Is this the right time to sell/short high flying consumption stocks in India?


First of all, let me make it clear that I am not talking about HUL or ITC. It has got more to do with the likes of TTK Prestige or Page Inds. I will list out my short-selling stocks later.


Short-selling is an art in itself. Not too many in the world have done it successfully in a consistent manner.


So am I bearish on these stories? If yes, why?


- A lot of the growth that these companies have achieved over the last 2-3 years has been a function of government spending. Whether it is the 6th pay commission handouts or the collosal spending otherwise. The large fiscal deficit is a reflection of that. But now the government is itself running on financial resources.The fiscal deficit is still large, but has flattened out. And most of the increase in the deficit is now in subsidies rather direct payouts in the hands of the people. In fact, I dont think it would incorrect to say that the direct payout component will go down moving ahead. These handouts were one of the reasons why the consumer durable industry had such a good time in the last 2-3 years.


- Inflation has sapped the purchasing power of the people. With no government payouts in the offing, discretionary expenditure should see a cut.


- If the whole of Europe is in trouble, particularly the banking industry based there. Than it is very likely that the IT industry here in India will find it tough to grow. That makes it likely that graduates will find it difficult to find campus jobs or laterals may find it difficult to hop. And that might apply not only to the IT industry but also to other export facing industries as well.Generally speaking there could be an environment where there is a bit of scare and loss of confidence. These two things can really dent the psyche and postpone purchases.


- From a stock market point of view, these stocks are very richly valued. They are building in a lot of growth in the next 2-3 years. If the above factors are reasonably correct, then those growth expectations are not going to be met. That should lead to a fall in stock prices.


- There is a uniform consensus that the consumption story in India is going to continue strong, even though there are some indications that it may not be so. 4-wheeler sales are flattening out. Consumer durables did not report good numbers in their peak summer season. This uniform growth consensus, despite a few contrary indicators, has the potential to boomerang if things dont turnout the way people are expecting them to.



I am listing down the stocks that I think should be sold or shorted, in no particular order. I am also noting down the prices as of today in brackets.


- Page Inds (2515)
- TTK Prestige (2573)
- Jubilant Foods(870)
- Hawkins(1524)
- Whirlpool(225)
- Hitachi (162)
- Lovable Lingerie (462)
- Titan(205)
- Zydus Wellness(530)


I may have missed out a few more.


CAUTION: It is always advised, and very wisely so,  that going against the trend in a market is a fool's idea. Even if your thinking process is on the right track, it is famously said "Markets can be irrational longer than you can be solvent".


But trend reversals do take place. And I think there are enough indications for that to happen.
Of course, I can be wrong but then that is a part of being in the market and a part of the never-ending learning process.


Happy shorting!! :)

Is the Indian 10 year G-Sec headed for 10% yield?

I had written in January 2011 about why I felt there is a chance that Rupee headed to 50 against the USD. Today its around 49.5 to the USD. Though we are still to reach 50,I think we can fairly say that at least the thinking process was alright. But given the situation that has come up right I want to shift the goal post a little and see what effects it can possibly have on the government bond market. I am no bond expert but its just a calculated attempt.

I will touch slightly upon the rupee and then take its probable effects on the liquidity and inflation in India to justify my position on the G-sec market.

The situation in Europe is getting worse by the day. Banks are increasingly reluctant to even lend to each other. A corporate like Siemens has parked almost all its liquidity, amounting to roughly 6 bn Euros with the European Central Bank. Credit is getting tighter. US too is not going great. Banks across the globe are scampering to save as much as they in case of sovereign default at Greece and its contagion effects.

India's external debt is around 306 bn USD as of March 2011. I dont have the latest figures but will go ahead with the assumption that it will not have changed dramatically. The Indian forex balance is maintained by the inflow of money in the capital account, given that we are running a current account deficit.

Given the global scenario, it is very likely that inflows in the capital account, both debt and equity, might face a slowdown. In the worst case, a reverse flow may also take place for some period of time.

Given that banks are the ones which are going to be hit the most and our IT companies depend on them in a big way for their businesses, its also possible that IT companies themselves might suffer sales slowdown. That would not help the current account deficit problems.

Of the 306 bn USD for external debt, roughly 84 bn is to be paid within the next 12 months. So there is a need to get this refinanced. But if the banks in Europe and US are struggling, it will not be surprising to less than 100% getting refinanced.

The way rupee has moved from 45 to 49.5 in practically no time means that large FIIs investments are down 10% in USD terms and they havent had a chance to sell. This move has come about without any big scale sale by the FIIs. But if the situation continues, they FIIs will also have to liquidate some of their positions and that only adds to the pressure to rupee.

Current account deficit along with a slowdown in forex inflow will be a deadly combination for the INR to fight. I suspect if that happens, INR will depreciate even further. Maybe 55. Maybe 60.

Can RBI intervene to stabilise the currency? It can. But there is a price to it. It will have to suck out liquidity from the Indian banking system. That will be a blow to the system which in any case is in a liquidity deficit.Daily turnover in the forex markets is more than 8 bn USD on an average. So the intervention required to sustain INR will be reasonable. Thus there is also a limit on how much RBI can intervene.

Then what happens in case, the situation pans out this way.

With rupee depreciating that much, all commodities which are priced on import price parity basis will see their prices going up, unless the prices globally also go down to the same extent as the rupee depreciates.It is very likely that the depreciating rupee will have a inflationary impact.

Plus if the fore debt inflow is slowing down and refinancing is difficult, it might lead to more demand for domestic bank funding. That puts additional pressure on the liquidity situation in the Indian banking system.Banks may withdraw from their excess SLR commitments and lend it.

Inflationary impact of the rupee and bank squeezing their SLRs will have their impact on the yield. RBI intervention in the forex market will only add to the liquidity crunch and take the yields on all loans higher.

This scenario may not play out. Globally commodities, particularly crude oil may fall much faster than the pace of rupee depreciation (which is what happened in 2008). That eases pressure on the trade deficit front, but a global collapse of sorts will also make the FIIs press the sell button and will also reduce exports. Its difficult to quantify, which parameter will be dominant. But nonetheless there is always a chance that the rupee depreciation, if it happens, MAY NOT have the inflationary impact.

The other interesting thing that, there is almost a universal consensus that inflation and thus interest rates in India have peaked out. As I have discussed above, it MAY NOT be so. With the universal consensus being on the side of lower inflation, as of now it is surprising that government bond markets are yet to decisively move yield downwards. But things can change fast. the world is too dynamic.

I am not sure, how all this is ultimately going to play out but i think its worth to keep the above scenario as a part of the thinking process, so that it is not a surprise if we see G-Sec at 10% sometime in the near future. 10% is just an indication of the direction of the yield and not necessarily a target.

FM Pranab Mukherjee recently said its important for global leaders not to lose their nerves in these trying times. It applies to India equally if not more.

Where is India headed??

These are interesting times indeed. Europe and US seem to be having problems managing their fiscal situation and persistently high unemployment. Currencies are yo-yoing everyday. People in Middle-East are busy fighting their own masters. But majority people believe, Asia, led by India and China, will come out of the crisis in a relatively better shape.I dont know enough on China, so will not comment.

But is India as well placed as everybody believes it to be?

- India's average GDP growth for the last 10 years is roughly around 7.5-8% p.a.. We would have probably TREBLED Nominal GDP in the same time frame. I find it really amazing that with all this growth our currency "INR" is still where it was 10 years back against the "USD", which itself has been one of the weakest currencies in this time. That does not speak too well of the quality of the growth.

- After all these years, we are still running a huge Current Account Deficit. We require foreign inflows to keep our forex balance sheet from going haywire. Admittedly crude oil prices do not help, but then crude oil subsidies do not help either. Would we have grown this fast had governments not subsidised petroleum products and fertilizers? I seriously doubt it. Now that those subsidies have become huge, it is becoming very difficult to get rid of them. And they leave huge holes in the government's balance sheet and budgets. This is one of the reasons why the rupee is where it is. Had subsidies not been offered, we would have probably grown slower but would have been in a much better situation to handle the crude oil prices. Just imagine, if Rupee had been 40 rather than 48 to the dollar, the equivalent petrol and diesel prices would have been 20% lower. I know its easier said than done, but I am just illustrating here.

- A lot is made out the forex reserves of 300 bn USD. But India's external debt is more than that figure and more than 20% of the debt is short term in nature. Thus we are always susceptible to foreign money flowing out and creating currency headaches for us. Besides we are also dependent on FIIs to keep money coming in. And when in trouble thats the first money to go out. This is the second reason why the rupee is where it is. What happened in 2008 is a very strong reminder of how susceptible we are to capital flows. It required the government to come out with a big fiscal package to keep our growth momentum intact. That itself raises a question on the nature of the Indian Growth. Is it for real or is just one more liquidity driven story?

- Our political and bureaucratic system have proven to be a disaster. Just as an example, we have had record crops for 2-3 years in a row, but still food inflation is in double digits and people starve to death because we cant manage the food rotting inside our godowns. I dont think it can be explained by simply saying that we have infrastructure bottlenecks. Vested interests are to be equally blamed.One of the reason why inflation reaches double digits as soon as we start clocking closer to 8% GDP growth.

We have had "n" number of scams. These scams, besides denting our reputation as a country, have also drained the system.It is estimated the black money outside the country is more than the GDP currently but we dont have enough resources to put up the infrastructure required to sustain growth.

Look at the way public sector enterprises have been handled. BSNL, once the largest telecom operator of the country now struggles to compete in the market and has started to make huge losses, which, of course, will have to be borne by the tax-payer.

Indian Airlines and Air India have now run up a cumulative debt of around 40000 cr. And are incurring losses at the rate of 7000 cr per annum.

The situation in the 7th largest country in the world is such that industrialists are not able to get land for expansions. (They themselves are partly responsible for the problem)

The country with the 4th largest coal reserves in the world cannot produce enough for itself and has to import increasing quantities of coal. It almost gives a feeling as if, another "crude oil" situation is being made out of coal.

The second largest population in the world has labour shortage problems.Labour strikes are becoming more and more common.

All this probably can be added to the reasons for the situation of the INR.

With all this background, it is not surprising that INR has depreciated against USD in the last few weeks at a rattling speed. ( I had expressed my opinions on the same in my previous article. for those interested....http://rmbworld.blogspot.com/2011/01/is-indian-rupee-headed-for-50-to-us.html)

The way stock price reflects the state of affairs within a company, I believe the currency reflects the same for a country.

The way the world is shaping up, it looks headed for a tough year or two, at least. India wont be spared the pain. We will also suffer.The more important question is how do we come out of the crisis, if it comes. We would require some serious action on the part of the government and bureaucracy. Given the precarious situation of the govt, after all the scams, it is very likely that they will do more social welfare schemes than anything else.

This along with the currency scenario, will make it difficult for the RBI to reduce rates, because inflation MAY NOT go down substantially. That will only lead to slower growth. And 2 years down line, general election will be on the horizon.

So unless the government really comes out of their paralysis right away, the constraints today will be present 3 years down the line as well. Growth rates in this time will surely suffer. Stock markets, Job markets and general public, at large, are hoping to see much better.

There are few IFs :

- What if crude oil prices collapse and give us a lot of breathing space. But that would also lead to a lot of strife in the already tense Middle East. So a collapse in crude oil prices may not be orderly.

- Commodity prices also collapse and thus lower inflation in India. that will mostly happen when the growth in developed world really fizzles out. Given that a lot of sectors and companies in India are now globally correlated, I am not sure that is great news for that part of the economy though its definitely better off for the others. And a big slowdown and crash can also lead to foreign money outflow which is where we are really sensitive as a country. We have seen what happened in 2008.

The world is hyper-dynamic and things change reasonably fast nowadays, so difficult to take long term calls.

But as of now, I see the glass half empty.

Is the Indian Rupee headed for 50 to the US Dollar...again?

Now that I have got a few eyeballs (hopefully!!) with that headline, I hope to sustain the reading interest as well.

Not too much seems to be written about this topic nowadays. Or lets put it the other way, there are not too many bother points there. Newspaper/Magazine articles will generally follow only if there is an apparent problem caused by either more than anticipated depreciation or appreciation of the currency. As I write this 45.7 Rs are required to get yourself a US Dollar.

I will take the oft discussed parameters first, give my own very limited take on them(I am no forex expert) and then take up a topic which is a little off the routine track but which according to me may have a significant impact on how things shape up on the currency front.

Current Account Deficit(CAD).
We seem to be headed for the deficit of order of 50-60 bn USD. So roughly that is what is we require is terms of net capital inflows to balance things out. So FDI + FII +External credit flow has to be roughly in that range.
The CAD in our case if very sensitive to crude oil prices. Discussion on where crude oil prices are headed is beyond the scope of this write-up and of course, beyond the scope of my capabilities. So we are assuming that crude oil prices will remain in the range they are in right now i.e. 80-100$.
With FDI in the range of 15-25 bn USD, we will require another 20-30bn USD of FII flows. And that is where our well understood vulnerability to FII flows originates.
For the last two years, since the markets have bounced back, the discussion routinely figures around how the inflows will overwhelm the Indian system and lead to significant rupee appreciation. It did happen that way for the first few months. And rupee went to 44 to the dollar. After that it has taken a slightly different turn. The FDI bit slowed down. They were replaced by ECB flows to some extent.Oil prices went up from 60-70$ range to 80$. And rupee has turned back towards 45-46 range. So net net on this particular front the inflows outflows seem to be balancing out as of now.

FOREX RESERVES

Everybody seems to be very excited by the pile of dollars we have accumulated. Recently there was an article in a leading fortnightly business magazine which talked about the problems India faces with the bulging forex reserves and how it will head towards the 500 bn USD + mark over the next few years.
But what does not get the required attention is that the External Debt for India is as big as the forex reserves themselves. Its like showing cash on the balance sheet by borrowing and claiming to be in the pink of health. And good chunk of the debt also some from short term credit and thus will act as a pressure point for the Rupee when that is repaid.

With our CAD and policy paralysis which FDI hates, forex reserves have to come from borrowing and the so called "hot money", which has no longer term loyalty.

I think forex reserves are more a psychological relief than anything else.

So we have a had a look at the two most often discussed forex topics in the Indian context. Cant reach any definite conclusion, can you?
So where has the headline come from?
hmmm.....lets see if I can convince at least one of you. (I hope this is read by more than one, at least..:-) )

- I have written my opinion about the power industry in India in one of my blogs before. those interested may go here...
http://rmbworld.blogspot.com/2009/12/coming-power-ful-collapse-writing-after.html

I can tell you that the state of the SEBs in India has only gone much worse than what was mentioned in the article. Their losses this year are estimated to reach a figure closer to 100,000 cr(this is the ministry and planning commission estimate). Yes you read that right!! If so, that figure is bigger than the now famous oil subsidy bill.
Merchant power rates are probably down by 20-30% over the last one year.
There is a total of more than 100,000 MW under different stages of completion. Some are close to commissioning, some are half way through and some are designing their way up. At close to 5 cr per MW, we can roughly calculate the quantum of money that has gone into them or is going to go into them.
All of them are going to require coal, whether they import it or Coal India supplies them if yet to be seen. Coal India has already cut down its production estimates for FY12. Those who will import need to figure out where they will be able to source coal, at what price, which port has the capacity to import not far away from wherever they are?
Banks have funded these projects providing 70-80% of project costs.
Any problem in this sector is going to be a huge headache.
Banks are also funding SEBs with a total exposure of closer to 100,000 cr. I have no idea how SEBs are going to repay that money with their loss run rate. Are the state govts in a position to handle the total debt of these SEBs which now total up 300,000 cr.?

This has the potential to become India's "sub-prime". And if it turns out that way its not going to be funny.
And it has implications for the banks, infrastructure companies, financial markets, foreign flows and so for the currency as well.
And it doesnt look like that fiscal deficits are going to go down dramatically given the way govt wants to spend money in mostly non-productive purposes. In fact today more than 25% of govt revenues go into interest payments on the accumulated debt.
And in all this I am not discussing the oil subsidy bill, fertiliser subsidy bill and food subsidy bill.
Enough is already said about them.

And the other important thing is that these are domestic problems and have got nothing to do with external events.


What can go lead to rupee to appreciate or stay around where it is?

- Oil goes to 50-60$. But that would mean the one or two countries have gone bust and there is a global collapse or problem. That would also probably have taken the stuffing out of the indian markets and lead to serious FII outflows. So I am not sure that it is going to sustain the rupee.

- Overwhelming foreign inflows. Possible. But if the situation in the power industry turns out the way we have discussed above, then overwhelming foreign flows are difficult to imagine.

- Compression of CAD due to exports rising faster than imports. This scenario and appreciating currency probably hand in hand for too long, because an appreciating currency will have its impact on the exports.

- Phenomenal Dollar weakness. Cant rule that out . But against which currencies?

All this put together, I would bet that Rupee has a higher probability of depreciating rather than appreciating.
And my headline already makes my direction call clear.

Of course, I am no expert. But I am also ready for brickbats.

Have two wheeler annual sales in India come close to topping out?

Just been thinking about it. Two wheeler companies have had a great year. Their stocks have also performed well. 20%+ growth cannot be scoffed at for an industry which suffering everywhere else in the world. But to think of in a more macro point of view I was just trying to understand if this spurt was the last hurrah that these companies will have, in terms annual sales growth?
Just to make my point clear, I am not suggesting that their sales are going to collapse 50% tomorrow. All I am questioning is whether the long term growth of two-wheelers has reached an absolute mature stage, where low single digit growth or flat sales are the norm?
Here is my thinking process:
Just consider the Indian population 115 cr, roughly. Roughly 50% of those are females. Not exactly great potential customers for 2-Wheelers (2-w). Out of the remaining, 55 odd crores, 20% are probably too old to buy a new 2-wheeler (or past 2-w customers) and another 20% are too young to own one (future customers!!). Thus you are left with 35 odd crores as potential customers. Probably 10-15% out of these are our unfortunate brethren who are categorised below the poverty line and thus have very little to afford a vehicle. So we are left with around 25-30 cr potential customers. Out of this there will around 7-8 cr. people who already own a 2-w (total ownership of 2-w will probably around 9 cr.), and are not about to replace in a "given year" (year under consideration). That leaves us with a potential base of 20-25 cr serious customers.
The demographics will probably change in favour of the 15-35 age group going ahead. It has already started to happen in the last 5-6 years. But the change happens slowly and cannot possibly give a kick every year. It will help maintain sales, but growth is questionable.
This year we might sell around 8-9 mn 2-w. That means a conversion of around 4-5% of the customer base. That to seems a very reasonable conversion ratio for a big industry. A much bigger conversion ratio does not seem feasible simply because the sales will collapse too soon going ahead.
It is also difficult to quantify the effect of competition from 4-w given the aspirations of people. But since we cannot quantify it, we will leave it out of our calculations.
And I have also not discussed the effects of the huge 6th Pay Commission payouts and other stimulus measures taken by the government in the last 4 quarters. Again since I cannot quantify it, I will leave it out of the calculation.
All this makes me feel that 2-w industry in India is about to enter a phase that will give their investors a very hard time.
I have to say that it is not the highest conviction thoughts in my mind, but I am convinced enough to put it down in writing.
Lets wait for "TIME" to pass the judgement on this one!!

The Coming "Power"-ful Collapse!!

Writing after a long time...but this is one topic which has almost picked up my hand and put it onto the keyboard to get it writing. The Indian stock market has had a great 2009 after a dramatic collapse in 2008. Things may not have improved as much as the market suggests there are not too many people who care for negatives when the market is going up at the rate at which is going right now.
The 2008 collapse started with the "Great" Reliance Power IPO in January. A company plans to put 28000 MW of power plants starting almost from scratch. It has no previous experience of putting up a power plant or running it. But if its coming from the most well known industrial family of India, then it has to be good. Or at least that was the perception. The IPO got subscribed in the first minute of opening and the Finance Minister commended it as a sign of the "Great Indian Growth Story". What happened later has become a part of stock market folklore and I will not repeat it here.
The hype around the "Great" entrepreneur of RPower is all but over, but it doesn't look like we are through with the whole "Power" story in India yet. The climax there is still awaited. And I am afraid it may turn out to be a disastrous anti-climax.
Almost every company (it doesn't matter whether it produces steel or anything else or nothing at all) has plans to put a power plant. The reason? Merchant power. The formula is pretty simple. Get your company a coal block allocation. Lets not delve into how that happens in India but anybody with sufficient "funding" should not have a problem with getting an allocation. Design a power project around that coal mine. The cost of producing power assuming 90% PLF etc. comes out to anywhere between 1 to 2 Rs depending upon how various assumptions change. Then project the selling price at 4.5 - 5 Rs. if not more and make an excel sheet, which will end up showing investors, bankers and shareholders an RoE of no less than 50%. Those number will make almost any investor salivate and then valuations go through the roof given that the company has "created" a goose which lays "Golden Eggs" (in this case "Powerful Eggs"), and of course, since the company has learnt lessons from the "Golden Goose" story, it is unlikely to kill it. So the company gets valued at 4,5,6 times its book value. The valuation could be higher, these are just indications. It looks like a win-win story. Investors are happy with the "excel sheet", bankers see the "Great Indian Power Deficit Story" (all stories in India are "Great") and see no problems in funding the Project at a nominal debt-to-equity ratio of 3:1 if not 4:1. Govt. is, of course, happy (but for the subsidies that it has to shell out). Consumers are happy because now there will be less load shedding and govt bears the cost of additional power through subsidies.So then where is the hitch?

Lets take the assumptions in the story one-by-one
1. Merchant Power @ 5 Rs.!!
For starters, merchant power is power produced which is not bound by a Power Purchase Agreement with a Fixed RoE. Given the power deficit situation in the country, merchant power sells at much higher realisations than what a normal Fixed RoE power purchase agreement would factor in. Given the fixed nature of costs, every additional paisa goes to the bottom line and RoE zooms. That is helped in no small manner by the 3:1 or 4:1 debt-to-equity ratio. The very fundamental question is how long will this merchant power rate sustain before the free markets take these heady RoEs down to reasonable levels?
Like all other commodities, power will also depend upon the classical demand-supply balance. Power, as a commodity has additional characteristic which not too many other commodities have. If not consumed, it perishes instantaneously.
Indian has been facing problems of power deficits for the last few years and it has only grown bigger with demand growth outpacing the capacity additions. (2008 was a particularly bad year for additions and the deficit galloped to unprecedented levels.) To encourage private power plants, Govt made the required regulatory changes to make it attractive for the private money to flow into the sector. The economics turned out attractive enough for private money to start pouring in. And it is still pouring in.
Now I think we have reached a point where all the "merchant" power plant companies will collectively kill the "Golden Goose". Have a look at the plans of Adani/Reliance/Sterlite/Jindals/Indiabulls/Lanco. I am mentioning only the big ones. There are lot many small ones, which will also add up to a quantum which will not be small in the scheme of things.
We are experiencing a peak hour power deficit of around 12-13000 MW. The power plans of the biggies total up to more than 30000 MW over the next 3-5 years. Of course, the demand will also go up, but I think this time around the tables are going to turn and the supply side growth is going to outpace the demand.
I have not included the plans of NTPC here. Have also not included anything on the Hydro or Renewable front.
Just to give you a sense of what might happen. According to CEA, in 2007-08, there was about 13000 MW of gas-based power capacity which was running at 50% PLF simply because gas was not available. There is another 1100 MW which never got commissioned because of gas shortage again. Now with Reliance coming out with gas from KG D-6 and other discoveries still pouring in, there is a good chance that these power plants will start running full steam. That alone will increase supply by 4000-5000 MW. That's almost half the deficit we are talking about.
2. The other thing about the deficit is that it is "peak" deficit. Every body talks about the load shedding across various parts of the country as an indication of how big the power problem in the country is. But the point to be noticed is that most of the load shedding happens in the peak utilisation hours of the day. i.e. somewhere between 9 AM and 5 PM. What is consumed in the remaining part of the day is the roughly equal to the base load and the deficit there is not so huge.
So is it reasonable to assume 5 Rs of power for whole of 24 hours.?? I don't think so. In fact if trends on Indian Energy Exchange is anything to go by, the difference between the power rates for these two different time periods of the day has already become substantial. For quite a few days now the off-peak hours merchant power is trading at well below 2 Rs. The reason I would think is that in the race to take advantage of the "Peak" power deficit the power producers have started to overwhelm the off-peak demand and are unable to sell everything at peak rates. Even the peak rates which used to hover around the double digit mark a year back have come down to 5 Rupee levels. (I am using the IEX as indicator of merchant power rates in the day-ahead market)
The base load demand wil probably grow in conjunction with GDP. It should majorly depend upon how deep has the T&D network spread. Distribution is mostly in the hands loss making SEBs (Last year all SEBs put together lost 31000 cr., if subsidies provided by the govt. are included it comes down to probably somewhere around 12000 cr.) . That makes it difficult to for these SEBs to keep putting up additional distribution capacities "fast enough".They necessarily have to be supported by Govt deficits which are already out-of-control.
So here we have a value chain in the overall power business, where the power generators are hoping to make 50% RoEs and their clients (SEBs) are in perennial loss making mode. How long this can sustain is any body's guess.
3. One of the reasons for the losses of the SEBs are the famous (or should I say "Great") T&D losses. They are at about 30%. Even a 5% saving on this front can cut the "peak" deficit by half. I don't have great hopes here, but have just presented it as a scenario.

The Golden Goose story has twisted slightly. The fate of the owners will probably be the same. Just that they are not going to kill their own goose but may collectively kill each others.
I wont be surprised, if some time in 2010 or 2011, the merchant power rates collapse and everybody starts running for cover. Beware Bankers!!

Awaiting the "Power"-ful Collapse!!

(I don't claim to be the know-all in this business. These are just my thoughts. and I retain my right to be absolutely wrong)

Ethanol - Are we heading towards another big investment bust??

Peak oil theory says that we are running out of oil.Half of the geologists agree with it, the other half, of course, do not. I am not a geologist but that doesnt stop me from having an opinion. I dont know if it is according to the peak oil theory but i believe in the concept of increasing scarcity of oil simply on the basis that we cannot be exploiting the earth endlessly. It might look like a philosophical call but it is not without reasons.US, UK and Russia have peaked out in their oil production, according to production figures.We have not had a major oil discovery in the last 3 decades and every year the gap between the oil found anf the oil produced is increasing in favour of oil being produced. Which means we have not been able to replen ish our reserves of known oil. Moreover any new oil find takes anything more than 3-4 years before it reaches the market. the only major discovery of oil was in Kazakhstan about 3years back but that too will not reach market before 2011. the project cost has also doubled in the meanwhile. So not only is oil becoming difficult to find, but is also more and more expensive. In short, we as a world are unsure about the fate of oil, to say the least.

So we come to ethanol - the magic fuel the whole world has gone crazy about. US and Brazil are leading the way.US is employing the biggest corn crop in the world and Brazil the biggest sugar cane crop.Ethanol has amde countries to believe that it can reduce their dependence on Middle East oil. That it is a panacea for a good part of their energy problems. But....is it really that??

Lets see if there is something more to it.

About 60% percent of global ethanol comes from sugarcane and the other part comes from grains, majorly corn.

It takes 1000 litres of water, edible water at that, to process one tonne of sugarcane.Sugarcane by itself is a water intensive. So the process of making ethanol through sugarcane is going to be water intensive.
Then comes the process of making ethanol from corn.Every litre of ethanol requires 2.5 - 3 kgs of corn.The it requires 4-4.5 litres of water. Natural gas or some other form of energy is also put in.In effect we are putting wheat/corn/grain and water into our automobiles and none of these were ever used for automotive purpooses before.
The production of ethanol is scaling up big time. In 2005, it was estimated at 12 bn gallons. And it is again estimated to go up 2-3 times in the next 5-7 years, as continents and not just countries get hooked onto the band wagon.
Imagine the amount of water that is going into a process that never before consumed water, and similar is the case for grains.

The effects are already visible.US is starting to use an increasing amount of its corn in ethanol production.So are China and other countries.Corn prices are already at their ten year highs.And with more capacity coming up, the prospects for corn are bullish, to say the least. US and China are the biggest producers of corn and their exports have started coming down drastically. China's exports are expected to go down by about 45% this year. This is going to have a huge effect on the agricultural markets as a whole because the enhanced demand for corn is going to have reciprocating effects on other agri commodities.
This is very similar to what has happened in the biodiesel market. The demand for palm oil has caused the price of even coconut oil to go up.Increasing prices of agri products make them all the more less affordable for the poor as we go on putting their food into vehicles.

The water intensity of the whole process is scary in a scenario where we are increasingly struggling to meet the basic human demands for water. I have already given my views on water shortage in the previous article and would not deliberate further on it here. But in short, it is scary.

Ethanol, to me, is at the crux of this food-fuel war and the effects seem to be disastrous. I think this is one of the biggest mis-allocations of resources of every kind. Capital, agriculture or water.
Ethanol might turn out to be a big fraud on humanity.

WW - World War or Water War??!!!!

Did you know

- that more than a billion people have no access to safe drinking water?? (if that doesnt hit you then this will - every sixth human being doesnt have access to safe drinking water - imagine the whole of India not having water!!!)
- than in India only 30% of total cultivated land is irrigated??
- that India has only 4% of world's fresh water resources to support 16% of world's population???
- that by 2050 it is expected that Tibet plateau is expected to lose one third of its glaciers??...(remember is a big source of rivers for China and India!!)
- that some of the biggest lakes in the world like Victoria in Africa or Qinghai in China are shrinking or getting contaminated beyond repair??
- that demand for fresh water has tripled over the last 5 decades!!!

We can go on and on and on about this...the numbers are scary to say the least.Not oil, not copper, not zinc and not any other commodity, but water will probably lead to a lot of strife in the world.

Its not India alone. China, USA...well pretty much across the globe with no exceptions at all.Major rivers,including Nile in Egypt, Ganges in India, Yellow river in China, across the world are carrying lesser and lesser water.Fisheries have getting depleted at an alarming rate because the sea water is turning too salty for them as rivers increasingly fail to unload water into the oceans.
More and more water is now being diverted from irrigation to the growing urban population, leading to two consequences. One being the lower productivity of the land and secondly, disenchantment with agriculture as an economic activity since returns are too low to sustain living. Global warming is not helping the water cause with erratic and at times, extreme in nature, kind of rainfall.

In the increasingly tricky global geopolitical scenario, water will add a dimension like none other.The fight for water has the potential to escalate to a scale never seen in the history of mankind.

Can you imagine:
- China choking off Brahmaputra before it reaches India??
- Higher security around Lake Superior than around the White House??

Dont know if these are just hallucinations or the upcoming reality? But as an investor, optimism has to be in your DNA.

So how about large scale desalination plants doting the landscape across all the beaches in the world!!!!hmmmmmmm..........

What will power the next superpower??

Life is a flow of energy, and it requires a flow of energy to sustain itself. No wonder it is true for nations and more so for Superpowers!!
World has had superpowers before and it doesnt look like we are going to be deprived of one in the future as well.
Romans and Greeks probably did it on the basis of their agricultural prowess.Not surprising given that we did have these energy guzzling machineries in that era.
British did it on coal and steam engine. This brought about an industrial revolution and an inflexion point in human history.
USA carried that forward but on a magic liquid called the black gold a.k.a oil.
All the erstwhile empires lost their prominence on the world stage with loss of control on the source of energy or an alternative source coming about.And it also not surprising that the empires perished trying to get hold of these resources.
Greeks, Roman and British Empires were all victims of their own expansionary and imperialistic ambitions.These ambitions were not whims and fancies of the empire but became a requirement as needs of the empire and its people grew. It became the pre-requisite for sustenance.
Today we recognise US as the sole superpower.Oil is what powered it to these heights. It won the World Wars on oil.It achieved the highest state of living in the history of human civilisation, driven by oil.But as i have argued before, think we are at the begining of the end of the US era of dominance.
Just that i will be seeing it from the perspective of energy.
US was largely self sufficient in oil through a big part of last century. But its oil production peaked out in 1970s. and since then it has become increasingly dependent on others for its oil requirements. It was not that big a problem till the dependency was limited to its friends like UK. And also a big bear market commodities helped it sail through in the last quarter of the century.
But now it imports more than 60% of its oil. And more importantly, increasingly from not so good friends like Venezuela. UK production also seems to have peaked out with North Sea struggling.Like all good old empires US is now trying to get control of as many resources as possible. First to bear the brunt was Kuwait under the pretext of saving it from Iraq. US troops has still not left Kuwait a decade after the war is over. US has a massive troop presence in Saudi Arabia as well.Then came Saddam Hussein. Since they could not find any other valid reason to oust him, weapons of mass destruction were introduced as a pre-cursor to an ultimate invasion on Iraq's sovereignity.US presence in the Middle East is not at all funny.It is just doing what it has to do to survive.These regions are the last rich source of oil as we know it today. Next on the cards is Iran.
But then it is here that the picture changes. Because now China comes into picture.It is equally hungry to feed its own people and cannot possibly allow US to have an overwhelming presence and dominance in the region.So a war with Iran is fraught with th risk of plunging the whole world into a massive conflagration, which you might want to call the Third World War or Second Cold War.
Oil would be one of the reasons for the possible war besides many others including water.
But whoever comes out victorious from this clash has to sustain itself and oil may not be the answer this time.We have to turn to some other sources.
Alternatives:
Natural Gas: This is at present seen as an alternative, but the question is the same. Is their enough gas? and if yes where??...hope we dont again get to the Middle East for a very big part of the answer.
Wind Energy : Big source but not likely to have a the capacity to feed humans given its limitations in the sense wind speed, open land requirement etc.
Cold Bed Methane, Geothermal and so many others but they are a few decades away before making any meaningful contribution.

Think the source to bet on is the Sun. Everyday we get energy from the sun which ten of thousands of times the energy requirement for the whole year.The potential is much bigger than wind because of the retail penetration potential it has. You can have your power generator on your terrace.Clean and environment friendly. Solves so many problems that it almost sounds like an elixir for all our energy problems.The only problem as of now is the economic viability.But that after all is a relative measure.
5 of the biggest oilfields in the world have been producing oil from 1940s maybe. the last big discovery of oil was more than 3 decades ago. Ghawar, the oil field which supplies 5 mbpd oil out of a total world production of 84 mbpd, requires 15 million barrels of water to be pumped in to sustain the pressure to sustain production.The estimated reserves of these oil fields have been calculated to be the same over the last 25 years with no significant efforts for futher exploration.Mind you we are drawing oil from these fields big time and it is a little hard to digest that the reserves are still the same.
I believe oil will go beyond 100$. its a question of time and a time which is not too distant in future.And when that happens other sources of energy will follow suit given their supply limitations. Except maybe the Sun.

My bets are with the sun. How about you??

Of Hegemonies, Monopolies and Leaderships....

Disclaimer: a lot of views in the article are based on conviction and gut feel and i may not have any numbers to support my views...

lets look at media first...
Unlike in politics, incumbency is a boon in the media business. Its a headstart people will give their right hand for. And also unlike politics, its very difficult to remove an incumbent in media.
We have a very interesting situation in Mumbai. We are witnessing one of the most interesting battles in this media fiefdom called the "newspaper".
Times Of India has been the undisputed lord of this fiefdom in Mumbai.And that for decades.But now we have two candidates trying their might on the "as-of-now" impregnable fortress.Both Hindustan Times and DNA have in their own way started their journey, which they also understand is a going to be a long one and not necessarily successful.
lets see what was the state of ToI before these guys came in:
- Decades of dominance has made it complacent.
- Editorials are more often than not an apology for the meaning of the word.
- It was on its way to becoming a complete tabloid.

Lets see what it is after these guys came in:
- It is a few more steps down the lane to becoming a tabloid.
- In fact it has come up with a new tabloid itself, "Mumbai Mirror".

as far as i can see it, a response from ToI is conspicuous by its absence.

And this complacency is reflected across the board for the whole group Bennett & Coleman itself.

ET- the financial newspaper - is also one tabloid.
I strongly believe Cartoon Network can poach a few talented artists from ET because it has got better cartoonists than journalists.
Quite a few times a personality like Penelope Cruz is on the front page. If you are thinking why should that be for a business daily, then you are normal.
Getting the Who's Who in Indian Inc. to take over the editorial is an obsession with ET which makes me believe that the post is probably filled in by a non-serious part-timer.This belief is also supported by the quality of editorials.
The research work is shoddy and appalling and quite a few of the news items seem to be planted.
ET sells the paper on Saturday and Sunday at an obscene 9 Rs. Thats taking the "bottomline" focus a little too seriously.

So much for what is considered to be the best business daily in the country. There is more but we will leave that for some other day.

Now lets come to Radio Mirchi, the group's FM radio arm.
- they tell us that only 5% of the listener are "out-of-home" type.I dont know when this research was done but i will be shocked if the result is similar if the survey is done today. In the last 3 years, we have sold millions of mobile phones and a decent percentage of them would have FM. 5% number comes from the Stone Age i believe.
But that doesnt stop them from floating this so called "fact" around to support the "fact" that people dont switch channels.
- One of their other researches point out that only 5% people recall RJs and are therefore are irrelevant in the broader sense of things.
I wouldnt mind being absolutely unimportant and get paid 3 lac per month for being so.
With no content differentiation,RJs are probably the only link you have to make people stick around with your channel.But for them this is "irrelevant".
- They feel RJs having contacts in Bollywood are really important. I think RJs able to connect with people are a thousand times better.
- No wonder their programming content is hopeless.

What will probably happen is:
- HT would probably give ToI a run for its money much before a lot of people expect, if at all they expect.
- ET has already shown a drop of 25% in its readership in the last one year.Its a question of time before a quality daily like maybe a Hindu Business Line or somebody else will topple ET.
- Radio Mirchi will be no different.

And if these things turn out as i think they will, BCCL will become even more bottomline focused and give us more even more crap. Because that is the way they believe they can make money.
This "give-crap-n-take value' relationship is not sustainable.
In short I see BCCL group not being the same dominant group as before.And thats an understatement.

now lets our attention to Chennai where Deccan Chronicle is trying to create a dent in the Hindu stronghold. DC's contention is that its not too difficult because Hindu is not contemporary and DC will give people what they want.
Well, this "tits"-n-"bits" approach is going to attract some "eyes"-n-"balls". But only for some time.
Again, betting in a "nuisance vs value" fight is a no brainer.

In the TV business, we have seen leadership change 2-3 times now.
First we had Doordarshan, a monopoly and so a default leader.
But it did have some very popular serials like "Hum Log" and "Buniyaad".
TV business is a little different from newspaper in the sense that value here is in "entertainment" whereas "information" is what matters in a newspaper.But DD never renovated itself.
And when Zee came along in the early 90's, people yearning for a change just grabbed it with both hands and the slide of DD began. And it is still sliding for a number of reasons.
"Hum Paanch" and "Tara" became talk of the town in every town.And Zee prospered. Everything Zee did seemed to be perfect.
But over a period the offerings lost their freshness and again there seemed to be a vacuum.
This is when Star TV, KBC and Ekta Kapoor came along and just blew away Zee in practically no time.We have had a Star monopoly on prime time since then.Again whatever Star did seemed to be perfect.
Today we are at a stage where Star offerings are turning stale. It needs a renovation or it is a question of time before somebody blows them away.
the most likely candidate seems to be Zee again. Its got the momentum going. Some of its operas have started to feature in the top rung of the ratings.
Zee will have to keep delivering on content and maybe we have another change in leadership on the cards.

Now lets come to airlines.
The domestic story about LCCs and their increasing market share is all well known.
But what is not well known is that Yash Chopra, Javed Akhtar and Shahrukh Khan are on the Board of Directors of Jet Airways!!!
I would not be surprised if you hear Shahrukh Khan make in-flight announcements a few days from now.
What is also not probably well known is that Jet agreed to buy Sahara Airlines for a meagerly sum of Rs. 2500 Cr, when all it was interested in getting was the parking lots and some other airport infrastructure.That Sahara was losing money with every flight that was taking off didnt probably come to the notice of Jet!!!
Fortunately Jet on-the-ground performance has still not reflected the events of the boardroom. But that doesnt necessarily augur well for the shareholders i think. Because that leaves the scope for a Rani Mukherjee or Preity Zinta to join the Board.
Other airlines are eating away at Jet and it busy digesting Sahara, which is essentially "nothing". God bless Jet's shareholders.Amen!!!

well here i go....