 8% for males).

·         Labor force participation: Men are more likely to be employed than women; 25% of women are currently employed, compared with 75% of men. 83% of employed women earn cash for their work (unorganized employment).

·         Digital presence: One-third of women and slightly over half (51%) of men age 15-49 have ever used the internet.

·         Child marriage: 38% of women marry before the legal minimum age of marriage of 18 years, and 23% of men marry before the minimum legal age of marriage of 21years.

·         Infant mortality rate: The under-five mortality rate is 42 deaths per 1,000 live births, and the infant mortality rate is 35 deaths per 1,000 live births. The neonatal mortality rate is 25 deaths per 1,000 live births.

·         Malnutrition: Eleven percent of all children age 6-23 months were fed the minimum acceptable diet. 36% children suffer from stunting and under-weight.

·         Hypertension: 21% of women and 24% of men age 15 and over have hypertension. 39% of women and 49% of men age 15 and over are pre-hypertensive.

·         Diabetes: 12% of women and 14% of men age 15 and over have random blood glucose levels greater than 140 mg/dl.

·         Domestic violence: 45% of women and 44% of men agree with one or more of seven specified reasons for wife beating.

 Five months ago, I had highlighted the likelihood of a trading opportunity emerging in gold. (see here) The opportunity did present itself, though not exactly in the manner I had anticipated. Nonetheless, the gold prices rallied about 19% in USD terms; from a low of USD1630/oz in early November to a high of USD1950/oz in early February.

Since peaking out in early February, the gold prices have corrected about 7% in USD terms. It would therefore be pertinent to ask what traders and investors should be doing with their gold positions.

It has been my long standing view that gold is no longer an investment asset. (for example see here and here) The view is even strengthening with each passing year. I believe that it is highly unlikely that gold will stage a comeback as a widely accepted medium of exchange (gold standard); and it will be gradually phased out as a store of value as better digital options emerge.

In this context, the latest report of the World Gold Council (WGC) presents some interesting data that needs to be noted.

Demand structure of gold demand is changing

WGC highlights some important changes in the demand structure of gold in the past three decades.

·         The consumption demand of gold has declined structurally.

·         Gold demand in paper form (ETFs etc.) has turned negative in the post Covid period.

·         Demand for gold in bar and coin form has been sustaining since the Global Financial Crisis (GFC).

·         Central Bank demand that was negative for two decades has been sustaining since GFC.

It is therefore clearly evident that the demand for gold for social security, vanity and social status purposes is on the decline structurally.

Share of India and China in global gold demand peaking

India and China had emerged as major growth drivers for global gold demand during the 1990s and 2000s. The combined share of China and India in global gold demand had increased from ~20% in 1992 to ~55% in 2008. Post GFC this share stagnated and has declined to less than 50% post Covid.

Central Banks major buyers since GFC

In the post GFC period central banks have been a major driver of the global gold demand. The banks which were net sellers of gold in the 1992-2008 period, turned net buyers of yellow metal, buying close to ~1200tonne in 2022. Apparently, the unprecedented money printing prompted the global central bankers to diversify their reserves away from USD and EUR.

The major surge in central banks’ gold buying was also driven by the demand by central Asian and East European bankers for the fear of NATO sanctions.

Now since most central bankers are pursuing a policy of quantitative tightening and inflationary expectations are well anchored in medium term; the bond yields are expected to stay higher for longer; the sanctions on Russia and allies have failed to show the desired impact; global consumers continue to remain under severe cost of living stress; demographic indicators continue to deteriorate in the developed world and showing signs of population peaking in China; there are few demand driver for gold to sustain the current prices.

The short term trading opportunity in gold is therefore over in my view. The medium and long term outlook for gold continues to remain weak.

The recent move in prices of some popular e-commerce stocks listed in India has caught the eye of the market participants. These stocks have sharply outperformed the benchmark Nifty50, Nifty IT and even NASDAQ in the past one month. Notably, these stocks have been sharply underperforming the markets for the past one year particularly. Most of these stocks have lost about two third of value from their respective all time high stock price levels. Many investors who had bought these stocks in the 2021-2022 frenzy have seen material erosion in their investment value. It is therefore pertinent to examine, from the individual investors’ viewpoint, whether the tide is turning for these companies; to assess whether they should stay invested, buy more or consider using the latest price rally to exit their positions.

Use your own parameters

One grave mistake small investors usually make while investing in the stock of a company, is to use the valuation matrices followed by specialized investors like private equity, venture capitalists, angel investors etc. or professional investors who invest on behalf of other investors.

Specialized investors evaluate a business idea in terms of potential for wider acceptability, scalability and eventual profitability. They mostly invest in early stages of business development and are usually not concerned with conventional valuation ratios like price to earnings etc. Failure of a business idea is as routine matter for them as the death of a patient for an oncologist. In fact, in their case a 25% success rate is considered a great performance. They do not fall in love with any business and are always on lookout for an exit, regardless of profit or loss.

Professional investors are mostly concerned with the relative performance of their portfolio in relation to the benchmark indices. For example, a fund manager would be considered very successful if his fund loses 10% in a year when the benchmark index has lost 15%. There is no opportunity cost of the money assigned to them for management.

In my view, small investors should use their own parameters to evaluate the businesses they want to invest in. Losing money should not be an option in their investment strategy. They should aim to earn at least more than the risk free return they can get in bank deposits and government securities.

Individual investors can earn from their stock portfolios in three ways:

1.    Dividends or any other form of regular cash flows.

It is important that the company makes sufficient profits; is able to convert these profits into cash (good working capital management) and maintains reasonable free cash flows.

2.    Stock prices rise in tandem with earnings growth.

Assess if the earnings growth is sustainable (not cyclical) and healthy (good ROCE).

3.    Stock prices rise due to acceptability of higher valuation benchmarks like price to earnings ratio (PE or EV/EBIDTA); price to book ratio (PB); price to earnings growth ratio (PEG) etc.

Remember, higher multiple to the benchmark valuation criteria should be supported by fundamental change in the operations and balance sheet; and not just by the broader market movement or irrational exuberance.

Assessing the latest move in ecommerce stocks

For making an investment decision, investors need to assess whether the recent move in ecommerce stocks is a broader market wide move or a response to company specific developments. In case of the latter, it needs to be evaluated whether it is sustainable in medium term or just a temporary phenomenon.

For example, post 3QFY23 result, One 97 Communication (PayTM) has seen multiple upgrades from various brokerages. Analysts seem to be excited about improvement in lending volumes, operational efficiency, prospects of substantial improvement in revenue growth in forthcoming quarters and profitability at ‘adjusted EBIDTA’ level in the current quarters. The analysts are projecting marginally positive EBIDTA in FY25; but no one is projecting positive PAT or free cash flows in the foreseeable future.

As per some recent media reports, telecom major Bharti Airtel, has proposed to merge its payment bank with the PayTM payment bank in a share swap deal; though the company has apparently denied any such proposal. PayTM had also announced a share buyback program in December. Ant group of China, one of the promoter entities, has decided to materially pare its stake in the company, offering a big revenue opportunity for brokers. It is to be evaluated whether these events have excited the analysts or they have holistically changed their outlook on the stock.

In the case of Zomato, the company has announced re-launch of its membership program (Zomato Gold), termination of services in a few cities and some other operational corrections. The analysts are not too excited about these changes and have not tweaked their estimates materially. Similar is the case with FSN E-Commerce.

Conclusion

In my view, the recent rise in ecommerce stocks could be more in the nature of a technical or generic move that may not necessarily be sustainable. The current valuations or the projected performance matrix of these companies provides little comfort from the individual investors’ viewpoint.

Besides, the regulatory environment for ecommerce business is still at a nascent stage and could have material implications for these businesses, similar to what we saw in the case of telecom and private mining during the past two decades. Investors need to factor in this risk also while deciding to invest in these businesses.

By nature, all these businesses are strong and highly scalable. If these companies sustain for 4-5years and deliver 30-40% revenue growth, these may become profitable and generate enough cash flows to fit in the conventional valuation matrices, without using manipulative terminologies like ‘Adjusted EBIDTA’, etc.

The investors will get ample opportunities to invest in these businesses in future, once they mature and the regulatory environment stabilizes. Till then leave it to the professional investors and focus on already matured businesses.

Continuing from yesterday (The great Indian carnival)

With the presentation of the union budget earlier this month, the incumbent government has entered the final phase of preparations for the 2024 general elections. The preparations would be tested in several state assembly elections to be held prior to the general elections. Amongst these Karnataka, Madhya Pradesh and Rajasthan shall be keen contests.

As per most of the recent surveys, the ruling National Democratic Alliance (NDA) led by Prime Minister Narendra Modi, is likely to return to power for a third successive term in 2024. The alliance is mostly riding on the popularity of PM Modi for its electoral success. Of course the lack of a strong national alternative is also working in favour of the incumbent government, to some extent. It is therefore pertinent to examine what PM Modi has done right to maintain its popularity for the past nine years.

I would not like to delve into the role of the political strategy of BJP in sustaining the popularity of PM Modi, as it could involve dealing with several controversial issues. Besides, the political strategy is too obvious for everyone to see. I would therefore focus on the economic strategy of the PM Modi led government.

Continuing the good work of previous governments

The first thing that PM Modi has ensured is that the key growth drivers of the Indian economy that have evolved over the past two decades are not only sustained but also provided additional impetus. His government has continued and even accelerated the infrastructure development program, especially connectivity & logistics (roads, ports, airports and telecom), self-reliance in defence and development and commercialization of space programs, initiated under the Vajpayee led NDA-1 government and sustained under UPA governments (2004-2014).

The incumbent government has materially enhanced the program to digitize the economy with Aadhar and UPI developed by NPCI at the core. The financial inclusion program started in early 2010s has gathered significant pace with wider acceptance of Aadhar and UPI, and evolution of digital payment technologies.

In a recent presentation Nandan Nilekani, succinctly summarized the key drivers of the economic development and growth of India in the next ten year. Speaking to a group of investors in Bengaluru, Mr. Nilekani said, he believes “the Digital Public Goods (DPG) used in India today will form the basis for India’s economic development because the three cornerstones of the modern economy are no longer roti, kapda, aur makaan; they are identification, financial inclusion, and mobile + internet connectivity. The creation of the ‘India stack’ – Aadhaar (universal identification), Jan Dhan (bank accounts for all), Unified Payments Interface (UPI: online transactions using mobile phones), and Open Network for Digital Commerce (ONDC: seamless & democratized eCommerce) – is helping India get closer to delivering on this critical trinity. These initiatives will impact three key sectors – credit, logistics, and eCommerce – which in turn could have positive spillover effects thus propelling India towards becoming a $10 trillion economy”.

The government adequately supported DRDO and ISRO to continue with their missile and space development programs; and added significant impetus to domestic defence production by opening some key areas to the private sector.

Supporting the bottom of the pyramid through food and social security

Like the previous governments, the incumbent government has also maintained a socialist character and continued to support the bottom of the pyramid through social security programs like MNREGA and National Food Security Act. It has in fact further enhanced the social security programs through introduction of basic universal income and health insurance for select segments of the society.

Widening the global trade

The incumbent government has not only continued the policy of deepening the trade ties with the traditional trade partners, but materially widened the global trade of India, by engaging with new trade partners and introducing many new lines of goods and services in India’s trade basket. The policy of bilateral free trade agreements has been continued and assigned high priority. This widening of trade engagements helped India in enhancing its strategic relevance to some extent.

Energy security with focus on green energy

A key area of achievement of the incumbent government is enhanced focus on energy security with high focus on green energy. Significant capacity has been added (is being added) in the areas of solar energy, wind energy and biofuel production. The green hydrogen mission has been initiated. Though it is still early days, the strategy is likely to yield material benefits in socio-economic terms in the coming years.

Fiscal discipline

Fiscal discipline has been a hallmark of the economic policy of the incumbent government. Despite several social and political challenges the government has successfully reigned fuel subsidy; and managed the food and fertilizer subsidies reasonably well to keep the overall fiscal deficit within the acceptable parameters.

These features of the economic policy have ensured that the Indian economy has weathered the pandemic & consequent global slowdown; and monetary tightening with minimum damage. Though the growth trajectory has stagnated at suboptimal level; employment generation has been poor, and performance in some key areas like disinvestment, farm sector reforms etc., has not been good, the popular sentiment continues to be in favor of PM Modi.

Festivals are quintessential to the idea of India. No one can imagine India excluding the hundreds of festivals we celebrate. There is hardly any day on the calendar that is not marked with a religious observance or a social celebration. As a community we are so addicted to festivities that we even celebrate sporting events as festivals. Not surprising, political events like elections, local level political appointments, conventions of political parties, etc. are also celebrated as major festivals in India.

The largest festival in the world, Indian general election, is scheduled to be held in about one year from now. All political parties, like the troops participating in the annual carnival in Brazil, have already started preparing for the quinquennial event. The potential 950million voters are also looking forward to it; though one third of them may actually not bother to exercise their franchise.

In most major democracies in the world, the incumbent leadership and/or party seeks reelection on the basis of its performance in the current term and proposed agenda for the prospective term. However, in India the elections are mostly about persons rather than policies and programs. The caste and religion of the candidate is assigned more importance than their views on socio-economic policies; commitment to political ideology; or past performance.

There are many examples of one person contesting and winning as candidate of political parties subscribing to completely opposite socio-political ideologies. There is no limit on the number of times a person can represent a constituency (or different constituencies) in the parliament. There are numerous examples of candidates repeatedly winning from the same constituency despite dismal past performance and inadequate agenda for the future. In fact, many notorious candidates facing serious criminal charges like murder, rape, dacoity, kidnapping etc. not only get repeated nomination; they get elected with overwhelming majority.

In my recent trips to the hinterlands and various large cities, I discussed the current political scenario with people from various sections of the society. There appears to be unanimity on the point of the quality of politicians. Everyone appears convinced that the quality of politicians in India has deteriorated over the past 3 decades. Senior citizens recall that politicians in the 1950s, 1960s and 1970s were highly educated and held impeccable character. The quality started deteriorating in the late 1980s and the rate of decline accelerated sharply from the 1990s.

Surprisingly, the decline in the quality of Indian politics and politicians coincided with the structural improvement in the Indian economy. The socio-economic parameters like growth rate, occupational structure, urbanization, globalization, literacy rate, access and connectivity (roads, media, telephony, TV, internet etc.), higher education, gender equality, etc., have indubitably improved materially in the past three decades. The worst part is that the primary driver of popular mandate is no longer socio-economic upliftment; but the regressive agenda of aggressive social divide.

The points to ponder therefore are: (i) Why the empowered, enabled and enriched citizens are not aspiring for a cleaner, ethical and progressive political system; and (ii) Does socio-economic growth and development in India have any correlation with the political set up in India?

….to continue