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Elephant in the room – Indian Railways

September 15, 2019

In order to understand the economy of any country it is imperative to gauge the efficiency of its transportation system. Efficient transport systems provide economic, social and environmental benefits. It results in positive multiplier effects and provides enhanced accessibility to markets, employment and opens avenues for investments. The spine of the Indian transportation network is the Railways and an entire ecosystem has been developed over it. The Indian Railways is the elephant in the room and its prospects have a direct impact on the country’s economy and general welfare of the population. To comprehend the progress of the Indian economy without the Railways would be an incomplete task.

The Indian Railways is a fascinating institution that has contributed greatly towards the socio economic development of the country. It has played an integral part in transporting people and goods across 121,407 kms and 7349 stations. The logistical network created over the years is a maze and its management is certainly a case study in itself. India had its first rail during the time of George Stephenson himself, way back in 1832. Currently it boasts of the busiest routes carrying over 8.2bn passengers and transporting 1.1bn metric tons of freight in a year. It is also the world’s 8th largest employer with over 1.31mn direct and several thousand indirect employees (it carries a wage bill of Rs.1,15,271 cr!). A typical steel rail cross sections weigh between 40-70kg/m, excluding the sleeper, nuts, bolts etc. Further the requirement for additional wagons, stations and other related infrastructure pushes the demand for steel, fuel, electricity generation, retail outlets and other offsetting industries. Railways also bear social service obligation of around Rs 25,000 cr every year by carrying passenger services below cost.

The common perception of Indian Railways running late and being notoriously untidy is changing rapidly. Governments in the past and present have continuously worked to innovate, de-bottleneck and streamline the transport of goods and passengers. While many may argue that such improvements are coming at a very slow pace when compared to other countries, there should also be due consideration given with regards to the size of the country, the magnitude of population, state of the economy and constantly changing governments.

Amongst the major developments that have brought in a paradigm shift with regards to the management of Indian railways has been the phasing out of a separate Rail Budget and the decentralization and corporatization of several segments of the institution outside the bureaucratic and political framework (at least partially!). All of these entities have taken advantage of their independence and performed successfully.

  1. IRCON International- A transport infrastructure construction company

  2. Container Corporation of India Ltd (CONCOR)- operates a network of 60 container terminals, offering rail and road container services between the hinterlands and ports, and between major metropolitan areas.

  3. Indian Railways Finance Corporation (IRFC)- a dedicated financing arm of the Ministry of Railways

  4. Rail Vikas Nigam Limited (RVNL)- created to develop projects, mobilize financial resources, and implement projects.

  5. Rail land Development Authority (RLDA)- statutory authority for generating revenue by developing vacant railway land for commercial use.

  6. Dedicated Freight corridors corporation of India Limited (DFCCIL)- established to procure and operate selected new DFC.

  7. RITES- a domestic and international railway and transport consulting company.

  8. Indian Railway Catering and Tourism Corporation (IRCTC)- handles the catering, tourism and online ticketing operations of the Indian Railways.

Passenger experience has improved multifold. Today, we are asked for feedback for the services offered in the railways, something that could not be envisaged even 5 years ago. AC compartments have stewards and captains as in air travel. Security has become a high priority with regular policing and signaling systems have improved significantly avoiding frequent accidents. Travel for elderly people, bio-toilets, cleanliness and quality food have taken center stage. All this has happened by keeping ticket rates at affordable levels. Innovative revenue generation measures such as involving private players, providing space for advertisements, use of vacant properties, value added services such as short term AC accommodation and assisted travel programs have offset the rising costs. Raising investment funds from the market and other private players through debt and equity has augured well for the railways and reduced the burden of the government.

While emphasis has been given to passenger traffic there has been little improvement with regards to the major revenue generator the Freight Rail segment. Earnings from this segment, account for 65% of total revenues in FY18 and are used to cross-subsidize the passenger segment. In the 1950’s rail contributed to nearly 70% of the freight traffic the rest being handled by road, however things have reversed now and rail has hardly 20% of the market share compared to the road. Majority of the freight business is supported by 9 commodities: coal, iron, steel, iron ore, food grains, fertilizers, petroleum products etc. Freight trains still use nearly two-thirds of the rail network that is allocated to passenger trains. There is seldom regard for timetables and they are given the lowest operational priority. Investments in expansion of the freight corridor is finally witnessing traction. Anticipating the increased relevance of rail network in the economy the government has allocated Rs. 1,48,528cr in 2018 which is the highest thus far. Further in order to develop three new arms of Dedicated Freight Corridor (DFC) in the various regions of the country, the investment outlay is Rs 3,30,000 crores. Indian Railways is targeting to increase its freight traffic from 1.15bn tons in Fy18 to 2.16bn tons in Fy20 and 3.3 billion tons by 2030. Passenger traffic is expected to increase from 8.2bn in FY18 to 15.18bn in Fy20. The National Rail Plan (2030) envisages dedicated freight corridors, High speed rail connectivity, network with major ports, integrated multimodal infrastructure. Foreign Direct Investments (FDI) in railway related components reached US$ 897.09 million during the period from April 2000 – December 2017. 6 major global players have shown keen interest in developing ultra-high-speed trains in India.

The private sector participation in India’s rail sector is still very low compared to international standards. Huge business opportunity awaits local industries as the government weighs on its Make in India program. Involving customers in building rail lines especially for ports and mines have been a successful experiment. Rail connectivity to ports of Pipavav, Mundra, Mangalore, Kandla, Dahej, Krishnapatnam and Dhamra are evidences of successful private investments in the rail sector. Such PPPs should reduce the industry’s monolithic nature and distress the centralized decision making nature of the entity and allow for speedy resolution of problems.

The Railways has built its vision over three important pillars- Infrastructure upgradation, Passenger experience and Preferred Freight carrier. This it hopes to achieve by non-fare enhancement of revenue and imbibing latest technology. It is clear that tracks have been cleared for the growth of this mammoth institution and without doubt it will carry the country along. A journey of a thousand miles has just begun.

September 15, 2019

Practical Speculation by Victor Niederhoffer and Laurel Kenner – Book Review

September 5, 2019

Media is filled with epitomized stories of Gurus who appear to be embodiments of PERFECTION. This is seldom the true story. “Practical Speculation” comes as a relief for those who have been constantly bombarded with stereotypical reading material. It is the story of Victor Niederhoffer’s roller coaster life which moves from success to failure and again to success finally ending in obscurity. Vic is a five time national champion in squash and a Harvard graduate with a Doctorate in Economics. He worked closely with George Soros and had all the ingredients to become an enviable Fund Manager. However, time would judge him differently.

The book show cases all the popular strategies followed by the herd, its pitfalls and why none of them provides a perfect solution. Admittedly, he fills the content with cynicism, perhaps a fallout of his failures. There is emphasis on making rational decisions about the markets and choosing survival first. He warns us on the glorification of various correlations and earnings propaganda purported by the media. Vic also explains how contemporary financial news reports could be done by computers working from a limited database of erroneous ideas and quotes from mediocre money managers, a trap to watch for. He disowns the legendary Benjamin Graham and gives his reasons for the same. He scorns at the corporate leaders who claim they are No.1 and presents a study on the spooky relationship between Hubris vs performance. He shares interesting strategies that have proved useful both on the court and in the market. The book concludes with some suggestions to investors, further reading recommendations and optimism on equity investing.

The book talks about acceptance of failure and the immense learning’s that it has to offer. To a response to one of the readers of his columns he quotes “ I am not an authority. I am trying to learn. I guess they figure that people trying to learn might have an audience. Perhaps it was my education and my need for a job?”

Both the authors Victor Niederhoffer and Laura Kenner have made sure that a serious subject which is often filled with technical jargons is presented in a simplified manner and spiced with a sense of humor for easy reading.

September 5, 2019

The Electric Vehicle Conundrum

August 25, 2019

Did you know you could have laid your hands on an electric car atleast 135 years ago, but you haven’t been able to do that yet!

Since its first appearance in mid 1800s, Electric vehicles (EV) have caught our fascination albeit intermittently. Impediments such as short travel range, low top speed, high battery cost and rapid development of the Internal Combustion Engine (ICE) quelled its progress.

Today there seems to be a revival in EVs, thanks to the noise created by Tesla and its Founder. Disruption evangelists such as Tony Seba have for long been predicting the demise of hydrocarbon fuelled vehicles. Propaganda theorists/environmentalists are calling for a complete ban of carbon emitting automobiles. In the past decade there has been a load of literature written with regards to the prospects of EVs, nevertheless several pertinent questions continue to remain.

We attempt to dissect the hype and understand the ground reality of EVs in India. Will it cause the so called “disruption” any time soon?

1. How feasible is it to buy an EV in India?

This would obviously be the first question for any car buyer. In the case of India, there is a huge visual gap that makes it uneconomical to own an EV. Both the purchase as well as running cost of an EV continues to remain way higher than a conventional vehicle. Further, unavailability of raw materials for the battery impedes local manufacturing capabilities increasing the cost. The whole of India has less than 1,000 charging stations compared to USA’s 47,117 making the choice even more difficult.

In our ground zero research we discovered Mahindra E20+ (which is probably the only EV you might see on the road) was double the cost of Maruti Alto LXI. Despite the low running cost of E20+ (being one-fourth of the Alto), it would still take about 3 years or 78,374 kms to break even (not considering the battery change post 3 years, adding another Rs.1.5lakhs). 95% of the EVs on the road are two wheelers. Hero Electric has been the first mover with very limited off-take of their scooters. Small size, low speed and high charging time make it an unviable option for a regular commuter.

2. Is it possible to witness more EVs than conventional vehicles on Indian roads by the next decade?

Simple answer NO.

Based on the growth in the economy, population, affordability etc. the projected annual automobile production will double in 10years to 50mn vehicles. Currently, the total EV sales in the country is at a paltry 56,000. To achieve 10% of the expected demand it would require a 100x growth from these levels. If one cuts the rhetoric of the government and manufacturers on their vision to capitalise on the EV market, there is hardly see anything tangible on the ground as yet. Compare that to China, which manufactures over 1.2mn EVs contributing to about 5% of their entire auto sales.
 
3. How is the Indian government helping?
 
Appropriate regulatory and government support are key to the success of EVs. Several thousands of crores have been allocated for promoting e-mobility in India (atleast in paper). The National Electric Mobility Mission Plan 2020 (NEEMP) supposedly allocated Rs.14000cr to achieve a target of 6-7mn Hybrid and Electric vehicles by 2020. Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME I, FAME II) are some of the recent policy initiatives undertaken by the government which intends to provide subsidies/incentives towards developing infrastructure for EVs. Other than attempts to purchase a few hundred buses for the government, very little has commenced yet on a larger scale. It is clear that none of these schemes have managed to move the needle yet!

4. What are the automobile manufacturers in India doing to improve their EV capabilities?

Indian manufacturers are way behind in building EV capabilities compared to their peers. Despite being the 5th largest globally in terms of auto sales, India doesn’t even feature in the top 20 when it comes to its EV contribution. None of the large players have invested meaningfully to promote EVs. Mahindra’s take-over of erstwhile REVA was probably the only venture into this space. Big moves will take place only if incumbents like the Tata’s and Maruti’s enter the stage in a mass scale. As of now, they are hibernating.

5. Are EVs actually an alternative to resolve the problems of pollution?

The fundamental case for an EV is pollution. However it is imperative to note that vehicular pollution only contributes to about 20% of air pollution. Industrial pollution is the primary contributor to air pollution, a large amount of which is caused by thermal power generation. India is already the 5th largest power generating country in the world. Coal powered plants contributes to over 75% of electricity production implying that other forms of power generation mainly solar, hydro and wind power are simply unable to meet the demand. Any additional capacity created to run automobiles will simply add to the already stressed out thermal plants and change the source from which these emissions occur. While the country struggles to provide steady electricity to households and industries, it is difficult to envisage demand from another segment.

 

Further, the recycling/disposal of batteries, mining for lithium, cobalt, manganese etc. can result in a whole new catastrophe causing another major environmental concern. Taking conventional vehicles off the roads might not be the perfect solution to control pollution. Instead there should be a holistic approach in controlling all the possible sources of pollution, as most them are inter-connected.

6. Social costs?

EV adoption in India is likely to create dependency upon other countries for batteries and other materials. 75% of the world’s lithium comes from Argentina, Chile and Bolivia popularly known as the Lithium triangle. For every 1% increase in global battery vehicle market penetration there is an increase in lithium demand by around 70,000 tonnes/ year. Cobalt prices have risen nearly 280% from their low point in February 2016 to hit an eye-popping US$82,000 per tonne as of February 15, 2018. More than 60% of its supply is from the volatile and labour exploiting Democratic Republic of Congo where political instability is prevalent. The geographic complications arising from sourcing these resources is a problem in ensuring economically priced vehicles fit for the masses. As the world continues to move towards quick adoption of EVs, it is highly questionable whether supply of these vital resources can match its demand let alone if it can be sourced ethically and responsibly.

It is estimated that the automobile and its offset industries employ nearly 20mn people. With new technology arises the need to replace and reskill this mammoth workforce. Significant amount of time and investment may be required for the same. It can also cause social issues and disruptions in family incomes which may outweigh the economic benefits in the short term till the industry re-stabilises. These concerns will need to be handled delicately and might become a major reason for the subdued rise in EVs.

Conclusion: Growing concern regarding the environment and insecurity over hydrocarbon reserves will surely accelerate the need for alternate modes of transport. In the case of India, considering the size of the population we believe EVs may become highly effective in public transportation more than private. While we would love to drive an electric car on Indian roads, the feasibility, economic viability and sustainability is yet to reach a minimum threshold required for a volume ramp up and compete with the conventional players. The agonizing wait to ride a proper EV may actually take some more time.
 
In this case, objects in the mirror appear farther than they actually are.
August 25, 2019

“Cul de sac” for the stock markets?

August 10, 2019

There has been a triumph of euphoria in the last five years which has led to the benchmark indices doubling. However the underlying earnings has remained flat with an absolute growth of a meager 4% during the period. This has led to PE expansion a.k.a Bubble like scenario. The Nifty 50 trades at a trailing PE of 29X which is the highest ever it has reached, thanks to the heightened optimism and the unprecedented fund flow (both locally and from foreigners). In order to revert to its long term mean the Index PE will have to decline by atleast 27%. This can happen in three ways, either there should be a significant earnings upgrade or the price decline or a combination of both.

Let’s dissect the earnings first. Nifty 50 consist of three major sectors that contribute to nearly 70% of the entire weightage of the index: Financial services, IT and Energy. Hence it is clear that if the benchmark has to witness any growth in earnings it has to come from these three sectors. The remaining are certainly not heavy enough to move the earnings needle.

In the case of financial services, except for provision write backs by some banks which may result in a significant rise from a low base, there is unlikely to be any core income growth. The sector is further burdened by liquidity and solvency crisis which is not fully reflected in the economy yet. Similarly the IT sector is facing headwinds and even with a benign dollar the best expectation is only a single digit growth. The case with energy related companies is also no different. Consumer goods, Automobile and Metals are all facing low demand. The below chart indicates the expected contribution to the Nifty earnings from each sector (collated from prominent sell side analysts).

With regards to the price, a decline may happen due to many factors ranging from strictures by the government, reduction in fund flows, scams, change in sentiments or just a loss of appetite for equities. While none of this is can be gauged effectively there are technical indications of bulls wearing out. With no scope for an earnings upgrade, the only way the Nifty PE levels could revert to the mean is via a price decline (bad luck!)

Hapless politicians appear to have run out of fiscal measures and are blaming Central Bankers for the current economic decline. But Central Bankers can do only what they can do best, manage monetary policy, reduce interest rates (which they have done already) or resign! German, French 10yr bonds are subzero, Italy is at all-time lows, US treasury 10yr is soon breaking the 2% support levels. India on its part is also nearing an all-time low level. Negative yielding bonds have risen to $13.4 tn in value which includes $608bn in corporate bonds globally. This further accentuates the case for a bear market.

Cul-de-sac is often not an exact synonym for dead end and refers to dead ends with a circular end, allowing for easy turning at the end of the road (..wiki). Which means, there are times when you need to invest and there are times when you have to turn around and save your money, so that you can invest later. Superior investment returns are possible only if both of these are maneuvered well. Low corporate growth, declining GDP levels and high valuations make it a clear case to reduce exposure to risky asset classes making it the perfect time to save aggressively. Great opportunities are usually missed only because of the lack of ear marking of funds at such junctures. Once the funds are allocated for investing for a later period, there will be little panic, fear or doubt which eventually is the cause for poor decision making.

August 10, 2019

IT industry imbroglio – are we looking into the rear view mirror

July 6, 2019

“Infosys effects ‘parking fee’ deduction in staff salaries”….Reported The Hindu, earlier this month…

This was a small headline published in the newspaper recently, but it struck me big time. The objective is not to venture into the legality or morality of the charges levied (we have the media to handle that part), our concern is on the IT industry as a whole. Once upon a time, working for an IT company was akin to going to the mall or so it seemed to mere plebs like me who have been surviving in dingy office spaces for most of their careers. Freebies included cab rides, laundry, food along with hippy dress codes, international travel and weekend entertainment. The brightest college students were recruited despite their totally irrelevant backgrounds and paid exorbitantly beyond their talents. Civil, mechanical, electrical, chemical engineers along with those who studied biology, physics, chemistry started coding…. And there began the end of the story!

Today, India boasts itself to be the no.1 Global destination for IT sourcing activities attracting 55% market share of an industry that is worth over $200bn. Thanks to the British occupation, we were left with wide prevalence of the English language in the country, which meant workforces were readily integrable. The industry contributes to 7.7% of the national GDP and is expected to be 10% by 2025. The IT industry had been a darling of the regional and national governments, who lured them through tax sops and free land offers. The businesses were cash rich, zero debt and high margin. Everyone seemed happy- employees, clients, investors….so what’s the problem now?

In the last five years from 2015-19, the aggregate profit growth on a yearly basis, for the top 4 IT companies in India has halved to less than 10%. If one removes the dollar appreciation during the period, the scene is dismal. Several factors contributed to this, such as higher competition from other countries, tighter billing rates, protectionist policies of US/Europe, subdued order book growth due to lower spend from key sectors such as BFSI/Auto. But the most common complaint remains the lack of value added services and heavy reliance on wage arbitrage.

IT companies/ departments are no longer construed as a service providing operational support for business units. Instead organizations are increasingly depending on their contribution in driving strategic objectives. Over 35% of global company heads strongly agreed that technology is driving business outcomes, plays a critical role in strategic planning and redefining their businesses. As this trend progresses what companies require from their IT partners will fundamentally change increasing the importance of partner ecosystems.

Global competitors are capitalizing on the blistering revenue growth from digital segments involving new age technology, Accenture has recorded 60% of its FY18 revenue from digital segments. The highest digital contribution among top 5 IT Indian companies is way below at 31% (which may not be accurate as they have classified facelifted ERP services as part of digital as well). This is cited as a primary reason for the fall back of Indian players resulting in slower growth compared to their global competitors. The linear Indian IT model allowed for companies to conduct most of their operations in India employing low cost programmers. However, the emergence of technologies such as AI, Robotics, Big Data analytics and machine learning have made these functions significantly easier to complete and large workforces are no longer required with most roles becoming redundant. This declining demand for traditional services (~50% Revenue) combined with the slow adoption of new tech has been a double whammy for Indian IT.

The rapidly changing requirements and emergence of new age technologies makes upskilling the workforce a priority. Therefore, old processes wherein companies hired hordes of graduates and trained them in key skills will no longer be viable. This is a peculiar nature of the IT industry wherein upgrading the domain knowledge continuously is key to survival, much different compared to the labour involved in other sectors. There already exists a concerning deficit of these specialists and is getting larger as companies struggle to upskill workers. To add to the problem, the quality of graduates have deteriorated significantly over the last decade and most of them remain unemployable.

Indian IT companies have been facing increasing pressures from the protectionist policies being implemented by the US. In order to satisfy regulators, they are setting up delivery centres in US and EU kickstarting research programmes at noteworthy centres of education and hiring local workforce extensively. These expenditures are causing their Dollar costs to rise rapidly and margins may suffer.

Indian IT industry is clearly the elephant in the room, and a pivotal part of the country’s growth. The industry directly employees over 4million people and provides indirect employment to over 10million. However, it is important to note the quality of employees that are currently being recruited. They no longer attract the best talent and the pay is considered much lower than other sectors. Most of the freebies are gone. With restrictions on visas, offsite projects are reducing for locals, which was once a great attraction. Apart from these existential issues they must also deal with other factors – delaying large projects citing unfavourable government actions (trade wars), protectionist policies, unexpected economic shocks.

There is a lot of hype always associated with technology companies, but the reality is quite different. Unlike other more mature industries such as Manufacturing, FMCG, Auto etc. IT has just come out of its sunrise status with a lot of handholding. It would require atleast couple of more decades to transform itself into the better or worse. Going forward, Indian IT companies must endure the ongoing test of resilience and display their management capability to be among the largest innovators in the world in order to maintain their global significance. The near term pain will expose the weaker links who would soon burn themselves out. What was once a matter of pride is certainly waning for now.

July 6, 2019

5 questions for Dummies!

June 6, 2019

In case you didn’t know, “For Dummies is an extensive series of instructional/reference books which are intended to present non-intimidating guides for readers new to the various topics covered. The series has been a worldwide success with editions in numerous languages.” …Wikipedia

We have often been asked by the investing fraternity about how we can go about evaluating stocks. Why do we always get it wrong and why is it so complicated that non-professionals can’t understand. Ancient philosophers would have dealt with this problem simply by asking more questions and debating them, thereby stimulating critical thinking and removing predispositions. Those who moved beyond the crowd did exactly that. They were the ones who asked the right questions, kept things simple and clearly understood the problem. Rest remained Dummies!

 

So, we decided to present a set of 5 questions in an attempt to simplify the process of evaluation, clear the garbage, structure the thought process and thereby enable stock selection.

 

What does the company do – this is so Basic

 

Do you understand the product or service offered by the company, to whom it is offered in terms of geography and profile of customers? Have you experienced the product or service offerings yourself? How vital is the company’s products/services for its clients? Are they easily replaceable?

 

If you find it challenging to answer this basic question then you are either under researched or the company has a complicated business model both of which should make you wary of investing. Develop a grasp on the economics of the business as its CEO would desire by studying how the business grew into its current shape since its inception.

 

Spend time contemplating the significance of the company from the perspective of its customers also look into satisfaction levels and how well the business retains them. Companies that understand their customer base well will keep track of how their needs are evolving. Incorporating that know-how towards product development will enable them to maintain their relevance factor in the long term to its customers.

 

Does the company have sustainable competitive advantage – is it special

 

Is the advantage sustainable? Can others recreate them, in how long? How profitable and competitive is the industry? How does the company handle suppliers? What are the risks posed by substitutes?

A sustainable competitive advantage enables the firm to protect profitability against competition for a longer period. It would be imperative to understand the key roles played by patents, licenses, brand loyalty and intangible assets which are common sources of these advantages. Keep in mind that the best returns are made from investing in businesses that are developing these advantages.

 

Today we witness several businesses burning cash to develop these advantages. Check for increase in customers and if continued importance is given to R&D, as these are signs that their efforts are fruitful. Pay attention to these advantages and look out for any declines, common threats include improvements in technology and rapidly growing industries.

 

This is an all-encompassing question which will also delve into the peer relationships, strengths, weakness, pricing and quality of the company’s offerings.

 

Quality of Management – tricky one

 

The prospects of any company is defined by the bandwidth of the promoters/top executives. Gauging the quality of management in a company is very important. There are a few indicators which might prove useful in understanding the worthiness of the decision makers in an organization.

 

First check out how the senior management is compensated? Are they buying or selling stock? Pay attention to disparities between company performance and management compensation

 

Managements with a long track record are more likely to be successful. Nowadays, reputed companies interact with the investment community on an on-going basis. Tracking down the narrative along with the follow up action provides significant insights and any mismatch can be easily captured.

 

Constitution of the Board is a key aspect, more independent qualified Board members auger well for better capital allocation decisions, integrity and shareholder protection.

Growth – Random variables X, Y and Z

How fast is the top line growing compared to peers and why? Is its growth organic or through M&A’s?

How has the company grown historically? How did management and companies previous M&As perform?

 

There are several variables to consider here. Statistically putting it in an equation with X, Y, Z… will not really help. Instead go deeper and identify the real reasons for growth. Growth supported by innovations or industry trends are more sustainable. Identify growth slowdowns by monitoring if business is targeting new customer bases, changing business models or paying higher proportions of earnings towards dividends.

 

Investors need to watch out for companies hastily entering new businesses that do not have much in common or in other words deviate from their vision. M&As are likely to be successful when managements have a history of successful acquisitions, displayed resolve by refusing overvalued ones and show an in depth understanding of the business being acquired. This is important especially in the current scenario when we are witnessing both start-ups as well as mature companies overpaying for acquisitions. Focus on cost savings and increase in revenue to ensure that the synergies claimed by management actually materialize.

Numbers say it all – Crunch and munch

No narrative will be complete unless financials are effectively scrutinized. Number crunching is generally considered a boring and tedious process, but it need not be the case. Filters can be used to skim out majority of the accounting shenanigans.

 

Strength of the balance sheet is measured by three important line items – Net worth, debt and cash levels Profit & Loss is evaluated based on the stability of margins, growth of top and bottom line Valuation can be compared using – Price earnings, Price to book, return ratios

 

The stocks that satisfy these filters are generally above average and report consistent profits. Adding the qualitative analysis to this result will throw out a decent number of companies which you can add to your portfolio. The relationship between growth, competitive advantages and intrinsic value is central to understanding when it’s worth paying up for a business.

 

There was a time long-long ago, when lack of information resulted in limited knowledge about a subject. Today we live in an exactly opposite scenario where we are bombarded with an incredible amount of information on a daily basis; but our knowledge level continues to remain pretty much the same. Screaming TV anchors are trained to ask questions that sensationalise rather than invoke any sense. The right questions will help decipher any problem and enhance decision making capability. It will encourage deeper introspection and improve the entire process of learning.

June 6, 2019

Busting myths #4- Big investors don’t make mistakes

May 25, 2019

Investment guru- a person who knows it all.

The common man is mesmerized by these so-called influential investors, the profits they make, their knowledge and maturity. Every word spoken is appreciated and repeated religiously. A book on their achievements is published, they are taught in school and they become a eulogized part of history. These are the people we are asked to look up to and imbibe their successful investing experience.

But the cynic in me has always wondered, haven’t these immortals ever made mistakes? What kind of superhuman abilities do they possess that they don’t lose money like you and me? How many of these gurus created wealth by investing their own funds? Are they really experts or just fancy articulators who are either paid or pay to come on TV?

 

Successful investors are generally considered super intelligent, and super intelligent people don’t make mistakes. Well that’s not true. History reports several super intelligent people making blunders- Isaac Newton, Mark Twain, John Maynard Keynes, Irving Fischer to name a few were some of the very intelligent people who bombed big time in the stock markets. Long term capital management was a Hedge fund constituted by the world’s best financial minds, but the scars it left constantly remind us of intelligence gone wrong. Mistakes can occur in the most intelligent of people, so we plebs can relax.

 

Experienced gurus can go wrong as well. Take for example the Dextor shoes investment by the legendary Buffet. His oversight cost him dearly and he kept brooding over it time and again in his annual meetings. Sequoia’s investment in Valeant pharma and Bill Ackman’s tryst with Herbalife are other examples where the experienced investor had full information and was completely convinced about their respective investments. But the market thought differently, and prices move the other way. The illusion of control is a behavioral bias which makes investors overconfident of their ability to influence events beyond their control in order to provide superior returns. However, the variance in price depends largely on the market’s expectations which is simply too difficult to quantify. Even the most experienced and informed investor in the world cannot weigh down the unpredictability of prices set by humans, because on the other side decisions are rarely ever made with rationale.

 

All these Gurus honed their thinking over time as they committed mistakes themselves. Some of them like Benjamin Graham contributed extensively to the area of financial research and analysis thanks to his own failures. Similarly, Jack Bogle created the trillion-dollar low cost index fund only after continuously losing money in speculative trading. Any investor is prone at some point to make bad decisions. But retaining discipline and avoiding systemic biases can help making a few right decisions that will outweigh the occasional bad ones and humble us enough to be wary of them in the future.

 

Human psychology makes us believe that we are smarter than the average. Weighing our opinion higher than logical reason leads us to make erroneous decisions. These mistakes constantly remind us that nobody is perfect, and losses are a part of the investment process. It is impossible to go through a prolonged period of investment without some going in the red. Investors must not allow the psychological effects of these losses to build in the form of regret and other emotions as they can cause serious lack of judgment resulting in even heavier losses. Accepting shortcomings in strategic design and recognizing what is within and outside one’s abilities will prevent the repetition of mistakes. It is vital to go into any investment factoring the possibility of profits as well as losses and having contingencies for any black swan event.

 

People attempt to recreate success and others study failures to avoid them. Temporary setbacks have knocked on all our doors and it is imperative to take these mistakes in your stride without regrets. So, don’t be disappointed by your failures, just make sure you don’t repeat them too often. As for the Gurus, we tend to forget that these individuals are in no way perfect or insulated from the risks involved. The market is no less unpredictable for them than it is for us, so stop asking them where we are heading!

 

Investment success accrues not so much to the brilliant as to the disciplined. —William Bernstein

May 25, 2019

Myth Busting #3: Don’t listen to your Parents: Conventional wisdom screwtinized…

May 20, 2019

The advice from parents is derived from their own success or failures. But considering the drastic changes that have taken place in the last couple of decades, it is almost impossible that their experiences match that of the current generation. Millennials would receive three conventional wealth creation master ideas…which will neither meet their aspiration or investment goal. Conversely, it may be the reason for the financial struggle’s that they may face in the long run.

Advice No1: My Dear…insurance is very important in life (rather…in death)

 

A generation ago, most households had a single bread winner in the family. It was very important to see a smooth transition in case of an untoward incident. Insurance played a very important role then. Initially it was just plain vanilla term insurance (which was more than adequate), but financial innovation and pressure from the sales guys led to a variety of products. We now have over 25 Life insurance companies offering hundreds of schemes, most of which are seldom understood by the seller or the buyer. Insurance is also commonly (mis)sold as an investment product, showcasing the dual advantage of growth in value as well as promising an insurance coverage. However, there are caveats…

 

As the economy grew and education levels improved, most households now have more than a single bread winner and multiple sources of income. The reliance on insurance has gradually declined in such cases. While its importance cannot be understated, it should only form a small part of your capital allocation rather than become the focus. A simple term insurance is the cost-effective way to cover your debts and leave enough for your loved ones (if you have any!).

 

Please note insurance is not a wealth creator (at least for the person paying the premium).

 

Advice No2: Buy a house and settle down in life (…welcome to the world of EMIs)

 

Owning a home has for long been considered a necessity and primary requirement to prove a person’s financial security in the society. But today’s lifestyle changes and reality of the workplace implies that the first location they work at is almost never where they will remain forever. Demographic structures around the world are becoming dynamic, families are becoming increasingly nuclear as a result of the opportunities that accompany rapid globalization. Older generations bemoan spending income on rent as a bad idea, implying it can be used to repay EMIs for home loans and create an asset in the process. Why is this conventional idea flawed…?

 

Firstly, increasing supply of urban housing has decreased rent on homes to roughly one third of the monthly mortgage repayments (EMIs) driving the average age of buying a house upwards.

Secondly, rental yields net of maintenance costs are less than 2% and is expected to remain that way in the foreseeable future, making it one of the lowest yielding investment option. Thirdly, real estate is a sticky asset class and to find a suitable buyer or seller at an appropriate price and time is a difficult process. Finally, for people on the move, renting is the best option as they are provided with a plug and play model which can reduce the extant of liabilities while relocating.

 

So, look at buying a house close to retirement, by which time your other investments would have grown significantly and your needs would have reduced to the minimum (at least you wouldn’t have to be near a school or office or in fact anywhere within the city by then).

 

Advice No 3: Let’s talk to our Banker for investment advice (the last person you should reach out to)

 

There was a time when the neighborhood bank manager was the unofficial CFP (certified financial planner) of the family. Any investment advice would start and end with a Fixed deposit (FD) or a Recurring deposit (RD), the tenure of which will also be his discretion. RMs are paid by the bank and based on the number of investment products sold. They are forced to push new schemes, closed-ended schemes, ULIP products etc. which earn higher commissions; instead of working in the best interest of the customer. Also, improvements in technology imply that individuals will rarely head to their branch or meet their RM. Most RMs are generally under qualified to advice on investments and at best work as liaison agents. Hence, they should be the last person you should reach out to for any investment advice.

 

Modern investors have access to a wide range of information and services that can help them develop the required understanding on the investments, so pause to critically evaluate and take prudent decisions. Most importantly check the source of your advisor’s income.

 

Typical monthly asset allocation

 

A typical asset allocation using conventional advice would divide your portfolio into 3-4 parts; each of which would be illiquid, low yielding and unable to even beat inflation. Millennials would require a more dynamic, flexible and liquid asset allocation strategy which can cater to their lifestyle as well as preserve enough for the future. When we run a typical portfolio based on the conventional idea vs. the millennial approach, it is easily observed that the returns are significantly higher (over a 20-year period).

Prudent investment would start with shedding the old habits and ideas of the earlier generations and creating new strategies to suit the current scenario.

 

So, beware of advice from Uncles, Aunties, Dads and Moms…don’t concede to emotional blackmails.

May 20, 2019

Myth Busting Series #2: Small Caps are Outperformers and Large Caps are Duds

May 6, 2019

Ever since David won over Goliath, it has always been mesmerizing to watch the small guys win over the big ones. In the stock market parlance as well, we tend to enjoy stories relating to how visionary investors jumped into companies when they were small. How they envisioned its growth and how they stayed with it all the while to watch it transform into a mid-cap and now exiting when it is the much sought-after Large cap. The investor (mostly your neighbor!) has reaped in a windfall gain and lived to tell an envious story.

But the reality sucks… three out of four small cap companies have remained small since their inception over 20 years ago. Picking a small cap which will become a winner tomorrow is more like playing roulette than anything else….

The chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. “- Benjamin Graham

 

Performance

 

Any investment should be gauged primarily on the basis of its risk adjusted performance. The simplest and most ideal measure for risk adjusted performance is the Sharpe ratio. The Sharpe ratio provides the returns per unit of risk (volatility ~standard deviation). Higher the ratio the better. We consider the Small, Mid and Large cap indices to prove the point….

 

Evidently, both in terms of absolute as well as on a risk adjusted basis, the large cap Nifty 50 index scored better. Ofcourse, there were periods of outperformance, but very clearly the range was limited and the commensurate risk-reward was unfavorable.

Management depth

 

Large cap companies are run by professional teams, overseen by eminent board members, only because they can afford to do so. Since leadership position has already been achieved, these companies place significant emphasis on reputation, brand and corporate governance. Institutional investors insist on global standards of reporting and investor transparency, which is readily available in most of such large caps. On the other hand, mid and small cap companies face two major issues; retaining the best talent and succession in their management (which in many cases are family run businesses with a few key people). This is a Black Swan event that smaller companies face and mostly ignore.

 

Well researched

 

Large caps have regular interaction with the investment community and are rewarded for their transparency by drawing more institutional long-term investor interest. They are well-researched as they provide authentic and timely data. Life is easy for the layman to choose amongst the large cap universe. The same is not true in the case of smaller companies, which resist sharing information and prefer to remain opaque. Hence, investors are led to make larger number of assumptions based on vague data and their analysis remain ambiguous.

 

Liquidity

 

Another inherent advantages of investing in large cap stocks is liquidity. Significant volumes are traded daily by individuals, domestic and foreign institutions. Hence the cost of transacting in such large caps are low and the price efficiency remains high. On the other hand, there is a liquidity premium when transactions take place in illiquid small cap stocks that adds to the cost. There is also a limit to buy these small caps owing to their lesser size. The situation is exacerbated especially during sell-off’s when panic hits the street. Under such cases the draw-downs for low market cap companies are significantly higher.

 

Large caps are certainly not duds or underperformers, but essential for creating wealth. They might not hold enough excitement or warrant story telling as in the case of a small cap investment. But clearly, the risks involved are lower and commensurate returns much higher.

 

Remember…David required divine intervention in order to succeed, so if you are a small cap investor better start praying!

 
 
May 6, 2019

Myth Busting Series #1 : Investment ≠ Excitement

April 9, 2019

When there is money involved there is always a reason to sensationalise events. Popular culture portrays stock market investors as flamboyant, moving about in their flashy suits and costly cars. Numerous films, books and news reports eulogise them as the ones who made tons of cash. They generally look like the most excited and always on top of the world …though in reality, the ones who made money by investing in the stock market are a minority and almost all of them are unassuming and boring!

Then what causes the excitement…

 

Bane of liquidity

 

Dramatizing the practise of stock market investing and drawing parallels to gambling are the two things that haven’t changed since the beginning. This is an unintended consequence of having to report the price of the security every second. Unlike real estate, where you don’t have an option of viewing the prices with such frequency, the process of investing in that asset class remains long term and sticky. However in the case of equities, the luxury of liquidity offered creates the unwanted excitement and leads to several wrong decisions.

 

Overload of Signals

 

Most investors are overwhelmed by the signals generated by two institutions who generally act as the primary influencers- Brokers and Media. Majority of the analysts are employed by brokers who are essential to the functioning of financial markets. However, the incentives motivating them are quite different; brokers are encouraged to maximise their commissions from transactions. Hence there is a flood of research reports that are produced by these brokerage houses constantly trying to influence the gullible investor to make the next transaction which would otherwise be unwarranted. Media on the other side, over play, scream and create maximum noise over frivolous news items in a desperate attempt to increase their TRP ratings. Both these institutions may provide the maximum signals and information required for an investor, but it is always prudent to cut through the chaos and take only what is required. Skim the noise for valuable information. This could be difficult initially but you will get used to it soon.

 

Incongruous timing decisions

 

When to buy and when to sell are seldom rational decisions. Investors and Fund managers are excited to buy whenever there is a large fund inflow and desperate to sell when there is requirement for cash. The concept of setting aside cash to invest at a more appropriate time is an often overlooked strategy. Hence those who come with a long time horizon, sell in the short term and vice versa. Another important reason for increase in euphoria is the derivative segment and margin trading, which induces high risk with the promise of providing of superlative returns. In such cases margin pressure forces the investor to square off positions, and the blame goes to risk appetites and patience levels. Volatility levels increase and excitement begins!

 

Story telling

 

Excitement is also derived from the numerous fancy stories we hear about how a quick buck can be made from the stock market. Everyone wants to have a go at it without proper planning or guidance. The dream of getting from rags to riches in a short period provides sheer delight even for the ones who cannot afford the risk. They are predominantly lured into investing in small cap stories sighting the higher potential for errors in market pricing. However, such micro and small cap companies also bring along innumerable risks such as improper accounting practices, opaque management, unfavorable levels of liquidity etc. Others look UP for advice…to the so called Market Gurus, or media savvy Fund managers who are invariably committed to raise funds for their own Asset Management Company. They are hence unable to give an unbiased view on the market under any euphoric state even if they intend to do so. Finally towards the end, most of these investors are driven into an unending vortex of losses and bigger losses. They live in a state of denial for a long period and finally end up seeking divine intervention.

 

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Soros

 

Like any asset class, equity also follows a life cycle. To participate in the life cycle we require a rudimentary strategy with a good process which is devoid of any emotion. Any well planned activity is most likely to end in success. Excitement will only lead to unintended and ad-hoc decision making increasing the stress levels causing unnecessary panic.

 

Keep it simple, Keep it Boring.

April 9, 2019

Our Testimonials

Aparna Ramesh, Client

Aparna Ramesh, Client

Pelican PMS investment strategy is based on strong fundamentals with emphasis on capital protection. Their investment policy is simple and sustainable and showing patience educating the clients on the investment model. The Portfolio reporting systems are organised with utmost transperancy. Thank u Pelican!!!

Ramki, Client

Ramki, Client

“pelican is one of fund managers managing my portfolio. ..there are many ways to invest and make wealth but wealth creation if it has to sustainable there has to be a methodicity which kanu their MD follows. .other pms invest the moment you invest..but in pelican they time the market and the nifty…I thought it was a contrarian approach but later I understood it was not so….in pelican you shall be assured of safety of capital and a definitive appreciation to your capital…patience to their approach may irk us but it worth the irk”

Ravindran V, Client

Ravindran V, Client

“The most important aspect of Pelican PMS is that their strategies are simple, safe and attainable. For a retired businessman like me who wants to relax, travel, and enjoy without a concern about the investments and security of his wealth, Pelican PMS is my top pick. When you add their periodic and exemplary reporting, I would recommend them as the first choice to anyone.”

Revathi Sanjeev, Client

Revathi Sanjeev, Client

With a hectic work schedule and changing scenarios that we need to keep abreast of, it is difficult to keep a close watch on the financial market too. But why should I worry when I have someone trustworthy to take care of it for me? I am a happy customer, who has turned a profit even in this volatile market, thanks to Pelican PMS, who are diligent in their study and manage portfolios of all their customers. Their approachability and drive towards customers’ satisfaction is remarkable. No investment portfolio is too small and due diligence is never compromised. The firm’s collective experience spans many decades and they apply this expertise thoroughly to advice their investors.

Srikala Venkatesh, Client

Srikala Venkatesh, Client

Pelican Holdings has been advising me and managing my investments for over nine years now. The amount of time money is kept in liquid funds before being deployed into stocks, made me initially wonder whether they would invest at all. The duration of holding while the markets moved up kept me guessing when they would sell. The outcome was good and satisfying. Having gone through the cycle once I am comfortable with the process, patience & method is the theme, not excitement. I like their service and reporting quality too. I wish them all the very best.

Suresh Kalpathi, Client

Suresh Kalpathi, Client

Pelican Holdings have been financial advisors to our Family for over two decades now. They work with integrity, are diligent and advise is based on fundamentals with emphasis on capital protection.Their execution and reporting are transparent. They have been ready to put in time & effort at anytime, through the years, to assist with data & information for reasoned decision making.

Vimal Kumar, Client

Vimal Kumar, Client

keeping in view the fundamentals of the investee company. They are in no hurry to deploy the funds, but rather wait till the valuation is right. This strategy has proven right especially in the current turmoil in the market for the past 2 years. – Vimal Kumar, Client. I am impressed with Pelican team’s patience to invest at the right time and at the right valuation, not swayed by market sentiments,