Ajay Piramal and Art & science of buying & selling businesses

There are multiple ways to invest in the equity market. Value Investing like Buffett, Growth investing like multiple investors picking small cap stocks and waiting for them to become large cap stocks. Many outsource it to fund managers by buying mutual fund units. Some just buy index funds. Few become co-investors with PE firms. Few take higher risks by investing into start-ups.

 

There is another way of investing which does not get discussed in the mainstream media. It is just following the entrepreneur. Had you believed in Narayana Murthy and Azim Premji thirty years ago and invested your money in the businesses they managed, what would be the returns on your investment? How about blindly following Elon Musk and put your money in Tesla early in the game? Just think about it. You would have earned handsome money and beaten the broader market.

 

I follow Ajay Piramal for similar reasons. I have invested in the businesses he manages because of him. His capital allocation skills are excellent. But he is well known for acquiring businesses, scaling them up and exiting at a premium. He did that with a pharma business. Now he is on his way to scaling his NBFC business. The earlier years of getting into lending business were more of learning years. Just providing wholesale loans to real estate developers was not profitable. In fact, he had to incur losses when the Covid had hit real estate industry hard. He had to de risk his business. Buying the bankrupt DHFL helped his firm to diversify into granular, low ticket retail loans. And he has built a team of professionals to manage the growth. Going by their loan book size, they are way bigger than many regional banks. Their eyes are set on getting a banking license, though it may take several years before they get one.

 

Knowing the person at the helm gives me confidence to invest in his business. It is my conviction, and I could go wrong if Ajay Piramal does not see success in the coming years. This is not an investment advice but sharing my conviction. Every business will have challenges but if you believe in the ability of the person at the top to overcome and make money, it is better I handover my money to him. I have just done that.

Risks and Rewards are not symmetrical

We often hear people say, “There is no payoff without a risk”. It is commonsense. But they further go on to say, “Higher the risk, higher the reward”. Now they tend to equate both risks and rewards. They say you must take higher risks and if you are lucky, you are going to do big in life. Here is where I disagree. Let me explain.

 

Dumb luck won’t reduce risk

Have you heard of people who died taking selfies at dangerous places? They seem to have misjudged the risks and rewards. On the similar line, let us do a thought experiment which all of us can easily understand. Put a bullet randomly in one of the six slots of a revolver and point it to your head and pull the trigger. If nothing happened, bravo, you were lucky. If you want to ride on that luck and take another chance, you also need to realize that your luck would reduce in the next chance, and you can’t be lucky more than five times in a row. Though this was an extreme example, people tend to take chances without understanding the risks they are facing.

 

Risks are difficult to know and quantify in advance

Look at any advertisement, pamphlet or a sales pitch, benefits are written in colorful, bold, and large fonts. How about risks? They are written in fine print. Even if you tried to read it, it is written in a language only lawyers can understand. All those salesmen want you to just ignore the risks, take a leap of faith and just believe what they are saying.

Many a times, it is hard to know what risks we are facing. If we understand the risks by experience or through research, it is difficult to quantify them. Let us say you drive a car. The potential risk is you can meet with an accident. But before the accident happens, you can’t estimate the damage. So, the insurance you have may or may not cover for all expenses. All our risk management exercises are based on estimates only. You will never know the damage beforehand.

 

What the wise say and do?

Warren Buffett, the legendary investor, has a favorite rule for investing. It is “Never lose the money”. His second favorite rule is, “Don’t forget the first rule”. If you don’t want to lose money, you need to understand all the ways and means you would lose money and block or manage each of them. What he meant was, you need to understand the risks well before you plan for an investment. That is more important than understanding the rewards. It is not easy task. But if you want to earn consistent rewards, you will have to manage your risks well.

 

Risks and Rewards are asymmetrical

A lottery ticket you bought for a few rupees can win you an unproportionate sum. Similarly, a small reward of picking coins in front of a steam roller can expose you to a disproportionate risk of losing your life. Risk and reward are not symmetrical in many (or most) cases. As you gain experience and improve your understanding of risks and rewards, you will notice two different combinations of risk-reward payoff. There are high risk, low reward situations. Similarly, there are low risk and high reward scenarios as well. Avoiding high risk and low reward bets is a no brainer. But when your judgment has improved and a low risk - high reward situation presents to you itself (they are difficult to find if you go on searching for them), you want to increase your bets on them. You are likely to receive a huge pay-off from it. They won’t come often but you want to wait for them and play when odds are not against you. Such opportunities do come routinely in all asset classes (Equity, Debt, Commodities and Real Estate). Not only in investments, but such scenario would also present themselves in other walks of life too. All you want to do in the meantime is improving your judgement of assessing the risks and rewards.

 

My journey

I had to lose lots of money, go through emotional pain, and then study various literature on risk to learn the lesson. But I have recovered my losses and doing better now as I am reaching the verge of financial freedom. What helped me the most were teachings of Buffett-Munger duo, podcast of Naval Ravikant and the books of Daniel Kahneman and Nassim Taleb. Learning about risks is counter intuitive, it won’t come easily like understanding of rewards. But without it, forget growing your capital, you are likely to lose it. Don’t be neither a pessimist or optimist, remove all those lenses and see if you can understand the risks as good as rewards of the given situation. If you don’t get a clear picture, it is better let go of the opportunity and continue honing your judgement through extensive reading, deep dive through of various case studies and taking small bets to validate your learning. When you are ready, it will be only a matter of time for the opportunities to present themselves. And the byproduct of better judgement, patience, would also keep you sane and helps you hang on till rewards materialize.

Further Reading, Listening and Watching:

1. Books by Nassim Taleb: Fooled by Randomness, Black Swan and Skin in the Game

2. Books by Daneil Kahneman: Thinking Fast and Slow, Noise

3. Naval Ravikant's podcast: How to Get Rich

4. Videos of Warren Buffett and Charlie Munger

Why meditation makes you a better investor?

As an investor, you will have to make 3 decisions continuously. Which stock to buy, at what price and when to exit? But that is not it.

 

Things do not go as you anticipate, and markets routinely surprise everyone. Stock that you bought goes down beyond your expectation, making you wonder what to do. Few go up too much in too little time, again you begin to wonder if there is any upside left. Many times, the stocks you bought do not move at all, boring you and making you to switch counter.

 

Exactly when things do not go as anticipated, you become emotional, misjudge the situation and make investment mistakes. This is when meditation can be of great help. Meditation teaches you to have patience, so when your stocks do not move, you won’t act out of boredom but make a rational choice. When market moves against you, you would not lose hope and probably add to your investments. And when things are working in your favor, you would not be caught in euphoria but remain grounded and book some decent profits.

 

Meditation basically calms you down. It removes chaos and brings clarity. It brings stability to your being by avoiding emotional tantrums and that reflects in the choices you make in everyday life. You would not only become a better person but a better investor too. The less biased, the less emotional person you become, the better investor you would transform into.

 

Get into meditation and know yourself. The clarity you get lets you understand why you are in the market and what the crowd does won’t bother you anymore. Then assess the investment opportunities available in the market. More likely you would get them right.

Growth drivers for Healthcare & Pharma Industry

When India had got independency, average life span of an Indian was 45 years. Thanks to improving healthcare facilities, now the average life expectancy is 69 years. (Link: http://niti.gov.in/content/life-expectancy) While the healthcare industry enabled this glory, it too got fetes to celebrate for itself. With doctors at the top of social respect and income hierarchy and pharma entrepreneurs becoming billionaires, healthcare & pharma sectors are set to become a lot bigger than what they are today. Here are some of the major drivers:

 

1.     Expanding senior population: The population of those aged above 60 living now is higher than ever in the past. Due to age related issues, their need to visit doctors for medial assistance would be much higher than the young population. As the demography of India changes from young to old, this phenomenon of higher medial expenses will only intensify.

 

2.     Increased awareness about healthcare: Couple of decades ago, checking blood pressure, sugar levels, blood tests were not as common as now. For preventive care, routine health checkups have become the norm these days. Also due to lifestyle issues and crappy food, getting the diseases early in their lives is also a common factor leading to more frequent checkups and increased consumption of pills.

 

3.     Ability to pay and insurance coverage: Slowly over the generations, people are being uplifted from poverty and their income levels are improved to afford healthcare costs themselves. For those who are still poor, Govt. does its bit to protect them. And there is a wider insurance coverage available now helping people to take care of unforeseen and higher medical expenses. All these have improved the affordability. With demand side becoming steady, supply of side of hospital network and drug stores too have improved and have a wider reach as well.

 

    All these growth drivers will only intensify with time and make the healthcare industry even bigger. There would be other topics of interest such as contribution of Indian healthcare industry to global phenomenon and the dark side of the industry involving doctor-industry nexus, scams at big pharma companies and large population being social engineered to benefit the pharma industry etc. They would become material for separate blog posts.

DHFL Resolution: Winners & Losers

Disclaimer: I am invested in Piramal Enterprises (even before DHFL came into picture). My views might be biased, though I strive to be not.

After couple of rounds of bidding, finally Piramal Enterprises has emerged as the winner. Let us look into who would gain and at what cost. Also see why it would make sense to creditors and the banking, NBFC and regulatory system in large to conclude this deal. Also let us see who lost everything with this deal.

DHFL's books

First let us take a short look at DHFL's books. Their promoter is in jail for siphoning off of funds. Company's net worth is negative (Liabilities are more than assets). They have not honored the payments to their creditors for more than an year. They have serious asset liability mismatch and if there were no takers for it, this company had to be closed with a serious blow to the entire system.

	Assets	Liabilities
DHFL (Based on their investor presentations)	Loan Book: 87,000 crores	Borrowings: 91,000 crores
	Wholesale Loans: ~50,000 crores Retail Loans: Rest minus investments	~50% of borrowings are form banks (SBI Major lender: ~10,000 cores) ~10% deposits Rest through bonds, ECB, NHB etc.
	Risk: ~20,000 crores loans may not be recovered	Banks have recognized the whole exposure as NPA Depositors & bond holders are not paid interest and not able to liquidate.

What does Piramal offer? 

Let us see what Piramal is offering through their bid.

• 37,250 crores Total
• 12,700 crores of upfront cash and rest will be paid in 10 years

What Piramal would get back is assets (DHFL's loan book) of approx. 60,000 crores. The key risk is, they would get to know the real value of the loan book only after they get to manage it. Some more of bad loans which is not accounted so far may turnout out be additional hole in the balance sheet. The business will need new management and systems, so it will need fresh investments. Also it has to face many legal battles that would surely come in the way. Bigger risks and bigger payoffs are in store for Piramal and investors in his company.

What lenders would get?

Though they have to take significant hair cut, remember they have already written-off their exposure. Any money going back is profit for them now. Upfront cash payments from Piramal and rest amount becoming regular loans improve the situation of banks, so they accepted this deal. It is better to recover whatever is possible than losing the entire amount.

Are regulators happy?

Surely. If you look at IL&FS which went dead few years ago and still the issues not getting resolved, DHFL finding a suitor in less than 2 years is a good move for the whole industry and the system. One reduced headache for RBI, SEBI, NCLT and the insurance regulator IRDA. This improves the confidence in the system in resolving such large scale issues.

Who would lose out entirely?

The shareholders of DHFL. 39% holding by promoters, 55% holding by retail investors and 3.5% holding by LIC will find their investment written off completely. It's recent market capital was around 1,000 crores that would disappear. (Unless Piramal decides to run this company separately which is not their plan either).

What would DHFL's existing customers & employees get?

Piramal said they would not let go any of the existing employees. So it is a relief for them. For customers, this would be a good news as their interest payments would reduce in time as Piramal's credit cost would be lower and they would pass it to existing customers of DHFL benefitting them.

Conclusion: 

Promoters of DHFL have paid a huge price. (Though they are facing charges of siphoning of 30,000 crores). If they had shown integrity and patience, they still would have made good money legally and ethically. But now along with them, equity investors of DHFL are losing their money too. Lenders did lose partially and it is their business to take risk while lending.

Ajay Piramal, an opportunist risk taker, a honed businessman known to acquire and sell companies, is likely to manage this acquisition well, benefiting himself and his shareholders. It may take 2-3 years to integrate it fully into his business and give him the benefits of retail portfolio his company needed. Any risks, I suppose are already priced in and discounted for it. So there would be fewer negative surprises for his company. Positive surprises would not be many either.

Overall, this is a positive step for the financial system of India.

Oil’s bear grip on India is ending

Like any oil importing nation, India’s economy too is at the mercy of crude oil price. As the dependence on oil increased, the impact of price swings too increased. But there are significant structural changes which are happening, though at a slower pace, are determined to free India’s economy from oil’s hostage.

1. Increase in Ethanol mixing: From the current 2% mixing of Ethanol with Petrol, there are lots of policy measures taken to increase it to beyond 10%. It works well for the sugar cane farmers too. Their crops can get better prices as sugar factories divert the cane juice to production of Ethanol. It may take two years or so for new distilleries to begin production but there are definite actions being taken to make it happen. With Sugarcane crop glut and high import prices of crude, Central Govt. has hit two targets with a single arrow. The money saved (from importing crude) flows into investments into Ethanol facilities (creating jobs) while also boosting farmer income.

2. Higher domestic oil production: Vedanta’s Anil Aggarwal says he can produce crude oil in India at $7 a barrel. Wow, that is 1/10th of the price we pay when we import it. His company Cairn Oil has won bids for the oil fields along Rajasthan border. Though we need to see how much of oil is available there, it looks promising for now and can surely take domestic production up from current numbers. Any increase here is savings in the import bill.

3. Railway Electrification: Indian Railways is the biggest guzzler of diesel in entire India. As their lines get electrified (they got huge sanctions in the last budget), demand shifts from imported crude to domestically produced coal.

4. Electric Cars: Though the electric car market is not deep, there is huge interest being shown by automaker as well as policy makers to increase their numbers. As these cars hit roads but don’t pay visits to petrol pumps but charging stations, oil consumption comes down by that proportion. With each passing year, the ratio keeps changing and probably 10 years down the line, things would have changed drastically.

Apart from this, recent price surge in crude oil and its retracement backward shows that similar changes are happening in the international market too. Any price surge may become temporary phenomenon as other channels begin to open and alternatives begin to play a catch up.

The risk to assumptions made could be in the timelines, it may take longer than expected but oil’s golden era seems to be getting over.

Business Vs Environment (Protests at Sterlite Tuticorin)

There were protests at Sterlite copper factory in Tuticorin, which took a violent turn and caused few deaths in the past month. State Govt. ordered closure of the factory. It drew my attention and I started looking into the details. Protesters claim health hazards rising in the surrounding communities where the factory operates in. The copper factory blames that on other power plants operating in the town and says its own factory is safe for community.

Most (if not all) mining and ore extraction companies cause environmental damage at varying levels, many a times they are irreversible. Few companies do take ownership and employ sustainable measures to keep the harm to a minimum and they also take initiative to develop the communities living nearby as a token of offsetting the loss caused to them. Keeping that in mind, a copper smelting factory at Tuticorin had zero discharge (no waste bi-products), so factory’s claims of being safe cannot be ignored. But the society’s suffering is real, so instead of targeting only this factory, a wider survey needs to be undertaken and all those causing environmental damage should be made to take necessary corrective actions.

That was one side of the story. Another side, this was one of the India’s biggest copper producing units. With its closure, India must import copper now, so the costs are going up substantially and all the value-chain using copper as input are suffering business losses and many jobs are at a risk. If 2,000 jobs are about to be lost in the copper smelting unit, at least 10x more jobs will disappear in the subsequent chain industries, if the the situation continues.

As a trade-off, I feel both the copper factory and protesters need to take a back-step from their stance and come to terms. Protesters should not only target this company but make all the polluting companies responsible and at the same, the industry needs to adhere to safety norms and spend more than they are doing now on developing the communities living nearby. Govt. need to strike a balance between jobs and the environment, rather than taking a side. That is easier said than done. If the protests were politically motivated targeting only the Sterlite, then it is a sorry state for the environment. Once those political leaders get their pay-off, copper factory will come back to life but the environmental damage caused by other factories will continue to remain an issue and an opportunity to fix it is lost.

Stock Pick (Fundamental): Nava Bharat Ventures

Trade wars will make India stronger

India’s GDP growth is driven by consumption and not by international trade. In fact, India has a trade deficit, it imports more than exports. When there are trade wars, it greatly affects those countries like China, Germany and Japan whose economies are export driven.

For India, if our exports are affected it would affect Pharma and IT but take a close look. Most of pharma exports are low priced generic drug. There are not may places you can make it cheaper than in India. Similarly, IT service exports are driven by the talent availability along with low cost. Again, you can’t easily get those millions of English speaking IT engineers at the cost which India operates anywhere else. Given these competitive advantages, though these two sectors will see a setback they don’t vanish. Other exports such as Textiles, Jewellery, Agri commodities have loyal consumer base for Indian exports. They too will see headwinds but their survival may not be under threat.

When it comes to imports, though oil & gold have the lion share but there are lots of other stuff like industrial equipment, automobile spares, etc. which in the times of trade wars becomes expensive and create a fertile ground to make them in India. That, over a period, will drive investments, creates new jobs and saves import bill. Remember that auto industry was non-existent in the 1950’s in India and now our car makers produce indigenous designs made for Indian consumers. Similarly, our defense spending, which is mostly spent on imports now, can slowly transform into the one which drives domestic industry growth. Since trade wars make imports expensive, it makes commercial sense to produce them out of India, wherever possible.

I hope and wish that India makes use of the opportunities provided by the trade war and come out stronger.

Sugar: The problem of plenty

Excessive sugar in our body affects our health. Excessive sugarcane output is hurting the farmer’s health who are already lean and do not consume much of what they grow. The bumper crop output for second consecutive year in Brazil, the world’s largest sugar producer and India, the second largest sugar producer, took the sugar prices down from Rs 50+ per kg to the levels below Rs. 30 per kg.

Sugar consumption or demand growth is in the range 5-10% year on year. But on the supply side, crop output is cyclical and in the last two seasons crop output is 50% higher than usual. Also, the extraction rates (percentage of sugar out of sugarcane) is also improving. That damaged the sugar prices significantly.

The optimum price level needed is Rs.40 per kg for both farmers and sugar mills to survive. Govt. has announced few relief measures that lets the farmers barely survive but the profitability is out of scope. Since the sugar stocks are already high in warehouses, best way out of this is to export them. There are few takers like China who import sugar in large quantities. There are trade wars and sanctions which may act as a hindrance yet whatever can be moved out needs to be done quickly.

Alternate markets for sugarcane like Ethanol, which is used as a bio-fuel, also molasses making for liquor industry are not encouraging as those markets are limited in size and can’t consume the million tons of additional crop output.

If no effective solution is found soon, farmers are likely to stare at huge losses. They better limit the acreage for this crop in future and move on to other non-cyclical crops. Considering sugar cane is water guzzler crop, it would be good to discourage as that much of water can be used for other productive purposes. Lower prices of sugar are already driving farmers toward discarding it. Had they reduced the acreage after one bumper harvest last year, they would have avoided the mess they got into now. I wish our farmers make more informed decisions.

Why does Investors have an edge over Traders?

Why do most traders lose money?

1. If you observe most of the large cap stocks produce 15-20% annual returns on average. But the same stocks, on daily basis, move up or down easily to the tune of 1%.

2. There are 5 trading session per week. In an year, there will be 250 sessions approximately. (5 per week x 52 weeks = 260 less 10 general holidays = 250 trading days). If market is unidirectional, those stocks would produce 250% gain or losses. But markets go in both directions or remain sideways. Considering 20% gains a year on an average, which can come in 20 sessions, what the market does in rest of the 230 sessions? It plays ping-pong. Gains will be reversed and falls will also be reversed, resulting in no net gain. Take away is, for 230 sessions, probability of gains or losses is roughly equal.

3. If you are a day trader, going by simple arithmetic of 230 sessions erasing gains and losses of each other, every day you have an equal chance of winning or losing. But consecutive win probability reduces with the time. For example, first day it is 0.5, winning the next day too is 0.5 x 0.5 = 0.25. Probability of consecutive win for 5 days is, 0.5^5 = 3%. So your winning streak or luck does not last long.

4. Psychology impacts decision making skills and staying rational. If someone wins for few days, he becomes overconfident, increases his bets while his chances are winning again are reducing with each day. You know what will happen to him when his luck vanishes. Similarly, when someone loses consistently, he loses the confidence and reduces his stake. He does not know that probability of losing consistently is reducing with each lesson.

5. A trader can train oneself to play a bull or bear. Trying to be both is hard. Changing track is not an easy thing as one can interpret the signals wrongly and increases the losses.


What works for an investor?

All the disadvantages which the traders face are not shared by investor community as they largely ignore the daily volatility. Their focus is on the annual gains and not the short-term volatility. So they need not worry about law of probability of winning everyday. Yet they too can lose money, if they had picked a wrong stock or paid a wrong price.

One of the famous quotes from Warren Buffet is, “Rule 1: Do not lose the money. Rule 2: Don’t forget the Rule 1”

Well, how can an investor not lose money in the stock market? The stock you pick may go down the next moment you bought it. But there are many measures you can employ of setting the game in your favor.

1. Avoiding a wrong pick: You should learn about due diligence. You need to learn about business valuation. You should understand the underlying business, not just the stock. How does that company generates revenue? Who are their customers? What drives those customers to buy the products or services of the business you are evaluating? How long the revenue growth will last? How is their financial model? What are the margin structures of the business? Does that company generate sufficient cash to honor their payments, also invest into the future? Finally, the intention of promoters. Are they willing to share the profits with a common investor? Have they paid dividends in the past? Are they honest enough in their communication? Getting answers to all these questions is a lot of hard work and better you do that else you run risks of losing your hard-earned money. Proper due diligence is the only way out of a wrong pick.

2. Diversification: You do not invest all your eggs into a single basket for a reason. You want to live another day to fight back and not lose out if the only stock you hold runs into an unknown issue. Building a portfolio gives a balance. It reduces risks and also returns. Since our Rule 1 is to avoid losses, building a portfolio and avoiding concentration in just 1-2 stocks makes sense. As you build portfolio of 15-20 stocks, you need to make sure those stocks do not belong to the same industry or sector. Take a look at any mutual fund portfolio and observe how many stocks they hold, what is their Top 5 stocks concentration and also Top 3 sectors concentration. You will get a fair idea of how they structure a portfolio. You also want to have a fair mix of large cap, mid-cap and small cap stocks.

3. Avoiding wrong pricing: Once you have identified the stocks for your portfolio, you do not want to put all the money in one go. You will identify the fair price band for each stock and you will wait patiently for a discount before you invest into it. You do not want to enter at whatever price the stock is trading but buy at only discounts as per your estimate. Since you will put only a fraction of money in the market each time and continue that way over a period of 4-6 quarters to fully invest into a stock, it gives you good time to study that company and assess if your estimates were right or not and take necessary corrective actions.

With this knowledge, you can very well say now “When a trader makes money it is mostly luck at play, while an investor makes money it is mostly patience and hard work”. Many traders struggle to earn a living while many patient investors earn their fortunes in the stock market. Capital follows knowledge. Acquiring knowledge should become the primary aim of investor. Fortune will follow subsequently.

We are coming

Looks like all the back-door negotiations have failed and the trade war has become real and staring at us. It is not just US and China. It would spread to other countries including India. We are very much on the radar.

If you see short term economic benefits, US seems to gain from the duties slapped on the international trade. US is the biggest consumer while China is export based economy. This move should make the US Dollar stronger in the shorter term. But at the same time you should not fail to notice the courage displayed by China in slapping back US with equal amount of trade tariffs. China is not standing on the loose ground. China is making arrangements to pay for its oil imports in its own currency avoiding the usage of US Dollar. Whole world is noticing it. Though US Dollar gained against emerging economies, it is falling against Euro and Japanese Yen at the same time.

Message is clear and loud. If you can look further into the future, China has ambitions to make its currency an international one, at the cost of US Dollar. It would slowly get off the vast US Dollar reserves it holds as and when its own currency finds takers. If we assume that Donald Trump continues to remain same in his approach, US Dollar will see serious damage to its valuation in the years to come. Its supremacy in the global market might end and Trump can make it as soon as possible by increasing the intensity of rivalry against China and other countries.

If we assume that US Dollar is going to lose value, it will have a greater impact on India too. Exporters (from India to US) will see their businesses shrinking and becoming infeasible. Talent drain will reverse at a faster pace. India is a consumption major economy unlike China which is export driven. Though two major industries (IT, Pharma) of India will see an adverse impact, rest of India would see things getting better for them with this structural change in the economy. Our currency getting better against US Dollar will help our economy as trade deficits would become thinner and gradually disappear.

Right now we say we are $2 trillion dollar economy with a national income $1500 to 2000 per person per year. If Rupee is going be stronger by 20-30% against USD, our GDP and per capita figures will also be revised by that gain in Dollar terms (though not much has changed in Rupee terms). This will help close the gap between us and rest of the world (mostly with the developed countries).

On PPP terms, India already has a decent ranking and it looks like it will only get better from here, may be at very fast pace than expected earlier. Except China, we can say confidently to rest of the world "We are coming."

Trade wars and hypocrisies

I could not resist appreciating Donald Trump this time. He raised a simple question. When India levies heavy taxes for the bikes made in USA while they enter in India, why reciprocal taxes were not put in place? (Link: https://www.ndtv.com/india-news/donald-trump-slams-india-for-high-import-tariffs-on-harley-davidson-1812557)

When US allows lots of goods manufactured in India enter their country with zero taxes, this case looks unfair. What you can disagree with? In this back drop, China and India criticizing Trump on disrupting trade appear like hypocrite behavior. Heads of India and China gave long speeches at Davos on protectionism and how it is affecting global trade while what they do is against their own advice.

On another note, Trump’s talk shows that his country is no more a world leader but fearful of China and India. He wants to make his country great again. It does imply that they have lost that position. Look at their currency, USD has lost 20% against Euro in the past year. If they continue with protectionism, global trade will shrink. Along with it USD valuation will shrink too. And other countries will have the reduced need to hold USD as reserves. India has more than $400B as forex reserves while China’s reserves are five times more of India. As USD loses its importance and the global trade begin to use other currencies, it will become a serious blow to the US. Probably Trump is not thinking that far. His predecessors were surely smarter than him. They did not have reciprocal taxes in place but had ensured that global trade happens in their currency. They were bigger hypocrites than the current leaders of India and China. Now what Trump is doing is dismantling that empire built by his predecessors.

It appears to me that it is time to sell USD and get on to Gold.

PNB and NiMo saga

The scam which has hit Punjab National Bank is making everyone lose the trust in how the public-sector banks are managed. Fraud to the tune of Rs. 11,500 crores going undetected in a bank having a market capital of Rs. 30,000 crores is a wonder. Many are speculating that it would not just be a con job but it had the involvement of top management else the alarms would not have gone silent.

Govt. had recently announced its decision to recapitalize PSU banks. And where does that money ends up? Why con jobs would not repeat again? Had these banks been responsible, this NPA mess would not have happened in the first place and the new scam shows that money just runs out of these banks into fraudulent hands at a high velocity.

When Govt. provides capital to these banks, it does so from tax payers money. PSU banks lose it to scams and bad loans and they go back to Govt. with empty hands. And the cycle repeats every few years. No wonder rich-poor divide is widening. Middle-class pay the taxes which is siphoned off to ultra-rich individuals in the mask of promoters who will fled the country with that money. What a shame!

Loans on recovery mode – India slowly getting over NPA mess

Last couple of years, we saw NPA raising at alarming pace. But things seem to be turning around. Take a look at three news items in today’s ET.

1. Bhushan Power’s liquidation value doubled to Rs 20,000 crore (Read more at:

//economictimes.indiatimes.com/articleshow/62560426.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst)

2. Lenders to take JSPL account off bad-loan list. The company's total debt was close to Rs 45,000 crore. (Read more at:

//economictimes.indiatimes.com/articleshow/62578088.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst)

3. Enforcement Directorate to sell Rs 4k-cr Vijay Mallya shares in United Breweries. (Read more at:

//economictimes.indiatimes.com/articleshow/62563065.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst)

Around Rs. 70k crore is collectively coming back into system. No wonder why RBI said things are improving during their last monthly report.

We don’t know how much of red figures turn into black. But we can see that trend is reversing. That money if used to fund the right businesses, it would add to economic growth.

Takeaway is, get onto Public sector Bank stocks. (Disclaimer: I am adding Bank of Baroda stocks to my portfolio).

Rupee is stronger as Dollar is weaker

This blog post title is funny but it is what it is. When we look at the exchange rate of a currency we assume that the reference currency has remained the same. For example, Rupee was exchanged at 66 for a dollar few of weeks ago. Now you need only 63 rupees and some change to get the dollar. At first glance, one might interpret that Rupee is getting stronger and say kudos to Indian economy. But wait, think slow and you will realize that it is Dollar which is weakening against all other currencies. What made it so?

US Fed is raising interest rates, it was supposed to make the Dollar stronger but it did not. Thanks to President Trump. His policies does not promote international trade like his predecessors did. In that situation, the reason for other countries to hold US Dollar in their reserves diminishes. Whether it is political clash or trade disputes, China is not piling up US bonds as before and in fact it may have reduced its dollar reserves. That has increased the supply of dollars in the system and there are no big takers for it. So USD lost to the tune of 10% against Euro and other currencies.

Rupee is benefited too because of this development. Though our economic growth has reduced slightly, trade and fiscal deficits have not changed significantly. So Rupee rallied against USD and scored some points. RBI holds $400B as forex reserves and it is likely to slow down or stop buying the dollars. That will help the gains in Rupee sustain. In case RBI decides to sell some of its reserves (like China did), expect Rupee to trade below 60 a dollar. Good times are coming. Are not they?

Manipulations in stock markets

Manipulation is nothing new in the stock markets but new tactics have evolved with technology enabling the use of algorithms. First of all, let us try to understand how manipulation works and  brings profits within a short term for those who set-up the game. Remember it is traders who are hurt the most and the long term investors the least in these plays.

• Every trader has an expectation with the direction of stock he is trading. It could be bullish, bearish or sideways.
• They have a trading plan too. Enter at some price, book profit at some price point or stop loss at a point when their trade goes wrong.
• And there are a given number of traders in a particular stock at the given time.

The above information is enough for an algorithm to set-up a game. Let us say, in one particular stock, there are more bullish players. Let us assume 80% of the bets are on the one side and if it is a small counter, it is possible to manipulate the stock (for example, by buying puts, selling calls and heavy selling in cash market simultaneously). As spot prices drop, all of those traders playing bulls will be forced to get out of the market as their stop losses get hit. The manipulator uses few tens of crores on just one stock to take it below technical support level of the traders (as identified by the algorithms). He will make small loss in spot market but gains huge in derivatives. As he kills all weak traders, he gets out of that counter. Sanity check comes back slowly and the stock price comes back to normal levels. This is just one simple example but the algorithms can be set for multiple strategies to make money for those who employ them.

How do you know which stock is manipulated?

• Look for very high OI on the option chain and Futures. As it reaches 100% of the limit, stock goes into F&O ban.
• In the intra-day, you will see high price variations with low volume. And the reversal happens pretty quickly. This process repeats multiple times as a bait to attract traders and then put the short term traders into a trap.
• Look for divergence from non-manipulative counters. Indices (like Nifty) and bigger stocks with a wide investor base (like Larsen, HDFC Bank) are not easy to manipulate as the manipulator need huge sums of money to manipulate and even if attempted there would be counter forces coming into play soon to restore the normalcy. In case of manipulated stocks, you will see an overreaction or divergence from broader market direction.

How do I survive now as a trader?

For human traders, it is not an easy thing to compete with algorithms. Psychological pressures will be very high to handle and the technical indicators seems to go wrong (as they are manipulated). So it best to avoid the counters once you identify the manipulations in them and stick to your trades in indices or with large cap stocks.

But if you are an experienced trader and have the ability to look at markets dispassionately, you would be able to understand what these algorithms are at since they are also devised by human beings. The key here is not to be emotional, wait patiently, do not get into devised traps and when the market seems to be not expecting a move, then you have a chance to go for a swing trade as those algorithms go out of action and you will have a chance to profit from it.

This opportunity does not come every day so one needs to wait until overselling or buying reaches an irrational stage and after that nothing seems to be happening for some time and it leads to volatility drop as one sided trades go awry. When the interest seems to be dead and a common person wonders 'what is happening with his stock?', the reversal happens. To time it and to know a price range to enter and exit, you need to understand fundamentals along with technical of that stock well along with market conditions and the changing investor profiles. It is really a hard game. As algorithms take the stock beyond fair levels on either direction, there lies an opportunity for a human trader to get into the game.

In summary, just being a technical trader, you cannot beat the algorithms consistently in the mid-cap or small cap stocks. It is better to focus on large cap stocks and indices. If you still want to trade in manipulated counters, keep your exposure limited. Do not just use support and resistances to enter a trade which worked earlier but no more, instead get a balanced view. You will begin to understand the master game being played.

Note: I do not mean all of algorithm trading is manipulative but I am of the opinion that it makes the manipulation easier.

Electric Cars are good for Indian Economy

There are discussions making rounds how good or bad are Electric Cars for Indian economy. I believe electric cars are going to be a game changer and will be good for Indian economy for the following reasons.


Reducing addiction to oil:
We are a trade deficit country. Oil the biggest bill in our import list. We maintain oil reserves to the tune of 15 to 45 days of the demand to ensure that country does not come to a halt if the oil supply is cut during a war or a geopolitical conflict. Think of a scenario where we reduce the oil import significantly as we commute through battery driven cars. Our import bills will be down. We will become a trade surplus country. Rupee will rise to below 50 Rupees levels against USD. And we do not have to maintain massive oil reserves for national security and we can ignore geopolitics.

CAD, USD/INR (Source: Tradingeconomics.com)

New investments & more jobs in power sector: As these electric cars need to be electrically charged, that will take the demand up for electric power supply. And it would mean new investments flowing into the entire power sector - coal fired power plants, hydro, wind and solar. This infra upgrade will create a huge number of long lasting jobs.

Consumer perspective: These electric cars are run by energy stored in batteries and do not need an engine (petrol or diesel). When engine is absent, you don’t need oil filter, air filter, fuel filter which are consumables and replaced during service now. You do not have to get your Engine oil or coolant oil changed as well. And there is no exhaust system and no emissions. Noise and vibration is reduced significantly and so is wear and tear. All these things mean your maintenance and repair bills come down sharply. So is the running cost per km too. That would pay for replacement of batteries every 4-5 years.

Good for environment: If we can charge the cars through renewable energy, we will be doing a great service to environment and to the future mankind. Reduced emissions lead to better air quality and limit damage to our lungs. Is not it good?

Negative on existing industry but why can’t they transform? The traditional automobile industry will see negative impact but why can’t they transform with the changing needs? And there will be ample time for it. Even if we assume few of them will have to close down, the net impact to economy would be still positive.

I am looking forward for these cars to become mainstream. And I need to research battery companies to make them part of my equity portfolio.

Decoding the strength of Indian Rupee

USD/INR (Source: XE.com)

If you take a look at the Rupee performance against USD on a 10 year chart, you will notice that the last year’s performance was really a strong one. It stopped devaluating and even went against it to regain some of the value it had lost. How do we explain this? We just need two charts to decode it.

Shrinking Trade Deficit & offsetting it: How do we get the Dollars or other foreign currencies (inflow)? Through exports, remittances, FDI, Loans based in foreign currency etc. And how do we lose dollars? Through Imports mostly and other factors are not that significant. If we take a look at Trade balance (Export – Import), India has a deficit but that has come down significantly, thanks to what happened to Oil and Gold prices. Now it is in the range of $5B -$10B a month. Our FDI, remittances are to the tune of $5B+, so many months we should be able to offset the trade deficit with our forex inflow. In net, the pressure on Rupee is off.

India's Trade Deficit (Source: tradingeconomics.com)

Forex reserves with RBI: When RBI buys dollars from open market, it impacts the exchange rate. It weakens the Rupee. RBI keeps dollar reserves to safeguard India against external shocks and to prevent damage to Rupee when there are sudden outflows. In that case RBI would sell their reserves to avoid volatility. But how much reserves do you really need? It was $300B three years ago but now it is close to $400B. It is enough to take care of 40 months of trade deficit. If you think of equity/debt market exits from FII, they too are fought nicely with ever increasing of SIP of Mutual Funds and EPF pumping money into stock market. So in summary, threats to foreign investments are taken care to a larger extent and it means RBI need not keep on buying dollars. On another note, how RBI buys the dollars? It has to print new money to buy it. But there is so much liquidity now, it limits the need for our central bank to do that.

India's Forex Reserves (Source: tradingeconomics.com)

The takeaway is, dollar outflows are shrinking while inflows remain strong and the need for RBI to increase reserves is reducing, it all points to one thing – stable Rupee. So don’t bet against it.

Where the jobs have gone?

Every month approximately 10 lakh youth come to the job market in our country and majority of them are not absorbed. Yes, on a yearly scale it is ~1% of population trying to find a job and that is way more than those retiring from the jobs. So the unemployment levels are increasing to highest levels we have ever seen. What happened to those job creation engines of India? And how this can be solved?

First of all let us see which sectors need the workforce most and what is ailing them.

Construction: This sector was a major job provider. Since skill levels do not matter much here, this sector was feeding all those with low skilled labor with low wages. Owing to unrealistic land price rise in the last decade, it was slowing down and demonetization brought it to a grinding halt. Much of the job creation got evaporated into thin air. Check with those masons, low-wage daily labors, electricians, plumbers, construction material providers and transporters, you will learn how they have lost their hopes.

Manufacturing: See Auto industry performance. Whole of last year, they saw with disbelief how their sales declined. With all discounts, unbelievable offers and intense marketing promotions, they were not able to clear their inventory and meet their targets. General Motors recently decided to wind up their India operations. In such a scenario, how will they increase capacity and what will happen to OEM (Original Equipment Makers) companies in the entire of supply-chain? When there is no capacity being added, why do you need more people? Case is the same with Steel, Cement manufacturing sectors too.

Services: BFSI (Banking, Financial services and Insurance) is the sector which gained the maximum benefits of opening up of Indian economy after 1991 reforms and created more jobs. Total services sector sped faster than Agriculture and Manufacturing (typical growth engines before 1991) and provided jobs in big numbers. It employs 40% of work force in India but now it is seeing a saturation. IT (Information Technology) which was a negligible job provider 25 years ago, grew at a faster pace during the last two decades but now has lost steam. Forget new job creation, those in the sector are striving harder than ever to survive.

Infrastructure: During last decade, Infra looked like a sunrise industry for all of those in this sector, but the sunshine did not last long for them as many of the infra projects did not make the intended money and in fact lots of big infra companies are on the edge of bankruptcy. They took their lenders (mostly PSU banks) down with them too. Take a look at the recent list of companies prepared by RBI and most of the infra companies find a mention for being a risk to economy.

Ok, India’s job creation engine is not firing on all cylinders. What can be done to improve the situation? I am no expert but being a participant in the Indian economy, I need to have an opinion and express it to shape the collective decisions we make as a society.

Govt.’s commitment to their motto: Why do ministers and Govt. officials want cars made by multi-nationals? Why cannot they drive cars made in India fully? Such actions would show their commitment to tags such as “Make in India”. And it will increase the demand for local manufacturing and its entire supply chain. You know one job created in manufacturing creates two in services sector. Investing in public transport to make it more efficient and serve more people would mean less fuel burnt overall, good to climate and lighter on import bills. The jobs created in these sectors along with productivity benefit with infrastructure upgrade would pay-off for the investments made.

Open up Corporate Bond Market: As of now, most of the load is on Banks to fund the growth story of India. But they are in bad shape. With increasing distressed assets, they are not in a condition to lend big sums to corporate. Take a look at international markets, it is the bond market which funds the corporate most and not the banking sector alone. Interest rates (or the coupon rate) is based on the risks of the borrower unlike how Banks fix a common rate to their borrowers. That would let the markets find a balance and help those with clean records to raise money from capital markets at a lower rate, build new factories and provide employment. Is not it a better way to avoid those bad performers from burning the debt they got from banks? For this to happen, RBI needs to get out of its conservative stance. But their eyes are fixed on the inflation, always. Following their intentions, it seems to be on their horizon but not as a priority yet.

Increasing public spend: Our current finance minister has done an applauding job in reducing the fiscal deficit and as a benefit we are seeing lower interest rates (as Govt. is borrowing less), a very low inflation and Rupee is stronger against USD. That is all good but whenever the economy slows down, public spending has to go up to kick-start those dead cylinders to make them firing again. I personally believe benefits of inflation do not surpass the disadvantages of lower number of jobs being created. If we maintain the status quo, rich will become richer and the poor will become jobless. That can have bad effects on the entire society. When the match is Economy against Sociology in a country with a billion plus population what will you do? Compromising on inflation (stoked by higher borrowing) for creating more jobs would not be a wrong thing to do. Why not fill in all those open positions in the Govt. owned companies at a faster pace by speeding up hiring process?

Promoting Entrepreneurship: We need more job creators and a support system to encourage them. Giving subsidies to them would bring more benefits to economy than giving fuel, fertilizer subsidies en masse. But the reality is, our country does not fare good in ease of doing business. If we want to increase the job creation pipeline, we need to make it easy for entrepreneurs.

In summary, we have answers to the problem on hand. Our youth need to find jobs. How else do we take India to next level?