These are the troubled days for Stock market
especially for small and midcaps but these types of corrections are normal and
serious investors do not lose their sleep over it. Indian economy is not doing
that bad and there is still room for much higher growth if and only if Govt has
the will power to move from projects to policy reforms; from slogans (Make in
India, digital India) to the real ground work because I think Make in India is
failing big time. Make in India was launched to make India a manufacturing
power house and to provide jobs to millions of unemployed people. Indian Growth
story so far was not inclusive at all and poverty is everywhere.
Growth of Industries and manufacturing
is required to provide employment to these bottom of the pyramid low skilled
people. Make in India aimed at providing 10 cr more jobs by 2020 but reality at
the ground is not that bright and one of the main reason for low investments in
Industrial manufacturing is the British era un-supportive labor and land laws.
Long awaited Labor and Land law reforms are still pending and these are vital
for the success of Make in India as in the absence of these, Labor hiring and
land acquisition is a messy task. 85% of Indian manufacturing firms employ less
than 50 workers. Apart from Labor and Land law
reforms, Agriculture supply chain reforms are the biggest policy push which can
give the massive dose of muscles to the economic growth.
Draconian Labor Laws: Biggest
hurdle in the industrial growth
Large number of labor laws in India (45
central Govt and more than 100 most of the times contradictory state laws) make
it very difficult for businesses to retrench in case of slowdown and adoption
of new technology like Industrial Disputes Act of 1947 states that a firm with
100 employees or more cannot close down without government permission. It was
the industry friendly labor laws which prompted the gigantic scale of
investments in manufacturing in China. FDI investments in large scale
manufacturing in India is way below China (in initial years of China). In spite
of large number of unnecessary and unfit labor laws India, just 10% of the
workforce is in formal sector while the other 90% works in conditions devoid of
basic employment benefits. In spite of low wages, India still is not a global
manufacturing powerhouse. India's share in global manufacturing is just 2%
compared to 22% of China. This just shows that something is horrible with our
Industrial and labor laws. so it is quite an irony that in spite of so much Hulla-Gulla
only 10% of the workforce is covered by these large numbers of Labor laws.
Current status of Labor laws motivates firms
to remain small or to focus on capital intensive industries. That is one of the
reasons that our Industrial sector is very small compared to other developing
economies. Share of Industry sector in GDP is around 17% (still at these levels
for last 25 years) while it is in high 30's in economies like China, Thailand,
Indonesia. India's manufacturing prowess is limited to auto and engineering
sector but we are lagging big time in others like India is a big importer of
Electronics goods (Including components) like Laptops, Mobiles, TV’s etc. The value
is big and it is expected to cross even our oil imports in next few years. The
Net import of Electronics goods is massive around 3 lac Cr which is closing in
with oil import (Net of exports) fig of around 4 lac cr.
Our
IT sector has grown big because most of the labor laws are not applicable on
them (but on Industries) as they enjoyed exemption from them by the Govt but
now labor department has decided to not to renew the exemption.
Land Acquisition and Agriculture
supply chain reforms
Land acquisition has been marred by the
misconception that this will hit our agricultural production and food security
and will exploit poor farmers when the reality is that India is never short of
farm land in fact we are 2nd largest farm land country; second only
to USA. 60% of India's land is agricultural land. Our farm land is 35% more
than China but China’s productivity is way higher than India…in some crops it
is 4 times…2 times in rice!! And this is one of the issues plaguing Indian
agriculture apart from Supply chain due to which farmers do not get adequately
paid. Most of the farmers have land holding around 1 acre only which leaves no
scope for mechanization and economy of scale. It is better if the lands like
these are consolidated under contract farming by corporate houses or sold for
industries (wherever possible) providing jobs to farmers. Our farmers with such
a small holdings can only go for subsistence farming and they'll remain poor
till their death.
On the other hand, Israel, whose 60% land is
desert and rest is arid, has transformed its agriculture from deficiency to
biggest exporter of high value agri crops. They recycle some 80-90% of
municipal waste water for agriculture, 90% of land is under Drip irrigation,
Desalination, use of most modern techniques and R&D…Israel is a power in
agriculture now and is studied globally for their success. India now has no
choice left but to follow Israel. Our water levels are dwindling fast (Part
courtesy free power), chemicals fertilizers have turned land toxic, Intensive
cropping has made land devoid of any nutrients and organic material like humus.
India uses drip irrigation just for 5% land whereas Russia has 80% and Brazil
has 50% coverage. No doubt our Governments have failed miserably in true
Agricultural reform for past 30 years. The growth that we have seen has just
dragged the future production into past/present (Through excessive use of water
and chemicals) and our water levels and Lands have lost productivity fast.
Agricultural reforms are the biggest route to
India getting 10% growth rate. And it does not mean free power, subsidies, high
MSP, Loan waiver as these are the reasons for the sorry state of the
agriculture. More than half of our labor is in farms but share of agriculture
in GDP is 14%...down from 19% a decade ago due to higher growth in other
sectors but this also means unequal distribution of growth/income as most of
the poor are still poor. As around 60% of our population depends upon
Agriculture so you divide the low agricultural production by 60% population and
you'll get that most of the India is poor and income inequality is high;
further in terms of workforce involvement we are still a Primary sector
economy. Our low industrial production levels of 17% of GDP also explains the reason for our rural population to remain indulged in subsistence farming as there are no jobs for them in manufacturing sector. We need to move this large labor from farms to industries which is not
happening in India.
Govt has put too much effort in controlling
but lesser efforts have been put in the creation. Job creation is low and
success of Make in India is vital for job creation. Agriculture productivity
and pricing will grow the rural economy fast and balance out the unnecessary
cereal production substituting the import of Pulses/edible oil. MSP has
“cerealized” the agriculture of India and we need to break that now at any
cost.
As shared in earlier posts also, i see Agro
supply chain as the next big revolution happening in the Indian Agriculture.
Crop wastage is huge and farmers do not get the full price for their crop. So
cold chain and warehousing infrastructure (Snowman Logistics), better price
discovery mechanism like Commodity trading exchanges (MCX), short term loans
against warehouse receipt (Kiran Vyaapar), reforms in the state AMPC Acts are
some of the steps to ensure the low wastage and better pricing for farmers.
Government is already on the Job
Fiscal discipline has been good so far but now
there are real dangers as Oil prices are rising, RBI may raise the Int rates to
counter the Inflation which will further hit the already ailing banks. Private
sector investments are low due to credit limitations of the NPA hit banks and
this is one of the reasons for low job creation. But Govt is now focusing on
equity investments in the banks and this may ease some pressure; also private
sector banks are in much better shape.
There is no doubt that Demoney and GST has hit
the economy hard, even the present high GDP numbers are not showing something
very important- the de-growth in INFORMAL economy which is the biggest victim
of Demoney and GST recently so I would take the growth in GDP with pinch of
salt. There is another case that some of informal economy (due to demoney/GST)
is getting reflected in the mainstream figure but at the micro level nothing
much has changed.
As is the experience in the past, growth rate
of 7-8% raises the Inflation in India because we lack the supply systems to
support this type of growth. Another reason for our better growth, better CAD,
better fiscal discipline was the low commodity prices globally especially Oil,
coal etc. and the recent spike in Oil prices is the real test of our economy.
Also, 8% growth rate of India and 2% of USA are not comparable at all and not a
moment of relaxation for India because the likes of US are matured economies
with very low poverty and unemployment but India needs 8% just to take lakhs of
people out of poverty. I have no doubt that this growth rate is not revealing
the terrible income inequality in India because Indian businessmen still
prefers (due to draconian labor laws) highly mechanized factories than labor
intensive factories like apparels (90% textile firms are small scale with less
than 8 employees). They prefer casual workers to whom they can hire and fire as
per their need.
So still, much work is pending on the policy
front. But on the other hand, we have encountered tough droughts in last 2
years and still been able to keep inflation under control. This year, rains are
expected to be good. Govt is working on ease of doing business especially on
Labor and Land laws. Modi Govt has abandoned the most disputed Labor law
clauses like Govt approval for sacking a labor etc. Modi Govt is working on
much improved business friendly industrial relations bill.
Further, these policy reforms with GST and
Insolvency code will spur the FDI investments in India. Global giants are
looking to build manufacturing units in India. Govt is also working on much
awaited FDI policy 2018 which will set the tone for much needed investments in
India.
As we can see, India is marred by policy and
not by other constraints and this for me is the biggest hope for India. BJP
Govt is getting hit recently due to issues like Oil prices and other issues but
I still feel that they are the best for this policy reform job and have the
aggression and daring for the same. I have no doubt that in spite of current
noises BJP will win in 2019 elections. And this is the minimum stock markets
require: a stable and Strong government.
Stock Updates:
So I am still buying in small amid the current
turmoil in the market. Today picked Narayana
Healthcare at 223 (best pick for Healthcare), Laurus
labs at 455 which is poised for strong growth in the future as it has
made big investments in the recent past which are yet to contribute to the
topline although their operational costs like salaries, Depreciation and
interest costs are hitting bottom lines. Picked VA
Tech wabag at 428 which is a stunning water tech company with around 100
patents, current working capital and order issues are temporary and we need to
see the gravity of water problems in India to realize the full potential of
this company.
Also picked Zee learn at 34 who
have fallen in spite of the great results due to market apprehensions about its
acquisition of MT educare but its management has come out in the open to
explain their business and reason for buying MT so in my view it is still one
of the best education company in India and deserves investment. Picked Praj Industries at 84 which is going to see
big activity due to coming Ethanol policy and Praj may secure big orders for 2G
ethanol. High Oil prices makes it logical for our government to promote ethanol
which will help in realizing the twin objectives of curbing oil imports and
raising farmer incomes.
Snowman Logistics: Picked more at 45. Agri supply chain is the next big
thing in Indian Agriculture. India wastes massive quantum of Agri produce due
to non-availability of cold chains and warehousing. And whenever i try to find
something related to it i always find snowman as the best candidate (Not to
forget Kiran Vyapar). I also try to find value in Future Supply chain (I am
holding its parent Future ent) but Snowman is available very cheap compared to
its asset base (which is the real earning potential). NP profile of Snowman
gives a very misleading picture...loss of 3 cr on 200 cr turnover but Its EBITDA
is strong 50 cr (25% margin). Its Depreciation is massive at 40 cr; higher than
employee cost of 20 cr!! It is the result of its recent expansion plans.
FSCL has EBITDA of 120 cr on turnover 800 cr
(15%) but cold chains require more investments in Plant and machinery so assets
base of snowman is higher than FSCL even at much lower turnover. I am also
planning to invest in FSCL because I like the management skills of Biyani. FSCL
is getting secured business from the very strong group retail business although
this has resulted in comparatively higher working capital days. But at PE of 40
FSCL is a good one. But Snowman is available just around its replacement cost
plus most of its capacity is yet to be fully utilized especially warehousing.
It has recently tied up with IKEA for managing
supply chain of IKEA’s in-store giant sized restaurants in India. IKEA derives
around 5% from restaurants business globally but they are targeting 10% in
india and building one of the biggest restaurant in the world comprising 1000
seats in Hyderabad. Snowman will manage the Pan India supply chain.
India is doing great in sea food exports for
past some time and the stocks like Avanti has given great returns. AP does the
sea food exports from Krishnapatnam port and Snowman has just completed recent
cold chain facility there (Operational Since Feb-18). So this is a big
opportunity along with agriculture and Biopharma for Snowman. I have
invested in Linde India (Global giant in freezing gases i.e. Cryogenic freezing
technology apart from Gases for Steel industry) also due to their plan to
invest 500cr for cryogenic freezing plant in AP. These are indirect plays on
the growth of seafood industry in India.
(Views
are personal and should not be taken as a recommendation for buying or
selling a stock. Stock markets are inherently risky so kindly do your
Due Diligence before investing. I am not a certified Sebi Analyst and
holding the shares discussed in this Post)