Do it yourself

Wednesday, September 20, 2023

Achilles heel showing some signs of soreness, again

Reliance on imported energy, especially crude petroleum, has been one of the weakest aspects of the Indian economy for the past many decades. Though we have made significant progress in the adoption of renewable and clean sources of energy, about 70% of our primary energy demand is still met by coal and crude oil. Renewable energy meets less than 5% of the primary energy and is mostly replacing traditional biomass in the overall primary energy mix.

India meets most of its petroleum requirements through the import of crude oil. Notwithstanding the ethanol blending policy, in FY23, over 87% of the domestic petroleum consumption requirements were met through imported crude oil; up from 83.8% in FY19.

Despite incentives and many policy changes, domestic oil production in India has consistently declined since peaking in 2011. The current annual production of crude oil in India is around 620 thousand barrels a day; the same level it was in 1995-96, before the New Exploration Licensing Policy (NELP) in 1997.

Recent reports are indicating that this winter global crude prices could see a material surge. According to OPEC, the global oil demand will rise by 2.44 million bpd in 2023 and 2.25 million bpd in 2024. The US EIA also expects the oil demand to hit record highs in 2023. OPEC and allied producers like Russia persist with their production cuts of 1.3 million bps until the end of 2023. The US EIA expects global oil inventories to decline by almost half a million bpd in 2H2023, exerting pressure on crude oil prices.

The higher crude prices could impact the Indian economy adversely. Since the election season is about to begin (5 key state assembly elections in 4Q2023, followed by the general elections in 1H2024), it is highly unlikely that the government will pass the entire rise in crude prices to the consumers. The state-owned energy companies and the central government shall bear the brunt of the higher fuel prices.

Considering that the oil & gas PSUs and private refiners (through enhanced windfall tax) could be made to bear the bulk of the burden, the impact on fiscal conditions may not be significant in FY24. There could be some pressure on current account deficit

However, if the higher oil prices are sustained for longer, i.e., beyond FY24, we may see some of the hikes getting passed to consumers having a second-round impact on inflation. We may see material pressure on the current account balance, bond yields, and INR exchange rate during FY25.

Investors need to watch the developments in the oil market carefully. For me, public sector oil marketing and upstream companies are a definite “No Go” zone; while I shall be watching private refiners closely.

Insofar as Indian equities are concerned, historically their correlation with the crude has been positive.

Friday, September 15, 2023

Some notable research snippets of the week

Mad (-cap.) dash (Kotak Securities)

We see limited point in trying to find fundamental reasons behind the steep increase in stock prices of several mid-cap. and small-cap. stocks. There is no meaningful change in the fundamentals of most companies; in fact, they have worsened in many cases. The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations (and purchase decisions) being driven by the high returns of the past few months.

Varying degrees of exuberance in the mid-and-small-cap space

We do not see many fundamental reasons for the meteoric rise in the stock prices of many mid-cap. and small-cap. stocks in the past few months. The fundamentals of most sectors have not changed much. However, market sentiment is quite exuberant, based on

(1) steep increase in the prices of many mid-cap. and small-cap. stocks;

(2) large inflows into mid-cap. and small-cap. mutual funds; and

(3) huge number of new retail participants in the mid-cap. and small-cap. funds. The strong performance of the mid-cap. and small-cap. indices has possibly pushed up return expectations among retail investors.

Stocks with great history (but potentially less favorable future)

Most of the traditional favorite mid-cap. stocks of institutional investors in the broader ‘consumption’ sector have been large laggards in the ongoing mid-cap rally, given weak consumption demand in general. However, the valuations of these companies have stayed high or gone to historical-high levels due to earnings cuts. We see risks of (1) lower profitability and (2) lower valuation multiples due to weakening business models (erosion of business moats of brand, distribution market structure and product).

Stocks with great purported future (but mediocre history)

Many of the new favorite mid-and-small-cap. stocks of institutional and retail investors are in the broader ‘investment’ sector (capital goods, defense, EMS, railways, real estate, renewables). These stocks have delivered eye-popping returns in the past 3-6 months, led by the broader ‘investment’ narrative.

We expect a decent investment cycle, but we are not sure about the quality of many of the stocks given their historical weak execution and governance track-records. In addition, many of these sectors fall in the B2G (business-to-government) or B2B categories, which raises issues around execution and profitability both. We believe that market expectations for both revenues and profitability may be too optimistic across these sectors.

Stocks with no history or possibly future (but why not?)

The last lot of the new favorite mid-and-small-cap. stocks fall in the dubious category of ‘turnaround’ stories. Many of these companies have been through serious operational and financial challenges (including bankruptcy) in the recent past, but the market has high hopes of these companies doing well in the future. We are not sure of the basis of the market’s confidence.

Strategy - Nifty Weight Analysis (Phillips Capital)

A snapshot

· Index leader – banks – near its peak weight in August 2023 (18.4%/25.4% in N-500/N-50 adjusted for HDFC Ltd).

· Highest weight increased in investment-oriented sectors, driven by industrials and metals. Basically, our favourite infra plays – industrials, metals and cement – have moved up strongly, but are slightly lower than peaks seen in 2010-15.

· IT is currently below pre-covid levels.

· Staples lost 200-250bps from its peak in 2020, but gained c.150bps since 2022.

· Discretionary (ex-auto) is nearing its highs of 2020.

· Automobiles’ weight up from covid lows, but still quite low vs. pre-covid levels.

· Pharmaceuticals gained weight in 2019-21; currently stagnant at 2022 levels.

· Oil & gas down c.200bps from its 2022 peak.

Financials – gains due to financial penetration

In N-50, financials have been leaders with banks being major contributors, gaining c.7% in the last 10 years (between March 2013 and 2023), plus c.4% in FYTD24 (due to the HDFC merger). Since 2014, in N-500, the sector’s weight increased by 5% to touch 22.4%.

Banks: The sector’s weight increased steadily in the past decade, especially in the N-50, to 31% from 20%; excluding HDFC Ltd’s merger impact, to 25.4%, up c.5%. Banks’ weight decreased during the onset of covid in 2020, while it has risen in the N-50 but is now stagnating at around 26%.

NBFCs: The sector has remained in focus in the last decade, gaining due to greater financial penetration and expanding economy, up almost 3-4% in terms of Nifty weight. Its weight increased consistently till 2021 from 2016, and declined gradually after that, seeing the highest drop in July 2023 due to the HDFC merger, excluding which, the segment’s weight is near all-time highs.

Investment-oriented sectors – highest gainers post covid

The weight of investment-oriented stocks in N-50 and N-500 was declining since 2014, but increased gradually yoy post covid. Their weight in the N-500 grew to 13% in FY23 from 9% in FY20 while in N-50, it increased to 10% from 7.5%, with a major rise coming from the industrials and metals & mining sectors.

Industrials: Its N-500 weight almost halved by 2020 (from 2014) to 3.6%, but doubled to 6.0% from FY20; it increased substantially post FY22 due to capex, infrastructure, and economic expansion. In the N-50, the sector saw its weight falling to 2.7% in FY21 from 7.7% in FY11 (led by change in constituents – then, BHEL, Suzlon, ABB, Siemens were a part of N-50 while at present it is only L&T). Weights rebounded by 110bps to 3.8% in FYTD24 from FY21, with major increase taking place after FY22.

Metals & Mining: Just like industrials, its N-500 weight declined to 2.3% in FY20 from 4.9% in FY14; then, spiked to 4.4% in FY22 due to a significant rise in demand after covid and sharp surge in prices. As prices corrected, so did the sector’s performance in FY23, losing weight by 40-100bps. In the last few months, it has picked up (in line with our expectations). In N-50, the trend and weight have remained almost same. In FYTD 24, the sector’s weight almost doubled to 4.3% in FYTD24 from a low of 2.2% in 2020.

Cement: Its N-500 and N-50 weights have been stable, at 2-3% since 2014 (after a slight dip in 2018-20). In the last two years, the weight has been stable near 2%, and we see an upside.

Consumption oriented – higher discretionary spend driving share

The weight of consumption-oriented stocks in the N-50 / N-500 was in the 15-21% /18-23% range since 2015. The sector gained momentum during the onset of covid, slowed over the next two years, but weights have increased lately, in 2023. Consumption’s weight in the N-50 / N-500 fell to 15% / 18% in FY22 from 21%/ 22% in FY14, but increased to 19% / 21% in FYTD24 due to staples and auto & ancillary.

Staples: The sector saw mixed sentiment in different periods, resulting in many swings in the last decade. Overall, its weight in the N-500 / N-50 declined to 6.4% / 7.2% in 2022 from 9.6% / 10.6% in 2014. It increased FTYD24 by 140/210bps for N-500 / N-50 from 2022 levels, led by price hikes amid softening commodity prices, downsizing product packets, and slight demand recovery – driven by increasing disposable income and emerging channels such as modern trade and e-commerce.

Discretionary: In the past decade, the sector attracted investor attention, resulting in an increase in weight by c.300 (also led by new listings) in N-500 and 100bps in N-50 during 2014-20. During the onset of the pandemic, it remained in focus, but after April 2020, its weight stayed mostly flat. The weight has increased in N-500/ N-50 to 6.2%/ 3.2% in FYTD24 from 3.4%/ 2.0% in 2014.

Autos & Ancillary: The sector’s weight has reduced from 2017 to 2022, halving since 2017. N-500 / N-50 weights reduced to 5.2% / 4.8% in 2022 from 9.9%/11.0% in 2017. However, recently (in the past 8 months), its weight increased by almost 100bps due to the rising standard of living and disposable income, robust demand for PVs/ CVs/EVs, government PLIs, and increasing government focus on infrastructure development.

IT and other services – global economy dragging the sector

Nifty weight of ‘IT and Other Services’ grew drastically from 2017 to 2022, gaining 450bps in N-500/N-50. During the same period, while the IT sector gained, Telecom and Services sector remained flat.

IT: The sector saw enormous growth in index weight during 2017-22; N-500/N-50 at 14.7%/18.2% from 9.8%/13.0%. A strong bounce in IT came after covid, as more businesses rushed to adopt digitization, enhancing demand for IT software and solutions. However, weight started falling in the second half of 2022 due to the global economic slowdown.

Telecom & Media: The sectors’ weight consistently declined since 2015, but increased slightly during the onset of the pandemic in 2020. It has been inching marginally higher since FY22.

Services: The sector’s weight remained flat for N-500 / N-50 at c.2%/1% since 2017.

Pharma & Chemicals – a mixed bag

The Pharma & Chemicals’ N-500 / N-50 weight was flat at c.7% / 3% between FY18-19. In N-500, its weight increased mostly after the pandemic until 2022, and stagnated thereafter. However, within this, the pharma sector’s weight grew majorly in 2020, while the chemicals sector’s weight grew majorly in 2021 and 2022. Currently, both sectors’ weights are below their all-time highs.

Pharma and Healthcare: The pharma sector’s N-500 weight remained flat at c.4.7% in FY18 and FY19. During the pandemic, in N-500, it increased by 90bps in 2020 from 2019 levels, while N-50 weight increased by 160bps in 2022 from 2019 levels. Currently, the sector’s weight in both indices is near its highest since covid, as it gained momentum recently due to improvement in business and earnings.

Chemicals and fertilizers: The sector’s weight in the index was stagnant during 2018-20, before rising in FY21. Its N-500 weight remained flat at 2% from FY17 to FY20. But in 2021, a sharp increase in global demand for speciality chemicals and a rise in prices propelled its weight. Currently, the sector’s weight in both indices is down (from 2022 highs) due to weak domestic demand, subdued global economies, and declining commodity prices.

Energy sector – almost flat!!

The energy sector’s weight has remained almost flat since 2017 with a sharp increase in 2022 due to high demand and low production. In the N-500, its weight increased slightly to 13.5% in FY22 from 11%.5 in FY17 and is currently at 10.8% in FYTD24, while in the N-50 its weight increased slightly to 14.9% in FY22 from 13.7% in FY17 and is currently at 12.9% in FYTD24.

Oil & Gas: The sector saw a slight increase in index weight majorly in FY16 and FY17. Its N-500 weight increased to 8.6% in FY17 from 6.8% in FY15, while in the N-50 it increased to 10.8% from 8.2% in the same period. Current weight is 8.2% and 10.7% in N-500 and N-50 respectively.

Power: The sector has seen a consistent decline in weight from FY17 to FY21, with negligible growth in recent months. Current weight is 2.7% and 2.2% in N-500 and N-50 respectively.

Corporate profit cycle enters value-creation zone (ICICI Securities)

RoE of NIFTY50 index is rising above the 15% mark after a decade and we expect it to expand to ~17% by FY25E, thereby clearly entering the value-creation zone, driven by improving demand environment for capital-intensive and cyclical stocks. P/B ratio of NIFTY50 index is at the long-term average mark of ~3x and a rising RoE is likely to boost it driven by the aforementioned stocks. A similar trajectory was observed between 2002-07 when cyclical recovery in the economy driven by the capex cycle boosted RoE to >25% and P/B >5x. Currently, as capacity utilisation is moving above the 76% mark, we believe the benefits of operating leverage have started to creep in, although corporate re-leveraging cycle is yet to begin. High-frequency indicators corroborate rising utilisation levels.

NIFTY50 index enters value-creation zone after a decade

Stocks that are likely to improve their RoEs over FY23 to FY25E and transition into value-creation zone include capital intensive and cyclical sectors such as auto, capital goods & infrastructure, utilities, telecom, commodities and financials. The RoE trajectory provides a sense of ‘déjà vu’ of what happened in the pre-GFC era between 2003-2007 when stocks within capital-intensive and cyclical sectors like L&T, BHEL, Bharti, NTPC, Hindalco, M&M,ACC, Reliance and DLF transitioned from sub-14% level RoE to value-creation zone of RoE >15%. Most of the aforementioned stocks further touched the high quality zone of RoE >25% at the peak of the investment and credit cycle.

Expansion in RoE could boost P/B ratio which is around long-term average

As capital intensive and cyclical sectors expanded their RoEs above the 20% range in pre-GFC era, their P/B ratio was also boosted and by the peak of the profit cycle, P/B ratio expanded well above 5x. A similar behaviour cannot be ruled out going ahead. Relatively less capital-intensive sectors such as FMCG, IT, pharma etc. are largely in value-creation zone (RoE >15- 20%) and do not provide any major driver of boosting RoE from current levels.

High frequency data indicates demand is robust and being largely driven by rising ‘investment rate’

Capacity utilisation improved to ~76% in the economy, as per RBI’s OBICUS survey, and high frequency indicators like PMI, GST collections, infra orders, and real estate construction indicate demand overall remains robust driven by the investment side of the economy.

Agri output and IT hiring slowdown are key risks to consumption demand

However, severe weather conditions pose risk to agriculture output and income growth for rural economy with ~46% of the working population involved in agriculture. Also, within the formal segment, IT hiring has been slow along with a weak outlook. Its enormous share of ~42% to the private corporate sector wage bill remains a key risk.

Refining Margin of Indian Players to Stay at $9-10/bbl (CARE Ratings)

After a period of almost nine months, Brent crude again breached the $90/bbl mark at the start of September 2023. With this, the gap between international benchmark Brent crude prices vis-à-vis Urals, the flagship Russian crude, has widened for Indian refiners as Russian crude can be sourced within the G-7 price cap of $60/bbl.

The Urals had mostly traded below the G-7 imposed price cap of $60/bbl but have breached the cap in recent weeks whereby it is trading at around $69/bbl. Upon the rise in prices of the Urals, the share of Russian crude in India’s total crude oil sourcing basket declined to 34% in August 2023 from nearly 40% since the outbreak of the Russia-Ukraine war.

With Saudi Arabia and Russia deciding to reduce their daily crude oil production by 10 lakh barrels till December 2023, any major softening in crude prices is unlikely in the near term on the back of stable demand prospects.

In this backdrop, Indian refiners which are the key beneficiaries of cheaper Russian crude should still be able to clock Gross Refining Margins (GRMs) of around $9-10/bbl in FY24 as the likely decline in their margins on processing Brent crude is expected to be offset by the significant expansion in margins on processing Russian crude which can even balance out the potential decline in supply of Russian crude in the near term. Also, with the onset of winter in Western countries, cracks for refined products are expected to improve from the existing levels, further helping the GRMs of Indian refiners.

FMCG: A crude spike and an uneven monsoon could spoil margin gains (Anand Rathi)

Spotty monsoon could drive food inflation higher, drag rural demand. August saw a sharp monsoon deficit after a flurry of rain in July. At present, the all-India monsoon (till 6th Sep) is 11% deficient with uneven rainfall distribution across the country. While sowing area rose 0.4% over the last year, less area sown in pulses, cotton, jute, etc was seen till 1st Sep. This could drive food prices up as was seen with select vegetable prices shooting up recently.

Palm oil, soda ash, packaging prices soft. Barring prices of milk, wheat and sugar prices of most other commodities have been down. Palm oil prices fell ~40% in FY23 and fallen another ~11% so far in FY24. The steep fall in palm oil prices benefits soap (~60% of input cost), snack (~30%) and biscuit (10-20%) manufacturers.

We expect the drop in palm oil prices to be favourable to HUL (~25% soaps portfolio) and GCP (~25%). Further, prices of many crude-linked inputs have fallen (soda ash down 14% y/y in the last six months,p olyethylene down 12% y/y). Soda ash accounts for about 20-25% of the input cost in the manufacture of detergents. Packaging costs constitute 15-30% of FMCG companies’ input costs. HUL (~25% of the portfolio) and Jyothy Labs (~30% of the portfolio) are expected to benefit from lower soda ash prices.

Gross-margin gains could shrink on crude-oil price spikes. The recent spike in crude oil (~17% over 3m) could mar gross-margin gains for FMCG manufacturers. In Q1 FY24, lower input costs (primarily crude-linked derivatives) for them had led to 100-800bp gross-margin gains. However, the spike in crude-oil prices drove prices of packaging, soda ash, LAB, titanium dioxide higher, which could shrink gross-margin gains.

Thursday, September 14, 2023

Cook your own meal

Have you ever been to the vegetable market after 9:30 p.m.? The market at 9:30 p.m. is very different from the market at 5:30 p.m.

At 5:30 p.m., the market is less crowded. The produce being sold is good and fresh. The customer has a larger variety to choose from. The customer is also at liberty to choose the best from the available stock. The vendors are patient, polite, and willing to negotiate the prices.

As the day progresses, the crowd increases. The best of the stuff is already sold. Prices begin to come down slowly. The vendors now become a little impatient and less polite and mostly in "take it or leave it" mode.

By 9:30 p.m., most of the stuff is already sold, and poor-quality residue is left. The vendors are in a hurry to wind up the shops and go back home. The prices are slashed. There is a big discount on buying large quantities. Vendors are aggressive and very persuasive.

Customers now are mostly bargain hunters, usually the small & mid-sized restaurants, caterers, and food stall owners. They buy the residue at a bargain price, cook it using enticing spices and oils, and serve it to the people who prefer to eat out instead of cooking themselves, charging much higher prices.

The cycle is repeated every day, without fail, without much change. Everyone complains, but no one tries to break the cycle. Implying that all participants are mostly satisfied.

A very similar cycle is repeated in the stock markets.

In the early cycle, good companies are under-owned and available at reasonable prices. The market is less volatile. No one is in a hurry. Smart investors go out shopping and accumulate all the good stuff.

Mid-cycle, with all top-class stuff already cornered by smart investors, traders and investors compete with each other to buy the average stuff at non-negotiable prices. Tempers and volatility run high.

End cycle, the smartest operators go for bargain hunting. Strike deals with the vendors (mostly promoters and large owners) to buy the sub-standard stuff at bargain prices. Build a mouth-watering spicy story around it. Package it in an attractive color and sell it to the latecomers and lethargic at fancy prices.

The cycle is repeated every time, without fail, without much change. Everyone complains, but no one tries to break the cycle. Implying that all participants are mostly satisfied.

If my message box is reflecting the market trend correctly, we are in the end cycle phase of the current market cycle. I get very persuasively written research reports and messages projecting great returns from stocks that no one would have touched early cycle or mid-cycle.

The stories are so persuasive and the packaging so attractive that I am tempted to feel "it's different this time." But in my heart, I know for sure, it is not!

If you are tempted to say that I have been saying this crap for almost two months now, I agree unashamedly with no regrets whatsoever.

Have a look at the top 50 price gainers at BSE in the past six months. The earnings of most of these companies are not congruent with the rise in market price. In some cases, it has been even lower. The stories are truly enticing and even inspiring in some cases.

Out of 8500 odd BSE listed companies for which data is available, over 5000 reported negative or marginally positive EBIDTA in the last results. More than 1000 companies trade at EV/EBIDTA higher than 25. In the early cycle more companies trade at lower PE ratios.

Make your own assessment of what I am trying to say.

Wednesday, September 13, 2023

Time to clear bills and take inventory of cutlery

The latest G20 Summit, hosted by India ended on a cheerful note. Apparently, most delegates and dignitaries enjoyed the Indian hospitality, especially the colorful ambiance and brilliant food. It was perhaps for the first time ever that a host country added so much festivities to a G20 summit. The city was virtually shut down to control traffic, minimize air pollution, and allow safe passage for the delegates.

Overall, the theme appeared similar to the famous three-day-long fat Indian wedding. The guests were welcomed in the same manner as a traditional Indian household would welcome a bridegroom’s family. They participated in a variety of events, unrelated to the G20 geo-economic agenda. The main venue of the summit (Bharat Mandapam) was decorated like a grand marriage pandal with colorful lighting, décor, traditional dancers, and all welcoming staff dressed in fine attires.

The bride’s family displayed its finery (UPI, rich culinary traditions, classical architecture, colorful attires, traditional dances etc.) to impress the guests.

Like all weddings, we had mixed experiences with the guests. Adorable younger Jija ji (Prime Minister Sunak) gave many couple goals to millions of Indians. Rebellious cousin (Prime Minister Trudeau) was mostly ignored. Slimy phupha (President Biden) was given top attention but he still chose to ridicule the host and criticize sharply as soon as left the country (press conference in Hanoi within hours of leaving India). The son of the elder brother (Russian foreign minister Lavrov) was delighted to have a valuable return gift (no explicit criticism of Russian aggression in Ukraine). The son of the sulking elder Jija (Prime Minister Li Qiang) also did not complain much. The friends and other relatives (German, Australian, French, Arabs, Indonesian, Brazilian etc.) generally appeared pleased with hospitality or at least had the decency to not show any displeasure. The distant poor relative (representatives from the African Union) appeared awestruck by the opulence. Now that the wedding is over and the guests have departed, it is time to clear the bills and take inventory of the cutlery.

In my view, the key achievements of the summit could be listed as (i) a consensus joint declaration that calls for greater global cooperation to tackle, inter alia, the critical issues of climate change and acts of transborder hostilities; thus avoiding any conflict with the major constituents Russia and China; (ii) conceptual agreement to build a trade corridor connecting Indian sub-continent with Middle East Asia and Europe; and (iii) announcement of a global biofuel alliance.

It may be pertinent to note that Bali G20 declaration of 2022 also skirted the issue of naming Russia and China as aggressors. The Belt and Road Initiative (BRI) of China has not yielded many positive results so far while entailing significant financial and social costs for the stakeholders. The International Solar Alliance (ISA) conceived jointly by India and France in 2015, which now has over 116 countries as members, took a long to show any quantifiable outcomes. So, the benefits for India would depend upon how fast and effectively we build on these initiatives.

Insofar, as the enhancement of India’s stature in the global order is concerned, I believe that it has been a secular trend for the past two decades, and this summit would just help in sustaining that trend. I do not visualize any major upward shift in this trend merely due to G20 summit.C

Tuesday, September 12, 2023

Mice chasing the pied pipers

In the past few days, I have picked up many red flags that have further strengthened my conviction that the markets may be running far ahead of fundamentals. In my recent posts, I have pointed out how the market participants have been extrapolating events like ISRO Moon mission (see here).

For example, the following three occurrences underline greed's dominance and gradually permeating irrationality in investment decision-making.

1. Recently, one popular finfluencer tweeted a list of some small and micro-cap stocks highlighting that their market cap is less than their current order book. Many of these stocks witnessed heightened buying interest, apparently from small household investors, following the tweet. The message was fervently circulated on other social media, like WhatsApp. I received the message through at least nine forwards from different sources.

All forwards appeared to endorse this seemingly manipulative message. No one on social media questioned the correlation of market cap (or enterprise value) with the order book. No one bothered to highlight the sudden jump in the order book, not substantiated by the overall economic activity. No one bothered to check the margin profile of orders received.

In fact, there are many instances in the market where the stock rises 10-15% just on the news of receipt of an order. One mega-cap company’s stock rose 5% in a day on the back of a news item that the company may have received two orders worth US$4bn from a foreign entity, to be executed over the next five years. The annual execution of this order would be less than 3% of the company’s annual revenue, and the margin profile of the order is still unclear. In the past, such orders have not been too profitable for the company.

2. On August 10, 2023, the Prime Minister, replying to the debate on the no-confidence motion, said in jest that stock market investors should invest in PSUs, which have been criticized by the Opposition parties in the past. Most PSU stocks registered material gains after the PM’s statement (see here). A case in point is the share price of a trading public sector company, which has incurred operating losses in the past four quarters. The share price of this company rose over 80% within three weeks after the PM’s statement.

3. A large reputable brokerage yesterday sought to caution the market by dropping its midcap recommended portfolio. The brokerage noted, “We see limited point in trying to find fundamental reasons behind the steep increase in stock prices of several mid-cap. and small-cap. stocks. There is no meaningful change in the fundamentals of most companies; in fact, they have worsened in many cases. The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations (and purchase decisions) being driven by the high returns of the past few months.”

A strategy note released by the brokerage highlighted that “market sentiment is quite exuberant, based on (1) steep increase in the prices of many mid-cap and small-cap stocks; (2) large inflows into mid-cap. and small-cap mutual funds, and (3) huge number of new retail participants in the mid-cap and small-cap funds.”

The small-cap and mid-cap indices recorded strong gains yesterday, mostly ignoring the caution to the wind.

Thursday, September 7, 2023

Fx cover – some red flags to be watched closely

The total foreign exchange reserves of India stood at a comfortable US$594.8bn; appx 16% of the estimated FY24 nominal GDP of US$3.6trn. To put this number in perspective, in the last twelve months, India’s trade deficit (Export-Imports) was US$229bn. For FY23, the total current account deficit was US$67.1 while net receipts of capital account were US$57.9bn.

Notably, the forex reserve position of India has not changed materially in the past five years. The forex reserves of India stood at US$422.53bn at the end of FY18, appx 16% of FY18 nominal GDP. The reserves peaked in September 2021 at US$642bn as Covid-19 induced lockdown resulted in the collapse of trade. The recent low was recorded in October 2022 (US$531bn). Since then the Reserve Bank of India has recouped over US$60bn of reserves, bringing the reserves to a comfortable position.

For records, the forex reserves broadly include foreign currency assets (89%), Gold (7%), Special Drawing Rights (3%), and reserve position in IMF (1%). The share of USD or US denominated assets in total forex reserve is usually 60 to 70%; similar to the composition trade invoicing of India. Hence, USDINR movement impacts the reserves materially.

The forex reserve movement during FY23 has however highlighted a few red flags that need to be tracked closely, especially in view of the slowing global economy (cloudy export outlook), rising energy prices (rising import bill) and shrinking US-India yield differential (pressure on USDINR exchange rate).

· FY23 The Current Account Deficit of India increased to US$67.1bn against US$38.8bn for FY22.

· Net capital account receipts were lower at US$57.9bn vs US$86.3bn in FY22. Foreign Direct Investment (FDI) was lower at US#28bn vs US$38.6bn in FY22. Foreign portfolio investment remained negative (-US$5.2bn) after an outflow of US$16.8bn in FY22

· External Commercial Borrowings were also negative (-US$8.6bn) against a net ECB inflow of US$8.1bn in FY22.

· High cost NRI deposits (+US$9bn vs US$3.2bn in FY22) were notable contributors to the capital account.

· INR exchange rate weakness contributed negatively to the overall reserve position for the second consecutive year.

A major global credit event may not put India in a crisis situation like 2008 or 2013. Nonetheless, a significant deterioration in the reserve position may put pressure on the INR exchange rate, credit spreads, and bond yields.

Wednesday, September 6, 2023

Statistics – good for discussion, not necessarily for investment

I indicated yesterday that I see markets fast moving to a point where it becomes worrisome. The argument for fresh buying or taking a leveraged position is vitiating every day. The sentiments of Greed (making some quick money) and Fear (of missing out on a rally) are already beginning to dominate the conventional wisdom, in my view.

To put things in perspective, the latest market rally, particularly in the broader markets, was driven initially by a combination of macro improvements and undervaluation. But now most of the macro improvement seems to be tiring. In fact, it is very much possible that during 2HFY24 we may actually see some of the macros like growth, twin deficit, consumption and investment growth, gradually deteriorating.

On a micro level, the earnings upgrade cycle might peak with 2QFY24 results; and we may actually see some downgrades occurring due to poor rains (poor rural demand); further clouding of global demand outlook; margin compression for banks; and the rise in raw material prices (chemicals and metals); etc.

The current valuations are close to the long-term averages and leave little margin for error whatsoever.

As a broader benchmark, under the current interest rate and inflation expectation scenario, a conservative investor like me would be comfortable with a PER between 15-25 for non-cyclical businesses. For cyclical commodity businesses, the comfort would end in an 8-10 band.

I am usually not comfortable valuing asset-heavy businesses with relatively longer and unpredictable revenue cycles on price to book (P/B) or replacement cost basis; because it goes against the principle of going concern. If at all these businesses might be valued at Net Realizable Value (NRV) for limited purposes of judging solvency conditions.

Evaluating financial stocks purely on the basis of net book value is also mostly not a good idea. It is also important to consider the profitability and reliability of the book for corroborative evidence.

These days any query on a corporate database would throw a long (ominously long) list of stocks trading at EV/EBIDTA ratio of over 20. (EV = Market capitalization plus Net Debt; and EBIDTA is earnings before interest, depreciation and tax). It is even scarier to read research reports early in the morning which find stocks with EV/EBIDTA ratio of 20+ as attractively valued.

In case you find this blabbering of mine too academic, I agree. Whenever I suffer from indecisiveness or I am confounded, I go back to textbooks in search of a solution.

In my view currently, the following three are the primary drivers of equity prices in India:

(a) Hope of material improvement in corporate earnings. The rise in public expenditure (both revenue and capital) and hope of revival in rural consumption is fueling the earnings upgrade. Though not completely baseless, in my view, hopes of 18%+ earnings CAGR in FY24-25 may not materialize. The prices may therefore have crossed over the line of reasonableness; though still not entered in the territory of bubbles.

(b) Incessant flow of domestic funds. Still low equity exposure of domestic investors, even after a significant rise in the past three years, is motivating many investors and traders.

On valuation, there is another rather strange argument being relied upon heavily.

Many analysts and fund managers have argued that the current PE ratio of Nifty is much below the peaks seen in previous bull markets, and therefore, the market is nowhere close to a bubble territory. This could be a valid argument on aggregate levels and thus relevant to the investors investing solely in Nifty ETF or Index funds.

Investors who are investing mostly in broader markets need to assess the valuation of their respective portfolios. Anecdotally, I find that the individual portfolios are presently highly skewed toward the very richly (or crazily) valued stocks. These investors may need to restructure or re-balance their portfolios rather urgently.

Remember, the average life expectancy in India is close to 70yrs. This definitely does not mean that people below 60yrs of age need not take care of their health as they are not likely to die anytime soon!

Tuesday, September 5, 2023

Déjà vu

My discussions with a variety of market participants in the past couple of weeks indicate that we are at a stage in the market cycle when the investors and analysts begin to change their valuation arguments. Extrapolation of one-quarter performance to the next ten years, “story” pages of corporate presentations, political visions of growth, etc. begin to dominate the assumptions in the valuation matrices. Three to five years of forward earnings are being considered for arriving at twelve-month price targets.

My experience of the past three and half decades suggests that this kind of deviation always leads to mispricing of stocks and eventual sharp corrections.

It is important to remember that the return on the investment in publicly traded equities is a function of three factors: (a) earnings growth; (b) changes in price earnings (PE) ratio and (c) dividend.

The earnings growth is a function of multiple factors, e.g., (a) capacity (production capability); (b) demand environment (market leadership); (c) competitive landscape (pricing power, cost advantage); (d) innovation and technology advantage; (e) resource availability (raw material, labor, capital, managerial bandwidth, etc.), etc.

Price-earnings ratio (PER)

The price-earnings ratio (PER), one of the most popular equity valuation criteria, is the ratio between the earnings of a company and its market value. It broadly signifies that at the current rate of earnings how many years it will take for the company to add the value that an investor is paying today. Principally, an acceptable PER for a company's stock is defined by (a) the return on equity or capital employed (RoE or RoCE) a company is able to generate on a sustainable basis and (b) the growth rate of earnings that could be achieved on a sustainable basis. A company that could generate higher RoE/RoCE consistently and is likely to grow faster, is usually assigned a higher PER as compared to the ones that generate lower RoE/RoCE or have low or highly cyclical earnings growth.

Re-Rating

A rise in PER, if not commensurate with the rise in earnings profile needs deeper scrutiny. Sometimes the rise in PER occurs due to correction in anomalies (undervaluation) of the past. This is a welcome move. Sometimes, PER changes (re-rates) due to relative forces, e.g., a rise of PER in comparable foreign markets or a change in the return profile of alternative assets like bonds, gold, real estate, etc. This is usually unsustainable and therefore a short-term phenomenon. Many times, demand-supply mismatch in publicly traded equities also drives the re-rating of PER (excess liquidity chasing few stocks and vice versa). This is again usually a short-term phenomenon.

Dividend

A sustainable rise in dividend yield could be a sign of improvement in (i) profitability; (ii) stronger financial position (B/S improvement by deleveraging); and/or (iii) stronger cash flows. In some cases, however, it could reflect stagnation in growth. Investors need to assess the reasons behind higher dividend yield before getting lured by it. A higher dividend for lack of growth/reinvestment opportunities would often lead to the de-rating of PER, thus reducing overall return for investors.

Friday, September 1, 2023

Some notable research snippets of the week

Growth steady; sequential momentum decelerates (Nirmal Bang Institutional Equities)

Early data for July’23 suggest that 68.8% indicators were in the positive territory on YoY basis, up from 65.6% in June’23. Final data indicates that 70.8% indicators were in the positive territory in June’23.

On a sequential basis, 31.25% indicators were in the positive territory in July’23, down from 37.5% in June’23. Final data indicates that 45.8% indicators were in positive territory in June’23.

Rural recovery remains mixed, although July’23 did see a dip in rural unemployment, aided by a pick-up in monsoon. The Manufacturing sector remains resilient despite some sequential deceleration. In the Services sector, formal job creation is under pressure while traffic indicators witnessed a sequential deceleration.

Rural recovery mixed: Rural unemployment moderated to 7.9% in July’23 from 8.7% in June’23, aided by pick-up in monsoon and kharif sowing activity while urban unemployment rose marginally to 8.1% in July’23 from 7.9% in June’23. Central government’s expenditure was growth supportive in June’23, up by 17.3%YoY and 31.9%MoM. Tractor sales were up by 6.2%YoY in July’23 but declined by 40.5%MoM.

Meanwhile, 2W sales declined by 7.2%YoY and 3.7%MoM in July’23. On the other hand, Passenger Vehicle sales were up by 19.2%YoY and 6.9%MoM in July’23 while Commercial Vehicle sales grew at a muted pace of 3.2%YoY and declined by 2.7% MoM. Overall, Motor Vehicle sales declined by 2.3%YoY and 1.6%MoM in July’23.

Manufacturing resilient: The S&P Manufacturing PMI continued to hold up at 57.7 in July’23 vs. 57.8 in June’23. Manufacturing, as measured by the index of industrial production (IIP), grew by 3.1%YoY in June’23 vs. 5.7% in May’23 and declined by 1% MoM. Capital Goods production was up by 2.2%YoY and 4%MoM in June’23 while Capital Goods imports grew by 9.7%YoY and 15.5%MoM, implying sustained capex recovery. External sector headwinds persisted, with a sustained decline in exports and imports. Exports declined by 15.9%YoY while imports declined by 17%YoY and Non-oil, Non-gold imports declined by 12.1%YoY in July’23.

Formal jobs under pressure; traffic indicators decline MoM: The S&P Services PMI sustained at an elevated level of 62.3 in July’23 vs 58.5 in June’23. Traffic indicators sustained their downtrend on MoM basis despite some improvement from June’23 on YoY basis. Rail freight traffic was up by 1.5%YoY in July’23 after a 1.9% decline in June’23. Air passenger traffic was up by 24.4%YoY July’23 vs. 18.8% in June’23 while major port traffic was up by 4.3%YoY in July’23 vs. 0.4% in June’23. Diesel consumption was up by 3.9%YoY while petrol consumption was up by 6.2%YoY in July’23, but both sustained their decline on MoM basis. GST E-way bill generation was up by 16.4%YoY and 2.2%MoM in July’23.

The Naukri Jobspeak Index declined by 18.8%YoY in July’23, indicating pressure on the formal services sector. Non-food bank credit growth (ex-HDFC merger) slowed marginally and stood at 14.8%YoY in July’23 vs. 16.4% in June’23. The credit-to-deposit ratio stood at 74.6% in July’23 vs. 75.1% in June’23. While deposit rates continue to rise, lending rates (particularly MCLR) are flattening out.

Utilities (JM Financial)

In an endeavour to improve our understanding of the emerging contours of development in India’s power sector amidst the tri-axial relationship of Climate change, Energy security and Economic growth, the first week of Aug’23 was truly enriching. We got the opportunity to meet senior officials from MNRE, CERC, CEA, SECI, NHPC Ltd. and SJVN Ltd. in Delhi in addition to hosting CMD & Directors of NTPC Ltd. in Mumbai. Our discussions were largely oriented towards the future of coal, developments around power markets, growth momentum in renewables, perspective on hydropower, knowing more about pumped hydro storage and the emergence of wind and nuclear on the ‘To Do List’.

Now, we know that the pumped hydro storage projects (PSP) have received unprecedented support from policymakers and the private sector. The 2,700MW of capacities (1,200MW Pinnapuram, 1,000MW Tehri, 500MW Kundah) are expected to be commissioned by 2025.

Projects totalling over 70GW are in various stages of finalisation (pre-construction). Capacity addition is likely to gain traction from 2027 onwards. We could sense the CEA’s confidence in exceeding 19GW of capacity addition by 2032. CEA looks at energy storage in totality, and PSP (19GW by FY32E) and BESS (39GW by FY32E) as the two ways to achieve it. Any shortfall in BESS (and a shortfall is increasingly becoming evident given sticky cost, lack of technology maturity and import dependence) is likely to increase contribution from PSP going forward.

NHPC, through its JV NHDC Ltd, plans to construct a 525MW PSP near Indira Sagar Dam, Khandwa, Madhya Pradesh using the existing reservoirs Indira Sagar and Omkareshwar of its Indira Sagar hydropower project.

During the last decade, India has seen an annual run rate of a meagre 700-800MW of hydropower generation capacity additions. We could sense a lot of enthusiasm among NHPC, SJVN and CEA (Hydro group), as the country is likely to have around 10GW of hydropower capacities in the next 5 years.

The government has been pushing central utilities (NTPC, NHPC, SJVN, SECI) to enhance their renewable portfolio beyond their respective core businesses. To our pleasant surprise, there appears to be constructive competition among central utilities in bagging more solar/wind projects (while remaining profitable, as they claim).

India is firmly committed to meeting its global commitments towards climate change. So, the government remains focused and determined to enhance the share of renewables in the energy mix while addressing the challenges of grid stability, power availability and affordability.

The consistent increase in solar power capacity in the generation mix requires the share of variable power and energy storage to improve, going forward. The addition of wind helps in addressing part of the problem by increasing CUF from 20-25% for solar and 30-35% for wind to 45-50% for SW hybrid power projects. MNRE is evaluating comments from various stakeholders on the draft Wind Repowering Policy. Attempts are being made to issue the revised policy soon, making repowering financially attractive for the original owners of the high-potential wind sites.

It was interesting to know that stray cases of renewable power curtailment in India are largely due to financial reasons and not due to technical issues like grid balancing as generally believed. The outstanding dues of discoms towards gencos are no longer a concern. However, in some of the places, we could read between the lines that it may suppress the demand for power in future.

We can’t wrap up the interactions during our Delhi visit without touching upon the most debatable and uncertain factor, i.e., coal, (still) the king of the power sector. Recent weather events (Himachal floods), the unseasonal rains during 1QFY24 and a relatively dry spell during 2QFY24 have led to large variance in power supply vis-à-vis the plan. During 1QFY24, hydropower generation from NHPC/SJVN declined YoY by 3%/23% despite a 1.3% increase in power demand. Similarly, the CUF of Torrent Power’s wind plants declined to 30.5% in 1QFY24 from 33.4% in 1QFY23 due to the Biparjoy cyclone in Gujarat. Such uncertainty in 6 CUF – Capacity Utilisation Factor power generation from non-coal power plants and global experience post-Ukraine crisis is gradually building momentum to kick-start coal-fired capacity additions. We heard that there has been an increase in the number of reviews on this issue by the ministry in recent months.

Accordingly, NTPC is targeting to order 7.2GW of thermal capacity by FY25. Recently, coupling in power markets has been under discussion across the sector. We also broached this issue with various officials to get a sense. To encourage active participation of other players in the power exchanges remains the priority. However, the government is evaluating various mechanisms given the operational and technical challenges in implementing any new structure.

Thermal power: Momentum is gradually building to kick-start coal-fired capacity additions. We heard that there has been an increase in the number of reviews on this issue by the power ministry in recent months. Accordingly, NTPC is targeting to order 7.2GW of thermal capacity by FY25.

Pumped hydro storage (PSP): Projects totalling over 70GW are in various stages of finalisation. Capacity addition is likely to gain traction from 2027 onwards. We could sense the CEA’s confidence in exceeding 19GW of capacity addition by 2032. Any shortfall in BESS5 is likely to increase contribution from PSP going forward.

Hydropower: India is likely to add around 10GW of hydropower capacities in the next 5 years from an annual run rate of a meagre 700-800 MW during the last decade.

Wind power: MNRE is evaluating comments from various stakeholders on the draft Repowering policy. Attempts are being made to issue the revised policy soon, making repowering financially attractive for the original owners of the high-potential wind sites.

Discom dues: The outstanding dues of discoms towards gencos are no longer a concern. However, in some of the places, we could read between the lines that it may suppress the demand for power in future.

Market coupling: The government is evaluating various mechanisms given the operational and technical challenges in implementing any new market structure. However, they are committed to encouraging broad-based participation. This was also echoed by CMD and Directors of NTPC during our interaction.

India re-designing – from charkhas to chips (Phillips Capital)

India's semiconductor industry, including software, AI, and hardware, is set to outpace global growth. The market is expected to reach US$ 110bn, at a CAGR of c.22% from FY20 to FY30, contributing 10% to the global semiconductor market by FY30.

As India’s aims for electronics production worth c.Rs 103.7tn (US$ 1,120bn) by FY32, with a major contribution from mobile phones, PCBA, IT hardware, etc, we expect India to develop as a strong manufacturing ecosystem. It shall be supported by the following factors: (1) China+1, (2) increasing government initiatives, (3) major investment announcements by MNCs, (4) huge exports opportunity, and (5) OSAT being the new growth driver. Indian EMS companies are foraying into backward integration (like OSAT/ATMP, Fabs, design, semicon, silicon) – this will lead to significant opportunity both in domestic + export market. This will also cause working capital to improve – with the component ecosystem developing in India.

Government allocated a fiscal support of c.Rs 2,550bn (US$ 30bn) for electronics manufacturing, out of which c.Rs 850bn (US$ 10bn) is towards developing the semiconductor ecosystem (display, fab manufacturing, OSAT, etc.).

Credit Offtake Remains Robust, Deposit Growth See a 6 Year High (CARE Ratings)

Credit offtake continued to grow at a similar pace sequentially, increasing by 19.7% year on year (y-o-y) to reach Rs. 148.8 lakh crore for the fortnight ended Aug 11, 2023. This surge continues to be primarily driven by the impact of HDFC’s merger with HDFC Bank, as well as growth in personal loans and NBFCs.

Meanwhile, if merger impact is excluded, credit grew at a lower rate of 14.8% y-o-y fortnight compared to last year.

• Deposits too witnessed healthy growth, increasing by 13.5% y-o-y for the fortnight (including the merger impact). The growth in deposits has not been at the same pace as credit since the larger proportion of liabilities of HDFC was by way of borrowings rather than just deposits.

• The outlook for bank credit offtake remains positive, with a projected growth of 13-13.5% for FY24, excluding the merger's impact.

• Deposit growth is expected to improve in FY24 as banks look to shore up their liability franchise and ensure that deposit growth does not constrain the credit offtake.

• The Short-term Weighted Average Call Rate (WACR) stood at 6.68% as of August 18, 2023, compared to 5.09% on August 19, 2022, due to pressure on short term rates basis recent incremental cash reserve ratio (I-CRR) norms by RBI.

Chemicals (IDBI Capital)

The consistent fall in chemical prices was arrested to some extent in July. Most of the management commentaries do point to slow global demand offtake and significant channel destocking especially in the agrochemical segment. China has been aggressively entering various segments and impacting them by steep pricing and volume dumping.

We expect pricing pressures to sustain for commodity chemicals with Chinese resurgence. However, realignment in the global supply chain to diversify from China and strong interest from global MNCs to source from India bode favourably for the Indian chemical sector.

Companies with long term contracts which have price variation clauses embedded in them will fare better owing to better revenue visibility and margin protection. Companies who are higher up the specialty chemicals value chain stand to perform better in the current environment.

Pricing Pressures remain: We chart out price data for various chemicals further in this report and present select highlights here. Mono Ethylene Glycol (MEG) prices increased by 9% MoM. MEG is more commonly used as a polymer precursor and as an antifreeze application. India Glycol is a major manufacturer of MEG domestically. Caustic Soda Lye prices have declined by 9% MoM as the industry is facing challenges in terms of weak demand and slow sales leading to higher inventory levels. Acetic acid prices have risen by 12% MoM. It forms a key input for manufacturing ethyl acetate and acetic anhydride. Soda ash (Dense) prices have risen by 2% MoM to Rs 41/kg . Toluene and Acetone prices are up by 20% and 12% MoM respectively.

Outlook: We believe that commodity chemicals segment would be under pressure especially in the wake of increasing competition from China. We prefer specialty chemical players with decades of rich experience, deep chemistry prowess and strong R&D and execution capabilities. Companies that are delivering value added products and moving up the value chain will fare better as compared to pure commodity plays.

Nano fertilizers (IIFL Securities)

Nano fertilisers are nanotechnology-based fertilisers — modified form of bulk fertilisers. Nano fertilisers deliver nutrients to the crop in one of the following ways:

• Encapsulated inside nano-materials, such as nanotubes

• Nano-porous materials, coated with a thin protective polymer film

• Delivered as particles or emulsions of nano-scale dimensions

Nano fertilisers have a high surface to volume ratio and are said to be more effective than the traditional bulk fertilisers. They are also said to reduce soil toxicity and the use of excessive chemical fertilisers. Some research also suggests that they boost crop output and optimise

nutrient utilisation.

While nano fertilisers can be applied by either foliar application or soil application, studies to determine the more efficient method are ongoing. Only ~30-40% of the traditional fertiliser is estimated to be absorbed by the plant; however, the absorption rate for nano fertilisers is estimated to be ~80-90%. As per reports, nano fertilisers are also easier to mix with water vs the traditional ones.

…will Indian farmers adapt?

The recently launched nano fertilisers (urea and DAP) have been in the limelight and should farmers adopt these products, the same are expected to reduce the government subsidy bill significantly. In this note, we discuss the selling proposition of these products, their likely impact on the government-subsidy expenditure and the changing industry dynamics.

IFFCO’s nano-urea has foliar application: IFFCO has recommended that the nano-urea it launched last year be “sprayed” on plants for effective use. It claims that the product can help improve yields by up to 8%. However, adoption by the farmer has been a bit slow, as the job of mixing with water and then spraying across the field is labour intensive.

Adoption of nano-DAP could be better than nano-urea: For the last five years, the average share of imports for urea and DAP stands at ~20% and ~40% respectively. Should the government be successful in replacing this demand with nano fertilisers, it could save ~Rs485bn in subsidy (at FY23 rates). However, adoption of nano fertilisers by farmers is slow. The nano-urea bottle is priced similar to the MRP of a conventional bag and provides little incentive for the farmer to switch products. Conversely, nano-DAP will provide greater incentive to the farmer - being priced at ~50% of the current MRP.

Several capacities coming up: In addition to IFFCO, Meghmani Organics has also announced a capex of ~Rs1.5bn to set up a 50mn bottle plant for nano-urea. NFL and RCF have also tied up with IFFCO and intend to manufacture ~50mn bottles each by FY25. Additionally, Coromandel has recently launched nano DAP; Chambal Fertilisers continues to watch this space closely.

Capacities coming up for nano-DAP are unclear, yet. Till date, only IFFCO (expected to launch soon) and Coromandel (expected to launch product in CY23) have announced capacities.

Should the government be successful in replacing imported fertilisers (Urea and DAP), it is likely to save Rs485bn in subsidy outflow (~28% of FY24 estimated expenditure). The savings are accentuated at ~Rs784bn, if it can replace ~50% of total consumption with the usage of nano fertilisers. However, the product’s acceptance is facing severe headwinds and thus, we believe that replacing ~50% of urea and DAP consumption is currently improbable.