Author name: Abhinit Kulkarni

India’s manufacturing sector has been contributing between 15% and 19% of GDP over the last decade. Transforming India into a global manufacturing hub would require a massive collective effort from both government and industry. The Make in India (MII) initiative was launched in 2014 to make this transition with the objectives of: increase manufacturing share to 25% of GDP, create 100 million new jobs, skilling of rural migrants and urban poor, improve domestic value addition in technology and manufacturing and thereby enhance India’s global manufacturing. India has a fragmented manufacturing eco system in some sectors, whereas a mature system in some others. To become a globally competitive, there is a need to translate from labour intensive low margin products to technology and skill intensive value added production. Despite the promising campaigns of 2014 and the subsequent years, private investment failed to significantly pick up. Along came a sudden demonetization which temporarily paralysed the economy. Note bandhi was followed by a patchy transition into a GST tax regime which aimed to organise India’s businesses and make taxation effective across the industry. The IL&FS crisis further discouraged capex addition by industry. Access to capital started to dry up as lending institutions became extremely risk averse. Finally, the coronavirus pandemic put a complete handbrake to all economic activity. Governments across the world had to loosen their purse strings to re-start the extremely scared economy. There seems to be finally light at the end of the metaphorical tunnel. In May 2020, the Indian government launched the “Atmanirbhar Bharat Abhiyan” with an economic package of Rs. 20 trillion (20 lakh crore). The goal was to make India self-reliant, and one of the aspects of this ambitious project was the Production Linked Incentive (PLI) scheme. While it is no secret that India usually runs a trade deficit (imports are greater than exports), it is widely believed that this is largely due to oil imports. The fact is that India runs a trade deficit even when only merchandise is considered. The table below depicts India’s monthly balance of trade in million USD. A higher negative trade deficit negatively impacts the GDP. Every nation ideally prefers a trade neutral or trade surplus position. For India, this means increasing exports and decreasing imports at the same time. Take a look at India’s import to GDP ratio among emerging economies. Source: Goldman Sachs Report From the above chart, it is evident that there is a pressing need to reduce relative dependence on imports. Increasing domestic manufacturing will decrease imports and increase exports at the same time. A lower trade deficit or a trade surplus has a direct impact on GDP growth. Easy Peasy? Actually not so simple.. A manufacturing boom is only possible through systematic improvement in manufacturing infrastructure, R&D, highly skilled technical workforce, and most importantly an economic environment which allows for globally cost competitive production. Think better logistics, availability of good quality power and water and predictable taxation environment. Countries like China and South Korea have become prosperous, just because such focussed efforts were taken about 3 decades back by their governments. In the past, our governments have tried various ways to trigger manufacturing surges by providing indirect support. Some of the examples of such incentives are: tax holidays (SEZs), import tariffs to protect uncompetitive domestic manufacturers, export incentives, social subsidies and the like. As economic and policy efforts go, all the above initiatives contribute in varying degrees to enhance the manufacturing sector. But none of them significantly bolsters it for a long duration. What has been missing is policy that is highly targeted and at the same time executable. Most recently, the government launched the Performance Linked Incentive (PLI) scheme to try and achieve just that. What is the PLI scheme? How does the PLI scheme work? The government in consultation with industry has identified 13 sectors where imports are significant, and where a boost in manufacturing could have a significant value. They have identified product categories within these sectors which are strategically important. Companies that manufacture these products within India will be eligible for taking benefit of the PLI scheme. Simply put, government will give companies cashbacks on achieving certain production targets in manufacturing of select pre-defined goods. Whether a company will be eligible for this PLI will be disclosed at the start so that there is complete focus on achieving the targets. The average cashback across sectors is 4-6% on incremental sales over base year of 2019-20 for a period of 5 years. To qualify: – The company has to commit a certain amount of production each year – The company has to commit a certain amount of investment in infrastructure/plant and machinery *The clauses vary across product categories as well as are different for domestic and international manufacturers. The main message here is as follows. Attain large production targets in products of strategic importance and the government will give you incentive on sales. Payment upon performance. There are only few companies that will get the nod to receive PLI incentives and hence the competition will be high. The maximum incentive is clearly defined for each product category so the qualifying company can plan accordingly. One can say that PLI incentives are so designed to only encourage large corporations to apply for the scheme. Why is PLI scheme required? Mature manufacturing companies need a nudge to make large investments in capacity addition. Foreign companies need confidence that there is governmental support, access of quality workforce and low costs which can make India a good destination to set shop. In case of domestic companies, the confidence needed is more on the know-how and R&D front, and the capital financing flexibility offered. The PLI scheme could provide this very nudge to large industry houses to commit to production targets in return for incentives on sales. In case of foreign companies, they can become cost competitive by making in India. In case of domestic companies, they can risk investing more in R&D and modern technology to achieve

Introduction How are the thousands of individual parts that make up a car made? What about the intricate mechanisms inside a watch? Is a child’s toy a child’s play from a manufacturing perspective? We have domesticated our surroundings to such an extent that today technology is ubiquitous. But in the background are scientists, inventors, designers, operators and CEO’s that make this almost invisible technology possible. At the core of it all are machines tools. These machines can: make the same identical part over and over again at extreme speeds; they can make complex parts as small as human hair to as large as a rocket shell; they can assemble these parts to make mechanisms, and package these mechanisms into machines that we call a mobile phone or a ceiling fan. These are the machine tools of the industrial age. Industry 4.0 is here and these machines are getting smarter, faster and more precise. Advanced machine tools, are able to course correct and warn and communicate with other machines within their eco-system. The result is a dramatic reduction in human intervention. Whenever a company is investing in CAPEX, it is likely that the equipment or the machinery it is investing in is a machine tool or a closely allied technology. A vibrant machine tools sector is indicative of the manufacturing gusto of an economy. Processes used to manufacture things There are various ways that a part can be made out of the raw material. Let’s look at a brief summary of various processes possible: Casting: Melting the raw material (RM) and making it flow into a mould: This is the most ancient way of working materials into desired shapes. In case of metals, this process is broadly called casting. Liquid material fills the mould and is allowed to solidify. The solid (end part) takes the shape of the mould cavity. Forming: Deforming the RM into a new shape. Deformation is done via controlled applications of force and temperature to the workpiece. Common forming processes include rolling, forging, extrusion, drawing and sheet metal working. Metal cutting/removal: Removing material using tools or other media to achieve desired dimensions. Typically involves relative motion of a sharp hard tool and softer workpiece, such that material is gradually removed from the workpiece. Common Conventional tool based processes are lathing, milling, drilling, sawing, grinding and gear cutting. Unconventional processes use other than mechanical forces to remove material. Examples are: electric spark machining (EDM), elecro chemical machining (ECM), LASER machining, ultrasonic machining, etc. Joining Processes: Used to join 2 or more components to create a single part. Common processes include welding, brazing, soldering, adhesive bonding and mechanical fastening. Additive Manufacturing: Uses raw material powders or wires which are melted, and subsequently solidified in layers to achieve final part. Common processes include Direct Metal Laser Sintering, stereo lithography, Direct energy deposition and fused deposition modelling process. Clearly there are many ways to achieve a desired part. Typically more than 1 process is employed to achieve the end product. What processes to apply depends on the material, quality, cost, time and creativity conditions. Gillette razors are the best in the world because they have engineered the perfect conditions and processes. Same with the Bosch fuel injector and same with the TTK Prestige pressure cooker. Before understanding the machine tool business, it’s important to take a look at India’s manufacturing sector. The Manufacturing Industry Machine tools are a subset of the manufacturing sector which in turn is a subset of the Industry sector. From fiscal year 2006 to fiscal year 2012, India’s manufacturing-sector GDP grew by an average of 9.5 percent per year. Then, over the next six years, growth declined to 7.4 percent. In fiscal year 2020, manufacturing generated 17.4 percent of India’s GDP, little more than the 15.3 percent it had contributed in 2000. Covid 19 pandemic has not helped the cause. However, it has put a spotlight on the importance of manufacturing in driving the country’s growth and employment. The sector is reviving rapidly post Covid as is evident by the Index of Industrial Production (see image IIP growth rate). The ‘Make in India’ project envisages manufacturing to contribute 25% to India’s GDP over the next 5 years and become a $1 trillion industry. But will the government efforts be enough to bring back private industry confidence to invest in the necessary CAPEX to drive growth? Private investment is the key to drive manufacturing growth in India. Below is an infographic which breaks down sector wise competitiveness of the Indian manufacturing value chain published by McKinsey & Company. We can break down these sectors as mature, intermediate and emerging. Machine tools are input CAPEX for each of the below sectors in varying proportions. The 2 images below show trend of India’s key manufacturing sectors investing in capital infrastructure. It also approximates the share of machine tool sector investment by those sectors in the same period. Data is gathered from Indian Machine Tool Manufacturer’s Association (IMTMA) The investment data is available only till 2018 as the Annual Survey of Industries publishes with a 2 year lag. It can be seen that there was a spike in investment activity by industry in FY2015. It had since tapered off indicating 3 things: First, a simple majority government in 2014 with a promise to progress did get India’s private industry’s vote of confidence in the form of huge capacity investments. Second, this confidence has since tapered and the sentiment around this is much to do with lack of consistency in reform and sudden measures by the government. Third and most importantly, capacity addition is a cyclical phenomenon. Years 2010 and 2011 saw a super CAPEX cycle in India the likes of which hasn’t been seen since. Industries add new capacities when they forecast high demand, witness consistent revenue growth and forecast their sales demand to soon outpace their existing production capacities. On a sectoral level, some companies will do better and some worse off. A rule of thumb is that if

We will focus on the following things in this post: the previous month in equities, the Q2 GDP results summary and an overall outlook on the markets. Indian Equity Markets: Indian equity markets performed robustly from May 2021 to Oct 2021 with the Nifty growing 27% to top off at 18604. The markets in the short term were overheated and a cool off was highly anticipated. A combination of the US FED taper announcements, inflation woes and the Omicron variant of the Covid-19 virus was the reason the market attributed to the fall in November 2021. The markets corrected almost 10% from their October all time highs. While we remain cautious to developments, this is not yet a bear market. The weekly and monthly charts of the NSE benchmark index still look strong. It is not uncommon for markets to correct in this magnitude especially after such a hot bull run. This could be a time to start accumulating some fundamentally strong stocks where valuations have eased. On technical fronts, there could be further short term pain if weak global cues persist and 16100 Nifty could be an important support level. On the upside, we see 17900 as resistance levels. We remain cautiously optimistic. However, there is no doubting uncertainty in the markets especially with respect to fundamental shifts caused by inflation and tightening of monetary policy, not to mention the new coronavirus variant. How individual sectoral indices performed: The table above gives a good representation of how the markets respond to such events. The sell-off is not sector agnostic, and it is typical for Pharma, IT and FMCG stocks to be safer short term investments during these type of markets. What we understand from the Q2 GDP numbers GDP grew by 8.4% surpassing most estimates, and closed above the pre pandemic levels in 2019-20. The Indian economy has staged a robust recovery, although it is not broad based. Some key points: For more on this, do watch this video: State Of The Economy With HSBC’s Pranjul Bhandari – YouTube The GDP news is as usual a mixed bag. But the bottom-line is that corporates are better off, MSME’s are worse off and the bottom of the pyramid economy struggling quite a lot. While this is good news for the stock markets, the long term impacts of this trend for India overall can be worrying. The only way out is government reform. The government on its part has taken reformative action, most notable of which is their asset monetisation scheme, PLI scheme and the IBC and bad bank reforms. No, we are by no means macro economy experts, and don’t claim to be able to recommend solutions or forecast outcomes. But we know this. For the Indian growth story to play out long term, wealth has to trickle down to the bottom of the pyramid, and we need to have a burgeoning healthy MSME sector that supports the large corporates and keep the markets competitive. We believe strongly in the India growth story overall, and are on the constant lookout for the best opportunities to invest in. We firmly believe that Indian equities as an asset class are a solid investment, if you know where to invest. Thank you for reading…

Garware hitech films is a leader in the manufacturing of polyester films. These films find their application mainly in sun-control films. The sun control films are used primarily in automobiles and architectural segment. The company has also started manufacturing paint protection films. These are used to coat the exterior of cars to avoid any damage to the car paint. As per reviews from teambhp, the company seems to have hit the right spot. This market for paint protection films has been dominated by the likes of international brands like 3M. The prices of these international brands have been exorbitant and Garware is offering equally good products for a considerably lower price. As per some reviews, the delta between the prices of multinational giants and Garware is as high as 50%! Such a high price differential is enough reason for consumers to switch loyalty from the multinationals to Garware. Essentially, grabbing more market share in the paint protection business shouldn’t be very difficult for the company. The quality of products offered by Garware is at par with the quality offered by giants (might be a debatable point, basis your experience. Would like to hear in comments). The company had made a conscious attempt to move from commodity products like plain polyester films into value added specialty films. In 2017, the contribution from commodity products was 52%, whereas in FY23, this contribution has fallen significantly to 20%. Owing to the change in product mix, EBITDA margins have improved from ~9% to ~18%. This improvement is significant considering the fact that commodity markets have been turbulent between 2020 and 2023. The company is backward integrated and manufactures it own raw material for making the films. The process for manufacturing films is as follows: crude oil –> basic petrochemicals –> raw material –> chips/ resins –> films. Rising temperatures globally is a blessing in disguise for the solar control films business. Protection from UV ways is taken seriously by the public at large. The management on one of its analysts call indicated that rising temperatures and wrath of Sun has a positive correlation with their solar control films business. The company’s PPF plant is not fully backward integrated at the moment. However, they expect the plant to be integrated soon. This integration is likely to further improve the margin profile. So how difficult will it be for competitors to achieve backward integration? Well, this is a capital intensive business with asset turnover ratio only around 0.95. By the time competitors reach the stage of backward integration, Garware might have penetrated the market and thereby created a name for itself in the paint protection segment. The company has already started Garware Application Studios (G.A.S as called by the company) at various locations in India. These studios help consumers in having a look and feel of the products. Being a dominant player in the sun protection films business gives them an early mover advantage in the paint protection films business. How do the business prospects look like? As per industry data, number of luxury cars sold in FY2023 was 36,508. In the first half of calendar year 2023, around 21000 luxury cars were sold. The growth has been high in luxury products, not just cars, but many luxury products are selling record volumes in India despite the mixed economic data. Needless to mention the long queues outside Apple showrooms for buying every new iPhone! Cutting the long story short, luxury product sales is surely a long term trend in India. Source of above image: Statista Talking about the risks, fluctuating crude oil & its derivatives price is a big risk for every business that uses downstream products. In the case of Garware, this risk is partially mitigated because of the backward integration, however they are not completely insulated from the risk, because they have to procure the basic petrochemicals at market prices. Corporate governance issues of the past: Garware Hitech is a family business of Mr. Shashikant Garware. His three daughters namely Monika, Sarita and Sonia are actively involved in the business in the executive capacity. Having such a diverse representation within the family is not very comforting to minority shareholders. In the year 2017-18, a few minority shareholders had filed a petition in NCLT Mumbai bench opposing the remuneration paid to the management. In that year, the Garware family paid itself close to Rs. 9 crores compensation. Back then, the net profit was Rs. 33 crores. Essentially, the family managed to withdraw a remuneration that is almost 27% of the total profits that year. To be noted here that as per Companies’ act 2013, the maximum compensation that can be paid to the directors of a public company cannot exceed 11% of the net profits of the company. In the year 2023, the remuneration of promoter directors stood at 18.78 crores (on a base of Rs. 166 crores net profit). The percentage comes to 11.33%. Although they have brought down the compensation within acceptable limits, the market perhaps doesn’t yet trust the company completely. And this is reflected in the valuation of the company (price to earnings ratio around 20 and price to book value ratio around 1.6). Let’s get to this part a little later. Over and above the remuneration, the company has paid Rs. 1.86 crores as rent to the Monika, Sarita and Sonia Garware during the year 2023. Also, Rs. 43.61 crores has been paid to Garware Industries Pvt Ltd. as processing fees. To be noted here that Garware Industries Pvt. Ltd is the 100% closely held entity by Garware family members. In the recent analyst call, a question was asked to the management about the processing charges. The management gave a brief answer stating that Garware Industries owns a technology for deep-dying, which is not present anywhere else in India. This technology differentiates the product quality of sun control films from those of the competitors. While this may be true, it remains unclear why is Garware Hitech not merging the

Equity investing is tricky, for multiple reasons. A lesser discussed aspect is : Who is your counterparty in a transaction? When you buy a house, you know the seller. When you buy gold, you know the seller: the jeweller! When you buy stocks, do you know who is the seller? It is impossible to know who the specific person (counterparty) is. It is not needed to know the specific person. Knowing the category of the counterparty can help you make better decisions. The various stakeholders in equity markets are: promoters, domestic institutional investors, foreign institutional investors, and retail investors. As a retail investor, here are the following possible outcomes of trading with the above mentioned counterparties: Analysing the shareholding pattern of a company may be helpful in providing insights on who the counterparty could be. Let me give some examples. Domestic institutional investors usually like companies that generate positive cashflows and deliver high return on capital. If you find such a company, please take a look at how much percentage of the company is owned by DIIs. If you observe that DIIs presently do not own any stake in the company yet, ask yourself the reason why DIIs are not yet invested in that company. Many times, the promoters of smaller companies are not accessible to investors. They choose not to conduct regular earnings conference calls, or their annual reports are not detailed. In such cases, DIIs find it difficult to understand the company in detail. It makes sense for them to skip such companies. Another instance why DIIs might skip a company is ‘low free float’. When DIIs want to invest in a company, they often want to have a significant stake. In the case of low free float, DIIs may choose to skip that company because it often does not make sense for them to track a company, in which they cannot invest a decent chunk of their money. If you can find such smaller companies which DIIs are not able to invest for the reasons mentioned above, there are high chances of striking gold in such investment opportunities! As the business grows, many times the smaller companies start getting more accessible to institutional investors. If you can invest in such companies before they catch an institutional investor’s eye, you stand a good chance of selling your stocks for a handsome profit (to an institutional investor who is likely to hop on at a much later stage). Just like DIIs love stability in a business, FIIs love growth. The risk appetite of FIIs is usually higher than DIIs. India is a growth market and an FII that sets shop in the country wants to make the most of the growth aspect. Developed economies grow at a lower rate than emerging markets. This makes FIIs chase growth in emerging markets. If you come across a high growth company in which FIIs have started building stake, it makes sense to ask yourself a question. How likely is it that the FII would invest more in this company? If the answer is yes, you have perhaps found a good opportunity and it makes sense to get into the details. FIIs also love private placements. They usually look for companies that may be in need of fresh capital and may consider raising funds through a qualified institutional placement or a rights issue. Summing up: Thanks for reading. Hope this short article makes you think about who your counteryparty might be! P.S.: These are high probable outcomes. Nothing is certain, especially in equity markets!

The million dollar question on the minds of young Indians is ‘buy a house or prefer a rented house’?. The answer from a financial angle is pretty straight forward. It DOES NOT make sense to buy a property considering the historical growth rates in real estate. Rental yields are in the range of about 3-4% in most Indian cities. Staying in rented house and investing the incremental savings (EMI-rent) in financial assets would surely give better results than buying a house. There are ample calculators online to help you visualise how the numbers look like in the case of buying a house vis-a-vis staying in a rented house. In this post, I will try to cover the non-financial aspects of whether one should buy a house or simply choose to stay on rent. Thanks for making it to the end. That’s it I have for now. Summing up, if you love financial independence, do not buy a house. If you love convenience, you may consider buying a house! P.S. Commercial real estate investments have a higher rental yield between 8-10%. A new way of investing in commercial real estate is getting popular (called fractional investing). It’s a simple concept. In fractional investing, a group of investors comes together and pools in the money for buying a commercial real estate like office or shop or a warehouse. The incoming rent is divided by the investors among themselves in the ratio of their investments. Many of the problems of residential real estate are avoided in fractional investing. Get in touch with us here, to know more

Kitchen Sinking- The term was first used by the business media in the context of financial results announced by a British retail chain- Tesco. In the month of April 2015, Tesco announced its biggest ever pre-tax loss of GBP 6.4 bn. That’s a staggering number, especially for an established business that has been into operations for more than 100 years (founded in 1919). Just the year before, Tesco had reported a pre-tax profit of GBP 2.26 bn. Why would Tesco do something like this in one go? It is pretty obvious that the loss would have accumulated over a period of many years. What was the need to declare such a massive piece of bad news in one-go! Didn’t they think about the shareholders and the trauma that the share price would undergo? General elections were planned in the United Kingdom during the month of May 2015. Election campaigning was going on in full force during April. Media houses were busy with publishing the political chatter that people like to read and discuss- political agendas. Amidst all this, the management at Tesco decided to give the shocking news of its biggest loss ever. Their thought process was clear. People would talk about Tesco for a day or two, and then later the media attention would again go back towards the election. No company would like negative news to be floating around for a very long time. The easiest way to do it is what Tesco did- kitchen sinking. Give all the bad news in one-go instead of a piece-meal approach. The crucial part here is timing the bad news. Do not give the media enough time to talk negatively about you! This is exactly what Tesco wanted! Coming to this in the Indian context. How common or uncommon is kitchen sinking? Let me start by giving one of the recent examples. Kitchen sinking is not done by just businesses, but also by governments. Indian stock markets rallied significantly during the year 2017. January 2018 was a month of complete euphoria and optimism about the economy and the markets. Then came the budget day i.e. 1st February 2018. It was evident enough that stock markets are due for correction. During the budget speech for that year, the finance minister announced the introduction of long term capital gains tax at the rate of 10%. This was the first time in the history of Indian markets that LTCG would be applicable for equities. This news of LTCG created a complete havoc in the markets and markets started correcting immediately on the next day of the budget speech. Media houses were prompt in ascribing cause (LTCG introduction) to the effect (stock market correction). It is not difficult to note that the ‘cause and effect’ relationship here is not as clear as it may seem. Let’s come ahead a bit i.e. 5th February 2018. On this day, the country received the news of India’s biggest wilful default made till date. It was Nirav Modi and his uncle Mehul Choksi. The amount of fraud that initially came out was Rs. 11000 crores. Stock markets had just begun to digest the news of LTCG introduction, and this news of Modi and Choksi defrauding Punjab National Bank was broken. Media was again prompt in ascribing cause to the effect! Let’s understand the chronology again. What the government did with the introduction of LTCG received a lot of media backlash. In that sense, it was not kitchen sinking; rather we can call it being opportunistic. The timing for the announcement of fraud by PNB was well planned. There was already enough panic among market participants regarding LTCG introduction and FII outflow. The news from PNB just added on to the pool of bad news. This brings us to the question: why do businesses/ governments resort to such tactics? Well, the answer is simple. These tactics are used only to keep one’s head above the water. The loss of PNB had ballooned to an extent where kitchen sinking was the only alternative. Instead of announcing multiple small frauds, the management (maybe the government) took a call of giving out all the bad news at once. They were quick in utilising the hue and cry in the media about LTCG introduction as a ‘scapegoat’. The month of February must certainly have been one of the best months for newspapers. The common investor was baffled enough by the volatility and newsflow. It was not easy to overcome the fear back then! The announcement of such drastic bad-news-bombs is not good for the markets. It creates volatility to an extent where average traders are likely to lose their pants. However, it is the nature of financial markets. Panic and crash come rapidly. Optimism and rallies take longer. It can be easily said that such activities of kitchen sinking are here to stay with us till such time that financial markets exist. What are the opportunities in all this? Well, volatility is perceived as risk in the modern portfolio theory. However, for someone who has been in the markets for a while, would agree that financial markets and volatility are first cousins. Treating volatility as risk is okay for traders, but for someone with a more stable and long term view, volatility is your biggest friend. Let me talk sectorally now. The Indian economy is blessed to have a multitude of sectors to propel its growth. There is no big dependency on any one sector. Many of India’s smaller neighbours like Srilanka and Nepal are extensively dependent on tourism for their survival. Even in India’s case, this was once true. However, it is an immense pleasure for me to write here that this land of snake charmers is now known for its various industries. IT and pharmaceuticals have been the country’s pride in the last 20-30 years. This story of a new sector emerging in the market is an ongoing process. Now is the time for new age IT technology companies to spread

You’ll often hear an advice from many elderly people around you asking you to keep away from the markets. Either those folks never invested in the markets, and hence want you to maintain the legacy, or they have severely burnt their hands in the markets. I bet, if you are an active trader/ investor, you dislike all the elderly people asking you to stay away from the markets! In this article we will try to analyse the reason why most market participants eventually lose faith in the markets and swear to keep away forever. Most people are unable to visualize how competitive stock markets are. Everyone feels stocks markets are very easy. One of the reasons for this illusion is that we do not see our opponents in stock markets. Well, your opponents are also sitting at their computers, on a cozy chair, in a comfortable room. This comfort makes us forget that there are opponents in every battle. Such comfortable arrangement makes it impossible for anyone to believe the disliked elderly seniors asking us to stay away from markets. Making money in the stock markets requires an ‘edge’. There are various types of it as we discuss below: Let us now see why it is difficult to master an edge in stocks markets: Having discussed the various types of edge and the corresponding difficulties in mastering them, I might sound like one of the disliked elders around you asking you to keep away from markets forever. But no, there is one more edge which is often overlooked. Let’s talk about it right below. Many of us come to the markets with the right attitude of being patient long term investors. What really goes wrong is we keep patience with the wrong companies. When we see no movement in the holdings, most of us have the tendency of saying ‘quits’! “Investing is like watching grass grow” – Paul Samuelson Buying the right companies and staying patient with them requires common sense and the right attitude to hold your companies for a reasonable period of time. The definition for ‘reasonable’ is subjective and varies from an investor to another. In my experience, the length of the business cycle is a reasonable period. The length of business cycle has been shrinking over the past couple of decades. What was once 10-12 years, is now down to 3-4 years. If you have the capital and the attitude to hold the right companies for multiple business cycles, you are an exceptionally lucky person. Wealth creation is certain in this case. What makes patience an unspoken aspect is again a simple reason. It is extremely boring to just sit. Everybody in their youth likes ‘action’. When somebody asks you to ‘buy right and sit tight’, the back of your mind reminds you of the boring disliked elders who asked you to stay away from the markets! This brings us to the conclusion. If you want to stay in the markets for a long time and make decent money for you and your family, there is no option but to master an ‘edge’. If you believe that neither of the bullet points is possible for you to do, the best option for you is buying good companies and staying invested for a ‘reasonable’ period of time. Thank you for making it to the end. Happy investing!

Investing in infrastructure companies is often tempting. The reason? Because many of the infrastructure companies are always available at attractive valuations. The reason for such lucrative valuation is again simple- investors have burnt their hands in infra companies and now swear to stay away forever. In the Indian context, infrastructure companies have been wealth destroyers. It is not uncommon to hear investors swearing not to ever again invest in the infrastructure sector! However, the current. government’s focus on developing world class infrastructure is again bringing back attention to this sector. In this article, we try to understand one critical aspect of infrastructure projects, that Is often difficult to figure out. Infrastructure is surely a sector that has the potential to generate wealth in a developing economy. In this article, we will understand why infra is a classic cyclical sector and why it is important to get the time of your entry right in infra companies. EPC stands for engineering, procurement and construction. In simple language, we can de-jargonize this and call them as infrastructure companies. There are various models in which infra companies operate, we will not delve deeper into each specific model. Rather, we’ll touch upon a relatively more important aspect called – ‘Percentage completion method’. Let me give an example. Let us say National Highways Authority of India (NHAI) has awarded a project to an infra company to construct 100 km patch of a highway at a cost of Rs. 1000 crores. That works out to Rs. 10 crores per km. Assume this contract was given in 2021 and expected to complete by 2023. Assume that to construct this piece of road, the infra company has to spend Rs. 800 crores. That simply means the company makes Rs. 200 crores profit on a top-line of 1000 crores. That’s a 20% profit margin for the company. Please refer to the table given below. You might stop reading the article after looking at the numbers. However, just please carry on. It is not difficult to understand. Let me explain these numbers in a simple manner. Columns A,B,C,D are from the perspective of the infra company. Columns E,F,G,H are from the perspective of NHAI. Column I is from the perspective of investors. In columns A-D, we are trying to calculate how much cost the company has incurred in each quarter. It is quite natural that the company incurs its costs based on how much it has spent by way of buying raw material, paying wages, managing liasoning expense etc. Very often, companies tend to overshoot the projected expenditure. This is exactly what we are saying in columns A-D. Toward the end, you’ll realise that the company ends up spending 25% more than the projected expenditure. This means the gross margin has turned negative for the company over the lifecycle of the project. Coming to columns E,F,G,H. It is time to ask yourself a question- How will the NHAI do its accounting? Will they do it on the basis of how much cost the company incurs? The answer is No! The NHAI is not bothered about how much money the company ends up spending. They simply want to see the output. Hence, they do their accounting on the basis of percentage of work actually completed. In our case, the work completion unit is KMs of road constructed. If the company constructs 10 KMs of road during a quarter, the client considers that the company has delivered 10% work during the quarter (Remember, that the total length of road to be constructed is 100 KMs) Referring to column I, let’s understand what’s happening. Since the company is incurring costs earlier than recognising revenues, there are few quarters in which the company is reporting loss. If you add all the values of column I, you will see that the company has made neither profit nor loss. It is important to realise that despite not losing any money during the project, the profitability (gross margin) for the company has been extremely volatile! How does this affect the performance of the company’s stock price? Firstly, the company was expected to make Rs. 200 crores over a period of 2 years. At the end of 2 years, the company makes no profit or no loss. While the company has not lost money on the project, it did appear over the lifecycle of the project that the company is losing money on the project. This is visible from the values of column I, when there were phases in which the company reported a loss. During such phases of loss, it is difficult for the investors to visualize how would such a project pan out for the company. Secondly, there are multiple projects that a company undertakes simultaneously. The complexity of multiple such projects is not easy to decode. Is there a way to find out the true state of profitability of an infrastructure company? There is a way that can give some hint about what’s going on behind the scenes. When the company is invoicing the client, they are doing it as per their estimates of work completed. These estimates are based on how much cost is incurred by the company. However, as we have seen in the table above, the client has their own way of judging percentage work completion. This difference leads to something called as ‘unbilled revenue’. Let’s say the company accounts for Rs. 10 crores of revenues in a particular quarter. However, NHAI allows the company to invoice only Rs. 8 crores of revenues. This is how the accounting entry looks like: As can be seen from the above table, there is a new account called ‘unbilled revenues’ that got created. Checking the balance on this account in a timely manner is likely to give some hint on how much trouble the company has ahead of them. Investors also can question the management on movements in the unbilled revenues account. The question that now arises is ‘Can the company avoid putting entry into

Dear Reader, May you find the strength to recover from all sorts of losses faced by you during the pandemic and come out stronger than ever before. Welcome to the Tequity Investing Newsletter. This is a medium via which we will share our thoughts, important news and some cool statistics on the markets on a weekly or bi-weekly basis. We hope this adds value to you. 🙏 Let’s begin! Have a look a the NIFTY 50 chart Technical View: The last time NIFTY 50 touched the 50 day moving average was on July 27th 2021(NIFTY: 15700). The bull run that began in early October peaked on the 19th with NIFTY making ATH of 18604. Since then the index has fallen 5.5% in a matter of 10 days to end the October month at a modest 0.8% in the green. On the 19th of October, few would have predicted that we would see the index touching its 50dma within the next 2 weeks, but just that has happened. The weekly and monthly charts remain bullish, while the daily charts are showing weakness. 17600⏬ and 17950⏫ are the key support and resistance levels to look out for. Fundamental View: Q2 FY22 results have in general come in robust with manufacturing, power, banking and automotive sectors showing a strong recovery. Even the laggard tourism and realty sectors are recovering. In their management commentaries, many companies warned about rising input costs, which could put pressure to margins and the demand outlook. Commodities, led by crude, are also seeing high inflation, as prices have soared. The reasons for these have been a mixture of things which include: developed nations central banks monetary easing flooding the markets with liquidity, supply-demand shocks due to the pandemic and geo political pressures especially from China which is strictly regulating its internal industry and trade policy. The NIFTY is trading at PE levels of about 26 which is a comfortable ratio given its historical context. With a robust Q2 and central banks showing no signs of tapering, the recent dip could be reasoned as an opportunity to buy the dip Sectoral View Barring PSU Banks, all indices fared poorly with some correcting as much as 7%. Tequity Smallcase Performance and Rebalances The momentum bull smallcase is for short and medium term investors to benefit from the bull market. It’s objective is to help investors make short term gains by investing in momentum stocks. Opportunities are identified by our expert team by employing a tested techo-fundamental screening process. Holding duration of individual stocks is from 1 week to 3 months and rebalancing is done weekly. Rebalance Exits This week for Momentum Bull Smallcase: 2. The Middle-Class Businessmen Smallcase This is our flagship smallcase launched in 2020. The smallcase focuses on fundamentally strong stocks with a firm focus on clean family run businesses with strong corporate governance track records. The smallcase invests in a healthy mix of small, mid and large cap companies and has vastly outperformed benchmark indices and most other smallcases in the category since inception. Rebalance Updates: Quarterly Rebalancing strategy. No recent updates Middle Class Businessmen Smallcase Fund Performance: Thank you for trusting Tequity Investing, and we hope we deepen our association with you in the near future. Happy Investing…

Dear Readers, Investors and Learners, We’ve decided to open up some of our learning content on Options Trading. For those who don’t know, options are a leveraged financial instrument which can help make money in all market environments – bullish bearish and sideways. Successful options traders can make anywhere between 20 to 100% annual returns on their investment. With great reward potential does come great risk. It is our opinion that everyone must be made aware of the practical implications and the mechanics of options trading. This course will teach you all the basics and bring you up to speed. In this 2 hour long 8 part series, we cover the basics of options in practical detail, with lots of examples and easy language. The goal is to make a complex product simple and easy to understand. We hope you enjoy it. Consider subscribing to us on YouTube as well. The course can be accessed by clicking here Happy Investing

The pandemic induced lockdowns were perhaps the first taste of enforced geographical bondage for most of us. We draw 2 inferences from this experience: First, our hunter gatherer predecessor generations left back an evolutionary trait within us that makes us want to travel. And second, the value of freedom. In my opinion, there is no higher pent up demand than in the demand for travel. What would you not give to just travel to your ideal retreat with a close group of 3 to 5 friends, sipping your favourite beverage as you watch the sun set? It is likely that once lockdowns ease demand for tourism will be at all time high levels. No, I am not making this claim based on analysts’ forecasts but observing already increasing flight travel data, and my personal interactions. But let the wanderlust in me not be taken over, as I intend t write this piece from an investing perspective. Tourism stocks can be classified as: hotels and hospitality, alcoholic beverages, entertainment (non-media), and aviation. Some are more intricately linked to tourism than others, but this broadly covers most aspects. Both cover leisure as well as business tourism. We analysed two year returns of 4 niche indices (TJI hotels and hospitality, TJI alcoholic beverages, entertainment and aviation) from Tijori Finance. They rank 45th, 49th 51st and 55th out of 59(Tijori Finance has 59 niche indices) in terms of stock returns over the last 2 years. Aviation and hospitality have posted negative returns. The highest among the four is 10.3% from alcoholic beverages which ranks 45th. During the same time, NIFTY, NIFTY MIDCAP 150 and NIFTY SMALLCAP 250 have given returns of 16%, 27% and 28% respectively. The sectoral underperformance is not shocking. An overview of the top companies in the space shows that the aviation and the hotels industry have been hit the worst, with not only losses mounting, but also debt levels rising in almost all cases. The entertainment stocks like Delta Corp and Wonderla are somewhere in the middle of the spectrum and the alcoholic beverages industry has done better. The alcoholic beverages industry is only partially dependant on tourism so its thematic downside is lesser. Some of the companies in this list surely do seem to be in trouble, whereas some others may be very attractive at current valuations given the strength of their balance sheets and flexibility in operations. How to Invest: Any investment at this stage would be of a highly risky nature, but this is also where the highest reward opportunities could lie. We are making no recommendations here, but only presenting a monochromatic picture. There are several things to consider fundamentally other than revenues, profits, debt levels and share prices. If you do decide to invest, evaluate the fundamentals and consider the best case and worst case scenario prospects. There may be a 10 bagger in that list and as easily a stock that might just blow up to 0. Contrarian investments are risky so diversify. When will the Tourism Bounce Back? Federer is playing at Wimbledon 2021 as I am writing this article. The centre court roof is closed as its raining in London and the court is full of spectators not wearing masks. Britain has aggressively vaccinated a large proportion of their population and they seem to be all-in on the hope that it will stop all the virus mutations. Either ways, we will get a good idea of vaccine efficacy in a month or two from these countries that have almost entirely opened up. From there we can extrapolate when tourism will open up in India at full swing. For the government’s part, it too has recognised the stress faced by the sector and has come up with schemes to make credit accessible to travel operators by capping interest rates and guaranteeing a proportion of the new loans. First 5 lakh international tourists are also set to receive a free visa. With millions of hard working people rendered jobless by this massively employing sector, let’s hope it makes a rapid recovery very soon. Happy Investing.

The NBFC- lending (Non-Banking Finance Companies) business is an easy to understand, but difficult to execute business. We explore two aspects of the NBFC lending business in this article: Capital cycle Let me speak about the capital cycle first. The model of NBFCs is pretty simple. They raise money through various sources (banks, institutions, retail investors) and lend it to customers. What they earn in the middle is a spread. For example, if a company can borrow at 8% and lend and 20%, it keeps a spread of 12%. Is a 12% spread realistic? We will come to that later when we speak about Net Interest Margins in another article. As mentioned earlier, NBFCs borrow money for their lending operations. When the economy is faring well, the NBFC business does much better than others. This outperformance in business is mainly due to the leveraged business model. This superior performance is reflected in the earnings. Outperformance in earnings attracts more investors to these companies. This leads to more equity investments in the form of private placements, follow-on offerings, etc. The debt markets also are very keen to offer money to these companies to participate in the growth story (NBFC is a high-growth sector). The story remains intact as long as the economy is doing well. The moment there are signs of trouble in the economy, fewer investors want to invest in NBFCs. This aversion towards NBFCs keeps growing as the economy worsens. We are going through one such phase after the outbreak of the COVID 19 pandemic. As the economy recovers from such a crisis, the confidence in NBFCs returns. This confidence peaks along with the economic cycle. This cycle of low and high confidence is called the capital cycle. To summarise the capital cycle, at its peak, many investors are interested in investing/ lending money to NBFCs. At its trough, NBFCs struggle to raise capital. The capital cycle discussion will be incomplete without discussing the source of capital for NBFCs. NBFCs borrow mainly from three sources: Retail investors, Banks, and Institutions. Institutional money is volatile in nature and tends to quit when times are tough. As against that, deposits raised from retail investors are pretty stable. Retail investors are highly appreciative of the extra rate of returns that NBFCs offer over banks. Hence, most of them do not really mind staying put with NBFC deposits even in rough times. The magnitude of stability is in the following order: Retail investors > Banks > Institutions You might have guessed it right, the borrowing costs are in the following order: Institutions < Banks < Retail Investors As can be seen, NBFCs face a trade-off when raising funds. High stability of retail deposits comes at a higher interest cost. NBFCs that manage to sail through the capital cycle successfully, are likely to have high growth periods in the following decades. There are many NBFCs in India that have successfully sailed through the capital cycle for many decades. To name a few, Manappuram Finance, Muthoot Finance, Cholamandalam Finance, Sundaram Finance, HDFC Ltd, Mahindra & Mahindra Financial Ltd. The ease with which these companies have raised capital through tough times is also partly due to their parentage. Investors trust NBFCs with strong parents more than standalone entities. A successful track record is also very important in the NBFC business. Demand cycle: As mentioned earlier, the demand cycle depends on the underlying customer base. Let me give a few examples. The NBFC sector can be classified as per the type of lending: Muthoot Finance is an NBFC having specialized operations in Gold lending. Sundaram Finance and Cholamandalam Finance have commercial vehicle lending as their specialty. Mahindra Finance focuses on rural financing. Muthoot Capital Services focuses on second-hand two-wheeler lending. LIC housing finance, CANFIN Homes are reputed names in the housing finance business. Bajaj Finance has established a niche for itself in the consumer lending space. You see, how various companies are trying to carve out a niche for themselves based on the type of customers, sectors, geographical focus, etc! NBFCs face demand cycles owing to the cyclical nature of the underlying industries. The automobile sector took a complete u-turn somewhere in 2018. This affected vehicle lenders severely. Many small lenders were compelled to shut shop. Companies like L&T Finance have been underperforming owing to their exposure to the real estate sector. After the COVID crisis, Muthoot Finance, Manappuram Finance are shining bright. Tough economic conditions lead to more borrowing by pledging Gold. This helps the gold loan business. It is also important to think about competition in a particular space. As a case in point, let us talk about the gold loan business. This business is getting very competitive with many new banks wanting to enter the business. The reason for this competition is understandable. Gold lending is a completely secured business. NBFCs lend much lower amounts than the actual value of gold kept as collateral. This gives a high margin of safety to the gold lending business. Let us analyze a gold lending business from the perspective of a borrower. Normally, anybody who takes a gold loan is in urgent need of funds. To take out that gold loan, a husband has to give a valid justification to his wife, and then she decides whether to pledge her ornaments or not. There is a huge sentimental value attached to gold ornaments (especially in India). The last thing that a sensible man would do is to default on the gold loan! Else, his social reputation might go for a toss or his marriage might be jeopardized. In order to avoid this reputation damage, borrowers are generally particular while selecting the gold lending NBFC. A company like Muthoot Finance has built high brand equity over the last many decades. This trust is in itself a moat for Muthoot Finance or Manappuram Finance. To conclude, different NBFCs face different demand cycles. Businesses like Bajaj Finance are less susceptible to the demand cycle. Businesses like Cholamandalam Finance have

Rallis India Ltd is a Tata group company operating in the agriculture input sector. The parent company of Rallis is Tata Chemicals Ltd. Rallis has presence across seeds, crop protection, soil conditioners & plant growth nutrients segments. It is also trying to establish a footing in the contract research & manufacturing services. CRAMS is a high growth area with many companies trying to establish credibility in the field. India is the fourth largest agrochemicals producer in the world after the US, Japan and China. There is little need to speak about the importance of agriculture in a country like India. Dominated by vegetarians and the soil quality conducive for agricultural activity in many parts of the country, India has the potential to be the most efficient food producer in the world. After all, we have 1.3 bn stomachs to satisfy and that puts the agri sector in a natural advantage of economies of scale. The agri inputs industry is critical for India to achieve its goals in the agriculture sector. As per FICCI, the sector stood at USD 5 bn in 2018 and is expected to grow at an impressive CAGR of 8.1% in the coming years. The major problems facing India’s agri sector are: over-production of certain varieties, emphasis on cash crops for higher realizations, lack of farmer education, low engagement with farmers to understand their preferences, Government’s role in deciding prices, subsidies, vagaries of monsoon, water availability, lack of farm infrastructure and modernization of farms, and in general low food prices which makes farming unviable for most smaller farmers. One of the few things that seem to be working for the sector is state Governments waiving off farm loans just before elections! The list of problems seems endless and I know you are thinking: why invest in a sector having an endless list of issues? But hang-on, the investment rationale is coming! Among all the problems listed above, what really concerns the agri inputs industry the most is the present low level of interaction between companies and farmers. It is no secret that knowing your consumer well is a key to success for any company operating in the knowledge economy. There is a tech & information tsunami that is sweeping almost all sectors inadvertently. Advancement in telecom has played a key role in the evolution of the manner in which agri input companies have interacted with farmers. There were times when the communication was a monologue in the form of television and posters/ banners being pasted at common meeting points. It was never truly a dialogue, which is critical for companies to know consumer preferences. This situation is expected to change fast as information is now available at the movement of fingertips. Companies not just want to inform farmers, but they are equally keen to hear from them. The potential for agriculture in our country is under-realized for all the reasons discussed so far. The path we have chosen so far is to develop the secondary and tertiary sectors of the economy by systematically ignoring the plight of the primary sector. I have a strong hope that such irregularities do not last forever. It is only a matter of time before technology starts improving productivity in Indian agriculture. Developments in the secondary and the tertiary economy will slowly increase people’s ability to pay more for food. To sum up, golden days for agriculture are yet to come. Whether they ever come or not, is something only time will tell. But, the hope is strong and especially in a sector which employs close to 50% of our population! Rallis India is one the better-managed companies in a sector which has a plethora of problems ranging from the vagaries of nature to the policy stance taken by the Government. The number of variables to be handled is too many, to say the least. “We cannot live without crops. Agriculture is dead only if we become hunter-gatherers again. That happening looks unlikely” Does it make sense to invest with so many variables and uncertainty? My answer to this is yes, it does. Especially in companies that have shown the ability to exist in such difficult sectors. It speaks about the sheer quality of management. Being hopeful is not wrong, in fact that is what most investors do. The combination of a hope of the underlying situation improving and a strong management to benefit from the improvement forms an investment case here. Investing in Rallis is similar to sailing with a strong captain through rough ocean waters, and hoping for calmer waters ahead. Raw material N,N – Dimethyl-P-Toluidine, triazinone, 4-NOX are some of the key raw materials for the company and prices increased by about 15% for the year ending Mar 2019. Operating cashflows Cumulative operating cashflows from 2010 to 2019 stand at Rs. 1332 crores. Cumulative PAT during the same period adds up to Rs. 1417 crores. Both the figures being almost equal indicates that the company is able to convert profits into cashflows without the added burden of working capital rise. Free cashflows Free cashflows to the company during the same period from 2011 to 2019 stood at Rs. 614 crores. Percentage of free cashflows to total cash from operations stands at 46.11% Indebtedness & solvency Long term borrowings for the company are Rs. 15 crores & short term borrowing stood at Rs. 53 crores as on 31st March 2019. Borrowing numbers are comfortable as a %age of equity (D/E < 0.1). Also, interest coverage ratio is a comfortable number. Working capital Receivable days for the company have increased from 28 to 78 from 2011 to 2019. During the same period, payable days and inventory days increased respectively from 95 and 59 to 110 and 114. Clearly, there is inventory buildup and also pressure on receivables. However, the increase in receivable days is partly offset by the increase in payable days. Dividends From 2011 to 2019, the company has paid total dividends of Rs. 440 crores against a cumulative

A look at the P/E ratio There is a beautiful saying in Hindi ‘Ummeed pe Duniya Kayam ‘ meaning the world is in order (rather not in disarray) because of Hope. A hope that tomorrow will be better than today and day after tomorrow will be better than tomorrow. When you pay money to buy a stock, you are hopeful. You expect the business to do well and reward you with returns. What is the returns you can expect? The dividends that the management pays and the capital gains/losses depending on how much the market values the stock(simply put the stock price). When will there be larger returns? When the business is more profitable. As the number of shares of a business is a finite figure, more profits mean more returns per share owned. Returns per share is alse called earnings per share or EPS. You want your company to be able to increase the EPS by at least the same rate of returns you expect from your stock. Because if the EPS doesn’t increase by that amount, you may not get the returns (dividend + capital gains) you expect. Or is it so? Ah, we are entering a territory where the river gets murkier, and there’s crocodiles in the water. The logical answer is NO. If the EPS doesn’t increase by the same amount as my expected returns, I will have to expect lower returns. But markets, at least in the short to medium turn have had a frequent history of defying logic. While the dividends you receive depend on what the company’s management deem fit, the share price appreciation/loss depends on what the market thinks it is. There is a popular relation between share price and earnings per share called as the P/E ratio P/E ratio = Market Price/Earnings per share This is a ratio that can be used to compare different stocks! Two stocks having very different stock prices can have almost identical PE ratios as their respective EPS’ could be different. So a P/E could be a good way to compare performances of various stocks. What does a PE ratio of say 40 signify. It means that if a stock price is Rs. 400, the earnings per share is Rs. 10. You have to pay 40 times of what this stock earns annually to own it. Put in other words, at current prices, it will take 40 years to recover your investment for owning that stock. Sounds like madness, doesn’t it? So why are some stocks like HUL trading at a PE ratio of 70? And what is the correct PE ratio? This is like a kid asking his parent why the sky is blue. There is no easy answer. One thing is clear, lower the P/E ratio, cheaper the investment and vice versa. But let’s try to explore this. The right PE depends on how the market as a collective unit deems it fit. A stable stock with a PE of 5 is much more ‘valuable’ that a stock with a PE of 50, but this is no guarantee of performance or growth. One sector of stocks can have a PE of 50 and be considered cheap, and another sector can have a PE of 12 and be considered expensive. The market sentiment drives the price of the stock whereas how the business performs drives its earnings per share. In the long term, these 2 are a happy family. In the short term, they can be ‘on a break’ from each other. It’s typical of market forces to favour the hot sector. The PE of hot sectors can have vectors of Elon Musk’s SpaceX. The PE of the out of favour sectors can have the characteristics of Musk’s ‘Boring Company’. So what’s a good PE? The answer to this question is – a good PE is whatever you think it is. This is a good answer if you’re a long term investor. For a short term investor, a better answer could be – A good PE ratio is whatever the market decides it to be. Ah, these financial advisors, they never give straight answers! Believe us, we would have loved this to be straight forward. But it’s not. So lets look at what the market thinks a good PE was over the years. Below is the long term PE trend of the NIFTY 50 index. You will be happy to learn that the NIFTY 50 index is currently trading at it’s highest PE ratio of 31.33 which is the in the last 2 decades! If you’ve been reading this article carefully, you would have already deduced that this growing PE must mean the EPS would be rising, and hence we are in a bull market! Well, let’s take a look. Below is the long term EPS trend of the NIFTY 50 index. The EPS for the NIFTY has grown impressively from 2003 to 2014. Since 2014, not so much. In fact, the EPS right now is the same as what it was in May 2014: around 360 per share. 🙁 We have a situation! The EPS is flat, but the PE ratio indicates a bull market. This means the stock prices are getting more disjointed from actual business performance. It is anyone’s guess that the massive drop in EPS is owing to the pandemic, but things weren’t that great before the pandemic struck either. We had a slowing economy, rising unemployment and a banking crisis. The pandemic hasn’t helped the situation. While some businesses have done well as a result of the pandemic , most of them have struggled and are grappling to stay afloat. The net effect is the decline in the EPS of the NIFTY. A rising PE ratio could indicate that investors believe that the drop in EPS is temporary. This could be on the sentiment that India has a stable government which will eventually lead India to become a global superpower that she is destined to become. Conversely, it could

Introduction RITES Limited is an India Central Public Sector Enterprise primarily in the business of providing infrastructure consulting and engineering services, focussed towards the transport sector in India and abroad. The company’s business is closely aligned with the Indian Railways. It is the only export arm of Indian Railways for exporting rolling stock (other than Thailand, Malaysia and Indonesia). The company has 2 subsidiaries and 2 joint ventures operating in allied businesses FY20 results were extremely good with the business having record consolidated revenues of 2734 crores, a PAT of 633 crores, both at a 6 year CAGR of 15% and 13% respectively. It can be said that 60-70% of the company’s revenues come from the railway sector and the remaining is a split between other areas such as roads and highways, urban transport, airports and seaports, inland waterways, etc. The infrastructure sector in India is a major thrust area for the government of India having announced ambitious targets and massive stimulus. For instance, Indian government introduced ‘Bharatmala Pariyojana’ in 2017 a new highways program expected for completion in 2022 has planned total additions of 34,800 kms at an estimated cost of Rs.5.35 tn. Massive tendering activity is being undertaken in over 15 cities for metro rail construction. The railways too, has expanded its capex budget and is aggressively targeting line doubling, tripling of lines and electrification in the coming years. RITES Business Areas: Financial Performance: Sources: Screener.in and company annual reports o Asset Turnover Ratio(Sales/Avg total Assets): Due to a low fixed asset base and revenues dependent on consulting, the company enjoys a healthy 4.4 ATR. o Inventory Turnover: Due to an asset light model, this ratio is also very healthy presently standing at 233. o Return on Equity: The average ROE over the last 5 years has been 19% o Return on Capital Employed: The ROCE as on Mar2020 was 34% and has consistently been around the 30% mark for the last 5 years. The financial performance of RITES paints a picture of a flexible company. It is a rare combination of high growth, strong cash position, high return on capital and low debt business. The company enjoys powerful parentage, and is leveraging its ability well to expand into export markets as well as private projects. Business Performance: The consultancy business is the key competitive advantage that RITES enjoys, and it contributes to 3/4th of the total profits and just 45% in revenues. On the other end of the spectrum, Turnkey construction projects generate only 3% of the profits. The leasing and export business lie in between this trend. Segment Performance Analysis: Theme of operational efficiency fuelled growth: Source: Investor Presentation FY20 The number of employees over the last 6 years has remained almost stagnant (3200). However, employee costs as a percentage of total operational expenses in 2015 were 46%. In 2020, this number was 28%, a whopping 18 percent points decline over 6 years. The revenue per employee has grown at a CAGR of 18.9% over the same period! This reflects well on management. During the same period, the company has grown in allied businesses such as exports and turnkey construction. RITES is now capable of providing end to end services in transport infrastructure segment making the company more competitive. Order Book: Source: Investor Presentation FY20 This translates to 2.5 years of current revenues. Management expects 8000 cr order book by end of 2020. Judging by past investor conference calls, management reliably forecasts future order book growth. Covid Impact on Business This section is based on the management discussion during Q4 F20 investor call and includes no personal views. The consultancy revenues ended flat in FY20 due to disruptions in the month of March. The lockdown impacted inspections on site and if business resumes in July, consultancy should be back to regular growth rates. There is also delay in award of some turnkey projects by the Indian railways owing which the order book is smaller than expected. Overall, barring some delays in execution, the company faces no material impact or loss in orders. Shareholding and Management RITES was listed on July 2, 2018 when the government of India divested 12.6% of its equity in the entity via an IPO on the National stock exchange. Thereafter, the government further diluted its stake to 72.02% leaving 27.98% with the public. Mr. Rajeev Meherotra has been the Chairman and MD of the company for over 7 years and under his leadership, the company has improved operational efficiency and growth. The board is diverse with 5 whole time directors, 3 government nominee directors and 6 independent directors according to the FY 19 annual report. The board members do not own any significant shares within the company and their remuneration is well within prescribed limit of 5% of PAT. A study of annual reports of the last 5 years did not cause us to raise any red flags on the management. Experience during investor calls is very good, with management being transparent and answering a wide range of questions. Risk Management The company has a robust risk management policy in place. The company regularly manages currency rate risk by employing appropriate hedging instruments. As for credit risks, these are more influenced by the individual characteristics of each customer. Trade Receivables towards export sales are generally managed by establishing Letter of Credit with the clients. Further, most of the clients of the company are Government or Government Undertakings; hence credit risk is bare minimum. As many of the nation’s RITES does business with are under developed markets, this can turn up to be a cause for concern in the future and we have accounted for this in our valuation. Valuation Our DCF valuations for RITES assumed that the company will grow rapidly at a rate of 15% for 5 years post which we have assumed a terminal growth rate of 4%. The operating margin we have assumed during this high growth phase is 25%, and a cost of capital of 12%. Taking

When it comes to agriculture, the second thing that comes to my mind is the ‘Government of India’ (the first thing is, of course, good food!). Policies and subsidies announced by the Government from time-to-time have played a crucial factor in the emergence of our Agri economy. Whether these policies have been enough for the upliftment of the farming community is a debatable subject. Let us discuss one such scheme- Pradhan Mantri Krishi Sinchayee Yojana. The PMKSY came into effect on 1st July 2015. It’s been 5 full years since this scheme came into effect. The scheme has the following components: Water Resources: Source augmentation, distribution, groundwater development, lift irrigation, diversion of water from water plenty to water-scarce areas, supplementing rainwater harvesting beyond IWMP, MGNREGA, and repair, restoration, renovation of traditional water bodies. Per Drop More Crop (Micro Irrigation): Installation of Micro Irrigation Systems (Drip & Sprinkler) in fields, extension activities, coordination & management. Watershed: Ridge area treatment, drainage line treatment, soil and moisture conservation, water harvesting structure, livelihood support activities, and other watershed works. The scheme has multiple objectives and micro-irrigation is just one of the components involved. The remaining part of this article shall speak in detail about micro-irrigation. Water resources and watershed management is beyond the scope of this article. Micro-irrigation involves two different methods: drip irrigation and sprinkler irrigation. The drip method is a more targetted one. Below two images should help you understand my point better: Sprinkler irrigation The following image shows the percentage of assistance that the Central Government and State Government together provide for micro-irrigation: Source: pmksy.gov.in DPAP and DDP stand for Drought Prone Areas Programme and Desert Development Programme respectively. The assistance provided is anywhere between 35% to 60% depending on the area in consideration and the category of beneficiary. Let us start by taking a look at the area under agriculture as a % of total land area in India Source: data.worldbank.org Here’s a corresponding chart for the world showing the % of agricultural land to total land: Source: data.worldbank.org And here’s a chart showing the world population in billions. Source: data.worldbank.org The world population has more than doubled since the 1960s, whereas the % of the area under agriculture has increased by a few percentage points. Quite certainly, humanity has done well for itself by increasing the yield of food grains per hectare. Without getting into the details of specific crops, let me share with you the yield per hectare of the top 10 countries in the world: Source: data.worldbank.org The world average yield in kgs/hectare stands at 4074 and for India, the corresponding number is 3160 kgs/hectare. The top two numbers might look mind-boggling to you. I tried digging into the reason why the yield is so high for these two countries. I found out that these countries extensively deploy greenhouse intensive farming methods. This method of farming has its own advantages and disadvantages. Discussing those is outside the scope of this article. However, the key takeaway from the above table is that the yield per hectare in India is lesser than the world average. One of the reasons for the low yield is the relatively lesser penetration of micro-irrigation in India. Benefits of micro-irrigation: Source: Report from Grant Thornton(click image) About the company: The company was established as EPC industries in the 1980s by Mr. K. Khanna. He was part of the first batch of chemical engineering at IIT-Bombay. The company was acquired in the year 2011 by Mahindra & Mahindra Ltd. Both companies had operational synergies. M&M brought its expertise in marketing agricultural products and EPC brought to the table, the product portfolio in micro-irrigation. As on 31st Mar 2020, the promoter (M&M) holds 54.51%. The remaining shareholding is diversified and there is no major institutional holding. Shareholding pattern trend (source: Tijori Finance) Products & Services: Investment rationale Is there a moat? Risks: Market potential: The total area covered under micro-irrigation in India as on 31st March 2020 stands at 1.26 crore hectares. The potential area that can be covered under micro-irrigation stands at 6.95 crore hectares. That is a massive 5.69 crore hectares, which is more than 4 times the total area covered as of today. The cost of covering 1 hectare of land under micro-irrigation is approximately Rs. 50,000. The total potential market comes to about Rs. 2.84 lac crores. (Please note that the potential area that can be covered under MI is an estimate by the Government under the PMKSY scheme. In case any readers think this number is too high or too low, we would love to hear more from you!) Competition: Netafim and Jain Irrigation are the major competitors for the company. Netafim is an Israeli company. It is a well-known fact that Israel is a leading country in agricultural research. Drip irrigation was invented by Simcha Blass. The rights to market the technology were purchased by Netafim. As far as Jain Irrigation is concerned, Mahindra EPC is gaining market share due to the ongoing financial troubles at the former. Government’s focus: The below table mentions the Government’s budget allocation to micro-irrigation (per drop more crop scheme) under the PMKSY. Source: Pocket book of Agricultural Statistics, published by Ministry of Agriculture & Farmers’ welfare The actual expenditure on micro-irrigation has been on the rise. However, every year, there has been a shortfall in the actual expenditure, when compared with the original allocation. This shortfall is not very uncommon in our budget. Many schemes have this kind of a shortfall when the actual numbers are out. However, a shortfall for many consecutive years may indicate some trouble for the industry. Joint Venture The company has entered into a joint venture with Top Greenhouses Ltd in the year 2019 and established a subsidiary Mahindra Top Greenhouses Pvt Ltd. If you can recollect, we said earlier that the yield per hectare in UAE is mind-boggling. The reason is that they use intensive protected farming methods. Mahindra Top Greenhouses has been established to focus on

A lot has been made of the recent bull-run which followed the market capitulation in March 2020 due to the coronavirus pandemic. The tech based NASDAQ Index in the US is trading at all-time high levels, whereas the Dow Jones Industrial average 30 stock index is just 10% shy of its all-time high. In India too markets are on the rise, and it comes as a surprise to many seasoned investors. While the NIFTY is down about 13% from its all-time high levels (Jan 2020), different sectoral indices are at various levels, as on July 6th 2020. Please refer to the table below for a snapshot: At its lowest, the NIFTY index hit a low of 7511.1 of March 23rd which translates to about a 40% decline from all time high level of 12430 on Jan 20, 2020. In contrast to the horrific low point, the present NIFTY levels of 10700-10800 seem to be at a great relief. Everything is at the end of the day relative. As seen from the above table however, the recovery is not broad based. There clearly are some leading sectors (pharma, IT, FMCG) and some laggards (metal, fin services, banks and realty). From an investing perspective, this data is of little help as not every company within an outperforming sector has done well and not every company in a laggard sector is languishing. Our attempt in this article is not to look at whether stocks are valued correctly. Instead, we try to flesh out another way to analyse macro level stock data and make some inferences which can be useful to understand which companies the markets are rewarding and which ones are being punished. In a recent video shared by Prof. Aswath Damodaran ( https://www.youtube.com/watch?v=215r6v4bfhQ), he proposed that companies which are “flexible” have been investor favourites in these times. In his endeavour to validate his thought of “flexible stocks” he has gathered data from over 30,000 listed companies across the globe. It is a formidable effort to make sense of such a large amount of data and we highly recommend interested readers to watch the video. The professor defines 4 parameters of flexibility: Investment flexibility, operating flexibility, financing flexibility and cash flexibility. He tests all the companies on these 4 parameters, and collates them to find meaning and insights into investor behaviour. In this post, we see if the same applies to the 250 largest companies by market cap in India. We take the study one step ahead and assess the overall flexibility of firms as well. Finally, we share a list of the 10% most flexible companies we found in our study. 1. Investment Flexibility: measures how much you have to invest to achieve a given level of added sales. The more you have to spend and wait for a given growth, the less your investment flexibility is (think utilities, power, etc vs technology and services). The metric we use to measure this is the asset turnover ratio (ATR) which captures the revenue to capital assets of a company. A company with ATR of 3 would mean that for every 1 rupee of capital asset it adds, it can add 3 rupees to revenue. The higher the number, the higher the investment flexibility. Below are the results in decile format. 4th decile would mean that the company ranks between 30 and 40 percentile of all 250 companies, and the 10th decile would mean the 90% -100% ranks. Therefore, the 1st decile indicates the stocks with lowest investment flexibility and 10th decile represents the top 25 companies by investment flexibility. For each decile, we measure the average change in share price in 6 months. The results are indicated below. From the table and chart, it is noted that the 5th decile has shown the highest positive change whereas the 1st to 3rd deciles have performed poorly. The top 5 deciles have in general performed better than the index as a whole. One thing is clear. The markets are punishing companies that have poor investment flexibility! 2. Operating Flexibility: measures how much a company’s operating income is affected by a given change in revenues. This boils down to measure the proportion of fixed costs that a company has to its total expenses. A company with higher proportion of fixed costs will face the rough side of the sand paper in times like a lockdown where revenues are hit. Higher fixed costs mean that regardless of sales, these fixed expenses have to be met. In comparison, a company that has higher proportion of variable costs will be impacted lesser if revenues fall, and hence have a high operating flexibility. There is a difficulty in measuring the ratio of fixed to variable costs, as financial statements don’t have an metric to clearly define this. As a proxy for lack of a better metric, operating margin (OPM) is used. The assumption here is that a company with high op margin is likely to have lower fixed costs, and hence higher operating flexibility. Check the results in the table below: It is evident that operational flexibility based market preference is dominant. As in the case of investment flexibility, companies that are not operationally flexible have been beaten down by the market whereas operationally flexible ones have performed better than the index. Here the 1st to 3rd decile of companies (75 data points) correspond to companies with OPM of lesser then 12%. Clearly the companies with low operating flexibilities are out of favour whereas the ones with better OPMs are in vogue. 3. Financing Flexibility: measures for a given change in operating income, how much the net income changes. The net debt (debt – cash+ Cash equivalents) of a company will impact financial flexibility. The more the debt, the higher the interest expense and lower the net income. A good cash position despite high debt can help a company meet its interest expense, and hence net debt is considered. To standardise for all companies, we take a ratio of

There are various ways of making money in the stock markets. And there are numerous ways of losing money too. The world in which we live today is changing at a rapid pace, mainly thanks to technology. Taking a long term view of your investments becomes challenging when the underlying dynamics change fast. This practical difficulty in investing has only grown with time. Does that mean the times of Warren & Charlie are gone? Not really, let’s discuss that point a little later. When a promoter is running the show behind a business, he is there to make money. For some promoters, making money is the primary objective, whereas for others, creating value for stakeholders is the primary objective. This latter breed of promoters believes that money will be made in the process of running a business ethically. Indians are fortunate to have some entrepreneurs who have consistently put the value creation objective at the forefront. Needless to mention, one such business house is the Tatas. What about those promoters whose primary objective is making money? Is that a wrong objective to have? Not at all, we are all here to make money! So what are the options that this breed of promoters have: Run the business efficiently, increase the topline, reduce operational expenditure, increase the asset turnover, optimize the working capital, manage human resources well, arrange for capital at a reasonable cost, liaison well with the Govt, and most importantly hope for luck to be in your favor. Wait, doesn’t that seem too much to do? Is there no quicker alternative to making money by starting your own business and taking the company public? Well, certainly there is a way out, and indeed a much easier way: trade the stocks of your own company. Let me start the discussion with the Vedanta episode. Recently, the group has announced that they intend to delist the company from the exchanges. The delisting story is not new to Indian promoters. The business is quite simple: 1. Come up with the IPO, 2. Make sure people like the story, 3. Sell them the stock, 4. Wait for the stock price to collapse (or in some cases, make it collapse), 4. Create a distress situation for minority investors, 5. Give them an offer of buying back their shares at a ridiculously low price. Here’s the chart for your reference. I am sure you will be able to relate with steps 1-5 from the following chart: Like I mentioned before the delisting game is not new to Indian companies. In the year 2002, Sterlite Industries delisted from the exchanges by making use of section 391 of the Companies Act, 1956. Section 391 allowed Sterlite to bypass section 77 of the companies act. Section 77 deals with buyback of shares and in a way was meant to protect minority shareholders. A few weeks later, shockingly, Godrej industries came up with a scheme similar to Sterlite. Investors were shocked with a group like Godrej trying to benefit at the expense of minority investors. Godrej Industries decided to come up with a buyback offer at a price of Rs. 18 per share. At that time, the book value per share for the company was Rs. 45. That’s a steep discount! A couple of days before the buyback announcement, the shares of GIL were trading at Rs. 24 per piece. What did the market regulator SEBI do to protect minority shareholders? Well, it did appeal to the Bombay High Court. To its dismay, the high court ruling was in favor of Sterlite Industries and Godrej Industries. SEBI took the matter to the Apex court, however, the Apex court too ruled in favor of the concerned corporates. Finally, these buybacks went through and minority shareholders were at the receiving end. While what these companies did was completely legal, the question is what was the intent behind taking these steps? Selling shares at a high price and buying it back at much much lower prices, is the instinct of a trader, isn’t it? Let me come to something more recent. February 2018 shall always be remembered for all the bad news. In the budget that year, the Finance Minister announced the introduction of LTCG on equity gains. The market reacted adversely in the following days. To grab the opportunity, the Punjab National Bank scam was broken out. The Government too played smartly by clubbing the big brewing scam with an already existing piece of bad news. That same month, news broke out in which Vakrangee purchased some stock in PC Jewellers. Here’s the shareholding chart of PCJ: Data: Tijori Finance It is quite clear from the shareholding chart that the promoters wanted to reduce their stake since Jul 2017. Obviously the fall in promoter stake was accompanied by a rise in stake by retail shareholders. Here’s the price chart of PCJ for you to relate better with the above timeline: As can be seen, the stock peaked above 500 somewhere in the year 2017. That’s precisely when the promoters started getting out. Again, what is this instinct of selling shares at a higher price and buying at a lower price? Yes, it’s equity trading! Let’s see a few more examples. That’s the shareholding chart of Yes Bank for you. As can be clearly seen, there was a trend of falling promoter stake for many years before the NPA divergence saga came out in open. Here’s a shareholding chart of Sterling Biotech. In this case, the promoter stake was not falling significantly, but the real issue was the pledged shares. Now, let me take you to the biggest Indian company by market cap, Reliance Industries. Here’s a screenshot of Reliance Industries shareholding chart. Ambanis have been upbeat on Jio and Retail and that confidence is well reflected in their increasing shareholding. Here is a summary of points to be learned: Judging promoter intent is an art and one can try to stay away from dubious promoters by observing corporate actions. Thanks

Second-order effects, or commonly referred to as side-effects are not rare. These effects could be as simple as a medicine resulting in undesired effects or it could be much more severe like an economic disaster owing to radical policies. We are going to talk about one such instance today: The Great economic depression of 1930s in the USA. The third decade of 20th century (1920+) was characterized as a high growth period in American history. This decade was popularly known as the roaring 20s. Stock markets were in a state of frenzy with people liquidating as much as possible from other asset classes to pump into the stock markets. Clearly, it was a bubble waiting to explode. The bubble did explode when the federal reserve decided to increase interest rates. Higher interest rates mean borrowing gets more expensive for corporates. This decision led to the beginning of a huge sell-off in the American markets. What was the need for the Fed to increase interest rates in the first place? Was the then-Fed chairman out of his mind to do this when everything was hunky-dory? Not really. The action was taken to achieve the desired effect which we call as the first-order effect. As mentioned earlier, stock markets in America were roaring in the 20s. This roaring quite naturally influenced greed among people to speculate and make a quick buck. Greed & fear generally makes one completely ignore the risks of second and third-order effects. To limit this speculative leveraged activity in the stock markets, the Fed decided to hike interest rates in the country. The response to this action by the Fed was initially comforting for the Fed. Stock markets started correcting as expected by the board. But, little did they know what was coming their way. The Great Economic depression lasted for almost a decade starting from 1929. Famously, this is also termed as a lost decade. What began in 1929 was followed by a series of banking crisis in the early 30s. The downturn hit bottom in March 1933 when the banking system collapsed and then President Roosevelt declared a national banking holiday. Unemployment was in the range of 25% in America in 1933. The shocks were felt throughout the global financial system. The Fed did achieve the first-order effect of restricting the speculative stock market activity, but at what cost? Unfortunately, they could not foresee the second or third order effects back then. What were the lessons from this decade of depression? The answer is simple. To date central banks across the world are wary of increasing interest rates. The learnings from this horrific experience has made us happy about having learnt from failure. Does this mean that we know everything about recessions and depressions? I am sure most economists would agree that economic policies are extremely susceptible to undesired second and third-order effects. Perceiving experience from failure as invincibility is the last mistake that any economist would want to do. Who knows what would be the grave second and third-order effects of the current passing phase of ever-increasing fiscal stimulus! Experience does not mean invincibility Let us come to 2020. This is something again unprecedented that we are witnessing. Talking about India, a nationwide shutdown of Indian Railways has created history. The first-order impact of this lockdown by the Indian Government is to win over the coronavirus. Talking again about the 1920s when the Fed decided to increase interest rates. Was this decision taken haphazardly without thinking about the 2nd and 3rd order effects? In all likelihood, not! The entire situation of coronavirus and lockdown is likely to have big 2nd and 3rd order effects. Some that I can think of are mentioned here: What else could be the positive/ negative second/ third order effects of COVID19/ lockdown for India?

..continuing the article from the earlier post here Let us begin the next part by looking at the current list of small finance banks in India Source: RBI website The Banking and Financial services space in India is fast-changing. The emergence of startups and Fintech companies has simply increased the rate of developments happening in this sector multi-fold. The agility of SFBs may put them in an advantageous position to leverage the power of digital by partnering with some of these high growth startups. This again means more activity in mergers & acquisitions is likely in this high growth area. Consolidation is pretty much the rule of high growth areas in which customer acquisition is involved. Acquisitions generally provide synergies to both the parties. In the banking space, we have witnessed a couple of such deals in the recent past namely IDFC Bank and Capital First. IndusInd Bank-Bharat Financial Inclusion. These mergers help the banks by providing them with a wider customer base. The NBFC scores by getting a more stable source of funding in the form of CASA deposits. We may exaggerate the synergies a bit more and say that some of these are marriages made in heaven. Such M&A activity is likely to happen in the SFB space in the coming future. The RBI has clearly expressed its intention of encouraging microfinance institutions, co-operative banks, NBFCs, and payments banks to convert themselves into SFBs. The requirements for this conversion are clearly laid down and looking at the trend, it looks like the picture will get clearer. Does that mean are we looking at mergers where SFBs would acquire smaller payments banks or NBFCs? Or does it mean that SFBs would get acquired by the commercial banks? At this point, it is difficult to comment. Honestly, the M&A activity in this space is tightly regulated by multiple regulators. Deals are announced and overnight they fall-off (Many traders burn their fingers by trading such news items). Let me stop speculating here regarding companies getting acquired, but definitely the space is hot and is likely to witness good action in the future! Why am I speaking all good about Small Finance Banks? Are there no risks involved in this business? Well, there are, and in fact not one, but many risks! Let us talk about them here: Small Finance Banks are required to lend 75% of their funds to sectors classified under priority sector lending (PSL). 40% of the total lending should be allocated to different sub-sectors within the PSL, the remaining 35% is at the bank’s discretion to identify the sub-sector in order to stay competitive. When we speak of scheduled commercial banks, the RBI mandated requirement for priority sector lending is 40%. The table below will discuss further on the difference between the requirements for both SCBs and SFBs. Let us look at the sectors covered under priority sector lending: Here is the summary of the difference between PSL targets for scheduled commercial banks and small finance banks: While the sub-sector targets are the same, the overall targets for SFBs are much higher than those for SCBs. Does this make a lot of difference, significant enough to prohibit SFBs from competing against their bigger and established peers? We need to analyze the NPAs in priority and non-priority lending on two fronts: Source: RBI data From the face of this, it appears that the priority sector NPAs as a percentage of total NPAs in the country is coming down. In a way, this looks good for SFBs. However, this does not necessarily mean that NPAs in the priority sector aren’t increasing. In the last few years, the NPAs in non-priority sectors have been increasing at a faster pace. This makes the percentage of priority sector NPAs a smaller number! Let’s look at the actual growth in priority and non-priority sector NPAs. From the below figures, the CAGR of NPAs in public sector banks stands as below: Here’s the data for your reference: Source: RBI data 18% CAGR growth rate is definitely better than a 28% CAGR, but in absolute terms, 18% CAGR is high. And mind you, this percentage number is likely to increase when the lending in priority sectors increases further. The growth rate in priority sectors NPAs may increase when aggressive lending picks up in this area owing to emergence of small finance banks Here’s a chart of NPAs in three important segments: Private banks, public banks, and small finance banks It is time to summarize the discussion we have had thus far: Conclusions: In a country where the ideology of Governance changes frequently due to anti-incumbency, priority sector lending is a risk. No investment thesis is without risks and potential rewards- small finance banks are no exception. In my opinion, having a small exposure to small finance banks is worth considering. It is a high growth area in a country which is likely to grow in the next 10-15 years. Thank you for your patience in reading this analysis. It became longer than intended. Questions/ suggestions/ feedback/ criticism most welcome!

Banking & Financial Services in India is a high growth area, and why not, after all, we are (or were until recently) one of the fastest-growing economies in the world. There is little point in debating the role that banks and financial institutions play in the development of a country. I believe we all will agree that India has the potential to develop from the current state. We may have slowed down owing to various structural changes like demonetization & GST rollout, but in my opinion, it is too early to say that the long term India growth story is in danger. Dependence of the economy on Banks & Financial institutions was recently tested once again in the aftermath of IL&FS crisis. For a few months, credit was frozen and banks were in a state of hyper risk aversion. We may not have completely recovered from that shock of IL&FS default, but yes the liquidity situation is improving, perhaps at a rate lower than desired. The Reserve Bank of India categorizes banking institutions under various heads namely: Private Sector Banks, Local Area Banks, Payments Banks, Public Sector Banks, Regional Rural Banks, Foreign Banks, NBFCs and Small Finance Banks. The reason behind creating various categories is to have a pre-defined objective for each type of bank. Today, we will discuss Small Finance Banks in detail- their origin, purpose of existence and finally how good an idea it is to invest in Small Finance Banks. Small Finance Banks have their roots in scheduled co-operative banks. In order to understand more about Small Finance Banks, we have to go back in time- almost 20 years. We have to revisit some scary stories of Urban Cooperative Banks to understand the reason for the existence of Small Finance banks. There are close to 1500 Urban Cooperative Banks in India. What separates UCBs from the gamut of other categories is the regulator. Urban co-operative banks in India are jointly regulated by RBI and the respective State Governments. This leads to dual-regulation and naturally, the consequences of dual regulations have not been pleasant. Let us discuss one such story of Madhavpura Mercantile Bank. Madhavpura Bank was established in the year 1968 in Ahmedabad and became a scheduled co-operative Bank in 1994. In 1999, the bank started providing financing to stockbrokers, one among whom was Ketan Parekh (Yes, the same Ketan Parekh who made many investors lose their trust in the capital markets forever). Stockbrokers used these funds for speculative trading. On the liability side, Madhavpura Bank owed money not just to the depositors, but also to other banks. It is outside the purview of this article to discuss the implications of allowing SCBs to accept deposits from other SCBs. In 2001, the problem behind the scenes came to light. RBI’s inspection revealed: Now, that really sounds horrific, doesn’t it? What happened to the depositor’s money? Immediately after the uncovering of the scam, the RBI decided to reconstruct the bank and placed it under a special scheme for 10 years. Unfortunately, none of that worked and in 2012 finally, RBI decided to cancel the bank’s license. The nightmare for depositors continued until the year 2018 when the Gujarat Urban Cooperative Banks Federation issued a statement that up to Rs. 2 lakh per depositor would be compensated back. That story of Madhavpura Bank is truly scary. Something similar (Not as worse as Madhavpura) has happened in the recent past when RBI imposed restrictions on the withdrawal of deposits from Punjab and Maharashtra Cooperative Bank. There was a state of panic and helter-skelter. The poor depositors could just wait for RBI to speak more! RBI’s scrutiny revealed that the Bank’s management had lent 73% of their assets to a single lender i.e. the HDIL group. RBI’s regulations do not allow such a large concentration of borrowings to a single borrower. Then how exactly did this take place? Was the RBI kept in complete darkness until the scam was uncovered? Precisely, Yes! The PMC Bank board decided to hide the loans given to HDIL promoters under the mask of retail borrowers. Around 21000 fake borrower accounts were created and loans given to the HDIL group were portrayed as borrowings by these fake account holders. That is another scary story, maybe not as scary as Madhavpura Bank, but definitely worth losing trust in the way cooperative banks function! Where exactly does the problem lie? Has nothing really changed since the Madhavpura Bank scam? Is RBI as a regulator incompetent to handle 1500 banks? In my opinion, the influence that state Governments have on Urban Cooperative Banks is the problem. The process of appointing the Board of Directors for UCBs is full of conflict of interest. Directors are nominated by members of the banks. Members essentially mean borrowers of the bank. If borrowers can nominate directors, can we really expect clean governance? Can we not compare this to a robber having the keys to a Bank’s gate? Enough said about co-operative banks. Let us move away from this topic and focus on the intended topic of Small Finance Banks. Having identified the problem at hand, the RBI has given 2 options to Urban Cooperative Banks: Now, what exactly is a Small Finance Bank? A UCB may convert itself into a Small Finance Bank by having a capital of more than Rs. 100 crores and capital adequacy of more than 15%. The bank is required by law to increase its capital base to Rs. 200 crores within 5 years from the date of conversion into a Small Finance Bank. In the present state, UCBs have a restriction on raising capital. Once these banks convert to Small Finance Banks, they may raise more capital by issuing shares at a premium to the par value. This means that Small Finance Banks would not have the biggest problem that Urban Cooperatives faced: capital raising. So far, so good! Looks like the RBI too is fed up with the Cooperative Bank business and wants to move towards

ITC is one of India’s leading and most respected conglomerates. The company is professionally managed and has a presence across multiple sectors. When one looks at the consolidated results of ITC, everything looks fine and one may feel puzzled as to why the stock price does not move up despite great results. However, by taking a closer look at the individual segments, you may get an answer to the question. Let us do a detailed analysis of the segments in which ITC Ltd operates. There are broadly the five segments in which the company operates: Let us look at the revenue contribution of each segment to the overall revenue of the company: For the sake of understanding the full-year numbers, we will look at the numbers ending Mar-2019 and not look at the latest quarterly numbers. As you can see, Cigarette revenue is a substantial portion of the total revenues for the company. We will discuss in the coming section how this affects the share price. Let us now look at the contribution to the overall profits by individual segments: As can be easily noted, cigarettes is the segment that contributes a majority of the profits for the company. All other segments are minor contributors to the most important metric- profits. Let us take a look at the growth rate of each segment for the last 4 years and the pre-tax profit margins: As can be clearly seen, the company’s cigarette segment enjoys the highest profit margins. However, the cigarette segment also happens to be a slow grower. The segments in which ITC is growing fast (FMCG and Hotels), the company has relatively lower profit margins. If you look at the Hotels and Papers segment, the company makes decent margins. When the margins look good and also the CAGR growth rates are decent, then what is the problem? Why is the share price not moving? Not analyzing the return on capital employed is a mistake that most new investors commit. In my experience, this metric starts mattering more and more after every passing year. It is like this- Imagine your friend asked you for some money to run a business. You decided to lend him the money. With every passing year, your anxiety will keep increasing if the returns that he generates on the capital are not adequate. Let us now take a look at the capital employed by the company in each of these segments: It can be clearly seen from the above numbers that the cigarette segment provides high returns on capital employed. Hotels and FMCG-Others are where the company has been pumping capital, but the returns they have generated on these investments are clearly not as per expectations. This is one of the major reasons why investors are not happy with the company and the stock price is being punished. Around 35% of the total capital employed is in the FMCG-Others and Hotels segment. Together these two contribute only 2.8% to the company’s total pre-tax profits. Cigarette business is a mature business and investors expect returns in the form of a dividend. If you take a look at the dividend yield of ITC, it is not what would entice dividend seeking investors. This leaves the option of enticing the growth-seeking investor. However, as can be seen from the above numbers, since the FMCG and Hotels business is not able to provide adequate returns on the capital employed, growth-seeking investors too are staying away from the stock. If both dividend seekers and growth seeker stay away, then who would invest in this company! Another aspect of why the company’s stock price is struggling is investor sentiment. Almost all major global cigarette manufacturers are being de-rated by investors. Below is the PE ratio chart of Phillip Morisson which happens to be a leading cigarette company. It can clearly be seen that the valuation that the company enjoys is significantly lower than the peak valuations that the company has enjoyed in the recent past. Something similar is happening with ITC Ltd. Let us take a look at the PE ratio chart for ITC. As can be seen below, the stock is available at an attractive valuation. Do note that the PE ratio of Nifty 50 is above 28 and you are getting ITC at a ratio of around 20! Does that mean you should get aggressive and put all your money on this stock? In my opinion, not at all! We will shortly come to how you can invest in this company if at all you decide to invest in it. In a country like India, which has been running a fiscal deficit, investors are always wary of the Government’s policy towards taxing sin products. Any possibility of an increase in taxation on tobacco products will cause the stock price of ITC to react adversely. Let me summarise this discussion. Broadly these are the points why investors are nervous: What is the future of this company? Is there any point in holding the stock for longer terms? I hope this post will help you make an informed decision about investing in ITC Ltd. Disclosure: I am invested in the company and intend to add in a staggered manner Data sources: Revenues, margins and other financial information from the company annual reports and investor presentations. PE ratios are calculated on the basis of earnings and share price.

I have been searching for quality mid and small-cap companies which can be good proxy plays in the Capital Goods space. The motivation to do this comes from the fact that the entire core sector is going through troubles. Leave aside investments picking up, consumption which has always been the inherent strength of the Indian economy is entering the zone of jeopardy. Well, this is the time when one should hunt for bargains, right? Here we go discussing one such fundamentally strong investment idea: Disa India Ltd. Background: Disa India is an equipment manufacturer with advanced foundry and surface preparation process technology. The company supplies complete foundry systems by integrating the international DISA range of molding machines and sand mixers with proper combination of sand plant equipment, surface preparation machines and environmental control systems. The company (DISA India Ltd) is a fully owned subsidiary of Denmark based Noricon group. The company mainly caters to ferrous casting industries, which are used in heavy commercial vehicles and tractors, by providing complete foundry machines and solutions. Wheelabrator division provides shot blasting machines for surface cleaning of castings produced at a foundry. About Noricon group: Noricon group was established in 2009. The group has four proprietary technologies in the equipment space: Noricon group has a presence in all major continents representing either of the above four technologies. In India, the company has four sales offices in New Delhi, Pune, Bangalore & Kolkata, and two manufacturing plants in Karnataka. The group is relatively new and started operations in the year 2009. Source: Annual results; Tequity Analysis Price to Earnings ratio chart for Disa India Risks to the call:

If you happen to google stock trading strategies, you will be bombarded with results with highly fanciful names: Iron condor, butterflies, lizards, sunrises, dragons, you name it! These are nothing more than attractively packaged titles to make trading strategies sound formidable, notable and attractive. But the crux of a successful strategy lies not in the name, but in its formulation, execution discipline and regular monitoring. It is worthwhile to study all the commonly used strategies to get an understanding of how they are constructed and executed, and we recommend our readers to do this exercise. However, most of the readily available tips and strategies have a serious limitation. All these strategies are generalized, and as we know, risk-taking ability differs from investor to investor. This is where it pays to create your own strategy: a tailor-made suit that fits you best. This article will explain the Tequity investing 7 step mantra to create successful trading strategies. The following 7 steps are prescribed to have a successful proprietary trading strategy: 1. Define the instrument: To start with, begin with strictly defining your instrument of choice. Equities, commodities, currencies, etc. Furthermore, define whether you will be trading in the underlying instrument directly or whether via futures, options or a combination of those. 2. Define Universe: Once your asset of choice and financial instrument of choice are finalized, it is imperative to define the boundaries of your selection criteria. For example, instrument is commodity futures, your universe could be crude, gold, copper, and silver. Nothing more, nothing less. Alternatively, if your area is equity stock options, your universe can be highly liquid NIFTY stock options, or perhaps, BFSI sector companies or illiquid mid-cap options. The choice is yours. Restricting the universe is imperative to reduce chaos and limit choices. IT greatly helps to bring objectivity in decision making. While a machine can pick from hundreds of available candidates, a human mind cannot. Having a narrowed down universe helps keep regular track of your underlying. Your familiarity with the underlying will help you to identify patterns that otherwise would not be possible. That being said, we recommend you answer the following questions when defining your universe: Does my instrument of choice and universe have: 3. Defining Entry Triggers: Once your universe is defined, it is time to step further and get to the execution end of things. This is where experience and individual discretion come into play. We will explain entry triggers via one of Tequity Investing’s specific trading strategies for better understanding: Our instrument of choice is highly liquid options of equity stocks and indices. We have 3 trigger conditions This is to say, we check the ratio of the implied volatility of next month and this month’s options for the same strike prices. If the value of this ratio fits our ‘target range’(our trade secret), we consider executing the trade. Internally, we call our strategy, a calendar volatility arbitrage. But for you dear reader, we will give it the fancy title of ‘Sleeping Tiger’ ☺ Do note that by defining our trigger, we achieve many important milestones. First, we adhere to a fixed repeatable discipline. Second, it helps us greatly narrow down to maybe 3-5 possible alternatives. A successful strategy among other things has to be repeatable, and also highly specific. If your triggers give you too many alternatives, consider adding another trigger level to further filter out the noise. This is how a trade comes into our ‘consideration set’. 4. Define Risk Metrics: After defining the entry trigger parameters and narrowing down your alternatives to achieve your consideration set, the time comes to quantitatively define risk metrics. For this process, the following questions must be answered Remember that all of the above have to be quantified with precision. The Tequity Investing way of doing this using a graphical representation of the strategy to ascertain risk parameters. Let’s take a simple example of a short strangle trade on Maruti trade(note that this example is different from the Sleeping Tiger strategy discussed above). The following are input criteria. Date: 4th Oct 2019 Spot Price: 6646 Short 7000 OCT CE for 123.85 premium received Short 6200 OCT PE for 81.95 premium received (If you don’t understand options, don’t be bogged down by the above terminology. Continue reading on) For this strategy, we have created a Payoff Chart using Opstra DefineEdge The payout chart shows the predicted outcome as on 31st Oct 2019. On the X-axis is the share price (current price on 4th Oct is 6645.95). On the Y-axis is the profit/loss. So at each corresponding value of share price on 31st October, we have an idea of our expected profit/loss. In this particular example, if the share moves sharply on either side there is a chance of making a loss. However, if the share price stays in a range between 6000 and 7200, there is profit to be made. By means of this payoff chart, we are able to define the risk questionnaire as under: With the above example, we have shown how strictly we need to define our risk and return expectations even before executing the trade. This exercise is done for all the alternatives that have been filtered from the ‘Define Entry Triggers’ step. The best alternative is chosen. If two or more strategies still look equally rewarding, the discretion lies with the intuition and experience of the trader as to which strategy/strategies to execute. Please note that risk and return are completely a function of individual interests and ability. The above example is a real-life illustration, but in no way is it a guarantee of generating 87% annual returns. Consistency of a trading strategy is more important than rates of return while evaluating a trading strategy. 5. Define Exit Triggers: If the risk and return are properly defined in stage 4, this is just a synthetic step. A strategy typically must be exited when the target profit, target stop loss, or target holding period is reached. However, one may

20th September 2019 witnessed historic movement in the indices and broader markets. BankNifty was up almost 10% intraday and Nifty around 6% intraday. Reduction in corporate tax rates to 22%+surcharges has been a big surprise. The effective tax rate comes to 25.2%. The cut in tax rates directly affects the earnings of companies and no wonder, there was exuberance in the markets. What matters the most at this stage is analyzing the impact of this move and coming to a conclusion regarding investing your hard-earned money. Let us begin and try to analyze the objections that critics have against this move: Structural vs. cyclical: This is one of the most debated topics in finance circles. A structural problem is one which is difficult to resolve. On the other hand, a cyclical problem is cured by the mere passage of time. In my opinion, the problem we have is a mix of both. This combination was topped up by the ill-effects of demonetization and GST. The move to reduce tax rates definitely does a bit to address the age-old structural problem of the Indian economy. (C+I+G+NX) represents the expenditure method of calculating GDP. ‘C’ represents private consumption, ‘G’ represents Government Spending, ‘I’ represents the Gross capital formed (Investments), ‘NX’ represents the net exports. Consumption has been the strength of our country and there is always a hue and cry about the lack of investment activity. The reduction in tax rates is likely to boost the investment activity by putting more money in the hands of corporates. Will the private sector really invest? According to me, this is a time when corporates would be worried about getting the first-mover advantage. Everybody likes to expand their business and if the domestic players do not show the agility, foreign investors will grab the opportunity by way of FDI. The ease of doing business in India has been improving over the last many quarters. Reduction in tax rates was a long pending ask that companies had from the Government. The Government’s bold step is likely to boost the sentiment and help companies in allocating capital towards new capital expenditure. Where is the demand? This is yet another classic ‘chicken or egg’ situation of macroeconomics. Critics say this is not the time to put money in the hands of corporates. The real problem is that there is no money in the hands of the common man and hence there is no demand. Well, my counter-argument is why is there no money in the hands of the common man? (Because there are not enough jobs). Why are there not enough jobs? (Because there are not many entrepreneurs ready to commit capital). Why are entrepreneurs shying away from investments? (Because the rest of the world offers better investment opportunities). I believe, boosting the sentiment in the form of providing stimulus is a myopic step. The biggest curse is unemployment and the tax cut shows a silver lining in this aspect. Fiscal stimulus — > Boost the sentiment Tax rate cut — > Boost the confidence What happens to the fiscal deficit? The incumbent Government’s commitment to fiscal prudence has been unprecedented. We may have done better on this front in the 1970s, but it is in no way an apple-to-apple comparison. What happens to the fiscal deficit is an important question. Here are my few cents on this: Fiscal deficit as % of GDP Figure: Fiscal Deficit as % of GDP; Source: Trading Economics Disinvestments: The incumbent Government has been focusing on increasing income via the disinvestment route. Their achievements are modest at best, as the disinvestment target was not met for the first 3 years of Modi 1.0. However, for FY 17-18 and FY 18-19, the disinvestment targets were exceeded. For the current year, the target is 1.05 trillion rupees. With the reduction in tax rates, it is likely that the private sector gets enticed to invest in these PSUs. There is a strong possibility that the disinvestment target for FY 20-21 will be ambitious and the Government will achieve it. Wider tax-base: The anticipated increase in economic activity is likely to increase the before-tax profits and gradually help the Government fill the deficit of 1.45 trillion rupees as tax foregone. Room for fiscal slippage?: Consider a worst-case scenario where the entire tax foregone of 1.45 trillion rupees moves to slippages. The current fiscal deficit is 5.39 trillion rupees. The percentage slippage in the worst-case scenario is 26% which translates into 4.4% fiscal deficit as a percentage of GDP. While the borrowing cost will increase significantly for the Government, one cannot forget the ongoing bull market in bonds. Close to 17 trillion USD worth bonds are yielding negative returns. The increase in borrowing costs will be at least partially offset by the global sentiment. “Every coin has two sides and so do economic decisions. You cannot make everything right in one decision. It is a continuous process” -Yours truly Conclusion: To be honest with you, I ain’t an economist. However, being in the market for several years, this move of reduction in corporate taxes seems big from a corporate India perspective. I agree that reduction in rates is not the best weapon in the Government’s arsenal at this stage. However, I find this as a more structural solution to a complex problem involving both structural and cyclical elements. Fiscal stimulus or reduction in GST is myopic when compared to a bold move of doing something for which India Inc has been craving for years. The sporadic up-move we witnessed yesterday, may or may not survive in the immediate future, however, the medium to long-term looks brighter. “By the time naysayers come to a conclusion, the concept of value stocks will again be history” -Yours truly Happy investing!

It is easy to make money in bull markets. In fact, in a year like 2017, it is extremely difficult not to make money in stock markets. The Nifty Midcap 50 index climbed from 3678 to 5540 in 2017. The percentage return is astonishing 50%+. Mind you, we are talking of an index and not a particular stock. The current value of the Nifty Midcap 50 at the time of writing this article is 4212. That is a steep fall from the highs. The deep-red portfolios are an eye poke for all the investors trapped at high valuations. At its peak, the Nifty Midcap 50 index was trading at PE ratio of more than 100. Below is the PE chart for the index: 5 year PE chart for Nifty Midcap 50 index Many of these super-charged bulls of 2017 have burnt their fingers enough to say good bye to the markets. The burns are causing excruciating pain while placing buy orders. On this occasion of Teachers’ Day, let us look at some lessons that bear markets teach: Let’s end this post with two famous quotes: “An Investment in knowledge pays the best interest”(Benjamin Franklin) “There will always be bull markets followed by bear markets followed by bull markets” (John Templeton) Happy investing!

A common statement I have heard from unhappy mutual fund investors is ‘The market has gone up significantly, but our mutual funds have not done very well’. In this article, we will explore the factors that one needs to take into account before selecting the right fund. 1. Fund category (Debt vs Equity vs arbitrage): The investor should be in a position to determine his investment objective, investment horizon and risk appetite. If the investment horizon is low and risk appetite is low-moderate, it is best to go for debt mutual funds. If the investment objective is open ended and there is nothing specific that you save for, plus your investment horizon is long term, it is advisable to go for equity oriented funds. Financial risk has a typical characteristic: The longer the investment horizon, the higher the chances of generating excess returns. One fund category that I want to highlight here is the Equity Savings scheme: In this scheme, minimum 65% of the total fund AUM is invested into equity and arbitrage opportunities and the remaining into debt. The arbitrage part is interesting and offers comfort to risk-averse investors who are looking for equity exposure. If the markets are overheated and the fund manager suspects that there may be a correction / crash anytime soon, he or she will start building positions in the derivatives segment. Let us take a simple example of arbitrage: Assume you have invested in a Nifty ETF. When Nifty crosses a PE ratio that the fund manager finds is not historically comfortable, he will start shorting Nifty futures. This shorting(or selling) is at a premium to the current value of ETF. Essentially what the fund manager has done is sold something at a higher rate when compared to what he currently owns. Doing this month-on-month gives him the required arbitrage. 2. Expense ratio: Just like every other business, in the mutual fund industry too, there are no free lunches. Mutual funds are managed by professional Asset Management Companies (AMCs) which are managed by professional fund managers and their research teams. The AMC has to take care of salaries of their staff and also manage the distribution costs. Expense ratio is calculated as operating costs of mutual fund as a percentage of average assets of the fund. As per SEBI guidelines, a mutual fund’s operating costs cannot exceed 2.5% of its average assets. 3. Sharpe ratio and Treynor ratio: Sharpe ratio is the ratio of excess returns a fund generates over the risk free rate per unit of standard deviation of the portfolio. Standard deviation is a measure of a portfolio’s risk. The idea behind Sharpe ratio is to measure the excess returns that the fund can generate when compared to the assumed risk. Higher the Sharpe ratio, the better it is for the fund. Treynor ratio is ratio of excess returns a fund generates over the risk free rate per unit of portfolio Beta. Higher the excess returns per unit of Beta, the better it speaks about the fund’s ability to generate returns. 4. Fund PE ratio and PB ratio: These valuation ratios are not something to go by absolutely, but they give you an overall idea of the fund’s philosophy. A fund with consistent high PE ratio indicates that the fund is a growth oriented fund. These ratios need to be compared with the PE ratio of benchmark indices. 5. Market capitalisation: It is important to consider the average market capitalisation of all stocks owned by the fund to ensure that you are taking only so much risk as you intend to. Small and mid-cap companies are considered risky and hence exposure needs to be limited for risk-averse investors. As against this, the blue chips are established companies and hence the associated risks are low. I hope this article helps you in taking the critical decision of selecting the right mutual fund. Do visit out mutual funds page to make sure you invest your hard earned money in the right fund. Happy investing!

India’s benchmark index, which also happens to be the poster boy for derivatives trading in Indian equity markets, has been experiencing a rangebound activity ahead of election verdict. The index made a handsome move from sub-11000 levels in early March and closed the March series on a strong footing at 11570. The months of April and May(thus far) have witnessed consolidation in a tight range of 150 points, between 11600 and 11750. I have done the analysis of Nifty chart on a 30 min candlestick and observed 2 futile attempts to form a trend. Below is the chart for your reference. As can be clearly seen from the figure above, 11560-11575 remains a support at the lower end of the range and 11750 remains a resistance at the upper end of the range. Which way will the range break? Well, it seems the market is waiting for getting confirmation on 2 important events: 1. The ongoing results season, which has been mediocre till now, 2. Results of the ongoing Lok sabha polls. Yesterday (6th May), there was significant call writing seen at 11700 and 11800 levels. This call writing has taken the Put Call ratio (PCR) below 1 for the May series. A put-call ratio below 1 is not considered From a valuation perspective, this range comes at a PE ratio of 29. At such high valuations, we are perhaps experiencing a range-bound activity for the first time. The dilemma that one would have is whether this is an impending PE expansion on the hopes of Modi Government returning to power or is it preparation for the next correction? The rangebound activity, after a strong uptrend is frustrating for traders, but do not lose your hopes, wait for the range to break and jump on the right side of the trade. Happy trading!

In this article I will try to explain how markets play with the mind of traders and what can traders do to stay insulated from unwanted noise. The modus operandi of delivering this thought will be through a stock that I have been trading frequently in the last 6 months: HDFC Bank. The story started in the month of September 2018. Indian markets were reacting adversely to the ILF&S fallout. I and my fellow traders in a closed group were scared to take trades. As it so happens, every trader has a tendency to become extra pessimistic when the sentiment is not good and become extra optimistic in a rosy environment. We were no exception to this vicious circle of greed and fear, however, we decided to take a contra trade in these uncertain times. After deliberating for a day or two, we decided to put our hands in HDFC Bank futures at a price of 1969 for the September futures. The spot price for HDFC Bank that day was 1956. For many days, the price did not move decisively, and we kept entering and exiting the position. These multiple entries and exits led to increased number of trades and thereby increasing the brokerage and taxes we paid, however, we could not think of any other option at that point in time. Below is the chart of HDFC Bank from September 2018 onwards Love affair with HDFC Bank (from a trading perspective) To sum up, the various phases in which I have been trading this scrip are as follows: You can see how this scrip has tested my patience and conviction at various levels. To say the least, it was frustrating to have it in the portfolio. This frustration was topped by the need for money to be withdrawn for my monthly expenses. During September, October, November and December, I committed a mistake by entering multiple times, however I was fully committed in January-April and had full conviction for the trade. This conviction was periodically reinvigorated after studying the quarterly results. Below, I would like to share my P&L for this scrip. I have been trading with 2 lots (250 quantity pre lot). I have made a side-by-side comparison between 2 scenarios: Patience & conviction vs. over-trading You see how, the multiple entries and exits in first four months costed me in terms of number of trades, my time, brokerage and taxes. Not just that, eventually even the gross profit I made was lesser than the second scenario. Having said this, I am still happy that I decided to stick with the trade in last 4 months. It has been a wonderful experience. Summing up my thoughts in the below points: Practical Suggestion for becoming a positional trader Conclusions Getting into positional trading and increasing the charting timeframe is a difficult job, however in the longer term for sustainable income, this is a superior strategy. One should aim for slow transition from Intraday trading –> Swing trading –> Position trading. Holding your position through volatility is an art, and every art is sharpened with practice. This will be of great help in preventing the market from playing mind games with you.

Return on Equity (RoE) is an accounting ratio used primarily by Value Investors world-over. The interpretation of this ratio is fairly simple: It is the ratio of Net Income earned from a Business to the Shareholder’s Equity for a given accounting period. Let us see how to interpret this ratio and apply it for taking investment decisions. Higher the Return on Equity, the better it is. Generally, it so happens that during the course of many years, that a successful Business is accruing profits,the reserves base becomes high and consequently the Return on Equity declines. Let us look at RoE as a composite of 3 different accounting ratios. This formula below is called as DuPont Analysis. RoE = (Net profit Margin) * (Asset turnover) * (Financial Leverage) = (Net Profit / Sales) * (Sales/Assets) * (Assets/Equity) You see how the denominator cancels with the subsequent numerator and we are left with Net Profit/Equity which is nothing but our original expression for return on Equity. Then what is the need to represent this simple ratio in a fairly complex equation? Well, the 3 constituent terms have their own significance. Let us look at each one individually: a. Net Profit margin: This is simply the net profit as a ratio of total Sales for a given accounting period. The higher the Net Profit margin, the better it is. A higher net profit margin is a result of operational and financial efficiency that an organisation exhibits over the course of the year. b. Asset turnover: This is the accounting ratio of Net Sales to Average total assets for a given accounting period. Average total assets are calculated by taking a simple average of assets at the start of an accounting period and assets at the end of that accounting period. A higher asset turnover ratio signifies that the company in question is using its assets efficiently. Likewise a lower ratio indicates the opposite. c. Financial Leverage: The ratio of average total assets to the shareholder’s equity is termed as financial leverage. In simple terms it indicates how much is the asset owned by the company for 1 unit of owner’s equity. The higher this ratio, it indicates that the company is dependent on external sources of funding to create its assets. This external sources of funds is nothing else but the liability that the company owes to the external financing entity. As you must have noticed, the financial leverage is a multiplier that does the job of increasing the RoE for Debt financed companies. Higher the financial leverage that a company operates at, the higher will be its RoE relative to a company with no leverage. Combined interpretation of all three ratios: As you can see, the simple multiplication of the above three ratios gives us the Return on Equity. However, it is important to understand the role that financial leverage plays in deriving the RoE. If the RoE ratio is amplified by the financial leverage, it means that the company has a scope for improving its core profitability and turnover ratios. What it is doing good is borrowing funds and using them efficiently to generate a higher Return for its shareholders. Financial leverage is not bad, infact it is desirable to an extent. However, it is a common belief that financial leverage must amplify the RoE over and above the expected RoE without financial leverage. How much RoE is enough? This is a subjective question and depends on the industry that we are talking about. However, RoE figure consistently between 25-30 percent is considered pretty good. When analysing RoE, it is important to note that RoE needs to be observed in context to the figures for the past years and not just the standalone number for a particular year. For the benefits of readers, I have decided to give the top 5 companies in India with highest RoE and I will compare it with the technological giants in the USA (Facebook, Amazon, Apple, Netflix, Google) 5 year average Return on Equity for companies listed on BSE / NSE Let is see how this compares to the technological giants in the USA from 2005-2019 Historical RoE of the famous five companies from USA How do management improve RoE? As mentioned earlier, it is a common phenomenon that RoE declines for companies in the maturity phase. This is because, these companies have accumulated huge reserves over their tenure of operations. The denominator of the ratio becomes large, but the numerator does not increase proportionately. This leads to a natural decline in the ratio. The management has following options in such cases: a. Buybacks of outstanding shares b. Distributing profits in the form of higher dividends c. Acquiring new businesses or raising capital expenditure The suitability of each method for boosting RoE is important, but is outside the scope of this article. How to interpret RoE and use it for making investment decisions? It is a popular saying in stock markets that tough times do not last, but high RoE companies do. Let us see how we can use this learning in taking investment decision. The actual interpretation of RoE is ‘How effective is the management in generating returns over the money it has’. I as an investor, will be comfortable with a company with is doing a decent job with generating returns on the funds the company has. Does this necessarily mean that high RoE companies are always outperformers? Well, the answer to this is high RoE companies may not be necessarily be high growth companies. There are companies listed on the Indian bourses which are high RoE, but low growth. One such example is Castrol India. Investors look forward to revenue growth as one of the important parameters before investing their capital. For high RoE companies, it is also important to know what Business activities they can expand from the accumulated reserves. The Tequity way We at Tequity, give first preference to high RoE, high profitability companies. However, our approach is pragmatic.

Brief about India VIX: India VIX is the volatility indicator formulated and computed by National Stock Exchange (NSE). It is dynamically updated in real time and measures the expected volatility in Nifty in the next 30 days. The calculation is complex and the main variable in this calculation is the option prices of OTM Calls and Puts. To read in detail about the history and methodology of calculation, click here. The interpretation of India VIX is interesting (and confusing at the same time). In this article, I am making a sincere attempt to articulate my understanding of this volatility indicator. The straightforward interpretation of a rising VIX is that option writers are asking for more premium to take a position. In other words, the risk premium rises. VIX cannot be interpreted in isolation. It works best when clubbed with nature of upcoming event, technical analysis and fundamental phase of the market (PE expansion, PE contraction or consolidation). Let us look at the different phases of VIX alongwith the different phases of Nifty and the broader market: I have posted below charts of nifty and India VIX for the readers to easily refer while reading. You may use your charting softwares for analysing the correlation in detail. The VIX puzzle: When I started studying this indicator in depth, I wanted to know ‘VIX moves the market or market moves the VIX’? This puzzle is very similar to the classic ‘Chicken and Egg puzzle’. Let us look at both aspects of the argument: My interpretation of this puzzle: VIX is the expectation of volatility in future that traders have. This expectation is mostly in anticipation of the outcome of a major event (mostly geo-political). This subjective and qualitative ‘expectation’ leads to a general ‘opinion’ amongst market participants and hence risk premiums increase gradually over a period of 3-4 weeks. This is a systematic and planned rise in VIX over the medium term. Consequently, it is safe to assume that on longer time frames, the VIX moves first and then the market. On shorter time frames, when there is no ‘expectation’ or ‘opinion’ amongst the market participants, it is very likely that the market moves first and as a reaction to that the risk premiums rise. Conclusions: a. VIX should not be interpreted in isolation. It works well with supporting technical indicators, fundamental phase of the market and most importantly the nature of upcoming event. VIX works better on longer term charts(weekly or monthly). If you are happy with my observations written in this article, contact us here or visit our training page here for more such unique techniques. Happy trading and investing!