tag:blogger.com,1999:blog-86293649980486677022024-03-29T12:52:45.641+05:30Equity, Economics And EnergyNothing in life is Still...everything comprising life is ever oscillating. True wisdom lies in knowing that life never clings onto anything. Stock markets and economies reflect this phenomenon of life perfectly.Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.comBlogger167125tag:blogger.com,1999:blog-8629364998048667702.post-48165185839652794322022-03-03T15:06:00.010+05:302022-03-05T12:13:09.520+05:30Russia-Ukraine War- Wars and Mis-calculations (Part 2)<p> Please <a href="https://oscillationss.blogspot.com/2022/02/russia-ukraine-war-wars-and-mis.html" target="_blank">Click here for earlier Post</a></p><p></p><p class="MsoNormal" style="text-align: justify;">Ukraine is still standing; not
sure whether on one leg or two but the same is irrelevant in the face of
great fighting spirit shown by Ukraine. This we can say is a fantastic
fight back. When US and NATO declared that they won’t support Ukraine against
Russia; Russia was smiling at that time at the pitifulness and helplessness of
Ukraine and just like Russia everybody discounted them as a loser without any
will left to fight. But these types of events are the reason that history books
have something interesting to tell; these are the events where they don’t need historians
to create (Read fabricate) a narrative to generate/justify/impose an alternate
reality. It would be interesting to see how Russian history books would narrate
(read downgrade) this tremendous fight back.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So as I have explained in the
earlier post- Strong and prolonged resistance by Ukrainians have disrupted the
Russian plans for regime change and now Russia has to reassess and recalculate
the inflow matrix. Russia and Ukraine are going to have another round of talks
today although just a week back Russia was not even picking their calls and it
had no interest in talks. So it means Russia has lost because now it can
only destroy Ukraine but can't win and that's why we are seeing them talking.
The deal point at the talking table now is- Russia won't destroy Ukraine and in
return it will take something from Ukraine and what Ukraine can give is a wild
guess because I don't think Russia's sole purpose for war was not allowing
Ukraine to join NATO. As I have shared earlier- I feel Russia doesn't want
democracy near its borders and Putin wants to revive the USSR before he is gone
from this world and he knows he is losing time. Putin wanted to make Russia a big
economic power when he started in 1999, even wanted to Join NATO. But as of now
we know Russia is still far from being a big economic power. Its exports are
mainly natural resources (not high value added products). So there are more
political aspects to the current quagmire than security aspects. Why did (what
fear) small eastern European (earlier USSR members) countries join Nato? Whether
NATO was really interested in Russian territory (NATO expansion card)? Whether
Russia ever counted NATO as a big threat to its security and whether there is
any doubt that NATO was on its death bead two months back so as to pose any real
threat to Russia (now revived by Russia)? Anyone who feels there are real/genuine
answers (Not just speculations) for these questions can understand that things
are much more complex than a feeble NATO expansion Card being cited as a reason
for this war. So as of now, I can't say that Russia was only worried about NATO
expansion and we are not really sure what further destruction he can do (or he is
already having plans). <span style="color: #2b00fe;">Putin has been successful in creating an image of an unpredictable fellow who can take irrational actions and that's why west is feeling a bit constrained in its reaction and planning to counter Putin. But I don't think that he is that irrational fellow because the same recklessness and irrationality is not on display in other spheres of his life and relations with other countries whether it is India or china; Putin has always taken rational decisions when it is with India or china so I think west has to plan their answers treating his as a rational fellow and then this bloody game is a great Game theory stuff- who will take what actions and strategies to counter the others. </span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Russia is our greatest friend but
that doesn't mean that friends can't make mistakes or dangerous miscalculations.
However in geopolitics we don’t raise a finger towards the mistake of friends
because most of those who want us to raise our finger also have bloody
hands and nobody is interested in us and our security. Truth (Realty) is
never linear and one dimensional. In a more logical world, Russia can't justify
its invasion pointing out that the likes of USA have also done it many times.
Russia said that Ukraine People are dying under Nazis and that they wanted to
save them; but now they are the ones who are killing them and destroying their
schools/hospitals/everything so that they can bring them to the table to have a
deal to save their face. So Russia has done something which has weakened it
(and India also) and I just hope that a more weakened Russia due to
economic sanctions doesn't strengthen China too much. A weak Russia will find
it tough to support India. So we can't really be certain in whose interest this
war started- Ukraine, Russia or just Putin but one thing is looking certain
that it will hit Indian interests and that's what matters the most for an
Indian. Rest all becomes secondary in this weird and imperfect world. Pakistan
who once was a fierce Russian enemy and the one responsible for their defeat
in Afghanistan and then subsequent division of the USSR is now an ally of
Russia. So Russia will ensure its interests before supporting India. The good
thing is that India understands that It can't really count others in its
fights; if anyone can join then good but India doesn't and can't really expect
too much from others and that's why we are neutral and don't mess with the
affairs of others.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So in a more logical world we can
expect that as Russia really doesn't have anything to gain by winning or
destroying Ukraine and costs and other economic, political and global
implications are very harsh and hence we could expect both Russia and Ukraine
to break a peace deal today or in near term...this is no brainer (in a logical
world). But Putin has shown we can't really expect him to follow the logic-
otherwise he doesn't have anything to justify the war/invasion. But still I
really feel and hope that by now the ensuing Russian fall might have forced
Putin to reassess, recalculate and recalibrate his much bigger and ambitious
plans and we can expect some peace coming soon.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">A big positive (feels good to talk about positives amid this catastrophe) I see after any such
peace deal is that the World may witness a longer peace period. For a long
time, I have been feeling that some big war may happen at any time in the world
because there is too much negative energy buildup. We have countries like China
who are ready to create nuisance all the time. We have too many conflicts
everywhere. Everybody feels that they are strong enough to destroy the
others...so the likes of China are doing nonsense everywhere in every possible
way and world really was/is like a dangerous volcano waiting to erupt any time.
But this war has shown the fragility of power and the strength of the weak. So
people have seen the destruction they wanted to see for a long time and also understood
the results that in today's world nobody is really that weak. The war has sort
of released the pressurized energy and people should focus on peace. Hence I
feel if both can find a peace deal then we may see the world becoming a
peaceful place...in a sense that it has avoided a more serious, destructive and
bigger war.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Although the likes of China may
emerge stronger due to a weak Russia and they will try to create nuisance but I
feel a silent Chinese decoupling from the global supply chain is already
underway and then even China won’t be able to withstand economic sanctions if
they try anything similar to Russian misadventure. But India will always be
alone to fight China though the QUAD presents some hope because out of sheer foolishness
China (most dictators are foolish or turned foolish over time) has created an
enemy out of India and forced India to join hands with USA when China’s main adversary
in realizing its global dreams (starting from Taiwan and South china sea) is
USA not India. China doesn’t have any serious conflicts with India which can
hit its economic or security considerations. India has even allowed China to
get away with Tibetan occupancy. So India was always ready to achieve peace and
that’s where China has miscalculated- to consider the peace willing fellow as
weak. India is willing to flex its muscles now (Especially under Modi) and is
not ready to accept any Gunda-gardi. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">But we may see some dramatic realignments
happening in the geopolitical arena in the next 2-3 years. Pakistan will destabilize
and we may see it changing parties and the same may end at either loosing POK
to India or closing a peace deal with India although before that India needs to
oust China from POK and so we can see that India-China rivalry may take center
stage and Pakistan will be just waiting in the corner and thus we have entered
a period where Pakistan as an adversary is going out of the way. And that’s why
this Russia Ukraine war is so important for India as this will also direct/impact
Chinese strategy. China is predominately an export based economic power (with
many challenges inside) and the people who earn money from others don’t fight
with them. One reason the likes of USA who are big customers for many (They
import big from everywhere) can wreak havoc by stopping/shifting their imports
and as USA is the biggest trading partners for most of the world so it is very
tough for anyone (like China) to ignore USA economic sanctions….USA is the
biggest consumer in this world…a consumer with one very valuable
commodity-Dollar. So India just needs to strengthen its economy and defence
capabilities and creating strong allies and there may come a situation for
India even to reassess its relations with Russia if the question is to counter
China.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">We will start investing again once
some peace is emerging on the horizon...preferably next week<o:p></o:p></p><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: #2b00fe; text-align: justify;">(oscillationss@yahoo.in)</span><p></p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com4tag:blogger.com,1999:blog-8629364998048667702.post-78304206943199157032022-02-26T15:12:00.037+05:302022-03-01T02:31:29.807+05:30Russia-Ukraine War- Wars and Mis-calculations<p style="text-align: justify;"> Dear All, I am regularly receiving messages to share my views on Ukraine-Russia war. First of all I am extremely sorry for not being able to post updates/studies on this blog for a long time. Actually I am working on something related to stock analysis/advisory work and hence not getting time for posting the studies as of now. But I will start the same shortly.</p><p style="text-align: justify;">About the war- I am sharing my messages on this which I am regularly sharing with the newsletter club of this blog. Please note that I am not a war or geopolitics expert and my views are constrained/limited to my very limited knowledge of the subject. Still as the issue was related to our stock Investments so I have shared my views and we will take the investment calls accordingly. So please ignore my views if you find them inaccurate/illogical (or funny). Ever since the war has been started by Putin I have been feeling that although Russia looks perfect to win the War but some of its calculations- like easy and fast win without much of Ukraine fight back, less harsh economic sanctions as it has some European countries to support it and their reliance on Russian oil/Gas may not happen as per their calculations and we may see some unexpected and unwanted surprises. So I still feel that Russian mis-calculations can lead this war into something very catastrophic and that’s why even though Russia is our friend I am not supporting this war (As Russia could have easily avoided the war and still emerged victorious achieving objectives). A stronger China emerging from this war is not good for India. The need is to see this war from Indian, Human and Global peace perspective first rather than Russian perspective alone. Reality is always multi-dimensional and multi-polar.</p><div style="text-align: justify;"><br /></div><p class="MsoNormal">
<b>From: Oscillations Date: Sat, 26 Feb, 2022, 13:03<br />
Subject: Market fall and the way ahead<o:p></o:p></b></p>
<p class="MsoNormal" style="text-align: justify;">Dear All, <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Surprisingly Kyiv is still
standing and Ukraine is giving a very tough fight. Their president is acting
brave and he is in Kyiv and leading from the front and even refused US help to
evacuate. Ukrainian people are also ready for right. This man was supposed to
act like a comedian ( he was a comedian before) but now he is some sort of a
global hero...and wars are fought on these emotions and motivations. Ukraine
was supposed to surrender on the first day but they still are giving a bloody
fight. This man made a mistake earlier for not strengthening borders earlier
when Russians were at the door...but at that time he was sort of assured of
NATO and US support.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Ukraine never supported India at
UN/kashmir...sold arms to Pakistan. As Russia is our partner and a time tested friend in tough times so India should not Vote against Russia now and should keep a neutral view. But we just hope that their miscalculations shall not hit our interests. Like more than a Russian win India should be more concerned about stronger China emerging out of this war as a reliable Russian partner and china will try madly to replicate Russian style invasions in India and other countries and Russia will support them even if they are against India. So I believe India must have or still been trying to make Russia accept peace. So the need is to see this war from Indian (indirectly not any direct action though), Human and Global peace perspective first rather than Russian perspective alone. Reality is always multi-dimensional and multi-polar. One linear perspective is never absolute. India needs to see this fight from its own perspective first- how it will
affect India from Russian angle/actions and that's why this war is not good
for India...if Russia wins it is Bad but if it loses then the worst...along
with a chance of a world war any time, India getting hard pressed to choose
Russia or others, India getting involved in senseless and dangerous cold war
for a long time, pakistan and China becoming stronger especially when a weak
Russia needs their support for its economy. </p><p class="MsoNormal" style="text-align: justify;">The earlier Narrative that Russia
is doing this to counter Nato efforts does not look credible at all. Russia was
supposed to hit and weaken Nato but Nato was a dying alliance before this war
and present russian actions has in fact reignited the alliance and EU is now
following and buying the US narrative of Russian danger. I don't think that
Putin was such a fool to not understand this...that nato will get alert and
will strengthen themselves and their security and expansion. Still he chose the
war and this is what worries me of his true intentions. I feel US and NATO announced earlier not to send armies in order to stop Russia from launching a war...their involvement means sure shot world war so in spite of public humiliation it looks like they have tried to avoid the global war. At that time, Russia was also having an opportunity to leave war plans on a high claiming a win which would have still served its objectives. But sadly for unknown reasons he chose the opposite.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Russia missed the opportunity on
the first day when Ukraine was not ready for the assault. I think attacking from
3-4 positions/sides may be one reason. Russia is still an expected winner but
it has a very bloody nose with large no. of casualties and if the number rises
further then this will be sort of a humiliation for the very strong Russian
army. This has given time to Ukraine to get their act and supplies together and
get arms from other countries and now things will be more dangerous for Russia.
The Russian supply chain is not doing good and it is an old weakness...so there
are tanks and vehicles left without fuel...their soldiers are asking for food
from local people. Most are just kids (18-20 years) pushed/forced into war.
They are crying after they are captured.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">The Ukrainian people are all
ready for a fight. Quite the opposite of what Russia was thinking or declaring.
Russia/Putin said that Nazis are ruling Ukraine and Ukraine people will cheer
and embrace Russian army...to see themselves getting liberated. So much
disillusion and histeria if Putin really believed in it or was made to believe!!
But this hasn't happened at all and Ukraine's president is now a global Hero
and if there was even a small contribution of this illusion in their motive
behind the attack then Russia will be in some very difficult time.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">We can assume that Russia will
now become more deadly but the time lost has given Ukraine much time to regroup
and also given fire to the protests in Russia which is very bad. Surprise
attack element and quick capture of Kyiv and dislodging of the Govt was the key
which didn't happen at all as per expectations. Russia is hitting civilian
targets although Russia was supposed to liberate these people earlier who as
per its understanding were living under hell. But there are nobody in local
buildings anymore...they were supposed to be in there on the first day of the
surprise attack and subsequent expected control of Ukraine...which never
happened as per calculations. This is why war calculations are always wrong...
because they are mostly based on underestimating the opponent and
over-estimating themselves.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">There are numerous examples in
Vietnam, Afghanistan that the will/motivation to fight for freedom is more
important (for a win) than a strong army and great high tech arms. Even if the
invader succeeds in placing a puppet government the same never succeeds in
controlling/running and it always needs support from the invader and is always
ousted by local people whenever they get stronger. That's why the Russian
puppet govt if they can install one stands no chance and perhaps Russia does or
will realise this. Economic sanctions will hit Russia very hard in spite of whatever plans they are having to counter it. SWIFT ban if happen will be very bad for its economy. I hope that effectiveness of these sanctions may deter China from invading Taiwan but they will intimidate India and chances are very less that any West/US country will come for our help. So a stronger China (Most probably in case of a Russian Win) may chose first to target India than Taiwan.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #2b00fe;">Russian real win was a win without much opposition and blood bath…that Ukrainian people/other countries don't have any reaction time and govt/regime is changed in Ukraine...but this is not what is exactly happening. Russia have to inflict a lot of damage to Ukraine infrastructure and general public. And so their win isn't going to be that effective...the destruction they have inflicted is not what a supporter does and Russia was posing like the one to their people. The initial plan was perfect to change the regime without people understanding much but with destruction the narrative and scenario has completely changed for Russia...and that's why chances of any misstep by Russia are higher now. All Russian calculations about getting less harsher sanctions or global outcry or its oil/gas bargain over EU was dependent upon quick capture of Ukraine but as it has not happened so all calculations are going wrong. Russia must have calculated EU countries like Germany/Italy/France supporting less harsher sanctions (like SWIFT ban) and caring for Oil/Gas supply from Russia but the delay and destruction will force these countries to change their stance and actions. I think these countries earlier supported Russia thinking that Russia will not wage a war after Ukraine agreeing to its demands for not joining Nato but now with so much destruction and fear of a global war these countries will see things differently and may make things very hard for Russia as far as Sanctions/Oil Gas import/Helping Ukraine are concerned.So Russia may be in some very tough times.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #2b00fe;">About NATO enlargement Issue- So far I have refrained from touching this topic as my knowledge in this respect is very limited. I don't like reading political documents/history at all. But still i feel if there was any such assurance then where is the document? Actually here are disagreements among scholars and is highly debatable but the then Soviet leader Mikhail Gorbachev had also confirmed that the Nato expansion topic was never raised. In fact, Russia also (including Putin) wanted to join Nato in 1990s and 2000s. <b>But I feel in case such assurance was indeed given to Russia then they would have wanted to get the same in writing. However, I don’t think that there is any such written assurance available.</b> Further, NATO is a formal alliance of countries/members with written rules so unless all members give their consent for any issue I don't think anyone from NATO can give such non-expansion assurance and there is no such written formal documents from NATO members also. So we can’t say what was promised and what not. But there is one written document between Russia and Nato- NATO-Russia Founding Act, 1997 an agreement on mutual relations, cooperation and security and that NATO and Russia do not consider each other as adversaries. But there is no mention of any such Nato expansion stoppage (as far as I can see after a hurried glance at such a boring political document). NATO-Russia Council was also founded in 2002. Nato expanded in 2000s and if there was any such non-expansion assurance then the same would have been invoked by Russia at that time. I feel at that time, Russia was more concerned about leaving Russia out of the crucial decisions (I think like Serbia/Kosovo) but Russia was never worried that Nato was a threat to it. Also, if both take actions where they pose that they are a danger to each other then it is natural that both would take actions to enhance security (by alliances also) and so in this regard we can’t say that Nato alone is responsible for creating such threat.So common sense says that both Nato and Russia need to sit peacefully and try to find a final solution for the betterment of humanity. We are tired of this nonsense mess.</span></p>
<p class="MsoNormal" style="text-align: justify;">Russia does have a strong army
but I think they may not be having relevant ground war experience and this is
why they are not successful in capturing the territory...they are doing deadly
air/missile attacks but not on the ground. They tried to took one airport near
Kyiv (Hostomel) but met with heavy Ukraine attack and destruction. This may be their
hurried effort or lack of planning I don't know but their ground work
capabilities are not looking good.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">Just like most Indians, I also like our Friend Russia and Putin...Russia still plays our songs (They are crazy for Mithun/Bappi da song "Jimmy Jimmy" from Disco dancer movie and you can still see them using/enjoying this song in their shows/remixes...I have so many russian versions with me and they are just fantastic). One version:</p><p class="MsoNormal" style="text-align: justify;">https://www.youtube.com/watch?v=2P09ow9sY6Y</p><p class="MsoNormal" style="text-align: justify;">(Just see the passion, joy and energy). That's why I am very concerned about Russia doing anything costly.</p>
<p class="MsoNormal" style="text-align: justify;">Still hoping for an end to this
nonsense war and peace prevailing and praying that this war does not turn into
something catastrophic.<o:p></o:p></p>
<p class="MsoNormal">Regards<o:p></o:p></p>
<p class="MsoNormal">Gurpreet singh<o:p></o:p></p>
<p class="MsoNormal"><br />
<b>From: Oscillations Date: Fri, 25 Feb, 2022, 20:02<br />
Subject: Market fall and the way ahead<o:p></o:p></b></p>
<p class="MsoNormal">Dear All,<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">I got some msgs as to why I don't
support this Russian invasion even though I am saying that Russia is our
friend. Actually let me tell you one thing- Ukraine joining the Nato narrative
is given by Russia for the attack but I have a feeling that Russia is using
this as a pretext...it was going to invade anyhow. Putin always wanted to merge
Ukraine into Russia as it never recognized its independence and one valid
reason for Ukraine to tilt towards the west. Putin is looking to have much
bigger ambitions and he has taken the gamble now thinking US is tired and weak
after the Afghan meltdown...but my worry is that his madness can turn this war
into world war any time and this is the big risk for this small victory...and
the reason I don't support this move. So i feel that this Ukraine joining Nato
narrative is just on the surface...it is for bacha party...Putin might be
having much sinister plans or ambitions to make Russia a big power again.
But this may cost Russia dearly and when I say this I am not talking about
their defeat in Ukraine but over a much longer period. EU and US will see the
re-ignition of Russia threat and whole world will be dragged into a nonsense
cold war and a potential world war at any time. And India will face some very
tough and complex scenarios- it won't be able to decide whether it needs strong
Russia or weak Russia. And that's why time has come for India to upgrade its
defence manufacturing and luckily they are trying to focus on that. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Actually earlier Russia was a
counter balance for India to US support to pakistan so Russia had a big role in
our strategy. But time has changed now- US is no longer an adversary but a
potential big partner and Pakistan is going to be dead on its own on one fine
day. India's most decisive and existential fight now is with China against
which Russia may not help much. Russia now is also building ties with Pakistan.
As they say in geopolitics- there are no permanent friends but permanent
interests. I still want a stronger and wise Russia as they have supported us
during tough times and they understand the evil designs of China. So still hope
that better sense prevails and war ends soon and the Nato Narrative is real.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So I only hope that this war ends
in the manner everybody is expecting- Russia wins and controls Ukraine...but
destiny has the reserved right for the unexpected.<o:p></o:p></p>
<p class="MsoNormal"><b>From: Oscillations Date: Fri, 25 Feb 2022<br />
Subject: Market fall and the way ahead<o:p></o:p></b></p>
<p class="MsoNormal">Dear All,<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">I hope you all are in fine shape
as far as market mood is concerned. I hope nobody has done panic sale. Last day
reaction from Indian market was way over-reaction as we were the biggest loser.
Last day got many msgs from Indian brokers and many have advised selling after
last day's fall...members/friends asked my opinion on the same and I told them
that It (brokerages’ decision to sell) was a bit ill-timed and shared with them
that we are not selling. Nobody was anticipating that Russia will do this step
as Ukraine and Nato was ready for a talk as EU was not in favor of a conflict
with Russia. So it was a sort of shock for the market but i think Putin gave a
clear war signal last week when he said in anger that Ukraine was doing
genocide. But I was not expecting this much fall/reaction from Indian market as
long as there is any sign from US and Nato to engage directly as they have
already shared that they won't fight directly. Many from US called me when US
market was down but I told them to wait for Biden's message and if he was not
engaging directly then there is nothing to worry ( As of now). <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Ukraine is doing a fine job and
they have given a strong resistance...which nobody was expecting. Russia has
suffered heavy damage...Ukraine MOD says that 800 russian army are killed which
is a big number if it is true. Last night some reports were for 3200. Ukrainian
are taking back the posts captured by Russian army and this is going to be the
order for quite some time as long as Kyiv is standing. Sanctions are going to
hit Russian very hard and If EU agrees on SWIFT removal then Russia will be in
a very big trouble though the likes of Germany/Italy are opposing ( Still
sanctions on Russian banks are a very big blow). Quite surprisingly, Russian
people are on the street opposing russian invasion and as number of Russian
causalities grow, the situation can get worst any time in Russia. In fact, last
night I was really thinking that Russia may see another division in the next
few years even though they want to annex Ukraine. 5-10 years are a big chunk of
the life of an individual but for a country's journey 20 years are also a small
number. Countries plan for 20 years strategies. So Ukraine needs to create a
noise around Russian causalities as Russia will not disclose this number and
economic sanctions will hit the morale of Russian population and this can
create serious riot like situations. I am sure the likes of US/EU are
contemplating this.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">If US can force EU to leave
Russian Oil/Gas then the US will be very happy. China looks like a winner but
it is mainly about US response for any future Taiwan invasion and China has to
take a big risk in assuming that US will not react. Putin I still feel acted
more like a Gambler, to show Nato/US its power but he has already achieved the
same without war. last day, Biden was smiling during address...people told me
that he was looking confused but I did not feel like that. There are stories of
valor of Ukrainian soldiers (like 13 soldiers in snake island) which will
inspire Ukraine to fight tough, Russian soldiers are not looking in good shape,
Ukraine president is still in Ukraine...so very tough fight. Today is the
DAY...if Ukraine can survive today then Russia will be in BIG trouble. I
expected Russia to be smart as we (India) need a strong Russia...I still feel
that some of the Russian calculations may go for a big toss. A strong Russia
may not help India against China but a weak Russia is good for China (although
Russia gave India S-400 in spite of heavy Chinese opposition). So let's hope and
Pray for Ukrainian people.<o:p></o:p></p>
<p class="MsoNormal"><b>From: Oscillations Date: Thu, 24 Feb 2022 at 21:11<br />
Subject: Market fall and the way ahead<o:p></o:p></b></p>
<p class="MsoNormal" style="text-align: justify;">Everybody knows that Ukraine army
is no match to Russia and that's what Russia has taken into its calculations.
But they are much bigger now than 2014 and they will make Russia to pay a
price. They can give them a bloody nose. Everybody knows that Ukraine can't win
but the thing is the damage calculations may go wrong and by damage i mean all
sorts of damage- economically. Russia might have calculated OIL/Gas as bargain
but EU will act differently. They will bear the cost of high gas and give
subsidy to its people (and still the cost will be lesser than a Russian
threat)...Everybody feels that US will ignore Russia as it wants to target China
but this is where the things can turn speculative as US may choose the other
and US has every logic to choose the Russia along with China at a same time.
Russia has done the same thing- it has tried to pose as a Madman and
unpredictable ( this is what Putin portrays himself...that he can do anything
and he is unpredictable). Russia can't think that It can achieve everything
easily. Earlier Russia was hiding the death of Russian soldiers in separatists
parts as death of separatists but now they have declared an armed
conflict...and Russian people won't like the dead bodies of their soldiers
coming in heap. The surprise is not about that Ukraine can win but Russia may
have to pay much bigger price then it must have calculated. I am also hoping
that as expected Ukraine will surrender in two days and as Putin has said that
he has no intention to Occupy Ukraine so all ends in lowest possible damage.
But my worry is that there may be some nasty surprise. And weak Russia (I hope
they are not Mad Russia) is not good (at least for India)...a multi-polar world
is needed not uni-polar (US) or Bio-polar (With nonsense China as the other).<o:p></o:p></p>
<p class="MsoNormal">Regards<o:p></o:p></p>
<p class="MsoNormal"><b>From: Oscillations Date: Thu, 24 Feb 2022 at 20:09<br />
Subject: Market fall and the way ahead<o:p></o:p></b></p>
<p class="MsoNormal">Dear All,<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So Russia has finally opted for
the ultimate and war has begun. But I still feel that Russia may be in for some
big shock...although Russia feels that they have done all the calculations but
there is never a perfect plan. Perfection is the right, domain and capability
of the Almighty. Who is right and who is wrong is always the most complex thing
in this world- Still, as I have shared earlier I think Russia has the right to
protect itself from west/Nato missiles placed in Ukraine borders against Russia
just like US had during the Cuban missile crisis. Russia sees Ukraine as
extremely crucial for their survival against western attacks. The
mode of ensuring the same by Russia is debatable but the world is never a
perfect place. Some Indian newspapers/scholars are asking India to take a firm
stand...and preferably against Russia in this issue. I am surprised to see
this, by not condemning the Russian attack India has already announced its
stand. Then, India needs a Strong Russia and I don't think that Russia will
ever discount or denounce India. India is a rising power...and a very credible
and ethical partner/power so Russia needs India. Russia as a younger brother to
China is not good for India and a weaker Russia engaged in a prolonged war with
Ukraine is good for US and then US can target China. So things are
really complex in this multipolar and multidimensional world and we just
hope that the crisis is over soon. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">I wonder whether Russia has made
calculations to seize the entire Ukraine as this will prolong the crisis and
inflict significant damage on Russia. Throwing missiles or bombs from
aeroplanes can't make you own a territory...for that you have to enter the
territory and that's where the things can go wrong for Russia. Ukraine must
have been having large anti tank ammunations and night vision abilities
supplied from the west and it can damage russian air supplies to its forces.
Any large russian casualties at the front will result in massive outcry in
russia. The issue was lingering for a long time and it is the failure of
western powers in not being able to stop it...looks like world may be a far
unstable place in the near future if this war does not end soon and on
something ensuring long term peace.<o:p></o:p></p>
<p class="MsoNormal"><b>From: Oscillations Date: Tue, 22 Feb 2022<br />
Subject: Market fall and the way ahead<br />
</b>Dear All, <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So looks like Russia has already
made its calculations and Ukraine joining Nato was not the main issue- it
appears it doesn't want democracy in Ukraine. It has chosen to sent army to its
areas of Influence in separatists regions of Ukraine which it is already
supporting for a long time...by this it has so far chosen limited invasion but
this may come at a huge cost. Ukraine not joining Nato was never a big issue
and Russia could easily get the negotiations as other Nato nations have no
intention to focus on Russia. But by declaring to undermine the democracy and
independence of Ukraine, it appears that Russia has ventured into a danger zone
and it may help US. Ukraine is not a soup and it will give a long bloody fight
to Russia in separatist regions...in fact the same is already going for long.
So if this issues is not resolved then russia needs to be ready for a long
period of Guerrilla war in unstable regions and it will have huge economic and
military costs for Russia. More economic sanctions will be imposed on
Russia...now US can force EU to follow the same as Russia has chosen a
different path away from Nato/ukraine issue. Nato will deploy more forces near
Ukraine/Baltic seas and I don't think having them so near will settle any of
Russian security fears. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So looks like Russia has tried to
get too much too soon and it may not yield best results. Western powers were
already ready for the deal and Russia could claim victory by getting the Nato
deal. But we poor people never know what these big people plan and why they
plan so. Only Russia knows what it is planning to achieve. Russia must have
counted China as a place to trade its Oil Gas/wheat...so it has chosen to embrace
China (smelly) and only time will tell what was costliest for them. But China
may not be a long term source for Oil/Gas as China is trying and investing big
in renewables to be self sufficient in energy needs and it may happen quite
sooner than anybody has anticipated. China is a tough negotiator and there is
not any easy lunch for Russian firms in China so far and they could not get
much market in China in spite of huge expectations. The trade is big now but
limited to Energy and agriculture. Russia used to treat China as a younger
brother but now China is behaving like the other. Russia has chosen to ignore
many of China's actions like theft of technology and china is forcing it upon
Russia in some ways like it forced Russia to avoid contracts in Vietnam/Taiwan.
Russia doesn't deploy Chinese tech in critical areas like defense and
communications. Russia does not allow Dalai lama in Russia so its Buddhist
people travel to India for that. So Russia reacts too much to small useless
statements from US/EU but ignore harsh China actions.But even here, Russia
couldn't ignore India even as China is not happy. China is hoping that Russia
may support it in Taiwan against US but Russia has not done the same so far as
it also fears a nuclear war with US just like US fear now. So the conflict has
its costs for Russia. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So things are quite strange-
Russia needs china for trade (Military support may not be the case)...China
also needs Russia as it is feeling the heat from US led alliances ( India is
already a part of one)...so Russia may feel it has power to make china check
its arrogance. China US tussle is good for Russia but now Russia occupied in
Ukraine may help US. Russia wants to show that it is not a declining power but
China wants to take on US position and impose itself on the globe. So US will
not care much for Russia and China is the target. Trade dependency on China is
not good for Russia ( It needs to be seen what sanctions are imposed upon
Russia) Assertive Russia is not good for Europe and they will try to
break away from Russian Gas (Only a matter of time). Russia now has some $630
billion (some $140-150 B in Gold) and it may feel that it can withstand the gas
export stoppage for a long time but he is not the only smart guy in this world.
Once EU finds a new gas supply (may be from Middle east/US) then the Russian
threat/bargain is gone forever and then this $600 billion is only a matter of
time.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">World leaders don't always do the
smartest- in fact they do the dumbest most of the times. The world is a chaotic
place (politically and religiously) only because of these smart leaders. Like
China wants to take on US at the world stage and needs Russia in its side but
it has created a big enemy in India by creating border issue. China
underestimated India completely and now it will pay a heavy price...India is a
serious threat to Chinese because India has never been into any alliance so it
knows how to trade alone. Sometimes back, a young girl told me that she wanted
to be a writer and writing a book on how to live a great life (Motivational/self
help/spiritual). I asked her why she wanted to be a Guru as she herself needed
to see and live the real life first...why not to be a student first (and
always) and then just share your experiences...why this nonsense to be a
Guru...to lead people into nonsense ideology. World is tired of Gurus.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Once I was listening to one such
Guru who was explaining the Ahimsa (Non-violence) and hailed it as mark of
Indian way of life and ideology. But I told him that linear/blindfold Ahimsa is
not Indian way....Lord Krishna told Arjuna to fight for the Dharma while Arjuna
had chosen the path of so called Ahimsa. So Hinduism is not about Ahimsa but to
fight when it is required to establish Dharma ( reaction not an action). Ahimsa
is misrepresented- our infected bodies fight and kill bacteria so what is micro
and macro level Ahimsa? So it is good that India is getting more assertive and
China has made a big mistake in taking India lightly....in its calculations to
show India its place and all its calculations went into haywire. So Russia has
also made some calculations and chances are high that most of those will be
wrong. Right now, only Russia knows what are these calculations and we will
know after most of them are failed.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Indian markets should recover
after a brief period of variability...then the issues like Oil gas prices will
be back and market will choose its direction accordingly. So as i have shared
earlier- it is better for members with moderate financial profile to wait for
some more time. Let market stabilize when it is assured about the Russian
routine course of action.<o:p></o:p></p>
<p class="MsoNormal"><br />
<b>From: Oscillations Date: Wed, 16 Feb, 2022, 02:14<br />
Subject: Market fall and the way ahead<o:p></o:p></b></p>
<p class="MsoNormal" style="text-align: justify;">Dear All, <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">One fellow just called me and
told me about the cyber attacks on Ukraine defence/banks. He further told that
Indian news channels are saying that this is the first sign of war sign. I told
him to stop watching Indian news channels...they are jokers. They are good for
fun-shun but no serious matter. I don't remember when last time I have watched
an Indian news channel ( I like WION ( Palki Sharma) News though...owned by
Zee). I feel Russia knows that Ukraine and West are listening to its demands so
it has also started easing the tone down...giving soft signals. Cyber attacks
may be another sign of showbaazi by Russia...of its capability. Russia has
shown its military might by amassing more than one lac troops.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Somehow I feel, Europe & US
understand that Russian worries about Nato coming near its borders are
genuine...they know from inside that what they are trying is a real potential
threat for Russia- Taking Nato near Russian borders. Nato can pose that they
are for the security of the alliance members but in their heart they do understand
that Russian unease is genuine. Why would Russia want its old and potential
adversaries planting missiles near its border? And that's why I think most of
the Nato members have distanced themselves...US also knows this. It is just
like Bangladesh allowing china to place missiles near India border...and India
will never allow this to Bangladesh.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So I still feel that chances of
Russia-Ukraine all out war are very less. We will see some tough negotiations
between Russia and Nato (US)...Ukraine was never the target but Nato. Russia
would ask for the lifetime guarantee from Nato and Nato in order to save their
face may opt for deferring the new membership for the next 20-30 years. This is
a very interesting game theory stuff- and if you understand game theory then we
will see a Zero sum game. Both Russia and Nato will gain something and lose
something.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Let's hope for the best. <o:p></o:p></p>
<p class="MsoNormal"><br />
<b>From: Oscillations Date: Tue, 15 Feb 2022<br />
Subject: Market fall and the way ahead<o:p></o:p></b></p>
<p class="MsoNormal" style="text-align: justify;">With European countries and the
US keeping a distance from the war, Russia understands that it will gain more
from the diplomatical solution rather than war. So the solution can take its
time...Ukraine is also giving mix signals...and US sounding alarms at war on
16th- If it doesn't happen tmrw then I think It won't happen at all. So let's
wait for one day.<o:p></o:p></p>
<p class="MsoNormal"><br />
<b>From: Oscillations Date: Mon, 14 Feb, 2022, 22:17<br />
Subject: Market fall and the way ahead<br />
</b>Dear All,<b><o:p></o:p></b></p>
<p class="MsoNormal" style="text-align: justify;">Investors live in a very tough
world- recently everybody agreed that rising US interest rates were not good
for the stock market and now US yields are down and markets are crashing
worldwide. And strangely it appears that investors don't know what they really
want. That's why stock markets are the toughest place to make money. Stock
market always has this view that there is always a world war coming. And Now
even when the US is saying that they won't send troops to Ukraine; it doesn't
believe them. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So just when we were trying to
solve the Fed interest rate puzzle, market has found another bomb. I don't
really have much interest in politics/geo-politics but here I feel that chances
of something bigger are less. There were risks for the same some time back (and
the market was calm at that time) but now the US has clearly expressed that it
has no plan for sending troops to Ukraine. Actually the US and Russia never
fight directly- both understand that the same will be catastrophic for the
entire human race, leave alone both. So they always fight indirectly through
others- Afghanistan, Vietnam, Arab world etc. No war happened when Russia
invaded Ukraine in 2014 (Russia is even stronger now). Perhaps, 2014 has forced
Ukraine to partner Nato while for Russia it might be just show of power. I
don't know what made Nato (US) to select Ukraine as a new member and what
Ukraine was thinking. Because now Ukraine has understood clearly that no Nato
country will send its troops to help them against Russia. Germany, France have
no interest at all. Europe is terrified of their choked gas supply from Russia
( it is surprising to see the impact of old world Oil/gas still having so much
bargain power. European countries like Germany were really fool to not to
address this issue while running after renewables). So Ukraine might be
thinking of its decision to go for Nato.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In fact, I feel that Nato
countries don't want to follow the US narrative anymore- they sent their armies
in Iran and Afghanistan (for US only) and now they have nothing to show
for that...they were literally humiliated. They looked like fools. So I don't
think we will see any Europe country fighting russia; they won't even vote for
Ukraine entry. Europe may not want an enemy in Russia. And perhaps Putin knows
this and that's why he has taken calculative risk to announce the arrival of
Russia. US I think is trying to hit Russia hard by instigating a war with
Ukraine. After seeing no mood of Nato members to fight, US has also decided to
stay away from this war but creating a noise and fear about Russia invasion.
And this may disrupt Russian calculations because Russia has nothing to gain
from Ukraine invasion as Ukraine is having much stronger army than 2014 and
this would hit Russia hard and holding back invasion in a hostile country is
not an option. So with Nato not supporting Ukraine with army, Russia has
already got what it wanted- to make Ukraine understand the reality and Russian
might in trade with Europe and domestic support for Putin with this power pack
show. But US would love to see both of them fighting. Russia can do some small
"Phuljhadi" but not an all out war with Ukraine. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">China may be watching with
interest the US response to see what US can do for Taiwan. But Ukraine is no
Taiwan- US needs Taiwan who is its biggest trading partner and the core of the
US semiconductor industry. Ukraine is nothing in the world supply chain but
Taiwan is an economic force and a very key strategic asset for China if it can
capture it just like Russia is having big bargaining power with
Gas. Infact, US leaving Ukraine can be a bad news for China because US must
have left Ukraine as it want to focus on Indo-pacific (China) where it has
created a new Quad with India, Aus and Japan. Russia is a spent and declining
force and all it wants is just to show its might ( Russia is a poor fellow
now and Poor can't rule others) but China has much bigger ambitions- as it
wants to own territories and Sea. US don't really care for the poor Russia so
it is better to keep Russia where they are. So last week Quad meet was a sort
of warning to China- what US really wants.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So we will get to know soon what
Russia actually wants.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">( Contact at oscillationss@yahoo.in)</p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com1tag:blogger.com,1999:blog-8629364998048667702.post-60004650231722569792021-09-04T01:37:00.007+05:302021-09-04T14:51:14.550+05:30Healthcare Global Enterprises Ltd.- Data is God- Updates on stake sale in Strand Life<p><a href="https://oscillationss.blogspot.com/2020/08/healthcare-global-enterprises-ltd-data.html" style="text-align: justify;">Click here for last year post on HCG</a></p><p class="MsoNormal" style="text-align: justify;">Today HCG has sold its stake in
Strand life to Reliance Industries. HCG had 38.4% stake in Strand and it has
sold it for Rs. 158 cr. Reliance is paying Rs. 550 cr for 80% stake in Strand.
I always liked the work being done by Strand in Genomics, Genetics and
diagnosis and I was thinking that HCG would sell their IVF business (Milann
brand) and use the same for increasing their stake in Strand. But looks like
the focus has changed after the arrival of a new majority shareholder in the
form of CVC and they want to focus only on Cancer care. I have no problems with
them selling strand but I also want them to exit this IVF business.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">But they have done one good thing
while selling stake in Strand- strand has hospital Labs and Clinical research
business and HCG has bought the same from Strand as a part of the deal for 81
cr (setting off 7 cr against receivables so net outflow is 74 cr). In my last
year article on HCG I have mentioned this clinical research business. I think
due to inherent strength of HCG in cancer care and their huge database of cancer
patients they can do great in clinical research in India. If someone wants to do
research for cancer treatment/diagnosis in India then they need the genetic and
cancer related data of Indian patients only and that’s where HCG can contribute
big. Acquisition of Hospital labs will help HCG to grow its diagnostics
business. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So after paying for Labs and
clinical research businesses it has got 83 cr cash which is good as they are
focusing on paying off debt and expansion also which requires funds. I like
businesses when they take tough decisions and this stake sale is a tough
decision by them. But I think they don’t have any other choice- Strand was a
research heavy business and only recently they started focusing on growing
their revenues. But they are still making losses and require regular capital
inflows which I think is something that HCG cannot do right now as they are
trying to generate capital for expanding their cancer care business and reducing debt. HCG needs to cut its debt but they can't take their eyes of the business expansion because India is still having massive unmet cancer care needs. So they need to be extremely careful in capital allocation. Hence in
these circumstances this looks like a wise decision and I like their single
minded focus on growing their cancer care business in India.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In last 2 years, we have picked three healthcare stocks
as our healthcare Trinity- Max healthcare (<a href="https://oscillationss.blogspot.com/2019/08/max-indiamax-ventures-and-analjit.html">click here for article on Max Healthcare</a>), Narayana Hrudayalaya <a href="https://oscillationss.blogspot.com/2019/11/narayana-hrudayalaya-ltd-axis-mundi-of.html">(Click here for article on NH)</a> and HCG. Max Healthcare
has already been almost a 10 bagger for us (adjusted for demerger) while NH and HCG are a double
right now but I always have a feeling that HCG may outperform all in the next 2-3
years as their expansions of last 2-3 years are going to bear fruits in the near
future. So HCG at 240 is still looking good.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: #222222; font-size: 13.2px; text-align: start;"><span face=""Calibri","sans-serif"" style="color: #0000cc; font-size: 11pt; line-height: 16.8667px;">(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 own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in)</span></span></p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com1tag:blogger.com,1999:blog-8629364998048667702.post-32959952506422090432021-07-05T01:51:00.006+05:302021-07-06T02:44:30.640+05:30Growth in a Finite World<p class="MsoNormal" style="text-align: justify;">These days I get a lot of queries
on whether the stock market is overheated and is going to have a crash. I think
people are expecting a crash since Sep-2020 but we have been investing
regularly and never stopped. This strong journey has taken many by surprise as
market is not seemed to be in any sort of negative mood. Every fall witnesses
strong buying afterwards. I see reports about the linking of USD, Bonds, Oil,
Gold, Interest rates/yield curve, FED policy, inflation etc. with the stock
market and all try to conclude the coming crash (sometimes jump) of the market. In this
crowd of variables; one can conclude anything and these days they are
forecasting a crash. Many times, I ask these people what drives the base
interest rate and there is no confident answer except some murmurs about
inflation rate but I see them shouting on the top of their voice about yield
curve and coming market crash.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">But Stocks, Dollar, Oil, Gold,
Bonds etc. don’t derive majority of their valuations from their inter-relationships.
Most of the time and most of their valuation is impacted by their individual
demand supply dynamics not the demand supply dynamics of other counterparts.
Like, most of the valuation of the Bonds is impacted by its own demand supply
dynamics rather than money from stock market entering bond market. Most of the
money circulating in Bond market is meant for Bond market only and same is true
for the stock market. Overlapping part is very less and shifting takes place
mainly for short time. Like for example, the prices of Onions are settled based
on its own supply demand dynamics. I call this price as Base price which is
based on its own supply demand dynamics. Now suppose there is a big shortage of
Tomatoes so people will shift some demand from tomatoes to onions and this will
raise the price of onions over and above the base price. But the individual
base price of the onion will still comprise the majority of the total price and
for the purpose of long term decision making (like fresh cropping) the price
impact due to tomatoes is not relevant and should not be considered.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">Like
for Interest rates, I always say that above everything, money is first a
commodity...a commodity for enabling trade and exchange. Unlike other
commodities like Onions money is not capable of satisfying any needs/desires
directly by direct consumption as its primary function is to enable exchange.
So in case I don’t need any commodity or service in exchange of my money I
would keep the spare money with me. But other people needing money for the
exchange of goods/services they don’t have create the demand for this spare
money available within the economy and this demand of money as debt creates a
price for the money in the form of interest rates. In case there is no demand
for money as debt then we would in fact be required to pay some charges for
keeping the money safe in banks etc. (regardless of whether inflation rate is
high or low). So Interest rate is not the "cost of money" as is always said but a
“price” which is a function of demand supply dynamics of money. So just like an onion, every asset has its own very individual base price upon which further layer (or layers) of price comes due to overlapping part (temporary shifting of money from one asset class to another).<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">So
most important factor for interest rate is demand supply dynamics of money
itself. Inflation is not the primary motivation behind interest rate. Inflation
does impact the interest rate but it is not responsible for the establishment
of base interest rate. Inflation can impact the portion of interest rate over and
above the base rate. In my view, base rate is a function of opportunity cost of
the money but base rate just takes the clue for the "Price" from the opportunity cost. Opportunity cost is not the reason for the emergence of the price (int rate) because price emerges due to its own demand supply dynamics. So Gold or real estate can play that role (opportunity cost). Somehow </span><span style="color: #0000cc;">I feel that the corporate earnings and stock market returns are more relevant opportunity cost for interest rates for a fairly stable and strong economy. </span><span style="color: #0000cc;">But inflation is not the opportunity cost of the money. There may be
a situation where inflation is high but there may not be much demand for money
from businesses or individuals as they mayn’t want to take risks for new
investments etc. Hence even with higher inflation the rate of interest will
still be low. Just consider the current issue of short supply of semiconductors
which has raised the prices of cars worldwide (second hand cars also). So is it
possible to reduce the resultant inflation by rising rate of interest? No, not
at all. In fact, I think the solution is quite the opposite- Governments need
to give low interest loans to corporates to build new capacities for
semiconductor manufacturing. So in real life, economics principles are very
different.</span> </p>
<p class="MsoNormal" style="text-align: justify;">Once one analyst told me that
market would fall as interest rate was rising (money would shift from stocks to
bonds). But I asked him why Interest rate was rising at first. Interest rate
rise is not some isolated individual act of God like heavy rain which can cause
floods and loss of crop. But the rise is a reaction to a number of events.
Interest rate may rise- Due to rising demand for loans by corporates as they
are investing big or due to risk of loan defaults by most of the corporates due
to economy shuffle or earlier mis-allocation of credit (like happened in India
in Infrastructure few years back). Stocks will fall in the later situation
while in the former more money will come both to stock as well as Bond market.
This more money will either come from other assets class or new money will be
created by banks.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So every commodity or asset class
has its own demand supply dynamics. Similarly, stock market also has its own
demand supply dynamics and it is the earnings growth/future earnings growth
(GDP growth) potential that drives the demand (base) for equities. And the
issue is- how growth happens? And the bigger issue is that current GDP
calculations are not more than a crude proxy for the real growth. Growth is much
more comprehensive and multi-dimensional and much bigger phenomenon than
summation of total income produced in a given period (GDP).<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Here I remember one interesting
book “The Limits to Growth” which was published in 1972 by a group of thinkers
called “The club of Rome”. The book was an attempt to forecast the outcome of
massive scale consumption of earth’s resources by humanity and the capacity of
Earth to withstand such consumption as our Earth is a “Finite sphere” with a
limited supply of resources like minerals. The club worked out a model based on
five basic variables affecting the resources of Mother Earth industrialization,
population, food, use of resources, and pollution. They modeled data up to
1970, and then developed a range of scenarios out to 2100, depending on whether
humanity could took serious action on environmental and resource issues. If
that didn’t happen, the model predicted “overshoot and collapse” – in the
economy, environment and population – before 2070.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Their main point was Earth being
Finite has limited capacity to provide resources for the huge growing
population. Hence our quest for unlimited growth by over-production and
over-consumption of resources will eventually lead to a crash. But we never grow
only by over-consumption and it is the emergence of new innovative technologies
which bring more growth. As we can see much of our growth in the last century
was mainly related to “Invention of New and Substitute technologies” like the
invention of Aircrafts and transportation technology which made possible the
exchange of goods/services across the globe, telephone and then Mobile phones,
Computers and then softwares. Their model was not well accepted as Population,
capital and pollution all grew exponentially in all their models, but
technologies for expanding resources and controlling pollution were permitted
to grow very marginally. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #2b00fe;">But I feel their model has one
very valid hidden (implied) statement- that unless we create and discover newer, innovative,
clean and efficient technologies we can’t afford to grow by consuming the
finite resources of the earth as one day they will be obsolete. And good thing
about technology is that they have INFINITE possibilities and potentials.
Technology does not create linear growth opportunities but even a small
innovation can bring massive growth and revolutionize the existence of entire
humanity. Here, I remember one such small innovation-Elevator. It was a very
small technological breakthrough but just imagine the world without it. Real
estate sector’s massive growth has been possible only because of elevators so
as of mining sector. Elevators have made it possible to construct massive
vertical buildings resulting in the most efficient use of available land. Just
imagine the cost of land and houses in the absence of elevators as we could
have only made 3-4 storey buildings not 50 storey now.</span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So technology is transformative
beyond imagination. Technological innovations can create new products/services
classes, can result in more efficient use of existing resources, and can create
new resources. Another massive but less talk about transformative impact is on
the even distribution of income and resources. This distribution pattern of
production and wealth is the biggest limitation of our current GDP calculation
measures as they don’t (can’t) take into account the decline in the “value” of
marginal production when it flows only to a few people (unequal distribution of
income). Right now, we are at that stage of our evolution that only technology
can create next leg of growth and save the humanity from pollution and
destruction. I find it funny to see words like “sustainable growth” because
unsustainable growth is not growth but short term exploitation of resources and
we count this short term exploitation of resources as production (extracting
coal is production but the resultant destruction of forests and water resources
is not “deducted” from the value of production) is the biggest mistake ever
committed by humanity (of course after Religion). I call this like having a
“Profit & loss account without a Balance sheet”.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">And right now, we are witnessing
a period of major technical innovations which will result in the next long leg
of growth and luckily it appears that this time the growth will also extend and
save the humanity and this earth also. This growth is going to be led by clean
technologies in the form of solar, wind and Hydrogen power. These are going to
transform the current energy dynamics across the globe and will also solve the
existential threat in the form of pollution. These clean technologies will
result in the even distribution of resources (energy) because wind and solar
are evenly distributed among nations as compared to oil which is concentrated
only to a few countries which has made many countries poor as they are
dependent upon costly imports for their energy needs. But this clean energy is
more democratic and this will change the distribution of wealth also. Just
imagine the scale of income generation in India if our energy needs are
satisfied in house from wind/solar/hydrogen rather than costly imports. It also
means that India can’t afford to lag behind in this race of clean technologies
and we need to up the ante for developing these in house.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">After clean technologies, there
is a massive growth in communication technologies in the form of 4G/5G and
space tech and these new age communication tech is going to create the next industrial
revolution. 5G is going to reduce the latency to just 2 milliseconds which
means that networks will almost be latency free and information will be
exchanged between devices in real time. New age communication technologies will
result in the growth of IOT, factory automation, autonomous vehicles, augmented
reality, remote healthcare etc. New age communication technologies, automation
and AI are also going to bring next revolution in agriculture which is hampered
by the negative impacts of 3<sup>rd</sup> agriculture revolution in the form of
chemical fertilizers. Then we have genetic engineering revolution which is
developing higher yielding and disease-resistant crops. Similarly Genomics and
Genetic engineering is going to transform our healthcare. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So we are now at a very critical
juncture in the journey of humanity and earth and our actions are going to be
critical. Good thing is- Humanity is looking good for most of the part…people
are surprisingly more aware and conscious about everything which is negative
and inflicting damage. World has taken a good start in the form of huge growth
in clean technologies and this is going to be the norm for the coming decade. So
we are going to witness a period of growth which has the capability to bring
comprehensive prosperity across the globe and it appears that market is aware
of this high growth phase and this is why we are seeing continuous rise in the
stock market and looks like it is not going to witness any major correction. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">India in particular has done some
major policy reforms which are going to result in high growth in manufacturing
in India which was the major pain point for India. Agriculture as of now is not
capable of transforming India into another leg of high growth as it is hampered
by political, technological, economics (small size) and supply chain issues.
But this Void is also an opportunity and recent start of policy reforms is a
good step. India’s focus on policy support in the form of PLI schemes and Make
in India for local manufacturing of electronics goods, medical devices and
chemicals is going to result in high growth in GDP even at the same consumption
levels because the money will be spent in india not on imports. This will also
create demand for new investments and incremental job growth. The focus on
growing Ethanol production is also going to create the same impact of high
growth in GDP even at the same consumption levels also raising the income
levels of farmers which is the long targeted objective of the Government but
which has taken a quite a bit of time (of course due to politics).<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So the time is to be optimistic
about the growth potential and India is also in a very sweet spot. Clean energy
technologies and new age communications technologies are going to lead the next
leg of growth.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">( Reach me at oscillationss@yahoo.in)</p>
<p><span style="text-align: justify;"> </span> </p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com3tag:blogger.com,1999:blog-8629364998048667702.post-69535646112657179902021-06-30T01:33:00.004+05:302021-07-01T10:40:34.160+05:30Heritage Foods Ltd: Worthy Portfolio Candidate<p><span style="text-align: justify;"><span style="color: #2b00fe; font-size: medium;">Stock Idea: Heritage Foods Ltd</span></span></p><p><span style="text-align: justify;"><span style="color: #2b00fe; font-size: medium;">CMP: 410</span></span></p><p class="MsoNormal" style="text-align: justify;">Heritage Foods is a Hyderabad
based dairy company operating predominately in AP, Telangana, Karnataka, Tamil
Nadu but off late expanding in Maharashtra, New Delhi, Haryana and Punjab. Its topline is 2473 Cr and NP of 148 cr in
Fy-2020-21. At CMP of 410 it is trading at 12 PE whereas Dodla dairy which was
listed two days back is trading at a PE of 25. In the IPO analysis reports from
brokers, they were surprisingly comparing the PE of Dodla to Parag milk who is
trading at a PE ratio of 32 but whose business is very different from Dodla as
Parag is predominately a Value added dairy player(70%-75%). They have not compared the
valuation of Dodla with Heritage foods (12 PE) which is also a southern India
player with almost similar business model (fresh Milk heavy). The size, margin
and net profit profiles of Dodla and heritage are almost the same though i
think Heritage has a better brand recall and higher share of Value added
products (VAP) (30-33% vs 25% of Dodla).<span style="font-size: 13.5pt; line-height: 115%;"> </span>I
am yet to do a detailed analysis of both Heritage and Dodla...this note is just
a compilation of my preliminary study.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgby6SL8hZFINndmeVv_mWGZB35zqGnzPNxEWUT0NtDDXuUUw-MmgjjI-my9Wj1e4yzhlIOcIWwJkgoTiU5QMI2T3-DdnR3mNqqMquU2GRaKHeyl3dBd0Kaql8IGrsYQPdecR2B39xNhXU/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="182" data-original-width="381" height="185" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgby6SL8hZFINndmeVv_mWGZB35zqGnzPNxEWUT0NtDDXuUUw-MmgjjI-my9Wj1e4yzhlIOcIWwJkgoTiU5QMI2T3-DdnR3mNqqMquU2GRaKHeyl3dBd0Kaql8IGrsYQPdecR2B39xNhXU/w367-h185/image.png" width="367" /></a></div><p class="MsoNormal" style="text-align: justify;">The margins in fresh milk business
are low but the ROCE is high due to lower capital requirements if the firm can
manage working capital issues. But for Value added products like Ice cream,
Ghee, Curd, Milk shakes etc. margins are high but ROE is lower until the firm
reaches a critical large scale of operations to drive the economies of scale
because the shelf life of these products is much longer requiring investments
in working capital and then capital investments in the form of plant and
machinery is also high. But brand connection in the form of fresh milk drives the sale of VAP as customer who are using fresh milk brand are more likely to use the VAP of the same brands. The higher investments by Heritage in assets shows the under-utilization
of VAP capacity and margin profile as of now of VAP must have been quite weak
but the same will improve once the economies of scale kicks in. Working capital
days in case of Heritage are 11 which is one of the best in the industry (Dodla
also has similar levels). Heritage is the second biggest private sector dairy player after Hatsun and they have done well in building long standing relationships with farmers amid tough competition from milk co-operatives.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Last year due to covid, farm gate
milk prices were low so dairy companies earned much higher profits which may
not happen in the future although though milk prices are still low this year.
But I am more interested in the growth of value added products which in the
case of heritage is going good and they have very strong brand recall. Heritage
belongs to Chandrababu Naidu (Former CM of AP) so this political link forced me
to wait for the last 3-4 years. Current Jagan govt tried hard to prove some foul play at Heritage
growth but nothing came to materialize and Heritage is growing strength by
strength even when Naidu is not in power. So this has made me to have a relook.
They are paying good dividends and i have a feeling that they are the most
liberal here and after Hatsun they have the best books. They have grown the
share of VAP to some 33% last year. FY-21 there was low share of VAP due to
covid as the sale of VAP products like Ice cream was hit hard. But this year
the same will grow fast and Heritage is quite aggressive in the branding and
distribution. So I feel that at 12 PE Heritage is trading cheap and rerating
may be fast.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Heritage is also into cattle feed
business with turnover of 120 cr and NP of 7 cr. Its topline has doubled in the
last 4-5 years and it is a fantastic fit for them as they can use their milk
procurement supply chain to sell these products to farmers. It is all about
relationships in Indian Dairy. Here farmer is the producer and the relationship
with the farmer in the form of milk sourcing tie up acts as a big entry
barrier. It is very costly to run a dairy farm in India due to high land prices
etc. That's why global giants couldn't do well in India as their global model
of having large farm houses will not work in India. So the milk supply chain is
a high entry barrier business.<span face=""Arial","sans-serif"" style="color: #222222; font-size: 12pt; line-height: 115%; mso-fareast-font-family: "Times New Roman";"> </span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Also, Heritage has almost paid the
entire debt of some 260 cr last year (35 cr now). So this will save interest
cost of around 20 cr which means its effective PE is just 10. With cash balance
growing in the future we can expect more liberal dividends and some good
acquisitions. keeping in view that it is yet to grow its VAP share to a meaningful levels, volatility in fresh milk margins, still some sort of political overhang please treat this one as risky business. Tier 3 Investment as of now.<o:p></o:p></p>
<b><span face=""Calibri","sans-serif"" style="color: #0000cc; font-size: 11pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: Mangal; mso-bidi-font-size: 10.0pt; mso-bidi-language: HI; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">(This
study is a business analysis of Heritage Foods ltd. 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 own Due Diligence before investing. I am not a
certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in)</span></b>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com0tag:blogger.com,1999:blog-8629364998048667702.post-32413237655966389582021-05-19T01:40:00.002+05:302021-05-19T01:51:23.810+05:30UTI AMC: Significant Re-rating Candidate<p><b style="text-align: justify;"><u><span style="color: #0000cc; font-size: 18pt; line-height: 115%; mso-bidi-font-size: 16.0pt;">Stock Idea: UTI
AMC</span></u></b></p><p><b style="text-align: justify;"><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Grade: TIER 2</span></u></b></p><p class="MsoNormal" style="text-align: justify;"><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: #2b00fe; font-size: 13.2px;">(This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021.)</span></p><p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNg3rJcHPXkXLjuB6fnSEI62E1OZNzvESmfGKOW5XhC6jK0GpbzYLfjY8BNF53ayAwErvyBuZCitAt5TKJmLG_PYh2fC5mzydnzKlZSpDbhCHeADmWb33Hkl_hu-dyfEkFBniJyg_MltQ/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="161" data-original-width="590" height="199" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNg3rJcHPXkXLjuB6fnSEI62E1OZNzvESmfGKOW5XhC6jK0GpbzYLfjY8BNF53ayAwErvyBuZCitAt5TKJmLG_PYh2fC5mzydnzKlZSpDbhCHeADmWb33Hkl_hu-dyfEkFBniJyg_MltQ/w532-h199/image.png" width="532" /></a></div><br /><br /><p></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZ34bpRaovz2RCnSauLhSNdww7Wcn53j3wSAOxx8yT_Bl7qe2Wpox2-yxYVka828-Uym-8iTgQQsLLVpnwg9A0ieSubecVA-JNz3Z46GYILsODWZIpzBjaErmSkLBo_MTOH1e6FzAhSxE/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="161" data-original-width="512" height="183" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZ34bpRaovz2RCnSauLhSNdww7Wcn53j3wSAOxx8yT_Bl7qe2Wpox2-yxYVka828-Uym-8iTgQQsLLVpnwg9A0ieSubecVA-JNz3Z46GYILsODWZIpzBjaErmSkLBo_MTOH1e6FzAhSxE/w533-h183/image.png" width="533" /></a></div><br /><br /><p></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4z_bF0tvmyjb7HCWN7gZwICPu_GaDd5r1Jy4w0ELoY0cZLJTPWbPrTmH9dVS0ypfXkXg-v2F9cTtf4T-dKM7N3x-s9leqV-X7rJLQzSOg-G_Ub5dL8EWYMQxy5dvcuME4Vji6F05buPw/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="121" data-original-width="588" height="185" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4z_bF0tvmyjb7HCWN7gZwICPu_GaDd5r1Jy4w0ELoY0cZLJTPWbPrTmH9dVS0ypfXkXg-v2F9cTtf4T-dKM7N3x-s9leqV-X7rJLQzSOg-G_Ub5dL8EWYMQxy5dvcuME4Vji6F05buPw/w531-h185/image.png" width="531" /></a></div><br /><br /><p></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">UTI AMC is a melodrama but the
drama started with the debacle of US-64 fund of UTI in early 2000 forced Indian
government to split UTI in 2003 into UTI Asset Management and Special
Undertaking Unit Trust of India (SUUTI, having the junk/illiquid assets of UTI).
First melody was tried with the likes of SBI, PNB, LIC and BOB acquiring 25%
stake in the troubled (reputation) UTI AMC bringing in 500 cr. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Things were going fine but it
still had the trauma of US-64 and then in 2009 these 4 decided to sell 26%
stake to the US investment giant T Rowe Price who manages more than $1 trillion
globally for $ 140 million (Rs. 650 cr). I think this was done to do some image
makeover by bringing in global giant as largest investor as this would make
people to have trust in UTI as global giant was picking a stake. This was a
good move or we can say a perfect move. But these 4 could not leave the greed
to manage one of the biggest AMC in India (holding some 10% (4<sup>th</sup>
biggest) share of Indian market at that time, now 6% share and 8<sup>th</sup> biggest).
They continued to interfere in the working of UTI along with government who
wanted to dominate and control the board of UTI which was just the opposite of
what had been promised to TR Price that UTI AMC would be a professional firm.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">On the contrary except PNB, the
rest three were having their own AMC businesses and they owned 18.5% stake each
which clearly was a case of conflict of interests. After the initial stage,
these 4 were not interested in running the UTI. In fact, LIC and SBI who were
having relatively very small AMC business even tried to acquire the stake of
others to control and merge UTI AMC with their own AMC business. It was without
the head for two years and so could not introduce new schemes because SEBI
rules do not allow a new fund offer without the approval from the head of a
fund house. Even around 2018 TR Price took these four gentlemen to court. As
the three gentlemen (except PNB) were running their own AMC businesses so they
were not that much focused on growing UTI AMC as they were<span style="mso-spacerun: yes;"> </span>having just 18.25% share in UTI so their only
attempt was to merge it with their wholly owned AMC business.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">The association of these three investors
(LIC, SBI, BOB) having their own AMCs with UTI was a clear case of conflict of
interests which was badly hurting the growth of UTI which was losing market
share continuously (SBI now is the biggest AMC in India). So things were
terrible for the growth perspective although the schemes of UTI AMC were doing well
and they have done well in last 20 years. But then amid this tussle over
controlling UTI; SEBI happened as a blessing. In 2018, SEBI in order to control
the conflict of interests made a regulation that a sponsor of a mutual fund,
its associates, group company and its AMC cannot hold 10 per cent or more stake
in a rival AMC. They also can’t have a representation on the board of another
mutual fund house. This regulation forced these three investors to sell their
stake in the recent IPO and brought the same to 10%.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In the recent IPO, TR Price and
PNB also sold 3% of their stake bring down their stake to 23% and 15%. So this
is a significant event in the journey of UTI and in my view this is going to
change the fate of this company.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In all research reports, I have
seen issues related to high employee cost and high operating expenses eating
out the profit margins so these reports conclude that UTI deserves lower
valuation due to these issues impacting profitability and they declare it is
working just like a PSU. But its historical ROE was around 16% and it is around
this level in Dec-20 and Nippon is also having the similar ROE. HDFC is having
high ROE of 31% but this is due to the fact that HDFC can distribute its funds
from its vast banking channel at much lower costs and at a much bigger scale. Bank
brand name also helps. Same has happened with SBI with highest market share
although it is also a PSU. <span style="color: #2b00fe;">Also, low dividend payout and large cash in the books
is one of the reasons for lower ROE for UTI and recently it has approved
dividend policy for much higher dividends (50% of profits) so this will improve
the ROE.</span><b> </b><span style="color: #2b00fe;">Dividend payout ratio of UTI was around 20%-30% while the likes of
Nippon and HDFC have much higher dividend payout ratios (80% and 50%
respectively). Even due to growing net worth the ROE of HDFC has also fallen
from 40% in 2018 to 36% in 2020.</span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Further, banks distributing
schemes of AMCs related to their group are a clear conflict of interest as
banks are forcing their group mutual funds on the customer rather than really
giving honest advice and in this process they are earning huge commissions from
the group AMCs. But I think SEBI is going to tighten the things more here in
the near future. Direct schemes (Online sale without any intermediary) are
gaining momentum as current investors are well informed and they don’t need to
go to some selfish intermediaries for deciding their choice of fund as they can
do the research on their own in this digital age. So things are going to change
in the fund distribution very fast. Already direct channel has grown to 50%
share from some 30% 2-3 years back. In today’s world, investors can find the
information related to consistent fund performers like UTI against others and
they can take independent decisions so due to this there is a possibility of
smaller funds growing faster than the other big brands. Like, UTI is one of the
best performer in the retirement solutions (pension funds) and its funds under
this are growing faster. Its retirement benefit pension fund is the largest in
its category.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">I was looking for the performance
evaluation of UTI AMC schemes and luckily I found the recent report from CITI
which has very detailed data and I found the same in their report saving much
of my time. UTI schemes have done much better. In last one year, UTI Equity
schemes have outperformed the benchmark index in 63% of their schemes. The same
figure is 10% and 30% for HDFC and Nippon. Axis is the leader with 78%. The
equity schemes of HDFC are performing badly and it is losing market share (at
13.6% from 15.8% last year Dec-19). Its stock price is also doing badly with
negative returns in last one year. <span style="color: #0000cc;">Actually people
do not realize that AMC is a knowledge based business and skills of managers
matter the most rather than their costs.</span> UTI has higher employee costs
as it got large number of employees from the erstwhile UTI in 2003 split and
management is working on it to reduce it. In next 5 years the retiring
employees will reduce some 80-90 cr payout.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">But
if it has legacy issues then it has some high growth catalysts also. First,
most of these problems were related to past and already happened in time and
space and current board run management is working to resolve these issues.
Second, UTI AMC has strong distribution strength in Tier 3 cities (B30) having
the largest share. Future growth in the AMC/Mutual fund industry will be driven
by these small cities. These cities have higher focus on equity schemes where
charges are higher than debt funds so UTI can earn higher than other due to its
strong presence in these cities. But for me the most important event is the
coming possible restructuring in the ownership of UTI. I don’t think the likes
of LIC/SBI/BOB have any scope left to acquire it or mismanage it. In fact, they
have sold their stakes in UTI Trustee Company to TR Price in line with their
stake sale in AMC business. A Mutual fund trust holds assets of the fund on
behalf of investors and monitor performance and compliance with regulations. <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;">So trustees have significant
control over the working of an AMC due to regulatory powers. After the stake
sale by these three; now TR Price holds 51% stake in Trustee Company which
enables it to indirectly control the operations at AMC also. TR Price is a
global giant and is waiting patiently for the things to turn good in India as
India is the next high growth market. It has waited 11 years for the things to
take shape in india which shows its commitments to India. So my feeling is that
very soon something is going to happen in UTI AMC shareholding. It may be that
these four may sell their stake (or part) making TR price the majority holder
running the show. TR Price can channelize huge funds from its US business to
India for investment through UTI.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">UTI AMC has big business in PMS
where it manages the funds of Employees Provident Fund Organization (EPFO),
Postal Life Insurance (PLI), National Skill Development Fund (NSDF) etc. UTI
manages the largest share of the funds of EPFO. SBI is the second AMC who
manages the funds of EPFO. Earlier it was only SBI who was managing the funds
of EPFO but it was performing very badly (not being able to beat the bank FD
rates). I think the likes of EPFO may opt for an independent AMC like UTI
rather than corporate owned AMC like HDFC AMC where there is a clear case of
conflict of interest as they may be biased in their EPFO fund investment
strategies. <o:p></o:p></p>
<p class="MsoNormal"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">Summary of Analysis levels Involved in the
study of UTI AMC:<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">1.
Level 1 (Lower relative valuation)</span></u></b><span style="color: #0000cc;"> –
Low valuation (18 PE and 2.4 times book value) keeping in view the established
brand, expertise, market share. Underlying performance metrics are not that
weak as compared to other two listed players. It is more the result of market
perception.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">2.
Level 2 ( Industry level growth and restructuring)</span></u><span style="color: #0000cc;">- </span></b><span style="color: #0000cc;">Mutual fund
industry will grow fast in India as people are getting aware of the financial
assets and planning for the same quite early.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">3. Level 3 (Forecasting of
management decisions which may result in massive future growth and value unlocking)</span></u><span style="color: #0000cc;"> – </span></b><span style="color: #0000cc;">However, the
most value will come from the actions of the management in shedding the
Government control, PSU work culture and becoming more professional, TR Price
acquiring majority shareholdings or some other private player coming by
acquiring the share of other PSU investors. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">This one is a Tier 2 grade stock as of now but once it implements dividend policy distributing liberal dividends, management becoming more independent and professional in approach and any stake sale by 4 PSU shareholders this will be transformed into Tier 1 quite fast and aggressively. </span></p>
<span face=""Calibri","sans-serif"" style="color: #0000cc; font-size: 11pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: Mangal; mso-bidi-font-size: 10.0pt; mso-bidi-language: HI; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;"><b style="background-color: white; color: #7f6000; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; text-align: justify;">(This study is a business analysis of UTI AMC. 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 own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. For subscribing to the monthly Newsletter reach at oscillationss@yahoo.in).</b><br clear="all" style="break-before: page; mso-special-character: line-break; page-break-before: always;" />
</span>
<p class="MsoNormal"><span style="color: #0000cc;"><o:p> </o:p></span></p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com0tag:blogger.com,1999:blog-8629364998048667702.post-50967525756209346872021-05-15T02:21:00.001+05:302021-05-15T11:33:23.342+05:30Newsletter Club of this Blog<p><span style="font-family: inherit;">Dear all, Off late receiving many queries regarding lesser stock ideas/studies being posted at this Blog in the last 5-6 months. Actually as I have shared earlier, we have started a monthly newsletter of this Blog in Sep-2020 and most of the stock analysis reports and ideas are being shared with the Newsletter club. The main focus of the Newsletter is on the education and learning part related to equity research covering financial and
fundamental analysis. In case anybody wants to join the club please send an email at <span style="text-align: justify;"><span style="background-color: white;">oscillationss@yahoo.in giving brief introduction<b>. </b></span></span>I am sharing the names of some of the stock ideas shared with the Club since Sep-2020:</span></p><p></p><div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOo3lQV7pfa3SlMyzX7-JZbqxrlfMWjG2xwLUOmRHUthoPyAi0oHWMLHiJUSI4yRuA0Z6eKjyTPGV849Lirjf26e9zP_OdIfubraxA9SCBu8t6WUNL5u25g5ZNqYpLW-90Ay3wv_CSMGk/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="486" data-original-width="689" height="409" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOo3lQV7pfa3SlMyzX7-JZbqxrlfMWjG2xwLUOmRHUthoPyAi0oHWMLHiJUSI4yRuA0Z6eKjyTPGV849Lirjf26e9zP_OdIfubraxA9SCBu8t6WUNL5u25g5ZNqYpLW-90Ay3wv_CSMGk/w553-h409/image.png" width="553" /></a></div><br /><br /></div><br /><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div>Apart from the above stocks, we are investing in many other promising stories. Also, we continue to buy many of our old stock picks whose studies have been shared at this blog like HCG, MCX, Godrej Agrovet, Zydus wellness, ABFRL etc. while many of the stocks advised in the last one year have performed well hence we are not adding them anymore like Tata power, Borosil Renewable, Laurus Labs, BEL,BEML etc. I am also receiving regular requests for sharing the performance of all the stocks shared at this blog in the last 4-5 years and the future course of action for these stocks. I have started the work on the same and will share the same very soon. </div><div><br /></div><div>Thanks very much for your support.</div>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com1tag:blogger.com,1999:blog-8629364998048667702.post-4682336918534487192021-05-13T17:02:00.003+05:302021-05-15T23:42:22.808+05:30Tata Coffee Ltd: The Arabica has Matured with Intense Flavors<p><br /></p><b style="text-align: justify;"><u><span style="color: #0000cc; font-size: 18pt; line-height: 115%; mso-bidi-font-size: 16.0pt;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90aBRjOeoSs2P40mGE_IibcUuSqEXHE0yVti5sG8k2t6juZ7MudcBl96eLReDhGJXFufNdTOtkSKnvMezicRDjhHKJmWpnr-2VTYUcHaJXKfli9tz01dO5Zg6MTanp8726bwnEdPOeRg/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="194" data-original-width="370" height="109" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90aBRjOeoSs2P40mGE_IibcUuSqEXHE0yVti5sG8k2t6juZ7MudcBl96eLReDhGJXFufNdTOtkSKnvMezicRDjhHKJmWpnr-2VTYUcHaJXKfli9tz01dO5Zg6MTanp8726bwnEdPOeRg/w184-h109/image.png" width="184" /></a></div></span></u></b><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Grade: TIER 1<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #2b00fe;">(This business study of Tata coffee Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021.)</span></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;"></span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwqdXmP3KqPS1HskKitHbPJcpKnmWL-mfPoENtmqu5ygSuqSdR-w_yRwLNp-I3JFGsPSJdnCitMy-EMbqLjbAa5DoIPNEj9sdQ-_1fSrYNWUPt5y2tTzOLgyQv3t7pqsuLMikikpmbcFU/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="181" data-original-width="678" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwqdXmP3KqPS1HskKitHbPJcpKnmWL-mfPoENtmqu5ygSuqSdR-w_yRwLNp-I3JFGsPSJdnCitMy-EMbqLjbAa5DoIPNEj9sdQ-_1fSrYNWUPt5y2tTzOLgyQv3t7pqsuLMikikpmbcFU/w508-h225/image.png" width="508" /></a></div><p></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;"><br /></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; line-height: 115%;"><span style="font-size: medium;"><br /></span></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; line-height: 115%;"><span style="font-size: medium;">Coffee: A
global Drink</span></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;">1) Coffee truly is a global drink
and a global commodity. However there are disputes related to this being second
most traded commodity after oil. Many argue that this is not the case as agro
commodities like Wheat or rice are having much bigger trade value. But I think,
Coffee may be a big trade commodity if we take into account only the
international trades as other agro commodities like wheat or rice are mostly
traded in the production country and international trade may be much lower than
the total production. Even on standalone basis the value of international trade
(exports) is significant at USD 30 billion.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Coffee generally is of two
types-Arabica and Robusta. Arabica is of premium quality with half of caffeine
levels as compared to Robusta. So it has much deeper, smoother and sweeter
taste with notes of chocolate and hints of other fruits flavor. So Arabica has
much higher and intense flavors. Robusta is much stronger in taste with almost
twice the caffeine levels. So due to higher caffeine levels, it is much bitter
and harsher in taste with notes of grains. Robusta is much easier to cultivate,
has almost double the yield and less prone to insect attacks (due to high
caffeine) so all these factors makes it to cost lower. But Arabica beans are
sold at double the price. The instant powdered coffee we find in all the retail
stores is all robusta coffee. In order to drive up the profits, producers are
using more and more of robusta coffee whether it is instant coffee or a coffee
retail chain.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Across the globe, Arabica
accounts for some 75% production share while Robusta is 25% share. Brazil leads
the globe with Arabica production (70% of its total coffee production) while
Vietnam is the leader in Robusta (95% of its total coffee production). The
global coffee production data is as follows:<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMCV1SH-TJ-XNBPPtuzwZLYc5Q5A155WDz38yvoodn1J15HMuSvSYbOwX02FrHES7Q581iuKHhkDAo5nKxflv1dI4dsMTt7StlEAnWvc2ex_5OBujoATWlZKZYAatN7As3-eg2DNktBq4/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="201" data-original-width="491" height="241" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMCV1SH-TJ-XNBPPtuzwZLYc5Q5A155WDz38yvoodn1J15HMuSvSYbOwX02FrHES7Q581iuKHhkDAo5nKxflv1dI4dsMTt7StlEAnWvc2ex_5OBujoATWlZKZYAatN7As3-eg2DNktBq4/w525-h241/image.png" width="525" /></a></div><br /><br /><p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-no-proof: yes;"><v:shapetype coordsize="21600,21600" filled="f" id="_x0000_t75" o:preferrelative="t" o:spt="75" path="m@4@5l@4@11@9@11@9@5xe" stroked="f">
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<p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">2) Europe accounts for some 35%
consumption with nil production. Europe and North/South America account for
some 65% of total global coffee consumption. Europe and USA are fairly stable
in coffee demand so now it is India and China which are the new coffee hot
spots. India’s coffee consumption is concentrated to southern India but off
late with the growth in coffee retail chains like CCD and Starbucks a strong
coffee culture is happening in India which is going to enter their houses also.
With the availability of premium coffee beans and electric roasters and coffee
makers the home consumption is going to increase significantly in India.<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6uR_GAUHEa8tyx9RpByF5knHZsQE5F6V5sCRJeFfdjdZ-7YT1a6qB2HeqHN399ax2wYgJRYIOnx0VWdd_Xv5W7TbnjJWBKv-pHG3qQEZId0BfRfY4cY5QqIkq1sfCotcs5UQlF22GNXA/s2048/arabica.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1152" data-original-width="2048" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6uR_GAUHEa8tyx9RpByF5knHZsQE5F6V5sCRJeFfdjdZ-7YT1a6qB2HeqHN399ax2wYgJRYIOnx0VWdd_Xv5W7TbnjJWBKv-pHG3qQEZId0BfRfY4cY5QqIkq1sfCotcs5UQlF22GNXA/s320/arabica.jpg" width="320" /></a></div><p class="MsoNormal" style="text-align: justify;"><b>As of now, India exports
around 70% of its production of 3 lac-3.5 lac MT. Karnataka accounts for 85% of
Indian production while the rest comes from Kerala.</b> So with rising
consumption in India, India has sufficient local production to cater to the
demand. And now the trend is clearly towards coffee consumption in India and
this will grow much faster than tea. In fact I feel we may see coffee
plantations growing up in India even in the Himalayas where the black pepper
plantations may bend towards coffee. So i think slowly more and more Indians
are moving towards coffee. I like it when in movies and TV Shows they show
actors holding a large coffee mug (though may be empty) because this is subtle
marketing and it hits the cords more effectively...though i am not sure whether
it is deliberate or not but if it is not then i think coffee marketing companies
should think over this seriously.</p><p class="MsoNormal" style="text-align: justify;"><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhX3h4zT-GhAoZItmw7tpoZbS2zgVp5OSs7FFqHrq_iSKmQR4ZWXApmWYWjcXL46SJmYJWuyx0FLCRfQ2Y6_cJUX-pVzTckrRK9lrMLKBbsYmEdqqWZKmm4Dmk4ti7OM1GtdThzPEWz7w0/s1875/coppertina-seed-to-cup.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="800" data-original-width="1875" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhX3h4zT-GhAoZItmw7tpoZbS2zgVp5OSs7FFqHrq_iSKmQR4ZWXApmWYWjcXL46SJmYJWuyx0FLCRfQ2Y6_cJUX-pVzTckrRK9lrMLKBbsYmEdqqWZKmm4Dmk4ti7OM1GtdThzPEWz7w0/s320/coppertina-seed-to-cup.jpg" width="320" /></a></div><p class="MsoNormal" style="text-align: justify;">3 Coffee beans (though Coffee
beans are not really “beans” but seeds of the fruit of the coffee tree) are
just like any other agriculture commodity with limited pricing power but when
we move up the value chain the dynamics of this industry changes to one with
premium pricing power with premium brands like that of Starbucks or Cafe Coffee
Day (CCD). So the value proposition changes relevant to the type of producer
like a plantation company is prone to boom and bust cycles of all commodities
and Coffee is not an exception. Right now, coffee industry is witnessing bust
cycle and prices are trending lower.</p>
<p class="MsoNormal" style="text-align: justify;">In last 10 years or so, the cost
of inputs for coffee production has increased by some 250% however the prices
have been increased only by 175% so there is a clear over supply of coffee
beans in the global market. But coffee production is not that easy to start and
stop. Unlike other commercial crops like Wheat/rice where crops are planted
every year the plantations like Tea, Coffee etc. take much longer time to start
producing and in the subsequent years it is not beneficial to stop production
as massive investments have been made in the initial unproductive years.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">It takes four to five years for a
coffee tree to start producing coffee fruits, while the land on which it grows
will produce fruit for about 25 years. Hence apart from routine inputs in the
form of fertilizers maximum annual costs are in the form of labour only.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b>The likes of Starbucks and
other retail chains brought a revolution in coffee drinking habits of the
people and this spurred the demand for coffee across the globe especially in
Europe and USA and more and more farmers started cultivating coffee as prices
were at life time highs. This started in Mid 90’s and culminated around 2007-08
and since then global supply has outpaced demand by fair margin putting
pressure on the prices.<o:p></o:p></b></p>
<p class="MsoNormal" style="text-align: justify;">In the last 4-5 years, Brazil and
Vietnam are producing more and more coffee even when international coffee beans
prices are lower. In fact, in dollar terms the cost of producing beans is
higher than the prices but still the poor farmers of Brazil and Vietnam are
being able to support even with these lower prices is only due to the fall in
currencies of these countries to Dollar. Fall in currency has enabled these
farmers to earn something more than their cost of production. However, Brazil
is mainly responsible for this supply glut in the global markets.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">As Brazil produces massive 35% of
the global production (25% of global export market), so it is the main force
behind the rise and fall of global coffee prices. No other country has this
much power in controlling the coffee prices. Here, Brazilian currency Real has
major impact because Real is falling as compared to USD every day and this is
making Brazil coffee suppliers to sell more and more coffee even at lower
prices in Dollar terms because they are getting more Real for every ton of
coffee sold in international markets. The exchange rate of USD to Real was 1.68
Reals in 2011 but the same now is 5.3 reals!!! More than 3 times fall. The weak
real is putting more pressure on the global coffee prices.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">4) So even when coffee prices are
ruling at 13 year ($1 per pound) low Brazil farmers were still able to extract
something but the situation is grim across the world for coffee producers.
Coffee producers across the globe are abandoning their coffee farms or turning
to other crops like Cocoa in Colombia which is the supplier of world’s best
quality coffees. So sooner or later coffee production is going to come down and
this will raise the prices to more reasonable levels.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">But I feel there is another
crisis which may come with current situation. The countries where coffee
farmers are abandoning their farms are some of the best quality coffee
producers like Colombia, Guatemala, Kenya which means this will reduce the
supply of premium quality Arabica coffee and this may result in very high
prices for premium coffees and very low prices for Robusta coffees.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">But still, even now people can
create the demand for premium quality coffee as prices are low. Low quality
coffee does not make people to consume more coffee but a cup of premium Arabica
coffee can make people to consume 3 cups in place of 1 cup of coffee and this
may create or raise the demand for premium coffee which is not within our reach
mainly because of low quality instant coffee used by most people so far. They
are no aware of the fine taste of a premium coffee.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Amid all this mayhem in global
markets, India is facing shortfall in its coffee production due to pest
attacks, climate issues. But this year is going to be good for Indian coffee
production and production will be higher. Also, Global coffee beans prices has
firmed up recently due to harvesting and supply chain issues faced by farmers
across the globe due to covid restrictions. So I think we may be near the end
of bust cycle of coffee and prices may start firming up from now on as supply
is going to shrink especially for premium Arabica coffee the prices may go up
much higher. So this year should be good for Indian Coffee plantation industry
including Tata Coffee Ltd.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">5) But things are different for instant
coffee or retail coffee chain branded players like Nestle, Bru or Starbucks. As
for these retailers, the low prices of coffee beans are good as the prices of
their end product are driven by suppliers not by consumers as demand is stable
at current price. This is because they are not selling a homogenous commodity
but a branded product with distinct attributes, quality and taste so producers
are price settlers. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">Tata coffee
Ltd: Indian Coffee story<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;">Tata coffee is India’s largest
coffee producer. Indian coffee production is mainly about small farmers holding
small land holdings and instances of large corporate producers like Tata coffee
are very few. Tata coffee deals in coffee in all combinations- it has
plantation business producing raw coffee beans, it has instant coffee
production capacities, It has retail presence in USA through Eight O’ clock
coffee brand, sells instant coffee in India under “Tata coffee Grand” band, it
supplies roasted coffee beans to all Starbucks chains in India, it has also
developed Indian coffee blend for Starbucks chains across the globe.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuik3SvVwMT-_xGPObBOP83gZtbk4Nw70OvGhhE4XL979HPe0mFSmdeQsv-Z8bGfEuOo_H9l-GMGKw33P3MHDm0f3kZowJKkiqN7yasgG0EQGcGop3m1Ry47RJywSvHeNsLWkmt-KS_uo/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="383" data-original-width="595" height="323" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuik3SvVwMT-_xGPObBOP83gZtbk4Nw70OvGhhE4XL979HPe0mFSmdeQsv-Z8bGfEuOo_H9l-GMGKw33P3MHDm0f3kZowJKkiqN7yasgG0EQGcGop3m1Ry47RJywSvHeNsLWkmt-KS_uo/w517-h323/image.png" width="517" /></a></div><br /><br /><p></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p>
<p class="MsoNormal" style="text-align: justify;"><o:p><br /><br /></o:p></p><p class="MsoNormal" style="text-align: center;"><o:p><br /></o:p></p><p class="MsoNormal" style="text-align: center;"><o:p><br /></o:p></p><p class="MsoNormal" style="text-align: center;"><o:p><br /></o:p></p><p class="MsoNormal" style="text-align: center;"><o:p><br /></o:p></p><p class="MsoNormal" style="text-align: center;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">Tata coffee owns around 8000
hectares (around 20000 acre) of Coffee plantations in southern India. If we
take Rs. 4-5 lac price per acre then the valuation of these coffee plantations
will be around 800-1000 cr. However, normally prices for Coffee estates are in
the range of Rs. 10 lac to Rs. 20 lac per acre especially in tourism heavy
areas like Coorg where Tata coffee owns around 11000 acres and this will make
the valuations anywhere near 2000 cr to 3000 cr!!! And we are still left with
2400 hectares (6000 acres) of tea estates. Recently Tata Coffee was looking to
acquire 12000 hectares of coffee plantations owned by troubled Café Coffee Day
for Rs. 1200-1500 cr (while CCD is asking for some 2000 cr) which supports our
calculation of minimum 1000 cr value for coffee plantations. Tata coffee has
entered into partnership with group hospitality company Indian Hotels for
managing its coffee heritage resorts for hospitality business. This also have
the potential for a good business going forward and this will further establish
the valuation of its coffee plantations.<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiL4dahpuEFsg0u4u7TWkA_lAQOHF4-mk5VHUY-ESMROQKqD-HSqtK68lKNZ-5qwh22Tqdh5_J9BL3ZEeisSm1LabvC3XrkLn4OZlliPwxGm1p-XvVufPeBzMB1erFzm-Zc-3bEhMnhaF0/s1280/Ama1.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="773" data-original-width="1280" height="254" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiL4dahpuEFsg0u4u7TWkA_lAQOHF4-mk5VHUY-ESMROQKqD-HSqtK68lKNZ-5qwh22Tqdh5_J9BL3ZEeisSm1LabvC3XrkLn4OZlliPwxGm1p-XvVufPeBzMB1erFzm-Zc-3bEhMnhaF0/w421-h254/Ama1.jpg" width="421" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZC5DNtfBEDxZDMjlv7ZSktKPFPV7dyj5_MK4AToalOA91Jjk77nILD8wuZ6RkWXwEHh1D1An_DP-oQ6vSfacTByn8KNJbacjAFPNDmKw0AzLhZWQZTHOd11tHow617vVXur_Mzzs-S7s/s1920/Ama.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1080" data-original-width="1920" height="247" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZC5DNtfBEDxZDMjlv7ZSktKPFPV7dyj5_MK4AToalOA91Jjk77nILD8wuZ6RkWXwEHh1D1An_DP-oQ6vSfacTByn8KNJbacjAFPNDmKw0AzLhZWQZTHOd11tHow617vVXur_Mzzs-S7s/w422-h247/Ama.jpg" width="422" /></a></div><br /><p class="MsoNormal" style="text-align: justify;"><br /></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-no-proof: yes;"><v:shape alt="Description: D:\Analysis\My Data\Newsletter\Articles\Dec-20-Jan-21\Ama.jpg" id="Picture_x0020_3" o:spid="_x0000_i1029" style="height: 207pt; mso-wrap-style: square; visibility: visible; width: 369pt;" type="#_x0000_t75">
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<p class="MsoNormal" style="text-align: justify;"><span style="mso-no-proof: yes;"><v:shape alt="Description: D:\Analysis\My Data\Newsletter\Articles\Dec-20-Jan-21\Ama1.jpg" id="Picture_x0020_4" o:spid="_x0000_i1028" style="height: 159pt; mso-wrap-style: square; visibility: visible; width: 368.25pt;" type="#_x0000_t75">
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<p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">Its recent expansion (invested
some 400 cr for new Instant coffee plant) in Vietnam has started performing
this year and mainly due to operation of its Vietnam plant <span style="mso-spacerun: yes;"> </span>its PAT for the first half is Rs. 59 cr vs 47
cr even during covid crisis which is an indication towards things to come in
the near future.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">Merger with
Tata Consumer to unlock big Value and Synergy for Both<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;">Tata coffee has 50.08% holding in
Eight O'Clock Coffee (ECL) which is a famous American retail coffee brand (Arabica
roast and ground coffee) dates back to 1859. Before Vietnam plant, ECL was
accounting for 60% of the total turnover- 1120 cr out of 1966 cr in 2019-20. ECL’s
net profit in 2019-20 was 117 cr but due to its 50% share only 58 cr accrue to
Tata coffee. But after Vietnam plant, NP will grow much faster as the same is
100% subsidiary of TCL. Its NP for the first half this year is 59 cr and I
think the same may touch 150 cr this year.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">CCL Products India Ltd. (Market
value 3200 cr, PE 20) is another listed coffee player but it is more of a
wholesale producing instant coffee and does not own plantations but still its
valuation is same as of TCL. But I think both can’t be compared- Tata coffee
also has large Instant coffee business but it has much higher brand strength in
both B2B and B2C. In B2C it has a great brand in Eight O’clock coffee which is
growing fast in USA now so it should be valued as an FMCG brand. In 2006, Tatas
paid $ 220m (Rs. 1000 cr as per 2006 exchange rates and 1600 cr as per current
exchange rates for ECL acquisition. Tata coffee contributed 50% of the amount
($110m). At that time, ECL was having revenues of $110m and the same right now
is around $160m so as we can see not that much high growth by ECL. And this may
be one of the reasons for the underperformance of Tata coffee because biggest
revenue contributor was not growing that much. But ECL once was top coffee
brand in USA and Tatas are now working on revamping the brand and supply chain
and this should show the impact pretty soon.<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHhyXww8yEkTME9h5jcn6ftshjhPJ1JoX_NBZr4MI6AVGJHw83rCdAgYdOjjScvY2UBNqEUlNU329U-_sZPNdxhdZIt4U6Qr0zqPibNOinY0BHu-PBFwRcX85K6z5s6eAZgpATOwhQkfU/s648/eightoclocklineup.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="262" data-original-width="648" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHhyXww8yEkTME9h5jcn6ftshjhPJ1JoX_NBZr4MI6AVGJHw83rCdAgYdOjjScvY2UBNqEUlNU329U-_sZPNdxhdZIt4U6Qr0zqPibNOinY0BHu-PBFwRcX85K6z5s6eAZgpATOwhQkfU/w493-h256/eightoclocklineup.jpg" width="493" /></a></div><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">I have not done its valuation
exercise comprehensively but 50% stake should value around 1500 cr Rs. (at 20-25
PE). 1500 cr value for 50% stake in ECL is still at the lower end as it would
make for just 2 times returns for Tata coffee in ECL in last 14 years. US is
still and will be the biggest coffee market globally (70% consumption at home
which augurs well for ECL) and that’s why ECL is critical to Tata group and
they are restructuring its business in USA and this year the growth is good in
ECL and looks like the strategy is working. Total Income of Eight O'Clock
Coffee Company for the Six months ended September 30, 2020 was USD 87 .81
Million compared to USD 76.48 Million for the corresponding Six months of the
previous year. <span style="color: #0000cc;">Further, I think as demand for
premium coffee will rise in India for home consumption there is a possibility
that Tata may introduce ECL in Indian market. And I feel Tata should make the
first move rather than waiting for other brands like Nestle. Recently, many
brands have started offering premium coffee beans in India for home consumption
like Blue Tokai which are witnessing high demand. Though Tata Coffee has also
introduced their single estate coffee brand “Sonnet” but still I feel ECL is an
established brand and have time tasted blends for USA market and these blends
should do well in India markets with some tweaking for Indian tastes (though I
think there is nothing like Indian taste in Indian coffee as of now). ECL can
benefit from vast supply chain and distribution reach of Tata consumer which is
way bigger than ECL in USA.</span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">Balance
50% holding in ECL is with Tata consumer which is also the holding company of
Tata coffee (57% holding) and that’s why I feel Tata coffee may be merged with
Tata consumer and at that time there will be value unlocking for plantations of
more than 25000 acre (coffee and Tea) which are not valued much in the current
valuation but for merger they should get the valuation of around 1000 cr. <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;">Tata consumer is already doing
the distribution and marketing for “Tata coffee Grand” brand owned by Tata coffee
Ltd. Tata group is on a great value accretive restructuring path simplifying
ownership, supply chain and management structure and there is no reason for
Tata consumer to leave Tata coffee alone when they have already restructured
the FMCG brands of Tata chemicals.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">Tata
Starbucks- Emerging Giant of Indian retail coffee </span></u></b><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Tata coffee is the exclusive
supplier of coffee beans to Tata-Starbucks (50:50 JV) in India and has also
started supplying the same for their global business and this is going to make
a mark for Indian coffee blends in the global market just like Indian single
malt whiskies by Amrut/Paul John/Rampur. Tata Coffee has revamped its
plantations into 8000 micro grids to cater to the premium beans requirements of
Starbucks. Growth of Starbucks in India means growth for Tata coffee. <span style="color: #0000cc;">It is for the first time in the history of Starbucks that
they are procuring coffee from the roasting facility owned by its partner. </span>This
shows the expertise of Tata coffee in producing premium quality coffee. This
localization also saves the costs for Tata-Starbucks as they are not required
to import costly coffee. Coffee drinking in India is moving beyond south Indian
states and coffee retail brands are going to see big growth in the future and
Starbucks should be the leader of the pack. Tata-Starbucks turnover last year
was 540 cr and it is already profitable and Starbucks is very aggressive about
Indian market growth.<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitNsnLQ4uGIUWkfPBpRXs-OW-D7Jcv4t4_zmJ7-1UyyU2JLVS1GtvNhUh5BCVyB6a4MkeyBiK14XVB0aosjyMpTibXtIcz__puyQuH-xIbJEbcK6d3Yh_6v8KruRNAJPWvo6baI5J3idQ/s640/star.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="468" data-original-width="640" height="308" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitNsnLQ4uGIUWkfPBpRXs-OW-D7Jcv4t4_zmJ7-1UyyU2JLVS1GtvNhUh5BCVyB6a4MkeyBiK14XVB0aosjyMpTibXtIcz__puyQuH-xIbJEbcK6d3Yh_6v8KruRNAJPWvo6baI5J3idQ/w529-h308/star.jpg" width="529" /></a></div><br /><p class="MsoNormal" style="text-align: justify;"><br /></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-no-proof: yes;"><v:shape alt="Description: D:\Analysis\My Data\Newsletter\Articles\Dec-20-Jan-21\star.jpg" id="Picture_x0020_9" o:spid="_x0000_i1026" style="height: 146.25pt; mso-wrap-style: square; visibility: visible; width: 218.25pt;" type="#_x0000_t75">
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</v:imagedata></v:shape></span><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;"><o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">Indian coffee market is still in
its infancy just like China. Just like India, China was a country of tea
drinkers. But Starbucks happened to china in 1999. Starbucks has succeeded in
blending coffee culture into Chinese culture and it has done the same by
relentless attention on details in creating Starbucks a place where Chinese
people love to enjoy best coffee, sit, relax and enjoy with their friends.
Starbucks has focused on integrating local customs and designs in its cafes. Starbucks
were aware of the growing middle class in China and its powerful impact on
demand and need for new recreational places. Coffee is a western drink but young
Chinese considers coffee culture sophisticated and to influence. It is normal
for people in China these days to have business meetings and even job
interviews at Starbucks. So with great execution, Starbucks has been successful
in creating its cafes as place to go after home and office. The same thing
happened in Japan which was another tea drinking nation and now a big coffee
nation with Starbucks having more than 1000 stores. Starbucks is having some 4400
stores in China, the largest outside USA and it is betting big on China as next
big market after USA. Its China revenues are around 6000-7000 cr which are only
going to grow bigger in the next 2-3 years as Starbucks is looking to double
the store count.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So India is going to follow the
footsteps of Japan and China in adopting the coffee culture and Tata coffee as
a supplier of premium coffee beans will be one of the major beneficiary of this
shift. Starbucks has worked out a great marketing strategy for Chinese market
and developed and created products keeping in view the Chinese tastes. Chinese
are much more serious about their culture and family value and social status.
So Starbucks did some great marketing there- No aggressive Coffee promotions to
avoid being treated as a threat to their tea-culture, blended Coffee culture
with tea culture initially, engaging annual family programs etc. Starbucks is a
giant success in creating great and innovative coffee products and it is doing
this for decades. Starbucks had partnered with local partners for China market
in order to address the complexity of massive china market. The same thing it
has done for Indian market which is going to as massive as China and after a
lot of search it partnered with India’s most trusted and iconic brand Tata. The
selection of Tata itself shows the brand strength, trust and customer loyalty
it has in Indian market. If you ask any Value investor- China was not a market
where Starbucks could achieve any sort of success but with their superior
executing skills they have made it their biggest outside USA and may one day
even bigger than USA. So I have no doubts that they will do the same in Indian
market also.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">As of now, Tata-Starbucks operates
200 stores in India across 13 cities. Tata’s stake is owned by Tata consumer
product ltd (TCPL) and as of now they have invested around 300 cr in the JV.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">But if you ask me the creation of
a coffee culture by Starbucks in India will have multi-dimensional impact on
coffee demand in India not just for retail chains of Starbucks but also for
home consumption and Tata coffee is going to be the major beneficiary here also
as it is focusing on developing premium Coffee products for Indian markets.
Recently it has launched premium single estate retail coffee brand “Sonnet”
which is available online. <o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimfqrFki3UO20CAEDlbho3RsPWf4cWDxAPaaxE0u6Y8IWLMfKDTSyGH3RhmO5t5bM8kab7Ns8OtFCLk6bc_Sst0L6uv-0EnHJqsu9HpHIJ5hOFzwcBcoDeG0qNxhz4ICz_MQhqPLFDBh8/s700/sonnets-press.png" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="400" data-original-width="700" height="267" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimfqrFki3UO20CAEDlbho3RsPWf4cWDxAPaaxE0u6Y8IWLMfKDTSyGH3RhmO5t5bM8kab7Ns8OtFCLk6bc_Sst0L6uv-0EnHJqsu9HpHIJ5hOFzwcBcoDeG0qNxhz4ICz_MQhqPLFDBh8/w466-h267/sonnets-press.png" width="466" /></a></div><br /><p class="MsoNormal" style="text-align: justify;"><br /></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-no-proof: yes;"><v:shape alt="Description: D:\Analysis\My Data\Newsletter\Articles\Dec-20-Jan-21\sonnets-press.png" id="Picture_x0020_6" o:spid="_x0000_i1025" style="height: 195pt; mso-wrap-style: square; visibility: visible; width: 341.25pt;" type="#_x0000_t75">
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<p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">Tata Coffee being an integrated
coffee player is going to be a major beneficiary of coffee industry growth in
India as it can restructure its product offerings as per the requirements of
the market like it can shift the export of its premium quality coffee beans to
meet the higher demand of Starbucks outlets in the future. For any premium
coffee retail brand like Starbucks the supply of uniform premium quality beans
is the foremost requirement and Tata coffee can maintain this supply through
premium coffee produced in its coffee plantations.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Troubled Cafe
Coffee day- An opportunity for Tatas to acquire assets and Relative strength<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;">Troubled Cafe Coffee Day
enterprise is looking to sell various assets/businesses to pay off the debt.
Promoter family is also selling their assets to reduce the debt at promoter
level. Tatas are interested in their Coffee plantations spanning 12000 hectares
and Coffee vending machine business. Talks were at advanced stage and are
taking time due to issues related to valuations and some creditors asking for
more. I think we will see something on this very soon... may be within a month
or so. Tata coffee and Tata consumer will do anything to acquire these assets.
The acquisition of coffee plantations will make Tata coffee a substantial
player in Indian coffee beans market and it will be an integrated coffee
player- all the way from plantations to retail sale and coffee chains.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">Some
analyst friends have questioned this asset heavy approach but I think owned
plantations are a key to ensure and control the coffee bean quality and Tata
coffee is eyeing premium-ness in its products now. India is going to witness a
coffee culture at home and out of home and this will create massive demand for
quality coffee beans and that’s why having its own plantations will ensure the
supply without any worry of the beans prices. Now, Tata coffee wants to be
established as a premium brand. Brand strength and loyalty in B2B is more
strong and relationships like supplier of Starbucks are tough to create and are
long lasting (Just check the valuation of recent IPO of Mrs Bectors).<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;">Tata coffee was in restructuring
mode for last 5-6 years and the stock has not performed at all during this
period. It is still available at 2014 valuations. So it has gone nowhere. I
think as of now, market has valued it as some sort of plantation company but
the share of plantation business and its impact on NP has come down to great
extent in the last 4-5 years and now it is more of coffee product company so
its re-rating catalyst are just nearing now and it may get the re-rating quite
fast just like the same has happened in many tata group stocks- Tata consumer, Tata
Motors, Tata communications, Tata chemicals and Tata power (we hold all). <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">I think things are nicely shaped
for Tata coffee to witness a high growth phase and at a valuation of 2000 cr I
think market is not valuing its various businesses adequately.</p>
<p class="MsoNormal"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">Summary of Analysis levels Involved in the
study of Tata coffee:<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">1.
Level 1 (Lower relative valuation)</span></u></b><span style="color: #0000cc;"> -
Current stock price is not reflecting the value of its coffee and tea
plantations, value of its overseas subsidiary Eight O’clock Coffee.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">2.
Level 2 ( Industry level growth and restructuring)</span></u><span style="color: #0000cc;">-</span></b><span style="color: #0000cc;"> Tata coffee is
going to see massive growth in its premium coffee beans and instant coffee
business due to growth of coffee demand in India both for home consumption and
Coffee retail chains.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">3.
Level 3 (Forecasting of management decisions which may result in massive future
growth and value unlocking)</span></u><span style="color: #0000cc;"> -</span></b><span style="color: #0000cc;"> (a) Merger of Tata coffee with Tata consumer products
Ltd (b) Acquisition of Coffee plantation assets of CCD.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #7f6000;"><b><span style="background-color: white;">(</span><span style="background-color: white;">This study is a business analysis of Tata Coffee Ltd. 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 own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. </span>This business study of Tata coffee Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. For subscribing to the monthly Newsletter r<span style="background-color: white;">each at oscillationss@yahoo.in).</span></b></span></p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com10tag:blogger.com,1999:blog-8629364998048667702.post-47036244436871732082021-03-03T01:36:00.006+05:302021-03-04T00:06:07.137+05:30Redington India Ltd: Imperfection is not Incompleteness<p> <b style="text-align: justify;"><u><span style="color: #0000cc; font-size: 18pt; line-height: 115%; mso-bidi-font-size: 16.0pt;">Stock Idea: Redington
India.</span></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 18pt; line-height: 115%; mso-bidi-font-size: 16.0pt;"><o:p></o:p></span></u></b></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #2b00fe;">(This business study of Redington India Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021)</span></p><table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin-left: 4.65pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184; width: 583px;">
<tbody><tr style="height: 15.75pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
<td colspan="2" nowrap="" style="background: yellow; border-right: solid black 1.0pt; border: 1pt solid windowtext; height: 15.75pt; padding: 0in 5.4pt; width: 175pt;" valign="bottom" width="233">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>Stock:
Redington India Ltd<o:p></o:p></b></p>
</td>
<td colspan="3" nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid black; border-top: 1pt solid windowtext; height: 15.75pt; padding: 0in 5.4pt; width: 262pt;" valign="bottom" width="349">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>Financial
Performance (Fig in Cr)<o:p></o:p></b></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 1;">
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: 1pt solid windowtext; border-right: none; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 135.25pt;" width="180">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b>Description<o:p></o:p></b></p>
</td>
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 39.75pt;" width="53">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(Amt)<o:p></o:p></b></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: solid windowtext 1.0pt; border: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 130.85pt;" width="174">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b>Description<o:p></o:p></b></p>
</td>
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 70.45pt;" width="94">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>Up to
Dec-20<o:p></o:p></b></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 60.7pt;" width="81">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>FY-2019-20<o:p></o:p></b></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 2;">
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: 1pt solid windowtext; border-right: none; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 135.25pt;" valign="bottom" width="180">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">CMP (On 28.01.2021)<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 39.75pt;" valign="bottom" width="53">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">135<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: solid windowtext 1.0pt; border: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 130.85pt;" valign="bottom" width="174">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Sales (Inc other income)<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 70.45pt;" valign="bottom" width="94">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">41500<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 60.7pt;" valign="bottom" width="81">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">51500<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 3;">
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: 1pt solid windowtext; border-right: none; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 135.25pt;" valign="bottom" width="180">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Market Value <o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 39.75pt;" valign="bottom" width="53">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">5240<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: solid windowtext 1.0pt; border: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 130.85pt;" valign="bottom" width="174">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Net Profit<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 70.45pt;" valign="bottom" width="94">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">483<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 60.7pt;" valign="bottom" width="81">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">534<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 4;">
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: 1pt solid windowtext; border-right: none; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 135.25pt;" valign="bottom" width="180">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">PE Ratio (Annualized)<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 39.75pt;" valign="bottom" width="53">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">7<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: solid windowtext 1.0pt; border: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 130.85pt;" valign="bottom" width="174">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Cash<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 70.45pt;" valign="bottom" width="94">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">3100<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 60.7pt;" valign="bottom" width="81">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">2368<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15.75pt; mso-yfti-irow: 5;">
<td nowrap="" style="background: yellow; border-left: solid windowtext 1.0pt; border: none; height: 15.75pt; padding: 0in 5.4pt; width: 135.25pt;" valign="bottom" width="180">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Net worth (Sep-2020)<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: none; border-left: 1pt solid windowtext; border-right: 1pt solid windowtext; border-top: none; height: 15.75pt; padding: 0in 5.4pt; width: 39.75pt;" valign="bottom" width="53">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">4500<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; height: 15.75pt; padding: 0in 5.4pt; width: 130.85pt;" valign="bottom" width="174">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Purchases-Stock in Trade<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: none; border-left: 1pt solid windowtext; border-right: 1pt solid windowtext; border-top: none; height: 15.75pt; padding: 0in 5.4pt; width: 70.45pt;" valign="bottom" width="94">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">39200<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-right: solid windowtext 1.0pt; border: none; height: 15.75pt; padding: 0in 5.4pt; width: 60.7pt;" valign="bottom" width="81">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">48600<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 6;">
<td nowrap="" style="background: yellow; border-bottom: none; border-left: 1pt solid windowtext; border-right: none; border-top: 1pt solid windowtext; height: 15pt; padding: 0in 5.4pt; width: 135.25pt;" valign="bottom" width="180">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Dividend Yield<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: none; border: 1pt solid windowtext; height: 15pt; padding: 0in 5.4pt; width: 39.75pt;" valign="bottom" width="53">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">3.00%<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-top: solid windowtext 1.0pt; border: none; height: 15pt; padding: 0in 5.4pt; width: 130.85pt;" valign="bottom" width="174">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Purchases/Sales <o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: none; border: 1pt solid windowtext; height: 15pt; padding: 0in 5.4pt; width: 70.45pt;" valign="bottom" width="94">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">94%<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: none; border-left: none; border-right: 1pt solid windowtext; border-top: 1pt solid windowtext; height: 15pt; padding: 0in 5.4pt; width: 60.7pt;" valign="bottom" width="81">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">94%<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15.75pt; mso-yfti-irow: 7; mso-yfti-lastrow: yes;">
<td nowrap="" style="background: yellow; border-right: none; border: 1pt solid windowtext; height: 15.75pt; mso-border-bottom-alt: solid windowtext 1.0pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 135.25pt;" valign="bottom" width="180">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"> <o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border: 1pt solid windowtext; height: 15.75pt; mso-border-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 39.75pt;" valign="bottom" width="53">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"> <o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: none; border-top: 1pt solid windowtext; height: 15.75pt; mso-border-bottom-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 130.85pt;" valign="bottom" width="174">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Debt<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border: 1pt solid windowtext; height: 15.75pt; mso-border-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 70.45pt;" valign="bottom" width="94">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">827<o:p></o:p></p>
</td>
<td nowrap="" style="background: yellow; border-left: none; border: 1pt solid windowtext; height: 15.75pt; mso-border-bottom-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 60.7pt;" valign="bottom" width="81">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">2537<o:p></o:p></p>
</td>
</tr>
</tbody></table><p class="MsoNormal" style="text-align: justify;">More than the perfection of the
market (stock market), it is its imperfection which is more beneficial and
attractive. I usually say this and someone questioned me why more value in
negativity. But I told him that Imperfection is not
incompleteness...negativity...deficit as is generally taken. It is not the absence of creativity and
skill but closeness to these. Perfection lies with the Almighty. When we move
into a garden...there is no perfect order...leaves are scattered all over...not
perfect but it is not incompleteness or disorder or chaos because the garden
looks beautiful...in fact this imperfection makes it look more beautiful.
Perfection may not be that perfect from the perspective of enjoying or living.
So the market is imperfect because it is its basic nature and it is beautiful,
lively and creative only because it is imperfect. As they say-Best is the enemy
of the Good and this is not more relevant elsewhere than in the stock market.<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4Rjy90Z_TFKctTJTiBd7quKmuHbg-1655acQAGIdj7yPBWLWXr-OruK2A7_utMdtlmi6exnruTtsTYlpU_wA71vEMVpDnl9FzLsQs_A2R-wFfMP6PoCxXv5h7qj4VdBG4Ec3vUkCE1wk/s728/tree+1.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="455" data-original-width="728" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4Rjy90Z_TFKctTJTiBd7quKmuHbg-1655acQAGIdj7yPBWLWXr-OruK2A7_utMdtlmi6exnruTtsTYlpU_wA71vEMVpDnl9FzLsQs_A2R-wFfMP6PoCxXv5h7qj4VdBG4Ec3vUkCE1wk/s320/tree+1.jpg" width="320" /></a></div><p class="MsoNormal" style="text-align: justify;">So perfect stocks are those
picked imperfect and amid imperfection. Redington I feel is one of the best
fit in this category- It has done perfect to improve its business, margins
and balance sheet but as of now lying in a corner ignored and so at low
valuation due to market imperfection but it is a great investment opportunity only
because of this imperfection.</p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Redington India is a global IT products distribution giant just behind Ingram Micro. It is an investor owned, Board managed and
professionally run company as promoters have exited by selling their entire
stake. At present, Synnex group which is a global giant in IT product distribution is having 24.2% stake, Affirma capital
15.8% (an arm of Standard chartered PE), MF 11.5% and FIIs/FPIs having 3.3% stake in it. Its turnover is massive
Rs. 51500 cr with 40% business coming from India but India is going to be their
fastest market. Its top 5 vendors are-Apple, Dell, HP, Samsung and Lenovo. Distribution is a high volume low margin business which makes it one of the toughest business with high entry barriers as it is very tough to create large scale supply chain, managing inventory of countless products, offering credit/financing to promote growth, long term relationships with suppliers and vendors, logistics, market making, technical support. And amid all this complexity they have to keep an eye on working capital management so as to ensure a reasonable level of margins (ROE). In distribution business, working capital is the plant and machinery and so the success and viability of distribution depends upon how well they manage this as higher levels of inventory and debtors blocks huge amount of capital straining returns and growth. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">This year they have improved
their working capital massively and generated large free cash flows as
their working capital days have been improved to 14 days from 38 days last year.
But this was due to significant collections due to covid and so this will stay around 30 days which is the normal practice in industry of
giving credit period of 1 month. I remember this figure was in high 60-70 days
some 3-4 years back so they have done massive improvements in their working
capital. Working capital is like plant and machinery for a distributor. In 9
months this year they have improved EBITDA by 11% in spite of the Covid
lockdowns across the globe and generated Free cash flows of staggering 2761 cr
(this will cool down to some extent next year). Its ROE stands around 17% but I
think this will see huge jump this year and very soon we will see this touching
25%. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">But
in spite of making massive improvements in working capital management in last
3-4 years it is still trading at low PE of 7-8 while Ingram Micro is trading at
25-30 PE during this period. Somehow, I feel market is not being able to value
and understand its high entry barrier business because it requires huge
resources and planning for building this gigantic supply chain in low margin
distribution business. <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;">Distribution business is very tough
as they have to establish their relevancy in the present era of cost cutting
where some product channels see them as not adding any value to the product
chain. But it is not….distribution is a very complex function, needing huge
resources for keeping inventory, giving credit to resellers, market knowledge,
providing after sales servicing and training etc. Just imagine how big
resources Producers would need to block in these activities if not for
distributors like Redington. Distributors earn their bits by achieving
efficiency in the supply chain and economy of scale. Distributors like Ingram
Micro and Redington, in order to fight another war of relevancy, have entered
into the distribution of Cloud computing business. Earlier some suppliers were
doubtful but then they see the value addition and now most of the cloud
computing suppliers are having distributors. Redington is distributing the
cloud products of Microsoft in India.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Distribution is one of the most
important functions in the entire value chain of a product from production to
final consumption. And when we talk about value chain then it implies that
distribution function adds “value” to the product. How? Distributors adds value
in the form of creating market for the product, bulk procurement and redistribution,
financing, inventory management and logistics, after sales services, knowledge
of the local markets etc. Distribution is inherent in the entire value chain
because the function like financing, storing large quantities, market creations
etc. are very important in order for a product to get demanded and sold. People
think that the likes of Flipkart, Amazon will eliminate the distributors but
they are wrong because then they will become the distributors itself because
somebody has to perform these distribution and marketing functions so if Amazon
holds the inventory, provide credit, ensure delivery then they are playing the
role of distributors. If they are not doing then it is sure that either the
producers themselves or someone else is doing this function. Retailers keep
small quantities of many products from different producers so they need the
services of distributors to procure these small quantities whenever they need.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Producers want and need to focus
on the designing, innovation, production and branding functions and these
require a lot of capital. So blocking further capital in the distribution
channel will be very risky for them as they can only afford to take that much
risk hence they need the services of distributors in placing and managing the
product and supply chain. So distribution needs large investments and lack of
proper distribution strategy can make or break a product in the tough market
conditions. Apart from the need for big investments, one can gauge the value
addition by distribution function on its own from the fact that if retailers or
consumers try to arrange for self-procurements of goods from producers then
this will render them very costly…in fact unaffordable. So Distributors
has independent value addition in the form of lowering the cost of product and
that’s why new disruptions like ecommerce will in most optimistic case will
only transform (not eliminate) the distribution function and may result in cost
savings and better efficiency. In traditional product distribution,
distributors with their immense value addition result in the creation/enabling
of a transaction which without them could not have been possible (Like without
distributors a new product can’t be sold to customers as who will create the
awareness of the product by market making).<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">Take
the case of Cloud computing where people were expecting the death of IT
distributors. But as I have said distribution is inherent in the entire supply
chain of a product from production to the final sale to the ultimate consumer. When
internet came many expected the death of middlemen as they felt the producers
would sell directly to consumers but the result was the emergence of much
bigger Distributors/Retailers in the form of Amazon/Alibaba. Cloud computing
has in fact widened the market of IT products as many small firms can now afford
costly IT systems which earlier were too expensive for them. But reaching these
millions of new firms who are prospective clients of cloud computing need the
support from IT distributors like Ingram/Redington in the form of financing,
technical support, market making, logistics etc. These distributors have long
term relationships with these firms and they can impact or motivate them to
look at Cloud computing as a low cost option for their IT system requirements
because in the end Cloud providers are competing with many other similar vendors
so they need the help of these “market gurus” and as they can rely upon the
expertise of these distributors so they can focus on their core work which is
offering new services/products under cloud.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;">Redington’s third party logistic
business “proconnect” is growing very fast. Proconnect is having one of the
biggest logistic capacities in India with 155 warehouses covering 6.7 m Sq
feet. In 2015, it was getting some 70% revenue from Redington but now the same
is just 13%. Total revenue is around 500 cr and the same is growing fast and
this one is going to be a big contributor in the future growth and valuation of
Redington.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Some Critical
Events and Decisions to put Redington into High Growth<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">But
apart from low valuation in high growth sector, there are some other very
critical factors which can catapult this one into another high growth orbit and
that is the coming growth of local electronics goods manufacturing in India. Indian
Govt. is promoting the local manufacturing by offering Production linked
Incentive (PLI) schemes. Indian Govt has launched a Rs. 50000 cr
production-linked incentive (PLI) scheme to boost the electronics goods
manufacturing in India. Global giants like Samsung, Nokia, Foxconn, Wistron
etc. are already going to ramp up their Indian manufacturing to benefit from
the PLI scheme. I think local manufacturing will increase the demand for its
services big time and this is going to be a big catalyst event for it. Second,
I feel as Redington has good cash reserves so time is ripe for it to do some
good acquisition in technology space or logistics space and I think we may see
something on this very soon. Third, the demand of Data centers/cloud will grow
much faster with 5G and Redington is already a big force in it and it will see
high growth in this vertical and I think it may even increase the services
offered in relation to Data centers/Cloud.<o:p></o:p></span></p>
<p class="MsoNormal"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">Summary of Analysis levels Involved in the
study of Redington India:<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">1.
Level 1 (Lower relative valuation)</span></u></b><span style="color: #0000cc;"> –
Low valuation (7 PE) keeping in view the scale, low debt, high entry barrier,
significant improvements in working capital (Plant and machinery).<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">2.
Level 2 ( Industry level growth and restructuring)</span></u><span style="color: #0000cc;">-</span></b><span style="color: #0000cc;"> IT products
demand is going to see high growth in India and across the globe and
Redington<span style="mso-spacerun: yes;"> </span>is nicely poised to
participate in this growth. Another massive industry level event is local
electronics goods manufacturing in India.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">3.
Level 3 (Forecasting of management decisions which may result in massive future
growth and value unlocking)</span></u><span style="color: #0000cc;"> – </span></b><span style="color: #0000cc;">They have already done the great work in last 3-4 years
which is not rewarded by the market. However, its management still has the
scope for another round of decision making to lead it to massive growth. The
decision to be taken by management for doing some acquisition in technology or
logistic space and then to capture market share in high growth cloud and
increasing their service offerings are the key strategic actions to be taken by
the management.<o:p></o:p></span></p>
<span face=""Calibri","sans-serif"" style="color: #0000cc; font-size: 11pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: Mangal; mso-bidi-font-size: 10.0pt; mso-bidi-language: HI; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;"><span style="background-color: white; color: blue; font-family: "Times New Roman"; font-size: 13.2px; text-align: justify;">(This study is a business analysis of the company under consideration. 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 own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).</span><br clear="all" style="break-before: page; mso-special-character: line-break; page-break-before: always;" />
</span>
<p class="MsoNormal"><span style="color: #0000cc;"><o:p> </o:p></span></p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com3tag:blogger.com,1999:blog-8629364998048667702.post-89102417832456039212021-02-04T01:33:00.005+05:302021-03-04T00:25:44.587+05:30TTK Healthcare Ltd: At the Crossroads<p> </p><p><b style="text-align: justify;"><u><span style="color: #0000cc; font-size: 18pt; line-height: 115%; mso-bidi-font-size: 16.0pt;">TTK Healthcare
Ltd.</span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Grade: TIER 3<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;"><u><b>Value
trigger: Level 3. Management is going to take certain decisions which will put
the company on a strong growth path.</b></u></span></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;"><u></u></span></p><div class="separator" style="clear: both; text-align: center;"><span style="color: #0000cc;"><u><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioAh5h7wwBITtwnkcjouxVSfoVR2DhL95_OmnJxAe9m6Mn_GdxTFBmR0IVnMktax0Sqi5T3fLCFv5Y_4RqkkOeuH0rVycqcq9aMRiIDui9LZ-IrSIwvDBmxSKWEL2KziE0uUn76n-vnyw/s375/ttk-healthcare-top.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="234" data-original-width="375" height="98" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioAh5h7wwBITtwnkcjouxVSfoVR2DhL95_OmnJxAe9m6Mn_GdxTFBmR0IVnMktax0Sqi5T3fLCFv5Y_4RqkkOeuH0rVycqcq9aMRiIDui9LZ-IrSIwvDBmxSKWEL2KziE0uUn76n-vnyw/w142-h98/ttk-healthcare-top.jpg" width="142" /></a></u></span></div><p></p><p></p>
<table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin-left: 4.65pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184; width: 249px;">
<tbody><tr style="height: 15.75pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
<td colspan="2" nowrap="" style="background: yellow; border-right: solid black 1.0pt; border: 1pt solid windowtext; height: 15.75pt; padding: 0in 5.4pt; width: 187pt;" valign="bottom" width="249">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">Stock:
TTK Healthcare Ltd<o:p></o:p></span></b></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 1;">
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 144.2pt;" width="192">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">Description<o:p></o:p></span></b></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 42.8pt;" width="57">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">(Amt)<o:p></o:p></span></b></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 2;">
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 144.2pt;" valign="bottom" width="192">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">CMP<o:p></o:p></span></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 42.8pt;" valign="bottom" width="57">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">562<o:p></o:p></span></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 3;">
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 144.2pt;" valign="bottom" width="192">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">Market Value <o:p></o:p></span></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 42.8pt;" valign="bottom" width="57">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">794
cr<o:p></o:p></span></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 4;">
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 144.2pt;" valign="bottom" width="192">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">PE Ratio (Annualized)<o:p></o:p></span></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 42.8pt;" valign="bottom" width="57">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">35<o:p></o:p></span></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 5;">
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 144.2pt;" valign="bottom" width="192">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">Net worth (Sep-2020)<o:p></o:p></span></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; padding: 0in 5.4pt; width: 42.8pt;" valign="bottom" width="57">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">275
cr<o:p></o:p></span></p>
</td>
</tr>
<tr style="height: 15.75pt; mso-yfti-irow: 6; mso-yfti-lastrow: yes;">
<td nowrap="" style="background: yellow; border-top: none; border: 1pt solid windowtext; height: 15.75pt; mso-border-bottom-alt: solid windowtext 1.0pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 144.2pt;" valign="bottom" width="192">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">Dividend Yield<o:p></o:p></span></p>
</td>
<td nowrap="" style="background: yellow; border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15.75pt; padding: 0in 5.4pt; width: 42.8pt;" valign="bottom" width="57">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">0.50%<o:p></o:p></span></p>
</td>
</tr>
</tbody></table><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtERVRNxpbYu0V5mhqfzMmhJXYVmar-E5mCs79SMWedkkdaj0NWAaVgHg_vwV65AplhYSrKI_PEFEnW48GUGbYj_VeH-fRgZrcfwuIPoj6CbfHQwGMVlodFZVNn42fZe3N4L6ywJHtoVQ/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /><img alt="" data-original-height="306" data-original-width="623" height="254" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtERVRNxpbYu0V5mhqfzMmhJXYVmar-E5mCs79SMWedkkdaj0NWAaVgHg_vwV65AplhYSrKI_PEFEnW48GUGbYj_VeH-fRgZrcfwuIPoj6CbfHQwGMVlodFZVNn42fZe3N4L6ywJHtoVQ/w547-h254/image.png" width="547" /></a></div><br /><br /><br /><p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-no-proof: yes;"><v:shapetype coordsize="21600,21600" filled="f" id="_x0000_t75" o:preferrelative="t" o:spt="75" path="m@4@5l@4@11@9@11@9@5xe" stroked="f">
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<p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">TTK is a very confusing company-
Not for analysis point of view but as a company because somehow they don’t seem
to be certain about their path. And in all this confusion they have created a
mess of products and divisions which are going nowhere. Their portfolio of
pharmaceuticals, medical devices and protective devices looks good but I don’t
understand what they are doing in deodorant and home care business (Good home
Brand-Drain Cleaner, Room Freshener, Scrubbers, Air Freshener Block and Odour
Remover) where there already is very stiff competition with established multinational
and national brands. I mean they could never spend on marketing and branding
like other biggies and there is nothing great about their products. They are
just routine products. And then they are also in foods business selling ready
to fry snacks!!! It is surprising why management plans these half-hearted useless expansions where they stand nowhere against the competition-neither
in terms of product innovation nor in terms of marketing spending. Their
investments in these verticals have not shown good results and they are
incurring losses or lower profits in these two. On the surface, their consumer
business earning PBT of around 18 cr on topline of 181 cr looks good but this
figure in mar-2017 was 240 cr and 25 cr respectively. So they are not being
able to compete. Same is the fate of food business where turnover has grown at
very slow pace from 72 cr in Mar-17 to 88 cr in Mar-20. So why to spend time,
energy, efforts and money on such adventures when they have other business
verticals with very strong growth potential and where they have done well. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">And
where they have done well?<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><u>Pharma and animal
healthcare business: </u></b>They have done well here. Topline has grown from
190 cr in 2017 to 231 cr and PBT at 21 cr from 13 cr. But they need to expand
their product line and they need some path breaking products. They have herbal
products like male/female fertility. In animal welfare division they offer
products like medicines, tonics and productivity boosters and if you ask me
this one is a great high growth opportunity. I feel they should have gone for
some acquisitions in pharma and animal welfare segments if they can’t expand
these businesses organically. Still, not a bad performance but they need to
focus on complex products.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u>Protective Devices and Sexual
wellness division:</u></b> They have done well in placing Skore in the sexual
wellness industry in India. They launched Skore condom in 2012-13 and with some
path breaking aggressive marketing and branding they achieved 3<sup>rd</sup>
position in no time by 2016. In 2012, it had to break its long standing
partnership with Reckitt Benckiser for selling Kohinoor and Durex condoms in
India because both couldn’t be able to reconcile their dispute. Due to this,
TTK lost the rights to Kohinoor (launched in 1979) and Durex (launched in India
in 1997). But TTK launched Skore condom with big heart in 2012 and within a
period of 4 years, it put behind both Kohinoor and Durex with wide margins. It
even outpaced the giant Kamasutra brand. It is now at 3rd place in India behind
Manforce and Moods with 10% market share (Manforce has 32%, Moods with 12%).
Aggressive marketing and advertising, is the main reason for this success. Its
advertising & Sales Promotion expenditure is at 88 cr in 2020 vs 68 cr in
2017 and bulk of it is going towards Skore. Recently it has started spending
more on the advertisement of Woodward’s Gripewater (WGW) and it would be
interesting to see the impact as WGW has not witnessed much revenue growth in
last 4-5 years. At present it is selling around 15 cr condoms.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Actually, although TTK lost the
brands of Kohinoor and durex but it never lost its technical prowess in
manufacturing high quality condoms. TTK was the first to establish condom plant
in India in 1963 and it was to first to install electric testing facility and
first to introduce subsidy free condoms in India in 1974. So with its decade
old marketing and distribution strengths, Skore was always going to make it big
and fast in Indian market.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #0000cc;">Recently,
Skore has forayed into sexual wellness products and has introduced innovative
products like lubes, sprays like pheromone-activated body sprays and gels,
Vibrating rings with rechargeable and remote controlled variants (three
variants, Skore Shiver, Skore Vybes and Skore Buzzz). These products are
selling fast at online portals and these are going to see high growth in India.
In fact sexual wellness category is growing at 25% across the globe so one can
judge the scope of growth in India where people are opening up on sexual
wellness and experiments looking beyond the taboo. Most importantly, online
platform are playing a vital role in the search, information, availability and
delivery of sexual wellness products not only in urban but rural India also.
Online sale of sexual wellness product is going to be the major differentiator
in the future high growth of this industry in India. In india condom
penetration is still way lower at 6% and a country with vast population the
value of condom industry is just around 1200-1300 cr. But this low value points
towards a vast untapped market and this is the reason Skore is playing the game
aggressively for the market share.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;">TTK management may look confused
when it is about their Eva Deo, Home care and Foods business but in sexual
wellness industry their approach and strategy is just top notch. I really like
the aggressiveness, strategy, product innovation, disruptive marketing and
branding activities of TTK management in establishing and growing Skore brand.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">TTK has capacity to manufacture 2
billion condoms a year at its three factories in southern India. Some people
compare the performance of Skore with another listed condom player “Cupid Ltd”
(female condoms) which is having high margins and profits. But they are not
comparable. Cupid is catering to wholesale market supplying to export market
and orders from welfare agencies like WHO/UNFPA. But Skore is focusing on
branded consumer segment where a lot of investments is required initially in
establishing a brand especially in premium segment. Indian sexual wellness
industry is still in the initial phase with a long way to go and that’s why one
can see brands like Manforce, Durex, Kamsutra spending big on innovative
products and marketing. Most of these players are incurring losses as of now
but accounting losses are different from business losses. In many cases,
accounting losses are business investments from business point of view for
accounting does not recognize or value strategy and brand establishment. So big
marketing and advertising spend is responsible for the losses of Skore whereas
the likes of Cupid does not spend much on these. Hence, over a period of time
with growth in volumes and lower requirement of marketing the profits of Skore
will see massive growth. TTK is also focusing on getting bulk orders for export
markets from agencies like WHO. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">Medical
device Business: The next big opportunity<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;">Indian medical device market is
quite large valued at some 40000-45000 cr but sad point is that we import
around 70-90% across various product categories. <span style="mso-spacerun: yes;"> </span>Local manufacturing is very poor and it is
mainly catering to low tech class 1 (class A) devices. Class 1 devices are
those which are having low to moderate risk to the safety and health of the
patient like stethoscopes, bandages, dental floss etc. The level of
manufacturing complexity is very low so these are low value devices. Class 2
and 3 are relatively much more critical to the health and safety of the
patient. Class 3 (Class C) is the most complex with highest risk to the life of
the patient. These are the devices which support or sustain the life of the
patient like the implantable pacemakers, prosthetic heart valve, ventilators, HIV
diagnostic tests etc.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">It is shocking that with vast
healthcare requirement for a large populous country like India we are importing
70-90% of our total requirements. This shows the neglect by the regulators and
government in formulating policies to promote the local manufacturing and also
a great opportunity missed by Indian manufacturers due to their own neglect. In
fact, this neglect and poor manufacturing prowess appears shameful if we see
the highly advanced world class pharma industry in India where India is the
global powerhouse in medicine manufacturing. Most of the medical devices which
india import from the global giants like GE, Siemens, Phillips are actually
coming from China who realized the importance of medical device manufacturing
much earlier than India and focused on local manufacturing some 20-30 years
back. The current value of industry is Rs. 40000 cr but this is going to grow
much bigger in the future with high growth in healthcare industry and demand.
For information, the value of chinese medical device industry is somewhere
around 4 lac cr to 5 lac cr!!! That’s why I always say that India needs
businessmen everywhere not politicians (to make policies for poor people) and bureaucrats.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">One of the major drawbacks
hurting Indian medical device industry was that Indian medical devices industry
was largely unregulated which hurt the investments and export opportunities. Now,
Indian government has released The Medical Device (Amendment) Rules, 2020 (“MDR
Amendment”) to regulate this market and they have approved stimulus package for
promoting the manufacturing in India. <b><span style="color: #0000cc;">(Will
cover more on this topic in the next edition on medical device sector).<o:p></o:p></span></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><u>TTK Chitra heart Valve:</u></b>
For decades, India relied on imports of expensive artificial valve replacements
to meet domestic need, but many families whose children developed Rheumatic
Heart Disease (RHD) were also among the poorest in India, and could not afford
even the heavily discounted price tags of imported valves, which hovered around
$1,200 each. And so our children died, or lived drastically shortened and
unhealthy lives.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Then TTK Chitra Heart Valve came
to their rescue, it was developed painstakingly over 12 years at the Sree
Chitra Tirunal Institute for Medical Sciences and Technology in Trivandrum,
India, the device is now licensed for manufacture and marketing to TTK
Healthcare. TTK valve uses the highest quality materials, features genuine
design and material, blood flow resistance reduction, and durability. But in
spite of high quality product with 12 year product development cycle with
extensive clinical trials, TTK Healthcare still sells each valve for just
$315-$400 (Rs. 20000-25000), a price range it has maintained since 1995, even
when inflation is high in India. Due to TTK Chitra heart valve, all the MNCs
had to lower their prices in order to stay in the Indian market.</p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-no-proof: yes;"><v:shape alt="Description: D:\Analysis\My Data\Newsletter\Newsletter editions\Dec-20-Jan-21\Work data\Chitra_Valve.jpg" id="Picture_x0020_13" o:spid="_x0000_i1028" style="height: 126.75pt; mso-wrap-style: square; visibility: visible; width: 126.75pt;" type="#_x0000_t75">
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<p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWqAbAPU9LNku9lsed4MW8wDCpyIv1zm-aKXC9ILLAr-dg9bHX3pd8cI2s6fCAMF7KPD6xL4O6s6PlxE3x84lIoKSicLzCfn0LGlvI27sf7PUoMWt5PL50bHC9EIQJx3j2VBN303U1Wxo/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="169" data-original-width="169" height="196" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWqAbAPU9LNku9lsed4MW8wDCpyIv1zm-aKXC9ILLAr-dg9bHX3pd8cI2s6fCAMF7KPD6xL4O6s6PlxE3x84lIoKSicLzCfn0LGlvI27sf7PUoMWt5PL50bHC9EIQJx3j2VBN303U1Wxo/w269-h196/image.png" width="269" /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEje6M4bh0NxocpwfwEpAaDYXkiiXUvGhNiVEJwupm3OOerjmNJ6GQDCIna9dpYt6ph2bI59s5Y1ABzJO9qdpI5JzXpMlAxClNkLmMkJ82SwXtoVsLy3laTL-CkA6c4A6S4G_uFkrdMthmw/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="169" data-original-width="214" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEje6M4bh0NxocpwfwEpAaDYXkiiXUvGhNiVEJwupm3OOerjmNJ6GQDCIna9dpYt6ph2bI59s5Y1ABzJO9qdpI5JzXpMlAxClNkLmMkJ82SwXtoVsLy3laTL-CkA6c4A6S4G_uFkrdMthmw/w223-h192/image.png" width="223" /></a></div></div><p class="MsoNormal" style="text-align: justify;">TTK Chitra heart valve is the
only Class 3 medical device produced in India which is a proof and a testimony
to the technical capability in India for manufacturing complex medical devices.
In numerous studies conducted, TTK valve has performed equal to other heart
valves manufactured by renowned global producers like St. Jude. One recent
study conducted in 2020 has established the efficiency of TTK Chitra heart valve
equivalent of an imported St Jude Mechanical heart valve at almost half the
cost making the prospect of cardiac surgery available to a large number of
deserving poor patients. India is home to estimated 20-25 lacs patients with Rheumatic
Heart Disease (RHD) which is the leading cause of structural heart valve damage
in the country so there is a huge undiscovered and unmet market for heart valve
surgery in India.</p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">The Indian Government has
designed and working on a massive Medical Insurance Scheme to cover poor
families and this is going to create big demand for cost effective products
like heart valve and orthopedic implants made by TTK.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEha6U1E0en4eEHIzbtkw3fvrp04nTb36OYJhqBL75rYO2Rtu6hxCl4prcy8aNv9DAox05x0ZStg9iVVhcvCbXncbAVhZuvdkezM1yJTeL5KU4qfpp08K1-07Trb2PTyM226OiYCQa5a-40/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="260" data-original-width="248" height="212" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEha6U1E0en4eEHIzbtkw3fvrp04nTb36OYJhqBL75rYO2Rtu6hxCl4prcy8aNv9DAox05x0ZStg9iVVhcvCbXncbAVhZuvdkezM1yJTeL5KU4qfpp08K1-07Trb2PTyM226OiYCQa5a-40/w202-h212/image.png" width="202" /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEcu3SvSIq4SqWx3QXXCNb354nQt7FSUjUZShCW1bFmPu6OeCVTzevBI_eTF5wXOHs5tycSgiAN283KTlINuQBjz0Q2hVSrIEWPD58ckBdo2u7YY9bn2DMBZ1SpzmMSLNBZteO808Cxbk/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="255" data-original-width="336" height="198" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEcu3SvSIq4SqWx3QXXCNb354nQt7FSUjUZShCW1bFmPu6OeCVTzevBI_eTF5wXOHs5tycSgiAN283KTlINuQBjz0Q2hVSrIEWPD58ckBdo2u7YY9bn2DMBZ1SpzmMSLNBZteO808Cxbk/w248-h198/image.png" width="248" /></a></div></div><p class="MsoNormal" style="text-align: justify;"><span style="text-align: left;">TTK healthcare is also into the
manufacture of orthopedic implants under the brand "Altius" which is
low priced option against costly imports. The products are very good with US
FDA cleared designs. As we can see, TTK has done well in medical devices but
somehow the hard work is not reflected in the topline numbers and I think it
may have been related to these products being looked down upon by Indian people
who can afford costly products (doctors/surgeons also don’t take chance and opt
for products with very slight medical benefits though at high costs) and then there are poor people with no
capacity to even buy these cost effective products in the absence of no support
from government which as I have shared above is going to change and TTK may see
high growth for its medical devices.</span></p><p></p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">TTK’s R&D expenditure was
around 4 cr (.6% of turnover) which is not bad keeping in view the fact that
its NP is meager 20 cr. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><span style="color: #0000cc;">So
what is going to be the catalyst event for TTK in medical devices business?<o:p></o:p></span></b></p>
<p class="MsoNormal" style="text-align: justify;">They are having around 210 cr
cash and I feel time is good for them to deploy this into high growth business
of medical device. There is no better time to enter this sector than now. So I
think TTK management is going to do something big in this segment this year-
may be they will acquire a mid-size company or they are going to make
investments for expanding their medical devices business. And if they can do
this then we will see high growth happening in this company finally. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Why I feel they can do something
big in medical device? Actually if we look at their performance in establishing
Skore as a national brand in just 4 years then there is no doubt that they have
the capabilities to execute something big taking over the entire industry;
establishing a product where marketing and branding is the key and they did it
skillfully so i think they can do something big in medical devices keeping in
view their vast experience in dealing with this industry for last 20-25 years.
The only thing is that they also feel like doing something in this industry.
But I feel they don’t have any other choice and so soon we will be hearing something
on this.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">TTK healthcare has not performed
at all in last 10 years and I think it has not given any returns at all but
still good thing about them is that they have kept their business out of debt
and amid all this surficial non-performance has created a significant consumer
brand in Skore which is going to see high growth in the future and even the
performance by Skore may be sufficient for a big re-rating. But as most of the value
is coming from the future strategic actions taken by the management so treat
this as a risky stock (Tier 3).<o:p></o:p></p>
<p class="MsoNormal"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">Summary of Analysis levels Involved in the
study of TTK Healthcare:<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">1.
Level 1 (Lower relative valuation)</span></u></b><span style="color: #0000cc;"> –
Not cheap but not high also…just adequate for the current scale.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc;">2.
Level 2 ( Industry level growth and restructuring)</span></u><span style="color: #0000cc;">-</span></b><span style="color: #0000cc;"> Sexual wellness
and Medical device industry will see high growth but scale is small for TTK in
these and it is not a leader in these segments so no <b>automatic </b>growth
for TTK similar to industry growth.<o:p></o:p></span></p>
<p class="MsoNormal"><b><u><span style="color: #0000cc;">3. Level 3 (Forecasting of
management decisions which may result in massive future growth and value
unlocking)</span></u><span style="color: #0000cc;"> – </span></b><span style="color: #0000cc;">So the whole value is coming from the strategy and
decision making of the management. Their strategy in growing sexual wellness
and acquiring or expanding medical device business are the key growth and
valuation catalyst events.<o:p></o:p></span></p><p class="MsoNormal"><span style="color: #0000cc;">(This article is taken from the Monthly Newsletter of this Blog)</span></p><p class="MsoNormal" style="text-align: justify;"><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: blue; font-size: 13.2px;">(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 own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).</span></p><p><span style="text-align: justify;"> </span> </p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com1tag:blogger.com,1999:blog-8629364998048667702.post-43602591814544576262021-01-29T11:55:00.006+05:302021-01-31T17:07:51.827+05:30Nitta Gelatin India Ltd: Can be the next Wellness story<p class="MsoNormal" style="text-align: justify;"><b><u>Nitta Gelatin India Ltd
(NGIL):</u></b> Just sharing a short note on this one. NGIL is a joint venture
between Kerala State Industrial Development Corporation (31.5% shareholding)
and Nitta Gelatin Group Japan (43%). It deals in Gelatin and Collagen products.
Gelatin is an industrial product and is used for making capsules, food and
cosmetic industry while collagen is a nutritional product. Animal bones, skin and
tissues etc. are the raw materials for extracting Collagen. Gelatin is obtained
from Collagen after undergoing industrial processes like heating. Collagen is
the most important and abundant structural protein in our bodies comprising some
30% of the total protein mass of our bodies. Collagen is the most important protein
found in connective tissues, skin, joints, bones, teeth and it is responsible
for providing structure and strength to our bodies and healing wounds. It is the
one which keeps our skin healthy and elastic and in its deficiency skin becomes
dry and dull losing its elasticity and freshness. It is just like a glue which holds
our bodies together.<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b>Stock: Nitta Gelatin India<o:p></o:p></b></p>
</td>
<td colspan="2" nowrap="" style="border-left: none; border: 1pt solid windowtext; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 127pt;" valign="top" width="169">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b>Financial Performance<o:p></o:p></b></p>
</td>
<td nowrap="" style="border-left: none; border: 1pt solid windowtext; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 51pt;" valign="top" width="68">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b>(Fig. In Cr)<o:p></o:p></b></p>
</td>
<td nowrap="" style="border-left: none; border: 1pt solid windowtext; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 68pt;" valign="top" width="91">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b> <o:p></o:p></b></p>
</td>
</tr>
<tr style="height: 60pt; mso-yfti-irow: 1;">
<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 60pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 135.7pt;" valign="top" width="181">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b> <o:p></o:p></b></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 60pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 40.3pt;" valign="top" width="54">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b>(Amt)<o:p></o:p></b></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 60pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 74.35pt;" valign="top" width="99">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b>Description<o:p></o:p></b></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 60pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 52.65pt;" valign="top" width="70">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b>Half Yearly upto Sep-2020<o:p></o:p></b></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 60pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 51pt;" valign="top" width="68">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b>Half Yearly upto Sep-2019<o:p></o:p></b></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 60pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 68pt;" valign="top" width="91">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"><b>FY-2019-20<o:p></o:p></b></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 2;">
<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 135.7pt;" valign="top" width="181">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">CMP<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 40.3pt;" valign="top" width="54">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">173<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 74.35pt;" valign="top" width="99">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">Turnover<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 52.65pt;" valign="top" width="70">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">189<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 51pt;" valign="top" width="68">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">179<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 68pt;" valign="top" width="91">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">342<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 3;">
<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 135.7pt;" valign="top" width="181">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">Market Value <o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 40.3pt;" valign="top" width="54">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">157 cr<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 74.35pt;" valign="top" width="99">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">Net Profit <o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 52.65pt;" valign="top" width="70">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">9<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 51pt;" valign="top" width="68">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">8.5<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 68pt;" valign="top" width="91">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">12.34<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 4;">
<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 135.7pt;" valign="top" width="181">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">PE Ratio (Annualized)<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 40.3pt;" valign="top" width="54">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">9<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 74.35pt;" valign="top" width="99">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">Interest Cost <o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 52.65pt;" valign="top" width="70">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">2.9<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 51pt;" valign="top" width="68">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">3.9<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 68pt;" valign="top" width="91">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">7.77<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15pt; mso-yfti-irow: 5;">
<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 135.7pt;" valign="top" width="181">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">Net worth (Sep-2020)<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 40.3pt;" valign="top" width="54">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">168 cr<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 74.35pt;" valign="top" width="99">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">Total Debt <o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 52.65pt;" valign="top" width="70">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">70<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 51pt;" valign="top" width="68">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"> <o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 68pt;" valign="top" width="91">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">76<o:p></o:p></p>
</td>
</tr>
<tr style="height: 15.75pt; mso-yfti-irow: 6; mso-yfti-lastrow: yes;">
<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 135.7pt;" valign="top" width="181">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">Dividend Yield<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 40.3pt;" valign="top" width="54">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;">1.45%<o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 74.35pt;" valign="top" width="99">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"> <o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 52.65pt;" valign="top" width="70">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"> <o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 51pt;" valign="top" width="68">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"> <o:p></o:p></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 15.75pt; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 68pt;" valign="top" width="91">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: justify;"> <o:p></o:p></p>
</td>
</tr>
</tbody></table>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p>NGIL is a dominant player in
Indian gelatin industry and in the past it has faced pollution related issues
for long time causing closure of its plants for long time hurting growth and
finances. But that is now gone and it is focusing on growth and has shown great
performance in last 2 years after the restart of its business. It exports some
40-50% of its turnover in quality conscious export market but this also means
it is subjected to foreign exchange fluctuations but they are doing hedging
etc. for the same. Demand for gelatin for industrial uses like pharma, food and
cosmetics is going to be strong and grow much faster in India. After extracting
gelatin from the animal bones etc. the remaining raw material is used for
producing Di-Calcium Phosphate for poultry feed ingredient, NutriGold as
agricultural growth promoter so nothing is gone waste and with growth in demand
there is vast scope for margin improvement. But I think there is huge growth
potential in collagen as nutritional product.</p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Across the globe, there is a huge
demand for collagen as wellness product and is used widely in many health
supplements related to skin and joint health. I am using collagen for long time
as a supplement for joint health and advised this to many people suffering from
joint pain or injuries and it has always worked wonders. Collagen is an
excellent skin care product which keeps skin alive and elastic having strong anti-aging
effects. As we age our bodies produce less collagen causing dryness and loss of
elasticity but supplementing it in the form of collagen supplements has shown
to provide anti-aging effects. Collagen/Gelatin are almost 100% proteins so
these can also be used as a protein supplements (though i may not advise to use
these as source of protein as these may be costlier than other cheaper sources
of protein like eggs/Chicken).<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">These days awareness about nutritional
and wellness products is growing across the world and India is not behind. The
same has picked up further pace after the onslaught of covid as people are
realizing the importance of strong immunity and health. Collagen is being
hailed as next nutritional wonder and its use in health and wellness products
is growing fast. There are even researches which have shown the benefit of
collagen in fighting against covid.</p>
<p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9FISk9jx2tVcZd4WdrbB9xWP83RSJ7h_JDK-82TzpUCdwjY29RzhyphenhyphenTX4rmzHR190fY52ipZEcvz656RjG7irHnnw0V7WwAYguF1672zEhZwsrHaOg6WUOHWt8DlGUMXulm7sxPyTSoYc/s500/gelixer-collagenpep-500x500.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="436" data-original-width="500" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9FISk9jx2tVcZd4WdrbB9xWP83RSJ7h_JDK-82TzpUCdwjY29RzhyphenhyphenTX4rmzHR190fY52ipZEcvz656RjG7irHnnw0V7WwAYguF1672zEhZwsrHaOg6WUOHWt8DlGUMXulm7sxPyTSoYc/s320/gelixer-collagenpep-500x500.jpg" width="320" /></a></div><p class="MsoNormal" style="text-align: justify;">NGIL is already operating in collagen wellness industry and is selling collagen supplements with brand name “Gelixer”. The same is available online (Amazon) and I am using it. One friend who was having joint pain due to old knee injury has used it and his pain has gone away. So I think this is a huge opportunity for Nitta and it has everything in it to benefit and extract a larger market share. It will be great if they can do some marketing for this as Indians are not aware of this. I think with better financial performance they will be having funds to deploy for the marketing etc. Nitta Inc. Japan is already selling Gelixer worldwide so their experience and approach will help in making Gelixer a success in India. Still, Collagen is different from Gelatin and do not have industrial uses so its demand dynamics are related to its acceptance as wellness product in Indian market. These days we can see many National/MNC advertising their nutritional and wellness products like protein supplements and Multi-vitamins on TV so i think Collagen will definitely find a place in Indian market. In any case, NGIL will be supplying collagen to other Indian brands which will provide another strong growth avenue till they make Gelixer brand a success in India.</p><p class="MsoNormal" style="text-align: justify;">There is quite a noise in the
industry about people wanting to use vegan products and they also want their
medicines/cosmetics to be vegan. So hunt is on for making Gelatin from veg
sources and Agar agar is being used as vegetarian substitute for gelatin. Agar
agar is a red algae (seaweed) that has natural gelling and thickening
properties. But still I think veg gelatin may not be a good substitute as a
nutritional product. Then cost is another factor as animal gelatin is way
cheap. Further it is a good way to use dead animal bodies which otherwise may
consume quite a bit of resources to dispose them off or else they will cause
huge environmental damage. So I think there will be a case for animal based
gelatin and vegan may take time to be a perfect substitute.</p><o:p></o:p><p></p>
<p class="MsoNormal" style="text-align: justify;">So I think at a market cap of 157
cr, PE of 9 and net worth of 168 cr, NGIL is worth taking risk. ROE is around 12% which is not bad keeping in view the plant closure troubles it has faced due to environment issues and this will rise further with future growth. It is getting the PE of a commodity player but if it can create a place for itself in the high growth nutritional and wellness sector then it will be a big re-rating candidate. I am reasonably
satisfied with the management quality. Dividend yield is good at 1.5% and this
may rise higher with good financial performance in the future. Still, treat this one as a risky stock (Tier 3) as most of the value accretion is dependent upon strategy and product placing in Indian market in the future. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: blue; font-size: 13.2px;">(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 own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).</span></p>
<p><span style="text-align: justify;"> </span> </p><br />Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com1tag:blogger.com,1999:blog-8629364998048667702.post-34334209364177594242021-01-28T01:51:00.007+05:302021-03-06T01:03:44.970+05:30Business, growth and Value-The Holographic universe<p><span style="text-align: justify;">Dear All, this study report is part of Monthly Newsletter of this Blog. I am sharing some samples from the report.
One article I have already shared last month at this Blog. Anybody who is
interested in reading the full report may please send an email at the ID of
this blog: </span><b style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px; text-align: justify;"><u>oscillationss@yahoo.in</u></b></p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin-left: 4.65pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184; width: 588px;">
<tbody><tr style="height: 18.75pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b><span style="font-size: 14pt;">CONTENTS<o:p></o:p></span></b></p>
</td>
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<tr style="height: 18.75pt; mso-yfti-irow: 1;">
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><span style="font-size: 14pt;">Description<o:p></o:p></span></b></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 55.05pt;" valign="bottom" width="73">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b><span style="font-size: 14pt;">Page
no.<o:p></o:p></span></b></p>
</td>
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<tr style="height: 18.75pt; mso-yfti-irow: 2;">
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">A Summary of Stock Valuation under
traditional value investing</span><span style="font-size: 14pt;"><o:p></o:p></span></p>
</td>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;">1-2<o:p></o:p></span></p>
</td>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">Valuation: Intrinsic or Subjective<o:p></o:p></span></p>
</td>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;">3-6<o:p></o:p></span></p>
</td>
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<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 385.95pt;" valign="bottom" width="515">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">Business, Growth and Value-The
Holographic universe<o:p></o:p></span></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 55.05pt;" valign="bottom" width="73">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;">7-16<o:p></o:p></span></p>
</td>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><i>Three levels in Business analysis<o:p></o:p></i></p>
</td>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><i><span style="font-size: 9pt;">12-16<o:p></o:p></span></i></p>
</td>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u><span style="font-size: 14pt;">Stock Ideas:<o:p></o:p></span></u></b></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 55.05pt;" valign="bottom" width="73">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;"> <o:p></o:p></span></p>
</td>
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<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 385.95pt;" valign="bottom" width="515">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">Tata Coffee Ltd (CMP 110, TIER 1)<o:p></o:p></span></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 55.05pt;" valign="bottom" width="73">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;">17-27<o:p></o:p></span></p>
</td>
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<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 385.95pt;" valign="bottom" width="515">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">TTK Healthcare Ltd ( CMP
562 TIER 3)<o:p></o:p></span></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 55.05pt;" valign="bottom" width="73">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;">28-33<o:p></o:p></span></p>
</td>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">D-Link India Ltd (
CMP 110 TIER 3)<o:p></o:p></span></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 55.05pt;" valign="bottom" width="73">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;">34-35 <o:p></o:p></span></p>
</td>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">Redington India ( CMP 135 TIER 1)<o:p></o:p></span></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 55.05pt;" valign="bottom" width="73">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;">36-39 <o:p></o:p></span></p>
</td>
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<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 385.95pt;" valign="bottom" width="515">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">UTI AMC (CMP 550
TIER 2)<o:p></o:p></span></p>
</td>
<td nowrap="" style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 55.05pt;" valign="bottom" width="73">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;"> 40-43<o:p></o:p></span></p>
</td>
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<td nowrap="" style="border-top: none; border: 1pt solid windowtext; height: 18.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 385.95pt;" valign="bottom" width="515">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><span style="font-size: 14pt;">Mahindra EPC (CMP 150 TIER 3)<o:p></o:p></span></p>
</td>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><span style="font-size: 14pt;">44-45<o:p></o:p></span></p>
</td>
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</tbody></table>
<p class="MsoNormal" style="text-align: justify;"></p><p class="MsoNormal" style="text-align: justify;"><b><u>Sample:</u></b></p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">A Summary of Stock
Valuation under traditional value investing<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="text-align: justify;">Traditional value investing tries
to calculate the intrinsic value of a stock/business. To calculate the same, it
mainly undertake two approaches- first one is fundamental valuation where
valuation is done purely on the basis of direct cash flows generated by the
business and second approach is relative valuation where valuation is estimated
with reference to valuation and fundamentals of peer companies. First approach
mainly uses <b><u>Discounted cash flows (DCF)</u></b> and second one uses
methods such as <b><u>PE ratio or EBITDA times ratio</u></b> etc.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Benjamin Graham who is regarded
as father of Value investing used a formula in his famous book “Security
Analysis”. This formula is widely used for calculating intrinsic value of a
stock.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Let me first come to DCF- <b>in
DCF a security or a business is valued based on the present value of its expected
future cash flows. </b>Present value of <b><u>future cash flows</u></b> is
calculated by using an <b><u>appropriate discount rate</u></b>. Appropriate
discount rate is cost of financing or <b>opportunity cost</b> of any other alternative
investment options <b>available to the investor</b>. I have seen DCF being
adored by many as being superior to any other valuation methods. But I think
this at the most is a good point of reference because I find this one a very
confused attempt to find “intrinsic value”. First indicator of this confusion
is – taking opportunity cost of the <b>Investor</b> (not business) as discount
rate for calculating the present value of future cash flows. <span style="mso-spacerun: yes;"> </span>DCF proposes to calculate the intrinsic value
of the stock/business but then instead of taking the cost of capital of
business it uses the cost of capital of the <b>potential</b> <b>Investor </b>which
is not at all related to the expected future cash flows of the business. It
fails to understand that just as future cash flows are related to
business/stock similarly cost of capital is also directly related to the
business/stock not to a third party investor. Cost of capital is a feature of
business just like future cash flows.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Similar issues are with the
estimation of future cash flows. Actually DCF concept is taken from the Bond
valuation. Long time back, it was established that value of a bond is a
function of its future cash flows discounted with a rate determined by the riskiness
of the bond issuer (not the bond investor). But bonds are different from
stocks/business and problems faced while valuing bonds are different from the
problems related to business. Like, cash flows are <b>CERTAIN</b> in the case
of bonds (we know the expected cash flows well in advance) but <b>UNCERTAINTY</b>
is related to credit risk of the issuer. And this credit risk of the issuer
impacts the discount rate (expected return keeping in view the credit riskiness
of the issuer). So as we can see, in case of bonds the life span and expected
cash flows are certain and known well in advance. The uncertainty related to
credit worthiness is responsible for increase or decrease in the discount rate
or expected returns.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">However in the case of
stocks/business UNCERTAINTY is related to future cash flows and to life span.
Cash flows are highly uncertain but DCF method does not answer as to why they
are uncertain. Whether their uncertainty is random? Without giving any answer, DCF
just provides a solution (quite random) in the form of discount rate. But in
case of bonds, the uncertainty of payment is not random but related to credit
risk of the issuer and hence this risk of payment increases the expected
interest rate. But uncertainty of business cash flows is more random and different
hence the solution can’t be similar to bonds (Impact on discount rate). I think
some other approaches like probabilistic distribution of cash flows (as the
problem may be statistical) are required. (I will be taking this issue in the
coming editions and will try to provide a solution). <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0000cc; font-size: 14pt; line-height: 115%; mso-bidi-font-size: 12.0pt;">Business,
growth and Value-The Holographic universe<o:p></o:p></span></u></b></p><p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRL9gXndl8qjQ6aeaGgOripsYNtQz9PE46cLFH5Khw72o3ncI_V0ETupXA_fa9O6rM9IfZDA650y_vPli6kYlG65uyCL4X8FppQ2yEnozAtbcPrZE5hrSlJ8tMawLUwGilaMohrkDqb3w/s1200/csm_holography_cyan_eaea795162.0.0.0.0.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="800" data-original-width="1200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRL9gXndl8qjQ6aeaGgOripsYNtQz9PE46cLFH5Khw72o3ncI_V0ETupXA_fa9O6rM9IfZDA650y_vPli6kYlG65uyCL4X8FppQ2yEnozAtbcPrZE5hrSlJ8tMawLUwGilaMohrkDqb3w/s320/csm_holography_cyan_eaea795162.0.0.0.0.jpg" width="320" /></a></div>Once I was sitting with some of
my friends. One fellow, who was a friend of one of my friend, was discussing
something about aim of life. He was some sort of religious preacher and claimed
to put people on right path. One friend asked him about the aim of life as my
friend was really getting eager to understand something of this life process
and he was greatly impressed by that fellow. The preacher fellow told them that
the aim of life is to help and serve the poor needy people; people who are in
grief, saddened by the troubles of life, no food no shelter. He told that this
is the principle message of his religion and he made a strong emotional pitch
about helping the poor people and many of my friends visualized themselves
helping poor people and obviously they felt great.<p></p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">But I asked him that his
perceived purpose of life (to help the poor and sad) would make things very
complex for the Almighty because in order to fulfill your (many more like him)
purpose of life you would always need poor and miserable people so in a way you
are praying for the people to be poor and saddened. For them to fulfill the
purpose of their lives, they would always require poverty, pain and grief. But
empathy and compassion are not the purpose but they are the manifestation of an
enlightened person. Just like a Brave fellow saving the modesty of a girl; his
bravery is not his purpose of life but it is the manifestation of fearlessness
of his being which is one of the signs of an enlightened person. So a
Brave/fearless person does not want girls to be molested in order to fulfill
the purpose of his life…his bravery is just a manifestation of his being in
time and space. I told the preacher fellow that he is just making a political
statement but luckily enlightenment is very personal and individual and there
is no such thing as collective enlightenment.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Inefficiencies of others can’t
make me an efficient person…I can’t strive for the supreme by following the
imperfection. Life principles are not made upon inefficient acts of others.
Path to the supreme (value) is not directed by mistakes of others. Ignorant
explorers can leave diamonds on road taking them as stones/glass but wise men
do not follow these ignorant explorers in the hope that they will throw away
more such diamonds because they know that by drawing a MAP to follow these
ignorant fellows will only result in them losing the path/direction where vast
quantum of valuable diamonds are trapped under earth. So they draw a MAP for
places where there are Kimberlitic rocks (for diamonds)…their hunt for the
VALUE is not dictated by the mistakes of foolish explorers but devising a plan
for hunting the valuable gems.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Sometimes I feel, Value investing
in essence tries to follow the ignorant explorers and in this quest of checking
stones thrown by them it leaves some of the most valuable diamonds because it
has not drawn a plan to hunt for these precious diamonds. It does need to
understand that the value is not created by the mistakes of ignorant fellows
but the wisdom, strategy and efficient decision making of the businessmen. So
value investing is about finding the Kimberlite rocks- a business with vast
scope of scale and a businessman with wisdom and vision for creating value. A
true value investor looks for the kimberlite rock where diamond is not shining
on the surface but it is hidden inside and rough. He knows that maximum value
is created by finding these rough diamonds because a large crowd is following
and looking for the final cut diamonds on the roadside which are far and few.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In its present avatar, Value
investing finds stocks like ITC, ICICI bank, HCL, Dabur, Godrej Consumer or
Titan in 2014-15 and these stocks have also given good returns after this
period (Hindalco is a value buy for the last 15 years and ITC for the last 10
years). But this Value Investing misses stocks like Tata Elxsi (40 bagger),
Avanti feeds (200 bagger), Borosil renewables (30 bagger), Biocon (15 bagger),
KRBL (40 bagger), Cera (40 bagger), Garware technical (50 bagger), Info edge
(15 bagger) and many more. I remember when I was buying Borosil Re (earlier Gujarat
Borosil) in 2015 there was skepticism about its business plan- about the
chinese import threats or no demand for solar power. But I was of the opinion
that Indian solar story couldn’t happen on imports; it has to be local and
solar glass is going to have regional markets (Full study of Borosil Re is at
my blog). So I started buying from 10 (adjusted for Borosil consumer stocks
after recent merger/demerger) and made last entry this June at 35. I sent another
buy call for Borosil Re at 40 in the Blog post related to Value investing in
July-2020. And it just blasted after that rising to 300 in no time.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In 2015, Borosil Re should have
been discarded by Value investing because it had nothing to prove its worth
against the stringent benchmarks of value investing formula. Same was the case
with Tata Elxsi or Garware or Biocon. But maximum value is created by these
stocks not by the generic value investing stocks. The reason is- these no
metrics stocks are just like Kimberlite rock (raw diamond) which does not shine
in the sunlight. Only a person with experience of ages and having an eye for
details can recognize the hidden diamond in the giant rocks. So in its current
Avatar value investing finds few discarded diamonds but fails to recognize the
large number of rough diamonds. These rough diamonds stocks/businesses create
value just like the real value is created- sheer hard work, wisdom, innovation,
strategy, risk and tough decision making. Value investing thrives on the
irrational choices/decisions made by the incompetent market but what if market
is not irrational? What if market is not ignoring a great stock like TCS by
making it trade at a PE of 10- I fear Value Investing will lost in darkened
corners of the city.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u>Sample:</u></b><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Value analysis tries to divide
the whole business into various parts and by evaluating and comparing some of
these parts it tries to find a figure which can be used as a representative of
the “entire” business. So they grade certain parts- Price to book value,
Debt-equity ratio, ROE etc. and assign a figure which they take as a “value of
the business” which it is not. And in its attempt to focus on the body it
misses the soul which in fact is the essence of existence and growth. Business
consciousness is the essence of the existence and growth of a business;
financial figures are just the physical manifestations. Physical manifestations
happen in time and space but consciousness is the truth, the source which is
un-manifested and unobservable by <b>analysis</b>. Some phenomenon can’t be
comprehended by <b>analysis</b> or by breaking them into their finer particles.
Our life and existence is one of them and comprehending business growth is
another one.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><u><b>Sample:</b></u><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span lang="EN-IN" style="mso-ansi-language: EN-IN;">Value investing appears more like classical
physics which tries to define the growth phenomenon by capturing the “molecular
or Atom level motions”. But just like cosmos, business consciousness follows
Holographic laws and so business growth can beat the barrier of speed of light
(when Financial valuation (Value investing) tries to evaluate Growth motion by
capturing the financial and other external parts). Growth is a sub-atomic
phenomenon and the same can break all the physical boundaries. Business
consciousness operates at sub-atomic level (through strategy, timing and risk)
and is multi-dimensional. It is multi-dimensional because it is
impacted/directed by Industry level, economy level and most importantly firm
level (Business strategy) actions. Financial and mathematical tools are one
dimensional so they are unable to capture the sub-atomic level growth motion of
a business operating under a superior business consciousness. A superior
business consciousness is able to outpacing competitors when Industry and
economy is doing good and it withstands tough times better so it is able to
capture much higher market share beating the industry level growth and that’s
why growth is Multi-dimensional while financial data is one dimensional. Value
investing tries to cut the business into various parts to evaluate the same but
it fails to comprehend the source of all parts of business- Business
consciousness.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><b><u>Sample:</u></b><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">In my terminology there are three
levels in the Value investing process.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u>Level 1 (Entry level/Evaluation
of Financial Data and Relative valuation):</u></b> This level is what our
traditional value investing is all about- to capture, assess and evaluate the
financial data to arrive at meaningful interpretations, inferences and relative
valuation. Here, the analyst primarily is capable of finding the businesses
available at relatively cheaper valuation, margin of safety where firms are
trading at or below the market value of its assets (land and other assets),
investments and cash. His perceived valuation gap is primarily due to these
historical material aspects (not futuristic qualitative aspects). This as we
can see involves simplest calculations and evaluations…level of insights and
decision making involved is not very complex but very straight forward.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b><u>Level 2 (
Intermediate/Industry level Insights and forecasts):<o:p></o:p></u></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><u>Level 3 (Advanced/Company
management decision assessment):</u></b><o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: blue; font-size: 13.2px;">(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 own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).</span></p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com0tag:blogger.com,1999:blog-8629364998048667702.post-42439852349499737272020-12-27T03:32:00.013+05:302021-02-01T10:10:36.012+05:30Value: Intrinsic or Subjective<p> </p>
<p>(<a href="https://oscillationss.blogspot.com/2020/06/value-investing-dance-without-passion.html" target="_blank">Click here</a> for old post on value investing)</p><p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt;">Recently, a young student was
discussing business valuation with me. The young fellow was quite intrigued by
the business valuation models particularly DCF. He asked me about my
preferred model for valuation and I told him that in my view these valuation
models are good for having a theoretical viewpoint and conceptual framework but
these are very primitive methods and not practical most of the time in the real
world. So we need much better valuation theory/methods which can stand on its
feet during the evaluation process.</span></p><p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">I know many hardcore Value
investing followers and once during our discussions one fellow asked (challenged)
me if I could suggest a better fundamental valuation method to value the
intrinsic value of a business/stock. But I asked him- whether things really
have intrinsic value? We value Roses and consider grass to be inferior to roses
but just keep humans aside and nothing is more valuable than the others. Things
are just IS. So Roses are Red only for us. The valuation we do is not linked
with the individuality of that thing (standalone value) but to the relevancy of
that thing to us. Without humanity, roses and grass have same value but it is different when they are “valued”. So value is different from valuation. Leave
aside human beings and all and everything has same value…objectively everything
is equal. But a three dimensional human being can trade all the grain of the
world for a glass of water when he is dying of thirst in Sahara desert….a human
can kill thousand others for something as abstract as religious sentiments. Can
we value the embedded value of a handful of wheat or a glass of water objectively?
So value is intrinsic but valuation is subjective. Objective valuation may not
even exist (at least for businesses/stocks).</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><b><u><span style="color: blue; font-size: 14pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">Value is intrinsic but valuation is
subjective<o:p></o:p></span></u></b></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt;"><b><i>Every asset that generates cash flows has an intrinsic value.</i></b></span></p><p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt;">Value investing postulates that
prices will oscillate towards intrinsic value (one and only one) and so this
intrinsic value is an objective value. I have seen many commentaries on value
investing and seen many value analysts (like Buffet) criticizing efficient
market theory (CAMP model) but at the fundamental level if we can see even
value investing believes that price and value should coincide. But first of
all, why there is a difference in market price of an asset and its value
because theoretically market price and value of an asset should be equal? Value
investing assigns </span><b style="color: #222222; font-size: 12pt;"><i>irrational behavior</i></b><span style="color: #222222; font-size: 12pt;"> (by market) as the reason
for this difference. Value investing accuses market to be guided by temporal forces
of greed, fear and its changing mood where it completely ignores the economic considerations
related to that asset. So if we can see this irrational behavior is the
backbone of value investing where they try to unearth hidden gems ignored by wisdom-less
market.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">So Value investing declares itself
to be far superior to the other irrational players of the market and it feels
that it is superior just because they try to calculate intrinsic value (though
with large numbers of highly subjective assumptions). But this “irrational behavior”
is a very weak rationale for the most fundamental part of the value investing
since presumed foolishness of others can’t create something very fundamental
related to most valuable aspect of human life- Valuation of assets. It is
possible that during Covid lockdown in India from Mar-2020 one investor might
have sold Laurus labs at 70 due to the fear of covid related unknown or another
investor might have sold it in order to arrange money to help poor migrant labors.
Can we say that their behavior is irrational just because they sold Laurus labs
at 70 which later on touched 350? Were they foolish for the choices they have
opted? No, definitely not.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">Fear and optimism are the
fundamental forces responsible for the direction of the economy. These are as
abstract as something can be but still they have the powers to drive and
motivate something as material as an economy. When people and entrepreneurs are
hopeful and optimist they spend and invest which drives the overall growth of
an economy. Major function of the governments is not micro managing productive
resources and their allocation but to create an environment where people have
the faith and optimism in the government policies and administration. Like, GST
was a great financial engineering having the capability to transform and revolutionize
the business models and supply chains in India but a Government can
always make a mess of this by making unnecessary rules and large number of
compliances which will only create confusions, increase the compliance costs,
restricts the flow of Input credit…and this will hit the confidence of
investors and industrialists hard and they may choose to invest in some other
country or cancel their planned investments in India forever. So fear and
optimism are not irrational behavior but are the driving forces responsible for
growth and preservation in adversity.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">It is a misconception that man,
material, money and technology are the most important forces driving the economies.
Actually economies are just like a big truck. But which part of the truck bears
the maximum weight of the cargo/truck? I ask this question all the time and many time I get answers like axle, wheel etc. But this is not correct as it is
the humble AIR in the tyres which bears the maximum weight. So, the most
insignificant, subtle and least-physical part holds together the most
significant. Similarly, Confidence of the people in the economy and the
Government is the most important factor driving the investments and thus
growth.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><b><u><span style="color: blue; font-size: 14pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">Role of Market in “Value” and “Price”</span></u></b></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: blue; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">So what explain the difference in
price and value? Actually I have always felt that the fallacy may be related to
the role of the market. Contrary to the general perception, the role of the
market is not to <b><i>“find the Value”</i></b> of an asset/stock/commodity but
the role of the market is to <b><i>“price’</i></b> these things as an
intermediary of the forces of supply and demand.</span><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";"> Price of wheat in the market in
the year of short production is high and it is low when there is bumper
production of wheat in the following year. The price of wheat is not determined
by the market keeping in view the relative value (which is same) but as an
outcome of demand supply forces. So, the value is perceived individually while
the price is determined collectively by demand-supply forces. </span><span style="color: blue; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">It is not the role of
market to find the true “value” of an asset/commodity but only to “price” it
which is impacted and directed by large numbers of complex and diversified variables.
</span><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">Hence,
even when value investing finds that value and price are same; market is not
doing anything to Value but it is just doing in which it is most efficient- to
price.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><b><i><span style="color: blue; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">And all of a sudden, we can feel
that this “price” is more objectively arrived at than the “value”.</span></i></b><span style="color: blue; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";"> Value investing use highly
subjective assumptions like discount rate, growth rate, terminal value, no
growth PE ratio etc. and so this makes intrinsic value highly subjective. </span><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">For example, expected
cash flows of an asset are subject to the wisdom/strategy/decision making of an
able manager who manages to extract much more value out of an asset due to his
wisdom and decision making. And that’s why valuation is subjective- there is no
standalone value which accrues to an asset on its own. Value is created by able
managers with wisdom and price is paid (and accepted) for this value subject to
prevailing market and general economic conditions.</span><span style="font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">
</span><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">Price
is what we know and value is what we perceive.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><b><u><span style="color: blue; font-size: 14pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">In Real Life Valuation is
Subjective</span></u></b></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">In real life things are also
like that. Valuation is subjective- just take the recent case of coffee retail
chain Café coffee day (CCD) which is on the verge of sale. Can we say that CCD
has one and only one intrinsic value? No, because its value will accrue
differently to each buyer. Tata coffee/Tata-Starbucks can extract big synergy
by consolidating CCD with them and thus creating more value as compared to
other buyers with unrelated business like Dabur or even Coca cola. But the
likes of ITC who are trying hard for long time to build a branded FMCG business
can see this as a big opportunity and will be ready to pay much higher price
because they will be hopeful of creating more “value” than by spending the same
money for promoting their other in-house brands. So whenever this will happen
there will be a fierce fight for the control of CCD.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">Let’s take the case of ITC. ITC
has not performed that well in last 10 years or so. So how value investing would have valued
ITC 10 years ago could have been very interesting. ITC was churning massive
volumes of cash and it had grand plans for doing big in FMCG business. Value
investing would have arrived at a very lucrative value keeping in view the past
record (in creating a great FMCG brand in Aashirwad) and low cost of capital of
ITC. But the most significant part in any business valuation is qualitative part
(and impact of intangibles) which is not captured that well by value investing.
Just like our traditional accounting which has no tools to evaluate intangible
assets. But we all know that net worth in fact is the minimum value as
businesses get maximum value from the intangibles like brands, technology,
Patents, customer loyalty, information and data which are not assigned any
value in the balance sheets by traditional accounting (not much even by Value
investing).</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">So the story moves forward and
ITC couldn’t create the value. First, it was not vry wise in allocating
capital. It wasted it in hotel business which is highly capital intensive but
low return business. In FMCG- apart from Aashirwad it failed miserably. It
invested and focused on second standard products in crowded segments like
Yippee, Sunfeast, Bingo which are forced choices...nowhere near Maggi, Lays
etc. I don't think it could ever be a leader in any of these products...when
Maggi was hit badly due to bad press it could not do anything even at that time.
Actually Aashirwad was a great venture and I was thinking at that time that ITC
would make a killing in Pulses/Spices with its Aashirwad brand but instead they
focused on other low margin businesses like stationary/Hotels and other crowded
FMCG products with very strong brands. The main reason for me to buy Tata
chemicals (Before demerger of branded product business) was their foray into branded Pulses and Spices business and Tata has
created a great brand in the last 5 years or so. Tata chemicals has really
leveraged its supply chain and brand recall in creating niche products (Tata
Sampann Brand). That’s why Tata chemicals is already giving almost three times
returns (Including value of Tata consumer post-demerger).</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">It is very tough to create strong
brands in FMCG sector which is already having strong brands. Inorganic growth
via acquisitions should have been a much better strategy than building brands
from the scratch. In today’s world it is very costly. So I feel a better way
for ITC was to acquire a good company in FMCG with good brands like last year
Zydus wellness did by picking Complan/Glucon-D and Horlicks was acquired by
HUL. These are master steps; CEOs are paid for this. Sometimes I felt ITC
should have sensed the opportunity in premium whisky in India and instead of
investing capital and efforts in creating new brands in highly competitive FMCG
sector related to snacks etc. It should have attempted at acquisitions
preferably in liquor sector like Radico Khaitan (who once was looking for a partner). United spirits and UB were
picked by Diageo and Heineken but investing 20000-25000 cr for buying these
giant Indian brands in high entry barrier Indian liquor industry would have
been a much better strategy for ITC and cash was never a problem for ITC. Liquor business is a much better extension
of its cigarette business and ITC understands the dynamics of this complex
regulated business in India much better than others and that’s why I think ITC
could have created more value for United spirits and UB businesses than by the likes of Diageo and Heineken.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">So the value is not created in a
linear mathematical formula but by human wisdom and strategy which are not
confined to any formula or any boundaries. Value is created and perceived subjectively.</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">Here I remember something- the
divine lovers Laila Majnu!! You know Laila wasn't very beautiful but Majnu was
a handsome guy. The king of the city liked him and he was very concerned to see
Majnu dying for Laila, an ordinary girl. So he invited Majnu to his palace and
offered him to pick any girl from his harem having the most beautiful girls of
that time. But Majnu declined; king was shocked and asked, “but how can you
decline these pretty girls for that ordinary girl Laila…she is nothing against
these women?".</span></p>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;"><span style="color: #222222; font-size: 12pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">"Well, my dear King, to see
the divine beauty of Laila...you need my Eyes", was the reply from Majnu.<o:p></o:p></span></p><p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;">(<b style="color: #222222; font-size: 16px;"><i>Every asset that generates cash flows has an intrinsic value so can we say that Money has an intrinsic value? I have asked this question to the young fellow as his next assignment)</i></b></p><p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in; text-align: justify;">(Views are personal. This post is taken from monthly Newsletter of this Blog. Reach me at oscillationss@yahoo.in)</p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com4tag:blogger.com,1999:blog-8629364998048667702.post-6447658381306742882020-12-01T23:42:00.001+05:302020-12-02T00:51:56.805+05:30Insurance and Reinsurance sector- Truth is Beyond Time and Space <p><span style="color: red; font-size: medium;"><b>Stocks covered in this study: GIC RE and <span style="text-align: justify;">Cholamandalam financial holdings Ltd</span></b></span></p><p class="MsoNormal" style="text-align: justify;">Dear all, this study is mainly about
the dynamics and factors affecting and governing the growth of insurance sector
and not about any particular insurance stock. I have tried to list out the
factors affecting the functioning and growth of this one of the most complex
sector. But insurance sector (General insurance in particular) is going to see
the huge growth for next 10-15 years in India and I feel this is going to be
one of the sectors to produce future multibaggers. The growth and performance we
have seen in Indian insurance sector up to now is nothing compared to the massive
growth lies ahead. So I have tried to find out the most relevant factors which
are going to shape this sector in the future and which stocks are going to be
the major beneficiaries is just a matter of time and space and we will continue to find
out more such stocks opportunities. As of now, I have selected GIC RE and
Cholamandalam financial holdings Ltd (CFHL).<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">This study I have shared with the
subscribers of this blog some 10 days back but due to some reason could not share
the same here and in the meantime CFHL has witnessed good buying
and<span style="mso-spacerun: yes;"> has</span> already touched 540 from 430 at
that time. So not wasting any further time, I have decided to share the same here. The study is detailed spanning 42 pages so it will take some time in reading and understanding due to the complexity of the subject. I have also tried to cover issues related to valuation of businesses especially of financial firms. The second part of this study will be released soon covering the detailed study of stocks like GIC Re and CFHL. The full version of this study is available for the subscribers of this
blog so I am sharing some samples from this study report here. Those who are
interested in getting the full report please contact at <b><u>oscillationss@yahoo.in</u></b></p><p class="MsoNormal" style="text-align: justify;">Sample study:</p><p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p><table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; mso-border-alt: solid windowtext .5pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184;">
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>CONTENTS<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b>Paragraph<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b>Description<o:p></o:p></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>Page no.<o:p></o:p></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(A)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Insurance- Role and impact on business and economy <o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">4<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">1<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Risk management in insurance and law of large numbers<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">2<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Law of large numbers is everywhere<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">3<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Concentration risk and Reinsurance<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(B)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Insurance is complex but Reinsurance is even more complex<o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">10<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">1<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Law of large numbers and correlated or concentrated risk events<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">2<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Reinsurance to manage concentrated/correlated risks<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(C)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Time for Reinsurance is yet to arrive in India <o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">16<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">1<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">General Insurance has a long way to go in India<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(D)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Reinsurance to play big role in India for the growth of
specialty insurance <o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">20<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">1<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Cyber Insurance and Catastrophic Insurance- The big game for
Reinsurance<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(E)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Cyber Insurance-The next big thing in insurance and Reinsurance<o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">23<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">1<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Valuation of Intangibles- where traditional accounting is useless<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">2<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Valuation of data, information, and intangibles- a must in today’s
world<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">3<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Valuing the data assets- The starting point of cyber insurance<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(F)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Crop insurance and Aircraft insurance- other Reinsurance heavy
sectors <o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">31<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(G)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Something about Float and Investment Income in Insurance
business<o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">32<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">1<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">How life insurance industry
adds value<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">2<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Solvency Ratio<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><o:p> </o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(H)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Government role is crucial in catastrophe insurance and GIC Re
will be a key player for India<o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">36<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">1<b><o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Catastrophe Bonds<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><o:p> </o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(I)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Individual valuation of GIC RE (CMP 127)<o:p></o:p></u></b></p>
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40</td>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">1<o:p></o:p></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Valuation of financial sector business- Book Value multiple or
Earnings Multiple<o:p></o:p></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b>(J)<o:p></o:p></b></p>
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><b><u>Cholamandalam Financial Holdings Ltd (CMP 430, Market Cap. 8100
cr)<o:p></o:p></u></b></p>
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<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;">43<o:p></o:p></p>
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</tbody></table><p class="MsoNormal" style="text-align: justify;">One friend once told me that he
was fortunate to be born into his present religion as his life could have been
useless had he been born into some other religion. But I told him that he was
not that fortunate because truth is beyond space and time. Truth is absolute,
ever-existing and ever-lasting. It is not affected, directed and objectified/represented
by variations in time and space. I told him that he would have felt the same
had he been born into some other religion. However my friend argued that still
he felt good about his religion. But I told him that I was not denying that
(feel good) but that which can be affected so much by time and space can’t be
the reality. It can be whatever it is but it is not the TRUTH. You aren’t/can’t
be defined by these temporal and spatial phenomena. I have seen people having a
feeling of greatness, ego and class because of money. But I always tell them
(wherever I can) that this is not the reality because this reality is bound by
time and space. They could have born into a poor family and they absolutely
have no control over this.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">This misconception engulfs every
sphere of life and Stock market does the same mistake when it thinks that
quarterly numbers <b>(time)</b> and issues (often temporary) affecting industry
<b>(space)</b> are the <b>truth. </b>As <b>i</b>t focuses on time and space so
it misses the truth. It sees bad quarterly numbers and reshuffling of Industry
as an end of the game. But restructuring, reallocation and consolidation in any
industry are indispensible for long term growth and sustainability of the
Industry. This restructuring takes care of the misallocation of the resources
in the industry and so the same is corrected through reallocation and
consolidation. It is not the sign of a disease but it is a much needed surgery
to cut off the cancer. So, quarterly results are not the truth (may be bad due
to industry or company specific issues)…Industry problems are not the truth.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjau_iIxSmun3Dwcip8pZffXojIk2DW6w6sn6KilLVSiHrQY-R_tfX6GkmP5JJRzHPW7Hx6v89UK0xvvIp28l6ZKQ5faEUJ5qeoHcX4Y5K15IxzVXpurUCnD8X4VjhOHuhDVYBo0-N5kIU/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="589" data-original-width="851" height="260" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjau_iIxSmun3Dwcip8pZffXojIk2DW6w6sn6KilLVSiHrQY-R_tfX6GkmP5JJRzHPW7Hx6v89UK0xvvIp28l6ZKQ5faEUJ5qeoHcX4Y5K15IxzVXpurUCnD8X4VjhOHuhDVYBo0-N5kIU/w360-h260/tru.jpg" width="360" /></a></div><br /><br /><p></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;">Truth is something else. Consciousness
is the truth as consciousness exits beyond time and space. Businesses/Firms
have their own consciousness which has the ability to create a superior product
with scale with high entry barriers. This consciousness can travel beyond time
and space. Promoters/management is just one of the part of business
consciousness which comprises technical capabilities, superior R&D
abilities and focus, Networking effects, superior and vast supply chain etc. Businesses
are not alive beings still we can feel they have their own consciousness…they
have their own aura…employees feel it (different feeling with different
employers), other stakeholders feel it. The <b>legacy </b>of a business, work
culture, integrity and focus attract, nurture and develop like-minded
people...just like the ones who have created the original legacy (Like Tata, I feel
even when Ratan Tata is gone the legacy and style of Tatas will prevail and
this shows that business consciousness is real and shape all and everything
around it). <o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><span style="color: blue;">Brilliance
is not the rarity but the opportunity and expression of it is. </span>So Steve
jobs, Gates and Ratan Tata are not the exceptions…they will keep coming. They
will keep coming into Microsoft and Tata attracted by their business
consciousness. Strong businesses are not one product wonders but they are
because they create and develop a work culture (consciousness) which automates
the generation of new ideas, innovation, expression and resilience. This is the
real strength of a company…its soul…its most important asset. This is what
makes companies to fight at the face of adversity and lead to their
resurrection. A business becomes more resilient to outside threats (competition
and existential) when it has technical expertise, high entry barriers due to
business model and complex supply chain. A great warrior is not who can hit
others hard with his power but he should have the will power to withstand the
hard blows of opponents…only then he can win fights and be a great warrior. So,
strong business model and technical expertise are not enough. A business has to
be resilient…it should have the strength and will power to withstand tough
periods…periods of droughts.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">Future growth is extremely
uncertain as it is impacted by thousands of variables…more so now because the
world has become a big single market (and it may stay so). I don’t think it is
possible to assess the impact of these vast numbers of variables into the
distant future with a high degree of certainty and then assigning a value for
this assessment (growth rate). This assessment or guesswork becomes
increasingly difficult and complex for an emerging line of business or when
there are structural shifts happening in an economy. But it is possible to
assess the technical expertise, strength and resilience of a business. The
chances of a traveller crossing a tough terrain are not determined by the risk
of dangers which may come during the travel but more by his strength and
resilience. He can defeat those dangers. So rather than focusing alone on
assessing the future dangers (guesswork) the better approach is to assess the
strength of the traveller. Same is also true for a business. Future growth is
not determined by the external threats but by the capability of a business to
fight of those threats.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">But I have seen business analysts
putting all efforts to declare a growth figure. I always wonder how they
calculate the growth rates i.e. at CAGR of 15% or 20% because 90% of the times
these estimates are wrong. But if I am a great analyst charging hefty fees then
I have to give a figure otherwise I can’t claim to be a God…I need to
demonstrate. I am not saying that all such efforts are futile and misdirected
but that they should not be the sole basis for assessing the worthiness of a
business. The value of a business should not be determined by these estimates.
I always feel that the major portion of the value of a business is determined
by the individual capability to fight and survive. Financial ratios are linear
but consciousness (strategy) is multi-dimensional.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">Last year I have written a
detailed post on Homeschooling explaining the pain points of our education
system. One school principal asked me that day what I think is the major limitation
of our study books and teaching. I told him that our books lose the purpose
when they declare, present and demonstrate that they know everything and what
they know is unquestionable and absolute. I always feel that schools should not
only teach what we know but also what we don’t know. Science books should also
have strong focus on what we don’t know as of now. This will create more
Einsteins…more children will feel interested and motivated. Similarly, I think
we need to understand that we can’t assess thousands of variables projecting
their future behavior in an excel sheet…rather than giving inconclusive and raw
figures it is better to declare that this we can’t assess or can assess with
lower degree of certainty.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">GIC RE- Its
recent business performance is not the TRUTH<o:p></o:p></span></u></b></p><p class="MsoNormal" style="text-align: justify;"> GIC RE has been hit badly in last one year and
trading at extremely lower valuations. But the truth is completely different
from its recent quarterly numbers. In the coming paragraphs we will try to
capture the truth.<o:p></o:p></p><p class="MsoNormal">GIC Re is India’s biggest reinsurer with around 60% market
share. Insurance business is one of the most complex businesses and reinsurance
is even more complex. So no wonder people are trying to assess the fourth
dimension with 3D tools.<o:p></o:p></p><p class="MsoNormal"><b><u>Sample 1:<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;"><b> <u>Insurance- Role and impact on business and
economy<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;">Insurance is basically a process
by which risk is spread among vast number of people across geographies. As I
have shared earlier, future is extremely uncertain and there are existential
threats for all whether for an individual or a business. So the focus was
always on as to how to eliminate these existential risks. Insurance tried to
fill this void with its innovative business model.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">To understand the model, let’s
assume a small town with some 1000 families. As there is a risk of untimely
death due to accident or disease so every resident is worried about the safety
and future of his family. The best way for him is to build an emergency fund
for his family. As per his estimates, the fund he needs is Rs. 1 crore and so
saves this much money. But this threat is for every family hence every family
is focusing on saving around 50 lacs to 1 cr in order to ensure the safety of
their families. This means that people will try to save 500-1000 cr in this
small town and the same will be parked in safe instruments like FD. But the
savings of this huge sum also means that people will spend less and take very
less risk for staring new ventures. And this will certainly hit the growth of
the town very badly and the question will come as to how they will save this
much money in the presence of low economic growth. Interest rates will be low
but still even at lower rates there won’t be much takers of credit as everybody
has become risk averse.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">But then, a smart guy comes into
the town. He does his homework and finds that on an average every year some 10
people die of accidents. So he understands that there is no need for everyone
to create emergency fund. In fact, he can create a fund sufficient to pay Rs. 50
lac to 1 crore to the family of each deceased fellow which will be around 5-10
cr and for that he can charge a small amount as premium from each family in the
town. The premium he will decide based on his cost of capital, administration
and other charges. So if everything goes according to his estimates (of 10
deaths) then he will make money from this business. Most importantly, people
will be very happy to pay small annual insurance premium (say Rs. 20-30K) to
safeguard the future of their families and avoiding the need to save huge money
for emergency fund.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">So we can see this arrangement is
a win-win situation for everyone but most importantly this will ensure the good
growth of the economy as a whole as people will feel comfortable to spend and
to take risks for new ventures. So we can see the big role being played by
Insurance for the growth of economy also not just ensuring the safety of the
people alone.<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUtHspXWZxJB9_HdTXGEop2XfmWULU_36VXyHao2qD_28_bWm3skG8dV_A0LAP_SApwx3eloZaZtzTreOSnFQRpGiri9AaSV8MkWZ2Me2JA0K9twvgCvO3-4_9ho3WRRhbBw-aB49fJQw/" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="512" data-original-width="512" height="185" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUtHspXWZxJB9_HdTXGEop2XfmWULU_36VXyHao2qD_28_bWm3skG8dV_A0LAP_SApwx3eloZaZtzTreOSnFQRpGiri9AaSV8MkWZ2Me2JA0K9twvgCvO3-4_9ho3WRRhbBw-aB49fJQw/w185-h185/678860_protection_512x512.png" width="185" /></a></div><p class="MsoNormal" style="text-align: justify;">But the major factor here is to
cover large population under insurance because only then law of averages will
come into play and this will further reduce the insurance premiums. Insurance
is mainly about vast coverage because if in the small town in our example only
100 people opt for insurance then there are high chances that out of these
hundred 7 people die of accident resulting in high claim payouts for insurance
company which is not a viable model. So the expertise of Insurance firm here is
to assess the mortality rate accurately and increase the insurance coverage to
large number of population. <span style="color: blue;">Hence, Insurance is
basically a risk management mechanism where the insured manage his risk by
transferring the same to the Insurer while the Insurer manages his risk by
accumulating/pooling the risks of similar large number of individuals.<o:p></o:p></span></p><p class="MsoNormal" style="text-align: justify;">Non-life insurance (General
insurance) follows the similar model and just like the life insurance it has to
assess the risk events accurately like motor accident rates, Fire and
catastrophe risks. But the focus here also is to cover the large geographical
area in order to spread the risks. Like in our small town case, effectively
1000 people are taking care of the families of 10 people expected to die of
accidents in the current year because instead of each family taking care of
themselves 1000 families are taking care by pooling money for an adequate fund.
So the core competency of insurance business is to spread risk because the
risks associated with different policies are not perfectly correlated so the
total risk of a portfolio of policies is smaller than the sum of the policies’
risks- for example, 100 policies having insured value of 100 cr…now the risk of
each policy is 1 cr but total risk of 100 policies is not 100 cr due to
nonlinear correlation between all the policies.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">Insurance is a unique business
and a very complex one because unlike other businesses where they sell goods or services but in insurance they sell promises…a promise to indemnify the
other in case risk/loss event happens in the future. So the indemnity event is
also contingent upon the loss event happening in the future which may or may
not happen. So, Insurance companies are required to keep adequate liquidity and
capital to meet out their future obligations in the form of insurance claims.
Insurance companies are required to maintain a solvency ratio of 150% in India
(will touch this in the coming paragraphs).<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><o:p> </o:p>A strong and efficient insurance
industry is vital for the growth of an economy because in the absence of
insurance support businessmen won’t be able to take the risk of setting up new
factories/projects. Take the case of a setting up of a power plant costing Rs.
5000 cr which is exposed to the natural catastrophic risks like earthquake,
hurricanes or other risks like war and terrorist attacks. In the absence of
strong and solvent Insurance industry it is not possible for any businessman to
invest such a huge amount. Banks can’t provide credit to businesses in the
absence of Insurance.....</p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><b><u>Sample 2:<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u>Concentration Risk and
Reinsurance<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;">This is what insurance business
is all about and the most important strategic decision for any insurance
company. The holy grail of Insurance business is to avoid concentration risk. This
is the most important factor which affects the demand and profitability of
insurance business however surprisingly there is not much information about
this in any of the coverage reports on Insurance business. They only talk about
regulatory and mass retail Motor insurance, health or fire which are required
by law and are non-discretionary. But due to easy money there is high
competition in these sectors. <o:p></o:p></p><p class="MsoNormal">The major risk for an insurance company is to have high
number of claims as compared to expected claims upon which they have built and
priced their insurance policies. Now this high claim risk can be due to two
factors- first, their assessment was wrong and their data collection and
analysis models were wrong or outdated; second they have accumulated/distributed
insurance policies in such a way that it has concentrated the risk for them……..<o:p></o:p></p><p class="MsoNormal"><b><u>Sample 3:<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u>Insurance is complex but
Reinsurance is even more complex<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;">I have not seen a business as
complex as Insurance where growth and demand dynamics are extremely difficult
to assess. But I have seen people treating both insurance and Reinsurance on
the similar lines…analysts predicts linear relationship between insurance and
reinsurance business and growth in retail insurance will result in the same
degree of growth in reinsurance. But this is not the case. Both have distinct
demand and growth dynamics.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">Once one analyst associated with
large broker house was telling me that their analysis about reinsurance is that
with the growth in Motor, health insurance in India more business will come to
Reinsurers. But I told him that I did not feel the same and instead as far as I
can see growth catalysts are very different for Reinsurers. Actually here
things are very complex- risks associated with Motor and Health insurance are
not co-related…means one car accident does not create the chances of another
car accident. In other words, if one car insured by insurance company X gets
into an accident in area A then it does not affect the possibility of another
car accident in area B nor it creates a chain where another car accident may
take place due to one car accident in area A…means each risk event is different
and independent and does not even out the other risk event. Car accidents are
not mutually occurring and each car accident is a mutually exclusive event and
independent of other car accident unlike catastrophes like hurricane where one
hurricane can do big damage in multiple and correlated risk events in a
particular area and further you can’t pin point the area in advance……<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><b><u>Sample 4:<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u>General Insurance has a
long way to go in India<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;">However, Indian general Insurance
industry as of now is very backward and needs huge resources and innovation to
start the new growth path. To have an assessment as to where India stands now,
two ratios are used across the globe to measure the development of insurance
industry. First is Insurance penetration which measure the development of
insurance sector i.e. circulation rate of the insurance products in an economy
and second one is Insurance density which is the ratio of total insurance
premiums earned in a given year to the total population.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">Insurance penetration rate is
measured as the ratio of premium underwritten in a particular year to the GDP. India’s
insurance penetration was 2.71% in 2001, when the world average was 7.83%. The
same in 2016-17 was at 3.49% (2.72% Life and a mere .77% for non-life). The
same now stands at 3.7% against global average of 6.8% which shows that we have
too much to cover as of now.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">But i don’t like this ratio much
and don’t think that this ratio is expressing the status which is desired
because:<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">(1) If we can see then this ratio
attempts to show the relation between premiums and GDP. But I think the focus
of Insurance is not on protecting GDP DIRECTLY. <o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">(2) In fact, Insurance aims to
protect the GDP generating assets not the GDP.
So I think the focus should be on to check how much of the income
generating assets (Like factories/power plants) are insured. <o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">(3) Also, insurance premiums are
affected by competition and interest rate in an economy (because insurers can
set low premiums to attract more business to invest the premiums in high
interest generating assets like Bonds).<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">(4) So I feel instead of focusing
on insurance premiums received in a year the better way is to focus on the
value of income generating assets insured as a percentage of total income
generating assets in an economy. I mean focus should be on sum insured not on
premiums paid. For example, if an economy has Rs. 10 lac cr worth of assets
then the penetration should be measured as how much of these assets have been
insured not the premium paid for ensuring these…….<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><b><u>Sample 5:<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u>Cyber Insurance-the next
big thing in Insurance and Reinsurance<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;">Data is God. As you all know I am
a firm believer of this. And as things are changing in the structure, growth factors
and catalysts of economies across the globe the same is going to be recognized
by all the businesses and insurance providers. The world, economies and
businesses as we know today are defined by one factor- DATA. Just see the top
companies of the world- Google, Facebook, Alphabet, Apple, Amazon, Microsoft,
UBER, Netflix, Linkedin. They are not our conventional companies selling
physical goods but they are the ones selling information, digital goods and
services. For these firms, Data is all and everything. Companies selling and
dealing in physical goods are no longer the global giants. Goods are replaced
by DATA.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">This Data orientation of the
businesses has fundamentally changed the risks associated with the businesses.
Two-three decades ago, businesses were about investments in machines, plants,
infrastructure and raw materials. Business meant physical assets but now is the
time of intangible assets……<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><b><u>Sample 6:<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u>Valuation of Intangibles-
where traditional accounting is useless<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;">Once I was sitting among the
group of stock market enthusiastic and CAs when one passionate investor told me
that my being a qualified CA helps me a lot in analyzing the stocks. But I
disagreed with him. I have seen CAs considering themselves as depositories of
accounting laws and fundamentals so they have a feeling that they can value
stocks and businesses. But I usually tell them that this is not the case
because stock analysis starts where traditional CA ends. In mergers and
acquisitions, intangibles are accounted for some 70% of the business valuations
with traditional assets in books accounting only for some 30%. The problem with
the traditional accounting is that it has no tools to evaluate intangible
assets. Our so called balance sheets comprise of just physical and financial
assets and liabilities and accounting says that the difference of the assets
and liabilities is the net worth which is the value of the business as per
accounting. But we all know that net worth in fact is the minimum value as
businesses get maximum value from the intangibles like brands, technology,
Patents, customer loyalty, information and data which is not assigned any value
in the balance sheets by traditional accounting. So we can feel the uselessness
of our accounting systems. The uselessness of our accounting is more pronounced
at present with the onslaught of digital economy as more and more resources are
invested in the formation of digital and intangible assets…..<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><b><u>Sample 7:<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;">But in the absence of
capitalization of intangibles or valuation of Data assets in the balance sheets
have rendered the books of accounts and return ratios meaningless in today’s
world because as pointed out earlier it is very much possible (it happens always)
that the revenue earned today is due to R&D expensed out 5 years ago so
this revenue will distort the return ratios/metrics big time and
investors/analysts will have a false interpretation of high return ratios when
the fact is that the most of the related expenditure is charged off 5 years
ago. Further, the timing of R&D expenditure may impact the results big time
and people may arrive at wrong conclusions when the fact may be that in a
particular year with lower profits the firm actually has invested much higher
in R&D for a new breakthrough product. For instance, take the case of
Pharma biggies like Gilead and Pfizer, aviation giants like Boeing planning a
new aeroplane…all these new products require massive investments in R&D the
benefit of which will be realized in the foreseeable future. So the books of
accounts we are seeing and analyzing today (especially of a tech heavy and
R&D heavy firms like Pharma) are just superficial. If you ask me, Indian
analysts have very low expertise in recognizing and valuing intangibles (Biocon
was never valued much in 2013-14 when it was spending big in R&D and I saw
many analysts questioning its return ratios at that time. But I picked it at
that time and it is now a 12 bagger). The main reason for this is that Indian
companies are very backward in investing in R&D so in India these analysts
have the liberty to ignore or deficient in valuing intangibles but still be
regarded as great analysts…..<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><b><u>Sample 8:<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;"><b><u>How life insurance industry
adds value<o:p></o:p></u></b></p><p class="MsoNormal" style="text-align: justify;"> If we can see, life insurance industry sells
the true interest rate sensitive products or policies. Almost entire profits of
a life insurance provider arise from the difference in the interest rates they
are earning on their assets and the interest rates they have promised to their
policyholders. So falling interest rates negatively affects the future value of
its assets which it needs to payout its liabilities in the future which are at
much higher interest rates. So this can result in the asset liability mismatch
and even can threaten the insolvency of the insurance firms. That’s why
prediction of long term interest rates is more relevant and imperative for life
insurance firms than non-life firms. <o:p></o:p></p><p class="MsoNormal" style="text-align: justify;">So the most important thing for
the life insurance firms is their ability to predict the behavior of interest
rates over a period of 20-30 years…..<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><span face="Arial, Tahoma, Helvetica, FreeSans, sans-serif" style="background-color: white; color: blue; font-size: 13.2px;">(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 own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).</span></p><p class="MsoNormal" style="text-align: justify;">
<span face=""Calibri","sans-serif"" style="font-size: 11pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: Mangal; mso-bidi-font-size: 10.0pt; mso-bidi-language: HI; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">
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</p><p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p><p class="MsoNormal"><o:p> </o:p></p><p class="MsoNormal" style="text-align: justify;"><span face=""Calibri","sans-serif"" style="font-size: 11pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: Mangal; mso-bidi-font-size: 10.0pt; mso-bidi-language: HI; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;"><br clear="all" style="break-before: page; mso-special-character: line-break; page-break-before: always;" />
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</p><p class="MsoNormal"><o:p> </o:p></p><p class="MsoNormal" style="text-align: justify;"><br /></p><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br />Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com0tag:blogger.com,1999:blog-8629364998048667702.post-79864421385778505672020-09-28T00:54:00.004+05:302020-10-10T21:58:51.939+05:30Value Investing- Fourth Dimensional Astral Body<p></p><p class="MsoNormal" style="text-align: justify;">Dear All, I am receiving regular
queries about the next post as it is almost one and half month since my last
post. Actually these days not being able to post as I am busy in some work so i will post as soon as i am free.
Further, I have been receiving requests for a long time to start some
initiative related to learning/education part of stock analysis and research. It
is really heartening to see that these days people want to learn about the
fundamental analysis. They are not that enthusiastic about short term trading
as people these days are aware that real wealth in stock market is created over
long term by investing in top quality stocks. But quite contrary to what
appears on the surface stock market is the toughest place to earn money
especially over a long period of time. Reason-stocks are affected by huge
number of variables which are almost impossible to track to perfection like action
by competition, risk of substitute products, global factors and variability (vs
local demand), risk on future scale of operations/products (like thermal power),
low entry barriers in the industry, scale of operations/market share, margin
variability due to commodity nature of the products, government policies,
Interest rates etc. And I have seen people trying too hard to comprehend and
measure these variables (so many). However, ultimately all such exercises lead
to an attempt to measure WEAK forces/factors of a stock (company) but i think Value investing starts from an attempt to FIND the point/points of strength. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Stock market does a big mistake
when it tries to discount each and every news/issue in terms of earnings and
stock price movement and it appears as stock price volatility is inherent or
natural and it is affected even by the change in the direction of air. But
there is something (in stock performance) which maintains its flow
(upward/positive) even when all and everything about a stock appears negative.
Sometimes I just find this similar to our body which is changing every moment
but there is something in us which remains the same from our birth to death….just
like the Linga-Sharira (Subtle/Astral body) of Indian Vedas. Vedic wisdom sees
physical body as something which is in constant interaction with surroundings
and changes form every moment but still something in us remains the same…throughout
our life and we can feel it even with closed eyes. We can feel that all the changes
in our gross physical bodies do not change the REAL We. Ling-Sharira is the real
FORM- its aspect changes but it remains the SAME. Ling-Sharira is the form or
base upon and around which physical body is created so Ling-Sharira pre-exists
physical existence and will exist even after physical body is dead.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So most of the times stock
analysis tries to measure the “Gross body” but the reality is the Ling-Sharira
which remains the same and value investing is about finding this Ling-Sharira. I
call this the fourth dimensional investing and fourth dimension is TIME. In our
three dimensional world nothing is constant as every moment a thing is no
longer what it was earlier. Me of today is different from me of yesterday or 20
years back but the difference is only in the aspect not the form…me of today
appear different due to Time. But if i visualize my image from birth to now
stretched out in time then I can see that something in me is still the same…this
whole stretched out image is Ling-sharira in a four dimensional world. In a
three dimensional world we only see or comprehend a part of this Ling-Sharira
but that part is not whole. So in my analogy- Value investing is only about
finding this Ling-Sharira/Astral body in every stock which never changes.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">So coming back to stock analysis learning
part- after thinking for a long period of time I have decided to venture into
stock analysis education part. I have finalized most of the details of this
venture. But still I
want to know the views of all of my readers and any suggestions they can give
before taking a final call. So if anybody is interested in being a part of this
initiative then please contact me at oscillationss@yahoo.in.<o:p></o:p></p><br /><p></p>Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com0tag:blogger.com,1999:blog-8629364998048667702.post-88554713499896979452020-08-24T03:24:00.002+05:302020-08-25T01:09:10.164+05:30NIIT Ltd- Disruption in Training<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">I am just putting a short note on NIIT as I think it may have a run very
soon. So due to lack of time I am just touching some of the most relevant
points and will share the detailed study at some other time. First time, I advised
NIIT at this blog in 2015 at 39 (<a href="https://oscillationss.blogspot.com/2015/05/tata-communications-ltd-niit-ltd-and.html" target="_blank">Click here)</a> and now at 120 I think it is still a great buy. Off late, i am buying it regularly from 80 levels and picked last week at 100.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
People still consider NIIT as an IT education firm offering IT courses
and as Indians care more for certificates and degrees than authentic knowledge
so no doubt this image of NIIT is a drag at least for the share price. NIIT is
the one who turned millions of Indians into Techies in the 90’s when our Govt feared
how they would survive with huge population. Our education system and
universities were not capable of technical education to masses but the likes of
NIIT and Aptech brought a big revolution in tech education in India. They
designed and developed their own content for Indian market and managed their
business with precision and professionalism and they were one of the big
reasons that Indians tasted success in IT. <span style="color: #0033cc;">But
current avatar of NIIT is not about IT education. It has modified its approach
at the right time. Our world now is changing very fast and skills are getting
extremely specific. So degrees are no longer that important as skills are. That’s why IT/Tech education is moving online as more and more people are doing these
online courses for developing a particular skill for a particular job which is
not there in university degree as there the focus was more on theory and
concepts. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">So, online tech education is disrupting the learning and education
models. A great revolution is happening in tech education and the likes of
Pluralsight, Lynda and Udacity are the new tech unicorn of the US with revenues
around $100-150 million (700-1000 cr). But they have big daddy in the form of
Skillsoft with revenues of around $ 500 m to $1 Billion. Cornerstone onDemand
and Topyx are the other big names. These online tech education companies are
mostly into B2C model even when they are having subscriptions from
organizations. And these companies have changed the lives of many with their
cheap education services…both of the content providers and students who can
take up the courses and do something better with their life regardless of their
current education and economic backgrounds. However, NIIT was also having a similar business
under Element K and it sold of this business to Skillsoft in 2011 for some
500-600 cr. So it may look surprising that NIIT sold that high growth business. But I think
that it was a wise decision because that enabled NIIT to cut its debt however most
importantly there was a strategic decision at NIIT to leave that business to
focus more on Managed Training Services business (MTS).<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="font-size: 12.0pt; line-height: 115%;"><span style="color: blue;">Managed/outsourcing Training Services- next big thing in corporate training
and learning</span><span style="color: #0033cc;"><o:p></o:p></span></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">There was and still is high competition in online tech education
subscription based business model. But big corporations like Citi, Shell, Rio Tinto, GE, Toyota
do not opt for these online portals. They need something more serious and
concentrated and current trend is for outsourcing their training function to
the experts in this field. For these large corporates, training is not core to
their business but a necessity for improving the skills and productivity of
their employees in today’s highly competitive landscape. So development, management
and delivery of training is a big costly distraction for them. But for training
management companies this is their core business and so they are highly skilled
for this important task. HR department people are not skilled in knowing and
understanding the complex training and learning needs of employees. In every HR
meet, there is big noise around machine learning, Artificial intelligence,
augmented reality etc. which are the current buzz words in the field of high end information technology but nobody is aware of how to implement these breakthrough
technologies. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">So now is the time to outsource complex training and learning task to
the professionals. <span style="color: blue;">Further, some businesses with high regulatory and compliance
requirements such as oil & Gas, Pharmaceuticals and banking have very
complex training and learning requirements and they have no scope for any
mistake in tight regulations as associated costs are very high like one mistake
in complying with the requirement of keeping full records of data/tests for a drug
may result in big losses in the form of cancellation of manufacturing license
or recall of medicines from the markets. So there is scope for significant value addition by MTS professionals in the form of high quality training/learning and cost savings. And whenever a process can add create value for itself in the entire business chain then it has a viable high growth business model.</span> US spends the most on training of its
employees and now the trend for outsourcing the same is rising. India, as
expected is still a very small market for MTS but the pace is going to increase
in India because Indian employees are terribly short of training.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">And I feel this is where NIIT has made a brave and visionary decision
because NIIT had everything to support and motivate this business because of
their 30 years’ experience in developing content and running a software
development company (NIIT tech). And if we see the results; it prove that NIIT
promoters were right in their vision. MTS is growing fast across globe and NIIT
has some 40 clients globally with the likes of Shell, Citi, Riotinto, Nokia,
ABB, Sanofi, GSK, Signify, Ebay, Skillsoft, Hitachi etc. In MTS, NIIT does everything
from content development, technology services, delivery, selection of third
party suppliers, consultancy etc. NIIT has managed to grow their MTS/CLG business
from 85 cr in 2011 to 700 cr in 2020. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">We have not yet counted the possible growth of India business in CLG.
Indian employees are terribly under trained; our tech students are markedly not
adequately trained in practical aspects. Earlier, Indian companies survived due
to low competition but now we’ll see high investments in training from here on.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">Its skill and careers business where it offers IT education has revenues
of some 230 cr. As compared to India, NIIT is a big force in IT education in
China and has achieved great results in training around half a million students
in around 100 Chinese universities.</span> <span lang="EN-IN">In China, </span><span style="mso-ansi-language: EN-US;">Job placement rate for students trained by NIIT
is over 90 per cent. I feel with proper planning and renewed focus NIIT should
do well in India again as now the focus on skill based digital education is
growing in India and NIIT has one of the best content in IT education. Using training
centers for IT education is a very costly choice and so not suited for all. But
deep internet penetration is going to raise the demand for online IT courses in
India.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="font-size: 12.0pt; line-height: 115%;"><span style="color: blue;">Any acquisition in Tech/digital education space is the next big growth Catalyst </span><span style="color: #0033cc;"><o:p></o:p></span></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">In mar-2019 NIIT sold its 23.5% holding in NIIT Tech for some 2100 cr.
After paying taxes, buy back and dividends they have around 1200 cr in books as
on Mar-2020 and this is where the real game will begin. I am sure that NIIT is
going to do some big acquisition in the field of tech/digital education or MTS in
the near time. Covid crisis may even help them in finding acquisitions targets
at lower value now. Traditional education delivery models and corporate training
models are going to see huge disruption in the near future and now is the right
time to build the scale. That’s why I think the best way to use the proceeds
from the stake sale is to build a new age business. Even the likes of Zee learn
(kidzee) will be a great fit for NIIT. Its promoters already have one of India’s
best IT education universities in Neemrana, Rajasthan (NIIT University). <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">It has 1200 cr cash in books and at CMP of 120 it is trading at a market
value of 1700 cr so there is a huge valuation gap and margin of safety. Its EBITDA is around 100 cr
on revenues of 900 cr and with further growth in revenues operating leverage is
going to come into the picture. Its promoters have raised their stake from
31.5% last year to 35.3% this year. Also recently, MIT has picked 2% stake in
NIIT and it already holds some 2% sake. Dividend yield of 8% is great and this
is going to be stable in the future.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;">So it has some strong high growth catalysts in the future in its business- 1) big
order wins in MTS business (right now orders for some 1700 cr in hand) 2) scaling up its IT education business 3) Any big acquisition
in Tech/digital education field and I just feel that we are going to see all 3
happening very soon. But as much work is yet to be done in these 3 catalysts and from hereon it will get most of its value from future performance (cash in the books is almost discounted and future is uncertain as of now) so treat this one as risky option and invest only riskiest capital into it.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-ansi-language: EN-US;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc; mso-ansi-language: EN-US;"><span style="color: blue;">(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. Reach me at
oscillationss@yahoo.in).</span><span style="color: #0033cc;"><o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
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Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com6tag:blogger.com,1999:blog-8629364998048667702.post-58274362513341164202020-08-21T02:14:00.002+05:302020-08-21T02:36:25.476+05:30Max Healthcare Institute Ltd- Listing Price Calculation<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Dear All, today my plan was to
calculate the expected value of MHIL for tomorrow's listing. But got trapped in
some work in the evening and could only devote some half an hour on this. (<a href="https://oscillationss.blogspot.com/2019/08/max-indiamax-ventures-and-analjit.html" target="_blank">click here for earlier post on Max group stocks)</a><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Earlier, deal in Sep-2018 valued both erstwhile
MHIL and Radiant at 7242 cr but they have vastly improved their performance after
that period...some 50%-60% improvement in EBITDA levels due to synergy and
other cost cutting measures. Also there is some 10 days impact on EBITDA levels
due to covid lockdown in Mar-2020. Their combined EBITDA in 2019-20 is 545 cr
so at 20 times EBITDA the valuation is around 11000 cr (Apollo trades at 22-25 times but could not do much detailed checking). Combined entity has debt of some 1500 cr
so valuation after debt is 9500 cr. But Apollo's EBITDA margins are 12% while
that of MHIL (Combined) is around 15% and this will improve further. I am
assuming a similar maturity profile although could not check. So because of
superior EBITDA if we value MHIL at 25 times then the valuation after
debt is Rs. 12100 (13600-1500) cr. But let me tell you one thing- 20/25 times are very conservative valuations because MHIL is going to perform much better from hereon and there is a further scope for cost optimization and margin improvements. Also KKR and Abhay Soi is a deadly combination. Narayana Hrudayalaya</span><span style="color: #222222; font-family: "times new roman", serif; font-size: 12pt;"> trades at some 20 times EBITDA as it has vastly improved its performance in 2019-20 on the expected lines (</span><a href="https://oscillationss.blogspot.com/2019/11/narayana-hrudayalaya-ltd-axis-mundi-of.html" style="font-family: "times new roman", serif; font-size: 12pt;" target="_blank">click here for earlier post on NH)</a> and this one is going to give even better returns this year because i still find this one very cheap<span style="color: #222222; font-family: "times new roman", serif; font-size: 12pt;">.</span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I could not devote much time on working out
the number of shares outstanding of MHIL (combined) but taking the deal price
of 80/- some 90.5 cr shares are outstanding in MHIL. </span><span style="font-family: "times new roman" , serif; font-size: 12pt;">So per share value at 20 times
EBITDA is Rs.106 per share and 25 times is Rs.134. Closing price of Max India
before stoppage of trading was 68 but it includes some 30 per share value of residual
business of erstwhile Max India sans Max healthcare (cash 500 cr + Antara
etc.). So that means at Rs.68 market was valuing max healthcare stake at Rs.38
only while the deal happened at 80 and now the expected price is around 100. </span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">So this working is showing a high
valuation gap (i hope my half an hour calculations are correct) and we should
get a pleasant surprise. So i think it should be a buy near 90-100 (Market cap near 8000-9000 cr) because
performance is going to vastly improve in the future. Please correct me if there is
some mistake in my working or it needs some further improvement as i have
worked this extremely fast. <o:p></o:p></span></div>
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<span style="color: #0033cc; font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">(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. Reach me at
oscillationss@yahoo.in).<o:p></o:p></span></div>
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Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com0tag:blogger.com,1999:blog-8629364998048667702.post-8564306581255663282020-08-17T03:04:00.004+05:302020-08-17T12:04:24.297+05:30Healthcare Global Enterprises Ltd.- Data is God- Updates<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt; line-height: 115%;">In my last post on Healthcare Global enterprise (<a href="https://oscillationss.blogspot.com/2020/08/healthcare-global-enterprises-ltd-data.html" target="_blank">Click here)</a> i forgot to
cover the valuation exercise of Strand life sciences in the final chapter on Financial analysis of HCG.
One reader pointed this out in the comment section. So i have updated this aspect in that article.
Further some readers have put the query as to why we assign high valuation
multiples to book value for some stocks and not for others. So i have also
added a short note on this along with some other changes in that chapter. So i am
reproducing the updated chapter here (updates highlighted in red):<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-family: "arial" , "sans-serif"; font-size: 14.0pt;">Financial Analysis</span></u></b><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">It may appear on the surface that HCG is doing badly
operationally when one looks at its financial performance- Turnover of Rs. 1100
(hit by Covid) cr in 2019-20 and Losses before tax of Rs. 119 cr. But just a
little bit of scratching of the surface and things will unfold into a new
dimension. HCG has done massive expansions in last 3 years by investing some
700 cr in creating new facilities across India. Numbers of beds under its
network are at 2071 in Mar-20 as compared to 1364 in 2017. Its gross block is
around 1200 cr in 2020 as compared to some 600 cr in 2017. It was a profitable
company in 2017 with NP of 23 cr on revenues of 700 cr. Now, I think you can
easily guess why its performance could have suffered after that- because of
costs related to new expansions hitting the profits with relatively much lesser
growth in topline. Like, its topline growth is around 50% from 700 cr to 1100
cr however depreciation is at 104 cr in 2020 (excluding lease impact) vs 57 cr
in 2017, interest cost of 82 cr vs 23 cr, Employee cost at 208 cr vs 121
cr. </span><span style="color: #0033cc; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">Further there is an
impact of Rs. 40 cr due to implementation of new lease standard 116 otherwise
the losses are much lower than the reported figure of 119 cr (loss before
tax). </span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">So as maturity profile
of recently commissioned hospitals is low hence they are not contributing much
to the topline but their expenditures are hitting P&L badly as turnover
growth is just 50% but most of the expenditures have been grown up by more than
100%.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">In Healthcare there is high operating leverage as most of the
expenses are fixed so when a hospital is new, revenue will be lower but fixed
charges like depreciation/lease rentals of building, machinery, staff payments
hit hard. Healthcare uses very expensive medical equipment so upfront fixed
expenses are high so this gives a false impression of losses. But as most
charges are fixed so most of the incremental revenue goes to bottom line. We
can look at the superlative performance shown by NH this year which will show
the operation of operating leverage. I am taking the performance of 9 months
ending Dec-2019 to eliminate the Covid impact in Mar-2020. Up to Dec-19 the
topline of NH was Rs. 2385 cr vs 2096 cr growth of 14%. But its NP was 107 cr
vs 22 cr…a massive jump of 500% as compared to topline growth of just 14%. And
stock price of NH increased from 200 to 400 in Jan-2020 (<a href="https://oscillationss.blogspot.com/2019/11/narayana-hrudayalaya-ltd-axis-mundi-of.html" target="_blank"><span style="color: #888888; text-decoration: none;">click here for the post on NH)</span></a>. We can see similar impact of
operating leverage on the performance of HCG anytime in this year.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="color: blue; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">For valuation, EBITDA can be used but as it has just completed a
major expansion in last 3 years so I do not think it is wise to try to assign a
valuation to it even on the basis of EBITDA. I have seen people using this
metric blindly in all situations. Similarly I have seen attempts to value HCG
on the same basis. But as I have told you hospitals are a very different
business and it is not easy to apply traditional valuation models on it. Like, for
EBITDA based valuation we can see that the value will be heavily distorted by
the presence of newly commissioned hospitals (large numbers) which are having
negative/break even EBITDA as of now. So these facilities which do not add
anything to the EBITDA of the company will not get any valuation at all!! So if
we try to value HCG on the basis of EBITDA (it shows some 135 cr for Hospital
business in 2019, 121 cr in 2020) then the result will give extremely wrong
valuation because it will not assign any valuation to the loss making/break
even hospitals. In fact, loss making hospitals will further reduce the overall
EBITDA of the company and this will result in the assigning of negative value
to a hospital like -50 cr for its Nagpur hospital. But can a hospital has
negative value or a zero value??</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="color: red;"><span style="font-family: "arial" , "sans-serif"; font-size: 12pt;">So I think the better
approach to value these growing hospital chains is- use EBITDA for matured
hospitals with positive EBITDA and use replacement cost based or revenue based
approach for the loss making/breakeven facilities. Last year Max healthcare was
sold at some 25 times EBITDA. But Cancer hospitals are much more expensive to
set up and due to costly equipments the capital cost is very high. Further HCG
is a young entity so I would take 30-35 times EBITDA for valuing HCG. Its
mature center EBITDA is 160 cr (including IVF business) so at 30 times EBITDA
the value is 4800 cr. I do not
have the value for cost incurred on new hospitals but they have given the debt
taken for new hospitals and the same is 432 cr as on mar-20. We can move ahead
with this figure by adding some value addition in the form of expertise in
setting up/planning and also in the form of first mover advantage in setting up
a new hospital in a small city because this acts as a deterrent against new
investments by competition. I think we can easily take the same at minimum 500
cr.</span><span style="font-family: "arial" , "sans-serif"; font-size: 10pt;"><o:p></o:p></span></span></div>
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<span style="color: red;"><span style="font-family: "arial" , "sans-serif"; font-size: 12.0pt;">Let’s also try to value on the basis of revenue which is 150 cr
for loss making centers. Max deal has happened at some 2.5 times of revenue
that too of mature hospitals. So I think we can take this at 3-4 times for HCG
loss making centers which will take the value at some 450-600 cr which is near
to 500 cr we derived on the basis of cost. So Value of Mature hospital 4800 cr+
new hospitals 500 cr-Debt of 700 cr will make the value around 4600 cr. It is
very high compared to the current market cap of Rs. 1600 cr. So let’s try to
lower the EBITDA multiple to 20 thinking wrongly that this is due to covid. So
at 20 multiple, the value of mature centers excluding debt is 2500 cr and by
adding 400 cr (only debt no value addition) for loss making centers the value
is 2900 cr still 80% higher than the current market capitalization which shows
that it is way undervalued.</span><span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></span><br />
<span style="color: red;"><span style="font-family: "arial" , "sans-serif"; font-size: 12.0pt;"><br /></span>
<span style="font-family: "arial" , "sans-serif"; font-size: 12.0pt;">Further, other comparative players like Narayana and Apollo are trading at 6 times of their book value while HCG is trading at 3 times its book value. The likes of Fortis and Aster are trading cheap (at one time and 3 times) but Fortis is fighting its own set of problems and Aster DM i think gets more than 50% revenues outside India so i have left both. Further, as i have shared earlier Cancer hospitals require more capital investments but still if we take 6 times of book value as the basis the valuation of HCG will be some 3200 cr which is near to our other valuations so we can say that our valuation of HCG is on right track. Some people ask me why for some stocks market pays such a high valuation compared to its book value...5-6 times is a big value. Actually stock valuation is where market sometimes shows great creativity. Like, if we can see low book value in case of hospitals in their infancy is an illusion because hospitals are a high capital investment business so in the initial period (say 4-5 years) there are losses due to the impact of high depreciation and other high fixed expenditures which results in big losses and so reduction in the book value. But this reduction in book value is not real as company is building business and growth catalysts are still intact. And with better performance in future due to operating leverage book value will be restored to normal levels. That's why in the initial phase market assigns high valuation multiple to book value but as they are matured this valuation multiple is normalized.</span></span></div>
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<span style="color: red;"><b><u><span style="font-family: "arial" , "sans-serif"; font-size: 12.0pt;">Strand Valuation</span></u></b><span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></span></div>
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<span style="color: red;"><span style="font-family: "arial" , "sans-serif"; font-size: 12.0pt;">But above valuation of HCG is excluding the stake of 38% in Strand life
which for me will be one of the biggest growth catalysts. As I have told you
earlier there is not much information about the revenues and valuation of
Strand. Like, in Feb 2018 Quadria acquired stake in it for 80 cr but how much
stake it acquired is not known. But as 38% is with HCG, then there are
investors like Kiran Shaw, Reddy, and Promoters etc. So I think Quadria much
have acquired somewhere 10%-20%. At 20% the value is some 400 cr and that was 2
years ago. After that Strand has acquired the diagnostic business of USA based
Quest in India. But if you ask me sometimes it is better not to try evaluating
something as revolutionary as Strand.</span><span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></span></div>
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<span style="color: blue;"><span style="color: red; font-family: "arial" , "sans-serif"; font-size: 12pt;">Once I was talking to a friend who wanted to make a career in
Astrology. During our discussions I shared my view about Astrology that it has
lost its credibility because it tries to answer (and change) everything.
Further, most of the things look beyond its reach and illogical keeping in view
its current technical/theoretical advancements. Like the sun we see in the sky
is the sun that existed 8 minutes ago because it takes around 8 minutes for the
light to travel from sun to earth. Same is for all the stars. A person comes
into this world 9 months before taking birth. Similarly I always feel that
equity investing starts to behave like Astrology when it tries to put a value
on everything. Some things are unfolded only on time and it is better not to
make a crude guess of what may unfold especially with outdated techniques.
CAGR, DCF etc. have outlived their lives and for emerging businesses they have
very limited utility. We need something better now (Even for settled businesses
targets announced by brokerage houses do not hit 95% of times). The likes of Quadria
has acquired stake in Strand so they have to put a value on it but most of the
times that value is purely arbitrary and does not have much perspective. That’s
why we see cases like Quess Corporations where Thomas Cook has made astonishing
returns. Thomas cook invested in Quess in 2013 and by 2020 the value of its
investment increased by some 25 times!! But in 2013 nobody could guess that by
2020 the same can be 25 times. In fact everybody would have laughed at. So the
price paid by Thomas cook was just the funds needed by Quess for their future
growth and so the valuation was arrived for the sake of valuation not out of
some precise calculation. Nobody can evaluate a disruption and innovation early
in its life. Same thing I feel for Strand and I think it is good that we are
not required to put a value for strand. I only wish for HCG to raise its stake
in Strand in the future.</span><span style="color: #990000; font-family: "arial" , "sans-serif"; font-size: 10pt;"><o:p></o:p></span></span></div>
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<b><u><span style="color: blue; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">CVC Investments will be a
game changer</span></u></b><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">Further, to make the valuation exercise more confusing the
company has sold 31% stake to a private equity player CVC at a valuation of
1600 cr. So, one can feel that the valuation offered is quite lower. But I
think there may be some valid reasons for this. Main reason can be the
devastating impact of covid on all businesses and healthcare was also badly
affected and there are high chances that healthcare will remain stressed due to
negative impacts on the incomes of people and this will hit their capacity to
spend on healthcare services. HCG was having a debt of 700 cr (some 30-40% in
foreign currency) and with not much help from government for healthcare sector
I think even their survival was at stake. So there was high uncertainty in
Apr-may-2020 about the impact of Covid and this might have affected the debt
reduction plans of the management in 2020-21 as Covid will easily wipe out 2-3
quarters this year. HCG stock price was beaten down to some 60 levels in
Mar-20. Hence, management realized the urgency to reduce the debt and this
might be the reason for going for the stake sale. In May-20 price offered was
100 which was increased to 130 in June-2020. HCG has got some 500 cr from the
stake sale and this they will use for the debt reduction and this will make
things much better for them.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">I also think that the present situation created due to Covid
crisis will hit the business of many hospital chains and those with weak
balance sheets will feel the more pain and this may help HCG doing much better
even in tough times and we may see some management contracts happening with
other local hospital chains. Further, the scope of deferment of cancer care is
very less as compared to other healthcare problems so HCG should not face that
much difficult time as may be felt by other healthcare services.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">HCG is planning to sell its fertility business under Milann
brand which is having revenues of 70 cr. I never liked HCG doing this unrelated
business especially when the scope of growth in the core cancer care is so high
which requires huge capital investments. Actually these types of unrelated
acquisitions raise the doubt of fund leakages by the management because why a
wise man would attempt this type of adventure when they are hard pressed in
their core area. Still, I want to give them the benefit of doubt keeping in view
the otherwise good reputation and credibility of the management and the fact
that HCG did this in 2013 way before their IPO and most importantly the
presence of marquee investors in the form of IFC, Tamasek, CVC raises the trust
factor to great extent. Now, they have decided to sell this fertility business
which is a good decision. So I hope that things are going to get better for
them from hereon because HCG has already suffered quite a bit. They went for
massive expansions but were hit badly by the onslaught of Covid. But current
valuations are already discounting (over-discounting) all such sufferings and
it is one of the best play on the growth of Genomics, Genomic diagnosis and
Cancer care in India.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="background: white; color: #0033cc; font-family: "arial" , "sans-serif"; font-size: 10.0pt;">(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. reach me at
oscillationss@yahoo.in).</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 10.0pt;"><o:p></o:p></span></div>
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Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com0tag:blogger.com,1999:blog-8629364998048667702.post-70802834324773407532020-08-11T02:25:00.001+05:302020-08-17T20:58:14.914+05:30Healthcare Global Enterprises Ltd.- Data is God<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">Healthcare Global
Enterprises Ltd (CMP 130 Market Cap 1600 cr)<o:p></o:p></span></b></div>
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<span style="font-size: 12pt;">Data is God. I usually say these
words and recently one friend asked me whether my emphasis was on
quantum of Data. But I told him that quantum is more about linear flow or one
dimensionality but God is multi-dimensional. So what I see when I say “Data is
God” is the ACCESS to the data. Like, we humans have access to 3D world and so
all our experiences and interpretations are impacted (or burdened) by this fact
(or illusions). We have very limited access to the universal Data and that’s why
most of the times we are unsure about everything. Then there are life forms
having much more access to universal data and we call them Deities and that’s
why they have better understanding of life compared to us and can do things
which are more like a miracle for us. And then the God, the ultimate creator,
has ACCESS to all the data of the universe. We can’t even guess whether the God
has created the data or he had access to data with which he created the great
creation (our universe INCLUDED).</span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">So creativity is about use of data.
That day (<a href="https://oscillationss.blogspot.com/2020/07/indian-public-sector-undertakings-psus.html" target="_blank">click here)</a> I have written about the need for investments in R&D if India
wants to capture next leg of growth. R&D is not something where one
captures an innovative idea by luck or in some moments of trance or by
accessing the future. Innovation happens when we have data in our mind…vast
amount of data is required first.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><span style="color: blue;">Here, I remember one such company
from India which is doing great work in the field of Genomics and
Bioinformatics by focusing and investing big in R&D. The company is- strand
life sciences from Bangalore. Genomics and Bioinformatics are just about DATA...VAST DATA.</span> Genomics medicine is a branch of medicine which
uses the complex interplay of DNA and biological expressions in our bodies to
study/diagnose their impact on our health and development of tailor made
treatments. The firm tracks its humble beginnings when in 2000 four professors from
the computer science department at IISc joined hands to pursue their passion in
the field of genetics and biological research. They were- Vijay Chandru (66),
Ramesh Hariharan (51), Swaminathan Manohar (60), and Vishwanathan Vinay (56).
They were inspired to pursue their passion by none other than our great- Ratan
Tata. IISc even holds a small stake in Strand. Strand was spun off from Indian
Institute of Science (IISc) and it was first such instance when a Public
institution like IISc invested in a business (I have talked about the similar
model in my recent post related to PSUs <a href="https://oscillationss.blogspot.com/2020/07/indian-public-sector-undertakings-psus.html" target="_blank"> Click here for the post on PSUs</a>).<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">Strand Life
Sciences- India’s attempt to claim a place in global high end R&D
Capability in Bioinformatics and Genomics<o:p></o:p></span></u></b></div>
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<b><u><span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;"><br /></span></u></b></div>
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<b><span style="color: #c00000; font-size: 12.0pt; line-height: 115%;">I am writing this
post on HCG but I choose to put the focus first on Strand because HCG is having
a 38.5% stake in Strand Life and the work Strand is doing in the field of
Cancer diagnosis is critical to the success/survival rate of cancer in
India and as HCG is one of India's biggest player in cancer care so Strand is
critical to HCG also.</span></b><span style="color: #c00000; font-size: 12.0pt; line-height: 115%;"> </span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Cost effective early stage
diagnosis is critical in ensuring the high survival rates from cancer and this
is one of the reasons for high survival rates of countries like USA. It is
surprising that Strand is not covered at all by the market while evaluating HCG
because I feel Strand is critical for the growth of HCG as a whole. Hence, in
the coming paragraphs as I explain the massive technological achievements of
Strand Life in Genomics you are going to feel goose bumps. Strand started as a
Bioinformatics firm and developed some path breaking Bioinformatics products</span>
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">for
analyzing DNA sequences- GeneSpring and Avadis which are used by research
institutions worldwide.<o:p></o:p></span></div>
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<span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">As shared many times
in earlier posts (especially in the post related to value investing-<a href="https://oscillationss.blogspot.com/2020/06/value-investing-dance-without-passion.html" target="_blank">click here for the post</a>) superior technical
abilities in a high growth sector with high entry barriers is the most value
accretive factor for me while choosing a stock for investment not the financial
analysis of the historical performance. I see most value in the superiority of
the business model not in the financial ratios. Traditional value investing
seeks to benefit from the asymmetry (so a matter of chance) of the stock market
in pricing a stock accurately near to its real worth. But for me value
investing gets most of the value from business analysis; financial analysis is
just for the purpose of ritual, for reverence (or to abandon). </span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">So in order
to understand the superior capabilities of Strand Life and massive scope of
Bioinformatics and Genomics in the future world of medicine we first need to
understand the application, role, importance and complexity of Bioinformatics and
Genomics in the structural and functional analysis of genomes and in drug
discovery. <o:p></o:p></span></div>
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<span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">As this sector is
just in its infancy so it will be premature to evaluate the performance based on
financial data because this is going to witness quantum jump in demand and
financial performance in the near future. So rather than trying to estimate
micro level financial metrics like EBITDA or Cash flows I prefer to estimate
the total size of the industry in the near future and this will give you an
idea about the future potential and after that it is up to the strategic
planning and execution of the company to capture a big pie of the total
industry and this we can gauge from the technical abilities and superiority of
its R&D investments. I find it really very strange when I see people
choosing stocks on the basis of filters- some certain % of EBITDA, NP etc. etc.
and they find their big moment. But I really like this because this has given
me the freedom and time to pick some real gems at peanuts due to market players using this filteration exercise for their stock pickings. Recent case is Laurus Labs where market denounced it due
to its limited ability to understand business model of Laurus where large
investments for new business (Final dosages) hit operating margins due to costs
bookings in the form of depreciation, Interest and operating expenditure of new
plant with no revenues. But just see the recent results of Laurus labs where
most of the topline growth is added to the bottom line and stock price has been
shot up to 1100 from 470 when I advised it last time just 2 months ago <a href="https://oscillationss.blogspot.com/2020/06/value-investing-dance-without-passion.html" target="_blank">(click here for recent post on Laurus)</a>.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Bioinformatics uses tools (software
tools) for computation and analysis to capture and interpretation of biological
data like that of Genome. It is a field of science in which biology, computer
science, and information technology merge into a single discipline. <span style="mso-spacerun: yes;"> </span>Bioinformatics has its main application in the
analysis and interpretation of genome.<span style="mso-spacerun: yes;"> </span>The
total length of the human genome is over 3 billion base pairs. This is massive
amount of data like if we took the DNA from all the cells in our body and lined
it up then it would form a strand (extremely thin) of 6000 million miles
long!!! I was reading that day that total length of Human genome (DNA) is
equivalent to some 70 round trips to Sun and 7000 trips to Moon (may be even
more)!!! Supreme creator has really done a miracle in condensing this gigantic
data into every cell (through dense thread like coil structures organized and
stored in chromosomes).<o:p></o:p></span></div>
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<span style="color: #0033cc; font-size: 12pt; line-height: 115%; text-align: justify;">And let me tell you
one thing- I think when Humans accessed this massive DNA data then that was the first moment of convergence of science and Theism/Spiritualism (not
religion). </span><span style="font-size: 12pt; line-height: 115%; text-align: justify;">Our DNA and Genome are highly sophisticated designs
and when we peep deep into the mastery with which our DNA and Genome are
created and structured we are left with no doubt that some supreme creator (God)
is behind this. Discovery of DNA proved that life follows a coded path or
information in cells not an outcome of complex chemical reactions as was
perceived earlier. Our DNA is not our regular matter or energy but they are
information processing centers. Information is not an outcome of natural chaos
like a pattern of clouds which may resemble a human face. Information is a
creation and is always created by intelligence beings just like our computer
program. We can see some random alphabet in the pattern of clouds but what if
we see a long pattern of clouds resembling
“HCG is valued at 10 times its EBITDA while others are valued 20 times
EBITDA”. This line is not a pattern but this is a complex set of information
and it is not possible that it can be formed randomly by natural chaos.</span><br />
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Like, each cell of our body has two
copies of genome (Genome is a complete set of entire DNA (including all genes)
of a being within a single cell, and a gene is a length of a number of DNA molecules
that codes for a specific protein, genes are structured/stored in chromosomes)
with one copy from each of your parent (mother and father). However, the case
is different with sperm and egg cells because both have only one pair of
Genome. But why is this difference? Because if a sperm cell (from father) and
an egg cell (from mother) also have two copies of Genome then this would mean
that when egg and sperm combine at conception the number of copies of Genome
shall be 4 in every cell of the baby not 2!!! And when this generation will be
having babies then number of pairs of genome will be 8 and so on it will rise
with every generation this DNA burden will eventually crush the cell. That’s
why germ cells in our bodies have only one pair of Genome. They do start with
two pairs but they eventually divide and in the end left with only one pair and
this arrangement means that life in every human starts at two pairs of genomes.
So some supreme being has planned and designed the structure of life in finest
details.<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-size: 14.0pt; line-height: 115%;">Bioinformatics
and Genomics- the biggest revolution affecting every sphere of life<o:p></o:p></span></u></b></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">The human genome sequencing project
was a massive success and great milestone for humanity to start a new charter
of growth.</span> However, <span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">the first genomes to be sequenced were of viruses and
bacteria. So as of now, the genomes of huge numbers of microbial, plant, living
organisms have been sequenced but this vast amount of data generated by genome
sequencing projects was unmanageable due to its sheer size and complexity.
Further, storage of this genome sequencing data was of not much use because
their true worth lies in doing comparative analysis of different sets of genome
sequencing in order to interpret and retrieve useful information which can be
used for some purpose. This is why the role of Bioinformatics is so important
because Bioinformatics analysis through its various tools has enhanced our
understandings about the genome structure. Without it, it is almost impossible
to manage, compare, analyze and interpret this gigantic data.<o:p></o:p></span></div>
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<span style="font-size: 12pt;">Bioinformatics uses very complex
sets of algorithms and statistical tools to compare, analyze and interpret the
relationship among the members of large data sets like comparing sequence data of
a gene (say insulin) of a particular human with the already existing sequences
to find out if there is any anomaly. Apart from analysis Bioinformatics
develops tools to cost effective storage and efficient access and management of
different types of information.</span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Like, let’s take the example of the
hemoglobin gene which is found on chromosome 11 which contains some 1500
different genes (in 135 million DNA letters) apart from hemoglobin gene. Hemoglobin
gene is composed of some 1600 DNA letters. A normal hemoglobin gene starts with
following DNA letters (in pair of 3):<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">ATG GTG CAT CTG ACT CCT GAG GAG...<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Each of this 3 letter word tells
the cell to produce a particular amino acid (protein). We need the production
of these various amino acids in correct order or we will end up With a disease.
Like a fellow with Sickle cell anemia disease has the following pairs of DNA
letters:<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">ATG GTG CAT CTG ACT CCT G<b><span style="color: #0033cc;">T</span></b>G GAG...<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">As we can see there is a change in
the second last pair (letter T in place of A) and this change of just one
letter in 3 billion letters can create a life threating disease!!!<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">So with Bioinformatics these types
of comparisons and analysis can be accomplished in remarkable short span of
time and this analysis serves as the building block for the search of the cure
for the disease. <o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">And this knowledge is playing vital
role not only in human well-being but it is extending far beyond covering every
aspect of human life whether it is agriculture, Nutrition and Food Microbiology,
Bio-energy etc. Like, for example, the use of Bacillus thuringiensis (BT) gene
in making cotton crop insect resistant. BT gene was extracted from a bacteria
and after mapping its entire genome, scientists inserted its genes in various
plants to make them insect resistant. So now BT has been used for making crops
like Cotton, Corn, potatoes insect resistant which has resulted in very less
use of poisonous insecticides on crops.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">And as we can see and guess the
possibilities are endless where we can use the knowledge of Genomics for
achieving remarkable feats earlier though impossible like, for example, regeneration
of limbs. Humans can’t regenerate their limbs/organs after their amputation/damage (barring some exceptions like Liver and bones when pieces are joined but still
these are cell/tissue regenerations because</span> <span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">if entire liver is lost then it
can’t regenerate.). But many others like Axolotls (salamanders) flatworms,
zebrafish can do. Axolotls are the champion here as they can regenerate complex
body parts lost at any age. Some Salamanders species can also stay young
forever. So by understanding how their genomes respond to any such injury
resulting in the loss of a limb/organ we can progress on to replicate the same
in humans. In Regeneration, real time genomic response is required and so real
time study is required to study the activated genes when faced with limb loss.
And before anything first of all we need to sequence the entire DNA of
that particular being like Salamander andwe can see the difficulties here in
studying/sequencing the genome. And after sequencing the next challenge is the
identification of all the genes because genes are a specific length of DNA and
it is extremely difficult to identify which length of a DNA code is a gene.
Before Bioinformatics, only way to identify the genes is to study their
behavior in the organism or by studying DNA in the laboratory which is an
extremely time consuming process. But Bioinformatics helps in identifying the
genes by analyzing the sequencing data in the computer by comparing the
data/experience of other beings.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
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<span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">Because if we can
see, technically human should also have <span style="mso-spacerun: yes;"> </span>this
amazing regeneration capability because once we were a small embryo ( a single
cell) with genome and then with this genetic code we were developed into a
complete being with all the complex organs and limbs. </span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">So we can
see that there is not much difference in the presence of genetic information in
a human and Salamanders but there are some steps which are missing in Humans
inhibiting our capability to regrow complex limbs. Some genes are switched off
in humans which are responsible for growing/re-growing limbs in these animals. <o:p></o:p></span></div>
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<span style="font-size: 12pt;">So, first step is to understand the
genomics of these beings and this was not an easy task itself. Why?? Because
its genome is massive…some 32 billion base pairs which is 10 times of human
genome!!! But number of genes of both humans and Salamanders are same
(20000-25000) so we can understand the difficulty in identifying these genes in
such a massive genome even after sequencing of the entire genome is done. But
that day I read that thanks to Bioinformatics scientists have finally sequenced
the entire genome of Salamanders so the day may not be far when we will hear
something great in this front. Now they will study whether limb in these
animals is regenerated with the help of some novel genes (not presented in
Humans but then we can insert them with genetic engineering) or same genes but
they control them better than humans. Regeneration of limbs mean high growth of
cells which is identical to cancer but it surprising that Salamanders do not
get cancer at all and this is what keeping scientists very excited for a
possible solution of current human epidemic-cancer.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZ2r13o3gZI8NlahfTJJpwAB3rYil10ZSga9uf5ykMpOez_l6NmfkktNlNxCS15ab9Xjy0cLre8R_j5C0piK7wZ1Ei_nquuKG8VeWSOFBuy0VDv-IbMrnTR0svRo3DZV2VKawjQJdcDMg/s1600/salamander.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1067" data-original-width="1600" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZ2r13o3gZI8NlahfTJJpwAB3rYil10ZSga9uf5ykMpOez_l6NmfkktNlNxCS15ab9Xjy0cLre8R_j5C0piK7wZ1Ei_nquuKG8VeWSOFBuy0VDv-IbMrnTR0svRo3DZV2VKawjQJdcDMg/s320/salamander.jpg" width="320" /></a></div>
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<i><span style="font-size: 12pt;">Image:</span><span style="font-size: 16px;">Salamander</span></i></div>
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<span style="font-size: 12pt;">That day my eight year old son
asked me that he did not want to see his mother getting old. And I showed him
the image of the holy Salamander and gave him a brief note on DNA/Genes in case
this can be a motivation for choosing Genetics as a career for him.</span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
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<span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">Further, as now we
understand the role and capabilities of Bioinformatics and genomics so we can
hope to see a cure for Covid-19 soon in the near future because these days we
can analyze the DNA of Covid-19 virus in its minute details and this will
enable us to find a cure to destroy the DNA of Covid Virus. Further, as now we
already have huge data base of the genome of many other hundreds of viruses
along with the treatments being used and tried (not successful though) so there
is a high chance that with Bioinformatics we will be able to compare the genome
of Covid Virus with the existing data base and in case the same is matching
with an exact genome or similar type of genome then we can have an idea about
where to look out for the cure.<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-size: 16.0pt; line-height: 115%;">Cancer,
Genomics and Strand life<o:p></o:p></span></u></b></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Cancer is a genetic disease and all
cancers are caused by damaged or mutated genes. Cancer is a very individual
disease and cancer of one person can be very different from the cancer of the
other. So, genomics is the Holy Grail for the cure of cancer. Traditional
cancer treatments use chemotherapy, radiation and surgery to kill/remove the
cancer cells but they also kill healthy cells along with cancerous cells and have
severe side effects. And that’s why for early stage cancers chemotherapy is not
used.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Chemotherapy uses deadly
DNA-damaging chemicals/compounds to kill the cancer cells by damaging their
DNA. But it doesn’t work on all the patients uniformly and in some cases where
it is non-responsive it does more damage in the form of killing healthy cells.
And it doesn’t work on all because humans are genetically very different so
response to the therapies focusing on cell work differently.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">So no doubt that genomics will
provide the much needed details about the genetics of cancer in a particular
human being and then on the basis of such analysis individual targeted
medicine/cure can be devised. Hence, there are high chances that the
chemotherapy will not be used in the near future and personalized precision treatment
based on genomics analysis will be used instead. In fact, even now genomics is
being used extensively and it has already made a marked difference in the
cancer treatment. Genomics enables health professionals to see the genetic
abnormalities in an individual after comparing the genome of that fellow with
the data base of genome of a healthy human. Then they can study whether the
genetic abnormality is inherited like some types of breast cancer are inherited
or DNA damage has happened due to external factors like smoking. Also, as now
we already have the genetic information about the inherited breast cancers so
doctors can warn and advise for the precaution and advance treatment for their
current and future generations. So in order to assess the cancer risk factors,
genetic diagnosis will play a huge role.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Hence, we can easily see that the
future of medicine is only about-Genetic diagnosis and genes based personalized
targeted medicine/treatment. But as I have told earlier, right now we are not at
the end of this genomics miracle but we have just scratched the surface of it.
In Human Genome project from 1990 to 2003, scientists were estimating the
presence of some 100000 genes in human genome and they were hopeful that once
we had the genome sequenced then we would decode/interpret all the genes very
fast but things were not that easy. The reasons: inherent complexity in the
interpretation of massive data and changing definition of Gene which also
includes non-protein coding genes. <span style="color: #0033cc;">Only 1.2% of
entire human genome account for protein encoding genes. The rest of 98.8% is
non-encoding DNA and earlier was considered useless and junk but now the
evidence is emerging that these are also vital for our survival and well-being.
</span>Many of these are responsible for the regulation of DNA/genes in cells
like switching on and off a gene. But I find it hard to believe that 98.8% is
less important than 1.2% and so I think this non-coding regulatory DNA may turn
out to be more important.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Result- we are still not sure about
the exact number of genes in human genome and there are competing human genes
data bases with differences of thousands of genes among them (estimates are
around 20000-25000 genes). And in the absence of consensus, it is very
difficult to interpret whether a new gene (marked by Bioinformatics) is a
“normal” human gene or some disease generating mutated gene. There is still
massive work required to interpret entire human genome. <o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Still, even with these numbers,
most of the times researchers are working and focusing only on some 2000 genes
out of 20000. This information is provided by Bioinformatics analysis. Until
now, the main focus is always on large genes with codes for many proteins or
genes which are prone to dangerous mutations so there is not much work on other
genes with potential for new drugs and treatments but are ignored. The need
here is the funding of more research into these ignored and unknown genes. Though
we are yet to uncover 98% of our genome but if you ask me it is not a drag but
a great opportunity. So there is no doubt that with more study and research
this field of medicine will only get better and precise and in future humans
will be healthier and live much longer.<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-size: 14.0pt; line-height: 115%;">Path breaking
work by Strand life in Genomics and Genomic/Genetic diagnosis<o:p></o:p></span></u></b></div>
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<b><u><span style="color: #0033cc; font-size: 14.0pt; line-height: 115%;"><br /></span></u></b></div>
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<span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">As of now, cancer
treatment and Genomics were not advanced and even genetic diagnostic tests were
not available in India and this is one of the reasons we always see our
celebrities going to USA for their treatment. But even this tour to USA may not
be enough because we Indians are different at genetic level from the fellow
Americans. Genomic database of Americans may not provide for the proper
comparison with Indian people visiting for treatments. So India needs to have
the genomic data base of its vast population in order to devise the cancer
treatments. But India with high genetic diversity with 17% population still
accounts for just .2% of the genome database collected across the globe. So keeping
in view the genomic diversity and variability in our populations across
country, Indian genomes can provide very interesting and vast sets of genetic
mutations and variations. One such initiative for human genome mapping project
named Indigen project (some 10k-20k people) in India is already underway by the
Government (also for agriculture) and Vijay Chandru of Strand Life was one of
the members of the team who prepared the draft proposal. However, due to
genomics testing already done by firms like Strand, Medgenome and other
independent research bodies have the database of some 500000 Indians and that’s
why the likes of Strand and Medgenome have better chances to make good
diagnosis products.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Strand life was a pure research
based firm and it achieved great success with its Bioinformatics products
(based in complex algorithms) which were lauded globally and still are the
leader across the globe. But in 2013 Strand Life decided to enter the field of
Genomics diagnosis after they get the funding of $10 million from San Francisco-based
financial firm Burrill & Co. Strand launched personalized Genomics
diagnosis tests in India in collaboration with hospital chains like Max, Mazumdar-Shaw
Cancer Center, HCG etc. In the 1990’s India lagged behind the genomics based
treatment because of the high costs. But the likes of Strand have done massive
work in bringing down the costs to Indian standards. Like, Strand has brought
down the costs of these genomic diagnosis tests to some 20000-30000 Rs. which
earlier was 3-4 lac rupees. These tests are instrumental in the devising of
personalized targeted medicines and saved the lives of many cancer patients in
India. Now thanks to these genomics tests, India has cancer survival rates
compared to the best across the globe.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">In 2014, Strand secured the patent
for its Virtual Liver product-HepTox which allows the pharma industry to assess
the side effects of a potential drug on the liver in pre-clinical studies which
cuts down the time and expenditure related to human and animal trials. Later on
the same was acquired by Biocon owned Contract research firm Syngene
International Ltd. Strand counts the likes of Kiran Mazumdar-Shaw of Biocon,
Dr. GV Reddy of Dr. Reddy’s as its shareholders. In Bioinformatics, once it was
having some 30% share in the global Bioinformatics industry.</span> <o:p></o:p></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Also, the genomic diagnostic firms
like Strand already has vast data base of genomic data of Indian population.
And this gives it an edge in devising genomic diagnostic tests and personalized
medicine. So Strand is a pioneer in genetic testing in India and is working on
to detect cancer early from blood and saliva. In 2017, it introduced a cost
effective liquid biopsy diagnostic test which helps in the detection of tumor
traces from a simple blood sample instead of doing costly invasive biopsies or
radioactive scans. The success rate of this test is around 35% for early stage
cancer and 70-90% in fairly advanced stage cancer and these scores are at par
with the best in the world. As costs are coming down, more and more Indian
people are getting interested in getting their genome mapped to find out the
potential dangers to them in the future. <span style="mso-spacerun: yes;"> </span>Also, as more genomic diagnostic tests will be
covered under Insurance policy this industry will see huge growth going
forward.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">In the early days of Genome
mapping, the costs were prohibitive (lakhs of Rupees) and it took around 2
years to complete a genetic testing but now even in India these can be done in
2-3 weeks with costs ranging from 3000 to 50000-60000. So India now is at the
start of a revolution in the genomics medical diagnostics. Indians are prone to
many genetic diseases related to blood, heart and eyes. Accurate genomic
diagnosis and DNA sequencing is leading to many innovative genomics treatments
like precision medicine and Gene editing. Gene editing is the next big thing in
the precision treatment of genetic disorders where a scissor like enzyme (found
in a Bacteria) cuts out the malfunctioning DNA of a gene and then replaces this
by good piece of DNA developed in lab. <o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">A time will come in the near future
where a doctor would look into the DNA sequencing/genes mapping of an
individual before prescribing any medicine to him. Genetic tests costs of
10000-60000 are within the reach of most of Indian middle class and very soon
we’ll see this as the first test to be done on a newborn in India. There are
many instances where a baby has inherited deadly genetic disorder from his
parents although his parents were not having the same disease. But it happens
because both the parent can have one copy of a faulty gene and they can pass on
this faulty copy of the gene to their child. So genetic testing/mapping can
list out the potential dangers in the genes. This will enable parents to take
informed decisions during early pregnancy or whether to plan future pregnancy
or not. So a person with one faulty gene in its genome has to make sure not to
marry a person having similar faulty gene…and you people have guessed right
that time is not far when instead of Kundali matching people will resort to
Genetic matching.<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-size: 14.0pt; line-height: 115%;">Genomic
Diagnosis is next big thing in medical diagnosis<o:p></o:p></span></u></b></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">So we can easily see that genomic
diagnosis and sequencing is going to be a huge market in India. Right now the
industry size is small and it is around 300-400 cr only but it is only a matter
of time when this industry will see exponential growth. As per estimates this
industry will touch around 1500-1800 cr in next 2-3 years. As these tests are
being available cheaply in India we’ll only see their adoption at faster rate.
India is already staring at a potential cancer crisis in the country as most of
the cancer cases are left undiagnosed due to lack of awareness and availability
of early stage testing. But now as they are available so it is only the matter
of time when players like Strand Life will open more labs across India
spreading awareness about genomics diagnosis. Here, Government has to play a
major role in supporting. Insurance companies will also need to come forward to
support this and they will come forward as early detection of potential genetic
disorder risk will enable them to provide for early treatment of their
customers and pricing their products. So they have a huge stake in the
widespread growth of this industry.<o:p></o:p></span></div>
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<span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">Indian diagnostic
industry is still about normal pathological tests which are 90% of the total
market. Genomic diagnosis is just 10% of the market but it is growing very
fast. For example, USA did 1.6 million genetic tests in 2015 but the figure
rose to 26.5 million in 2019!!! So, right now genetic testing market is nowhere
near the potential if we see the USA market or routine diagnosis market of Rs.
40000 cr. We will see similar type of growth in India also. </span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Also,
Strand bought the routine diagnostic testing business of the USA based Quest
diagnostic in India in 2018 in order to offer comprehensive diagnosis services.
Still, Bioinformatics is the biggest revenue generator for Strand but there is
no doubt that the future lies in Genomics. Strand now has around 27 testing
laboratories in India and recently one of its biggest labs in Haryana was approved
for the Covid-19 testing. <o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Strand’s NGS laboratory is the
first and only facility in India to have the accreditation from the College of
American Pathologists (CAP), and the National Accreditation Board for Testing
& Calibration Laboratories (NABL), respectively. In 2019, it joined the
Global Diagnostics Network (GDN) which is a strategic working group of 10 major
diagnostic laboratories collaborating to generate enhanced diagnostics insights
to improve the delivery of global healthcare.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Bangalore based Medgenome is the
biggest player in India followed by Strand Life. In early 2018 Strand raised 80
cr from Quadria Capital for its genomics business. Not much data is available
about the financial performance of the Strand Life but its topline should be around
70-100 cr however this figure does not capture the inherent strength of Strand.
Until now, Strand has primarily focused on investing big in path breaking
research and achieved remarkable capabilities in the field of genomics. But it
is yet to commercialize its achievements in Genomics and this is where the
partnership with HCG will prove to be a big catalyst.<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;">Clinical
Research:</span></u></b><span style="color: #0033cc; font-size: 12.0pt; line-height: 115%;"> </span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Another field where I think Strand
can achieve big success is the clinical research. Global drug giants are
looking at india for clinical trials and India is well placed for high growth of
clinical research due to presence of superior healthcare system and vast patient
base for variety of diseases like life style diseases, cancer and neuro
disorders. So, clinical research is best placed to become the fastest growing
sector in the life sciences. Strand life has unique capabilities to achieve big
in clinical research in the form of Bioinformatics, Genomics and laboratory
analysis, large database of Indian genome and vast network of hospitals in
India (HCG). So this is one area which can really grow fast in India and there
is no reason why Strand Life shouldn’t do well here.<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-size: 14.0pt; line-height: 115%;">HCG-Well
poised for the growth of Cancer care and Genomics in India<o:p></o:p></span></u></b></div>
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<b><u><span style="color: #0033cc; font-size: 14.0pt; line-height: 115%;"><br /></span></u></b></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Cancer care in India is way
under-penetrated and under-served and this is one of the reasons for the high
cancer mortality rates in India (.68 vs .38 in USA) as detection of cancer is
done at an advanced stage when it has already spread to other parts of the
body. But Cancer crisis is getting very severe in India. WHO has estimated that
1 out of 10 Indians will suffer from a cancer in their life time and 1 out of
15 will die of cancer. Every year some 8 lac people die of Cancer and around 13
lac new cancer patients are added every year which is going to increase fast.
These are very scary statistics. Apart from the fact that Cancer care is
inadequate, the situation is made worse by the concentration of around 95% of
cancer facilities in Tier 1/2 cities and small cities and rural people do not
have timely access to cancer care.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">The likes of HCG and Tata Memorial
Hospital have focused on Hub and Spoke model to penetrate deeper into small Indian
cities/villages. In Hub and Spoke model, Hubs which are capable of treating
complex forms of cancer are connected to other spokes capable of treating less
complex forms of cancers.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">But in Cancer care, timely
detection is the most critical factor. Further, Indian people are mostly suffered
from cancers of breast, Cervical and Oral which have almost 100% survival rate
if detected on time and these are easily preventable. Like, skin cancer survival
rate is 100% if detected early but it drops to 30% and 16% if detected in stage
3 and 4 respectively. That’s why Hub and Spoke model is critical for the Cancer
care in India and as Spokes can easily provide cost effective cancer diagnosis.
Compared to other healthcare streams like Heart care, cancer care is still not
that advanced and still huge efforts are underway to achieve better progress in
the survival rate. Like, cancer diagnosis tools bases on Blood/saliva are a massive
success to ensure the early cancer detection and Strand has already done path
breaking work in this and is ready to reap the benefits of superior efforts and
investments in research.<o:p></o:p></span></div>
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<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">India is not far behind technically
in cancer care compared to the likes of USA. USA has lower mortality rate because
of high rate of diagnosis. Failure to diagnose cancer is a major lawsuit
against hospitals in USA so healthcare professionals in USA do not take any
chance when it comes to cancer and that’s why there are some studies which say
that USA is over diagnosed and over treated for cancer because they do
procedures like Chemotherapy even for early stage cancers which are not recommended
at all. So these survival cases raise the survival rates. Still it does not
mean to say that we are at par with USA…we have vast distance to travel. But our
deficit is related to penetration, technically we are not far behind like in
2018 India received the approval for using <b>Immunotherapy</b> for treating cancer
like kidney cancer, urinary cancer, breast cancer within one year of its
approval for use in developed countries like USA (HCG is also using this). Similarly, I remember in 2018
India got Digital pathology solution produced by Philips Intellisite Pathology
Solutions within one year of its launch. HCG got the same in Apr-2019
and in Dec-2019 HCG became the first in India to fully digitize its HCG-Strand
Laboratory in Bengaluru.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Government role is going to be a
big factor as Cancer care is very costly and still beyond the capacities of
most Indians. Government is already on this and some cancer treatments are
covered under Ayushman Bharat scheme. But still more work is required on this and
Government support will further pave the way for deeper penetration and growth of
cancer care in India.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">But major positive for India is the
low cost of Cancer treatment which is in many cases is around 1/10<sup>th</sup>
of cost in USA</span> and on an average it i<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">s about 2 to 5 times cheaper than
countries like USA and Canada. Hence as I have explained in detail in my Post
related Narayana healthcare, India is going to be a favorite destination for
medical tourism for cancer care also. India is already getting large numbers of
cancer patients from Middle East, Africa and SAARC nations but still we need to
break some myths related to backwardness of Indian cancer care as in cancer
care India is regarded as a secondary destination as compared to other Asian countries
like Taiwan, Singapore.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 14.0pt; line-height: 115%;">Finally time
for some Rituals- Financial Analysis<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 14.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">It may appear on the surface that
HCG is doing badly operationally when one looks at its financial performance-
Turnover of Rs. 1100 (hit by Covid) cr in 2019-20 and Losses before tax of Rs.
119 cr. But just a little bit of scratching of the surface and things will
unfold into a new dimension.</span><span style="color: #0033cc; font-size: 16px;">First of all, there is an impact of Rs. 40 cr due to implementation of new lease standard 116 otherwise the losses are much lower than the reported figure of 119 cr (loss before tax). </span><span style="font-size: 12pt;">Most importantly, HCG has done massive expansions in last 3 years by investing some 700 cr in creating new facilities across India. Numbers of beds
under its network are at 2071 in Mar-20 as compared to 1364 in 2017. Its gross
block is around 1200 cr in 2020 as compared to some 600 cr in 2017. It was a
profitable company in 2017 with NP of 23 cr on revenues of 700 cr. Now, I think
you can easily guess why its performance could have suffered after that-
because of costs related to new expansions hitting the profits with relatively
much lesser growth in topline. Like, its topline growth is around 50% from 700
cr to 1100 cr however depreciation is at 104 cr in 2020 (excluding lease
impact) vs 57 cr in 2017, interest cost of 82 cr vs 23 cr, Employee cost at 208
cr vs 121 cr. </span><span style="font-size: 12pt;">So as
maturity profile of recently commissioned hospitals is low hence they are not
contributing much to the topline but their expenditures are hitting P&L
badly as turnover growth is just 50% but most of the expenditures have been
grown up by more than 100%.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">In Healthcare there is high
operating leverage as most of the expenses are fixed so when a hospital is new,
revenue will be lower but fixed charges like depreciation/lease rentals of
building, machinery, staff payments hit hard. Healthcare uses very expensive
medical equipment so upfront fixed expenses are high so this gives a false
impression of losses. But as most charges are fixed so most of the incremental
revenue goes to bottom line. We can look at the superlative performance shown
by NH this year which will show the operation of operating leverage. I am
taking the performance of 9 months ending Dec-2019 to eliminate the Covid
impact in Mar-2020. Up to Dec-19 the topline of NH was Rs. 2385 cr vs 2096 cr growth
of 14%. But its NP was 107 cr vs 22 cr…a massive jump of 500% as compared to
topline growth of just 14%. And stock price of NH increased from 200 to 400 in
Jan-2020 (<a href="https://oscillationss.blogspot.com/2019/11/narayana-hrudayalaya-ltd-axis-mundi-of.html" target="_blank">click here for the post on NH)</a>. We can see similar impact of operating leverage on the performance of
HCG anytime in this year.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><span style="color: blue;">For valuation, EBITDA can be used but as it has just completed a
major expansion in last 3 years so I do not think it is wise to try to assign a valuation
to it even on the basis of EBITDA. I have seen people using this metric blindly in all situations. Similarly I have seen attempts to value HCG on the
same basis. But as I have told you hospitals are a very different business and it is not easy to apply traditional valuation models on it. Like, for
EBITDA based valuation we can see that the value will be heavily distorted by
the presence of newly commissioned hospitals (large numbers) which are having
negative/break even EBITDA as of now. So these facilities which do not add
anything to the EBITDA of the company will not get any valuation at all!! So if
we try to value HCG on the basis of EBITDA (it shows some 135 cr for Hospital
business in 2019, 121 cr in 2020) then the result will give extremely wrong
valuation because it will not assign any valuation to the loss making/break
even hospitals. In fact, loss making hospitals will further reduce the overall
EBITDA of the company and this will result in the assigning of negative value
to a hospital like -50 cr for its Nagpur hospital. But can a hospital has
negative value or a zero value?? </span><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">So I think the better approach to
value these growing hospital chains is- use EBITDA for matured hospitals with
positive EBITDA and use replacement cost based or revenue based approach for
the loss making/breakeven facilities. Last year Max healthcare was sold at some
25 times EBITDA. But Cancer hospitals are much more expensive to set up and due
to costly equipments the capital cost is very high. Further HCG is a young
entity so I would take 30-35 times EBITDA for valuing HCG. Its mature center
EBITDA is 160 cr (including IVF business) so at 30 times EBITDA the value is
4800 cr. I</span><span style="font-size: 12pt;"> do not have the value for cost
incurred on new hospitals but they have given the debt taken for new hospitals
and the same is 432 cr as on mar-20. We can move ahead with this figure by
adding some value addition in the form of expertise in setting up/planning and
also in the form of first mover advantage in setting up a new hospital in a small
city because this acts as a deterrent against new investments by competition. I
think we can easily take the same at minimum 500 cr.</span><br />
<span style="font-size: 12pt;"><br /></span>
<br />
<div class="MsoNormal">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Let’s also try to value on the
basis of revenue which is 150 cr for loss making centers. Max deal has happened
at some 2.5 times of revenue that too of mature hospitals. So I think we can
take this at 3-4 times for HCG loss making centers which will take the value at
some 450-600 cr which is near to 500 cr we derived on the basis of cost. So
Value of Mature hospital 4800 cr+ new hospitals 500 cr-Debt of 700 cr will make
the value around 4600 cr. It is very high compared to the current market cap of
Rs. 1600 cr. So let’s try to lower the EBITDA multiple to 20 thinking wrongly
that this is due to covid. So at 20 multiple, the value of mature centers
excluding debt is 2500 cr and by adding 400 cr (only debt no value addition) for
loss making centers the value is 2900 cr still 80% higher than the current
market capitalization which shows that it is way undervalued.<o:p></o:p></span><br />
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span>
<span style="color: blue; font-size: 12.0pt; line-height: 115%;">Further, other comparative players like Narayana and Apollo are trading at 6 times of their book value while HCG is trading at 3 times its book value. The likes of Fortis and Aster are trading cheap (at one time and 3 times) but Fortis is fighting its own set of problems and Aster DM i think gets more than 50% revenues outside India so i have left both. Further, as i have shared earlier Cancer hospitals require more capital investments but still if we take 6 times of book value as the basis the valuation of HCG will be some 3200 cr aswhich is near to our other valuations so we can say that our valuation of HCG is on right track. Some people ask me why for some stocks market pays such a high valuation compared to its book value...5-6 times is a big value. Actually stock valuation is where market sometimes shows great creativity. Like, if we can see low book value in case of hospitals in their infancy is an illusion because hospitals are a high capital investment business so in the initial period (say 4-5 years) there are losses due to the impact of high depreciation and other high fixed expenditures which results in big losses and so reduction in the book value. But this reduction in book value is not real as company is building business and growth catalysts are still intact. And with better performance in future due to operating leverage book value will be restored to normal levels. That's why in the initial phase market assigns high valuation multiple to book value but as they are matured this valuation multiple is normalized.</span></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><span style="color: blue;"><u><b>Strand Valuation</b></u></span></span></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">But above valuation of HCG is excluding the
stake of 38% in Strand life which for me will be one of the biggest growth catalysts.
As I have told you earlier there is not much information about the revenues and
valuation of Strand. Like, in Feb 2018 Quadria acquired stake in it for 80 cr
but how much stake it acquired is not known. But as 38% is with HCG, then there
are investors like Kiran Shaw, Reddy, and Promoters etc. So I think Quadria
much have acquired somewhere 10%-20%. At 20% the value is some 400 cr and that
was 2 years ago. After that Strand has acquired the diagnostic business of USA
based Quest in India. But if you ask me sometimes it is better not to try
evaluating something as revolutionary as Strand.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Once I was talking to a friend who
wanted to make a career in Astrology. During our discussions I shared my view
about Astrology that it has lost its credibility because it tries to answer (and
change) everything. Further, most of the things look beyond its reach and
illogical keeping in view its current technical/theoretical advancements. Like
the sun we see in the sky is the sun that existed 8 minutes ago because it
takes around 8 minutes for the light to travel from sun to earth. Same is for
all the stars. A person comes into this world 9 months before taking birth.
Similarly I always feel that equity investing starts to behave like Astrology
when it tries to put a value on everything. Some things are unfolded only on
time and it is better not to make a crude guess of what may unfold especially
with outdated techniques. CAGR, DCF etc. have outlived their lives and for
emerging businesses they have very limited utility. We need something better
now (Even for settled businesses targets announced by brokerage houses do not
hit 95% of times). The likes of Quadria has acquired stake in Strand so they
have to put a value on it but most of the times that value is purely arbitrary
and does not have much perspective. That’s why we see cases like Quess
Corporations where Thomas Cook has made astonishing returns. Thomas cook
invested in Quess in 2013 and by 2020 the value of its investment increased by
some 25 times!! But in 2013 nobody could guess that by 2020 the same can be 25
times. In fact everybody would have laughed at. So the price paid by Thomas
cook was just the funds needed by Quess for their future growth and so the
valuation was arrived for the sake of valuation not out of some precise
calculation. Nobody can evaluate a disruption and innovation early in its life.
Same thing I feel for Strand and I think it is good that we are not required to
put a value for strand. I only wish for HCG to raise its stake in Strand in the
future.</span></div>
</div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span>
<span style="color: blue; font-size: 12.0pt; line-height: 115%;"><b><u>CVC Investments will be a game changer</u></b></span><br />
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Further, to make the valuation
exercise more confusing the company has sold 31% stake to a private equity player
CVC at a valuation of 1600 cr. So, one can feel that the valuation offered is
quite lower. But I think there may be some valid reasons for this. Main reason
can be the devastating impact of covid on all businesses and healthcare was
also badly affected and there are high chances that healthcare will remain
stressed due to negative impacts on the incomes of people and this will hit
their capacity to spend on healthcare services. HCG was having a debt of 700 cr
(some 30-40% in foreign currency) and with not much help from government for
healthcare sector I think even their survival was at stake. So there was high uncertainty
in Apr-may-2020 about the impact of Covid and this might have affected the debt
reduction plans of the management in 2020-21 as Covid will easily wipe out 2-3
quarters this year. HCG stock price was beaten down to some 60 levels in
Mar-20. Hence, management realized the urgency to reduce the debt and this
might be the reason for going for the stake sale. In May-20 price offered was
100 which was increased to 130 in June-2020. HCG has got some 500 cr from the
stake sale and this they will use for the debt reduction and this will make
things much better for them.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">I also think that the present
situation created due to Covid crisis will hit the business of many hospital
chains and those with weak balance sheets will feel the more pain and this may
help HCG doing much better even in tough times and we may see some management
contracts happening with other local hospital chains. Further, the scope of
deferment of cancer care is very less as compared to other healthcare problems
so HCG should not face that much difficult time as may be felt by other
healthcare services.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">HCG is planning to sell its
fertility business under Milann brand which is having revenues of 70 cr. I
never liked HCG doing this unrelated business especially when the scope of
growth in the core cancer care is so high which requires huge capital
investments. Actually these types of unrelated acquisitions raise the doubt of
fund leakages by the management because why a wise man would attempt this type
of adventure when they are hard pressed in their core area. Still, I want to
give them the benefit of doubt keeping in view the otherwise good reputation and credibility of the management and the fact that HCG did this in 2013 way before their
IPO and most importantly the presence of marquee investors in the form of IFC, Tamasek,
CVC raises the trust factor to great extent. Now, they have decided to sell
this fertility business which is a good decision. So I hope that things are
going to get better for them from hereon because HCG has already suffered quite
a bit. They went for massive expansions but were hit badly by the onslaught of
Covid. But current valuations are already discounting (over-discounting) all
such sufferings and it is one of the best play on the growth of Genomics, Genomic
diagnosis and Cancer care in India.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><span style="background-color: white; color: #0033cc; font-family: "arial" , "tahoma" , "helvetica" , "freesans" , sans-serif; font-size: 13.2px;">(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. reach me at oscillationss@yahoo.in).</span></span></div>
<br /></div>
Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com17tag:blogger.com,1999:blog-8629364998048667702.post-79689971412471692012020-07-21T00:04:00.001+05:302020-07-21T00:40:40.293+05:30Clariant Chemicals (India) Ltd: Updates<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="color: blue;">Dear All, Clariant chemicals has
just performed as per our expectations and given great returns so far keeping
in view in the tough market situation.<span style="mso-spacerun: yes;"> </span>Congratulations
to all those who had picked it when it was lying low in a corner. Clariant was
advised around 270 in Nov-2019 <a href="https://oscillationss.blogspot.com/2019/11/clariant-chemicals-india-ltd-solid-for.html" target="_blank">(click here)</a> and <a href="https://oscillationss.blogspot.com/2020/02/clariant-chemicals-and-basf-india.html" target="_blank">(here)</a> for earlier posts on it. It has touched 600 recently so a good 120%
return.</span> I added more of this one at 230 in Mar-2020 when market was hit badly
due to Covid crisis. In Nov-19 when we entered, it was a special condition
stock as it was expected to sell its Masterbatches and Pigments business to
focus more on high margin specialty chemicals business. I was expecting it to
sell the same at anywhere around 1500 cr to 2000 cr valuation while it was
available at just 600 cr market cap. So the valuation discount was massive.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
So as of now, it has sold off its
Masterbatches business for 426 cr which is around 17 times its previous year
EBITDA just as per our expectations. The turnover of Masterbatches business was
284 cr so it has got the valuations of 1.5 times of turnover. And as expected
it has announced special dividends of Rs. 140/- per share distributing almost
entire sale proceeds.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Now, Clariant is expected to sell
its pigments business also by the end of 2020. Its Pigment business in India is
much bigger than Masterbatches and so we can hope for another big dividend this
year. Its Pigments business clocks turnover of somewhere around 700 cr and it
is generating good profits which after acquisition by any related sector
company will generate even better profits so i think it should get much higher
value...its pigments business EBITDA is around 60-70 cr and at 15 times of it
or 1.5 times of turnover makes it 1000 cr and also there is some land costing
25 cr in the books so i think with this the figure should grow bigger. But
still after the sale of pigments, there is specialty chemicals business with
topline of some 70-100 cr this year. So conservatively, I had valued Rs. 1500
cr as par value for Clariant.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc;">So
few days back when it hit 600 it was trading around 1400 cr valuation. There
was dividend tax issue involved so I sold all my holdings at 580 because I booked
some short term capital losses which would take care of the short term capital gain
from the sale of Clariant. Actually I found it a bit overheated at 1400 cr
valuation because due to covid there may be some overhang on the sale of
Pigments business and its final valuations because pigments is relatively lower
margin business. So as I was getting valuation near to my par valuation much ahead
of the real transaction so I decided to sell this one.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
Now, after the sale of Pigments
business it will be left with small specialty chemicals business which is going
to be the focus of Clariant globally. Turnover of this business is very small
at 60-70 cr so I think delisting appears a much likely option for the
management though I would like them to continue and grow this business through
listed arm but chances are very less. So my buying this one again would depend
upon their delisting decision...if not then I may invest more in BASF or Tata
chemicals.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
As on Mar-2020 Clariant has some
106 cr cash in books as compared to 40 cr last year as it has reduced inventory
and debtors. That’s why apart from Rs. 140/- as special dividend they have also
declared Rs. 11 as final dividend for FY-2019-20. I don’t know how much of this cash of 106 cr pertains to specialty chemicals business but specialty chemicals is a high
margin business. Further, they still have valuable land in their books costing
some 25 cr and in case large unused land is not the part of sale of
pigments/masterbatches business then this may add further juice to the
delisting offer price. But what could be the delisting price (in case it is
offered) require some more data crunching about land valuation etc. So I’ll post
further updates in the course of time.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
But let me share something on
this. When there was no deal happened, at that time Clariant was trading at
very low valuations. But the stock market valuations are more about “price”
than “value”. And price is influenced more by temporary forces and there may be
instances where temporary forces may put tremendous negative pressure on the stock
price but even in those cases value remains intact. The need is just to keep
the faith in the management and let the tough time pass. Just remember- Price
is transitory but Value is the fundamental. So at 1400 cr valuation for
Clariant we are seeing price covering the distances towards true value of
its business. So there may be times when a worthy stock is hit badly by
temporary forces (whether of stock market or industry forces) then we just need
to keep the faith in the capability of management to sail through the tough
times with their strategic planning and execution. Just like in case of Tata
power where I have invested quite a bit when it was at 29 in Mar-2020 and is still think it is a good buy even now at 49. I think,
management is doing a fantastic job in solving the issues one by one and Tata
power may be the turnaround story of this year.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc;">(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. reach me at oscillationss@yahoo.in).<o:p></o:p></span></div>
<br /></div>
Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com2tag:blogger.com,1999:blog-8629364998048667702.post-22432163728907040682020-07-17T02:18:00.002+05:302020-07-18T00:42:35.395+05:30Indian Public Sector Undertakings (PSUs): Pride or Prejudice- Updates<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
In the recent post on PSUs (<a href="https://oscillationss.blogspot.com/2020/07/indian-public-sector-undertakings-psus.html" target="_blank">click here for the post)</a>, I wanted
to explain the impact of Govt/PSU investments on the economic growth which is
much deeper and complex than checking their profit & loss account
statement. PSUs mobilize resources and channelize investments in an economy
differently so their performance shall be judged from macro level of socio-economic
impact rather than micro level of linear net profits. But I left this segment in
that post as I had decided to explain the same in the next post on development of semiconductor
industry in India. But now I have decided to put a brief note on this in the blog
post on PSUs. I have added the same under para A(c) of the post. I am putting
the same here also:<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc;">Net
profit is a wrong measure to evaluate the contribution of PSUs to economic
growth<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
I have seen many attempts to
evaluate PSUs by comparing their performances (Profit & Loss account) with
private sector counterparts and straightforward conclusions are derived fairly
easily just on the basis of profit & loss statement. But great thing about
life is that it is multidimensional (not just 3D). Net profit is just one
dimension of multi-dimensional growth matrix and this growth matrix becomes more
complex when we raise the platform from micro level (Firm level) to macro level
(Economy level).<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Growth (profit) for a corporate
firm is an individual (linear) phenomenon while for the economy the same is a comprehensive
(inclusive) phenomenon. Actually GDP is a composition phenomenon but GDP growth
is a distribution phenomenon. Economic growth occurs when wealth is
distributed. <span style="color: blue;">That’s why when a private bank like ICICI decides to close a loss
making remote town branch (or decides not to open a branch) then this will
increase their profits but when SBI does the same then it does hit their
profits but it results in economic growth (wealth creation). Another way to see
this opening of a bank branch by SBI is that it distributes income (wealth)
from SBI to village in the form of investments in Branch (assets/employees) which results in further growth of wealth (Because village as a
whole also grows due to availability of banking... result is the higher production and so economic growth). So loss to SBI is an investment for the economy.</span> Hence, net profit is a very
inefficient barometer to measure growth at macro level (economy) just like GDP which is good enough to measure “Income generated in an economy” but not “wealth”
created.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
I have seen SBI branches in
remotest places in India and so it is not appropriate to compare SBI to other
private sector banks just on the basis of net profit. Once I was posted in a small town in MP (Sarni) and there was no other mobile services working properly (no tower) except BSNL and BSNL broadband internet was a pleasant surprise for me
when dongles of other providers were too slow. So value of PSUs can’t be judged
on the basis of net profits but their contribution to economic growth which I think
is massive. Like PSUs are required to procure around 25% of their procurements
from MSME vendors so this process may result in higher costs and execution
delays but the impact of economic growth is much higher in the form of development
of these MSMEs and employment generated through these MSMEs. We can see PSUs
are distributing their wealth more comprehensively. Concentration of wealth in
the hands of few is not good for an economy. It has to be distributed. Socio-economic
impact of PSUs is very high.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Like, the role and importance of
Indian railway can’t be gauged from profit and loss account alone. Now, as private
players will be allowed to run passenger trains so they can choose profitable routes thus maximizing profits. So there is a much higher purpose behind PSUs and
if these can be made better then they can provide massive boost to economic
growth. As they are dealing with public money so there are processes, checks
and control measures to avoid any willful mishap like fraud etc. So there are
tendering norms (against selective buying), L1 norms for awarding contracts, regulatory
agencies like CAG, CBI and CVC etc. This is to ensure the fulfillment of
objectives and to stop the misuse of power and public money. So these checks
and controls can make PSUs bulky and slow moving at times but safeguarding of
public money is also equally important. The need is to choose a midway to allow
more freedom.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
That’s why private firms are more
nimble and a firm like Reliance can source crude oil at spot market to get the
benefit of big temporary fall in prices but state owned refineries like IOCL
are required to issue tenders for the same. This is one of the reason for
Reliance to have high GRM (It has highest Nelson Complexity Index for its refineries;
Recently IOCL’s Paradip refinery is having high NCI. Then Reliance’s refineries
are near coast saving money, big size). But now as controls/managements are getting
better so state owned refineries are also allowed to source crude at spot
prices. Recently IOCL has set up a trading desk in Delhi to source cheap crude
at spot prices just like Reliance. IOCL/HPCL/BPCL are setting up a massive
refinery (60MT almost double of Reliance’s biggest) at west coast.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
But there is a risk with the
concentration of power/agility in a thundering juggernaut like Reliance. Fraudulent
managements can siphon off the shareholder’s wealth by taking dubious decisions
thus leaking out the money. We have seen many examples recently in the cases of
Vijay Mallaya, Yes bank, DHFL, Videocon, IL&FS. So there was a purpose
behind CAG and CVC to have an eye on the working of PSUs and this acts as a
check against these destructive frauds though this has a cost on PSUs in the
form of bulkiness. We can’t afford a Videocon, Satyam in a critical sector like
defense. But still there are better ways to ensure more freedom for better
agility (which I’ll discuss in a separate post in more details) by empowering
their managements…like Singapore’s Temasek Holdings which acts as Investment
company where portfolio companies are managed by their independent boards.
Tamasek can independent business decisions and Singapore govt has no role in
it. . However, in any case the RISKS of existence threatening frauds are much
lower in PSUs.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
And if you ask me then these
lesser risks should lower the cost of equity capital of a PSU just like
bulkiness may raise the cost of equity (At times I find calculations of cost of
equity somewhat funny and not much worthy in practical life…but still a fair theoretical
concept to understand the factors making a firm more risky than the other.) <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
PSU is not an Indian concept
and they are still used globally for achieving socio-economic goals. In fact, State owned enterprises (SOE) have
played major role in the stunning economic growth of China. Government is
required to invest in sectors which are strategic for the nation long term
growth and safety like Defence, Energy, Mining etc. Government is required to
play a major role in high risk sectors where private sector has lesser appetite
for risk like take for example Semiconductor, AI, advanced telecommunication
tech etc. Govt. has access to cheap capital and it can afford to take risks
much better. Indian private sector has failed to capture and develop the
massive opportunities in sectors like Solar power, Electronics goods, Semiconductor,
telecom equipment and so now it is better if Govt. (through PSUs) invests in
creating these capacities in India.<span style="color: blue;"> I’ll discuss more on Govt. investments in
these sectors in a separate post on development of semiconductor industry in
India.<o:p></o:p></span></div>
<br /></div>
Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com2tag:blogger.com,1999:blog-8629364998048667702.post-89649518142277898332020-07-12T04:13:00.005+05:302021-06-25T01:20:36.787+05:30Indian Public Sector Undertakings (PSUs): Pride or Prejudice<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: left;">
<span style="color: blue; font-size: large;">(Stocks covered: RITES Ltd, Bharat electronics Ltd, BEML Ltd, HAL, CONCOR, ELGI Equiments Ltd, Laurus labs, Sasken Tech)</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">Ignorance is the biggest
hindrance to growth but still the good thing about ignorance is that it itself
does not pose as a hindrance…it does not obstruct the path on its own. And
that’s exactly why Prejudice is most dangerous because it can mislead to wrong
path while the traveller is assured of righteous which eliminates the chance of a course correction. Wrong path is more destructive than no path. And so we can
see that religion is not marred by ignorance but prejudice. Most of our wrong
choices and mistakes are not out of ignorance but prejudice.</div><div class="MsoNormal" style="text-align: justify;"><o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">Here, I remember when IPO of one
of the defense PSUs, Bharat Dynamics Ltd was launched. At that time a message degrading
R&D capability of BDL was doing the rounds that India's premier missile
manufacturer spends as much on research as our hair oil company Marico. The
message said that for 3 years period 2015/16/17 Marico spent some 80 cr on
R&D while BDL spent just 85 cr. That message also came to me. But I told
them to stop spreading nonsense. Why nonsense? Because PSU defense companies
like BDL, BEL, HAL etc. do not do the major R&D work for their products. It
is DRDO who spends money on R&D as per Govt. budget allocation (Ministry of
Defense. However ISRO reports to PMO, which is busy in all other works so does
not interfere much and that’s why ISRO has much freedom and much advanced
R&D system). DRDO has established these PSU’s painstakingly and over
decades. Like BDL was founded by some 60-70 scientists of DRDO in 1969.</div><div class="MsoNormal" style="text-align: justify;"><o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
So DRDO does the major R&D on
behalf of these PSU’s. DRDO develops the foundation technology and then the
final manufacturing is done by these defense PSU’s. Just like DRDO developed
the Akash missile's foundational technologies then BDL and BEL are doing the
manufacturing of this. So one needs to add the R&D done by DRDO before
arriving at misleading conclusions.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Indian PSU’s are often ridiculed
and blamed for being inefficient, lethargic, living on government support and
devoid of any energy. Indian PSU stocks trade at extremely lower levels as
compared to their private counterparts. Talks are there always to sell them to
private sector in order to make them “better”. Government is also planning massive
disinvestment process of these PSUs.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
But are these PSUs really that inefficient?<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">A) R&D
investments are the basic mantra for economic growth<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
Recently I was talking to an
analyst about investing into PSU stocks like BEL, Rites. He told me that these PSUs
are useless as they lacked terribly in innovation. Then I asked him whether he
knew the share of R&D in India by private sector. He answered in negative.
I told him to give a ballpark figure keeping in view his high regard for
private sector. He said that that should be the highest. But I told him that
things are actually in reverse. Private sector investment in R&D is the
lowest in India at 37% against a global average of 71%. Most of the R&D
(63%) in India is still being done by government sector where central Govt. has
45.4% share, PSU has 4.6%, State govt. has 6.4% and Higher education sector
6.8%. So, central Govt/PSUs have 50% share of Indian R&D expenditure which
is massive. However, Govt. share in R&D in US is 10%, in China it is 15%,
Canada/UK 7%, Korea 11%. Our State governments need much work to do here but this
also shows that there is a tradeoff between wasteful subsidies and innovation.
In Govt/public sector, DRDO has maximum share of 31.6% of R&D expenditure
followed by Department of space (DOS) (19.0%).<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
India lacks badly in R&D and
we spent 0.7% of its GDP on R&D in 2017-18. Most of the developed countries
spent more than 2% of their GDP on R&D like the US (2.8), China (2.1),
Israel (4.3) and Korea (4.2). Our spending is around .7% for almost two decades
now. This is one of the reasons for the dismal growth of our industries in last
decade or so. We were/are not good enough to compete at global levels. That’s
why in spite of being one of the biggest markets of smartphone not a single
component of smartphone is manufactured in India. Our consumer electronics
goods industry is fully under the control of global giants and Indian players
are reduced to fringe players.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Further, most of the R&D in
private sector is done by drug/pharmaceuticals and transportation/auto sectors…around
50%. Tata motor (around 4000 cr) is the big gun here and in fact at 99<sup>th</sup>
place it is the only Indian in top 100 global spenders in R&D and if we add
R&D of JLR (some 15000 cr) then Tata motor is at 13<sup>th</sup> place. <span style="color: blue;">You will be surprised to know that defense PSU giant Bharat Electronics Ltd. spends around 9% of its turnover on R&D!!! Its top-line is 12000 cr.<b> </b></span>Further,
foreign firms also account for major chunk of R&D being done in India which
is included in this 37% share of private sector. And if we look further deeply
into R&D done by our private sector we can see that the focus is mostly on
process or incremental innovation to reduce the cost or improving the
efficiency…the focus is never on breakthrough product. That’s why though we
spend quite a bit in Pharma but still we just export low cost generic medicines
and compete on the basis of cost and as other countries like Philippines are
also upping the ante in generics so the sailing is getting tougher for Indian
generic players. Our manufacturing exports include low margin high volume
products like refined petroleum, cotton, leather goods etc. There is no Indian
brand in manufacturing at global level.<br />
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;">a) R&D
work by Indian defense organizations<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
On the contrary, look at the
achievements of ISRO in space technology which has catapulted it into being one
of the biggest commercial players in the space industry globally. ISRO has
developed space technologies almost scratch in India as no other country is
willing to share highly sophisticated and premium space technology. Apart from
building these from scratch, ISRO has done the same at extremely low cost.
These low cost but premium products will pave the way for ISRO to achieve grand
success commercially across the globe. ISRO’s Mangalyaan mission cost $74
million (500 cr) against $671 million spent by the NASA on similar missions.
The cost was lower than the cost of Hollywood blockbuster movie Gravity.
Similarly, Chandrayaan-2 mission last year cost around Rs 978 crore. Though
there is a difference in the tenure of the missions of NASA and ISRO and
shouldn’t be compared one to one but still they are way cheaper and the main
aim was not to spend longer time at Mars or Moon but to demonstrate/test the
technical ability to reach there. In the future, we will see more advanced,
mission critical and complex missions to space.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjd_OjbtehsGLg2u5QLsgQpm7U-OVUxVoT1fHHN3JjlWUzPxlOAoldtFAV2t-r6diII-Y1PfgfZpwGIUcORM4XhZiqZ1USMcRduCLk169b0x0aX58Kld82pmRZm7rWBJp3V9r1gey2kdbM/s1600/isro.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="440" data-original-width="660" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjd_OjbtehsGLg2u5QLsgQpm7U-OVUxVoT1fHHN3JjlWUzPxlOAoldtFAV2t-r6diII-Y1PfgfZpwGIUcORM4XhZiqZ1USMcRduCLk169b0x0aX58Kld82pmRZm7rWBJp3V9r1gey2kdbM/s320/isro.jpg" width="320" /></a></div>
<div class="MsoNormal" style="text-align: justify;">
Some people think that low cost
is due to low cost of engineers and scientists in India. But this is not the
case. Space missions involve thousands of hi-tech critical components
where there is no scope for failure. Sourcing these components from other
countries would have been very costly so ISRO marched towards the tough part of
developing these locally. And while doing so, ISRO has created and promoted
many private players who have supplied these components to ISRO at fraction of
cost of importing it. ISRO built the technology and the same was licensed to
private players who then did the manufacturing.</div>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Similarly, our Navy has also done
quite a work in R&D and India is almost self-sufficient in manufacturing
Hi-tech super critical navy ships required by Indian navy. In Missiles, DRDO
has done a great work and we are almost self-sufficient in missile technology.
Recently, Brahmos missile (joint venture with Russia) has been a grand success
story of DRDO which is being touted as one of the best globally.<span style="mso-spacerun: yes;"> </span>It is capable of travelling at speeds of up
to Mach 3.0 (three times the speed of sound, around 3400 KMPH) and it travels
at low altitudes so it is very difficult to be detected by radars. China is extremely worried over BrahMos because these are not even detected by S-400 missile defense
systems china is procuring from Russia. Just before hitting its target, BrahMos
performs `S-manoeuvre’ to evade any anti-missile defence system which makes it
very deadly. The high speed gives it enormous kinetic energy which can rip
apart even large warships. In case of a short swift war with China, India can
wreak havoc at Chinese military infrastructure, radar and air defense systems. <span style="mso-spacerun: yes;"> </span>India is planning to sell these to Vietnam
& Philippines which has made china extremely worried because it knows that
it has no answer to these missiles. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxopP6H4uVfcuCTye1uqMN_gYScEA0SOrVd-ueEzfskzihHNcbQ9HqVShsL3FLay-WOHXE2jW2naBS9Db83NF5dMmCq_Mt7KQ_pTxf4lFBjWFYnoVGY9S56zChUru3JmMwChyYGs-iZpk/s1600/AKASH-AIR-DEFENCE-WEAPON-2-1.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="484" data-original-width="768" height="201" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxopP6H4uVfcuCTye1uqMN_gYScEA0SOrVd-ueEzfskzihHNcbQ9HqVShsL3FLay-WOHXE2jW2naBS9Db83NF5dMmCq_Mt7KQ_pTxf4lFBjWFYnoVGY9S56zChUru3JmMwChyYGs-iZpk/s320/AKASH-AIR-DEFENCE-WEAPON-2-1.jpg" width="320" /></a></div>
<div class="MsoNormal" style="text-align: justify;">
Surface to Air Akash missile was developed
by DRDO and manufacturing was taken by defense PSUs BDL (Bharat dynamics Ltd)
and BEL (Bharat electronics Ltd) and both have also engaged private players
like Tata and L&T for critical components like missile launchers and almost
300 other small private players for smaller components. Akash has a kill
probability of 88 per cent for the first missile and 99 per cent for the
second. Almost 90% of Akash missile components/cost are made in India.</div>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSfKCaUo68rmQWSPxKXC9pO7pfsay3SJsElnOoHsdU20xiJBjYrUAvohgy9wcr3EHJUPWQLwX9lgT1mh8OQ90yEpcqGv2MRkwLKdY48iR3BtYJ3nPBy-pVga1almrTdDypUkiDaCgMeks/s1600/885495-872187-brahmosmisile.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="720" data-original-width="1280" height="180" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSfKCaUo68rmQWSPxKXC9pO7pfsay3SJsElnOoHsdU20xiJBjYrUAvohgy9wcr3EHJUPWQLwX9lgT1mh8OQ90yEpcqGv2MRkwLKdY48iR3BtYJ3nPBy-pVga1almrTdDypUkiDaCgMeks/s320/885495-872187-brahmosmisile.jpg" width="320" /></a></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Recently, DRDO has developed
Seeker technology and used the same on BrahMos missiles successfully and this
will lead to the savings of around 15000-20000 cr as the same are imported
right now and this comprises some 30-35% of the cost of a missile. Seeker
technology equips a missile to hit its target with pinpoint accuracy and this
technology is a closely guarded secret so local development is a great
achievement. There is already demand for both these missiles from other
countries and very soon we’ll see India securing large export orders for both
these.</div>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
People in India try to ridicule
Hindustan Aeronautics Ltd (HAL) for huge delay in making India’s first Light
combat aircraft (LCA) “Tejas”. But delay was mainly caused by regular changing of
specifications/requirements by IAF. We don’t always need the best technology in
the world. We need better technology than the rivals. The best way to promote
localization is to create a basic product which can serve most of our needs and
then we can make incremental improvements in it over the period of time. In
case of Tejas, the responsibility of making incremental improvements should
have been given to IAF. Similar model is used by Indian Navy and this is one of
the reasons of success of local manufacturing in Navy.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Tejas LCA was meant as a
replacement for ageing MIG-21 and it was to fight against Pakistan’s JF-17
(supplied by China). And Tejas is a better aircraft than MIG-21 in all respect.
Like, I was reading that Tejas has a tighter turn radius of 350 metres, smaller
than F-16 which helps in dogfight. And F-16 is better than JF-17 anytime. Tejas
have an advanced autopilot feature that automatically pulls up Tejas if it is
going down too fast and crossed the danger line of altitude and this makes
Tejas one of the safest fighter aircraft. JF-17 don't have such features. In
case if engine failure, Tejas has a parachute feature to regain control or
minimize casualty. In the absence of these safety features, 3 JF-17 have
already been crashed. JF-17 was poised to compete against Tejas in Lima-2019 Aerospace
Exhibition and also at Bahrain International Airshow to woo the potential
customers but at the last moment JF-17 had pulled out both times.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
India has very large defense
budget and it is clear that we have no other option but to focus on local
procurements. This no option may be the thrust India needs to focus within
India. If India wants to be a significant player in defense export market then
first of all these products should be used by Indian army itself. Like, a
number of countries has shown willingness for Tejas but unless the same is used
by IAF other countries will also be apprehensive. Tejas should be used and
tested first by IAF improving/rectify it further before offering it for
exports.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
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Tejas has used General Electric
F404 engine and its radar system has been procured from Israel. But still a
fighter aircraft is not just about engine alone. Engine costs some 25% of the
total cost of a fighter aircraft. But other critical components have been
developed locally in India like fuselage, landing gear, AESA radar, control
system, networking, sensors, weapon management system, braking system, oxygen generator
and many other subsystems. Aeronautical Development Agency (ADA) undertook the design
work on Tejas with zero previous experience but still they did a great work.
ADA had used advanced technology at every opportunity-advanced computational
fluid dynamics for the aerodynamic design, a mock-up designed for the first
time in India entirely on the computer, advanced carbon fibre composite
material for the structure, advanced avionics in the cockpit. India is also
working on developing indigenous Kaveri engine to replace GE F404 engine in the
future upgraded versions of Tejas and it will take another 2 years or so.<br />
<br />
Just remember that these defense
products developed by our defense organizations are one of the most complex,
sophisticated and strategic products which are critical to the national
security of a nation. They involve very complex and highest levels of technology
and expertise…much higher than any other industrial product (our regular cars,
machines etc.). And our defense organizations are making complete products not
just components. And if other countries are showing interest in procuring these
(deals are at final stages) then that shows that our defense organizations have
been successful in developing globally acceptable high quality/strategic
product while our private sector firms have not achieved much success in
producing globally accepted premium quality industrial products.<br />
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<b><span style="color: red;">b) Government
R&D investments have done better<o:p></o:p></span></b></div>
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<b><span style="color: red;"><br /></span></b></div>
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So as we can see from above,
Govt. R&D investments have produced great results in developing niche high
tech critical technologies in space and defense. On the contrary, if we can see
the R&D efforts of private sector in IT services, Pharma and Auto sectors
which comprise the major chunk of R&D investments-the focus is never on
breakthrough technology development. Our IT sector survives on low cost of
highly skilled professionals. In spite of so much talent we could never
developed/created an IT product like Java, Oracle. In Auto sector, R&D
efforts are mainly driven by the need of the hour due to stiff competition from
global giants. Our behemoth Reliance industries spends just .5% of its topline
on R&D. Somehow, the focus is not on innovation though there are valid
reasons for this. Like in medicine, tight control over pricing of the medicine
push away the investments in developing new breakthrough medicines because
developing a new cure costs billions.<o:p></o:p></div>
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<span style="color: #0033cc;">I
have seen people talking about PSUs that they had been formed to create
employment in the country. But employment was just the secondary objective. The
main aim behind the creation of PSUs was to develop critical technologies in
heavy industries and strategic/core sectors for self-reliance. Due to focus on
developing high end technologies after independence, India was ahead of most of
other developing countries. </span>But then we lost the track in developing and
further modernizing these technologies. Private sector was playing the role of
assistant to Govt. in core sectors. <span style="color: #0033cc;">Non-core sector
was left for private sector but private sector was content in having monopoly
conditions in protected market and this hit us very badly in product
development. When our economy was opened, global hi-tech players just threw our
local manufacturers into the dust.<o:p></o:p></span></div>
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After the onslaught of global
giants, when private manufacturers were crushed but heavy industries PSU like BHEL
still managed to hold their forte. BHEL is in power sector producing top
quality power equipments which are powering India for almost 60 years. Power plants
constructed by BHEL are running smoothly even beyond their useful life all over
India that too when Indian coal has very high ash content but BHEL was able to
develop technology to handle this issue efficiently. <span style="color: #0033cc;">BHEL
still is one of the biggest R&D spenders in the country; it spent 750 cr in
2017-18 (820 cr in 2018-19) which is 2.7% of its turnover and it was at 10<sup>th</sup>
place in India. Our Auto maker Maruti spent 1.1% of its topline on R&D.</span>
The fortunes of BHEL in recent years were hit hard due to the entry of cheap
Chinese players in power sector and focus on solar power from thermal due to
pollution woes. Chinese players have inferior power products but they dented
the market due to low cost which is due to the fact that Chinese players get
big export subsidies, low tax and interest rates while BHEL has to fight with
higher tax and interest rates. This was something which should not have been
allowed to happen at the cost of local players. We can’t allow foreign players
to capture our market by undercutting. They should compete on merit. <o:p></o:p></div>
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<span style="color: #0033cc;">(Image BHEL: Gas Turbine)</span><br />
<span style="color: #0033cc;"><br /></span>
<span style="color: #0033cc;">It is
worthwhile to mention that in 2018-19 BHEL secured 97 patents in India which
was the highest for an Indian company. It is noteworthy that BHEL earned this
in the presence of our IT giants like TCS/Infosys. </span>Though global chip
maker Qualcomm was the leader with 405 patents followed by BASF with 232
patents granted, Tata group was at 3<sup>rd</sup> place with 211 patents. In
2018-19, apart from Tata, BHEL was the only Indian firm in the top 20 patent
winners in india. At present, BHEL is working on to develop technology for
generation of methanol from high ash Indian coal.<br />
<br />
<b><span style="color: blue;">As shared earlier Defense PSU giant Bharat Electronics Ltd. spends around 9% of its turnover on R&D!!! Its topline is 12000 cr.Another PSU BEML has spent 3.4% (104 cr) of its turnover on R&D in 2019-20.</span></b><br />
<b><span style="color: blue;"><br /></span></b>
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One of the reasons for lower
success of make in India in defense is the stiff technical specifications (GSRQ)
by Indian Army while procuring defense products which is difficult for the likes
of DRDO, Defense PSU, Ordnance factories and private sector. Now there are
calls from ministry to lower down these specifications so as to promote local
products because we don’t need advanced products like US as we are not fighting
wars across the globe. We are to guard our borders so we need to focus on our
requirements. Army/Defense sector can do improvements on these later on. Similar
model was followed by China and many other countries to grow local defense
industry.<o:p></o:p></div>
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Turther, Govt undertakings operate under
the eyes of CAG, CBI and CVC (called 3Cs) which limit their freedom and risk
taking ability otherwise they can do even better. These agencies question every
decision taken by PSUs, so even in R&D they are forced to avoid taking high
risks on breakthrough innovations due to fear of failure and questioning from
these 3Cs. In fact, in order to free these PSUs from the eyes of 3Cs, govt.
wants to bring down the ownership in these PSUs below 51% (though there is
issue regarding the meaning of “Control”). <o:p></o:p></div>
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Recently, India has secured an
export order (300 cr) of Weapon locating radar (WLR) from Armenia competing against
defense power-house Russia and Poland. WLR has been developed by DRDO and BEL.
Now India is looking at other markets for this as India has edge because of
lower price with more or same specifications. So far India shied away from
defense export markets due to geopolitical issues but now government is looking
at export market very seriously. <o:p></o:p></div>
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<o:p></o:p></div>
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<span style="color: #0033cc;">We
can see that apart from investing much higher in R&D as compared to private
sector (Indian companies only) Govt. sector has been able to create and develop
more innovative products and technologies. In other words, their return
quotient or innovation index is much better than private firms.<o:p></o:p></span></div>
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<b><span style="color: red;">c) <u>Net
profit is a wrong measure to evaluate the contribution of PSUs to economic
growth<o:p></o:p></u></span></b></div>
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I have seen many attempts to evaluate PSUs by comparing their performances (Profit & Loss account) with private sector counterparts and straightforward conclusions are derived fairly easily just on the basis of profit & loss statement. But great thing about life is that it is multidimensional (not just 3D). Net profit is just one dimension of multi-dimensional growth matrix and this growth matrix becomes more complex when we raise the platform from micro level (Firm level) to macro level (Economy level).<o:p></o:p></div>
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Growth (profit) for a corporate firm is an individual (linear) phenomenon while for the economy the same is a comprehensive (inclusive) phenomenon. Actually GDP is a composition phenomenon but GDP growth is a distribution phenomenon. Economic growth occurs when wealth is distributed. <span style="color: blue;">That’s why when a private bank like ICICI decides to close a loss making remote town branch (or decides not to open a branch) then this will increase their profits but when SBI opens a branch in a remote town/village then it does hit their profits but it results in economic growth (wealth creation). Another way to see this opening of a bank branch by SBI is that it distributes income (wealth) from SBI to village in the form of investments in Branch (assets/employees) which results in further growth of wealth (Because village as a whole also grows due to availability of banking... result is the higher production and so economic growth). So loss to SBI is an investment for the economy.</span> Hence, net profit is a very inefficient barometer to measure growth at macro level (economy) just like GDP which is good enough to measure “Income generated in an economy” but not “wealth” created.<br />
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I have seen SBI branches in remotest places in India and so it is not appropriate to compare SBI to other private sector banks just on the basis of net profit. Once I was posted in a small town in MP (Sarni) and there was no other mobile services working properly (no tower) except BSNL and BSNL broadband internet was a pleasant surprise for me when dongles of other providers were too slow. So value of PSUs can’t be judged on the basis of net profits but their contribution to economic growth which I think is massive. Like PSUs are required to procure around 25% of their procurements from MSME vendors so this process may result in higher costs and execution delays but the impact of economic growth is much higher in the form of development of these MSMEs and employment generated through these MSMEs. We can see PSUs are distributing their wealth more comprehensively. Concentration of wealth in the hands of few is not good for an economy. It has to be distributed. Socio-economic impact of PSUs is very high.<o:p></o:p></div>
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Like, the role and importance of Indian railway can’t be gauged from profit and loss account alone. Now, as private players will be allowed to run passenger trains so they can choose profitable routes thus maximizing profits. So there is a much higher purpose behind PSUs and if these can be made better then they can provide massive boost to economic growth. As they are dealing with public money so there are processes, checks and control measures to avoid any willful mishap like fraud etc. So there are tendering norms (against selective buying), L1 norms for awarding contracts, regulatory agencies like CAG, CBI and CVC etc. This is to ensure the fulfillment of objectives and to stop the misuse of power and public money. So these checks and controls can make PSUs bulky and slow moving at times but safeguarding of public money is also equally important. The need is to choose a midway to allow more freedom.<o:p></o:p></div>
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That’s why private firms are more nimble and a firm like Reliance can source crude oil at spot market to get the benefit of big temporary fall in prices but state owned refineries like IOCL are required to issue tenders for the same. This is one of the reason for Reliance to have high GRM (It has highest Nelson Complexity Index for its refineries; Recently IOCL’s Paradip refinery is having high NCI. Then Reliance’s refineries are near coast saving money, big size). But now as controls/managements are getting better so state owned refineries are also allowed to source crude at spot prices. Recently IOCL has set up a trading desk in Delhi to source cheap crude at spot prices just like Reliance. IOCL/HPCL/BPCL are setting up a massive refinery (60MT almost double of Reliance’s biggest) at west coast.<o:p></o:p></div>
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But there is a risk with the concentration of power/agility in a thundering juggernaut like Reliance. Fraudulent managements can siphon off the shareholder’s wealth by taking dubious decisions thus leaking out the money. We have seen many examples recently in the cases of Vijay Mallaya, Yes bank, DHFL, Videocon, IL&FS. So there was a purpose behind CAG and CVC to have an eye on the working of PSUs and this acts as a check against these destructive frauds though this has a cost on PSUs in the form of bulkiness. We can’t afford a Videocon, Satyam in critical sector like defense. But still there are better ways to ensure more freedom for better agility (which I’ll discuss in a separate post in more details) by empowering their managements…like Singapore’s Temasek Holdings which acts as Investment company where portfolio companies are managed by their independent boards. Tamasek can independent business decisions and Singapore govt has no role in it. . However, in any case the RISKS of existence threatening frauds are much lower in PSUs.<o:p></o:p></div>
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And if you ask me then these lesser risks should lower the cost of equity capital of a PSU just like bulkiness may raise the cost of equity (At times I find calculations of cost of equity somewhat funny and not much worthy in practical life…but still a fair theoretical concept to understand the factors making a firm more risky than the other.)<o:p></o:p></div>
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PSU is not an Indian concept and they are still used globally for achieving socio-economic goals. In fact, State owned enterprises (SOE) have played major role in the stunning economic growth of China. Government is required to invest in sectors which are strategic for the nation long term growth and safety like Defence, Energy, Mining etc. Government is required to play a major role in high risk sectors where private sector has lesser appetite for risk like take for example Semiconductor, AI, advanced telecommunication tech etc. Govt. has access to cheap capital and it can afford to take risks much better. Indian private sector has failed to capture and develop the massive opportunities in sectors like Solar power, Electronics goods, Semiconductor, telecom equipment and so now it is better if Govt. (through PSUs) invests in creating these capacities in India.<span style="color: blue;"> I’ll discuss more on Govt. investments in these sectors in a separate post on development of semiconductor industry in India.<o:p></o:p></span></div>
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<b><span style="color: red;">d) Private
sector’s big failure in developing products for global markets<o:p></o:p></span></b></div>
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<b><span style="color: red;"><br /></span></b></div>
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In the absence of R&D
investments, our private sector has chosen the easy way of having technical
collaboration with global players on license or royalty basis. Due to this
licensing of technologies, they can only focus on Indian markets. Notable case
is our battery makers Exide Industries and Amara Raja- You can see them forging
technical collaborations or JVs with foreign partners for Indian markets only.
They still do not have their own technology. They have brand and distribution
strengths in tough Indian market which forces global players to enter into
partnerships with them which was not the case with electronics goods like TVs,
smartphones etc. and global players just captured the Indian market fully as
they ventured to create their own brand promotion and distribution clout.<o:p></o:p></div>
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This inability of our private
sector to focus on developing hi-tech top quality products for Indian and
global markets is the reason that our manufacturing sector is stagnant at 17%
of our GDP for almost a decade. Further, due to this our merchandise exports
are also stagnant for last 10 years or so. India can’t survive in the highly
competitive export market with low cost alone because many new countries like
Bangladesh (in textile), Philippines (in generics) are coming to capture market
from India as in low value added products their cost structure is still lower
than India. Selling tea and cotton in global market is not a big deal as there
is very low value addition so entry barriers are very low.<o:p></o:p></div>
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Indian private players have so
far failed to build “products” with strong “Brands” for global markets. Because
the focus is not on developing product as they are content in being a component
supplier to global players. For India to be a global power, we need to focus on
products. Just make a look at all the listed Indian companies in stock market
and try to find a player with strong global product/brand. You may not find
many.<o:p></o:p></div>
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But still there are success
stories like Mahindra tractors. You can see Mahindra tractors (Swaraj Brand)
roaring in American fields. American farmers are very quality and brand conscious
and this is indeed a big achievement by Mahindra. But we need many more like
this.<o:p></o:p></div>
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<span style="color: #0033cc;">Here
I want to mention another such Indian company which I like very much. The name
is ELGI Equipments Ltd which I think is the first Indian premium global brand
in capital equipment space-air compressor. <o:p></o:p></span></div>
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<span style="color: #0033cc;"><br /></span></div>
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<span style="color: #0033cc;">The
likes of Bharat forge are great but they are just component suppliers to
foreign producers. But ELGI has chosen the tough path of developing branded product in
B2B segment that too in premium segment, creating manufacturing facilities in
US/Italy etc. It has very strong brand recall and it is seventh largest player
globally and in the last 10-12 years ELGI has increased export share in its
turnover (around 2000 cr) to 50% which is a great feat and it will grow further
due to the launch of innovative products like oil free compressors at almost
the same cost of an oil-lubricated one. In Indian market, ELGI is a closed
second to global giants like Atlas copco and Ingersoll Rand. ELGI spent around
4% of turnover on R&D in 2018-19 (it was 3.4% in 2017-18) which is quite
good by any standards and this is the reason it has maintained the edge and
premium-ness in its products. On the contrary, once a formidable force Kirloskar
Pneumetic spends just 1% on R&D. <o:p></o:p></span></div>
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<span style="color: #0033cc;"><br /></span></div>
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<span style="color: #0033cc;">The Kirloskars
are here for decades but they faltered big time on growth. Once they were the
leading industrialists in India competing with the mighty Reliance/Tatas but
they just could not find the right path. They were the very first in focusing
on product approach and they did a great job in developing hi-tech technologies
locally. They were way ahead of other generic industrialists of India with
their focus on brand power and globally competitive products. Their brand
strength is such that people in Africa uses “Kirloskar” word for Pumps…they
believe that meaning of Kirloskar is pump. Shantanurao Kirloskar was the
visionary behind the spectacular growth of the group. He was the one of very
few Indian businessmen like Tatas who treated their employees like a family. He
was man behind the formation of the Federation of Indian Chamber of Commerce
& Industries (FICCI) in 1927. But still, the good thing about the group is
that they are almost debt free and some restructuring here and there may
catapult them back to growth as an Indian leader in manufacturing. I really
want them to do great and I am looking to pick stocks like Kirloskar brothers
and Kirloskar electric.<o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbxvDCsR-YalrZgh6UWFp-dXh70q5lZZW2-o0d2qegEkJYSf8YAZtktxvA27w_-lbmP9ynGzjs3f8jaEZl1Y_2fUA3y0KbCas_dXu6FRsPq0Wnn4zFH9RHpKCQBYDfzCFGhYgv5wE4UdQ/s1600/elgi.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="720" data-original-width="1280" height="180" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbxvDCsR-YalrZgh6UWFp-dXh70q5lZZW2-o0d2qegEkJYSf8YAZtktxvA27w_-lbmP9ynGzjs3f8jaEZl1Y_2fUA3y0KbCas_dXu6FRsPq0Wnn4zFH9RHpKCQBYDfzCFGhYgv5wE4UdQ/s320/elgi.jpg" width="320" /></a></div>
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<span style="color: #0033cc;">ELGI
is a premium player with very premium product offerings. They never tried to be
a low end low quality player. They have matched their product quality with the
best in the globe and this is one of the reasons for their success in highly
quality conscious export market like US. ELGI is now investing big for branding
and taking part in trade shows across the globe. Air compressors are ubiquitous
because every factory need needs compressed air, and therefore a
compressor-whether it is mining, food processing, medicine, railway braking,
petrol pumps…everywhere. Recently, ELGI has launched its AB (Always Better)
series at the Hannover industrial fair is one of the mainstay of its strategy
in global success. ELGI has invested 5 years in developing this and these
products have the potential to revolutionize the business. The global oil-free
air compressor market will grow much faster due to environmental impact of
oil-lubricated air compressors. Also, the industries like food and
pharmaceuticals only use the oil-free ones.</span></div>
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<span style="color: #0033cc;"><br /></span></div>
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<span style="color: #0033cc;">I
think this one to be the major beneficiary of coming expected growth of manufacturing
in india and current problems faced by Chinese players across the globe.
Capital investments were low in India in the last 2-3 years but this will pick
up pace as most of the economy cleanup (NPAs) has been over and India is
looking big at local manufacturing. ELGI may get more market share as many weak
players will leave the market due to covid crisis. <o:p></o:p></span></div>
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<span style="color: #0033cc;"><br /></span></div>
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<span style="color: #0033cc;">Its
profits this year have been fallen but there is more to the story. Actually
ELGI is expanding in newer markets in Europe and it is investing for creating marketing
and supply chain infrastructure from the scratch rather than acquiring the
existing distributors which is very costly. It has acquired some in the past
though in other markets. So they are building a team of 70 people whose salary cost is hitting
NP along with other fixed costs by some 40 cr (will hit for next 3-4 years).
Then some costs they incurred in India this year won't be happening in
future...some 10 cr or so. Their employee cost is up by 60 cr to 400 cr in
2019-20 from 340 cr. <o:p></o:p></span></div>
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<span style="color: #0033cc;"><br /></span></div>
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<span style="color: #0033cc;">But i
like companies taking pain in building a premium brand. Brand strength and
customer loyalty in B2B segment is much stronger than B2C. ELGI is taking great
pain, efforts and investments in building a great premium Indian industrial
brand. Good dividend player...low debt...good cash in the books. ELGI was in
investment mode so far and I believe its current earning profile is not
reflecting the true potential because this one is going to reap the benefits of
investments in superior product quality and distribution across the globe. <span style="mso-spacerun: yes;"> </span>I have started adding this one from 140
recently and will add more of in the future.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
Similarly, I remember when I
picked pharma giant Biocon few years ago at 40 <a href="https://oscillationss.blogspot.com/2015/05/tata-communications-ltd-niit-ltd-and.html" target="_blank">(Click here for earlier post on Biocon)</a>. My main reason for investing
was its very superior R&D focus. At that time many analysts were negative
on this one but Biocon was my only pick in Pharma sector and it has delivered
big time so far- 10 times returns so far as it is trading at 400 now. I am
still holding it. Last 3-4 years were very bad for Indian generic pharma
players due to competition in low entry barrier generics but Biocon is one of
the very few which has given great returns. Biocon was in complex generics and
at present the biggest player in very complex bio-similar segment which
requires very high investments in R&D as compared to small molecule
generics. After Biocon, now I have picked Laurus labs as the next pharma high
growth candidate which is another stunning player with very superior R&D
capabilities in manufacturing complex APIs. During covid market fall I added
good chunk of my portfolio in it around 300-330 and it is already touching 600.
But still a worthy candidate for any portfolio.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;">e) Whether
India’s R&D Intensity ratio of .7% is really that poor?<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
India spends some .7% of its GDP
on R&D which is considered very low by global standards. But I think more
than the absolute amount we fared badly even in getting the most out of these
R&D (.7%) investments. We fare worse in Innovation quotient or innovation
rank. This is due to faulty (or risk averse) approach to innovation. Most of
the Private sector’s R&D investments are in Pharma and Auto sector where
due to the nature of business (faster technology changes, regulatory and global
competition) they are “forced” to invest in R&D otherwise they would have
been content in doing run of the mill business churning out low tech low
quality mas products for local market. Like, in Pharma R&D investments are
into reverse engineering a medicine for producing the generic version which is
less risky but very less innovative.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Further, I think R&D
Intensity ratio (calculated as total R&D investments divided by total GDP,
which is .7% for India, 2.8% for US, 4.3% for Israel/Korea) does not render
much information about the innovation potential of a country just like overall
GDP figures do not provide any information about the quality of national income
(sustainable, promoted with high debt or investments or consumption). Actually,
R&D investments are directed by the nature of industries an economy
primarily deals with like an economy which is primarily based on tourism will
have very low R&D Investments because the share of other industries are
smaller as compared to tourism. But still, it is possible that in those
industries they were doing some breakthrough innovations. That’s why observed
R&D intensity ratio is greatly impacted by the composition of industries in
a particular economy like if we take the case of South Korea which invests big
in R&D but this is due to the nature of industries it is operating in. Korea
is a big force in ICT (Information and communications technology) industry
which an R&D intensive sector. Similarly a country can be a force in low
R&D intensive industries like chemicals.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
And so if we account for the
industry structures of an economy along with standalone R&D intensity then
the resultant modified R&D Intensity gives different results. Standalone
high R&D intensity economies like South korea and Finland are ranked much
lower when their industrial structure is accounted for. It simply means that
they are average in industry agnostic innovation index. They do not spend much
on R&D unless they are forced to due to industry specific dynamics. This,
however, can’t take away the stunning performance of R&D of these countries
in ICT industry.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc;">In
the absence of industry specific R&D requirements, R&D investments are
governed by perceived high returns for R&D work or innovations. And that’s
why the countries like US are ranked much higher in Innovation as compared to
their overall R&D intensity. This is due the fact that innovators see high
returns for their innovations in US (due to favorable regulatory environment as
I have mentioned earlier about tight price control on medicine pricing in India
discourages R&D investments). Further, countries like US have vast market
size for products which increases the revenue potential of any breakthrough
innovation. Also, Govt in US provides highly supportive environment for R&D
investments which reduce the cost of doing R&D. All these factors result
into higher propensity to invest in R&D which is not affected by the nature
of a particular industry.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
Strategy&, a business unit
within Price Waterhouse Coopers is publishing an annual report of the top 1000
most innovative companies in the world for over 12 years. So far, it has found
no statistically significant relationship between R&D spending and
sustained financial performance. Strategy& has found that the top 10 most
innovative companies are rarely the top 10 spenders on R&D.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
So when we account for the industry
composition of Indian economy then this .7% R&D investment may not look
that poor. Like, manufacturing is around 16% of Indian economy which is lower
as compared to other countries like China/Korea having almost 30% share of GDP.
But as Indian manufacturing does not involve high R&D intensive industries
like ICT so this figure is not low in itself. Also Agriculture accounts for
some 16% share of GDP in India which is just 1% in US (although the size is
very large in US) but Indian agriculture is very backward with very low farm
sizes. Low farm size forces farmers to avoid using innovative
products/machinery and this is one of the biggest hindrances in the growth of
Indian agriculture and R&D investments. <span style="color: #0033cc;">So when
we account for these factors we can see that R&D intensity rate is not that
bad; our Govt. just needs to create a rewarding environment for R&D and
Innovation so that people are motivated to try novel ideas.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
India is a preferred location for
global giants for captive R&D investments due to low salaries for highly
qualified engineers and research professionals. Like in integrated circuit (IC)
designs, India has great capabilities and many MNCs have established their IC
design research centers in India but most of the work done in India is transferred
to other countries where manufacturing of ICT products is done. But off late,
startup culture is growing big in India and many Indian startups have developed
some great innovative products but most of them are acquired by global giants
which now are seeing Indian startups as some sort of R&D outsourcing. Many
of Indian startups in Chip designing have been acquired by global giants like
Qualcomm. But still due to recent focus on startups and innovations, India has
improved its ranking in Global Innovation Index from 81 to 52 between 2015 and
2019. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjP4Fpr1NcFnDL9dXc9XgErOs2PmXZEKF5ap_lnXNjnao1Ym_7QCvk6zO3gy0z8lixZTYYsg_EJon1_QRNXhY8OP0cyzjN7hjFekOLsYslP-RVVFBKqzVY2EFTNE3IYoGysTOd3qVi3QNw/s1600/signalchip.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="510" data-original-width="818" height="199" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjP4Fpr1NcFnDL9dXc9XgErOs2PmXZEKF5ap_lnXNjnao1Ym_7QCvk6zO3gy0z8lixZTYYsg_EJon1_QRNXhY8OP0cyzjN7hjFekOLsYslP-RVVFBKqzVY2EFTNE3IYoGysTOd3qVi3QNw/s320/signalchip.jpg" width="320" /></a></div>
<div class="MsoNormal" style="text-align: justify;">
Many Indian startups are doing great work in manufacturing fabless semiconductor chips in India like Cirel Systems, Signalchip, Mymo Wireless, Saankhya Labs etc. Some like Mymo are in fact making 5G products.</div>
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<b><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></b></div>
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<b><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></b></div>
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<b><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></b></div>
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<b><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">B) PSUs are best
suited for Investments by Government for economic growth<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<div class="MsoNormal">
<o:p></o:p></div>
India was and still is a poor
country with large population which means that availability of private capital
for investment will be risk averse and costly. In poor economies, demand supply
equations are erratic and supply may not be able to create the demand making
private capital apprehensive to invest in such variable scenarios. Fewer
investments mean less income generation and so low demand which makes this a
classic chicken-egg dilemma. This is where government has to take the lead role
in making investments because government can arrange capital much cheaper and
can also impact the demand scenario with its efforts/schemes.<br />
<br />
After witnessing satisfactory growth in last 10-15 years, now India needs large investments for
taking the economy towards next leg of growth. In last two decades, IT services
and Pharma sectors played the major role in economic growth as they brought
huge amount of wealth to India through exports. Auto sector has also grown big
but it is not in “Income generation” but in consumption of generated income. In
agriculture, we are yet to realize our true potential…production is increased
but not the income of the farmers. In this period, we have done a grave mistake
in ignoring the very important sectors like electronics goods and telecom which
are very large and getting very important strategically. IT/Pharma sectors are
matured now and they itself are looking for next growth catalysts and for that
they are also required to make big investments (like in R&D). Our Auto
sector is also stagnant now…its next leg of growth will come either from
exports (only options is low cost Car Africa) or high growth in other sectors
in India apart from IT/Pharma. So without any second thought we need to invest
more locally. As of now, investments are some 28% of our economy while the rest
is consumption and government spending. China is around 42% and it is having
this share for quite a long time and this is where India needs big improvement.
Our Investments touched some 40% around 2010-11 but keeping in view the size of
our country and population we need to take this figure to high forties for
longer periods of time. Right now our investments are more or less equal to
developed countries.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
And so the question is- from
where these investments will come? First of all, let me tell you all that
cheaper and easy credit is the first pre-requisite for investment growth in an
economy. As of now, private sector has not impressed that much at all in last
decade or so. Just look at the quantum of NPAs in sectors like power, steel and
other infrastructure like road etc. There is no doubt that most of these NPAs
are not strategic mistakes but willful frauds. Then, private sector has avoided
taking high risks in investing into much needed sectors like semiconductors,
electronics goods. They have opted for less risky avenues like infrastructure
like power plants/roads to have long term revenue contracts. If we can see they
have just tried to replace government firms like NTPC here who are already
doing good job for long time. In these infrastructure related sectors there are
less execution risks (though fraud risks are huge). <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Why risks are less in infra? I
have explained the same in my previous Blogpost related to Value investing that
infra debt is less risky. Debt and infrastructure are made for each other…made
in heaven. The loans taken by normal business entities like Telecom, FMCG,
Steel, chemicals are more risky than infra loans because there is tough
competition in these industries and often it is happening that two competitors
are fighting hard for same business/market share with loans and as we can guess
one is going to bite the dust and his loans will turn NPA i.e. the fight we are
seeing in telecom now. So debt to normal businesses is very dangerous and
requires high skills in allocation of debt. If one particular sector is already
having high debt and chances of demand in that sector may go down or there may
be severe competition and price war coming so in that case caution is required
in allocating loans to that sector.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
But Infra is different. Due to
competition and miscalculations by businesses, we can create excess (redundant)
capacity in steel sector but can we lay extra gas pipeline of 5000 KM length??
Can we make another road parallel to a newly constructed road?? Can we make an
additional Airport or another power plant without long term PPA? So as we can
see there is hardly any scope for redundancy in infra and if properly planned
(like costs during bid stage) then chances of failure are very less in Infra.
That’s why I feel there should be low chances of NPA in infra but it needs
lower interest rates.<span style="mso-spacerun: yes;"> </span>So in my view
government should have motivated private sector to invest in other import heavy
sectors like ICT and energy.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;">a) Better
to choose change in management style and land sale than disinvestment<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
But you can’t expect private
sector to take big risks in investing into high risk ICT sectors with high
interest rates, weak government policies in promoting local products. And this
is where I think PSUs have much greater role to play. The calls for
disinvestments of PSUs are made citing weak and inefficient management though I
have shown that this is just a misconception. But still, if there is a need to
further strengthen the board and management of these PSUs then I do not think
disinvestment is the only option. Let’s make management of these PSUs independent
with government just playing the role of a strategic and majority
shareholder/investor only with no interference in the management like in the
case of Maruti Suzuki JV for manufacture of cars in India where Suzuki was
having the majority of the management control for running the firm which was a
big success. Management decoupling is much easier then selling these highly
profitable PSUs cheaply. This is just like selling the family gold and this
disinvestment is not an infinite source of funding but if government can make
these PSUs better and more profitable in partnership with private sector then
it can reap the benefits in the form of higher dividends/taxes forever. Also,
with the grand success of ISRO globally there should be no doubt about the
efficiency of government owned and operated firms.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Further, most of PSUs have large
valuable land holding across India. In my view it is much easier and better for
the government to sell these land holdings rather than selling these PSUs.
Believe me, land sale alone can generate gigantic sums. Once, I was reading
that BSNL (biggest PSU loss maker) has done the valuations of 1/3<sup>rd</sup>
of its prime land holdings and the same was some 65000 cr!!! Can you imagine it
was just 1/3<sup>rd</sup>. Same is the case with BEL, BEML, HAL, BHEL, Railways,
New India Assurance and many more others.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;">b) PSUs
as investment vehicles for directing the economy<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
Most importantly, government can
control its investment target for pumping up the economy much better with these
PSUs. Like, when there is a confidence crisis in an economy then it becomes
very difficult to induce private sector to invest in the economy even with low
tax and interest rates. We are facing the same situation right now in India.
Confidence of the businessmen and consumers is the biggest driving force behind
any economic growth. Take the example of Solar power manufacturing- India is a
big importer of solar power components but we can’t afford to build huge solar
capacity on imports. This will destroy our economy and in that case thermal
power is better for us. So now, India needs investments into solar energy
manufacturing. So far, it has not happened…may be due to any reason. But
government can’t force private industry to invest for solar energy. However, it
can ask the likes of BHEL and BEL to invest for the manufacturing of silicon
wafer in India. Both have the required expertise to do the same efficiently.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;">c) India
needs large investments in semiconductor industry<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="color: red;"><br /></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
India needs huge investments in
semiconductor and electronics goods industry because they are the biggest
imports now and we are not in a position to let this happen for a long time
from hereon as the demand for these are growing very fast (fastest growing
segment). Some halfhearted efforts have been done by government to promote the
local manufacturing but they are a big failure. I think here the best option is
to have a public private partnership. The likes of BHEL and BEL are best suited
for this role as they have the expertise for electronics. BHEL is already
making silicon wafers for solar panels for ISRO…though not on large scale but
still they have the knowledge. BEL is also having the expertise in chip design.
So both BEL and BHEL coming together and in partnerships with a private player
is the way to go. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Recently Indian government has
announced 3 incentive schemes for promoting the manufacture of electronics
goods in India which somehow went unnoticed by media. I think more promotion of
these schemes is required across media platforms. Taiwan is the largest chip
manufacturer in the world (its TSMC is the global giant) and then Samsung
(south Korea) is the next. Both countries have friendly relations with India
and I think there is no doubt that our Government should welcome them to create
facilities in India in partnership with Indian firms or on technology transfer
basis. Taiwan is facing tough time in its manufacturing facilities in China due
to ongoing US-China cold war and US is pressing it to leave china and to invest
in US. So Taiwan has valid reasons to invest in world’s next biggest market for
semiconductors.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Then, India already has a great
chip design talent and a number of startups have developed great innovative
fabless chips. Chip design is the first step in the entire chip fabrication and
it is very complex part. Chip manufacturing requires huge upfront capital
investments. So there are increasing numbers of firms which are Fabless-means
they do everything related to chip but not the chip manufacturing, they design
and sell the hardware but don’t do the manufacturing of silicon wafers.
Qualcomm is the global fabless giant and others are Broadcomm, AMD, and Nvidia-they
are all from US. In many instances, Indian fabless startups were acquired by
these global giants. Here, I think there is a need for PSUs to make strategic
investments in these startups which will promote R&D in India and these
important technologies will remain with India. PSUs have large amounts of cash
in its books like BEL has some 4000-5000 cr cash and it spends big on chips for its
products. Hence the likes of BEL should promote startups in this sector.
Recently, BEL and Wipro have developed a system on chip (SoC) that can be used
for civil applications such as tablets and mobile phones.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Now is the time for India to get
big on semiconductor industry in India and it is good that Indian government is
taking some right steps in announcing incentives schemes for manufacturing and
investments in India. I will be explaining this sector in much detail in
another post related to this sector.<br />
<span style="background-color: white; color: #222222;"><br /></span>
<span style="background-color: white;"><span style="color: blue;">As of now I have made small
investment in Sasken technologies (invested at 480) which I think can do
something big in fabless chip manufacturing sector growth in India. Sasken was
one of the very few in India to focus on product development (IP based) in IT
rather than focusing on run of the mill low value third party software
services. It was among very few Indian IT companies who invested for R&D
for IP developments in communications sector and still holds 70 valuable
patents. Semiconductor and telecom are its major revenue sources. They have
good capabilities in Chip design and hardware design and I like it as it is a
pure play on Chip/semiconductor sector as other large IT players have small contribution
from this sector. They used to be major supplier of IT Product to Nokia phones
but then Nokia lost the race in smartphones and then another big customer the
network equipment maker Nortel collapsed. So they were in reconstruction mode
and done some real transformation. But amid all this transformation they have
maintained their normal run rate of cash generation and avoided useless
spending on acquisitions</span></span><br />
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0.0001pt;">
<span style="color: blue;">. <o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0.0001pt;">
<span style="color: blue;">After the restructuring, apart
from chip design and semiconductor Sasken is focusing on IOT,
vehicle-to-vehicle communication, 5G, Telecommunication and satellite
communication, machine learning and consumer electronics. Major customers of Sasken include Intel,
Qualcomm, Intel, British Telecom, Honeywell, Sony, Inmarsat, Harman, Motorola
Solutions, Texas Instruments, GE etc. In Fabless chip manufacturing, Sasken
works for third party Fabless manufacturers like Qualcomm and it has the
capability to develop entire product from the scratch like it has designed and
developed satellite phones for Inmarsat from end to end. Sasken’s chip design
Recently in Jan-2020 it has been selected by Taiwan Fabless giant Mediatek for
its IOT programme for AI-enabled semiconductor chipsets. Recently it has
partnered with Qualcomm for auto sector to support their customers in the
adoption of the ‘Qualcomm Snapdragon Automotive Cockpit’ platform and ‘Qualcomm
Automotive Wireless Solutions’. Sasken has partnered with Qualcomm and Mediatek
for around 15 years and its products are used in their chips.<o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0.0001pt;">
<span style="color: blue;">Good management…regular dividend
payer…normal dividend yield is 3-4% but it distributes big special dividends
quite regularly which shows the willingness of the management to share the
wealth with shareholders. Last year they paid Rs. 35 as special dividend. They
did the same by paying Rs. 25 as special dividend in 2016 and in 2014 and 2015
they paid Rs. 20 & 25. Most importantly, even now they have cash of 340 cr
against market cap of 700 cr. So with 50% cash holdings and PE of 7-8 makes it
very cheap and worthy of investments. CMP 480.</span><span style="color: #222222;"><o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
</div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">C) In stock
market investing, management integrity > Ability<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
Now, finally coming to investment
in PSU stocks where I have seen all sorts of weird theories for not investing
in PSU stocks. And if you ask me- in most cases these PSU stocks have not
performed well only due to these weird theories itself not otherwise. But let
me remind you the biggest risk in stock investment. It is not the execution
risk (the company doesn’t perform well) of the management but the risk of
having a fraudulent management which will wipe out all the wealth in a single stroke.
We have seen the cases of satyam, DHFL, Videocon, Geetanjali etc. where fraud
management destroy everything. Worst part is that management integrity risk is
most difficult to judge or analyse. I always say that I am not worried at all
when my stock does not performed well due to industry level crisis because an
able management will be able to sail through difficult times. But there is no
remedy or hope when management itself wants to steal the shareholder’s share of
wealth.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
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I have seen our so called great
analysts assigning low valuations to management skills of the PSU firms (which
I have proved wrong) but they never assign high comparative valuations to
management integrity and honesty of the PSUs which will even out any valuation
difference. Just compare the likes of Anil agarwal of Vedanta Ltd with PSU
mining giants like NMDC. Anil agarwal was always having dubious credentials but
recently the board of Vedanta is facing the criticism for going for the
delisting of Vedanta ltd at very cheap price. Price offered by the board is 88
vs some 200 book value. Delisting is not wrong but management must pay fair
price to the shareholder and not being opportunistic during market mayhem.
Whether the final bid price made by shareholders is high or not but the low
price asked by management says a lot about the integrity of the management. And
these types of managements can wipe out the wealth in a single master stroke
and for the bad luck of Indian investors there are a lot of such types of
dubious stocks lurking around in our stock market.<o:p></o:p></div>
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<br /></div>
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Just compare the same with NMDC
which always tried its best to help the tribal dislocated due to mining while
Vedanta is always under criticism for destroying the local tribes and
environment. <o:p></o:p></div>
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That day I was checking Advanced
enzymes technologies. I can’t say that its management is not honest but still
some actions raise the doubts and this makes the final decision making very difficult. I liked it during IPO time but made an exit last
year at 220. Somehow the vibes were not that comforting. And when we have
negative vibes without any reason then we have to dig very deeper in the books
of accounts to find the red flags. They earned some 350-370 cr in last 3-4
years and after putting some 100-120 cr in assets they have some 200 cr
cash...but dividends are just like peanuts and they are buying companies
outside India. So i have seen that these acquisitions are typical signs of
money leaking out so i think this requires much deeper investigations...not
analysis like who is the promoter/shareholder of acquired companies, what is
the value addition to its business, how much goodwill they have paid for the
same and whether they have acquired just an asset or a business for which
goodwill paid can be justified?? In their books their net assets are 200 cr but
goodwill is 300 cr!! Just for a perspective, their goodwill in 2016 just before
IPO was 171 cr (it was revised to 220 cr in 2018 AR, don't know why) and this
has been increased to 300 cr after IPO while revenue is increased to 440 cr
from 300 cr while the assets have been doubled. So my only worry is the doubts
on the intention of the management. They have done the IPO and i was also very
positive on the business but management could not prove their will to share the
wealth with shareholders. I may be wrong but this happens with a lot of IPO
stocks.<o:p></o:p></div>
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Then, there is Parag Milk. I
liked Parag due to its focus on Cheese business because Milk is a very tough
business and there is no product differentiation exists among all the milky
warriors. But as I consider IPO's from unknown people risky so I refrained from
investing large sum in it. Somehow I lost my trust in its management because they
talk so much...always talking...launching so many products when there is no
need as they should focus on Cheese and whey protein only. So it may appear
that with so much noise they may be suppressing the cries of some wound. Their
foray into too many products and brands is what irks me the most. Cheese,
protein supplement, premium milk, mango drink- all this is getting too much as
these all have huge working capital requirements apart from large spends on branding.
It has bad debts which are far higher as compared to other market players/industry
norms. They have much higher bad debt provisions which cast doubts on their
topline/business strategy. Then there is export subsidy issue which comprises
the biggest chunk of their bottom line. Though these issues can also be a sign
of management inefficiency, not necessarily a crooked management. But if we
look at them launching so many products along with other red flags then the
story looks dubious. But still Parag is a very strange case. I have seen many
junk companies like sanwaria, Manpasand beverages and it was very easy decision
to discard them as junk because their cooked financials are easily exposed as
their products were not visible in the market which is the conclusive evidence
that their topline is fake. But Parag i have seen the products
everywhere...even this January when i was in Punjab i found its products
available everywhere though i was thinking that it is just a western India
player. But still, not getting comfortable I made an exit at loss and put the
money in other stocks like TV18 and Clariant where I recovered my losses quite
early.<o:p></o:p><br />
<br />
<span style="color: blue;">But i am not saying that both Parag and Advanced enzymes are not trustworthy...just want to share that these types of actions raise the doubts and we need to be extremely careful in ignoring all the business prospectus, historical performances and financial soundness.</span></div>
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<span style="color: blue;">So if you ask me then this integrity
& honesty factor of PSUs should be valued much higher.</span><o:p></o:p></div>
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<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">D) Some great
PSU stocks for investments<o:p></o:p></span></u></b></div>
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<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
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I have invested quite a bit in
PSU stocks. So I am just sharing my views in brief on some of the best PSU
stocks. I will explain these in much detail in some other blog posts.<o:p></o:p></div>
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<b><u>Rites Ltd (CMP 255, market
cap 6300 cr):</u></b> Indian needs massive investments in its infrastructure if it wants to capture next leg of strong economic growth. Railway Infrastructure is the missing link so far and thankfully India has realized this and massive investments are being made in Dedicated freight corridors and Metro projects across the nation. So Railway is the next big investment theme for next 10 years or so and there is not any better name than Rites Ltd. Consultancy is its mainstay as of now which is a high
entry barrier business. Rites is just among the best globally. It wins most of
its bids by competitive bidding. I have seen many instances when Rites had to
be inducted subsequently when MNC consultant failed to deliver on time. But its
consultancy work is not about writing a story...it acts as General consultant
where it undertakes the entire work starting from engineering design, location,
tendering, vendor selection/evaluation, quality control and timely execution.
It is highly technical work. Their domain expertise and knowledge is very
critical for minimum cost variations and timely completion with quality
standards. Their role is very crucial as they have to prepare the cost
estimates and on that basis the bidding is to be done. RITES has been providing
services to Indian Railways/Transportation sector and now to Defence. These
projects are quite complex with very few agencies are having capability to
execute such projects in India.<o:p></o:p></div>
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Its number of employees is same
in last 10 years...some 3100-3200 but revenue per employee is increased from 21
lac to some 70 lac which i think could even beat the best in IT sector. So what
we have now- High entry barrier business with high margins, trading at low PE ratio of 8-9, Profit almost 650
cr (i see this touching 1000 cr in next 2 years), ROE is 25%, dividend yield around 6% which i think will easily touch 10% in
near future. Cash in the books is around 1400 cr. It does not need to spend big
on capital assets so it has big operating leverage which means in the most of
the top-line growth will generate more free cash flows which means much higher
dividends. It is the nominated agency for exports of railway products like
Locomotives of Indian Railways which is again low capital high margin business
and which will grow big. Same is the case with leasing business which will grow
big due to dedicated freight corridor and coming privatization in passenger
trains.<o:p></o:p></div>
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<b><u>Bharat Electronics Ltd. (
CMP 99, Market cap 24000 cr)</u>: </b>I picked this one around 30 <a href="https://oscillationss.blogspot.com/2013/09/semiconductor-chips-and-telecom-sector.html" target="_blank">(Click here for old post on BEL)</a>.<b> </b>For me this is the proxy for Indian
defense sector. I liked all defense stocks like BDL, HAL etc. But BEL
undertakes the work from all of them including Midhani and ISRO so I decided to
invest only in it. Midhani I also own from 100. Another thing which I like
about it is that it has fairly large non-defense business where I am seeing
high growth. As of now defense segment is around 80% of its turnover but the share of non-defense is growing much faster and it is investing in R&D for non-defense products.<br />
It has some 900 acres of land in prime locations of Bangalore.
Recently HAL has sold some land in the similar area around Rs. 30 cr per acre
which value the land bank of BEL at some 27000 cr when its market cap itself is
at 24000 cr !!! This is one stock where I have invested quite a large chunk of
my portfolio and during covid market meltdown I started picking it at 60-65 and
recently made buying at 90. <span style="color: blue;">It spends staggering 9% of its turnover on R&D. </span><span style="color: blue;">Its turnover this year is 12000 cr and has an order book of 52000 cr. Almost 96% of its turnover is from products developed through in house R&D. </span><span style="color: blue;">Dividend yield is around 4% with around 4000-5000 cr
cash in books. It trades at a PE of 13 which is low if we look at its high ROE of 20%, High cash in books, massive order book, strong focus on R&D, high share of locally developed products, growing share of non-defense revenue and exports...it deserves minimum PE of 20. One of the best pick in Indian defense sector.</span><br />
<o:p></o:p></div>
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<b><u>BEML ( CMP 636, Market cap
2600 cr)</u>: </b>I like it because<b> </b>BEML has significant presence in
Metro rail car manufacturing in India….50% local share. BEML was the first
Indian firm (still the only indian) to start manufacturing of highly complex
metro cars in India. For Metro rail cars, in next 5 years, demand will be for
some 25000 cr in and 70000 cr in next 10 years. 75% is to be procured locally
so BEML is going to get great business. Then export market is the next thing.
The cost of a coach is around INR 9 cr in India while it is around 15 cr across
the globe. BEML’s local content in Metro is 65%. Titagarh also has presence
through its Italian firm. I also hold this at avg of 40.<o:p></o:p></div>
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I see significant economic
measures to be taken by Indian govt on chinese presence in India and chinese
have secured large orders in Indian metro. I can’t say about the fate of
existing orders but new orders will be difficult for them. Plus BEML has one of
the best in defense in India. Its mining equipment division will also see high
growth after a slow period as mining leases are renewed at fast pace. Major
mining sector reforms were announced under Aatmanirbhar Bharat package. BEML has some 70% share of indian earth moving industry. Mining
sector may see high growth in the future and I think large number of auctions
will take place and this will help MSTC greatly which is another pick where we
have invested big. It wins most of its orders like metro in global competitive
bidding which shows its mettle.<o:p></o:p></div>
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The only thing they need to
tackle is the high employee cost which is around 25% of the turnover (BEL has
some 17%) but I think they are already on it as in 2019 they have reduced the
employee count by 500 from 7600 to 7100 and this year the figure is at 6600. So for me this is one of the re-rating catalyst. Another catalyst
is any large near term order from metro etc. Its order book is around 10000 cr and almost 50% is from Metro projects. Its turnover this year is 3000 cr. Almost 70% of its turnover is generated through in house R&D efforts. It has spent 3.4% (104 cr) of its turnover on R&D in 2019-20. This year, BEML has delivered India's first driverless metro cars to Mumbai metro which was launched by PM Narendra Modi. BEML has achieved 65% indigenization level in Metro car manufacturing in India so far and this is going to get better.<br />
<o:p></o:p></div>
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BEML has been put on sale which
may spur the big re-rating. BEML also has significant land holdings like in
Bengaluru it has 205 acres of land, in Mysore 530 acres, 2,400 acres in Kolar
Gold Fields and 375 acres in Palakkad. Last time when there was an outcry against
its disinvestment, the value of assets owned by BEML was claimed to be
staggering 50000 cr when its market cap is just 2600 cr!!! <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u>CONCOR (CMP 430, market cap
26000 cr):</u></b> One of the best play on coming high growth in railways sector
due to dedicated freight corridor.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div><div class="MsoNormal" style="text-align: justify;"><b><u>MIDHANI (CMP 200, Market Cap 3800 cr):</u></b> One of the best space and defence play in India. It deals in the manufacturing of advanced specific alloys catering to critical sectors like Space, aerospace and defense. Right now the major share of revenues are from Space so we can see that with higher local manufacturing of defense products its order book is going to grow big. It is investing big for capacity expansion and very soon it will see major growth in topline. This is not a stock to be missed.</div><div class="MsoNormal" style="text-align: justify;"><br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u>Hindustan Aeronautics Ltd.
(CMP 900, market cap 31000 cr): </u></b><span style="mso-spacerun: yes;"> </span>I like this one and soon will be putting money
in this one.<o:p></o:p></div>
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<span face=""arial" , "tahoma" , "helvetica" , "freesans" , sans-serif" style="background-color: white; color: #222222; font-size: 16px;">(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. reach me at oscillationss@yahoo.in).</span></div>
<br /></div>
Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com21tag:blogger.com,1999:blog-8629364998048667702.post-58607693628349757742020-06-12T00:19:00.000+05:302020-06-12T15:01:54.815+05:30Whether current Stock Market rally is fundamental or Liquidity driven? <div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">In past few days, got many messages that current stock market rally is
liquidity driven...so much noise. I see many analysts crying
"liquidity" and claiming that a big market crash is coming. But every asset rise is always about liquidity first. Further,
Can anybody say that stock market fundamentals are destroyed forever (say for
5-10 years)? No, not at all!! Liquidity is definitely there, but it could go
to other asset class also. But it has come to stocks because investors know
that they are cheaper as compared to their fundamentals. These talks of
liquidity driven market rally may be coming from those who have missed the
current rally and now they are trying to prove that "grapes are
sour". <o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">First of all, now the understanding of covid crisis is vastly
improved and now we know that it is not that deadly except for old and
vulnerable people and if you ask me this is very important. Market
"fundamentals" were hit badly in March because nobody was sure about
the covid crisis and how we would tackle this. So now, as our understanding is
better hence "fundamentals" have been restored to some extent and
that's the reason money has come to stocks otherwise the same would have gone
to bonds or gold. Nobody wants to touch corporate bonds now and fall in Gold
price itself means that money is flowing to riskier asset as investor are
hoping for early economic revival as lock downs are gradually being lifted.<o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">Today, US markets are hit badly but they are already recovered
very fast from the covid lows of Feb-march while we are still way down from the
Feb top. Also, in US they have distributed free cash of some $ 600 per week and
this will keep the things and economy in control although job data may be weak.
Fed is ensuring the liquidity by buying bonds. They are buying corporate bonds,
including the riskiest investment-grade debt, for the first time in its
history. Here, let me clear one thing. Many people say that this bond buying by
Fed creates excess money supply. But it is not, it is just supplying or
creating liquidity in “exchange” of an already existing asset (bond). Because
due to covid, people are not willing to buy Bonds etc. so this may create big
problems for the bond owners who may need money for crisis situation or for
business purposes. So Fed is coming forward to manage this temporary gap in
liquidity and Fed is buying real assets for money supplied. Fed will sell these
bonds in the future when things will return to normal and it will sell these
bonds back to market and will take out this temporary liquidity.<o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">Similar steps I was also expecting either from RBI (direct Corp Bond purchase) or from our
Government because Banks were not lending money as they were not ready to take
risk in spite of big liquidity infused by RBI in banks. Hence, in order to create
liquidity our Government has done a great job by announcing full loan guarantee
scheme as this will push banks to lend to NBFC’s etc. Due to this scheme, banks
do not have to make any provision for the loans in case they become NPA.<o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">Also, the current demand slump is not due to structural deterioration
of the economy. The current demand slump is due to the imposed/forced lockdown and
demand for jobs will be back when they are re-opened. The images we are
seeing now are that farmers in Punjab are doing everything on
their own in their farms in the absence of laborers and in fact they are
arranging transport etc. for the laborers to return back. So this is not a
recession. I have pointed out in many blog posts that recession is much
more fundamental than fall in GDP rates alone. Recession is about significant
misallocation of productive resources whose course correction is not possible
in the short term and this will destroy the misallocated resources and so the
jobs. So in a recession, an economy has to go through the labor pain to reverse
the misallocation of resources. Same is not the case now.<o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<br /></div>
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 12.0pt;">But I was always worried about our migrant situation and this
may still turn very bad. So this is the biggest risk for India and this may
also hit jobs. But as we know interpretations are very easy in hindsight. When
laborers started migrating in March then at that time there was very little
clarity about the covid crisis and how it will hit the humanity and how hard
will be the hit. So everyone has taken the decision keeping the worst in his
mind. So laborers were allowed to move by their employers as they were also not
sure about the situation and so were the laborers. So now the real challenge is
to normalize this unexpected damage. In India, covid cases are rising fast but
still recovery rate is almost 50% and tests have also gone up...death rate is
still manageable. So i hope we will be in much better position by the end of
this month. For stock market, i think we may see a mild correction now not
a traumatic bear phase again. Let’s hope for the best.<o:p></o:p></span></div>
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Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com7tag:blogger.com,1999:blog-8629364998048667702.post-472609194619400032020-06-03T01:03:00.001+05:302020-10-20T23:22:26.275+05:30Value Investing: Dance without passion is just cultured movement<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: blue; font-size: large;">(Stocks covered: Godrej Agrovet, Laurus Labs, Tata power, Borosil renewables, BEL, BEML, Oberoi Realty, Mahindra Lifespace, Mahindra EPC, Rallis, NH, Max India, HCG)</span><br />
<br />
<br />
Passion is growth. Passion is
transformation of energy. Once I was travelling in train and a nice fellow who
was a classical dancer and dance teacher was travelling with me. He was
explaining about dance to other passengers and then he showed us a video of
some party where one fellow was dancing full of energy but with unrhythmic
steps. Then he explained that there is a natural rhythm in our body but that
fellow in the video is dancing badly and then he pointed out another fellow
with almost perfect dance steps. But I told him to look at the energy and
passion in the dance of first fellow (bad one) while the focus of other perfect
fellow was on his steps only as he was looking towards camera and other people
all the time. Then dance teacher asked me why focus on passion? <b>“Because
dance without passion is just cultured movement,”</b> was my reply. I told
him that in Lord Siva’s Tandava extreme passion is the underlying force…it is not
the cultured movement…and when Lord Shiva is overwhelmed with passion then even his
dance becomes a cosmic event.<o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkUr43-1xNBRCniuaOXuqfgEs9x-B634X-cfGvTYd452MhFA8K5pVQ-ROwZ9Smht9k6eEtRQNy0cVGxfPx-8GO0ktfoi-69QihsS4vnIyiZpThjk1OLAP4A9C-3T2-y3eR2C-LglHjwbc/s1600/shiva35.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="335" data-original-width="500" height="214" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkUr43-1xNBRCniuaOXuqfgEs9x-B634X-cfGvTYd452MhFA8K5pVQ-ROwZ9Smht9k6eEtRQNy0cVGxfPx-8GO0ktfoi-69QihsS4vnIyiZpThjk1OLAP4A9C-3T2-y3eR2C-LglHjwbc/s320/shiva35.jpg" width="320" /></a></div>
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And it is strange that I find the
implications of passion in each and every sphere of life. Any action without
passion is just a cultured movement. Food, sex etc. provide physical
contentment and joy but passion is the food for the soul…it is the realm of
spirituality. Expression can be in any direction (dance, music, science)
because expression itself is the culmination. We do 9 to 6 job but this is not
our passion because our focus is not on the “expression” (job) but on the end
result-money. Passion is the enjoyment of expression. And strangely when it is
about enjoyment of expression then most of the times a passionate businessman
(Dr. Devi Shetty) is more spiritual than a religious fellow because most of our
religious fellows do not enjoy the journey...the expression but only their expected
comforts from religion including ego (the most dangerous thing in this world is
the Goodman’s Ego).<o:p></o:p></div>
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When the likes of Dr. Devi shetty
(Narayana Healthcare) decides to extend his passion into business then his
passion alone is what makes a stock a Value Buy. Value investing for me is
finding these passionate businesses because financial data is just the
result/demonstration of the actions of these passionate beings. <span style="color: blue;">Please note "passion" factor is not just about one man or promoter but includes everything in an organization which makes it <b>capable </b>to create superior products with high entry barriers. Promoter is just one of the factors which create or develop this capability in an organization like technical expertise and superior R&D focus (like Biocon and Laurus Labs), strong brand strength and first mover advantage (like Tata entered in staples via Tata Sampann Brand), Networking effects (like MCX), Superior and vast supply chain etc. </span>Financial
metrics do not create a business (and a value buy) but it is the business whose
performance creates financial data. So a true value investor does not find value
in a stock which is “cheap” on financial metrics but he yearns for
“premium-ness” in the business model which can create a great product with
strong entry barriers. Passion factor in business implies the ability to create
a superior product with scale with high entry barriers. I think in traditional
old school value investing there was too much focus on financial metrics like
P/BV, PE ratio, FCF, Debt equity ratio, margin of safety and so on and then in
the end a small mention of business model. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
I think there is a need to
realize that this financial melodrama emerges from business only so first value
point is the business model not the other way round. Financial metrics are
transitory. Strength of business model (passion) is permanent (relatively). <span style="color: #0033cc;">Some time back, I gave much better example to a student
about real (new age) value investing. I gave him the example of Indian
Epic Mahabharata wherein before the start of war both Duryodhan and Arjuna went
to meet Lord Krishna for his help and support for the upcoming war. Duryodhan
was the old school value investor so he chose the army of Lord Krishna (
Financial metrics) but Arjuna who was the world’s first new age value investor
picked Lord Krishna (passion, Transformation potential) and rest is the history
how Lord Krishna, even without picking a weapon, was instrumental in the win of
Pandavas due to his divine presence and unhuman wisdom.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #0033cc;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
Present day investing looks more
like a simulation model where too much focus is on giving a target price of the
stock advised though i am sure that the target given is not achieved 90% of the
time in the manner it was proposed. This addiction for giving a target price
comes from a feeling to demonstrate the superiority of the research- a target
means great study and analysis. But if value investing is this simulation model
then very soon computers will do the same much better than us (they are already
doing in fact) and there is no job for analysts in the future. But fortunately investing
is not simulation model. The main task of investing is to find the right
direction which requires creativity, imagination, huge data of businesses and
economies, and then some amount of luck. Financial metrics are helpful in
choosing or discarding a vehicle to cover the distance in the right direction
but they can’t decide the right direction. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
So strength of business model
which entails future scope of large scale of operations and transformation
potential (like in Agriculture and electronics goods manufacturing in India) is
the most important value accretion factor than any financial data. In many of
my earlier posts I have mentioned this aspect in picking a great stock.<br />
<br />
<span style="color: blue;">I do use
financial data for judging the capacity and sniffing (dubious companies) but value for me emerges from business model
and entry barriers. It is just like mining of Gold. Here, the main capability is not superior mining equipments but the ability to assess the presence of Gold. If someone can't assess the presence of Gold then he is just taking high risk and high possibility that superior mining equipments will prove useless and costly. Financial metrics are just like mining equipments but true value event for business is the superior capability to assess the presence of Gold.</span><br />
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">Value
investing was more relevant in the age of less competitive business landscape<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
Value investing was useful (or
great) when there was “information scarcity”. In old times, some 50-60-70-80-90
years back there was not much public information about various factors and
dynamics about the business and a particular stock because of limitations and
capability of media reach in those times. Only the privileged ones had the
timely access to the specific information. Also, most of the public was not
aware of the dynamics of stock market. For them stocks meant speculation. For
them a stock like Colgate and a local Tooth Powder stock were same because for
them stocks were just prices…nothing else. So stocks were lying here and there
with asymmetrical and irrational buyers. Hence this helped and created
opportunities for value picks because financial data/metrics were indeed the
representatives of sound underlying business prospectus.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
But I think another major factor
was that businesses were much simpler and competition was less and globalization
impact was much lower. Hence one could easily believe that the business growth
line would mostly be a straight line. But not anymore. Globalization and flow
of capital and technologies across the globe has rendered businesses very
complex. Technological breakthroughs are occurring at such a fast pace that valuation
methodologies like 10 year DCF have become useless because in this extremely
fast changing environment nobody can estimate future cash flows as far as 10
years. Earlier, businesses were built upon capital but now capital is easily
available. The differentiating factor is the business strategy and capability
to create high entry barrier products. Like, optical disc storage manufacturers
like Moser Baer tasted grand success and destruction of their business
completely just in a span of 5-6 years. These days, slight delay in taking
critical business decisions may prove catastrophic just like in case of Nokia
and Kodak. That’s why study of business model is the first value factor in analyzing
a stock/business. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">Most
important: Business strength is relative not standalone<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">One thing which I find missing in
all business analysis whether it is value investing or credit rating is
relative strength. A business is under constant threat from competition and
most of the times businesses are vanished not due to mistakes or frauds but due
to strong competition. So first thing, strength in business is not standalone
but it is relative. Like, recently I was reading a credit rating report on
Oberoi realty which was revised downward to negative due to Covid. Their logic
is simple that there is pressure on its business but this even a layman can say.
But business and life is not that simple. Oberoi is having one of the strongest
balance sheet due to low debt and very strong brand positioning so it has much
better capability to withstand any short to medium term pressure as compared to
other players with very weak balance sheets due to high debt. So there is high
possibility that this may knock out many small and weak players and due to scope
of leverage (that too at lower interest rates) Oberoi realty can even acquire
these properties or land at much lower prices. So if one can see then its
relative strength is increased. Same is the case with Mahindra Lifespace which
is also having least amount of debt and poised to acquire properties and will enter
into partnerships with other weak players. <span style="background-color: yellow;">Both </span></span><span style="background-color: yellow;"><span style="font-size: 12pt; line-height: 115%;">Oberoi realty (CMP 300) and </span><span style="font-size: 16px;">Mahindra Lifespace (CMP 200)</span><span style="font-size: 16px;"> </span><span style="font-size: 12pt;">are my preferred picks for real estate sector.</span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">So there is nothing like standalone
strength in business and many cases when we may be witnessing a deterioration
in the business and financial metrics of a stock/firm (and may declare unfit as
a value buy) but there are strong chances that its relative strength may have
increased massively which will pave the way for even stronger and comprehensive
business growth in the future. We can see the impact of this aspect in many
cases and I think the interplay will be more prominent in current Covid crisis.
There will be many industries like Hotels, restaurants where strong and
organized players will reap the benefits of increased relative strength in the
future. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">Risks and
potential are embedded in business and economic realities not in financial
metrics<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
Just to elaborate above points in more details...i am putting some cases below
where some stocks were great value picks as per value investing metrics but due to
subtle intricacies of their business models there were inherent risks and
potential threats to their businesses. And similarly there are some sectors/stocks which are a great buy because of their business model and strengths which will create high growth in the future.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">Banks and NBFC
stocks<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
Let’s take the case of banking
and NBFC stocks because I have always seen very strong fascination for these
stocks in Indian market especially and all the times I have seen metrics like Price
over book value being used for pointing out the undervaluation and scope for
growth. I have no stock related to banking and NBFC businesses in my portfolio.
These two businesses are highly leveraged ones so domain expertise and focus is
very important. I have always found these very risky because of their current
erratic business model. Like, the main task of Banks is accumulation of savings
and creation of credit but they are distributing long term risky infrastructure
loans which for me is not their forte. They lack the expertise to assess the
risk associated with these infrastructure projects. I invested in NBFC’s in
2016 when I felt that because of their domain expertise in infrastructure
sector they can fill up the vacuum created by Banks as banks were busy in
repairing their NPA hit balance sheets. But I cashed out of all NBFC stocks in
the beginning of 2018 (around 10 times gains) because I realized that they were
also going way over the top. Everybody was becoming an infra developer because
of low hanging debt money and I thought the debt will never be paid back.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Further, apart from risky loans
by NBFC’s other factor was the high rate of interest in India and I was having
doubts over the paying capacity of the builders. I don’t think infra development
is a viable business at interest rates of 10%-15%. Infra should be developed at
lower interest rates and for this it is the duty of government to give interest
subsidy. I am waiting for long time to see interest rates falling in India and
I hope that this may happen now. <span style="color: blue;">It looks absurd to have such a high interest
rates for a strong economy like India. In fact large borrowings by the Government is one of the main reason for high interest rates in India as Govt competes for funds with private sector. </span>So if they can’t control or lower it
then they should give interest subsidy for infra which is going to add some
value into our economy like large scale warehouses for storing agro produce to
save the same from wasting, roads and railway enabling faster and cheaper
movement of goods. These infra investments pay for their debt on their own as
they do value addition. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
But still, the records of our
banks and NBFC’s with regard to infra debts is very bad and I think there is
more to the story than just bad poorly planned infra projects itself. Because I
think, debt and infrastructure are made for each other…made in heaven. The
loans taken by normal business entities like Telecom, FMCG, Steel, chemicals
are more risky than infra loans because there is tough competition in these
industries and often it is happening that two competitors are fighting hard for
same business/market share with loans and as we can guess one is going to bite
the dust and his loans will turn NPA i.e. the fight we are seeing in telecom
now. So debt to normal businesses is very dangerous and requires high skills in
allocation of debt. If one particular sector is already having high debt and
chances of demand in that sector may go down or there may be severe competition
and price war coming so in that case caution is required in allocating loans to
that sector.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
But Infra is different. Due to
competition and miscalculations by businesses, we can create excess (redundant)
capacity in steel sector but can we lay extra gas pipeline of 5000 KM length??
Can we make another road parallel to a newly constructed road?? Can we make an
additional Airport. So as we can see there is hardly any scope for redundancy
in infra and if properly planned (like costs during bid stage) then chances of
failure are very less in Infra. That’s why I feel there should be low chances
of NPA in infra but it needs lower interest rates. However, government can
construct excess infrastructure to create jobs in the economy but which may not
add any value to the GDP growth like in the previous post I have given the example
of investments made by Chinese government in waste and excess infrastructure
just to grow the GDP but these infra is not used. But there is no risk for the
infra developer here.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">Current
consumption vs productive business investments<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
Further, I don’t rate lending for
current consumption (relative to investment) very high. We are just dragging
the future consumption into the present and demand for these consumption loans
raises the interest rates. Consumer credit is not used to generate the income
that will pay off the loan, as with business finance. Instead, payment of
consumer loan will make people spend less so any spike in the GDP is reversed. <span style="mso-spacerun: yes;"> </span>So interest paid on consumer loan does not
have much economic development role and it is more like a rent on the economy.
But giving a car loan, housing loan and personal loan is less risky than infra
loans so lenders love these and because these are mostly secured so credit
creation here is more like a rent. Also the assets like houses, cars etc. do
not pay for their debt (more cars means more oil import also) because they do
not generate income like that of a business asset. They are paid from the
future savings so their impact on GDP growth is lesser. So more lending should
be for business asset for a growing economy like India rather than consumption
loans. India first needs to put money for business investments then we can
think of a consumption based economy. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
So banks’ main role should be the
credit formation for tangible productive investments in the economy like for
electronics goods manufacturing which will generate more income for paying the
debt. But these days most of the bank finance is used for financing of real
estate, business buyouts and financial assets like Bonds which are already in
place. So for me, in their current avatars banks and NBFC’s were always very
risky businesses for me regardless of the strength of their balance sheet which
is always transitory. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The pressure on GDP growth we are
feeling now is because of lesser investments in high growth sectors like
electronics goods. Now we need new avenues for growth and for these investments
is must like solar power equipment manufacturing. Now focus should not be on
growing consumption because those who can consume they are already doing it and
those who can’t needs money which will come from jobs and jobs will be
generated by business investments. So if you ask me then consumption always
follows investments…it is not the other way round as is being felt. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">Auto sector
woes and new torch bearers for Economic growth<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
Current pain in the Auto sector
does not imply the malfunctioning of our economy. Actually what we are seeing
now in our economy and in Auto sector is self-correction mechanism of a growing
economy. While growing fast, this is natural that there is some misallocation
of resources as one can’t oversee everything in minute details in a vast
economy. Like we created vast manufacturing capabilities in Autos but none for
electronics goods and saturation in auto is hitting us now. Further most of
cars are sold (80%) on credit in India so natural demand was always low. Also,
our Auto sector could not capture the export market due to product quality
issues as India is a market of cheap and small car. But still, there is still a
chance for our auto sector to grow their export business. So in an economy, in
correction mode resources shift and structural changes take place like new
demand and supply centers will emerge. This is perfectly normal and good thing
about our economy is that we can still control it, direct it because we are not
primarily an export oriented economy (demand is local) nor we are a saturated
one like USA where they are trying to make people consume more and more.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc;">Electronics
goods manufacturing</span></u></b> is the best alternative because of the sheer
size of demand which is met entirely from imports. So here, without growing the
aggregate demand in the economy we can grow the size of the economy by import
substitution and with our impressive record in Auto sector there is nothing
that should stop us because we are already the global leader in chip designing
which are used in these electronics products. <o:p></o:p><br />
<br />
<span style="background-color: yellow;">Defense is another sector where i think huge scope for local growth and India has no choice but to go for local manufacturing as we can't fund the massive defense spending by imports. Here, i am investing in BEL (now at 73) because apart from defense it has equally potent non-defense business and it has everything to venture big time into electronics products manufacturing in India. Also, it gets the defense work from all other defense firms like HAL, BDL, Midhani etc. so it is like a proxy for the growth of Indian defense sector. BEML i like mainly for its Metro rail manufacturing in India, first Indian player to do this...has 50% share in local manufacturing. It has equally great defense business and govt. is going for the strategic sale of BEML (now at 600) so this alone can trigger a massive upside.</span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc;">Healthcare</span></u></b>
is another stunning option and this is where we have unmatchable technical
expertise and we can create an affordable global hub for healthcare services to
promote medical tourism. We already are one of the biggest and highest growing in
medical tourism but we can create a real giant much bigger than IT industry.
Unlike other industries, healthcare sector create more jobs as the role of
machines are comparatively less. <span style="background-color: yellow;">Narayana Healthcare, Max India and HCG are my picks for this sector.</span><o:p></o:p><br />
<span style="background-color: yellow;"><br /></span>
<span style="background-color: yellow;"></span><br />
<div class="MsoNormal">
<span style="color: #0033cc;">Laurus
labs is another stunning stock which I think is ignored by market due to recent variability in financials/Profits though it was having one of the highest passion quotient
among all Indian Pharma stocks. It is one of the best in complex API globally courtesy its strong focus and investments in R&D. Last year, due to raw material sourcing issues
from China, its profits were hit as it could not raise the price of its
products. But this has given Laurus an opportunity to do backward integration
to manufacture the same in house cost effectively. Then there was the impact of
capital investments for its formulations business. It invested some 500 cr for
the business but it takes time for the new business to start generating
revenues and profits. Laurus was in investment mode for past few years and it
has invested some 900 cr overall in last 3 years or so. So apart from normal
running expenditures of these newly created assets, the impact of depreciation
was significant and this has alone hit the bottom line and I have seen many
times investors lack the understanding of depreciation which is a non-cash item
and for new ventures can distort the profit figure artificially. Like its
revenues were increased just 30% from 1800 cr in 2016 to 2300 cr in 2019 but
its depreciation cost almost doubled to 164 cr vs 92 cr. Other expenses
increased from 200 cr to 400 cr. So as we can see, it was not that something
has hit the earning potential of its existing business. It was just the impact
of expenses/charges related to unused and preliminary assets. At 470 this one
is a great buy. I have added good qty at 300-330 amid covid crisis.<b><o:p></o:p></b></span></div>
</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc;">Solar
power equipment manufacturing in India</span></u></b>. It is clear even to a
layman that we can’t build our solar dreams on imports (80-90% equipments are
imported) because then we are better to stick with thermal power. At least the
income will be generated in India. So we have no choice but to promote solar
manufacturing in india and for that government should give free land, cheap
power, low interest loans and for that they have to ration the resources
available in the budget. I am even in favour of RBI creating credit (at 1%
interest rate) for solar and electronics goods investments because in any case
banks are not lending money to them. Government has accumulated sizeable amount
by imposing safeguarding duty on solar and electronics goods so that money
should strictly be used for the purpose of growing manufacturing for these
sectors in the form of subsidies. <span style="background-color: yellow;">Here i like Borosil Renewable very much which is only indian company producing solar glass of top notch quality and recently invested big in doubling its production capacity to cater to coming local demand. I have invested quite a bit in it recently at 35. This is the best pick for solar sector as of now after Tata power which is another one i have added at 30-33 recently having order book of some 9000 cr. Tata power may be the stock of this year.</span><br />
But if one looks at the financials and books of these two then they are not anywhere near to be regarded as value buys but when you study their business and their relative strength they are deep value buys.<br />
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc;">Agriculture
one of the best Bet:</span></u></b><span style="color: #0033cc;"> </span>India
has huge land fit for agriculture. Some 60% of our land is fit for agriculture
which is among the highest in the world. India has some 160 million hectares
arable land which is second highest in the world…larger than china. USA is the
first. But just look at our productivity as compared to China. Like in Rice,
China’s yield is double of India. So, India has large arable land but less
minerals (mining) so it is prudent for India to build an agriculture based
economy for exports and build industries based on agriculture like food
processing etc. But not much work has been done into this. Corporates and their
investments are required for this. So if you ask me, this presents a grand
opportunity because sooner or later India has to focus on this. <span style="background-color: yellow;">So these days I
am again looking for promising bets in agriculture sector and so far has picked
stocks like BASF, Godrej Agrovet, Mahindra EPC (got a bargain at 80 recently), Rallis India
etc. Godrej Agrovet is a stunning player and a great proxy for agriculture sector growth. I have no doubts that after the recent reforms in APMC acts by Modi Govt, Godrej Agrovet will go for Contract farming for Palm oil at massive scale. Why i feel this is because in other agro commodities India is quite self sufficient but we import huge amount of Palm oil (Pulses is also a very big import) so we need this to substitute imports. Godrej Agrovet has massive turnover of 7000 cr with very diversified streams of revenue. It is into animal feed, Agrochemicals and seeds, Dairy, Oil palm, FMCG (Godrej Tyson foods). Animal food is the biggest contributor of the topline with 3700 cr, Agrochemicals at 1100 cr, Dairy at 1200 cr, Oil palm at 700 cr, FMCG 500 cr. So it is adequately diversified into various sectors related to agriculture. At 370 it is a steal and i am investing good chunk of my portfolio in it.</span><o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
I think corporates like Tata,
Mahindra should be encouraged to make large investments for growing basic
agriculture in India. To protect and look after the interests of farmers state
governments can become equity partners in these projects. <span style="color: #0033cc;">Just take the case of development of large integrated
industrial clusters by Mahindra Lifespace (Mahindra world city) in Chennai and
Jaipur (1500 and 3000 acres) in partnership with state governments. India needs
type of plug and play industrial clusters where manufacturing can be started
immediately without putting large investments and time. These are preferred by
foreign firms and in these integrated cities developed by Mahindra (Chennai is
fully leased out) foreign manufacturers/businesses are the main customers. <b><u><span style="background-color: yellow;">Mahindra
Lifespace is one stock for which I really see a great future and this one is a
great value pick at 180.</span><o:p></o:p></u></b></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;">One last
example on DHFL<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="color: #0033cc; font-size: 12pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
Lastly, just want to share a part
of my blog post on Nelco <a href="https://oscillationss.blogspot.com/2017/12/nelco-ltd-sky-is-coming-down.html" target="_blank">(click here)</a> posted in Dec-2017 wherein
I have explained the relevancy of financial analysis and also expressed my
views on the riskiness of DHFL which was around 600 at that time (now at 12):<o:p></o:p></div>
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<i><span style="color: #0033cc;">Sometimes
I feel that understanding when and how to use financial analysis is more
complex than learning various financial analysis tools itself. Like, for
example, let’s take the case of ROE…I have seen people using this ratio to
compare one stock with other industry stocks when in fact this ratio should be
used first of all for comparing it with the COST OF EQUITY of the stock under
analysis. Cost of equity of each organization is different keeping in view the
riskiness of the operations of the organization. The more the riskiness higher
is the cost of equity. ROE should be compared with this Cost of equity not with
the ROE of other companies. Just let me give you a hypothetical example of PNB
housing and DHFL. Both have ROE of around 15% but PNB trades at PE of 30 as
compared to 20 of DHFL. Now I have seen reports which simply conclude that as
ROE is same of the two stocks (not just these two) so DHFL is undervalued to
the extent of 50% as compared to PNB. <o:p></o:p></span></i></div>
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<i><span style="color: #0033cc;"><br /></span></i></div>
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<i><span style="color: #0033cc;">But
business profile of DHFL is more risky because it provides housing loans to low
income and self-employed people while PNB is more focused on salaried employees
(just assuming) due to its banking reach. So keeping in the view the high
riskiness of business of DHFL (due to high rate of default) cost of equity of
DHFL should be much higher than PNB (So as its Bond Int rates) and at once the
undervaluation margin of DHFL will disappear. This safety is the reason HDFC
will go on commanding premium valuations even if its ROE is lower than others.<o:p></o:p></span></i></div>
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<i><span style="color: #0033cc;"><br /></span></i></div>
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<i><span style="color: #0033cc;">So
I have always felt that for new emerging sectors/products (Like <st1:stockticker w:st="on">IOT</st1:stockticker>, Geo-spatial, Agri warehousing finance) the
focus should be on to evaluate whether they can create/add some value on its
own as only that’ll ensure their long term viability. Affordable supply and
corresponding high demand is the most significant factor for a new technology/product
to achieve widespread acceptability and growth. So in the coming paragraphs
we’ll endeavor to find out whether the Satcom industry in India can add some
value (solve a problem) on its own, can create adequate supply at affordable
prices in order to create long term value for itself. This is going to be more
fundamental with least (or no) focus on financial data of the current industry
players as at current scale it is not required.<o:p></o:p></span></i></div>
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<span face=""arial" , "tahoma" , "helvetica" , "freesans" , sans-serif" style="background-color: white; color: #222222; font-size: 16px; text-align: justify;">(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. </span><span style="color: #0033cc; text-align: justify;">Reach me at oscillationss@yahoo.in</span><span face=""arial" , "tahoma" , "helvetica" , "freesans" , sans-serif" style="background-color: white; color: #222222; font-size: 16px; text-align: justify;">).</span></div>
Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com7tag:blogger.com,1999:blog-8629364998048667702.post-31751062097067499442020-05-26T02:49:00.001+05:302020-07-19T16:49:00.402+05:30Vitamin D impact on Covid-19 Mortality and What China wants<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Covid-19 crisis may be going to change
the world as we know as of now. I still hope that India will emerge stronger
from this crisis though there may be some complications due to migrant labours on virus infections and economy front in the near time and we need to plan
for normalizing this migration as early as possible. On infection front, I still
think our demography and better immune system may help us in controlling the severity
and mortality though I think infections can run high as due to novelty of this
virus it is highly contagious. But I am very hopeful of finding a cure of this
virus very soon because of the advancements in the fields of genomics and DNA
mapping.<o:p></o:p></span></div>
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<b><u><span style="color: #0033cc; font-family: "times new roman" , "serif"; font-size: 14.0pt;">Covid
mortality and Vitamin D<o:p></o:p></span></u></b></div>
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<span style="font-family: "times new roman" , serif;"><span style="font-size: 12pt;">I am a great devotee of Sun and
believe in the power of Sun for our </span>well-being<span style="font-size: 12pt;">. Every day in office, i take sunshine
for 20 minutes at the roof of our office. For me Vitamin D is a miracle
molecule for our health and longevity. When Covid began spreading in India in
March i was of the view that Vitamin D is vital for covid immunity.
Because Vitamin D inhibits inflammatory response of our
bodies which is the main cause of death in covid. <o:p></o:p></span></span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Coronavirus is not killing us...in
most cases it is the inflammatory (immune) response of our bodies. Coughing is
our immune response- to throw out the pathogens so is diarrhea and
vomiting....it is our body's immune response. Fever is a common immune response
to an infection because a higher body temperature can provide a hostile
environment for pathogens. That’s why I never take medicines for fever, throat
infections etc. because I want my body’s immune system to fight with these
infections and this further strengthens the response time and impact of immune
system.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">There is always a debate whether to
treat fever or not. But fever is not a disease but a sign of fighting against
the disease. That day I was reading about Wagner von Jauregg who in 1900
(before invention of antibiotics for bacterial infections) injected malaria
parasites into the bloodstreams of people with syphilis which caused high fevers
for many days. Then he treated the malaria with quinine. <span style="mso-spacerun: yes;"> </span>But then he found that the high fevers caused
by malaria cured syphilis. For this achievement, von Jauregg won the Nobel
Prize in 1927. That’s why I always try not to treat the fever. Also at higher
temperatures, our immune cells like white blood cells (neutrophils), B cells,
and T cells work better.<o:p></o:p></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEit8NHNByWt1XBoxEbr_BGruaXnnNftaDiRYT3qCOvZl6RmblOpJVuWJhdk0UZya4ex8UKlRb5nUAyIrIK4KEzNr8kbhUa-VJBw8XERGunUCRFVLRh-Qkyk4M4iyEfcc5N9hzORZMipFYE/s1600/inflammation-innate-immune-system-vector-diagram-39001791.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1026" data-original-width="1300" height="252" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEit8NHNByWt1XBoxEbr_BGruaXnnNftaDiRYT3qCOvZl6RmblOpJVuWJhdk0UZya4ex8UKlRb5nUAyIrIK4KEzNr8kbhUa-VJBw8XERGunUCRFVLRh-Qkyk4M4iyEfcc5N9hzORZMipFYE/s320/inflammation-innate-immune-system-vector-diagram-39001791.jpg" width="320" /></a></div>
<span style="font-family: "times new roman" , serif; font-size: 12pt;">Inflammation is the immune response
of our bodies where white blood cells (like neutrophils) along with other
chemicals fight against bacteria and virus. These white blood cells are
equipped with weapons like enzymes to break the structure of the infectious
organisms. This inflammatory response has two stages- first, “pro-inflammatory”
where cells and other chemicals are produced for attacking and neutralizing the
harmful pathogens/substances by releasing the enzymes and anti-bacterial
products. So this is the first part of the battle where many cells and
bacteria/virus will die which are required to be removed from the battle field
and to rebuild the recovery (healing).</span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">This healing of the tissue starts
after the end of pro-inflammatory stage. Then “pro-resolving” forces take charge and
they are the ones tasked with the task of tissue repair after the elimination
of the disease-causing bacteria/virus. The discovery of existence of “pro-resolving” factors revolutionized the treatment of inflammation which earlier was mainly focused on
“treating” (or hindering) pro-inflammatory factors by trying to reduce the
action of the pro-inflammatory components but now they are focusing on to increase
the action of the pro-resolving factors to start the healing process more
quickly. Medicine world is getting the understanding that if we try to stop pro-inflammatory
factors by using strong anti-inflammatory medicines (like aspirin, paracetamol,
ibuprofen) then this will also hinder the signals for “pro-resolving” factors
to come up and start healing process.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">So when our lungs are attacked by
virus then our immune system comes for the fight to eliminate the virus and
clear away the damage and then to repair the lung tissue. When our immune
system is working properly then it is very strictly regulated so as to only
impact or attack the infected area. So our immune response to the virus causes
inflammation in the lungs but in some cases it can also cause significant lungs
tissue damage and this is the why covid is deadly. Thus this tissue damage and
inflammation can cause difficulty in breathing and that’s why the role of
ventilators are so big and so is the role of a robust healthcare system. This
can also explain the high death rates of elders whose lung tissue is already
weak due to old age. <o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">It has been observed that in some
individuals this virus may only cause mild symptoms but in some cases it causes
an overactive inflammatory response in the form of massive release of
“pro-inflammatory” cytokine cells. And this overactive inflammatory response is
the only difference between survival and death from Covid. Virus is not at the
core. Virus has the role in infection. In march when I was discussing this with
some of my doctor friends; there were suggestions that this can be due to
genes. But I told them that there can be a possibility of role of Vitamin D
deficiency also because Vitamin D inhibits the production of pro-inflammatory
cytokines.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Coronavirus is suggested to have
come from Bats though it is not proved as yet but still lessons from Bats are
important. It is surprising that bats are responsible for the spread of all the
deadly viruses like Ebola, Nipah, SARS and MERS. Actually Bats are wonderful
creatures as they can live safely along with the presence of these deadly
viruses in them. This is due to their remarkable ability to limit inflammation…better
to say their anti-inflammatory ability.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Bats are the only mammals that can
fly and this requires massive amount of energy for long period of time. So no
surprise these Bats have very high metabolic rate (Metabolism is the
biochemical process whereby our bodies create energy with oxygen for carrying
out various functions) to enable the functioning of higher muscle activity for
flight. We humans also do physical activity but only for short duration of time
whereas Bats do this for much longer period of time. This high metabolic
activity raises the temperature and in Bats this high temperature state
persists for much longer time (to be considered as Fever state as per our
benchmarks) so this leaves Bats with much higher body temperatures than human
beings (41 degree vs 37 degree). <o:p></o:p></span><br />
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Due to this high metabolic activity
and high temperature the result is the significant breakage of cells and DNA
structure and this result in massive release of DNA bits floating around
freely. Our bodies’ immune system identify and recognize these free DNA
fragments as Viruses and this trigger our immune system to activate
inflammatory response (release white blood cells (T cells ) ) which as
explained above sometimes goes into over drive and releases massive number of
cytokine cells which damages healthy tissue along with infected tissue. So same
should have been the case with Bats also and they should have very short lives.
But Bats have developed a remarkable ability to suppress this inflammatory
response to minimum. In order to survive the massive release of cells damage,
Bats might have lost some genes via mutation over generations related to high
inflammatory response.</span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">So the inflammatory sensors which
work in our bodies to trigger inflammatory response but these react barely in
Bats. So Bats do not survive due to inflammatory (fighting) response but
because they have high tolerance for any infection. So this fierce and swift
response from Bats makes viruses on their bodies replicate and mutate much
faster and this is why they are so deadly for weak immunity system human
beings. Also, as Bats have higher body temperatures so technically they are in
fever state most of the times and this fever stops the infection from deadly
pathogens. Further, as the viruses from Bats’ bodies already have exposure to
high temperatures so they are more deadly for humans.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I am a hard core gym man for more
than 20 years and also like jogging and sprinting. Many times friends and
relatives have questioned this madness for physical workout and strength as
they feel that career is more important than this. When I was doing Chartered
accountancy many doubted on me as they perceived this gym etc.as wastage of
time and declared that CA and Gym are not made for each other and I’ll be a
failure. But I did pass the CA that too without any sort of coaching. I have
seen the children of our relatives and friends doing study all the time. so many
times I have told them that as you have never done intense workouts so you
don’t have the ability to feel the massive inflow of power, energy and rhythm
in your body. <span style="color: #0033cc;">I told them that when we regularly stretch
our bodies to the maximum (by intense physical activity) then our bodies
release large amounts of testosterone (a hormone) which is what makes a man a
MAN. It is vital for sex drive, bone mass, muscle building, fat burning and
sperm count. Its production drops as we age. So one can see why our current
generation is so weak, fatty and powerless. It always surprises me how a real
MAN can derive happiness from owning an Apple mobile phone rather than having a
strong and powerful body. </span>But sadly this is what our current generation
is and many times I have to tell them that you surprise at my madness but I
pity you for your weakness.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Many times I have told my friends
the impact of high temperature on the health of our bodies. Like if you are
doing gym/sports/intense aerobic activity 4-5 times a week then you are taking
your bodies into higher temperature for longer periods of time and this will
save you from many infections. Many times, in winters in Punjab whenever I
caught with flu I would simply do intense sprints in the morning for around 1
hour and most of the times it cured the flu. The reason may be the high
temperature. Further, my body remains hot most of the times and in winters if I
do intense workouts it emits steam just like a pot of boiling water. Many people
get terrified to see the steam oozing out of my body. It took me long time to
understand that this may be due to higher metabolic rate of my body.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I studied about the remarkable
bodies of Bats while I was searching for the answers for steam coming out of my
body and then I found the reason from the Bats- it is high metabolic rate and
higher base body temperature. So taking the clue from Bats I always have the
belief that ability to fight off the Covid may be derived mainly from the
regulated inflammatory response of our bodies and hence Vitamin D may play
vital role. <o:p></o:p></span></div>
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<span style="color: #0033cc; font-family: "times new roman" , "serif"; font-size: 12.0pt;">So few days back,
there are reports which confirm the important role of Vitamin D in controlling
the deadliness of Covid (Not preventing as most people are reading it wrong). The association is the role of Vitamin D in
inhibiting/regulating the production of cytokines. The study was able to find
that this is also why countries like Spain and Italy suffered so much since the
people there had lower Vitamin D levels as compared to most other Northern
countries. Scientists who have done this research are of the view that the
impact of Vitamin D might be as high as cutting the mortality rate in half. The
government health agencies of UK have recommended taking vitamin D supplements
during this pandemic. Some links:<o:p></o:p></span><br />
<span style="color: #0033cc; font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span>
<span style="color: #0033cc; font-family: "times new roman" , "serif"; font-size: 12.0pt;"><a href="https://www.sciencedaily.com/releases/2020/05/200507121353.htm">https://www.sciencedaily.com/releases/2020/05/200507121353.htm</a></span><br />
<br />
<a href="https://www.nutraingredients.com/Article/2020/04/28/Clear-link-between-vitamin-D-deficiency-and-severity-of-coronavirus-say-researchers">https://www.nutraingredients.com/Article/2020/04/28/Clear-link-between-vitamin-D-deficiency-and-severity-of-coronavirus-say-researchers</a><br />
<br />
<a href="https://www.indiatoday.in/coronavirus-outbreak/story/is-vitamin-d-a-shield-against-coronavirus-researchers-study-covid-19-connection-1681736-2020-05-25">https://www.indiatoday.in/coronavirus-outbreak/story/is-vitamin-d-a-shield-against-coronavirus-researchers-study-covid-19-connection-1681736-2020-05-25</a></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I also think that the mortality
rates are defined by the robustness of healthcare system because in the worst
cases there will be stress on healthcare system in the form of ventilators etc.
But it is possible that Vitamin D has also one of the factor affecting
mortality rates.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">So the threat of covid is here but
it would be better to look after our Vitamin D intake. The perfect way is to
absorb sunshine on bare body when sun is at maximum height (around 12 am to 1
pm). Then there are cod liver oil capsules, eggs and mushrooms. Also, studies
have found that by exposing Mushrooms to sun for almost an hour results in the
massive increase of Vitamin D levels, almost equal to Vitamin D supplements.
Just take the mushrooms out of packing and place them in sun uncovered. Whether vitamin D is effective against Covid or not but it is great for our strong bones and
overall health.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="color: blue;">(Disclaimer: I do not belong to medical profession in any capacity so please discuss with your doctor before moving ahead with anything)</span></span></div>
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<br /></div>
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<b><u><span style="color: #0033cc; font-family: "times new roman" , "serif"; font-size: 14.0pt;">But
how high is the mortality rate of Covid-19<o:p></o:p></span></u></b></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I was trying to get the answer of
this question as this will have the most significant bearing on our response
and length of lockdown in the country as lockdowns have massive economic
impact.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Death rates across the world seem to
vary too much but as the timing and strain of the virus is almost same so the
death rate should almost be the same. Virus is not mutating very fast as of now
and also it shouldn’t be more deadly in one place than another. But still there
is way too much variation.<o:p></o:p></span></div>
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<br /></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">The likes of Italy, Spain, France,
UK and Netherlands have death rates in the range of 10-15%which is very high
while the likes of Russia, Germany, south Africa, south korea, Chile, Qatar has
low rates of 1%-2%. Even worse affected US has death rate of 6%. But there is a
pattern to this variability. Like, first countries with elders have suffered
the most like Spain and Italy. Italy has the largest population in the world at
65 or older and this also defines the high death rate because these elders were
already suffering from many other life threating diseases. So there is high
chance that the death is not due to Virus but due to other reasons but as they
were Covid infected so it is treated as covid death but this may not be the
case. Still, the elders are almost 80-90% of the dead in high death rates
countries including USA.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">But I checked the life expectancy of
Italy, Germany, USA, <span style="mso-spacerun: yes;"> </span>Spain & France and
the same is 82.5, 80.6 , 78.6, 83 and 82<span style="mso-spacerun: yes;">
</span>years. So Italy, Spain and France’s populations are equally or better
equipped to fight the virus. So there are other factors at play than the virulence
(deadliness) of the Covid alone.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Germany has lowest death rate due to
robustness of its healthcare and one of the reasons is that large proportions
of infected in Germany were aged between 35 to 59 which has very lower death
rates. Russia also has low death rates due to fairly young population but there
were accusations that it hide the actual death cases. But there is no visible
increase in the overall death rate in the country as compared to previous
years. Further, Russia has done very extensive testing (some 6 million) and I
think this is one of the reasons. Avg age of people died in Italy is above 70.
Germany also had much lower infections in older people (20%, Spain and Italy
50%). <o:p></o:p></span></div>
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<br /></div>
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<span style="color: #0033cc; font-family: "times new roman" , "serif"; font-size: 12.0pt;">I tried to find out
the number of deaths in Italy, spain in the same period in the previous years
so as to check how many deaths are actually due to covid. Actually, in my view
this data should have been taken for all the countries because too many people
are questioning the data where they want to or where they find the death rate
low but they wanted the same to be higher (Ego bias) like they have questioned
the data for countries like India/pakistan which have low death rates but in my
view one of the biggest reasons is the young population of these countries. But
still, having the data of normal death rates of previous periods (excluding
accidents as now there are lower accidents due to lockdown) would have given
some valuable insights because too many deaths might have been recorded as
Covid deaths when the underlying reason is not covid related complications.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Also, the method of counting deaths
due to covid in Russia is important as Russia has counted only those deaths due
to covid which are actually due to underlying covid symptoms like pneumonia not
where people have dies due to heart attack but they were infected from Covid. I
think this will have profound impact on mortality rates. Also, as explained above Vitamin D may also have a role on the death rates.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Testing is the main reason which can
artificially inflate the death rates. Because due to limited testing capacity, in
most of the high death rates countries testing is only done on those with
severe symptoms. But as per the experience there are many people who don’t even
show any symptoms (asymptomatic) or show very mild symptoms so they are n tvot
been tested at all. So there is a selection bias of only counting symptomatic
people in high death rate countries. Estimates put asymptomatic people at some
40%-50% of all the infected people.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Iceland is one such country with
high testing rate of almost 13% of total population and so far it has only
reported 1800 cases with just 10 deaths.</span> <span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">It
has tested everybody quite opposite to what every other country is doing-
testing only the sick persons with symptoms and large numbers of people were asymptomatic.
Iceland has no lockdown as of now. Even schools are opened. Germany also has
done more extensive testing including those with no symptoms. So testing only
on the basis of symptoms may be giving inadequate data for doing any reliable
analysis and drawing inferences. Current conclusions about death rate of covid
do not take into account that only a fraction of infected people are actually
tested (selection bias).<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">But one of the best case for us is
the cruise ship Diamond princess where some 700 people were tested positive out
of 3500. So this ship is like a closed environment test in a laboratory. The
ship was quarantined in Japanese waters on 3rd feb with 3711 people so almost
two months have been passed. Japan has tested all the people on the ship. The
ship has more elderly people. The ship was perfect for the spread of virus as
infected crew was cooking and cleaning the rooms, all the people were eating
together in closed places, close living spaces, many old people, much higher
social interactions. So that ship had the worst environment. Infection started
from foodservice crew members which put all of the ship into the virus risk.
Out of 3711 people some 712 were found infected but 651 have recovered with
only 13 dead (all elderly). So, almost 83% were never infected at all in spite
of being in such a dangerous place for virus spread. Almost 50% infected people
do not show any symptoms at all…the same is 100% for Children below 10. <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">It is surprising to see such a high
% of asymptomatic people for a virus considered so deadly. So if we can
extrapolate these findings on our current death rates then these rates should be
fallen by 50% because as of now our data and study is based on symptomatic
persons when 50% do not show any signs.<span style="mso-spacerun: yes;">
</span>One can say that cruise passengers generally are rich & otherwise
healthier people so this ship data may also be biased. But still in any case,
we can very well count and rely on the data of recovery and asymptomatic
patients. Also, it shows that this virus is not at all deadly when it
encounters healthy people even if they are elderly people.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">But still, the attack rate of this
virus is relatively high as there is no immunity to it as of now. So in case
infections are high then there will be heavy stress on the healthcare system
which is very dangerous for countries like India with less robust healthcare
system. Hence, until more data about its mortality rate is found or there is a
medicinal cure for it, it is better to follow social distancing. It is
particularly important for the safety of elders in our homes and people with
compromised immunity due to underlying diseases as they are more vulnerable. So
i think India is doing right by locking down as our healthcare system may not
be as robust. Further, sometimes over-reaction is much better response than
over-confidence.<o:p></o:p></span></div>
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<br /></div>
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<b><u><span style="color: #0033cc; font-family: "times new roman" , "serif"; font-size: 14.0pt;">What
China wants<o:p></o:p></span></u></b></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">If you ask this question to any
Chinese, ultimately the finger will be pointed towards only one man- Xi
Jinping. Welcome to the world of Autocracy. Some people believe that authoritarian
governments are better for planning a great strategy and its implementation and
so they are more likely to lead a country into economic growth. They cite the
reasons like fewer regulations, prompt and timely implementation, power to make
bold and big decisions etc. This logic may look better on the paper but real
life is always very different because of its multi-dimensionality. First, for
this to succeed a superman like human being is required like Maharaja Ranjit
singh, Samrat Ashok, Shivaji, Akbar, Maharana Pratap etc. But persons like
these are very few and stretched over centuries. So collective consciousness has
better chance to perform under democracy than when autocracy is the slave of
someone average like Xi Jinping. Democracies due to their public answerability
are much better in planning strategically to the core and implementation if
successful is maintained even if there is a change of leadership like BJP in
place of Congress. Further, democracies due to freedom and openness promotes
innovation & creativity which are the main forces fostering economic
growth (quite contrary to the Chinese model where debt is given to states for
spending and Voila!! GDP growth is here). That’s why I always say that GDP
growth is not economic growth.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">And China needs a superman now. But
the problem is that there are some people who think that superman is superman
because he wears his “underwear” over his pant (this is Underwear syndrome). China
has so many like them. Recently, British economist Jim O'Neill remarked he was
thankful the coronavirus outbreak started in China and "not somewhere like
India”. If one can see these are the persons who suffer from “Underwear
syndrome”. Look at the wisdom of this man…he can’t see the conspiracy and poor
governance levels of china in handling the virus but he is so sure of India’s
incapability to control. Now this man should see the pathetic response and condition of UK in fighting with the virus.</span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span>
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">There are many such</span><span style="font-family: "times new roman" , serif; font-size: 12pt;"> “underwear syndrome” people in
India also who shout “Bhakat” at everything which can question their intellect.
Being in stock analysis stream, I normally want to have free discussions
without being tagged as a follower of BJP or Congress like I was critical of
the timing of Demonetization but still PM Modi ji is doing a fantastic job.
Look at the fear he has instilled in the minds of Pakistan and China. <span style="color: blue;">After very strategic Balakot strikes, Modi Ji has ended the pakistan's madman theory of using nukes...Balakot strikes called the bluff out of Pakistan's Madman theory. And now both Imran
khan and Pak army is trying to bring India into talks. Now they are saying nuclear weapons are very dangerous. </span>Look at the alliances he
is building with all the global powers of the world. Indian Economic growth and
PM Modi ji- I’ll further touch this topic in some other post but let me bring a
perspective. India and China had almost same GDP in or around 1988-89 and they
had the similar defense spending but today China GDP is almost 5 times of India
and defense budget is some 6-7 times bigger. And in all this period from
1989-2019 when for most of the time congress was in command. </span><br />
<span style="background-color: white; color: #222222; font-family: "times new roman" , serif; font-size: 12pt;"><br /></span>
<span style="background-color: white; color: #222222; font-family: "times new roman" , serif; font-size: 12pt;">Further, there was high growth phase during 2004 to 2012 but that was
the time of great IT and Pharma export story which happened mainly because of
some great maverick and visionary individuals and there was not much role of
govt. They supported it once it was put into act by these individuals. And then
these two sectors set the tone for the demand for cars/bikes which set the tonefor
the growth of Auto Industry in India. It also developed real estate and wealth
distributed from these rich IT/Pharma people to common man. But when Modi
government took charge in 2013, the growth started to slow down in these
sectors due to competition and global slowdown. So India is in need of new
sectors which can be the torch bearers of growth for next 10-15 years.</span><br />
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0.0001pt;">
<span style="color: #222222; font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
</div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">So there were many people around me
with whom I used to do free and long discussions but then I noticed some of
them using “Bhakat” jibes in social media and I left them completely after
that. They are not worthy of a talk leave alone brain storming discussions.
Recently, one such fellow brought the topic of RBI giving the dividend to
central Government. One of my friend replied that central govt might needed
this money to which that fellow used “you are a Bhakat” Jibe and was smiling.
But then I asked him whether he tried to understand the inner working of RBI
and the impact of this dividend. He only had a wry smile and murmured that ex
RBI governor was also against it. But I told him where is his intellect and why
you want to believe this man Raghu Ram only…why he has better credibility. Why can't Ex RBI governor Bimal Jalan who has advised for this dividend? Why it is that you people only find value in someone who is Anti-Modi? In some cases i have seen these people supporting pakistan and china also!!!<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I told him that earlier Raghu ram
had also hailed Modi Govt to initiate the bank loan cleanup and blamed the
seeds of this crisis on reckless lending in UPA regime.<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">But the main reasons for not
re-electing him was more about his attacks on Govt policies and less on his RBI
operations. When he was not lowering the int rates in spite of Govt pressure he
expressed that the prime mandate of RBI is financial stability/inflation not
economic growth. But then on other hand he was criticizing govt heavily in
public over Make in india, Jan dhan Yojna, Tolerance which was never his
mandate and he was giving his comments as RBI Governor. I think he was crossing
the line.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Raghu was also advising for privatization
of PSU banks which was easy to say at his position not at the Govt level and
the time needed for this was massive while economy/banks needed urgent support.
PSU banks are not bad per se it is the managing power. UPA mismanaged but this
does not mean that BJP would do the same. PSU banks have social
responsibilities of taking banking to poor masses in rural area. I have seen SBI
branch in remotest villages of India but not a single private bank. So another
view to see PSU banks as social and economic growth driving entities as a whole
not from the micro view of the profitability of these banks.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Even Jalan panel advocated the
dividend out of revaluation reserves. The panel is chaired by former Governor
of RBI Bimal Jalan who is an institute in itself and a very credible fellow. So
I tried to explain to him the logic behind the RBI dividend. I am explaining
the same here also. Please keep in mind these are just my views:<i style="mso-bidi-font-style: normal;"><o:p></o:p></i></span></div>
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<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">1. First of all, RBI has a very
different type of balance sheet. It has liabilities in the form of money issued
but it is the only one who can issue interest free liabilities. So RBI has this
superhuman ability-it issues zero interest liabilities and earns interest from
the assets purchased from it. Due to its capability to create money it’ll never
default on its liabilities.<o:p></o:p></span></i></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">2. So due to the nature of its
function-zero interest liab which earns interest-it’ll always earn net income
so due to almost nil risk the requirement of capital is not high. In fact there
are some countries like Israel whose Central bank has even operated with –ve
capital. So we can afford to be conservative with central banks.<o:p></o:p></span></i></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">3. Then, RBI balance sheet is a part
of big macro level balance sheet of Government so it can’t ignore the fragile
balance sheet of govt while maintaining high levels of capital. RBI is part of
Govt. But it is also true that to give autonomy to RBI they should have
adequate levels of capital.<o:p></o:p></span></i></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">4. So as we can see now the issue is
what is this adequate level? If we take the global standards, then RBI is way over
capitalized. Against the median ratio of capital to assets of 8% RBI had 27% in
2017-18.<o:p></o:p></span></i></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">5. As we know reserves are part of
retained earnings. Same is true for RBI but almost 3/4th of the reserves of RBI
are revaluation reserves. Foreign currency assets are some 70% of total assets
as this is the prime role of RBI to have foreign reserves. Then there is Gold
and local currency G-Sec…so most of the reserves comprise of the fluctuations
in these foreign currency reserves and Gold/G-Sec.<o:p></o:p></span></i></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">6. As rupee is falling forever so
these reserves are only rising. So prudence says that RBI should keep reserves
in case there is rupee appreciation. But RBI keeps most of the revaluation
reserves in the contingency reserves not available for dividend (although
commercial banks can show valuations gains as profits).<o:p></o:p></span></i></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; text-align: justify;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">7. Now there is big secret about RBI
needing these reserves. Actually RBI has limited ability to influence Rupee
depreciation i.e. it can’t sell all its USD reserves to support the rupee as it
needs USD for country. But strangely, RBI has unlimited ability to support the
appreciation of rupee as it can buy any amount of USD by creating money at
will. So due to this, the chance that Rupee will appreciate massively is remote
as RBI can control that.<o:p></o:p></span></i></div>
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<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">8. Also, at the current levels of
contingency reserves RBI can support the appreciation of rupee to the levels of
45 which is highly unlikely.<o:p></o:p></span></i></div>
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<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">9. So all this means that RBI can
part away some of the revaluation reserves to support the government without
affecting and risking its existence and autonomy. As per Jalan committee, RBI
has excess reserves to the tune of 50%-60% (some 5-6 lac cr) which it can
transfer in 3-4 years.<o:p></o:p></span></i></div>
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<i><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">10. Now the next important question
is-how this will be done and where the money will be spent. But here are many
combinations to do this and each one has its own repercussions like public spending
of this money will be inflationary and dangerous. To channelize for the
economic growth and to avoid high inflation the excess dividend should go to
bank re-capitalization.<o:p></o:p></span></i></div>
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<br /></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">But I was sure that that fellow
could not grasped the essence of this explanation. I told him not to act
like a fool. But when they use “Bhakat” jibes I actually find this very
funny and laugh a lot as it just shows that they have nothing much to say or offer on the subject
though I want to say to them, “come on!! you can be better than this.” But when these people use "Bhakat" jibes they think that they are a superman with underwear on the pant.</span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">But I don’t expect
foolish jibes from intellectual people. These are only for the use of average
people who can’t think much so all this buzz and noise is created for these
brain dead people. But I again want to say I expect much better from
intellectual class.</span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Coming back to China- So there is no
doubt that China has done a big blunder in handling Covid and spreading it in
the entire world and there is massive global backslash and US is using this
opportunity to trap, sideline and destroy China. So a normal human with average
wisdom would have tried to reach other countries with helping hand using soft
power. Just like what Taiwan did- Taiwan has distributed large quantity of
medical assistance to the countries across the globe just to create a positive
environment for them so that they can throw away the Chinese takeover threat.
But what is China doing?? Just the opposite. They have tried to trap small
countries into debt for medical supplies, imposed duties on Australia imports
for asking for Covid inquiry, showing aggressiveness in south china sea, taking
away autonomy of Hong kong and now they are creating troubles with India at
borders. <o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">There may be a chance that Xi wants
to portray the strength and power of China in the wake of local and global
backslash. He wants to show that china is still tough and will take hard
stance. But this is expected from average fellow like Xi and it is good that
this is happening because at least now the world will be able to recognize the
threat of autocratic and irresponsible country like china. The threat is not
new and global powers had in them to recognize this much earlier when china was
stealing technology, when they were ring fencing their economy but wanted to be
largest exporter, when they killed innocent in Tiananmen square in 1989,when
they killed Tibetan soul, when they are forcing millions of Uyghur muslim in
detention camps. But all kept quiet due to their economic reasons as China was
a massive market for them or they needed china money like Pakistan. But now all
of a sudden, the world has got a massive slap from the china behavior and I
feel world will never be the same for chinese.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">India has also crafted their China
strategy carefully now and all of a sudden India is getting into the game.
India has made string alliances with China adversaries like US, Japan,
Australia. Also i think, we need to play the economic card well because china can't afford to loose such a large market like India. In the past, India never tried to avoid One China policy and never
recognized Taiwan as separate but recently two BJP MP’s virtually attended the
swearing-in ceremony of Taiwan President Tsai Ing-wen and even sent her
congratulatory messages. India avoided the same in 2016. India also supported
Covid inquiry proposal at WHO. So now China by creating tensions at border
areas is trying to give a warning to India. But I think India now is well
prepared and well assured of itself. And even this plan of China to hit the
psyche of India may backfire because this will further strengthen the purpose
and need of strong alliance of India with US. China can’t afford the US
alliance with India because this will hit its interests very hard both from
India and US.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">So China has done a grave mistake in
letting India to go to US to balance the threat of China. China has done a
foolish thing by posing themselves as a threat to India when it was certain that
India would always wanted to settle the disputes with china and move forward. There is not much at stake with border disputes with India and both china and India could have settle the disputes by keeping something and giving something for the mutual benefit. China
has nothing much to gain from any war against India now as this will hit China
very hard both physically and economically and this will give US the chance the
pounce at south china sea, Hong kong and Taiwan. Even Tibet will be in danger.
But strangely China has chosen Pakistan which itself is very unstable and
opportunistic. So wisdom would have advised China to befriend a democracy and
responsible power like India for long term benefits. With Pakistan, China can’t
even be sure of the safety of nuclear weapons. Some says that with Pakistan China may benefit from the expansion of BRI initiative via CPEC. But had china formed a friendship with India then india would not have opposed the same and in fact may have even partnered with them. </span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="color: blue;"><br /></span></span>
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="color: blue;">Right now amid current border tensions t</span></span><span style="font-family: "times new roman" , serif; font-size: 16px;"><span style="color: blue;">h</span></span><span style="color: blue; font-family: "times new roman" , serif; font-size: 16px;">ere is high chance of a small scuffle between India and China though both may want to avoid it as no one knows for sure whether it could remain low intensity fight. Both may be apprehensive of each other (game theory) and may even decide to forego it for some other time. But China is giving India the reason to change their strategy and target where it hits china the most- by supporting Taiwan and south china sea and forming alliance with US for defense strengthening. There is a big tactical difference in the focus of both- India considers China as prime enemy whereas China considers US. So China has to cross US for its global ambitions and it is not in its interests to create a strong enemy in the form of India. Here, it is better if India behaves or create its image as someone very unpredictable because this makes formulating a definitive strategy against India very hard. Though i feel that India's Balakot strike and tough stance during Doklam is enough to create an aura of unpredictability. But China after facing humiliation at Doklam may want to avenge the same by having a low intensity fight...so India also need to create unpredictability. Also, there are always doubts on the combat qualities of chinese forces...they are timid and corrupt. One of the reason is the one child policy of china due to which some 70-80% of chinese army men are only son of their families and this make them combat averse. I think China knows this especially keeping in view the brave stories of indian army right upto kargil war where they snatched the victory from the jaws of defeat.</span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">China foolishly tried to blackmail
countries to stop questioning covid handling by stopping the supply of
essential medical and other supplies. This has led many countries across the
globe to think about their mistake in creating their supply centers in China.
And I have no doubt that there will be flight of supply chain from China. Whether
this will come to India or not is another thing which I’ll discuss in another post
on economic revival and growth of India. China may try to stop this forcefully
but now they have already committed the grave mistake and now there is no
stopping.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I have seen some commentaries these
days which say that China growth is much internal now and share of exports have
fallen to some 20% of GDP. So they mayn't worry that much about Exports. But if you ask me this is not the case and there is
a need to do some fine tuning. First, Investment is one of the biggest components
of the China’s GDP (some 40%) and this investment is controlled by the Communist
Party. Massive funds in the form of Debt is given to state run enterprises,
local governments via state run banks and this debt is used to construct roads,
bridges, large real estate projects. So for them it is very easy to grow GDP.
By increasing debt for investment by some 10% they can create GDP growth of 4%
(10% of 40%).<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">But most of these investments are
waste and bad as they do not contribute anything for GDP growth because they
are in excess of their requirements. Nobody use these bridges, real estate
projects…these are ghost cities. So these investments does not do anything for
the economy…no factory uses the road and bridges to move their goods faster, no
farmer benefits from them and save his agri produce. So these are just bad
investments and needs to be written off so as to correct the GDP figure. But
this is not done in China and as per estimates some 10-15% GDP is reported
higher due to fake numbers and bad investments like this. In my view this can
even be higher. China has one of the highest debt to GDP ratio ( 317% as of now) and most of the debt is bad.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">So if one takes into account this
excess reporting of GDP by some 15% then all of a sudden 20% share of exports
becomes 30% and this is very significant because share has fallen but absolute
value has gone only bigger and bigger and then further there is a question of
distribution pattern of local growth and export income.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">I am leaving this topic here now due
to length of this article but will touch this issue in much detail in the next
post on economic growth.<o:p></o:p></span></div>
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Gurpreet singhhttp://www.blogger.com/profile/10779546706508152515noreply@blogger.com6