Reading the future

 

The 50% share of retail businesses in RIL’s OP and shift to clean energy capture an economy transiting to a buyer’s market

 12July 2021

Stock valuations can be misleading. They do not always correctly reveal management’s risk-taking or risk-averseness. Surging prices can be due to irrational exuberance or lots of liquidity even when there is lack of clarity on the road ahead. Depressed prices might stem from a cyclical downturn, credit crunch, or from an emergency like the current pandemic, affecting capacity utilization and output. A reasonably fair method to check the health of the economy is by examining the financial performance of companies. Unless subjected to window-dressing, numbers do not lie. There is no need to dig into all listed companies. A close look at a few, representing the industry they operate, can give a glimpse of ground-level reality. State Bank of India’s credit flow points to the economy’s slump or resurgence. Bajaj Finance is considered a play on consumer sentiment. The composition of the order pipeline of Larsen & Toubro indicates the state of domestic capex of the private and public sectors. The robustness of infrastructure capacity-building finds an echo in the financials of Bhel. Coal India’s offtake offers a clue to the ability of power producers to make payments. TCS and Infosys earnings are affected by the strength and weakness of the Indian currency, influenced by dollar inflows and the import bill. Asian Paints’ sales suggest revival or slump in industrial activity and discretionary spends by households. HDFC’s sanctions and disbursements hinge on mortgage rates and resistance to inflation. Rural demand, depending on monsoon and the procurement price fixed by the government, can lift or slow down Hero MotoCorp.

 

India’s most valuable company is increasingly being viewed as a proxy for India’s travel from the licence raj to a choice-based economy The oil-to-chemicals conglomerate’s moves usually mimic the direction of the country. Reliance Retail started 15 years ago and Reliance Jio 10 years later. The consumer businesses contributed half of the operating profit of the 48-year-old conglomerate last financial year. The transition from a B2B company to a hybrid model gradually focusing on the mass segment has a message for Corporate India if it has missed the better discounting banks with a higher share of retail deposits and assets are getting. The other takeout is the market’s diminishing obsession with oil. Two forces are responsible for the change. First, technology giants have replaced refiners in the market-cap sweepstakes. The top five companies in the US, including Apple, Microsoft, Amazon, and Alphabet, are much younger than Exxon Mobile, pushed below the 20^th rank. Second, the growing movement to reduce carbon footprint. Many big-ticket investors will not touch polluting companies. The availability of substitutes is hastening the transformation to clean energy.

 

RIL seems to have read the tea leaves. The quest to attain leadership by underwriting voice calls and offering data at low tariff was initially greeted with scepticism. The strategy looks visionary in retrospect, following the reliance on mobile connectivity during the pandemic lockdowns. Resources that would otherwise be swallowed by the commodity business are being freed by inviting Saudi Armaco to pick 20% stake for US$75 billion in the O2C segment and giving UK’s BP 49% equity for US$1 billion in the joint venture floated to sell fuel at pump stations. One-third control in Jio Platforms, the arm that will supervise the digital backup of the telecom and retail ventures, and a small stake in the retail entity to foreign investors resulted in a collection of Rs 3.24 lakh crore last year. Funds are attracted to mature industries for their track record and to emerging businesses for their potential is the third implication. Partnership with global brands is to tie up capital as well as knowhow. Two stakeholders, Facebook and Google, will provide the platform and support to make Reliance Jio addictive to users looking for entertainment, shopping and surfing. The net debt-free status allows raising Rs 60000-crore capex over three years to put up infrastructure to generate clean fuel, with an ambition to produce over 20% of India’s 450-GW solar generation target for 2030, in the race to become net zero carbon emission free by 2035.  Collaboration with small retailers through telecom and digital offerings and earmarking Rs 15000 core for value-additions and financing of solar ancillaries will ensure captive cash-flow. Ironically, the four giga factories will come up at Jamnagar in Gujarat, the venue of its Old Economy world-class refinery, setting an example of how to seamlessly transport from the past to the future.  

-Mohan Sule

India’s re-rating

 

A compassionate management’s drive to meet capex by restructuring has resulted in record-breaking forex reserves

 28 June 2021

What attracts investors to a company can be a mystery. Besides the ability to produce decent capital gains, a track record of hefty and consistent dividends interspersed with bonus shares and occasional buybacks to support prices during a turbulent phase might appeal many. Some are likely to mix and match past actions and outlook to take a bet. Several with low risk-appetite stick to sluggish stocks because of their transparent governance.  At the same time, investible savings are found to chase those whose tantalizing future promises a divorce from the rocky past. Allocation can hinge on the promoters’ clarity of vision. Headwinds do not inhibit if the challenges are viewed as temporary and openings to enter at low levels. Premium over peers is not scary if there is conviction that it arises from scarcity, product and marketing innovation, or pole position. Despite the market’s tendency to categorize stocks into buckets of emerging and beaten-down wealth creators, the hunt for growth cannot be exclusive of value. A cyclical scrip’s expensive valuation can be a turn-off even when demand is back. A fad is worth following if the price is not at a tipping point of turning into a bubble. Now the puzzle is if businesses can be separated from the countries in which they operate to assign discounting. Many companies’ credit worthiness is higher than the sovereign rating. Microsoft is perched above the US. RIL’s investment grade contrasts with India’s negative outlook. The fear of impact on operations by sudden political shocks recedes if these are listed on exchanges insisting on high standards of disclosures. In return for openness, they attract quality money, boosting their standing in the marketplace.

 

Realizing the indispensability of overseas funds to strengthen their social sectors, developing countries are increasingly focusing on reforms and effective grievance redressal. Though the competition to pull in dollars is fierce, India has an edge. Its history of peaceful regime changes assures stability. After a period of uncertainty from the late 1990s till the mid-2010s, it has got a new management team. The generalization of being a back-office supporter can be shrugged off on the reckoning that none of the Fang constituents (Facebook, Apple, Netflix, and Google) can do without its huge market. The world’s pharmacy, known to make cheap generics, is now demanding a seat at the table with the big boys after rolling out an indigenous covid-19 vaccine around the same time as by the developed world. Recently, all households were electrified. Now the race is to ensure tap water and housing for all. The dominant share in GDP of agriculture, whose resilience was demonstrated when rural purchases offset the fall in urban consumption during lockdowns last year, is used to underline the persistence of legacy weaknesses. Yet the leap to the top of the league of countries ranked by number of digital transactions illustrates the demographic dividend. The capex to modernize offers revenue visibility for manufacturing, whose neglect is being sought to be addressed through Make in India, Atmanirbhar Bharat and production-linked incentive schemes. India will be the only country in the world to grow by high single digits this fiscal year.     

 

Alongside restructuring, including ramping up FDI limit in insurance to 74% and multi-brand retail to 51%, divestment from non-strategic sectors and minimal presence in four strategic sectors, India is tightening the compliance architecture. The crackdown on delinquencies spares no one, be it the nation’s richest man or intra-day traders. Fines have been imposed for previous misconduct. Clients need to put up their own margins to scotch speculation. Their securities can no longer be used by intermediaries for proprietary transactions. Funds’ exposure to risky debt instruments is pegged to assets under management. Credit risk will be as per the duration of the holdings as well as the investment objective. The cleaning-up seems to be reaping yields. India became the biggest recipient of foreign portfolio inflows among emerging markets last fiscal year. Investment in equities of Rs 2.74 lakh crore is the highest-ever, despite the fiscal deficit set to touch 6.8% of the GDP in FY 2022. The US$64 billion FDI in CY 2020 is the fifth largest in the world even as global flows plunged 35% in the previous year. Forex reserves swelled more than US$100 billion between April and March 2021 to cross US$ 600 billion beginning June. What must be satisfying to big-ticket investors mindful of companies’ social responsibility is the transfer of cash to 400 million citizens and food to 800 million from end March 2020 up to November 2021. India is a growth stock with value proposition.

--Mohan Sule

 

 

 

 

Division in the ranks

 Discounting of companies is factoring in the share of products with pricing power, user stickiness and deployment of cash 

 

14 June 2021

 

The worst humanitarian crisis in 100 years is how Prime Minister Narendra Modi recently described the covid-19 pandemic. Contraction in India’s GDP by 7.3% last financial year has not been seen in 40 years. For the stock market, it is the best of times. The benchmark Nifty scaled 2021’s second new high early June, doubling from its multi-year March 2020 bottom. Several companies across market capitalization not only remained profitable during the year but continued to produce record-breaking numbers in January-March 2021 after the December 2020 quarter. Even amid the bleakest period, particularly during H1, companies in India and overseas were successfully raising funds. In India, the third consecutive normal southwest monsoon, competitive and accessible money and staying relatively untouched by infections bolstered rural spending, partially compensating for the caving in of urban consumption. Money shifted from producers of essential output in the early stages of lockdowns to neglected commodities and infrastructure players as restrictions began easing. The rollout of vaccines has now rekindled hopes of the global economy eventually getting weaned away from the life-support of liquidity infusion.  

 

In the absence of innovative tech companies, with the stature of Facebook, Apple, Netflix and Alphabet, investors in India resorted to sifting within sectors. Health and hygiene products supported the lack of interest in beauty products of FMCG players. Entry-level two-wheelers and cars were bought to avoid public transport. Drug makers with a higher share of active pharmaceutical ingredients turned star performers in search for niches. Fertilizers and insecticides makers surged as an above-average rainfall and cheap credit boosted sales. Differentiation based on demand is not new. Earlier, the backing was for those achieving scale. Higher revenues, it was believed, implied market share gain. The theory has evolved, with those commanding better margins, implying pricing power, bagging better discounting. What were informal distinctions for stock-picking even within thriving industries consolidated during the breakout and recovery from the outbreak. Companies tilted their portfolio in favor of premium products in the same category to squeeze out more realization. The strategy will pave the way to pass on increased cost of inputs as consequence of quality. If so, it will indeed be transformation of the marketplace. From pushing value for money gratification -- as amplified by sachets, beginners’ range discretionary consumer products, low-cost airlines, and budget hotels to woo ex-metro buyers -- to targeting discerning users is indeed a gamechanger. Valuations will also account for consumer engagement rather than relying primarily on the number of users. The trend has been visible for some time. The covid-19 upheaval has hastened its acceptance. The regulatory moratorium on servicing loans during the lockdown nudged investors to examine collection efficiency and composition of the assets instead of getting bewitched by the size of sanctions and disbursements. Holdings of mutual funds are getting closer scrutiny as safety supersedes risk reward. The attraction of financial institutions with a higher share of the low-cost current-account-savings-account deposits is not a secret. Also emerging is the preference for lenders servicing home mortgages and gold collaterals. Defaults are negligible when compared with borrowings against credit card limit and to finance purchase of consumer durables. A new order is emerging from the chaos.       

 

The frenetic rush to take advantage of the cheap funds to strengthen the balance sheet by reducing debt is another outcome of the medical emergency. The discounting separating companies from peers will factor if the preparation is to face future disruptions or to cater to the pent-up demand by ramping up capacity. Cash pile cannot be hoarded. If not used for organic or inorganic opportunities, it will have to be returned to the shareholders as dividends, capitalized as bonus shares or deployed for buybacks. The equity base of many companies has ballooned from private placement of shares at moderate valuations with institutional investors. Of the many implications, the prominent is the confidence of servicing the investment due to the low bar. Second, employing the inflows to deleverage the balance sheet will allow funneling the revenue stream into operations instead of interest payment. Third, the reserves can be used to fend off unwanted suitors, attracted by the low return on assets stemming from mobility restrictions, by shrinking the outstanding capital. For investors, all the possibilities will unlock value. 

 

 --Mohan Sule

The coming third wave

 

If the rebound rode on growth stocks and reopening boosted value plays, vaccination is set to prop up services

 

 The March 2021 quarter results were always expected to be an improvement over the low base of a year-ago period. A 21-day nationwide lockdown from 25 March last year had disrupted economic activity. An inkling of the coming boom was visible in Q2 and Q3 of FY 2021 numbers, reflecting the five-phase unlocking from June. The market, too, anticipated a healthy outcome. The Nifty scaled a lifetime high on 15 February of this year. Release of the bunched-up demand cannot be the only explanation for the record revenues, volumes, and profit by many companies. Several other factors converged to produce a memorable January-March 2021 period. The impact of the Union government’s cash transfer to farmers and rural and urban poor became visible in the marketplace. Focused spending on agriculture, healthcare, education, and infrastructure and reforms to ease doing of business were the other cornerstones of the aid package. The central bank, simultaneously, was lowering the cost of funds and undertaking targeted lending to sensitive sections with the capacity to magnify the assistance. Staring at credit crunch after the collapse of infrastructure financier IL&FS in September 2018, the gushing liquidity was a turning point for lenders to home buyers, farmers and MSMEs. Also emboldening banks was the implementation of the Insolvency and Bankruptcy Code from September 2020, freeing resources tied up in bad loans. Peak corporate tax was cut 22% from 30% in September 2019. Coinciding with the man-made efforts, a second consecutive average southwest monsoon improving rural purchasing power.

The two other catalysts, both in January 2020, were the thawing of the two-year-long US-China tariff tiff, with the phase 1 trade agreement, and the UK formally leaving the European Union, three-and-a-half years after a referendum. A deal for an orderly exit was finalised before the year-end deadline. The transition to BS VI norms from April 2020 cleared another overhang since 2016, contributing to spurring consumption and investment that had got stalled in FY 2020.  If MSMEs were able to tap low interest rates, institutional investors were snapping the downsized shares of large and medium corporations. The decline in input and overhead costs provided flexibility to deleverage, strengthening the balance sheet for funding growth. Tinkering the output mix towards premium products increased realization. Establishing a digital presence offset the drop in physical footfalls. Besides the need to meet higher usage, the coverage of production-linked incentives encouraged many companies to look for ramping up capacity as utilization touched the optimum level.  Gains made their way from growth to value counters, punctuating the market’s overheating. A vibrant primary market signalled risk-taking.

 

If the escalating benchmarks foretold Corporate India getting into shape, their current movements offer hints of outlook. The Nifty P/E has slowed to around 29 from a high of 41 mid- February. Apart from spurt in earnings, the contraction in the premium over the historical average of about 22 suggests a slower pace of returns as raw materials turn expensive and logistics issues persist. The Nifty IT index lagged over the past month on fears of recoiling inflation leading to tapering of prime pumping in the US and the EU, the major markets. The Nifty Auto index’s outperformance, despite down from its peak, captures the struggle to obtain chips as well as hopes of CVs catching up with PVs and two-wheelers on normalcy. Tie-ups to churn out covid-19 vaccines and medication are once again propping the Nifty Pharma index after a brief hibernation, when the first wave had started receding in H2 of FY 2021. The Nifty Bank index has doubled from its year-ago bottom, coming out of correction. Provisioning and capital collection are supposed to facilitate higher credit flow. The Nifty Metal and Commodities indices are touching new tops due to the revival of capex and prospect of another season of bumper harvest. They might plateau as central banks end their loose monetary policies early 2022.  In the run-up, attention will shift to the third orbit comprising frontline sectors including aviation and hospitality. The leaders in the entertainment and retail space are up from their pandemic lows and holding on to their gains. Services is consolidating the comeback of the US, initially fronted by tech and then by manufacturing, with outdoor masks no longer required for those inoculated with two doses. The sharp drop in caseloads and estimates of all Indian adults getting two jabs by December 2021 are setting the stage for funds to move into the next upcycle.

 

 --- Mohan Sule

 

Shift in strategy

 

Record-breaking quarterly numbers might remain history as the next challenge will not be demand but inventory management

 

The liquidity-pumped euphoria is showing signs of wearing out. The best-ever revenues, volumes, and profit in the March 2021 quarter produced by many companies are not generating the enthusiasm unleashed end of last calendar year. The market was flat in the past month to 7 May 2021. The benchmark had rebounded from the March 2020 multi-year low of 7,610 points, buoyed by RIL’s Rs 2-lakh-crore fund-raising through 33% stake-sale of Jio Platforms in less than two months from end April and a rights issue thereafter. After stabilizing at the 11,600 level for three months from August 2020, the Nifty shot up 30% in the subsequent four months to touch a lifetime high mid-February 2021. HDFC Bank, a proxy for economic health, surged 41% in the period. Bajaj Auto, capturing discretionary spend, gained 34%. Grasim, symbolizing industry consumption, advanced 64%.  Hindalco, a play on the private and public investment mood, improved 75%. Tata Steel, pointing to infrastructure capex, surged 66%. The tailwinds were the signs of spring in the June 2020 quarter results, which started trickling mid-July, after a 21-day nationwide lockdown from 25 March 2020 had knocked down Q4 of FY 2020 earnings. The catalyst was expectation of a better Q2 due to a normal southwest monsoon and festive spending in Q3. The second US$900-billion stimulus from the US end December 2020 put more cash with overseas investors.

The benchmark shed 2% in little less than the past three months despite a third fiscal stimulus of US$1.9 trillion by the US in March. HDFC Bank tumbled 31% and Bajaj Auto lost about 6%, reflecting the setbacks to the banking and automobile sectors. The Supreme Court end March 2021 lifting the moratorium on servicing loans from September 2020 triggered fears of  ballooning of advances turning sour as Indian states enforce region-specific shutdowns. HDFC Bank’s gross non-performing assets were up in Q4 over Q3 and over the year. Two-wheeler makers froze assembly lines as chips became scarce. Profit-booking from pharma, automobiles, and tech counters, the recipients of attention as public transport was curtailed to cap the spread of the pandemic, is making way to commodities, which will be at the forefront to benefit from normalcy, and because of a soft dollar. Grasim returned 17%, Hindalco 26%, and Tata Steel 63% over the past quarter till the first week of May. There are three messages that the market is giving. First is the doubt about the sustainability of current valuations. The outbreak and retreat of the virus is uneven across the world. The US and some parts of the EU are emerging from the emergency for the third time. India is facing a second surge. A fourth wave has overwhelmed Japan’s healthcare system. The Nikkei index tanked 3% on 11 May 2021. Travel restrictions enforced to isolate countries engulfed in the flare-up will worsen the disruptions in distribution. The second outcome is economies getting caught in the crossfire of uncoiling prices and fragile recovery. Stimulus packages have improved consumption but not employment as enterprises focus on keeping overheads low. US retail selling tag in April jumped to 4.2% over the year and from 2.6% in March. The rate was the highest since CY 2008. On the other hand, the number of unemployed is not dipping to show return of routine. Businesses are unable to cope with the release of pent-up demand due to difficulty in procuring raw materials.

The Federal Reserve wants 2% inflation to be persistent and vacancies to slide to the pre-March 2020 era before beginning to hike the cost of funds. In the meantime, it might start withdrawing from bond-buying to mop up liquidity. The European Central Bank is toying with the idea. India needs continuation of loose money policy as it is projected to see yet another round of higher caseloads. The Reserve Bank of India might be left with little room if there is an acceleration in the outflow of foreign funds, smelling higher yields back home. The third fallout will be volatility in earnings. Q1 of FY 2022 results, while expected to be better than a year-ago, are not likely to be accompanied by pronouncements of record-breaking milestones because of varying degree of impact of localized lockdowns.  The dilemma will be whether to pass on the higher input bill or focus on volumes. Inventory management will become complicated. Supplies tied up during revival will have to be disposed of at a discount if yet another resurgence paralyses economic activity. Investors and companies have never faced such a balancing act.

 

 --Mohan Sule

Making peace with uncertainty

 Investors will have to navigate volatility from localized lockdowns, ample liquidity, and short bull-and-bear phases    

 

One month into FY 2022, it is becoming increasingly clear that investors will have to tailor their strategies by co-opting the pandemic for several reasons. First, the rollout of vaccines from the end of the last calendar year had raised hopes that the outbreak was some months away from weakening. That might not be so. The retreating wave has the nasty habit of coming back by mutating into more lethal variants. The spread and decline of infections are not in synchrony across the world. Even as the UK and the US seem to have gained control over the third surge of late, India is facing a second comeback of coronavirus. Japan is seeing a renewal. Companies will have to prepared for supply chain distribution for a long time. Second, the campaign to blunt the medical emergency is not running smooth. Two provisional candidates were briefly suspended by the US and EU regulators post-administration complications despite the affected being a tiny fraction of the total sample. Eventually investigations ruled that the protection offered outweighed any possible deviancy. An opposition campaign in India criticized the rush to introduce a home-made vaccine, citing lack of clarity on the outcome of phase 3 trials. The concerns proved shallow as subsequent studies pronounced not only its efficiency but also its potency to fight newer strains. As such, a return to the pre-covid-19 job level will have to wait. Third, the coverage is not consistent. The UK had vaccinated most of those above 50 years, the most vulnerable group, by 15 April. In the US, 40% of the population has received at least one jab. With hardly any major incident of late, the Chinese seem to be in no hurry to get a security cover. India has become the fastest country to inject more than 14 crore people above 45 years in about three months. Region-specific travel bans will have to be in force till confidence returns that airlines are not ferrying potential virus carriers.

The fourth cause of uneasiness is the volatility in economy data and equity market indices imparted by the rise and fall of new infections and the pace of immunization. Even as the US is opening and the UK is gradually coming out of its three-month lockdown, some EU members are again tightening restrictions. The varying severity of curfews enforced by different Indian states to tame the latest fury will lead to uneven factory and services output and GST collections. Investors moving their cash and holdings as per the standard five- to seven-year bullish and bearish cycles might be unable to take a long-term view on any sector. If tech stocks go up on travel advise to stay away from hotspots, crude cools down but so does activity in oil producing countries that are markets for a host of goods and services. The fifth concern is the recklessness seeping into bets on the unstated understanding among participants that a market meltdown like that on 23 March 2020 is unlikely. If at all there is bleeding, it will be quickly staunched by fresh support packages. Liquidity pumping, incentives and cheap assistance looking for value are propelling the unlikeliest of stocks into stars at the first hint of turning of the corner. IPOs are sold for rich valuations. Prices in the secondary market run ahead of earnings, anticipating return to the pre-covid-19 era, despite uncertainty when that will happen.

 

The sixth outcome is the weakening of time-tested linkages guiding investors. Foreign portfolio investors and domestic institutional investors, who should behave in tandem, are staking out contrary positions. The mystery is if overseas funds are withdrawing due to the country’s isolation on the international map following the release of a new outbreak or on expectation of higher interest rates back home.  There is also no clarity if the net buying by mutual funds over the last couple of months is because of correction or on easing of redemption pressure. What is becoming clear is that the world is no longer flat. The US and China are rebounding even as many countries in Europe, Asia, and Africa continue to struggle. The seventh fallout is the increasing flow of cash infusion from governments into an alternative swap system that runs on sentiments rather than demand and supply. Already a legal tender in Japan, EV maker Tesla, some major corporations in the US and Singapore have embraced digital currency. Russia, China, and India are going to come out with their own versions. A trading platform for cyber currencies recently got listed at euphoric discounting. So far as transactions remained on the fringes, the parallel universe could be ignored. The Old Economy's acceptance of the new reality is a complication. Central banks can crack down on a market without rules to insulate the real world or shepherd its transition to the mainstream to control the narrative.

--Mohan Sule

Springboard of setbacks

 

Crises such as freezing of debt schemes and misuse of PoA by brokers have resulted in a safer trading space

 

What can move and shake the equity market is uncertain. The covid-19 outbreak was a health emergency, but the policy interventions of slashing interest rates and fiscal incentives mimicked those in a cyclical downturn. As is the norm, export-oriented sectors led the revival. Profit-booking in the tech and pharma counters trickled to commodities, infrastructure, and real estate. In a departure, domestic consumption, too, was happening alongside. A good southwest monsoon and cheap credit boosted offtake of fertilizers, insecticides, tractors, and housing products. Another divergence was the varying performance of segments within the industry. Health and hygiene products of FMCG companies sold briskly but not personal-care solutions. Entry-level passenger vehicles were favored for mobility, but commercial vehicles ignored due to movement restrictions. The rebound was quick, unlike the four to five years of zigzag trajectory during the transition from a bearish period into a bull run. The Nifty climbed up 21% in five months after wiping out the loss on the way to the bottom in less than 11 months. The benchmark expended 22 months to regain the January peak and 76 months to top it with 21% wealth creation after the 2008 liquidity squeeze. Big-bracket investors did not follow a secular strategy last year. After being overall buyers in CY 2018 and CY 2019, local institutions dumped shares even as FPIs net pumped Rs 2.42 lakh crore in the 15 months till March 2021. The unabated Rs 93000-crore 10-month selloff in the 14 months to February 2021, with the intensity tapering in March, by mutual funds was sparked by redemption pressure from corporate and individual unitholders to conserve reserves. In contrast, overseas accounts had access to ample no-cost cash searching for higher yields. 

 

What has been left unsaid but inferred is the disenchantment with money managers. The restlessness is despite the Securities and Exchange Board of India taking steps to instill confidence in pooled investments. Spreading the distributors’ commission replaced upfront payment to encourage long-term investing. A 1% advance fee per annum for three years is only for SIPs of Rs 3000 or more per month to ensure enlisting of serious investors. Inversely linking the total expense ratio to the growth in assets under management aims to discourage proliferation of copy-cat schemes. It took a series of crises for the realization that there are no risk-free returns. The seizing of the credit market following the collapse of IL&FS in 2018 resulted in side-pocketing of paper the day it is downgraded to insulate the NAV of the rest of the scheme. After the freezing of six debt schemes by Franklin Templeton AMC in April 2020 due to the pandemic-induced rush to exit, the portfolio and yields of the underlying instruments need to be disclosed fortnightly, and not monthly. Amortizing the coupon daily can be done only for fixed income instruments of 30-day maturity. Those of a longer duration are to be marked to market to know the realizable value. A fund house’s exposure to a single issuer is 10% of the corpus. 

 

Sloppy governance is part of the problem. The other is the uninspiring track record. The median one-year returns of the 10 best performing large-cap schemes at the close of March 2021 were 40%, the highest being 49%. The NSE’s mainline index improved 68%.  The top 10 performing multi-cap schemes’ mid-range was 8%, with the upper end appreciating 17%. The BSE 500 climbed up 73%. Besides ease of online trading, the near doubling of growth rate of demat accounts to 5.15 crore in the 10 months from end FY 2020 as against 14% increase from FY 2019 is in no small measure contributed by the desire of the ordinary investor for control due to the mismatch between expected and earned gains, particularly after the cleaning up undertaken by the market regulator to create a safe environment. The blowout in 2019 of Karvy Stock Broking, which quietly sold members’ securities to fund real estate arm Karvy Realty, was a turning point that led to reviewing the use of power of attorney given by subscribers. Now securities will remain with the clearing house and not transferred to the broker’s account. Since 1 September 2020, 20% upfront margin is required from the client for every intra-day order as against the practice of the platform provider often putting up the margin on the squared-up position at the end of the day. Buyers and sellers will now have to wait till settlement before executing a fresh trade. These reforms have emboldened the marginal player. It is a triumph of David over Goliath.

  

 -Mohan Sule

 

 

Face-off

 

The strange ties of stocks and bonds, New and Old Economy, oil and demand, and the US dollar with recovery

 

The tussle for supremacy between stocks and bonds is one of the many paradoxes of investing. Both are dependent on each other for survival but feed on each other’s misery. Equities and fixed income securities are chased on signs of the economy blooming but for contrasting reasons: one for capital appreciation and the second to capture the prevalent rate-bearing instruments on expectation of borrowing costs sliding further. The mark-to-market value of a portfolio comprising loans taken by the private sector and the Union government and the central bank improves as lending cost looks set to tumble. A rate-hike cycle to pull back assets from entering bubble territory caps consumption. The valuations assigned to companies based on their projected north-bound trajectory on low-cost money go over the top. There is exodus from debentures and government securities in anticipation of future issuances at higher coupons and yields. The playbook is becoming increasingly visible of late. The rapid rollout of vaccines and a third fiscal stimulus in the US even as interest rates are near zero are sending yields soaring and correcting shares. The return of demand is triggering commodity inflation. Producers are ramping prices, setting the stage for a lingering inflation unlike the flare-up caused by the temporary bottlenecks in getting food and non-food supplies. Snapping up the diving counters is fraught with risks. They might turn dud if the drop continues. Locking funds in NCDs and treasuries might be lost opportunity for higher returns going ahead.

 

The ties of sustenance and destruction are not only between two types of investment vehicles. They exist even between opposing segments and within a grouping with similar characteristics. The shift of inflows from tech stars to Old Economy scrips is a reaffirmation that the regime of soft borrowing is beginning to end. The bout between growth stocks, requiring cash infusion to take off, and value stocks, languishing due to slump in usage during a period of pessimism, is yet another irony. The two categories thrive at the expense of each other. In the absence of opportunities for higher earnings in a low-cost environment, funds gravitate towards emerging areas because of their ability to expand rapidly in short periods. Traditional sectors start attracting attention only when they can reclaim their pricing power. Oil sprang 175% from a bottom a year ago as global economies clawed back to normalcy. The commodity has become a proxy to gauge the health of the global economy. After plunging in April last year as nations hunkered down, prices scaled back after a rapid rise due to renewed shutdowns in the European Union on resurgence of covid-19 infections.  Fall in upstream sales indicates trouble for both the explorer-refiner and consumer. Softness at pumps at the height of the pandemic provided no solace to the grounded aviation players. Prices rebounded when airlines were permitted to undertake flights with certain limitations. 

Industries with low raw material and intermediary expenditure should be a cause for alarm rather than satisfaction because of the transitory nature of the benefit. The initial bounce-back of polymers and paints was based on rural markets, buoyed by good monsoon and cheap credit. These sectors might not be able to maintain their margins with the bubbling of input costs. The recent upward direction of petrol and diesel inhibiting buying of automobiles is one side of the story. The other is the disruption in transport affecting delivery of semiconductors. The problem will resolve as soon as the threat of coronavirus is under control. The smooth resumption of transport will no doubt enable acceleration in output. The outcome will be higher prices of chips as logistic providers re-work their bill. Another confounding benchmark is the US dollar. It weakens, rather than strengthening, during a bullish phase in the US economy, coinciding with loose monetary and fiscal policies. Inflows into the world’s convertible suggest a difficult period ahead.  Investors departed from risky assets for a safe harbor in the greenback during the initial periods of the lockdowns. A strong currency complicates US recovery as its exports become uncompetitive. The Federal Reserve had to pull down lending rates to near zero to diminish the appeal. Those who prefer to stick to their comfort zone, own rather than lend to businesses, or have a long-term horizon usually sit out during one of the alternate phases. Institutional investors, who face redemption pressure at the slightest souring of the mood, rebalance their portfolio to make the best of the two cycles. Volatility is the consequence of such transition.  

 

 --Mohan Sule

 

 

Tailwinds and headwinds

 

Duds become stars and invincible stocks tumble as taste turns fickle in a liquidity-fueled era

 

The rebound of the global financial markets from the bottom over the past year is resembling a tempestuous romance, with its share of infatuation, breakups, and temper tantrums. From being besotted with the Fang club, comprising Facebook, Apple, Netflix, and Google’s parent Alphabet, to turning back on tech for the attraction of Old Economy sectors, and the re-discovery of the charm of bonds, the tumultuous ride has been replete with chills and thrills. The twists and turns in the plot have skewed time-tested theories. Nothing is untouchable. The decision of new-age Tesla to invest and accept cryptocurrency for payment propelled Bitcoin into the mainstream.  The search for the next big bet transformed stocks that would not have merited a second look in the pre-covid era into multi-baggers. Hitching on to the turned around electric vehicle pioneer on envisioning a distant future of road fuel-guzzlers being geared up from neighborhood chargers is understandable. Not so is the craze for GameStop, up 1,861% in seven months, and AMC Entertainment, up 715% in less than a fortnight, amid surging cases of infections, triggering more clampdowns, and the massive US$1-billion valuation accorded to the IPO of loss-making digital storage provider Snowflake. The return to growth of the video rental outlet network in the December 2020 quarter after years of struggle and narrowing of pandemic losses of the world’s largest theatre chain operator was perhaps a message of fatigue with OTT entertainment and yearn for taking back control over the viewing experience. Indeed, the anticipation of a sunny outlook for cloud services by ignoring the dull past seemed a throwback to the era when land banks and page views were the basis for demanding rich discounting in the giddy 1990s.

In India, fortunately, such instances of excesses were rare in the secondary market, largely restricted to the pharma and IT sectors, but abounded in the primary market. Expensive offerings across industries garnered oversubscription, with most listing at gains. Hardnosed moneybags swooned over swashbuckling qualities of daring vision and efficient execution to part with Rs 4 lakh crore for 33% holding in the digital arm and 16.5% stake in the retail arm of RIL at the peak of the outbreak. In the process, the counter’s 85.5% spurt outperformed the Nifty’s 69% gain during April-December 2020, emboldening other issuers. What endeared was the agility of India’s largest private sector company by market cap to draw on the indispensability of telecom services to stay connected during lockdown to recoup from the setback of Saudi Aramco putting on hold its US$15-billion investment for a 20% stake in the oil-to-petrochemical business. Sentimental attachments to entities with a record of good governance and dividend payment was discarded in favor of practical attributes. Fast-moving consumer goods dispensers earning major revenues from health and hygiene products were picked for pampering. Makers of entry-level passenger car and two-wheelers were fancied as they found increasing acceptance from pandemic-weary users keen to avoid public transport. Nearly 17% of the value of the name behind a top-end two-wheeler brand was knocked down in days in January. Passenger vehicles of India’s largest automobile producer were sought but its commercial vehicles given a cold shoulder. Tractors hogged the limelight.

Trending fads had short shelf lives. Value-for-money models are likely to lag premium carriers following skyrocketing fuel prices as the economy looks to normalize. Just like in matters of heart, complacency can be fatal as investors betting on leaders in industries with high entry barriers realized. A capital-intensive or cyclical field is no guarantee of limiting rivalry. The fiscal stimulus-fueled boom put a lost cash in the pockets of those looking for the right catch to avoid future shocks of infidelity and live happily. The roadmap preferred was to become an all-rounder, vested with wholesome appeal.  A cement manufacturer’s decision to flirt with paints was viewed as a strategy to become an integrated player by catering to downstream and upstream consumption. The shaking off a staid segment shocked an entrenched kingpin just like Reliance Jio’s entry, with free voice calls, disrupted a smug façade of first-movers’ pricing power due to shrinking of competition stemming from the huge spectrum acquisition bill. Any which way for those looking for suitable matches, the era of playing by the book appears to be over. The winners in the post-covid-19 world will be those who constantly reinvent themselves to stand out in the crowd.  

  -- Mohan Sule

A year later

 

Despite the pandemic’s devastation being more severe than the September 2008 crisis, the recovery has been swifter

 

With the benefit of a rear view of nearly a year since stocks plunged to multi-year lows as nations prepared to down their shutters, the global medical emergency has offered valuable insights into markets’ stumble and rebound. The crisis differed from past blowouts in two ways. First, the magnitude of the devastation. There was no benchmark, sector or stock that was not swept away by the tidal wave of selloffs. While the Nifty’s 59% loss was spread over 10 months to beginning November 2008 amid the credit crunch, the index shed 34.5% in two-and-a-half months to 3 April 2020. Second, the suddenness with which investors were caught unawares. The Nifty was trading at a steady level of 12,200 for two months to mid-February 2020 before it started losing ground. There were sporadic, but alarming, reports about the breakout of a communicable disease that had prompted China to put an entire city under lockdown. Yet the potency and scale of spread of the deadly virus, which was so mysterious that for many days was known after Wahun from where it originated, was not something that had been anticipated. There were contrarian voices during the dot-com boom warning about the sustainability of the eyeball-based valuations and during the home mortgage madness about the dangers of exotic spliced-and-diced debt instruments. Even the beginning of the end of a cyclical bullish phase has enough red flags for those concerned about prices running ahead of historical earnings growth. Covid-19 was horribly different. There was no roadmap to vanquish an invisible opponent who seemed omnipresent and resilient. There was no knowing how long the war would last.

 

Nearly nine months later, the situation had changed for the better, with vaccines from six different sources in use and more on the anvil. The issue occupying much bandwidth is if the recovery is too fast and too soon. The Nifty rebounded to conquer its January 2020 peak in over seven months after the 23 March dive in contrast to the two years it took from the January 2008 milestone. The journey from the brink to back was not easy. There were restrictions on movements. Supply and distribution chains were disrupted. In the post-covid-19 world, certain ways of living had altered, either permanently or drastically. In the process, new stars were born, some got a fresh lease of life and others a second coming. The steps leading to the re-emergence from the turmoil comprised fear, rescue, differentiation, search for the next big idea and return of risk-taking. The conditions leading to the seizing up of liquidity can be mismatch between revenue inflows and valuations of Internet properties at the turn of the century, miscalculation of the direction of asset prices during the period of low interest rates in 2007, or disarray in production and reach of goods and services last year. The redeeming feature of the latest scary event was the exemption of essential services such as pharmaceuticals, polymers and fertilizers and the discovery of the indispensability of tech. These sectors attracted idle money and rekindled investor interest.

 

With the wisdom of how keeping the lending pipeline de-clogged aided recovery post the financial sector meltdown over a decade ago, central banks quickly loosened supply of no-cost money. Without any too-big-too-fail institutions to rescue to limit the contagion from infecting other healthy parts of the economy, governments resorted to direct cash transfer. In India, vulnerable sections, with the power of lifting other segments of the economy, were identified for support. Assured of a safety net, companies, on their part, cut costs and concentrated on keeping production running. The search for better returns during a period of negative interest rates had two consequences. Picks were not based on headline numbers. The scrutiny turned to niches and specialties. Makers of two-wheelers and farm equipment, insecticides, and health and hygiene products found fancy within their industry. The confidence to embark on the next risky bet, with the comfort of liquidity limiting the downside, resulted in a shift of attention from growth counters to value stocks, temporarily thrown out of gear. Renewal of buying in metals, infrastructure, capital goods and real estate coincided with the phase-wise lifting of lockdowns. If proof is required that the wheel has completed its rotation is crude more than doubling in 10 months to cross US$ 60 a barrel after hitting a bottom and estimates that central banks will likely tighten money flow as early as in H2 of 2021 instead of 2022. It had taken Federal Reserve seven years to lift interest rates from zero after September 2008.

 

-Mohan Sule

A toolkit for recovery

 

India’ graded and targeted fiscal and monetary support should be a template for future economic crises

 

Rarely does a budget pleases all stakeholders. Union Budget 2021 has achieved the impossible feat. The government is satisfied that its intention to gradually withdraw from running businesses, except in four strategic sectors, has been enthusiastically embraced by the market. The Nifty gained more than 11% over the next fortnight. Companies are cheering the 34% increase in capital expenditure. The massive allocation of Rs 5.54 lakh crore to create assets in the coming fiscal year and the allocation of Rs 1.97 lakh crore for productivity-linked incentive scheme covering 13 sectors over the next five years will trigger private investment, essential for growth to sustain. The proposed development financial institution is a break from the piecemeal approach to infrastructure. The targets to build roads, railways and metros will spur offtake of commodities, capital goods, transport, and power. The resultant generation of employment will see higher inflows into savings and investments, apart from discretionary and non-discretionary buying. The surging stocks captured the enthusiasm of investors, particularly after the resilience displayed by most companies in Q3 December 2020 despite the lingering challenges of supply and distribution.  The Nifty Bank index flirted with a new high, spurting more than 11% since the budget, on the prospect of public sector banks cleaning their balance sheets by disposing of toxic assets to a bad bank and getting Rs 20000-crore capital infusion to prepare for the anticipated increase in appetite for credit. The Nifty Realty index galloped 15% in 10 sessions since end January, reflecting the change in the outlook for developers due to the growth-oriented budget, low interest rates and profit booked from a resurgent stock market looking for diversification.

 

There is more on the plate for the cautious investors looking for alternatives to the volatile equities. With the next fiscal year’s borrowings pegged at Rs 12 lakh crore, there is urgency to attract investment to the debt market. Infrastructure debt funds can issue zero coupon bonds below face value to capture current yields. Real estate and investment trusts can get dividend income without TDS to turn them into hot destinations for FPIs. The most significant change is freeing government securities to all categories. The jump in individual clients of brokers even during the lockdown and simultaneous redemption of mutual fund units indicate retail investors are snatching back decision-making from fund managers. Small savings schemes will continue to be an important option for a resources-hungry government. Surprisingly, even the finnicky ratings agencies have been circumspect. Instead of scolding the government for allowing the fiscal deficit to spiral to 9.5% of the GDP this year and to 6.8% in the next, there have been murmurs of understanding. The expenditure splurge, with the potential to bolster inflationary pressure, has sought to be offset by divestment and strategic sale of PSUs and monetizing dedicated freight corridors, airports, and railway infrastructure.

In fact, the four Atmanirbhar Bharat packages have created a new template for pulling the economy back from the brink by marrying loose fiscal policies with calibrated monetary measures. The standard operating procedure of liquidity infusion, found so effective in the aftermath of the credit crunch of September 2008 and repeated during the current pandemic, has been enriched by step-by-step policy support. Instead of dispatching monthly cheques, India deposited cash into the Jan Dhan accounts of the poor. Besides the quarterly instalment in farmers’ accounts, free ration to the urban and rural poor ensured food security. Access to low-cost money was eased for the vulnerable sections. Collateral-free loans to the unorganized sector and partially guaranteed credit lines to NBFCs smoothened the flow of money in the desired direction. The targets were MSMEs for their ability to create jobs, home buyers to set in motion demand for housing-related inputs and farmers, whose disposable income is a magnet for consumption themes such as consumer durables and non-durables. In the process, India has created a toolkit to be mimicked to contain future economic crises. The most heartening outcome has been Prime Minister Narendra Modi’s assertion that damning the private sector is insulting the youth. After the 1991 dismantling of licence raj, which was a covert nod to entrepreneurship but celebrated as coexistence of a mixed economy, the statement in parliament is the most overt acknowledgement by any government of India of the contribution of promoter-owned businesses in the country’s development.

 

 -Mohan Sule

 

Atmanirbhar Bharat 4.0

 

Union Budget 2021 draws a roadmap for growth after previous stimulus packages brought the economy back from the brink

 

 If Budget 2021 evoked memories of Budget 1991, it was not without reason. Both the exercises were undertaken against the backdrop of a perilous situation. If socialist practices had drained India of forex reserves, a global pandemic had sapped resources due to supply disruptions. The economy had contracted in H1 of the fiscal year. Timidity was not an option. After dismantling the licence raj that had turned Corporate India into a cosy club of cronies, India had to wait for three decades for a decisive about-turn on pampered PSUs. Many were draining cash without contributing to growth. Several central enterprises including LIC have been lined up for divestment. Besides IDBI Bank, two more government-owned banks and one general insurance company are to be sold off, reaffirming the intention of maintaining minimum PSU presence in strategic sectors. Additional capital infusion of Rs 20000 crore and the setting up of a bad bank to park non-performing assets will prepare public sector banks to meet the demand for credit as the economy returns to normal due to the vaccination drive, for which Rs 35000 crore has been allotted. If the aim of the three Rs 27.1 lakh-crore, or 13% of the GDP, Atmanirbhar Bharat fiscal packages announced in March, May and November and a series of intervention by the Reserve Bank of India was to support the vulnerable sections through cash infusion and loosening the loan availability to farmers, urban poor, micro-and-small-and-medium enterprises, home buyers and realty developers, Budget 2021 took forward the process by focusing on infrastructure, well-being, and minimum government.

The highest-ever GST collections in December 2020 suggest that the de-railed economy is getting back on track and ready to enter the next cycle of development. The launch of Swatch Bharat 2.0 for waste disposal, after Swatch Bharat 1.0’s nationwide coverage, is illustrative of the Modi government’s ahead-of-the-curve thinking. The unexpected hike in FDI ceiling in the insurance sector from 49% equity to 74% implies the time for incremental measures is over. In addition to spending Rs 1.97 lakh crore over five years on the 13 sectors identified for production-linked incentive scheme, setting up seven textile parks over three years will boost Make in India and generation of employment. The agriculture credit target has been ramped up to Rs 16.5 lakh crore. The outlay on highways and railway infrastructure will be Rs 2.28 lakh crore next fiscal year. Over Rs 3.06 lakh crore has been earmarked for power distributors over five years to upgrade their systems. Allocation to rural infrastructure fund has been enhanced by Rs 10000 crore and micro irrigation funds corpus doubled. Support to MSMEs is up 100%. Capital expenditure will be around 34% more than in FY 2021. The fiscal deficit of 6.8% of the GDP in FY 2022 is to be met, not by higher taxes, but through Rs 12-lakh-crore market borrowings, Rs 1.75-lakh-crore share-sale, monetising non-core assets, and handing over the running of freight corridors, sea- and airports, power transmission assets, oil and gas pipelines, railway infrastructure and sports stadia to private players.

The ease-of-living thrust comprises the Rs 5-lakh-crore AtmaNirbhar Swasth Bharat Yogna to strengthen the healthcare system and the urban water supply and waste disposal missions over five to six years. The gas distribution network is to be expanded to 100 more districts. Various legislations governing securities transaction will be clubbed into a single code. Investors will have a charter of rights. Continuing the targeted strategy implemented in the previous doses to help sectors that have a multiplier impact, the excise duty on petrol and diesel, whose end utilisation might get diffused and dispersed, has been substituted with cess to funnel resources into agriculture infrastructure. Loans to Food Corporation of India will be through the budget mechanism to bring transparency. A timeline for closure of sick PSUs will unblock assets. The tinkering with customs duties was restricted to a few items to promote local manufacturing and cool inflation and not to replenish the treasury. Concerns of rising bond yields due to government crowding out private borrowers are expected to be offset by higher investments by FPIS in infrastructure through development financial institution, zero-coupon infrastructure bonds and debt of infrastructure and real estate investment trusts. The key to success of these measures is the rollout of the reforms. The finance minister and her team deserve applause for attempting to restrict the government’s role to the social sectors.

 -Mohan Sule

 

 

Divide to grow

 

 Instead of one-size-fits-all approach, Union Budget 2021 should mimic the targeted pandemic fiscal and monetary packages

 The market’s reaction to the Union budget can range from temporary exuberance, despondence, or indifference. The exercise always has elements of shock and awe. The comeback of the long-term capital gains tax on equities in the 2018 Budget was expected. There was debate happening about how India was turning into a tax haven. Scrapping of the dividend distribution tax and shifting the burden to the recipients in the 2020 Budget came out of the blue. The old regime had grown comfortably familiar to induce complacency. The introduction of retrospective taxation in the 2012 Budget was disturbing but inevitable. If not, Rs 2500-crore capital gains due from the sale of an Indian telecom asset by the foreign owner to Vodafone would have to be let go after the adverse Supreme Court ruling a couple of months earlier. Some insertions are so innocuous that they sink in only after a scrutiny of the fine print. The backlash against increase in surcharge to 25% from 15% for non-corporates, with taxable incomes between Rs 2 crore and Rs 5 crore, and to 37%, for those earning Rs 5 crore and more, taking the effective tax rate on them to 39% and 42.74%, in the 2019 Budget was brutal. FPIs pulled out almost US$150 billion in the subsequent three weeks. Nearly 40% of them were structured as trusts or associations of persons. The Nifty wiped out all the gains made in the year in the month since the presentation of the budget on 5 July. The misadventure was scotched end August. Each budget, therefore, is unique. It cries of desperation, confidence, or prudence, hinging on the spending record of the government. A dispensation focused on its vote bank will rarely bother about income-expenditure mismatch as when the 2008 Budget granted Rs60000-crore loan waiver to farmers. 

 

The possibility of the 2021 Budget turning out to be a routine ritual is stronger than throwing sucker punches. The checklist of what remains to be done is getting shorter. Standalone peak corporate impost is now a competitive 22%, without exemptions. The September 2019 announcement was two months after the annual event. 2020 Budget revised personal income tax, exempting earnings up to Rs 5 lakh. The rate up to the Rs 15 lakh slab has been slashed 10-15%. The scope for tinkering with the goods and services tax is outside the scope of the budget.  State finance ministers meet periodically to review the levy. Only 19% items have a 28% burden, with 60% in the 12-18% range. Bringing fuels in the uniform indirect tax regime is overdue but unlikely as it will plug a lucrative loophole to boost revenues. The fiscal deficit has already crossed the estimate of 3% and might spiral beyond 5% by the end of FY 2021. The temptation to tinker with surcharge and cess on corporate and personal tax rates will be strong. Going by the Securities and Exchange Board of India’s directive of collecting margins on each intra-day trade, instead of at the end of the day, points to a hike in the 15% short-term capital gains tax. Such a move will blunt criticism that the 500-basis-point difference with the long-term capital gains tax punishes serious investors.

Tempering the excitement of a buoyant capital market presenting plenty of opportunities to squeeze out juice will be the sombre reality of contraction of the economy in H1 of the current fiscal year, and a fragile recovery since then, resulting from the lockdowns to contain the outbreak of covid-19. Any misstep will be a setback to the Make-in-India campaign. At the same time, the circumspection might not last till next February. Turning hawkish will pivot on how fast the economy rebounds. Most multilateral and domestic institutions are forecasting double-digit, and the highest compared with other countries, economic expansion for India next fiscal year. Another important reason why the leadership might not want to spook the stock markets with short-sighted measures to cap borrowing is the elephant in the room: PSUs. The pandemic de-railed the divestment timetable of Air India and BPCL. Successful stake-sale of the long line-up in the space will achieve two objectives: keeping interest rates low and getting funds for social schemes, whose penetration is crucial to win states going for elections this year. Saddled with a huge vaccine bill, the finance minister can take a leaf from the three Atmanirhbar Bharat packages and the central bank’s two major fiscal initiatives during the peak of the pandemic: targeted support. Differentiated import duties based on the country of origin is a potent weapon. The proceeds can be used to enlarge the production-linked incentive scheme and offer subsidies to encourage local manufacturing.

-Mohan Sule