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