India's consumption-driven growth, which helped it buck the global trend in 2022 following the post-pandemic reopening, appears to have stalled. Out of the approximately 4,253 listed companies, only about 42% reported growth in both topline (sales) and bottom line (operating profit) compared to the previous quarter in Q3FY22.

To gain a better understanding of Corporate India's Q3FY23, we will be analyzing four key metrics across industries - trailing twelve months (TTM) vs. previous year (PY) sales growth, TTM vs. PY operating profit growth, current quarter (CQ) vs. previous quarter (PQ) operating profit growth, and CQ vs. PQ sales growth.

In an effort to provide a more accurate picture of results, companies with a market capitalization below 100 crore have been excluded from the analysis. This is because such firms tend to have an outsized impact on overall results of an industry and can distort the true state of affairs.

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The Backdrop

To provide you with an accurate understanding of the results, it is important to first contextualize the current global economic environment. Here's a brief summary.

Interest rates around the world are on an upward trajectory, driven by central banks mission to control inflation. High interest rates tend to have a cooling effect on an economy in two ways - first, it incentivizes people to save rather than spend and secondly, it sucks the excess ‘liquidity’ out of the system as it becomes expensive to borrow.

A combination of the above two is supposed to reduce demand and there by help tackle the inflation problem. Reducing demand (i.e. consumption) has a direct impact on earnings growth of companies.

Furthermore, rising interest rates can also impact companies that rely heavily on borrowing to finance their operations. As borrowing becomes more expensive, these companies may face higher interest costs, which could further eat into their profits.

The US Federal Reserve, which is widely considered the most important central bank in the world, has raised interest rates from their historic low of 0.05% in March 2020 to 4.57%, representing the fastest increase on record. It is expected that the Fed will continue to raise rates throughout this year, potentially reaching a range of 5.5% to 6%.

But what does this mean for you, and particularly for corporate earnings?

In the short term, consumers are being encouraged to save rather than spend, as they are offered higher returns on bank deposits. At the same time, borrowing money has become more expensive, as higher interest rates translate to higher EMI payments.

Below are the interest rates for traditional fixed deposits at some of the major Indian banks. Banks are willing to provide as high as 8.3% today for you to deposit your money with them. So if you were, for example, thinking of buying a second car for Rs 10 Lakh, you are being disincentivized to the tune of Rs 83,000 as the opportunity cost.

Similarly, yield on risk free assets like 6 month US Treasury Bill is now higher than the earnings yield of S&P500. So for a low risk dividend seeking investor, it now makes more sense to buy a 6 month US Treasury Bill than invest their money in S&P500 index.

However, it's not all doom and gloom. There is some positive news for the global economy, as two of the most significant costs - oil (energy) and shipping (transport) - have decreased significantly in the past 12 months. This should help corporates offset some of the pressure from higher interest costs.

Now that we have established the global economic backdrop, let's shift our focus to analyzing the earnings of each industry within India's corporate sector.

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Across Sectors Sales and Earnings Growth

After excluding companies with a market capitalization below 100 crore, the remaining data indicates that around 77% of companies reported sales growth compared to the previous year. However, only around 51% of companies reported sales growth compared to the previous quarter.

In terms of earnings, approximately 56% of companies reported earnings growth compared to the previous year, while around 53% reported earnings growth compared to the previous quarter.

The data clearly indicates a slowdown in topline, though corporate India is able to withstand margin pressure to some extent.

Upon examining individual industries, it is clear that the slowdown is most pronounced in sectors that deal directly with consumers. Industries such as footwear, consumer goods, automobiles, and FMCG have all reported a slower pace of topline growth.

For example, only 56% of listed companies in Footwear industry reported a quarterly sales growth. Similarly in FMCG, only 38% companies reported a quarterly sales growth. Further, on a consolidated basis, median quarterly sales growth across FMCG companies stands at a negative two (-2%) percent.

The only sectors that reported both, a strong quarterly as well as yearly sales growth are - Aviation, Jewellery and Cement.

The worst impacted sectors are chemicals, textiles, paper & packaging and education - all of them reporting a negative median quarterly sales growth.

Retail and Hospitality which includes sub sectors like Hotels, Retail Stores, Cinema Chains, Restaurants and QSR, were the biggest beneficiaries of re-opening reporting almost a ~50% median sales growth, but even there topline growth has slowed down sharply this quarter to just about ~19%.

When it comes to earnings growth, the overall picture is much healthier. Corporate India has, in most cases, managed to protect its operating margins to a significant extent, as input costs such as energy and freight cool off in conjunction with recent price hikes.

Industries like cement which took several price hikes in second half of 2022, have clearly benefitted with about 81% of listed companies reporting an increase in operating profit vs pervious quarter.

Here too consuming facing sectors like FMCG continue to suffer with almost zero median growth. It remains to be seen if the consumption economy revives or declines further in the next quarter.

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Sector Wise Analysis

BFSI

In the BFSI segment, the best performance for this quarter belongs to banks (both private and public combined). The median quarterly sales growth for banks, came in at 8.1%. Apart from banks, in the listed exchanges, MCX did very well with an actual quarterly sales growth of ~13%.

Among banks, Ujjivan Small Finance Bank is the clear winner when it comes to both YoY and QoQ Sales growth, followed by AU Small Finance Bank and IDFC First Bank.

In terms of pure EPS growth, however, Equitas Small Finance Bank takes the lead, followed by Bank of Maharashtra and Punjab National Bank.

Turning our attention towards another big sector within BFSI - Insurance. Here too, most companies continue to struggle with the only two exceptions being - Star Health and Religare Enterprises.

Railways

Most companies within Railways sector are doing well, driven by the big government capex push. Among, all the companies Jupiter Wagons stands out.

Although most railway companies are experiencing significant growth in their topline, Jupiter Wagons, Titagarh Wagons, Integra Engineering and Kernex Microsystems are the only ones achieving notable growth in bottom-line, i.e., operating profit.

Retail & Hospitality

The last 12 months for retail and hospitality sector were the gift of God. Almost all of hospitality sector has been growing on steroids driven by ‘revenge spending’ and post pandemic reopening.

The best performing sub sector within the entire retail and hospitality sector - Amusement Parks!

Imagicaaworld Entertainment and Wonderla Holidays, two listed amusement parks, have reported remarkable topline growth in both quarterly and yearly periods.

Meanwhile, cinema chains have taken the lead in terms of operating profit growth. It's worth noting, however, that this growth rate is abnormal, as both PVR and Inox Leisure were impacted by the pandemic in the previous year.

The topline growth of hotels is varied, with companies like Mahindra Holidays & Resorts struggling to grow, despite tailwinds in the sector. On the other hand relatively unknown firms like, UP Hotels, the owner of the Hotel Clarks chain, and EIH Associated Hotels, a JV of the Oberoi group, have exhibited the best overall performance at both quarterly and yearly levels.

Now, let's shift our focus to one of the most adored sectors in the retail and hospitality industry - the QSR and traditional restaurant chains.

Among them, Speciality Restaurants - the company behind the popular 'Mainland China' and 'Asian Kitchen' restaurants - stands out as a clear outlier.

Among pure QSR names, Westlife Development - operator of McDonald’s stands out.

Contract Manufacturing of Electronics

The median yearly topline growth for electronics contract manufacturing space has been ~16% and median yearly bottom-line growth around ~19%.

Here, three companies - Amber Enterprises, PG Electroplast and Calcom Vision stand out among the rest.

Footwear

Within the footwear industry, some of the most popular and beloved stocks like Relaxo seem to be clearly struggling while other ignored names like Bata India emerging as clear leaders.

This space was also a recipient of the re-opening tailwinds and has been growing topline at a median growth rate of ~26% and bottom line at ~32%.

The quarterly growth rate has slowed down sharply to ~1.7%, so some headwinds maybe ahead.

Defence

Companies across the defence sector in India posted a ~8.4% quarterly median topline growth and a similar ~8.5% quarterly bottom-line growth.

Most listed companies in this sector are quite different from each other in terms of product offerings, maturity and technical capabilities, as such it is hard to do a like for like comparison.

Some of the companies that stand out are Solar Industries, Astra Microwave Products and ship developers like Mazagon Dock Shipbuilders.

In terms of pure quarterly EPS Growth, BEML takes the pole position.

Paints & Adhesives

The median quarterly growth rate for Paints & Adhesives companies was at a negative 0.8%. The only company that stands out here among its peers its Jyoti Resins and Adhesives.

Jyoti Resins and Adhesives has been quite consistent, beating out its peer group in almost all of yearly and quarterly growth metrics.

Healthcare

Within the healthcare sector, hospitals have published the best yearly topline performance, increasing sales by ~10.6%. The worst performing part of healthcare seems to be diagnostics with this quarter’s median topline growth coming in at a negative 6.3%.

Narayana Hrudayalaya, KIMS, Dr. Agarwal's Eye Hospital, and Lotus Eye Hospital are among the hospitals with the highest level of performance

Auto

Autos, which were the star performing sector of 2022, showed signs of slowing down this quarter. While the median yearly sales growth for auto companies comes in at a impressive 18%, the quarterly sales growth was at a negative 3.3%. Only about 30% of auto companies reported a positive sales growth vs previous quarter.

Among the names that stand out are - Olectra Greentech, Kabra Extrusion Technik, Automotive Axles and NDR Auto Components.

Chemicals

Chemical sector too, broadly speaking, seems to be reeling under pressure. The earnings growth, both yearly and quarterly, in this sector is non-existent, with a median quarterly topline growth of a negative 6.8%.

High valuation of companies in this sector, also makes it prone to severe stock price corrections amidst a sub par performance.

The fertilizer companies appear to be the only area showing strong performance within the wider chemical sector. Nearly all fertilizer companies have reported robust double-digit growth rates, and in some cases, even triple-digit growth rates.

Notably, National Fertilizer stands out as an outlier, boasting approximately 295% yearly growth in operating profit and about 75% yearly growth in sales.

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Conclusion

In summary, the Q3FY23 earnings analysis of Corporate India reveals a mixed bag of results, with indications of a slowdown in consumption-led growth. While certain sectors such as Railways, Hospitality, and Defence are performing well due to various reasons, there is a lack of broad-based earnings growth. Even within large sectors such as chemicals, only specific sub-sectors, like fertilizers, are showing strong performance, with very few companies in that sub-sector performing exceptionally well.

Given the absence of widespread earnings growth, it may become increasingly challenging to select winning stocks going forward, particularly when coupled with a challenging global economic outlook. Therefore, it is likely that the overall market will consolidate for at least another quarter.

As a first-time earnings analysis, certain sectors such as technology were not covered due to ongoing data organization efforts at my end.

While this article may contain a lot of metrics and data, I look forward to hearing your thoughts, criticisms, feedbacks and comments on how I can improve this for the next quarter.

Going forward, this will be a regular exercise on my part and you can expect a detailed earnings analysis like this, once every quarter.

Please do leave a comment and share your valuable feedback.

Leave a comment

Thankyou for reading. Until next time.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

At the turn of the century, United States was facing a big environment problem - that of acid rains. Acid rain occurs when sulfur dioxide content in atmosphere exceeds a certain permissible limit. The rapid industrialization of US during the 1900s meant that the country was burning more fossil fuel than it did ever before. Without a strict emission control policy, this increased burning of fossil fuel led to very high content of sulphur and nitrogen in the atmosphere which in turn, led to frequent acid rains.

The Clean Air Act of 1990 aimed to systematically reduce the amount of sulphur and nitrogen in US atmosphere. The act in itself though wasn’t anything extraordinary, but the mechanism of ‘cap and trade’, through which the act proposed to regulate and reduce the sulphur levels, was a new invention.

This is how ‘cap and trade’ worked ⤵️

US EPA (Environment Protection Agency) would set a limit on permissible yearly sulphur emissions for each industry. All the participants within the industry were allowed a maximum emission limit based on the size of their business.
This is the cap part of the ‘cap and trade’.

If a company within the industry required a larger emission allowance than allotted, they had to buy it from the quota of another company who may not be using it.
This is the trade part of the ‘cap and trade’.

US EPA would yearly reduce the allowed permissible sulphur emission limit, thus requiring all companies within the industry to work on long term plans to reduce their respective yearly emissions.

Companies which were successful in reducing emissions beyond their yearly quota, could sell their unused emission credits to other companies within the industry and generate income.

The price of the emission credit itself was decided based on the demand and supply of credits within the market. The higher the price, more the incentive for industry participants to reduce emissions.

This cap and trade policy worked wonders for the US. Since its implementation in 1990, sulphur di oxide levels in US atmosphere are down by ~95% (see chart above) and acid rains are a thing of the past.

In 1997, United Nations Framework Convention for Climate Change (UNFCCC) met in Kyoto, Japan to discuss binding emission reduction targets for 37 industrialized countries and the European Union.

To enforce these emission targets, the Kyoto Protocol policy was adopted. This led to the establishment of the first international carbon market system and ‘cap and trade’ was at the heart of it.

Shortly after the Kyoto Protocol, China opened its first environmental market exchange, followed by US and most other developed countries.

The modern day carbon markets in the last two decades have exploded in value, with majority of the growth coming in 2021.

Global carbon markets today are valued at ~750 Billion USD and have grown every year for the last five years. 2021 was a banner year with trading value increasing 2.5x compared to previous year.

The main reason behind this growth were the pledges made by several governments, in the run up to COP26, to cap respective carbon emissions by 2050. The largest growth was seen in the European Union market, which also happens to be the biggest carbon market in the world as well as the most regulated.

This article aims to serve as a primer for carbon markets. We will explore everything from the basics of how carbon markets work, to the scope and future of such markets in India as well as globally.

The structure of the article is as follows:

• Part One: Types of Carbon Markets

• Part Two: The Carbon Credit Lifecycle

• Part Three: Current Demand & Supply Dynamics

• Part Four: Problems with Carbon Markets

• Part Five: How to Invest in Carbon Credits

• Part Six: Carbon Markets in India

Before we proceed, please consider sharing this write up with your friends or on your social media.
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Part One: Types of Carbon Markets

There are two types of carbon markets

• Compliance Carbon Market

• Voluntary Carbon Market

Compliance carbon markets are the ones set up by a government regulatory authority. This is the same type of market that was set up for reducing the sulphur emissions by United States in 1990 via the Clean Air Act. The buyers and sellers tend to be businesses operating within the industry and are bound to reduce emissions by law.

Voluntary carbon markets on the other hand are set up by independent certification bodies and have no direct regulation from the government. The buyers in these markets tend to be large organizations that want to voluntarily offset their carbon emissions. Example of this would be Google buying carbon credits to offset its yearly carbon emissions.

Over 99% of all carbon market transactions in 2021 (about ~750 Billion USD in value) took place in compliance carbon markets. Compare that to voluntary carbon market, which managed less than 1% of all transactions in 2021, with a combined value of less than ~1 Billion USD.

There are also two types of trading systems,

• Cap and Trade

• Baseline and Credit

We have already explored cap and trade at the beginning of this article. Lets now understand what is a Baseline and Credit system.

What is a Baseline and Credit System?

Baseline and credit system assumes the current emission growth rate of a company in line with its yearly growth and extrapolates it into the future. This serves as a baseline for the company’s carbon emissions.

If in a particular year the company emits more than its baseline, it has to buy carbon offsets to reduce its emissions. Similarly, if the company emits less than its baseline, it can sell the ‘extra unused emissions’ as carbon credits.

The important part to note here is that both cap and trade as well as baseline and credit systems work for only compliance credit markets. Each country’s regulatory authority that sets up and governs these markets decide whether the trading system will be based on a cap and trade system or a baseline and credit system.

For example, European Unions Emission Trading System (EU ETS), the largest carbon market in the world, is a cap and trade system. Whereas, China’s latest carbon market, the National Carbon Trading Market, is a baseline and credit system.

Since voluntary carbon markets are not regulated by a Government authority, their trading involve an entire lifecycle and several participants, which we will explore in the next part.

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Part Two: The Carbon Credit Lifecycle

Voluntary carbon markets are not regulated and as such require several third party agencies to verify the origination of the carbon offsets.

A typical voluntary carbon market will include the following participants:

1. Project Developer

2. Carbon Offset Standard Agencies

3. Third Party Auditors and Consultants

4. Project Investors

5. Carbon Brokers

6. Carbon Exchanges

7. Credit Buyers

Project Developers: can be any organization (public, government or private) that wants to set up a carbon offset project. There are about 170 types of carbon credits ranging from renewable energy projects like biomass cookstoves to reforestation projects to energy efficiency projects. Basically anything that can help reduce carbon from the atmosphere.

A project developer has to build these carbon offset project in accordance to the detailed standards set by the carbon offset standard agencies like Verra. If a project developer fails to adhere to these standards, they will not be able to sell carbon credits generated from the project.

Carbon Offset Standard Agencies: These are usually not for profit organizations that run a registry / database of very high value verified carbon offset projects. The agencies are responsible for setting the standards required for a carbon offset project to meet a certain quality and qualify as authentic.

There are several of these around the world but by far the biggest of them all are Verra and Gold Standard.

A stamp of approval from any of these mean that the carbon offset generated from the project are of the highest standards of quality and have been verified by independent third party auditors.

Each of these standards are several hundred pages long and require compliance with complex criteria to qualify. The details of each standard are out of scope of this article but at a very high level, all of them require compliance with four key pillars - Real, Additional, Verifiable and Permanent (explained below).

Third Party Auditors and Consultants: These are companies that help project developers understand the standards set by agencies like Verra and ensure the entire process from project development to registration of project, third party audits, listing of project and finally sale of carbon credits is done in a smooth fashion.

Companies like EKI Energy Services fall under this category of the value chain.

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Carbon Exchanges: These are similar to financial exchanges like Nasdaq, NYSE, NSE and BSE, but are oriented towards carbon markets instead of traditional finance. Unfortunately, not many of these exist yet but we are witnessing some fast developments in this space globally.

One of the oldest carbon exchange is CTX Global and more recently Salesforce announced that it will launch a new carbon exchange called ‘Net Zero Marketplace.’

Closer to home, in India, we have companies like IEX working with the Government and various agencies to launch India’s own carbon market.

In the next part, we will explore the demand and supply dynamics of both compliance as well as voluntary carbon markets.

Part Three: Current Demand and Supply Dynamics

The Demand Side

Almost entirety of demand today for carbon credits is top down regulatory driven with the European Union representing over 90% of the global turnover. Carbon markets in EU are much more advanced, liquid and mature than their global counterparts.

Overall, there are about 17 existing and operational regional carbon markets, concentrated across North America, European Union, China, South Korea and New Zealand. Post COP26 and Paris Accords, several new carbon markets are under development across the world.

Apart from government mandated demand, there is demand for carbon credits in compliance markets from industry organizations as well.

The global aviation industry adopted a policy on reducing carbon emissions via a cap and trade program known as CORSIA. CORSIA was meant to help international flights cap and gradually reduce their emissions starting 2016. What was perceived as a big tailwind for carbon credit industry, ended up being a dud as international air travel witnessed massive decline due to global pandemic and has since yet to return to pre-pandemic levels.

As countries and global industry organizations commit further to cap and reduce their carbon emissions, expect higher demand for carbon credits in these markets.

The shipping industry, which accounts for 2.5% of global carbon emissions, is already exploring a compliance program to regulate and reduce its carbon footprint.

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Demand in voluntary carbon markets though small today is growing at a rapid pace. Innovations in allowing individuals to offset emissions for their flights, meals etc. coupled with already existing demand from organizations willing to voluntarily reduce their emissions, is enabling the demand for carbon credits in voluntary markets to grow by leaps and bounds.

The Supply Side

In compliance markets, supply of carbon credits is via the governing regulatory body. Its under the voluntary markets where supply of carbon credits gets complicated.

As we have discussed earlier in this article, there are about 170 types of carbon credits differentiated based on their origination, quality as well as verifiability. High impact verifiable and permanent projects like direct air carbon capture are priced the highest as demand for these exceeds the supply. Whereas low impact non verifiable and less permanent solutions like reforestation programs tend to get valued at the lowest end of the price spectrum.

The below table provides a detailed overview of metric tonnes of CO2 offset sold at various price points for each type of carbon credit.

Each carbon credit type traded on the market has a project backing it. Most of these projects are based in India, Brazil, Africa, Thailand and China. Majority of these projects, however, suffer from the biggest problem currently ailing the carbon credit market - that of permanence and verifiability.

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Lets dwell a bit deeper into these issues.

Part Four: Problems with Carbon Markets

The key problem that ails the carbon market today is of verifiability. How does a carbon credit buyer know for certain that a project actually removed the amount of carbon from atmosphere as it claims to do.

To add problems further, the current market structure is designed to help the cheapest solution for carbon offset. However, these cheap solutions usually are the least verifiable projects and generally do not live up to their claims.

The problem is so extensive, that even large credible institutions like Disney and JP Morgan Chase, have fallen victims to these unverifiable and dubious carbon offset claims.

The below video summarizes these key points well.

In the next segment, we will look at ways through which one can invest in carbon markets today.

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Part Five: How to Invest in Carbon Markets?

The easiest way to get exposure to carbon market is to buy an ETF that hold futures contracts for most liquid carbon markets globally. As of writing this article, there are 6 ETFs available that invest directly into carbon credit markets.

Each ETF has its own methodology and as a retail investor this is the least cost path to get exposure to carbon credit market in your portfolio.

Other than ETFs, an investor can get exposure to carbon markets by investing directly into companies that are associated with this value chain.

The Indian bourse listed EKI Energy Services is a third party consultant that helps project developers traverse through the lifecycle of a carbon credit.

If instead of a middleman, an investor wants to get exposure to carbon credit project developers, then Toronto listed Carbon Streaming Corporation is a worthy option.

Carbon Streaming Corp (Tickr: NETZ.NEO) is a financier of several different carbon credit projects. The companies business model (as shown below) is to provide upfront payments in the form of financing to a project developer. Once the project is developed, Carbon Streaming Corp receives a certain portion of carbon credits from the project as payment.

Finally, there are carbon exchanges like the ones from Salesforce and India listed IEX, both of which we discussed in Part Two of this article.

The carbon credit market is small, non standardized and still at very early stages. As such the choices to invest are limited, but I do expect the market to grow very fast in the coming years.

Speaking of fast developments, lets now explore the scope of carbon markets in India.

Part Six: Carbon Markets in India

On August 08, 2022 India passed an amendment to the Energy Conservation Act, which among many other things aims to establish both compliance as well as voluntary carbon markets in India.

As per the draft blueprint by Department of Energy, India plans to consolidate its existing Energy Saving Certs as well as Renewable Certs into a larger carbon credit program while establishing a national carbon market in a phased manner.

If implemented in its existing form, India would be able to standardize the issuance, monitoring as well as trading of its carbon credits. This would be the first step in a long road, to create a highly liquid and mature voluntary carbon market like that of the EU. In such a scenario, companies like IEX which already facilitate trading of ECerts and RCerts, stand to benefit the most.

So that was the detailed primer on carbon credits. I hope through this article, you were able to learn more about this niche area of investing.

Are you excited about carbon markets? Do you have any exposure in your portfolio?
Let me know in the comments 👇

Leave a comment

Thank you for reading, see you in the next one.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

Why am I telling you something that you already know?
Cause, to understand the events of today, we have to understand the financial events that took place at the start of the Covid-19 pandemic.

Nations around the world weren’t prepared for an event like the Covid pandemic, and who can blame them. The last known pandemic (Spanish Flu) happened more than a 100 years ago in 1918, much before globalization and commercial air travel was a thing.

Before Covid, pandemic preparedness in the modern world was meant for medical text books. Not a single financial book ever talked about economic implications of a pandemic, much less prescribe the playbook of necessary steps required to steer the economy through one.

So when the pandemic hit in Jan 2020, Reserve Banks around the world were entering uncharted territory. By March of 2020, when the entire world shut down and everything came to a standstill, the US Federal Reserve along with US Congress took a few bold steps and announced unprecedented liquidity measures to support their economy.

Anyone who wanted to borrow money, could at dirt cheap rates.

Free stimulus money of upto USD 1200 was sent directly to every US citizen, small businesses were allowed to borrow money at extremely favorable rates, unemployed citizens were granted additional USD 600 per week in payments (~31,000 USD per year) and US Fed cut its interest rates as close to zero as possible.

The Fed had one goal at the time - to prevent US economy from a depression onset by the severe and unrecoverable destruction in demand.

By providing ease of money in an otherwise troubled economy, the Fed orchestrated the greatest financial maneuver in the history of economics. It was able to ensure the demand stays intact even though almost every major part of the economy was shut.

These moves of US Fed were replicated by major central and reserve banks across much of the western nations.

What these central banks failed to judge accurately is when to stop the pandemic era stimulus measures - and it is at this point of failure our story begins.

Before we proceed, please consider sharing this write up with your friends or on your social media.
My aim, through these write ups, is to reach out to as many people as I can, so that they can make informed financial decisions.

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Part One: Too Much Demand, Too Little Supply 🏷️

Economics and finance are usually termed as social sciences. They do not have any rigid rules of hard sciences like E = MC^2 in physics or the covalent bonds from chemistry.

Most of the rules in economics are malleable and depend on the context of the situation, except one.

If demand rises faster than supply, prices rise.
If supply rises faster than demand, prices fall.

This demand and supply rule of economics, is maybe as close to a scientific rule as we would ever discover.

When demand increases much faster than supply, prices rise sharply.
This sharp increase in prices is what is termed as inflation.

The pandemic era stimulus measures helped keep the demand intact around the world but supply side of the equation deteriorated. Lockdowns across majority of the world ensured that factories weren’t running at their maximum capacity and cargo shipping lines, which carry nine out of every ten products globally, came to a standstill.

When the world slowly returned to normal, restoring these supply chains took time. The previous two decades of globalization also meant that more products move from eastern part of the world (Asia) to western part of the world (EU and North America).

These skewed trade routes led to problems like ports getting clogged, long shipment wait times and not enough labour, which contributed to the initial inflationary pressures within the global economy. These initial pressures were felt by businesses and we witnessed profit margins for majority of companies reducing by mid 2021.

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Employment levels in US were still rising all through this period and as such US Fed maintained that inflation is transitory. To their credit, inflation wouldn’t have been such an issue, had it not been for two simultaneous events that twisted the global supply chain further in 2022 - the Russian War and the Chinese lockdowns.

Part Two: Grains, Fuel and Everything Else 🌾

8.5% of the global wheat supply
70% of global neon gas supply
40% of global krypton supply
46% of global sunflower oil supply

Before February 24th 2022, these stats about Ukraine weren’t common knowledge.

That changed with Russia’s invasion; overnight Ukraine took centerstage. Apart from sending supply shock to global food, semiconductor and edible oil markets, the war also destabilized the oil and natural gas markets of the world.

Russia accounts for 10% of global oil production and 8% of global natural gas production. To make matters worse, major economies in European Union, like Germany, rely a large part on Russia for their energy requirements.

Just within days after Russian invasion, global oil prices rallied 40% to hit an all time high of $138 per barrel.

Prices of oil, wheat and edible oil impact everyone in the world.
When oil prices rise, everything gets expensive.

Russia’s invasion of Ukraine was an unseen shock - even though Russia was building a military presence on Ukrainian borders for months - few expected Russia to launch a full scale invasion of another sovereign nation in Europe.

The global energy market was suddenly caught off guard.

At any other time, this invasion would have been the top news across the world, but not this time. The war had barely begun, when four days later on 28th February 2022, a large scale outbreak of Covid-19 (omicron variant) emerged in the largest city of China - Shanghai.

China managed to relatively escape the wrath of Covid for majority of the last two years. As soon as pandemic emerged, the Chinese government shut down borders and isolated any cases it could find. While this helped keeping the fatality count low, it also lead to another healthcare issue.

The Chinese population at large hasn’t developed a natural immunity against Covid like the rest of the world has. So when omicron emerged, its impact was minor for majority of countries but deadly for China.

Within days of first omicron case, thousands of cases started to emerge in Shanghai followed by Beijing - two of China’s largest cities. China’s Zero Covid Policy also meant that they had no option but to lockdown these cities and along with it - two of the most important cogs in the global supply chain.

Together Beijing and Shanghai account for a large share of global supply. The port of Shanghai is in fact the busiest port of the world for almost a decade now.

With both these cities under lockdown, the already stressed supply chain of the world, squeezed even further.

These two unrelated and isolated events (Russian War and Chinese Lockdowns) contributed to the acceleration in otherwise already steady growth of inflation around the world - which brings us to where we are today.

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Part Three: Will there be a Recession? 📉

As I write this post, on a Wednesday night (15th June 2022), in the background US Fed is announcing the highest increase in Fed Funds Rate since 1994.

I wont get into the details of how Fed Rates impact an economy and stock market. If you want a primer on that, you can go through the below Twitter thread.

The inflation is US is at a 40 year high of 8.6 per cent against the Fed’s target of 2 per cent.

Developed economies like US do not normally have inflation 4 times their target.
The last time inflation was running rampant in US was during the early 90s and Fed then didn’t have to combat a broken supply chain along with a pandemic recovery!

Inflation isn’t just high in the US, its impacting a majority of countries around the world - a direct effect of the broken supply chains.

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So when supply chain keeps getting stressed and demand is overheating in an economy, we either have to fix and increase the supply or reduce the demand for us to able to control price rise - and its effect - inflation.

Since Fed cannot really control the supply side and new production capacities along with production bottlenecks in real world take time to resolve, the only option we have at the moment is to reduce demand.

A faster than expected reduction in demand will eventually lead to a recession - a degrowth in corporate earnings along with income and spending levels of individuals.

As an investor, the correct question to ask ourselves today - isn’t whether there will be a recession or not - it is what will be the severity of such a recession and how long will it last?

While the consensus states that their will be a recession, the jury is still out on the severity and duration of such a recession.

Part Four: Impact on India

So there will be a recession in US, EU, UK and much of the western world, but what does that mean for India?

During the pandemic when majority of western world was busy distributing cash to its citizens, Indian Reserve Bank treaded lightly. The RBI was accommodative to the extent necessary and our Government made policies that were targeted at specific sections of the society rather than a blanket one size fits all approach.

That conservative approach of RBI is helping us tame inflation today. While the inflation in India is high as well, it is no where near the 4x of upward target of 6%.

To put this in context, current inflation rate in US is well above 8% (4x of Fed’s long term target of 2%). Had RBI been as aggressive as US Fed during the pandemic, inflation in India today might have been as high as 24%.

Add to this, our banking system along with the government are flushed with cash and possess strong financials.

So while there maybe a slowdown in overall economic growth rates of India due to a recession in western world, the extent of such a slowdown will be limited.

This trend also shows itself in the broader stock market indices. Over the last six months, Indian stock market have been more resilient compared to their peers in Europe and America.

This resilience comes against the backdrop of the highest FII outflows from India in more than a decade.

So why are FIIs selling if India is doing so great?

A simple logical explanation is because India has done so great. When you look across the emerging market options available to institutional investors globally, there are pretty much only four major markets to invest in - China, Taiwan, South Korea and India.

Traditionally China has taken the lions share of emerging market allocation, followed by South Korea, Taiwan and then India. No institutional investor allocating to emerging markets looks at India in isolation, its always a comparison vs other countries.

When money moves out of emerging markets its moves out across all countries as a risk off approach. Because India has relatively performed stronger than other markets, more money moves out of India as that’s where institutional investors have profits to take off the table from.

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My Investment Strategy

So all of the above ultimately brings me to my investment strategy for next two years.
Here are some of the assumptions I am working with.

• There will be a recession in EU, UK and US

• Severity of the recession will be mild in US

• Extent of such a recessions will last upto 18 months (start to mid 2024)

• India’s economic growth will slow down but still remain above 6%

• India will still remain the fastest growing economy in the world

• Stock markets will gyrate between volatile to sideways until 2024

• Intense bull market run will not start again until after the elections of 2024

• Valuations will cool off to the lowest or mid quartile range from current highest quartile range

• Recent speculative SPAC listing in US will continue to get butchered and may prove to be a good hunting ground for high risk high return investments

• FIIs will return to India late 2023 with a higher allocation that they have made ever in the past

I will put a caveat here that these are just my assumptions and not necessarily what will happen. I have made the above assumptions based on the factors described throughout this article and in my view the above have a decent probability of playing out.

Based on the above assumptions, below is my simple investment plan.

• Continue to be very stock specific and extend the timeline of building full position from weeks to quarters

• Allocate to index where a large correction has already occurred and underlying fundamentals of index constituents remain robust - Nasdaq 100 and Bank Nifty for example

• Build and continue to hold at least a 15 to 20% cash position until end of 2023

• Sell positions where inflationary headwinds are eroding fundamentals and earnings

So as you can see, from supply chain issues, inflation, Russian War and Chinese lockdowns there are little fires everywhere across the world 🔥

Whether these little fires turn into a full fledge blaze is dependent on

1. How fast supply chains get fixed

2. How central banks and governments around the world act through the upcoming recession

Do you have an investment plan? What assumptions described above do you not agree with? Let me know in the comments 👇

Leave a comment

Thank you for reading, see you in the next one.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

Disappointed, the trio gets news that the Russians are trying to offload a few repurposed Intercontinental Ballistic Missiles (ICBMs), so they head east. Over a few too many rounds of vodka, they stuck a deal to buy three ICBMs for $21 Million. The Russians, would later back out of the deal and try selling ICBMs to Elon for $21 Million each, $63 Million in total.

Frustrated by the experience, Elon Musk, in a typical Thanos like fashion would utter the words, “Fine, I will do it myself”, and so will take place the birth of SpaceX.

Twenty years later, this singular experience, would go on to change the dynamics of space industry as we know it today.

Welcome to the Space Age 🛰️

Before we proceed, please consider sharing this write up with your friends or on your social media.
My aim, through these write ups, is to reach out to as many people as I can, so that they can make informed financial decisions.

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Part One: The Past that Led to The Present

The roots of modern day space industry started just after World War II, in the period known as Cold War. From the ashes of World War, emerged two super powers, Soviet Union (USSR) and USA. Both countries were fighting war by proxy and in an effort to prove their superiority over other, they targeted space as their battleground and science as their weapon of choice.

USSR won the first battle with the launch of Sputnik I, the world’s first artificial satellite.

US couldn’t stand USSR’s accomplishment and soon after increased its funding towards exploration of space, with the set up of a dedicated organization in 1958, called NASA.

Just like that, we were off to the races, between two super powers of the world, competing to outdo each other in the exploration of space. The same technology that was used to propel missiles in World War II, was now being used to put a man on the moon.

Ten years after NASA was established, on July 20th 1969, Neil Armstrong became the first person to ever walk on the surface of the Moon.

Space race, would continue for another 20 years, till 1989 when Berlin Wall fell, marking the end of the Soviet Union empire.

The fall of Berlin Wall was a pivotal moment in history, it established United States as one true super power in the world but that also meant the billions of dollars, US was spending on space missions weren’t necessary anymore - there was no one to compete with!

NASA’s budget shrank every year after that and with it so our advancements in space technology. Rockets remained pretty much the same and costs of sending anything to Earth’s orbit was so expensive with so little return that only governments could fund it.

Until that is till 2001, when Elon Musk set about to launch his own rocket company.

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Part Two: A Commercial Rocket Launch Every Week

The largest cost for any space mission used to be the rocket carrying the freight to either Low Earth Orbit (LEO) or Geosynchronous Stationary Orbit (GSO). Unless cost to launch a rocket reduced by orders of magnitude, no real commercial space missions were feasible.

This was the key problem, SpaceX aimed to solve.

Before SpaceX arrived on the scene, the best of rockets used to cost ~$25,000/kg. Today in 2022, they cost less than ~$1000/kg. By the end of this decade, this cost will further reduce down to $100/kg.

This reduction in launch costs is the key reason behind the boom in commercial space industry. Its finally cheap enough for even high school kids to send their own satellites in space.

Another key tailwind is the miniaturization of satellites.

Meet Dove, a satellite designed by Planet Labs. For those of you who are reading the name of the company for the first time, Planet Labs is a part Google owned company that scans every inch of the world every day all year round.

If you’re reading this article from your roof or from an open ground, look up, there is a high chance that your image is being taken by one of these satellites.

Creepy? Maybe. Impressive? Hell Yeah!

This simple palm sized satellite is many times more powerful than some of the giant satellites we sent to space in early 2000s.

Miniaturization of electronics (camera, mic, processing units) is also directly effecting the miniaturization of satellites. In most cases today, satellites use off the shelf electronic parts, some of which are the same as the ones used in your phone.

So what happens, when the technology you need to send to space gets smaller in size and lighter in load while costs to send something in space decrease by orders of magnitude?

You open the floodgates to space centric business plans and rocket launch activity.

Today, there is a commercial space launch every single week and its dominated by two companies - SpaceX and Rocket Lab.

Much of the commercial activity today is centered around launch of small satellites to the Low Earth Orbit (LEO) but other space centric businesses are starting to emerge right around the horizon.

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Part Three: Making Money in Space

There are a few ways to make money in the space business, let’s explore them.

The most common way is to help other businesses reach space in a cost effective manner. The simplest way to achieve lower cost is to design reusable rockets - something SpaceX and Rocket Lab are very good at.

There is a flurry of start ups trying to race ahead and build the best in class cheapest reusable rocket solution today. Some of these are mentioned below.

This is an industry that has extremely high barriers to entry. Even the paint that goes onto a rocket needs to be approved and certified.

I will let, Peter Beck, CEO of Rocket Lab, explain all the barriers to entry for a rocket company.

High barriers to entry doesn’t necessarily mean that it is a very lucrative industry. Unfortunately, the entire industry yearly revenue for rocket companies in 2022, taps out at $3 to $4 Billion per year.

Nine out of ten rocket companies shut shop even before their first launch. The ones that can make a commercial reusable rocket work are truly special.

When SpaceX lands its Falcon 9 booster on a ship, its essentially landing a sixteen storey high building on a tiny remote controlled drone ship in the middle of Pacific Ocean - if that’s not magic, I don’t know what is!

So when the primary industry is not big enough today, the only way to survive is

1. Have a billionaire backer like Musk in case of SpaceX and Bezos in case of BlueOrigin

2. Expand into ancillary industry services

SpaceX is building Starlink to provide a secondary income that should fund all the upcoming R&D. Rocket Lab is expanding into becoming a one stop shop for satellite components, providing at scale manufacturing of bespoke parts.

As the industry matures, I expect a large consolidation to take place with only a few players left standing.

Should I write a detailed deep dive into Rocket Lab, a company I am personally invested in? Leave a comment below 👇🏼 and let me know.

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The second way to make money in space business is to build a constellation of satellites that can stream and transfer data to any part of the world.

BlackSky and PlanetLabs are examples of using satellites to image and monitor entire Earth and subsequently selling that data to customers.

The final way to make money in space business today, is to execute government contracts. NASA, for example, is the biggest customer for SpaceX.

Everything related to space is being taken over by private companies and government agencies today are handing out contracts rather than build everything on their own.

Two of the biggest upcoming government contracts are

• Artemis Mission - building a permanent station on Moon

• Building a new International Space Station

These two are big gigantic leap worthy missions that will cost billions of dollars and companies are lining up to get the right to execute even a single part of the contract.

When the next humans step on Moon in 2024, they will be there to set up a permanent outpost.

The current International Space Station is reaching its end of life, the next one will be built by a private commercial company instead of governments.

Axiom Space is the leading organization that has won several contracts from space agencies around the world to build specialized habitats for them. We will have a new commercial space station ready and functioning by the end of this decade.

Part Four: Space, The Final Frontier

So there will be increased rocket launch activity, we will build a new space station, maybe several of them and a new base station on Moon.

Then what?

How does this industry keeps progressing and make reoccurring revenue and ultimately profits that will help move it from a niche industry to mainstream?

This next part may sound like science fiction but I assure you its rooted in reality.

There are many things that are only possible in the gravity less environment of space. Take Organ Printing for example. Yes! we have the technology to print organs from bladders to even hearts. Millions of patients die every year while waiting for an organ transplant, this soon could be a thing of the past.

Microgravity enables manufacturing for far superior products that are not possible otherwise on Earth.

Apart from manufacturing cool things in space, we are also gearing up to extract and mine materials out of space objects - moon, asteroids etc.

Again, this isn’t science fiction, its reality and will be happen far sooner than you realize. The tiny country of Luxembourg has even passed regulations enabling space mining companies to set up in the country.

Today, space industry is at its nascent stage. In terms of the internet age its like Netscape browser was just released and people are yet to discover what e-mail is.

Its still very much a wild wild west.

But unlike the internet age that took twenty years for companies like Amazon, Google, Apple and Microsoft to become trillion dollar corporations, the next trillion dollar space company might be just round the corner.

Thank you for reading! see you in the next one.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

To put things into context, Tesla in 2012 barely managed to sell 10,000 of their cars. Electric vehicles were a distant dream, at best, telecom companies were flashing in their brand new ‘high speed’ 3G internet service and Apple had just released it’s state of the art iPhone 5!

Fast forward 10 years to 2022 and Tesla is doing over ~$75 Billion in annual revenue, selling just shy of a million electric cars every year, last of 3G services in US are being shut down and 5G services are being rolled out in most developed countries in the world.

World moves fast!

This write up is my attempt to imagine what 2032 may look like. Now, I do not claim to see the future or predict it accurately, most of what I have to say today may not turn out exactly as written but by looking at data and ground up research, we can make an educated guess into what technologies will succeed and how dramatic these transformations may be.

I will also not bore you into stating the obvious - electric cars will be the norm or renewables will power the majority of the electric grids.

With that, lets dive in.

Before we proceed, please consider sharing this write up with your friends or on your social media.
My aim, through these write ups, is to reach out to as many people as I can, so that they can make informed financial decisions.

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Prediction #1

The world of Gaming and VFX will overlap and consolidate

This one is pretty obvious and already happening without us realizing it. Gaming industry today is many fold bigger than all of movie and music industry combined. Technologies are made for gaming first and adapted for movies later on.

If you’re a fan of the TV Show Mandalorian, you maybe surprised to know that entire VFX for the show was done in Unreal Engine by Epic Games (the makers of Fortnite). There was no typical ‘green screen’ used in the show, backgrounds and visual effects were pre rendered in a game design software and simply added via Led Screens while filming.

The implications of such a move? Millions of dollars and thousands of hours that were spend on VFX are now reduced to simple pre renderings costing you no more than a subscription to a software. It is for this reason that gaming companies are in 2022 buying out VFX companies like Peter Jackson’s Weta being bought out by Unity.

A typical gaming company of 2032 looks very different from a gaming company of 2022. In 2032, gaming companies earn most of their revenue by licensing out their world creation software - to movie studios, smaller game design studios and other indie developers, just like today you can subscribe to a Adobe software and have access to the same tools as a professional.

Further, all gaming in 2032 is streamed, think of Netflix but instead of an on demand movie or tv show, you get to play a game from an endless continuously increasing library.

Signs of this change are already showing - with Google experimenting with Stadia, Amazon with Luna, Netflix with their minor games related to their IPs, Microsoft with xCloud and PlayStation with PS Now.

So what does all this mean to you as an investor?

Well, for starters, a proxy bet would be the underlying software providers to these gaming companies - Unity being an example of such. The other is small gaming companies, will find it increasingly hard to compete in a space that is getting major attention from deep pocket Big Tech. In 2032, gaming industry is highly consolidated and dominated by players that have technology and online distribution as their strength first and creating immersive games second.

If you would like me to do a deep dive or hold a webinar into Gaming and Metaverse related companies, please leave a comment.

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Prediction #2

Low Skilled jobs ranging from farming to truck driving will be automated
(*at least in the developed world)

This one isn’t that hard to predict. Most of the western world is going through a labor crunch esp. in low skilled areas. The reasons behind it vary - from an aging population to a more educated and skilled workforce and finally inability for a worker to survive on a low skilled pay.

Some western countries like Canada are tackling this problem by allowing more immigration. More than 80% of growth in Canada’s population is due to immigration alone. The country of 30 Million people, wants to allow over 361,000 new immigrations every year starting 2022.

The reason for this mass immigration is simple - Canada has an aging population which if not revived with a much younger workforce can collapse its economy and social security systems in the coming years. Today, if you are college graduated and below 30 years of age, you can get a Canadian PR visa in a few weeks.

The problem with such immigration is - most immigrants are skilled and do not migrate to a developed country like Canada to work in restaurants, drive a taxi or apply for other low skilled jobs. So as the population ages in the coming decade, the high skilled jobs are the first to get filled with immigrated population, the low skilled ones - well, they will keep facing labor supply crunch and thus are ripe for - automation.

In 2032, low skilled jobs in countries like Canada are increasingly automated. Take farming for example. Canada is one of the largest producers and exporters of grains and food in the world. An average farm in Canada is around 700 hectares in size and uses machinery that costs millions of dollars. These farms will be the first in the world to adopt technology that will make them increasingly automated.

Before we see autonomous cars, we will have autonomous tractors. The logic behind it is simple - its much easier to program a tractor or any other farm equipment to operate on a piece of walled off empty farmland than it is to program a car to operate autonomously on a road filled with multiple other vehicles and pedestrians.

Signs of autonomous farming equipment are already emerging. Below is video by John Deere - the largest farming equipment manufacturer in the world showcasing their new fully autonomous tractor.

The farm of 2032 is self farmed - with minimal supervision involved.

Another area to get automated is truck driving - again with autonomous vehicles. TuSimple - a company listed in US already operates completely autonomous trucks for UPS every single day.

As these trucks make more trips, the autonomous driving software will get better at an astonishing pace. Expect to see more autonomous trucks in future.

The underlying need for all of this automation is the aging population and unavailability of enough labour supply to fill these jobs. As these jobs get more automated, the pay for such low skilled jobs will further reduce and drive even further shortage of labour until we reach a point where these jobs are automated to a large extent.

So what does all this mean to you as an investor?

Look for companies that are enabling this automation. Automation for passenger vehicles is far away, but in 2032, farmlands are completely automated. John Deere for example, is not considered by many a bet on autonomous vehicles, yet it is!

Look for opportunities where others aren’t. If there is consensus around an investment thesis, its usually the wrong investment to make.

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Prediction #3

Space Industry will worth many Trillions of Dollars

Space, the final frontier for humanity. In 2022, Space Industry is largely ignored by the investment community - it is seen as a small niche industry that makes less than $10 Billion in revenue every year. But by 2032, Space Industry combined will worth many trillions of dollars and growing at high double digit rates.

Here is why I say so.

Access to Space is Democratized

The main challenge for any form of space industry to take place was access to economical launches. This in 2022 has been fixed to a large extent - there are multiple successful rocket launch companies, SpaceX and RocketLab being the two most successful ones.

As a result, launch activity has exploded.

From just about 20 satellites being launched in 2009, we have reached velocity of ~1000 satellites being launched in 2022. This pace will sustain through the coming decade. Today, the use case for space transportation companies is the small-sat industry, tomorrow, the use cases will be far and wide.

Take for example, building a new space station. The current International Space Station is nearing its end of life and will soon be burnt up and decommissioned by NASA by 2028.

The next space station to be built, will not be sponsored by a Government agency like NASA. Instead, there will be multiple space stations developed by private companies in collaboration. Just like today in 2022, companies lease out commercial office space from real estate companies, in 2032, companies will be leasing out space (no pun intended) on the Space Stations orbiting the Earth.

Take for example, Axiom Space, a company that specializes in building space habitats. It was recently awarded $140 Million contract by NASA to build habitats that can attach to the current International Space Station.

The same company, signed a deal with Tom Cruise’s production company to build a studio in space!

In 2032, space stations are commercial and operated via private companies. The same space station is used by movie studios, research companies and new age businesses that can only operate in environment of space - 3D Organ Printing for example.

So what does all this mean to you as an investor?

Look for companies that enable this industry to take place. It is not easy to build a rocket company, a sustainable reusable rocket company - even harder. This is an industry with the highest barriers of entry - even the paint that goes onto a rocket has to be approved first. When a rocket launches, the entire aerospace surrounding it has to be seal off from activity. In 2032, when the rush for space age is in full swing, it is these rocket or space transportation companies that will be the prime beneficiaries.

I will let Peter Beck, the founder and CEO and Rocket Lab, explain this further.

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Prediction #4

The most significant advancements will be made in the world of Biology - Not Necessarily Healthcare but Biosciences

In 2022, synthetic biology is at the cusp of its commercialization. Advancements in the field of CRISPR and precision fermentation over the last decade have finally made it possible for humans to control and program biology.

Today, we can make enzymes and bacteria in lab do whatever we want to.

Want to revive the smell of a 200 year old extinct flower? Well, we can do that. Want to make enzymes that take all the waste material out of a chemical plant and produce valuable products out of them? That’s possible too.

In 2032, biosciences effects every product that you use without you ever knowing it. The chemical used to make the products you use - they are 100% carbon neutral - all thanks to an enzyme. The food you consume - 100% organic and disease free without using a single harmful pesticide - all thanks to the wonders of synthetic biology.

Enzymes in 2032 is a buzzword, similar to how Artificial Intelligence and Electric Vehicles are a buzzword today in 2022. The largest chemical company in 2032, doesn’t have any chemical plants - it instead manufactures and sells enzymes that help boost the output of other chemical plants in a carbon neutral way.

Another advancement in the field of Biology, will be precision medication.

Today, traditional drug manufacturing companies only invest R&D money into areas where there are a large enough pool of patients. This unfortunately ignores those that suffer from rare health disorders. In 2032, patients of all types are cured no matter how rare the disease is - all thanks to sharp decline in R&D due to gene sequencing.

So what does all this mean to you as an investor?

Look for areas where companies are enabling this movement. The guys at Andreessen Horowitz, famous for coining the term ‘Software Eats the World’, are today focusing on companies that enable this movement towards biosciences. They even run a podcast called ‘Bio Eats World’.

Gingko Bioworks is an example of a company that is enabling this movement.

So, those were my four predictions for what the next decade holds and where it is headed. I do not claim that these will turn out exactly as I have described them here but by looking at data and researching from grassroots its easy to get a sense of where some of these industries are headed.

No matter what the year 2032 may look like, I am sure it will be an exciting time to be alive.

Thank you for reading, see you in the next one.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

Some of these regulations have worked, while others have failed miserably.

The Electricity Amendment Bill of 2021, is different. It focuses on the root causes of the problem and devises solutions accordingly, rather than try fixing them with a Band-Aid (as previous regulations did).

The method opted by the Bill to fix these ailments, is to bring about large changes in the Industry - ranging from privatization of distribution companies to mandatory sourcing of renewable energy.

Whenever there is a regulatory disruption in an establish Industry - the ground is fertile for opportunity. This article is an attempt to identify such emerging opportunities.

Before we proceed, please consider sharing this write up with your friends or on your social media.
My aim, through these write ups, is to reach out to as many people as I can, so that they can make informed financial decisions.

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This article is divided into the following parts:

1. Current Problems with the Energy Sector in India

2. What does Electricity Amendment Bill 2021 proposes?

3. Opportunities arising out of Electricity Amendment Bill 2021

4. Conclusion

1. Current Problems with Energy Sector in India

Within the Indian Energy Sector, the current public electricity distribution companies are a ticking time bomb waiting to explode and impact the financial stability of the entire industry.

Together, all state owned electricity distribution companies (or DISCOMs), owe upwards of INR 75,000cr (~$ 10 Billion) to power generation companies. To complicate matters further, most of these DISCOMs have large debts to various state and national banks.

Financial conditions of these DISCOMs today is so bad that even after subsidies and various monetary schemes by central government (UDAY etc.), they are unable to turn a profit or breakeven.

Below table is taken from a report by Power Finance Corporation of India. It shows the difference between cost and revenue structures of distribution utilities. Notice, how in the revenue structure, the total is still ~50,000 cr. short to breakeven. Take away the regulatory grants and subsidies and it gets worse.

These state owned DISCOMs haven’t made enough significant investments in upgrading the transmission and distribution infrastructure. The old infrastructure along with inefficiencies of a government owned utility company and political use of cheap electricity to win votes - has over the years translated towards India becoming the only large economy in the world where AT&C losses are upwards of 22%.

AT&C stands for Aggregate Technical & Commercial Loss, it is the difference in total energy generated by the grid vs total energy commercialized.

AT&C is a measure used to understand how much electricity produced by a country is wasted or lost (via transmission or theft or other inefficiencies)

As you can see from the above Figure, states who have privatized distribution of electricity (eg. Delhi and Maharashtra) report much lower AT&C losses compare to states where distribution of electricity is still under the control of state government (eg. Arunachal Pradesh).

Among the myriad of challenges, include GST and taxation. As electricity comes under State Government, there isn’t a standard nation wide taxation policy. It is left upto State Governments to decide how they want to tax electricity consumption - which in some states is taxed as high as 20%.

To complicate matters further - lots of taxes and duties are levied on coal (responsible for over 50% of electricity generation in the country). Even though coal is under GST regime, electricity consumption is not - which prevents utilities from accessing the input tax credits as per GST policies. It is estimated that just inclusion of electricity under GST will reduce cost of electricity consumption by 17paise per unit across the nation.

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Today, the central government has to infuse funds to this sector every year (~90,000cr in 2020 alone) while the collective debt of state owned discoms stand to touch ~6 Lakh cr. This trend is obviously not sustainable and if something isn’t done anytime soon - the entire sector maybe on the verge of collapse.

To prevent this from happening - the parliament is about to pass the Electricity Amendment Bill of 2021 in the upcoming winter session.

Let’s now look at the major parts of this Bill.

2. What does Electricity Amendment Bill 2021 proposes?

Regulatory changes are not new to the power sector in India. Over the previous two decades, multiple regulations have been introduced with the objective to fix specific ailments within the sector.

The last major change was the Electricity Act of 2003, which introduced multi year tariffs and 25 year Power Purchase Agreements along with power trading and open access.

Open Access allows consumers with requirements of more than 1MW to source electricity directly from generators instead of distribution companies

Since 2003, specific regulations have been introduced to either stabilize the financial stress within the sector or to reduce the AT&C losses we discussed earlier.

The Electricity Amendment Bill of 2021 is primarily targeted at

1. Introducing private distribution companies and allowing end consumers to choose a distribution provider - a private company or a state owned player

2. Reducing AT&C losses within the system by making it mandatory to install smart meters

3. Enabling larger consumption of renewable energy by allowing for fixed renewable power purchase obligations

4. Giving more powers to the regulator to settle disputes and regulate the system by bringing more efficiency and transparency (like RERA did for real estate industry)

Let’s take a closer look at the first three.

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Multiple Distribution Companies and Consumer Choice

The Bill recognizes that today distribution companies across the country are monopolies, either government or private. This reduces competition, disincentivizes the distribution company to invest in efficiencies and improving service, and leaves the customers with subpar experience and high electricity rates.

The Government now wants to delicense this entire sector. No longer a distribution company will require a license (which are limited and controlled by the state) to operate. Instead anyone in the country can apply to become a distribution utility.

To operate legally as an electricity distribution company, they have to register themselves with the appropriate commission in the State. As long as these companies meet the eligibility criteria, their applications will be approved within 60 days. Upon approval, a distribution company will remain bound by rules, regulations and oversight of the State Electricity Regulatory Commission (SERC).

What this essentially means is you as a consumer will have choice to either have a Torrent Electricity Meter, Adani Electricity Meter, Tata Electricity Meter or a meter from your local State Government owned distribution company.

The whole process and experience for the consumer will be very similar to how you have a choice today of telecom provider - you can choose between a Jio, Airtel, Vodafone or BSNL.

Just like today a Jio or an Airtel doesn’t have to stand in line and ask for operating license from every State government, similarly tomorrow, a power distribution company will not have to apply for a license in every state.

This operating model is nothing new - its already implemented across most of the developed world. In UK for example, consumers have an option to choose which utility provider they want - this is referred to as retail choice.

To enable this retail choice in India - government will separate the function of content (retail electricity) and carriage (wires). No longer a utility company will be responsible of building and maintaining the transmission infrastructure. This enables specialization and allows a DISCOM to focus on its core objectives - set up connections, provide quality service and collect revenue.

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Reducing AT&C losses by making it mandatory to use Smart Meters

As we discussed, earlier in this article, India has one of the highest AT&C losses of any large economy in the world. Billing efficiency in India at a national level stands around ~83%. To counteract the issue of electricity theft and reduce AT&C losses, Govt of India, launched a National Smart Grid Mission, which has met with a lot of success in pilot states of UP, Madhya Pradesh and Manipur.

In Manipur, AT&C losses reduced by ~50% since the government started using prepaid and smart meters.

Smart Meters further help in load management, forecasting and overall more efficient management of the grid. Its no surprise then that Govt of India wants to implement them at a nation wide level now.

Along with smart meters, GOI is also inclined to allow DISCOMs to source power directly from exchanges under a policy called - Market Based Economic Dispatch or MBED.

This combination of cheaper sourcing of power and higher billing efficiency, should help the ailing DISCOMs achieve financial stability.

Larger share and mandatory purchase of renewable power

Renewables already make up of 25% of the national grid capacity. Every State has an obligation to purchase a certain percentage of their electricity requirement from renewable energy producers. However, these renewable purchase obligations are not always enforced. A state discom today chooses to purchase electricity from a state generator even though there maybe cheaper alternatives available in the market.

Further, only top six States in India account for 78% of all the renewable energy (RE) generation. RE rich states like Karnataka, Andhra Pradesh, Rajasthan and Tamil Nadu continue to meet their RPO while other do not.

To plug this gap, the Bill will introduce new provisions related to Renewable Purchase Obligations (RPO) and those who do not meet these new provisions will be subject to harsh penalties.

If you want to learn more about Renewables and New Energy Sector within India, you may opt to watch my in depth five hour long webinar.

Watch the webinar by clicking on the below link ⤵️

Watch Renewable Energy Webinar

3. Opportunities arising out of Electricity Amendment Bill 2021

Whenever there are dramatic changes in an industry structure - either because of regulations or technology - there will always be a set of winners and losers.

Before, I focus on the winners, lets take a look at the characteristics of losers.

A typical loser in this space will be someone who has

• High Debt

• Current Monopoly Status

• Lack of efficient infrastructure or capability to maintain it

• Is not investing into customer service and experience

Those listed monopoly distribution utilities are an example of losers esp. if they haven’t kept up with technology, managed the leverage (debt) on their balance sheet and have high inefficiencies when it comes to collections.

The license these companies hold, which continues to prevent their monopoly status, will soon vanish much similar to how a New York Taxi License today is nearly not worth as much as it was before the launch of Uber.

Comment below on who you think meets the above criteria of losers and may get disrupted in coming year.

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Let’s now focus on the winners.

Based on the motives of the bill, there are four type of companies that stand to benefit from the upcoming regulatory tailwinds.

• Renewable Energy Producers

• Power Exchanges

• Transmission Infra (Smart Meters, Transmission Companies)

• Private Distribution Companies with Strong Balance Sheet

Let’s explore a few available investment opportunities within each of the above category.

Renewable Energy Producers

The obvious beneficiaries are renewable energy producers. The Bill mandates a higher obligation, on all States, to source renewable energy. This will directly benefit the likes of Adani Green and ReNew Power.

Power Exchanges

Second obvious beneficiaries are power exchanges like IEX and PTC. Regulations like MBED, larger advocacy for open access and cross border trading and supply of electricity will function as tailwinds for these companies.

Transmission Infra

The other beneficiaries are companies that are providing the infrastructure required for this transition. Manufacturers of smart meters like Genus Power and those who lay down the transmission lines like Adani Transmission are direct beneficiaries of the new regulation.

Private Distribution Companies

Finally we have private distribution utility companies like Tata Power who are positioned to reap the maximum benefit from the new legislation. Be careful when picking companies within this space - most of them have heavy debt on their balance sheets and as such cannot afford to reap the maximum benefits of forthcoming opportunities.

Length limits of this article prevents me from doing a deep dive into each of the companies mentioned above, but I will leave you with snippets of how some of them are perceiving and preparing for the upcoming opportunity.

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Genus Power on Smart Meter Demand

Tata Power on Applying for DISCOM opportunity in multiple cities

Other Private Discoms Ready to Take Over Ailing DISCOMs even before the Bill is Passed

Conclusion

As evidence shows, the Electricity Amendment Bill 2021 represents a historic change in the current structure of the power distribution industry. If implemented correctly, privatization of DISCOMs will have a massive impact on the fortunes of existing private DISCOMs and other incumbents present across the value chain.

As an investor, it is our duty to look at evidence, assign probabilities to outcomes and make decisions based on facts.

My earlier picks in this space have been Tata Power and IEX, and I am currently looking closely at ReNew Power and Genus Power.

I hope this article was helpful in decoding the Electricity Bill and the upcoming opportunities within it. My aim through this write up was to explain the various moving parts of the bill, present an investment thesis via data and then point you towards a direction to research further.

If you would like me to write a deep dive into some of the companies mentioned above, leave a comment.

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Thank you for reading, see you in the next one.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

Domestically too, in India, a little known Indian software business by the name of Infosys has started to grab headlines. It was to become the first Indian company to list itself on Nasdaq. Returns to Infosys shareholders since its IPO in 1993 were phenomenal as well, making Infosys a multibagger stock.

Yet, few imagined, that by the time year 1999 comes to a close and dawn of a new century begins, Infosys share price will increase more than 900%.

The reason for this 900% return in a single year was the Y2K Bug.

Y2K was a single event that laid the foundation of Indian software services industry, gave birth to the Indian middle class and changed the future course of our nation. India in 2021, would have been very different, had it not been for the Y2K bug and the subsequent boom of Indian IT Service industry.

Almost two decades later, a collection of multiple such events is transforming the IT industry of today and establishing the foundation for Trillion Dollar dreams of the future.

Before we proceed, please consider sharing this write up with your friends or on your social media.
My aim, through these write ups, is to reach out to as many people as I can, so that they can make informed financial decisions.

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The Rise of Indian SaaS Industry

Infosys, TCS, Wipro - everyone knows these names, they are the founding fathers of the IT Service industry and have done incredibly well for themselves in the last two decades.

Zoho, Freshworks, Chargebee - these are the names that you probably haven’t heard of, yet these are the founding fathers for the Indian IT SaaS industry.

What is exciting about the latter SaaS names is that the business model is very different compared to their predecessors in the IT Service industry. While a business like TCS does margins of 30% on a good year, SaaS businesses like Zoho, Freshworks and Chargebee routinely operate at above 70% profit margins. SaaS businesses also tend to have sticky customers compared to IT Service where you have to hunt for new deals every couple of quarters and continue to build your order/service books.

On a unit economics basis alone, a SaaS based IT product business is far superior than the traditional IT Service business. It’s this giant leap in business fundamentals along with a bunch of supporting events, that is driving up the economic boom in this part of the industry.

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The Lollapalooza Effect

Several factors today combined have created a lollapalooza effect in the SaaS Industry. Here are a few numbers to give you an idea of the incredible speed of growth in this industry.

A decade ago in 2010, Indian SaaS industry was almost non existent - it was made up of a few names mostly the likes of Zoho and Freshworks who were trying to set up a global cloud based SaaS business from India, against all odds.

If you want to read a detailed deep dive into the business of Freshworks, you can read so here.

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The Business of Freshworks

Shan Krishnasamy and Girish Mathrubootham are not household names in India, neither is the company they founded. Almost everyone in India, no matter what part of society they belong to, may recognize Flipkart and Ola, but very few know about Freshworks…

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5 years ago · 19 likes · 42 comments · Tar

By 2015, we had about ~5000 SaaS based businesses operating out of India. Today, we have more than 8000 SaaS based companies incorporated out of India and more than 40 of these have raised considerable capital (Series C funding and above).

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India is one of the fastest growing SaaS markets in the world and is expected to increase to ~USD 20 Billion in ARR by 2022, representing a 9% global SaaS market share. This represents a 32% growth CAGR over the last 5 years.

Below are the multiple standalone events that are aiding this growth:

1. Availability of low cost digital talent: India is blessed with troves of digital talent - this talent is not just limited to coders and engineers but other necessary skills like UI/UX Designers, Product Managers, Sales, Marketing and Management - all the combinations required to set up a well run and successful SaaS business

2. Robust capital ecosystem via Venture Capital and incubation funds: Success of first generation entrepreneurs of Zoho and Freshworks attracted others to set up and experiment with a SaaS start ups in India. The first choice of a BITS Pilani or IIT Grad today is not to fly off to Silicon Valley, but try out the less charted path of building a global business out of India (GreyOrange, Postman and so many others are examples of this fundamental change)

3. Democratized world class infrastructure thanks to developments in cloud computing: Amazon Web Services changed everything for everyone in the world. Today a cloud based SaaS business in India has the same infrastructure available to it as someone setting up a similar business in US. Your geography no longer impacts the quality of infrastructure you can access, thanks to AWS and other giant cloud infrastructure set ups available from Microsoft, Google, Oracle and so many more

   

4. Large market and demand for Indian software products: The world today looks upto Indian made software products. Indian software today is equivalent to German engineering with cars, Japanese quality with hardware. Scaling and selling this software is just a matter of a few clicks and marginal incremental costs. A company completely set up in India can advertise and target customers in South Korea.

   For example, Kissflow, a digital workforce management platform, based out of Chennai, has customers in 160+ countries around the world.

5. Supportive Regulatory Ecosystem: Government of India along with Industry bodies like SaaSBoomi and Nasscom have over the years made it easier for someone new to set up a software business in India. An army of VC partners, incubators and coworking spaces further strengthen this ecosystem.

Types of SaaS Businesses

Broadly, a typical SaaS business can be segregated into one of the following four categories:

1. SMB focused SaaS

2. Vertical Specific SaaS

3. Globally Competitive SaaS

4. India specific SaaS

Each of these four categories represents unique opportunities and have several established and successful companies within them.

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SMB Focused SaaS Companies

These companies are focused on creating software for the small and medium scale enterprises globally. Most of them are horizontal offerings aimed at a particular function, for eg. subscription management, with applications across industries. This group is dominated by the first generation of SaaS companies established in the early days of Indian SaaS industry (pre-2010).

Examples include, Zoho, Freshworks, Chargebee and Kissflow.

Vertical Specific SaaS

These are businesses that are focused at disrupting industries currently underserved by the presence of software, eg. hospitality, logistics, wellness.

Most companies in this group are trying to disrupt individual functions within an industry with the help of software. For example, subscription based analytics software for utility companies, document management in case of legal industry and policy service management in case of insurance industry.

Globally Competitive SaaS Products

Increasingly, global leaders in various categories of SaaS products are emerging from India. Unlike their predecessors in the IT service industry, these companies are not just servicing the giants but they are the giants in the industry.

Most companies in this group are using emerging technologies to build innovative and differentiated products. For example, venacular.ai is a voice AI company that can automate the process of routine customer support tasks across industries.

Other established players in this industry include Postman, BrowserStack and Hasura.

India Specific SaaS

These are the companies showcasing the best of Indian ingenuity - focused at creating SaaS based products for India specific use cases targeted both for B2C as well as B2B customers.

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The best example is a company called MyGate - a SaaS business aimed at providing software products to residential and commercial establishments to manage their building security along with other community tasks like collection of maintenance fee etc.

Businesses in this category can be further divided into - Pure play SaaS companies and SaaS enabled B2B platforms.

Interesting SaaS Businesses of India

Before I conclude this article, I thought of introducing some really interesting SaaS businesses both in private as well as public markets.

Infra.Market

Infra.Market is disrupting how raw material is sourced and managed in the real estate and construction industry. Infra.Market runs a platform to aggregate customer demand and solve for supply chain inefficiencies via technology.

This single start up alone has managed to completely reform the supply side construction market. Infra.Market is currently working on 140+ construction projects and has 70+ clients.

Ninjacart

Ninjacart is disrupting the fresh food produce supply chain industry. Its aim is to use technology and analytics to solve for inefficiencies within the supply chain industry and leverage technology to directly connect farmers to retailers.

Freight Tiger

Freight Tiger is trying to transform logistics supply chains by enabling businesses to better control and track their shipments. Its using software to better connect shippers and transporters with businesses.

LoveLocal

LoveLocal helps local stores create a digitized storefront. Its aim is to empower Indian retail businesses to migrate online and leverage technology to digitize their existing businesses.

Airmeet

Airmeet is India’s answer to Zoom. Airmeet specializes in creating and providing software tools to businesses for building and organizing large scale immersive webinars and virtual conferences.

The company has slowly started gaining global market attention and is securing a great niche for itself within international markets.

Druva

Druva is a data protection and cybersecurity company built from the ground up for the cloud computing era. Traditional cybersecurity software vendors were focused on on-premise servers and didn’t keep up pace with the advancements in cloud computing. This provided a window of opportunity for companies like Druva to enter and garner market share.

Druva is one of the major success stories of Indian SaaS industry, esp. when it comes to building products for a global market.

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Listed Indian SaaS Companies

Very few pure SaaS businesses are listed in Indian equity market. Few names that exists are in transition to move their business models from sales of software licenses to subscription based revenue models.

Some of these IT Products companies once transitioned to SaaS model, stand to do very well for themselves.

Examples include, Intellect Design Arena and Newgen Technologies.

Conclusion

We have come a long way since 1999 and Y2K. The two decades of prosperity in IT Service industry and the butterfly effect that took place because of it, stands to be overshadowed by the rise of Indian SaaS industry.

The coming decade belongs to Indian IT industry, more specifically, the SaaS based IT product industry. Few of the names, discussed here today, will rise up to become giants of tomorrow.

Until next time.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

Disclaimer: No part of this article is investment advice, please consult a financial advisor before investing.

Over the last decade, International markets have outperformed the returns over domestic ones.

Nasdaq100 (US Tech Index) has increased 1200% since its last bottom in March of 2009. Other US indices like S&P 500 and Dow Jones Industrial Average (DIJA) have yielded similar returns to their investors. In other parts of the world, like China this growth is even higher.

We live in a globalized world, consume global products and services and yet continue to only invest in domestic stocks. If you fall under this category, you're not alone. Majority of investors worldwide exhibit this behavior known as home country bias.

Home Country Bias is a behavioral finance phenomenon which states that investors have a tendency to favour companies from their own country over those from other regions even though by investing globally they may reduce the risk in their overall portfolios.

As the awareness about global brands and services increase, investors are rapidly overcoming this bias and gaining exposure to international equities. In India too you can witness this growth with the emergence of mutual funds that have exposure to international markets and various startups launching new products to invest in global equities directly.

This article will help you understand everything you need to know before investing internationally - the charges, taxes, legality and the various options of platforms available to you.

Is it Legal?

The most frequent question I get asked over at Twitter about investing internationally - is it legal?

So let me answer that first - yes, its legal.

Reserve Bank of India (RBI) allows every Indian citizen to remit upto USD 250,000 internationally every year. What that means is that every year you can invest or transfer upto ~Rs 1.8 crore (1 USD = 75 INR) anywhere in the world from India.

You can use this money to buy a house in United States or you can transfer this amount to a US based broker to invest in stocks or you can just spend all of it on a trip to Disneyland - its your choice. The limit is USD 250,000 per year in either case.

This policy of RBI is called Liberalized Remittance Scheme or LRS. There are a bunch more associated regulations with this scheme, you can read all about them here.

What are the options available to invest?

With that out of the way, lets look at the options available for an Indian individual to invest internationally.

There are two ways you can get exposure to international equities - Direct and Indirect.

Direct is by investing directly into single stocks similar to how you will buy a stock of a domestically listed company from your Indian brokerage account. We will discuss the details of this later in this article.

Indirect is by investing via mutual funds that allow you to invest either in an international index like S&P 500 or Nasdaq 100 or have a portfolio that holds international stocks.

An example of the latter is Parag Parikh Flexi Cap Fund - that has exposure to international stocks like Facebook and Google in its portfolio.

Benefits of Indirect vs Direct

There are several benefits of indirectly investing in international stocks vs direct investing. Indirect investing is hassle free, straightforward and ancillary costs to invest are much less compared to direct investing.

Though you can invest as low as USD 100, the costs associated with direct investing don't make sense for a small portfolio. While most brokerages and platforms do not charge you a lot for each transaction, the costs to transfer funds and withdraw are really high. Due to this, it only makes sense to invest directly, if you have a sufficiently large portfolio and each investment is greater than at least Rs 1 Lakh in value.

I have laid out these charges and ancillary costs for each platform further in this article.

With that, lets first discuss the various Indirect options (mutual funds, index funds) available to invest today.

There are three types of Mutual Funds that let you gain exposure to international markets:

1. International Index Funds

2. Feeder Funds

3. Domestic Mutual Funds with exposure to International Stocks

International Index Funds
These are funds that invest into an ETF that tracks international indices like Nasdaq 100, S&P 500 or HangSeng (Chinese Index). An advantage of these funds is that you can invest via SIP with amounts as small as Rs 100. The entire process is similar to investing in a domestic mutual fund with expense ratios on these funds being quite reasonable. This route of investing is the most affordable and convenient way to add international exposure to your portfolio.

E.g. Motilal Oswal Nasdaq 100 Fund of Fund

Feeder Funds
These are mutual funds that have a partnership with a larger international fund. These domestic mutual funds serve as feeder funds to the larger parent fund. Their purpose is to collect capital from domestic investors via lumpsum or SIP routes and send that capital to the parent fund to invest and manage along with the larger fund. The expense ratios on these funds are slightly higher than international index funds and its important to investigate and understand the holdings of the parent fund before investing in these feeder funds.

E.g. Edelweiss Greater China Equity Off shore Fund

Taxation on both International Index Funds and Feeder Funds are as below:

Short Term (Less than 36 Months): Gains taxed as per your Income Tax slab
Long Term (More than 36 Months): 20% tax on gains with Indexation Benefits

Domestic Mutual Funds with Exposure to International Stocks
Some domestic mutual funds do invest into select international stocks as part of their investment portfolios. These are again a very good way to gain international exposure. Some of these mutual funds have outperformed the broader index and have consistently ranked among top performers over a 5 year and 3 year period.

E.g. Parag Parikh Flexi Cap Fund

Taxation on these funds is more straightforward and in line with other domestic mutual funds.

Short Term (less than 12 months): Gains taxed at 15%
Long Term (more than 12 months): Gain taxed at 10% on returns over Rs 1 Lakh

How to invest directly?

There are several ways to invest directly, each with it own set of complications and benefits. Each of these options have associated charges with them - withdrawal fee, deposit fee and transaction fee being the most important ones.

Let's explore each of these options and associated fees in detail.

Traditional Brokers (HDFC, Axis Bank, ICICI, Kotak)

Traditional Brokers, like HDFC, Axis, ICICI and Kotak Securities have tied up with various investing platforms to bring international investing to their clients.
Each traditional broker has a partnership with a different platform and as such have very different structure of fees and charges.

ICICI Direct Global (partnership with Interactive Brokers)

ICICI Direct has a partnership with a US based brokerage firm called Interactive Brokers.

A major advantage of ICICI Direct is that you can invest in pretty much all major markets around the world including but not limited to, United Kingdom, United States, Germany, Japan, Singapore and Hong Kong.

The fees and charges for each of these markets is different and can be accessed here.

Another major advantage of ICICI Direct is that your deposit and withdrawal process is relatively easy if you have an ICICI Bank account.

If you're someone who has a large portfolio (>1cr) and wants to invest into direct stocks globally in all major markets than this is the best option available for you.

HDFC Securities (partnership with Stockal)

Just like ICICI Direct, HDFC Securities has partnered with another platform called Stockal.

Unlike ICICI Direct, HDFC and Stockal's platform only lets you invest into US listed equities. The process to deposit and withdraw is seamless and online if you have a HDFC bank account and there are no minimum deposit or account opening charges.

Below are the charges for HDFC + Stockal's offering.

Axis Bank (partnership with Vested)

Like its peers, Axis Bank too has partnered with a platform called Vested to bring its customers the option to invest in US listed equities. Like HDFC's offering, Axis's offering too lets you invest in US stocks only.

Here are the charges for Axis + Vested's offering.

I personally, am not a fan of Vested's offering since they charge for Account Opening, have significantly less number of stocks available and have higher withdrawal fees compared to their peers.

One area where Axis + Vested wins over its peers (ICICI, HDFC) is the 0% brokerage on any transactions.

If you're someone who has a small ticket size and will not withdraw often then you may consider this option.

Kotak Securities (in partnership with Interactive Brokers)

Like ICICI, Kotak too has partnered with Interactive Brokers to allow its clients to invest globally.

The key difference between ICICI's offering and Kotak's offering is:

1. Unlike ICICI, Kotak only allows to invest in US listed equities. You cannot invest in other markets like UK, Singapore, Germany, Hong Kong and Japan.

2. Kotak's base plan is cheaper than ICICI's on a per trade basis. While ICICI charges you USD 2.75 per trade on its base plan, Kotak only charges you USD 1.99 per trade on the base plan.

If you wish to have exposure to only US stocks and have a significant corpus to invest then this maybe the right option for you.

Standalone Offerings

If you do not wish to open an account with these banks then you can directly open an account with any of the service provides these banks have partnered with. The charges in this case may differ and you may be charged an account opening fee along with other host of fees.

Links to these platforms are mentioned below.

1. Interactive Brokers

2. Vested

3. Stockal

New Age Broking Platforms

Other than the above options, you may open an account with a new age broking platforms like Groww and IND Money.

Both these platforms are mobile first - they have made significant investments into UX/UI and their app design, investing and account opening experience is as easy as downloading their app.

Both these platforms do not charge any fee - no account opening fee, no withdrawal fee, no transaction fee. Your bank will however charge you a deposit fee to remit money internationally to the US based brokers these apps have partnered with. These remittance charges vary based on your bank and are fixed irrespective if you transfer USD 100 or USD 100,000.

I personally use Groww and it has so far served me well. I like the UX/UI and the entire process to remit, place orders and monitor positions is easy and user friendly. The offering for Groww is currently limited by invitation only - you can use this link to secure your invite and receive Rs 100 as a reward to open your account.

Taxation for Direct US Investments

Finally, lets understand the taxation aspects if you wish to directly invest into US equities.

Broadly, there are two types of taxation

1. Taxes on Investment Gains
   Any gains on your investment will be taxed in India and will not be withheld in United States. The amount of taxes you pay, depends on the length of your investment.

Short Term (less than 24 months): Taxed according to your income tax slab rate Long Term (more than 24 months): Taxed at 20% with indexation benefits

2. Taxes on Dividends
   Any dividends received by you on your investments will be directly taxed in the United States at a flat rate of 25%. United States and India have a Double Taxation Avoidance Agreement, under which you can avail this tax paid as Foreign Tax Credit and can use it to offset any income tax payable in India.

Risks and Recommendations

Risks

If you choose to invest directly into US equities you should be aware of the major risk, i.e., these investments are not held under your name by the US Broker but under the brokers name.

Unlike in India, where stocks are held under individual's name by the Depository Participant, in the US, stocks are held under the broker’s name by the Depository. The broker in turn maintains a record for each individual and this information is not privy to the depositories.

So in the unlikely scenario, the broker goes bust, you are likely to lose your investment above USD 500,000. This USD 500,000 limit is the federal insurance limit under which all registered brokers in the United States are covered. You may read all about it here.

So if you have investments of more than USD 500,000 you may want to consider this risk before investing.

Recommendation

Here are my recommendations for different types of investors.

1. ICICI Direct Global - For a serious investor with large corpus who wants to invest in global markets not limited to just United States

2. Kotak Securities - For an investor with large corpus who wants to gain direct equity exposure to US stocks only

3. Groww - For the new age investor who wants to invest small amounts and gain small exposure to US Stocks

4. Index Funds and Mutual Funds - This route of indirect investing, is suitable for 99% of investors who do not want the hassle of added taxation, or want to pay additional fees

I personally use a mix of Mutual Funds, Index Funds and some single stock names via the Groww platform to gain exposure to Chinese and US markets.

In today's world, portfolios need to have global exposure to participate in the growing international markets. As discussed in this article, there are many options available to invest and choose from - ranging from low cost index funds to sophisticated platforms that let you invest in multiple markets. I hope this cleared any doubts related to investing internationally from India.

Until next time.

Peace,
Tar

Bund Summit is the yearly gathering of the most influential people from Chinese industry - regulators, business leaders, billionaires - you name it.

It was to this crowd, Jack Ma was addressing in his key note address, when he went off script and decided to criticize the Chinese financial regulator (whose senior members were sitting in the front row at the summit).

He accused the regulator of stifling innovation and said the state owned banks (some of the largest in the world) suffered from a 'pawnshop mentality'.

Why did Ma decide to do this, days before the $37 Billion IPO of Ant Financial (the fintech arm of Alibaba) is a mystery, but one thing was clear, that speech was the first domino to fall for the Chinese Tech industry.

The Chinese Tech Empire is controlled by three corporations - Baidu, Alibaba and Tencent (BAT).
Between these three, it is Alibaba and Tencent that effectively have the lion's share of the Chinese startup investment world.

The below two graphics will give you an idea of just how wide and far reaching their empire is. There are maybe only a handful of tech companies in China that don't have either Alibaba or Tencent as their investor.

These two companies don't just control the industry - they are effectively King makers too. Any startup that gets the funding from either Tencent or Alibaba effectively wins the entire market share in its respective industry.

Alibaba and Tencent have over the years built their own walled gardens - links to Alipay or Alibaba owned companies do not work inside WeChat (a super app run by Tencent) and links to WePay (by Tencent) do not work with applications built by Alibaba.

Imagine if Microsoft and Apple controlled everything from Facebook to Google Pay and didn't allow their products and services to integrate with each other.

Such is the situation in China.

For years the Chinese regulator had turned a blind eye to these companies and their ambitions - the Chinese economy was growing, billion dollar start ups were being minted every day and Chinese technology companies were overtaking the western world in research, quality of products and revenue.

Until that is, on Oct 24th 2020, when Jack Ma made that speech.

Ma's speech sent alarm bells ringing across Beijing and it is believed that Xi Jinping himself culled the Ant Financial IPO.

You see China isn't your typical communist nation - you're allowed to do whatever you want to as long as you obey laws and do not go against the ruling party.
The communist party of China only hates one thing - dissent, and they do everything in their power to keep this under control.

Ma's speech was viewed as an attack against the ruling party and Beijing knew it had to put a lid to the rising power of Chinese Tech industry.

Within days after Ma's speech, the Chinese regulator launched a probe against both Tencent and Alibaba under monopolistic practices.

As part of these investigations, the regulator has come up with new laws to ensure an incident like the one faced with Ma, doesn't repeat itself.

Some of these new laws effectively puts a cap on how far and wide these companies can grow without regulators approval, some deal with cybersecurity laws, some deal with ensuring all Chinese companies that want to list abroad, do so post gaining permission and a cybersecurity clearance from the regulator - something with Didi Chuxing (the Uber of China) refused to do and in retaliation the regulator stopped the company from onboarding any new customers, days after it was listed on the New York Stock Exchange.

What's happening with these two giants and boarder Chinese Tech industry is their government finally taking anti monopolistic action against them and opening up the industry to outsiders for competition.

This is very similar to what is happening in the West and has happened before with - A&T, Standard Oil, Microsoft.

United States Congress has an open anti trust investigation against the giants there - Microsoft, Apple, Facebook, Google and Amazon.

The effect and rulings are just faster in China as its a single party system.

July 26, 2021 - Beijing unveiled new rules for Chinese private education sector.

These new rules, effectively barred the tutoring companies including EdTech firms from earning profits, raising capital or going public.
This however isn't related to the broader technology industry and to understand this, we have to travel back in time to the year 1979.

1979 was the year when China started enforcing its 'one child policy'.
Under this policy, married couples could only have a single child. There were legal repercussions including jail time and hefty fines if anyone were found to have had more than one child.

This was nothing new in China, the country has been playing with reproduction rates of its citizens since the early 1950s, limiting and controlling the birth rates of it population.

The one child policy though was the strictest reproduction related policy enforced to date. Now, if only China had consulted Hans Rosling before enforcing this, it would have realized that population dynamics adjust automatically as the country progresses.

Here is a great video of him explaining this dynamic in detail.

In 2015, after almost 4 decades of one child policy, Beijing announced that it will repeal the policy and allow everyone to have upto 2 children per couple.

The response from the citizens though was lukewarm. After decades and almost two generations of single kids who were brought up with no siblings and aged parents to look after, a lukewarm response to having kids and starting a family was the best Beijing could hope for.

Rising cost of living, every adult having to support aging parents and virtually no siblings meant that not many were interested in getting married and raising a family - most didn't know how to.

This is a problem for China today, the share of population that is aged is increasing much rapidly compared to the share of population that is young. This means that the state has to support a lot more of old aged population who do not work and generate taxes compared to the active workforce of young able bodied individuals.

This problem worsens further as the birth rate in the country is dropping below the sustained level of 2.4 new born per person who dies.

If China doesn't find a way to encourage its population to reproduce more, it will face a bleak future like Japan - whose economy rose rapidly during the 1970s only to hit a peak in 2000s as the country's population shrunk in size.

To alleviate this, the Chinese government is taking steps to ensure the cost of raising children is minimized to the least possible, in hopes that this will encourage its population to produce more kids.
Every five years, the Chinese government publishes a strategic plan - its a document that lays out its goals in excruciating detail - everything that China wants to accomplish in the next five year.

Here is the link to the latest 5 year plan.

This plan clearly lays out its ambition to increase the working urban educated population. How do you increase population? By incentivizing your citizens to reproduce more. How do you incentivize your citizens to reproduce more? By making sure the cost of raising children is minimized as much as possible.

The action against EdTech companies is a step towards that direction. Cost of Education in China is one of the highest esp. for private schools and tutors. Government wants to ensure that same level of education is available to all its citizens at affordable and subsidized rates.

This gives us a perspective that the government’s action against the Ed Tech companies isn't the same as its action against the giants - Alibaba and Tencent.
These are two different events, driven by different reasons and just happen to occur and coincide close to each other.

The occurrence of these events close to each other was enough to spook investors though. Chinese Tech stocks have taken a beaten and have lost upto $800 Billion in their market cap through last week and even more since Ma's gave his speech.

The Nasdaq Golden Dragon China Index, which tracks the Top 30 Chinese companies has fallen by almost 50% since its peak in Feb'21.

Such is the panic today when it comes to Chinese stocks.

To give you an idea of the intensity of panic, lets take a look at valuations of Alibaba and Tencent. Here is what Alibaba as a business is doing. Its a business that is growing at ~50% YoY, has yearly sales of more than $100 Billion, produces $35 Billion in Cash Flow every year from its operations. Alibaba, also includes the stake in FinTech giant Ant Financial (which we discussed at the start of this article).

What is the current market cap of BABA, you ask?

Its about ~$500 Billion. The whole business is available at about 5x Sales and less than 1x its FY24 Sales.

Let's look at Tencent.

Tencent too is growing at fast rates, has $75 Billion in sales and produces ~$30 Billion in cash flow from its operations every year.
More importantly Tencent has stakes in almost every promising gaming company in the world.

It holds IPs like Fornite and control Epic Games, the makers of Fortnite. Tencent has stake and partnership with Roblox (the US gaming Metaverse company) and Tencent owns Unreal Engine - which is arguably the most advanced gaming system ever developed.

Such a business too is available at ~$500 Billion.

There are many other similar businesses in China that have face a significant drop in their stock price over the last few months and may continue to face it for next few.
In my opinion, the panic is making these wonderful businesses available for less than they are worth - and it is in this panic a good investor finds value.

Similar panic ensued in the month of March 2020, those who were willing to take the risk and find value in panic have essentially doubled their portfolios since then, if not more. I believe what's happening to the Chinese stocks today, is similar in nature, mostly cause it has nothing to do with the fundamentals of these companies but everything to do with a temporary blimp caused by increase in regulations.

Over time these businesses will find a work around, adapt and evolve as businesses have in the past and as great businesses will in the future.

So what am I doing?

I have limited my exposure via Edelweiss Greater China Offshore Fund and buy on dips while having an active SIP. I find the fund to be very well established, its a feeder fund to the broader parent fund controlled by JP Morgan Asset Management (JPAM).

Here is their fact sheet if you're interested.

As you may observe from their holdings, the fund has exposure to semi conductor companies like TSMC and doesn't have any EdTech names under it. I personally believe in two years time, the returns on this fund will be beyond any other index globally.

Never let a good crisis go to waste and I personally believe this is as good of a crisis as any to find opportunity in.

Hope this provided some clarity in what is happening in China.

Until next time.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

Disclaimer: No part of this article is an investment advice, please consult a financial advisor before investing

In one of my previous articles, I have explored Renewables Sector in India and its general outlook. If you’re a new subscriber, you can read it here.

In this article, I will be exploring renewables as a general theme and how it may very well be the next major disruption in our lifetime.

Before we start discussing renewables, I would like to point out an investing framework I follow – disruptions and S Curves.

Disruption - is anything that can substantially change the paradigm in an industry or advent even new ones.

All disruptions follow a S curve in adoption. They are typically slow at the start as the technology is in research and development mode. Costs of research are high, failures are frequent and tech is limited to lab or niche government areas where investors cannot participate. Once the technology is ready for commercial application though, there is an incredibly fast adoption at a pace which astounds most analysts.

The last major disruption was the internet. 

It started as a niche military experiment and then later got adopted at a very small scale at CERN before breaking out of the lab and getting commercial adoption.

In case of Internet, it took about 30 years before it went from a military research paper to small scale adoption at CERN and then took less than 3 years from CERN to commercial scale.

To give a perspective, for the internet disruption, here is the below timeline

Early 1960s - First papers envisioning modern day internet are published
1969 - First contracts for Internet Research (ARPANET) awarded by US Department of Defense
1990 - Tim Berners Lee creates the first World Wide Web network at CERN
1993 - 1% of all two-way telecommunication flows through WorldWideWeb
2000 - 51% of all two-way telecommunication flows through WorldWideWeb
2007 - 97% of all two-way telecommunication flows through WorldWideWeb
2020 - I don't need to state the importance of Internet and Web during the pandemic and how an integral part of our lives it has become

All of this happened in less than two decades. Amazing, isn’t it!

Even the most bullish projections couldn’t capture the growth of internet in early 1990s.

This is what disruption do, and all of them follow a S curve.

Below is an example of a S curve, that can be applied to any disruption (old or new).

As the graphic explains, the reasons why disruptions work is because

a. The new technology is far superior and more economically efficient than the current one
b. As new technology gets adopted and scaled, its costs reduce dramatically
c. This cost reduction, incentivizes other producers to shift from old to new technology
d. This shift further reduces the costs of new technology while also increasing the costs of the old one
e. This cycle continues until the new technology has captured the entire market from the old tech

Something similar is playing out today in the most lucrative industry – the energy sector.

Let’s try to understand briefly, what are renewables and how does this disruption thesis apply to the energy sector.

Renewable – A Renewable is any naturally occurring source that will replenish itself automatically by the portion depleted by usage or consumption of that source.
In short, using the source doesn’t cause it to reduce as in the long run the resource replenishes itself and is thus by definition – infinite.

Sources like wind, solar, biogas, geothermal, nuclear all fall under the definition of renewables. For this article, I will be focusing majorly on solar and wind as those are two areas where most developments are happening.

With this let’s try to apply the disruption framework and S curve thesis to renewables.

Let’s first try to understand the current energy industry structure.
There are various moving parts to the current energy infra.

First is the raw material – this is usually coal in most cases. This raw material is used by a power plant to burn the coal and produce enough heat that is then used to create electricity.

A typical drawback here is, a coal plant once started cannot be shut down. Shutting down and restarting the coal plant will take more resources and is not economically feasible.

Once electricity is generated, its sent to the grid which then ultimately reaches the end consumer – residential, commercial and industrial users.

As you can imagine, you need endless source of coal to keep burning and setting up more and more thermal power plants to produce electricity. Further, as the electricity consumption in the economy increases, the need to set up even more power plants.

I do not need to point out that burning all this coal is causing a lot of harm to the environment and further contributes to climate change.

Throughout this article, I will analyze renewables with an economic point of view rather than through the lens of climate change – the main reason being, disruptions work when they are economically feasible as the economics itself acts as an incentive to switch.

Now let’s examine what the energy grid will look like once we switch our dependence on coal.

As highlighted earlier, disruption works when the new technology becomes economically viable and is superior than the old technology.

I think we can all agree that renewables are more superior than fossil fuels for many obvious reasons (infinite and clean) we do not need to list here.

So, we just need to explore the second part of the equation – does it make economic sense to install a renewable plant over a fossil fuel plant for our energy needs?

Solar – Fuel for Limitless Energy

Before I deep dive into solar, let me just get a very frequently asked question about this sector out of the way.

Question: Solar has been around for more than a decade, wind even more, so what has changed now that will cause them to disrupt the energy sector?

A very good question indeed and the answer is simple – costs and convergence of technologies.

Let me explain.

Solar and Wind, while still green and clean a decade ago, weren’t as economically viable as they are today. Over the last 10 years, there has been a significant drop in prices of solar and wind along with developments in another very important technology – batteries.

Pre-2011, batteries weren’t that important in our daily lives. Remember Nokia phones that had batteries that used to last weeks? The advent of smart phones meant we could no longer rely on our existing battery technology and had to work on improving Lithium Ion batteries. As improvements were made in Lithium Ion battery and more phones, laptops, smart watches etc. started to sell in the world, the cost to produce these batteries started reducing at a dramatic rate.

Post 2015, the rise of Tesla and other electric car companies meant Lithium Ion battery market increased multi-fold and new players started emerging with new advances in both cost reduction and capacity increase of batteries.

The below chart shows how serious this reduction in Lithium Ion battery prices is.
(Note: The x-axis is logarithmic)

Remember from earlier in the S curve, how adoption of new technology is slow at first. Solar and Wind went through the same from 2000 to 2010. Barely any new capacity was added, most capacity added was mainly to either prove that the technology works or to make a point against climate change and fossil fuel. Nobody set up a solar or wind plant in 2000s because it made economic sense to do so.

Thus, the prices remained high and whatever capacity was added couldn’t be stored cheaply as the cost to set up required batteries remained very high.

However, in 2011 as smartphones took off and Lithium Ion battery prices started coming down, a nation saw an opportunity to embrace renewables – China.
Now, China didn’t embrace renewables because it cares about the environment. It did it for economic reasons. Remember S curve again – how disruptions accelerate dramatically when it makes economic sense to do so.

By 2011, China had become the factory to the world and amassed enough wealth for it to be called a super power. The rise of China through the 2000s is just extraordinary and I am sure something that will be studied as a case study in colleges for decades to come.

China though a super power, was still reliant on a lot of oil import as the nation barely has enough oil reserves of its own. This over reliance on oil meant that Chinese growth was dependent on how much oil can it import for itself and oil in 2000s and 2011 wasn’t cheap – it costed well over a $100 per barrel. Every year China was spending billions of dollars in oil imports to keep the economic growth engine running.

With renewables, it saw an opportunity and made an early move to incentivize its citizens and industries to embrace renewables. This early move paid off and China today controls well over 65% of all solar power value chain. This early move combined with Chinese enormous scale meant giant factories that can manufacture parts of solar value chain were set up, which ultimately pushed the prices of solar PV modules down (as shown below).

Let me give you a quick walkthrough of the solar power value chain.

Solar panels are made from silicon which comes from heating sand at abnormally high temperatures of >2000 degree Celsius to refine the sand and convert it into silicon with 99.9999% purity.

This silicon is then compressed into ingots which are then sliced into wafers and then converted into solar cells. A combination of solar cells is called a solar module.

The whole process is very industrial and hence works well when factories with large capacities are set up and economies of scale of those capacities drive the costs down. That’s why the price of solar cell decreased so dramatically as China started scaling up solar manufacturing.

Meanwhile in the last decade, some improvements in solar cells have also led to increase efficiency of about 18 to 21%.

All the above led to a drastic decline in electricity generated via solar, and I do mean drastic. Look at the chart below.

Costs to generate electricity from solar went from $359 per MWh in 2000 to $40 per MWh. That’s a decline of almost 90% in costs. I expect them to reduce well below $10 per MWh in the coming decade.

With this decline – it now makes economic sense to generate electricity via solar than any other resource, and this is exactly what the governments around the world are up to.

Solar Wind Battery Systems

Earlier in this article, I spoke about batteries and how they play a key role in adoption of solar. Over the next decade, it’s the battery tech and advances in that industry that will really drive the growth in renewables adoption.

100% solar, wind and battery farms will be common across the world. These hybrid farms will be capable of supporting all electricity needs of the communities and we will move from a central power structure to a distributed one with micro grids made up of various community solar, wind and battery farms.

These grids are already a reality in remote corners of the world with Tesla setting up large scale solar wind and battery farms in Hawaii and Australia.

As battery costs reduce and further advancements are made, the adoption will dramatically increase further (S-curves).

How to Invest?

By now you must be wondering – this is all great, but how do I as an investor invest in this disruption and benefit from it financially.

My advice – don’t invest. Stay away from it for now and continue to read about the disruptions and all developments taking place.

Here is the reason why.

As disruption takes place and new players enter the market, costs reduce dramatically with competition increasing and businesses find hard to survive and keep up with the change. The same playbook has played out multiple times in the past.

In 1900s during automobile boom, 1000s of companies went bust.

In 1940s during the airline boom, 100s of airlines went bust.

In 1990s during the internet boom, 1000s of internet companies went bust.

Like before, even in renewables boom, many companies will go bust.

But, if you study the sector, keep up with it, there will certainly be a time when the industry will mature and stabilize enough for you to identify the winners from the losers and at that point in time, you can use all the knowledge you gained by studying the sector today, to your advantage.

In the coming two decades, there will be a lot many disruptions than the century went before. Science and technology is advancing at a rapid pace and some of these advancements will trickle down to industry.

Study them but be vigilant.

See you in the next one.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

If you answered yes to any of the above questions, then you're not alone.

Only about 1% of India's population (1.3 crore) invests, compared to about 20% in countries like US and UK.

In 2019, out of 130 crore Indians, only 5.78 crore filed income tax returns. Out of this 5.78 crore, 75% or 4.33 crores reported an income below 5 lakhs.

Source: https://zerodha.com/z-connect/rainmatter/beyond-misleading-trading-turnover-numbers-the-actual-size-of-indian-capital-markets

So its not surprising that majority of Indians struggle to manage their personal finances. We are inherently great savers and as a country have one of the highest household savings rate in the world, but we aren't great investors.

We are taught very little about money and almost nothing about investing in either school or even at college. When we do start earning as adults, it seems like a daunting task to understand this completely alien world of finance. More so, family wisdom dictates that one should opt for fixed deposits rather than invest in capital markets as fixed deposits are 'safe'.

Those who can afford to, hire financial advisors, while those who can't, usually give up after experiencing losses and settle for low returns by investing in bank fixed deposits. (By the way, fixed deposits may have worked for previous generation when interest rates were north of 15 to 20%, they do not work today. Post tax return on a fixed deposit is barely enough to beat inflation, so over a longer timeframe you are actually losing money by investing in a fixed deposit.)

In this article, I will try to bridge this knowledge gap and layout a simple to understand framework that will help you get started with investing and managing your personal finances.

To understand the world of investing, you need to first understand three very important concepts.

1. The more risk you take, the higher your returns can be (and equally larger losses)

2. The more effort you are willing to put in managing your money, the higher your returns

3. Compounding is a hard to imagine concept but if used effectively can create enormous wealth over a long period of time, with very little investment

Lets understand each of these a bit more in detail.

The more risk you take, the higher your returns (and equally larger losses)

Every investment carries some amount of risk. The more risk you're willing to take, the higher the returns are promised to you.

Take for example, you have two friends - Ram and Shaam. On occasion, both of your friends have asked you to loan them some money. Ram has always paid you back in full and on time, while Shaam still owes you from that time you loaned him about 3 years ago.

In May'20, when Covid was at its peak and India was in lockdown, Ram and Shaam came knocking at your door with a request to loan them some more money for emergency relief.

Now you being a good friend decide to help them out by extending a loan with an interest rate on it.

Would you charge the same interest rate to Ram (who has always paid you back in full and on time) as Shaam (who has never paid you back and still owes you money from a previous loan)?

If your answer is no, then you have understood this very important concept.

Extending a loan to Ram carries less risk as Ram has a history of paying you back on time. While extending the same loan to Shaam is riskier as Shaam has historically never paid you back on time and most likely will not pay back this loan on time as well.

Banks follow the same concept while extending loans to you. They look at your credit history (record of what loans you have taken and if you have paid them back on time) and decide the interest rate on the loan accordingly. The higher the risk, the higher is the interest rate.

Similar concept plays out in investing.

If you're willing to take no risk with your investment, you will be more inclined to invest your money in a bank fixed deposit with very low but predictable returns. While if you're someone who can take more risk with his/her/their investment, you will be more inclined to invest in stocks or mutual funds and expect a higher return than a bank fixed deposit as you're taking on more risk.

Below is a table depicting risk and returns for some of the common investment options available:

Your goal is to minimize your risk while maximizing your returns. In finance this concept is known as risk adjusted returns or alpha, more on that later.

The more effort you are willing to put in managing your money, the higher your returns

Investing in a boarder sense can be divided into two types - Passive and Active.

Passive investing requires very little effort on the part of the investor. Its a concept that has become popular in recent years and passively managed investment funds are gaining market share compared to actively managed funds.

Examples of passive investing is buying index funds (funds that track a market index, in case of India these will be Sensex and Nifty) via SIPs every month. You can set a reoccurring investment of as low as Rs 100 a month into Nifty and forget about it. Over a period of 20 years, you should get an average yearly return anywhere from 12 to15%.

Active investing on the other hand, tries to beat the market returns by actively buying and selling stocks as the markets rise and fall. Most mutual funds in India are active funds. Active funds have a higher expense ratio (money that is deducted from the returns generated on your investment by a mutual fund) as these are managed by a team of investment professionals and well, they need to earn as well to keep the lights on. Another example of active investing is managing your own stock portfolio. This approach is obviously riskier and requires more effort from an investor. However, if the investor knows what they are doing, returns from this approach can also be extremely rewarding.

Your goal should be to maximize your return while minimizing your effort.

Compounding is a hard to imagine concept but if used effectively can create enormous wealth over a long period of time, with very little investment

Compounding is the only reason you should be investing. As human begins we aren't very good at intuitively understanding the concept of compounding over long durations. It's hard for us to comprehend how compounding can lead to extremely large numbers when repeated consistently over a large period of time. Our brains are not wired to understand exponential growth.

In simple math it plays out like this:

6 + 6 + 6 = 18
6 * 6 * 6 = 216 (this is compounding and exponential growth)

Compounding enables your investment to grow faster towards the later stages of investment cycle than it does at beginning. Take this for example, consider you are able to achieve 13% yearly returns (this is the rate at which Nifty and Indian stock market has grown over the last 20 years), your money would double itself every 5.5 years. So in 22 years you would have multiplied your money four times, once 5.5 years, another 5.5 years later and then again and once again at the end of another 5.5 years.

What would be your investment amount if you had invested Rs 10 Lakhs at the beginning and compounded it at 13% every year for the next 20 years?

It would be 1.33 crores.

Magical isn't it!

Maybe that's why Albert Einstein referred to compound interest as the eight wonder of the world.

Now that you have understood these important concepts, lets figure out how to actually invest while minimizing effort and risk and maximizing your returns.

Minimizing Risk

To minimize your risk, you first need to understand your risk appetite. Every one has different risk appetite based on their circumstances. A young 21 year old who has no dependents can take more risk compared to a 30 year old who is the sole bread earner for their family. If you are someone with a lot of debt on hand, your risk appetite will be far lower than someone who has no debt. Calculating risk appetite is a tricky and personal affair, only you can judge your risk appetite for yourself. Most likely you will end up either over-estimating or under-estimating your actual risk appetite so take time to self evaluate your current financial situation, talk to family members and then decide your actual risk appetite.

To guide you in making this decision, you may refer to some of the below general rules.

Young, no dependents, stable income → High risk appetite → More allocation to stocks

Old, many dependents, not stable income → Low risk appetite → Low allocation to stocks

Minimizing Effort

Once you have identified your risk appetite, you now need to decide how much effort you want to put in towards managing your investments. If you're someone who wants a no frills investing approach and doesn't have time to read about economy, find investment trends etc. then passive investing is the way to go.

On the other hand if you're someone who wants to read and learn about investing and can devote 15-20 hours weekly, then active investing by purchasing direct stocks is the way to go.

For most of us, passive investing into low cost index funds is ideal. It’s the boring way to invest but as shown in the example above can still net you decent 13% returns every year for over 20+ years.

Maximizing Returns

So by now, you have narrowed down on your risk appetite and decided how much effort you want to put in towards managing your investment. Your next step is to identify where and how to invest.

For someone looking for safe and assured returns, your choices are limited to

1. Fixed and Reoccurring Deposits → These are offered by banks and carry very low rates of return

2. Government Bonds → These are guaranteed by Government of India and generally provide a tiny bit higher return than a bank fixed deposit. Post office deposit returns can also fall under this category.

3. Corporate Bonds → These carry a higher risk as they are issued by a company and carry a higher rate of return compared to Fixed Deposits and Government Bonds.

For someone looking to invest in stocks, your choices are as follows:

1. Passive Index Funds → As described earlier they copy the returns generated by the entire stock market index like Nifty and Sensex (for India). Since these are passive in nature, the expense ratios on these are very small and these should be your ideal investments for someone looking for a no nonsense low effort way to invest.

2. Actively Managed Mutual Funds → These are your typical mutual funds available to invest via SIPs. For anyone looking to invest in a mutual fund, you need to be careful about a few points:

   a. Rebalancing → Every year you should be looking at your mutual fund returns against the market and if your mutual fund generated lesser returns for you than the index, please sell it and reinvest your money someone where else.

   b. Direct vs Regular Funds → Please do not, never, under any circumstance buy a regular fund. Every actively managed mutual funds has two offerings - a regular type fund and a direct type fund. Regular funds have higher cost structures and expense ratios (the money deducted from your yearly return) as they include commission cost, compared to a Direct Fund. These costs can set you back as high as 1% in total return every year, which again compounds and adds up to a lot over a course of 20 years.

   You can read more about direct vs regular mutual funds here.

   c. Overlap in underlying stocks → Please do not buy more than 3-4 mutual funds at a maximum and please always check if any of the funds you are investing in have an overlap in terms of underlying stocks that the fund holds with any other fund you're investing in. You can use this tool to quickly check what percentage of stocks overlap between the funds you are investing in.

3. Stocks → Unless you're someone who doesn't follow economics, read a lot about investing, understands concepts like diversification, stock betas, etc. and cannot allocate 10-15 hours a week to research and learn about the companies they want to invest in - then please stay away from investing in direct stocks. Investing in stocks is as much about patience, controlling your emotions of fear and greed, as it about research and learning about the companies the stock represents. Every stock represents a company and unless you are willing to spend time to learn about the company and industry that the company operates in, you're better off investing passively in index funds.

4. Options Trading → Options are sophisticated financial instruments meant to be used by professional traders. In my view, these shouldn't even be available to the average investor to invest in and unless you understand concepts like Vega, Gamma, Delta, Theta and Rho - please stay away from them. Anyone who tells you that they can make you a quick buck by investing in options is lying to you and is using your money to gamble. More wealth and fortunes have been lost by investing in options than made from it.

I hope this article helped you understand the basics of investing and how you can get started with an investment plan for yourself.

Until next time.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

If I had made that prediction even 5 years back, you probably would have labelled me as a fool. No one, not even the experts in this field imagined the scale and speed at which the world has adopted renewable energy.

This pace is only set to increase in the coming decade. The closest comparison I can draw is the year 1994 when software and internet had just started to show what's possible. No one in that year could have predicted that 25 years later, internet start ups will not just dominate every other industry but also disrupt them and help us survive a pandemic.

Renewable sector today is at the beginning of a similar trend with disruption happening across the energy sector. Global oil and gas giants like Total and British Petroleum have announced significant capital expenditure plans in renewable space. For the first time in their history, oil and gas companies are spending more towards building renewable infrastructure than they are on building traditional oil and petroleum wells. Here is an extract from a recent presentation British Petroleum did for its investors.

Total (French energy giant) on the other hand announced a joint venture with Adani Green (India's leading renewable energy company) to build renewable infrastructure, including data centers powered by solar energy, in India.

India enjoys a strategic geographical presence in the world that enables it to capitalize on this trend. India's geographic location means that it gets enough sunlight throughout the year to generate energy with minimum to zero down time. With enough solar infrastructure in the country, India theoretically can produce energy from sunlight throughout the year without spending significantly on building a supporting battery infrastructure to store any excess energy generated.

Another factor that helps India dominate renewable sector is low labor costs. Recently, the lowest solar energy rate ever was quoted in India at Rs 2.41 per kWh.

To understand the growth and disruption potential of renewables, we can look at our neighbor China, which enjoys a lead start (compared to other countries) in this space.

China: The current world leader in renewable energy

China started embracing renewable energy at the start of this decade and its investments seem to have paid off. China has about a third of total industry market share in this space. Almost all manufacturing of components in renewable sector (solar glass, solar wafers, manufacturing of modules, etc.) is dominated by Chinese firms.

Effectively China, has a monopoly and if it was a company, it would be facing anti trust lawsuits.

By comparison, India's renewable sector is at its nascent stage. If other countries, esp. India have to build its renewable sector it needs to implement protectionist policies for the domestic industry, in order to allow it to grow and eventually compete in the global markets.

China decided to embrace renewable energy to reduce its dependence on oil imports. This is the same reason majority of other countries including India wants to invest and embrace this sector. Crude oil production is dominated by a handful of countries with resources unequally distributed across the world. On the other hand, if countries can capitalize on solar energy and shift some of their energy needs to renewables from crude oil imports, they can reduce their dependence on oil and save on significant energy spending which can then be routed to more useful expenditure like infrastructure.

Early adoption of renewable energy has made China the biggest market for energy vehicles. Almost all public transport in China runs on electricity, one out of every two electric vehicles sold in the world in 2018 was bought by someone in China.

If China, hadn't embraced renewables and electric vehicles at this pace, it would still be dependent on oil imports for a majority of its energy needs. Here is an old chart from McKinsey that explains what China needed to do in 2010 in order to achieve energy security.

Every country aims to achieve energy security, with renewables, countries like India stand a chance to make that a reality. Current government in India realizes this and over the last few years, has implemented policies that will take us further in achieving that goal. These policies combined with a rapid pace of development have made renewable sector one of the fastest growing industry in India.

The Paris Accords - A Big Catalyst

22 April 2016, is one of the dates that will be remembered in history. On this day, all 197 countries in the world signed The Paris Agreement. The Paris Agreement, lays out a framework with set targets for each country to meet in order to limit the global average temperature increase to below 2 degree Celsius and prevent irreversible climate change.

There are only two ways to limit carbon emissions:

1. Find ways to limit the use of coal and oil

2. Replace the use of coal and oil with climate friendly alternatives

Either way, we have to leverage renewable energy to achieve the goal. The agreement acted like a booster shot for research and development in the industry. Every country had to now invest and help the renewable sector grow in order to meet its goals.

Just look at how even in India, Ministry of New and Renewable Energy's budget has increased YoY after 2016.

Paris agreement also helped create the biggest market for renewable sector. Before 2016, renewables was an experiment, cost to produce energy was still higher than oil and there was a big issue on where to store the excess energy. Signing of the Paris Agreement, transitioned renewables from an experiment to the next big industry. It helped cement the future global demand of renewables and attract significant investment in the process.

Where India currently stands in renewable energy?

India has a lot of policies when it comes to renewable sector, and I mean a lot! There is one for installing solar powered pumps for farmers, one where barren farmland can be converted by a farmer to a solar electricity producing point all paid for by the Govt., one where all energy distribution companies have to source a share of their energy from renewable resources, one where all vehicles on the road need to be electric by a certain year. If you want to read about them in detail, you can find them here.

Summary for all of them combined - India is betting big on renewable energy. We are not only aiming to generate enough energy for our needs but also want to export energy to our bordering nations like Sri Lanka!

Who are the major players and the investment ideas?

Okay, so there is growing demand, Govt of India is on board, everyone can make money and a new industry can be build. But wait, who will build it?

This is the fun part of the article, companies I have identified that are most likely to benefit in this industry.

I should put out the disclaimer now, I am not an investment advisor and this is not investment advice. You should consult a financial advisor and understand your risks before making any investments.

These are the players in the Industry, we will explore each company in detailed research in following articles.

1. Tata Power - aims to build electric vehicle charging network throughout the country. Diversifying into renewables, backed by Tata.

2. Tata Chemicals - company is transforming from producing low margin commodity chemicals to high margin specialty chemicals and aims to build biggest lithium ion battery production facility in India.

3. Indian Energy Exchange - India based energy exchange that enables power producers and power distributors to trade electricity contracts and discover prices. As renewables develop, more of energy will be sourced from the exchange rather than traditional 25 year fixed price agreements.

4. Borosil Renewables - only Solar Glass manufacturer in India, backed by good management. Company has doubled its capacity twice in last 4 years and still cannot meet the demand. One of the few profitable non China solar glass manufacturers in the world.

5. Adani Green Energy - producers and distributors of solar energy, company is the largest solar company in the world and has the maximum renewable market share in India. Company has plans to build data centers powered with solar energy across India.

6. ReNew Power - another big solar energy producer in India, private company cannot be invested in via public markets. Backed by Goldman Sachs.

7. Ola Electric - one of the most interesting of all companies here. Ola is still a private company but I had to mention it in this list simply cause I think it may be the biggest winner in all of this. I firmly believe that electric vehicle transformation in India will happen via two wheelers and not four wheelers (at least initially). Ola Electric wants to produce and export electric three wheelers (e-rickshaws), two wheelers and electric public transport. It recently announced that its building the world's largest electric two wheeler factory in Tamil Nadu.

   ---

I plan to write more about each of these companies in subsequent articles. There may be more winners to be identified along the way and some of the above companies may even fail but one thing is certain - renewable industry will be bigger in 2030 than it is today and there is real money to be made by investing along the way.

Until next time.

Peace,

Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.

Over the past 3 decades, India has gone through 3 huge wealth creation opportunities each with a significance of its own. It all started in the early 90's when the country started opening up its economy to the world. India's economic liberalization and abolishment of 'license raj' acted as a foundation for country's economy to grow.

Since 1991 when India first opened its economy, its GDP has grown from then 330 Billion USD to the current 3.26 Trillion USD.

This growth in the last 30 years has minted many billionaires and even more millionaires. It led to companies like Reliance and Tata growing even bigger, birthed new ones like Infosys, Wipro and TCS and even more recently multi billion dollar start ups like PayTM, Zomato, Postman, RazorPay, Byjus, Unacademy.

The last three decades provided an economic foundation for India to stand on and dream of even bigger laurels.

Here is how I view the past three decades.

1. 1991 to 2000: This was the period of economic liberalization, international companies wanted to establish their presence in India and for the first time in India's independent history, foreign capital inflows along with privatization created a rising middle class in an otherwise clearly segregated society of 'haves' and 'have-nots'.

2. 2000 to 2010: This decade in my view was India's moment to earn its credibility in the world. Until the 2000s we were mostly a poor nation and majorly discounted by rest of the world as an under developed to a slowly developing economy. The onset of the great millennium and the Y2K phenomenon led to the birth of India's IT services industry and gave the country a chance earn its credibility among the leaders of the world. (If you want to learn more about Y2K bug and how it helped Indian IT service industry, you can read about it here.)

3. 2010 to 2020: The end of the previous decade was marked by The Great Financial Crisis of '08 and even though the crisis was global in nature, India managed to escape largely unscathed. Foreign multinational companies had set up shops and outsourcing units in India and were creating even more jobs than the previous decade as a result of competitive 'cheap and skilled labour'. The rising middle class of the 90s had ballooned to the biggest share of the population. The country transitioned from an agriculture based economy to a largely service and manufacturing one and in the process lifted hundreds of millions out of poverty. Home grown start ups like Ola, Swiggy, PayTm were competing head on with multinational firms like Uber and in many cases beating them.

Not bad for a country that was mostly written off by the world as a 'land of snake charmers' until a few decades back.

The end of this decade, the year 2020, brought another challenge and with it another chance for India to rise. The pandemic halted economies and killed millions, it also exposed faults in the global supply chains. For majority of the last two decades, China's ambitions to become the 'factory of the world' and unchecked globalization meant that every country, if not directly was at least indirectly dependent on China for either finished goods, intermediaries or basic raw materials. The capitalist hunger to grow profits and decrease costs meant that companies never paid much attention to where they were sourcing from as long as it was the cheapest available.

In March of 2020 as countries around the world started to close their borders and the world came to a halt, the global supply chains had by then already started to break under pressure. China with a pandemic to handle, imposed restrictions and lockdowns in several of its industrial towns. Demand for goods all over the world dropped, stock markets around the world were in a freefall and the symphony of capitalism, unchecked consumerism and globalization suddenly stopped.

It is at this moment in March of 2020 that our story starts.

India and the decade ahead

Just a few weeks before the onset of pandemic, India's finance minister unveiled the nation's budget. In it were several policies and targets for India to achieve in the next few years, which ultimately would all combine and help the country become a USD 5 Trillion economy by 2024. One of the policies that stuck with me was the use of PLI or Production Linked Incentive Schemes to help certain industries develop and become self-reliant. This was unique as even though India has experimented with such schemes in the past, it wasn't always a key tool in Government's arsenal. India until now had mostly relied on providing subsidies and levying duties.

While this worked in the past (huge duties on import of cars and two wheelers insulated the domestic auto industry and allowed it to claim a 7.1% share in India's GDP), such tactics are hard to justify in an open globalized economy. Further PLI schemes are an tool of a cash rich government. The implementation of GST and several other major reforms meant that the government was finally generating stable cash for itself which it can then use to fund such incentives.

These incentives and disruptions in global supply chains mean that there are several tailwinds (finance jargon for a good trend and conditions) for a selective few Industries in India.

Let's explore a few of these trends in detail.

Long term mega trends that are favorable for India

Trend #1: Anti China Sentiment and China plus one strategy for supply chains

Covid 19 pandemic highlighted the various issues with current global supply chain and the heavy reliance on China for majority of the world's goods. Increasing trade tensions between US and China along with China's military skirmishes in the South China Sea, recent border dispute with India and the rising cost of manufacturing in China, all have led to companies diversifying their existing supply chains out of China to countries like Vietnam, India, Indonesia, Thailand and Bangladesh.

India and Vietnam are bound to benefit disproportionately from this effect. Vietnam already has good industrial infrastructure and was already competing with China for business before the pandemic. India has the largest and youngest workforce in the world and can quote rates cheaper and more competitive than many other manufacturing economies.

In the short term, we are likely to see small supply concentrations being diversified by investments in India and Vietnam. (This is already playing out in India, two of the biggest suppliers to Apple have set up shops in India to produce electronic goods). India also aims to become the largest mobile manufacturer in the world and government has already announced production linked incentive schemes to help develop this industry. Massive firms like Samsung have set up factories in India with production capacities larger than anywhere else in the world.

In the long term (10 years), India will most likely come out on top and take significant market share of the new supply chains provided it keeps making investments in its own infrastructure.

Opportunity: Electronic manufacturing, infrastructure, industries like pharma and specialty chemicals

All the above industries will likely benefit from this trend and some of them like pharma are well on their way to dominate the global supply chain already.

India is one of the leading suppliers of active pharmaceutical ingredients to the world.

I will do a write up about these specific industries and key investment opportunities within them in a subsequent post.

Trend #2: India will become a leader in global renewable energy sector

India has lofty goals when it comes to renewable energy. Not only the country wants to build a working energy grid of 175GW by 2022 but it wants to almost 2.5x that target by 2030 to 450GW.

To achieve this ambitious goal, India has already announced several large scale projects including the largest solar park in the world to be located in Kutch desert. The size of the park is bigger than the whole land mass of Singapore.

Even though the scale of the project is massive, its not something new to India. The country has already built the current largest solar park in the world located in Tamil Nadu along with the only airport in the world to be powered entirely by solar energy in Cochin.

Renewable energy as a sector is getting attention directly from the Prime Minister's Office and there is good reason for that. For most of its development and energy needs India is heavily dependent on import of crude oil and burning of cheap coal.

Crude oil imports are the biggest line item every year in India's import bill and often leads to substantial outflow of currency.

If India can find a way to self fund its energy needs and reduce this dependence on crude oil, it can save a lot of money that can be used for better things like investing in its own country.

I think our Prime Minister realizes this and is the reason why he has made getting rid of oil imports via development of renewable sector as one of the key agendas for his government.

There is just a small problem with this plan.

China also went through something similar, it was dependent on importing too much oil and started on renewable journey well before everyone else in the world. As a result, the renewable energy industry is dominated by Chinese firms.

Almost all of the public transport in China is now electric and runs on renewable energy. China is also the largest market for electric vehicles in the world with more EVs on its roads than any other country.

Most of India's initial renewable energy projects were made by importing solar modules and components from China, which were then assembled in India. If India has to achieve its ambitious goals, it has to create, establish and thrive the renewable energy industry within the country and the Government just aims to do that.

Indian government has already announced several PLI schemes to help establish the industry, it is also going all out and imposing tariffs and duties of upto 40% on any of the solar module imports. This is the same playbook India used to establish its auto industry. The only difference this time is the new strategy is even more aggressive. The government has also started to give out domestically sourced only tenders for the massive solar projects its undertaking.

All of this has already started to bring some effect with more private players entering the market and the groundwork for the industry being laid. There are very few publicly listed players in the renewables space but I expect more companies to go public via IPO route in the next 2 to 3 years.

There is a lot more happening in this space, I will cover it in detail later in a dedicated post.

Opportunity: Renewable energy companies that will build India's renewable infrastructure

Trend #3: Foreign capital is rushing to invest in India

Foreign portfolio investors (also known as smart money) are making investments into the country at a faster rate than ever before. Even in 2020 when most of emerging economies saw net outflows of foreign capital, India bucked the trend and received more than $13.5 Billion dollars in capital investments. This figure does not take into account the investments made by Private Equity and Venture Funds into private companies like Jio etc. The $13.5 Billion figure is just for Indian public equities!

Investments by foreign investors is a good sign as these are usually large funds that invest for the long term. Just like any other market, stock markets are governed by the forces of demand and supply. As more money piles in and starts buying stocks, it constricts the existing supply and causes prices to shoot up.

Availability of easy foreign capital also means we don't have to compete for the same resources and more companies can raise money easily for their capital expenditure (investment made by the company in itself) plans. This expenditure in turn creates jobs and boosts income - all contributing to the development of the economy.

In the next few years, I expect this trend to continue and even more foreign capital to find its way into our country.

Its not just public markets, even private markets are witnessing foreign capital inflows like there's no tomorrow. Private Equity (PE) firms have bought businesses at a faster rate than any other year going all the way back to India's independence.

These are just three of the many mega trends that are playing out in India's favour. With the youngest workforce in the world, good government policy, a cash rich government and plenty of money to fund infrastructure expenditure plans, I expect India's economy to grow faster than it has in the previous two decades.

In the subsequent posts, I will attempt to deep dive into some of the industries mentioned here like pharma, renewables, infrastructure and specialty chemicals.

Until next time.

Peace,
Tar

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. The analysis and insights presented are based on publicly available information, and while efforts have been made to ensure accuracy, we cannot guarantee the completeness or reliability of the information.

Investing in securities carries inherent risks. This post should not be relied upon as a substitute for independent research or consultation with a qualified financial advisor.

The author of this post and the platform on which it is published do not provide personalized investment recommendations or financial advisory services. Any investment or trading decisions you make based on the information provided in this post are solely at your own risk.

Neither the author nor the platform shall be held responsible or liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this post. Readers are encouraged to conduct their own due diligence and seek professional advice before making any investment decisions.

By accessing and reading this post, you acknowledge and agree to the terms and conditions outlined in this disclaimer.