Have you ever thought about investing ?? 

Investing if done right, it has the power to generate returns more than an entire lifetime of working. The first process of investing is having a good financial plan and understanding the goal you want to achieve with the returns from the money.

Once you have your financial plan ready, it will help you understand the average return that is required from the investment to achieve your goals. It is important to link the investing style to your financial goals.

There are multiple avenues that one can invest in, they are as follows:

• Stocks and Mutual Funds
• Real Estate 
• Government bonds 
• Gold and Sovereign Bonds
• Fixed Deposits 

There are various concepts and strategies in investing, Today we are going to speak about one of them known as Coffee Can investing from the book Coffee Can Investing by Saurabh Mukherjea. This Strategy basically says Buy and Forget. In this method, it is about finding the right companies according to criteria mentioned in the Coffee Can Investing philosophy and sit tight to watch these companies grow.

This means staying invested in the companies even in the times of ups or down in the market. 

Most successful investors hinge to two questions – Which stocks should I buy & for how long should hold these companies? When it comes to investing in India it is surrounded by sub-level advisors and common thinking “ To make higher returns in stock markets One must take higher risk.

Warren Buffett suggests that when investing in the companies we should understand the following things

1. Understand the business plans
2. Management and its trustworthiness 
3. A sensible price tag to the business 
4. Enduring Moat, a competitive edge that competition cannot replicate 
5. Once we find a company like these stay invested forever

Then the next question arises why most of the investors aren’t adopting this. It’s because emotions sway the decision making of investors. 

Coffee Can investing strategy was founded by Robert Kirby in 1984, where he had suggested his client buy shares of Xerox for $ 500 each and held it for 10 yrs. And the portfolio grew to $ 8,00,000 which came from the zillion shares of Xerox.

How to Create Coffee Can Portfolio 

The process starts with identifying the companies having a minimum market capitalization of Rs 100 Cr. Once this filter is applied the next filter is looking for companies that have grown in sales by at least 10 % year on year along with 15% ROCE ( Return on Capital Employed) in the last decade.

The median portfolio returns (compounded and annualized) has remained robust at around 24 to 25% historically, regardless of whether the investor’s holding period has been as short as three years and as long as 10 years. If held for at least five years, there is more than a 95 % probability of generating a return greater than 9 %.

The Coffee Can philosophy of investing is built using the twin filters to identify great companies that have the DNA to sustain their competitive advantages over ten to twenty years. Hence able to generate such returns. 

CCP in action – Page Industries 

Page industries the master franchise of Jockey in India. The firm has consistently achieved revenue growth in excess of 10 % per annum and ROCE above 15 % each year. Page’s Revenues have grown at 31% CAGR and ROCE has averaged a staggering 55 %.

Page has, on an average, reinvested around 50% of its operating cash flows back into the core business via fixed asset investments to expand its manufacturing capacity. More importantly, although the stock’s trailing P/E multiple re-rated from 27 times in 2007 to 70 times in 2017. The firm has delivered 32% earnings CAGR over this decade.

Once the portfolio is created, then during the 10 years there are no changes to be made. While churn in a portfolio goes against the basic philosophy of long-term investing, it ensures a higher probability of profits over a longer period. Investing and holding for the long term is the most effective way of killing the ‘noise’ that interferes with investment decisions.

The Coffee Can portfolio attracts businesses with smaller ticket sizes and repeats the purchase of products and services. Businesses in B2C can leverage loyalty with consumers and can be one of the competitive advantages. Also, a great B2C firm is better able to respond to or drive an evolutionary trend of its end-consumer. CCP Prefers the company with Strategic Asset.

Strategic assets are those that give a firm a platform over which it can build a stack of initiatives like raw material procurement, product development, marketing strengths, great distribution, pricing power, supply chain, etc. For most good (but not ‘great’) companies, strategic assets are only tangible in nature. 

But CCP prefers companies whose strategic assets are a combination of such tangible strengths alongside intangibles and hence difficult to replicate no matter how much money a competitor is willing to spend.

Expenses matter 

Gross return is not a true reflection of a portfolio’s performance because it is inclusive of fund managers’ and brokers’ fees. Investors should instead look at net returns

Transaction fees:

Also called brokerage, it is the fee you end up paying every time you enter a transaction. If a broker charges you a 0.5 % fee for a stock purchase, it may not seem like much. If, however, in the course of a year you bought and sold five times, your total fee as a percentage of your portfolio becomes 5 %.

Annual fees:

This is more typical of funds (like mutual funds and PMS) wherein the fund manager charges an annual fee which can actually be paid on a monthly or quarterly basis as well.

Hidden fees:

In insurance products and structured products, it is not easy for investors to understand exactly what fees are being charged. Expenses too can compound over time!

Mutual Funds 

The Indian mutual fund industry now has more than forty fund houses offering approximately 2500 schemes across various asset classes like equity, debt, hybrid, and commodities (gold). The industry now manages more than Rs 20 lakh crore.

Mutual Funds have exit loads which are charged from 0.25% to 2.25% if investors redeem in less than a year. The distributor of mutual funds used to earn as much as per 5% to 10% annually from the upfront commissions alone. 

Read more about Mutual Funds here

Active Funds & Passive Funds 

Active funds are those funds that are actively managed by fund managers and focus to outperform the benchmark index. While Passive funds are those funds that replicate the index and are not actively managed and hence have lower managing charges.

Direct Schemes investments give investors an option to deal directly with the fund house without any intervention by intermediaries like distributors, agents, financial planners, banks, etc. Direct plans are much cheaper, by 0.5 to 1% per annum in equity and 0.05 to 0.5% per annum in debt.

The Real Estate Trap 

As we all are aware, Real Estate is a large size transaction and due to this remains one of the largest components in most Indian investors. Most Indians associate property with safety, status, and prestige, given the feudal traditions of our country. 

In the previous era, people typically built houses when they retired. A house was something which was built for staying, never as an investment. Fast forward ten to fifteen years. In the opening decade of the new millennium, we saw a paradigm shift in the way retail investors started viewing residential real estate

Why do Investors get trapped in residential Real Estate? 

Compared to the familiarity of buying land or gold, investment in any form—either in mutual funds or in stocks or bonds—is alien to most Indian investors.

Unlike other asset classes like equity and debt, which can have a cycle of three to five years (i.e. price movements change their trend every three to five years), real estate runs into a supercycle of over ten years. So, most people who made significant profits in the bull cycle of 2003–13 don’t have any experience or memory of a downward cycle. 

 More importantly, outsized gains on this scale leave a lasting imprint on not just those who made the gains but also on their friends and relatives—envy is a powerful emotion. returns: All investment decisions have to be considered relative to their opportunity costs. Most real estate investors are usually satisfied simply because they look at absolute returns in isolation.

But the compounded annualized return that property has generated over the last twenty years is just 8.3 %. In that same period, the Indian stock market’s benchmark index is likely to have risen at 15 % per annum which, compounded over twenty years translates to a sixteen-times return.

When it comes to real estate, investors are happy to buy and hold for long periods. As a result, they end up holding their properties through thick and thin, which is why they are able to see an appreciation in the value. In contrast, inequity, investors typically end up buying at the peak, trade frequently, and then exiting at the bottom. The harshness of most investors experience of the stock market versus their happier experience in real estate

How to own real estate at low cost 

Non-convertible Debentures / Real Estate debt funds 

NCDs are similar to bonds issued by borrowers which promise to pay a certain coupon along with the principal back within a predetermined tenure. They were issued by real estate developers, typically at a project SPV level. The high-interest rates offered—anywhere between 18 and 25%—was because these projects could not get funding from banks and other avenues.

REITs 

REITs, or Real Estate Investment Trusts, are structurally similar to mutual funds in that they pool investors’ monies and invest in real estate projects.They are allowed to invest in income-bearing assets only and mandated to return more than 90% of the rents they get as annual income to investors. The pooling gives an excellent opportunity to investors with small ticket sizes who cannot afford to invest in a single property.

Real Estate has given far lower returns compared to equity over long periods of time. Along with that, its high correlation with equity means that real estate offers little by way of diversification. 

Patience & Quality 

What explains this investor pessimism with respect to equities, given that the asset class has given healthy returns?

The answer to this can be best understood through Shlomo Benartzi and Richard Thaler’s paper published in 1995, They defined ‘loss aversion’ as: ‘We regret losses two to two-and-a-half times more than similar-sized gains.’ Let us assume we buy two stocks—A and B—for Rs 100 each and sell them for Rs 95 and Rs 110 respectively. We thus book a gain of Rs 5 in total (gain of Rs 10 on stock B minus the loss of Rs 5 on stock A).

 In simple words, we will regret the Rs 5 loss on stock A at least as significantly (if not more)

As we would rejoice in the gain of Rs 10. to stop regretting investments in equity markets, his probability of generating profits needs to be at least twice as much as the probability of generating losses.

At what point investors lose their regret about investing in equities, is the probability of generating profits twice as much as the probability of generating losses.

The Patience Premium 

‘Patience Premium’ is the difference between annualized returns generated by a stock or an index over any holding period compared to the return generated by the same stock or index over a one-year holding period. A positive value of ‘patience premium’ implies that the longer the holding period of the stock, the higher is the return generated from it for an investor.

For example, if holding stocks for five years gives you 10 % per annualized returns whereas holding stocks for one year gives you 7 % returns, then the patience premium is 3 % (10 % minus 7 %)

‘Quality premium’, which we define as the difference between the annualized returns generated by a stock or a portfolio and the benchmark index ( the Sensex) over a particular holding period.

As the holding period increases from one year towards three and five years, volatility (and hence risk) of returns for a Sensex investor reduces.

The degree of risk involved in a one-year holding period has been three to four times higher than the risk involved in a five-year holding period and six times higher than the risk involved in a ten-year holding period.

There were certain observation made on the CCP 

• The shorter the holding period, the higher the quality premium
• A high-quality portfolio with a very long holding period delivers the highest return with the lowest risk

Conclusion

We conclude that investing in stock markets is a long term game that ensures a higher probability of returns. The Coffee Can investing  Philosophy is completely based on the game of patience.

If you are looking to invest to in the stock market for the short term, then definitely this CCP is a philosophy would not work for you. Even Warren Buffett mentions to be successful in the game of investing one needs to have systems in place.

Coffee Can investing is one system. As they say, one size does not fit all same goes for the investing.

Chech out the book on Amazon:

About the Author

Saurabh Mukherjea is the CEO of institutional equities at Ambit Capital, an Indian investment bank. In 2014 and 2015, he was rated as the leading equity strategist in India by the Asiamoney polls. Mukherjea has spent most of the past decade trying to construct and implement systematic methods for analysing Indian companies in the midst of the chaos that surrounds the Indian stock market. A London School of Economics alumnus, Mukherjea is also a CFA charter holder. 

About Roopesh

Roopesh is an author at Hackedwits and writes on summary for books from Business and Finance.A Project Manager at day and content writer at night. Love to learn new things, to connect dots in life. Follow him on LinkedIn for collaboration for freelancing projects.

Read his other top articles here:

1.  3 Things to think for to build Emotional Resilience
2.  10 Things to consider while buying a life insurance
3. Before you Start-Up 

The post Book Summary: Coffee Can Investing appeared first on E S Krishna Ram.

The aim of investing in equities/debt is to generate wealth over time, and mutual funds do just that. But they do it with much less risk than individual stock picking. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income on your behalf.

The Mutual Funds Sahi Hai campaign had a huge positive impact on demystifying mutual funds in India. This led to a lot of investors seeking Mutual Funds as an investment tool, especially through a Systematic Investment Plan. With the flexibility and options it offers, there is a fund for everyone!! Let’s explore some of the options:

Types of Mutual Funds

Equity Mutual Fund

An equity mutual fund is one which predominantly invests in equity shares or other equity related instruments. So how much should be in equities? So as per current SEBI Mutual fund regulation, for a mutual fund to be classified as an equity mutual fund, it should invest no less than 65% in equities. The fund manager has the liberty to invest the other 35%. Considering that in mind, there are various types of equity mutual funds, some are described below.

Large cap MF

The top 100 stocks by market capitalization listed in the Indian stock markets are called large caps. A mutual fund which invests in these top 100 stocks makes up the Large Cap Mutual Funds.

Mid cap MF

The next 150 stocks by market capitalization listed in the Indian stock markets (100-250) forms mid caps. A mutual fund which invests in these 150 stocks makes up the Mid Cap Mutual Funds.

Small cap MF

The stocks with rank 250+ by market capitalization listed in the Indian stock markets forms the small caps. A mutual fund which invests in these stocks usually 250-500 makes up the Small Cap Mutual Funds.

Multi cap MF

As the name suggests a Multi cap mutual fund has the freedom to invest across market capitalizations. A recent development in multi cap space is a circular by SEBI dated 11/09/2020. The circular states that a multi-cap mutual fund has to invest at least 20% each in Small, Mid and Large caps to stay true to its name.

Index Funds

Index funds, as the name suggests, is a mutual fund that tracks an Index. They are passively managed funds. That is there is no active stock picking. The role of the fund manager is mirror the respective index as closely and accurately as possible.

Because of the passive nature of such funds, fund houses need not spend huge amounts of cash for fund managers to identify and pick stocks. Hence the expense ratios for such Index funds are much lower than actively managed funds.

Index funds are often the best instruments for beginners to enter into equity markets

Besides these, there are also sectoral funds, thematic funds, international funds, focused and value oriented funds.

Debt Mutual Fund

A debt mutual fund is a scheme which invests in debt instruments such as corporate bonds, debentures, government bonds and other money market instruments. Such investments are often risk averse and provide stable and predictable income to investors, unlike equity investments.

The following are some of the types of debt mutual funds:

Liquid Funds

These mutual funds invest in debt instruments with a maturity period less than 91 days. Are often the safest funds to invest due to the low duration. Liquid funds are an excellent alternative to a savings bank account (or even FD in the current low interest situation) and often producing better post tax returns.

Average Yield: 6-7%

Corporate Bond Fund

Corporate bond funds are those mutual funds which invest not less than 80% of their portfolio in bonds of companies having a rating of at least AA+. As such a credit rating is only given to financially strong companies and history of paying back lenders on time, investment in such companies is seen with lower risk.

Average yield: 8-10%

Duration Fund

These are mutual funds which hold various debt instruments over certain durations of time. In fact Liquid funds discussed above are a type of duration fund. They are classified based on the duration to maturity of the underlying instruments that the fund is holding. Some of them are:

• Overnight
• Liquid Fund
• Ultra-short duration
• Low duration
• Short duration
• Medium duration
• Medium to Long duration
• Long duration

Gilts

Gilts are debt mutual funds that invests in government securities. These instruments have no credit risk associated with it as the borrower is the government and repayment is assured. (Indeed, if the government defaults on its interest payment, it would mean the GoI has defaulted, in such a case you would be having much bigger issues to worry about!!)

Hybrid Mutual Fund

A hybrid mutual fund is one which invests in both equity and debt to extract the best of both world. It often produces better returns than debt funds due to the allocation in equities but are more riskier than debt funds. Compared to pure equity funds, though it doesnt give returns as much as equity funds, but they are less risky and less volatile. This makes it an excellent choice for investors with medium risk capacities.

Even within hybrid mutual funds, there are subcategories such as

Aggressive Hybrid

Aggressive funds can hold up to 75% of the portfolio in stocks and the remaining 25% in fixed income options such as debts and FD like instruments.

Dynamic

A dynamic fund offers the fund manager complete freedom as to the accocation towards debt and equity. There is no fixed maximum and minimum percentage for the asset class and the manager is free to choose an allocation he deems fit according to the market condition.

That is if the manager feels that the stocks are overvalued and a crash is eminent, he can completely exit and invest in debt and vice versa.

Multi Asset

All the mutual funds discussed til now either invested in equities or debt. A mutli asset mutual fund can have a third asset class such as gold or real estate.

Multi asset funds are required to have a minimum of 10% in each of the respective asset classes at all times.

ELSS

Equity Linked Savings Scheme or ELSS is an equity mutual fund that helps you save tax under Section 80C by investing up to a maximum of Rs 1,50,000 per financial year.

ELSS mutual funds have a lock-in period of 3 years. Since the on-set of the new tax regime, exemptions under 80C have been removed. This makes ELSS scheme unattractive for such investors, opting for the new tax regime as it does not offer much benefit and their investments are locked away for 3 years.

FOFs

Fund of Funds (FOF) is a mutual fund that invest in other mutual funds for managing risk, volatility, ease, etc. But FOFs usually have higher expense ratios and tend to dilute the portfolio.

Things to consider

Open vs Close ended funds

99.99% investors should only invest in open-ended mutual funds because of the peculiarities of how closed-ended mutual funds work and how it might not be the right option for most investors. Read more…

Direct Plan ONLY

Mutual funds offer 2 ways through which you can purchase them. One is directly from the fund house (Direct Plan) or through an intermediary, usually the brokers (Regular Plan). The key difference between the 2 is that through the regular plan, usually the brokers take a commission for themselves out of our total fund value. This reduces our returns by over 1% each year and is not worth it, as you will see in the example for expense ratio.

Zero commission direct mutual fund investing has caught up even through brokers such as Zerodha and other offerings such as Groww, ET Money, Paytm Money.

Expense Ratio

There is literally zero direct cost of owning mutual funds at the hand of the investor. However, the fund house charges you a percentage of your total holding for running and maintaining the fund.

Expense ratio though doesn’t seem like much, but over years and compounded becomes an enormous amount in itself. A simple additional percentage over long periods can have huge repercussions.

Example:

10 lakh lump sum at 15% for 25 years grows to Rs 4,15,44,120

Add 1% expense ratio to that equation, the net return becomes 14% and the total investment becomes only Rs 3,24,51,308

That’s a humongous difference of nearly 90 lakh rupees over 25 years!!

Exit Load

Again, certain mutual fund houses charge a small percentage of holding if you exit the fund within a specified time period. This is in fact to discourage people from shuffling around with the funds too often and will not be a point of concern if your investment horizon is long term for most funds.

AUM

AUM stands for asset under management. It refers to the total value of investment a mutual fund house is holding under that specific fund. A general rule of thumb is to ensure the mutual fund has at least a couple of thousand crores as AUM so that the fund faces no liquidity pressure while redeeming.

FAQs

I hope the article covered enough to provide a bird’s eye view of the mutual fund space. If you have any doubts or comments feel free to let me know in the comments or through any other mediums, will be happy to discuss.

My other articles on Investing: Investing: Why should you start now?, What I learned after 5 years of Investing

The post Mutual Fund Investing: An overview appeared first on E S Krishna Ram.

Looking back at the top 5 posts from the month of August 2020. All these posts were originally published in LinkedIn as part of the daily content I have been posting.

Project Update: Rohtang Tunnel

India’s one of the most ambitious and strategic road project, Rohtang Tunnel will be inaugurated in September this year after nearly a decade in construction .

Project through the years 

1983 Ideation 
1⃣ 1990 Feasibility study
2⃣ 2004 Geological Report
3⃣ 2006 Design and specification report
4⃣ 2007 Tenders floated
5⃣ 2010 Foundation stone laid
6⃣ 2015 Expected project complete date
7⃣ 2020 Project completed

Salient features 

World’s longest tunnel above an altitude of 10,000 ft
All weather connectivity 
Telephones, fire hydrants, air quality monitoring, CCTVs etc at regular intervals
Length: 9.02 km
10.5 m wide, 5.52 m height
80kmph maximum speed
Up to 1,500 trucks and 3,000 cars are expected to use it per day
Reduces the distance between Manali and Leh from 474 km by 46 km to 428 km, and reduces the journey time by 2.5 hours.
Project Cost: 3200 cr

1% a Day

Whatever you want to get better at, do 1% more each day.

1% compounded everyday is 3800% a year

What’s your favorite?

Buy as costly as possible and sell as cheap as possible: How often do you hear that?

The primary objective of most private companies is to buy as cheap as possible and sell as high as possible. This is how they make a profit.

Amul on the other hand is not a private company, it is a Co-operative, where small farmers and dairy producers come together to pool their resources, process and market their product.

As a Co-operative their aim is not to make profits for the company, but to maximize the returns for its stakeholders/suppliers, who are also the owners.

Dairy being a perishable good, they also have to ensure much of the products are sold off within the end of the day. They do so by ensuring a delicate equilibrium of the lowest difference between buying and selling.

This strategy/philosophy has worked wonders for the company. Amul is already the largest FMCG in India with revenues of Rs 52000 crores in 19-20. Whereas, the largest listed FMCG company, Hindustan Unilever had revenues of about Rs 40,000 crores as of March ’20.

Google launches People Cards in India

Ever wanted your name to rank on Google, now it’s possible with Google People Cards

You can now set up how you want to be found on Google Search in form of virtual visiting cards that shows details such as

Your name
Occupation 
Education
About
Website
Social media handles
Phone/E-Mail

To create just search for Add me to search while being logged on to your google account from mobile

Cost, Price and Value

Warren Buffett once said “Price is what you pay, value is what you get” this is not only applicable in stock picking, but in everyday life and business also.

Cost: Money incurred on the raw materials, effort, and process of manufacturing a product or rendering a service.

But you will almost never be able to buy a product at this cost, because who would want to sell at break even?

Price: Cost + Profit 

This is what you and me pay for to buy a product or a service.

Value: What the customer gets out of a product or a service that he paid the price for.

Can Value exceed the Price?

Let’s say you paid 50000 rupees to buy your latest phone, the Price you paid is 50000, which might have Cost the manufacturer 30000 to make.

Now let’s say you were able able to derive a value of Rs 70000 with the phone over its life time, this might be through actual money earned by selling photos you take, leveraging social media or percieved value from daily tasks the phone was ment for, or even the social image of having Xyz Phone.

When Value >> Price, people will pay you money for it. This is why people pay crazy amounts of money for a Rolex watch, when a normal watch would have shown the same time.

Honourable Mention

Project Update: Kasaragod’s COVID Hospital by Tata Group

The first hospital in Kerala dedicated for COVID is nearly ready for handover to the government in Kasaragod district of Kerala.

Built using pre-fabrication technology, following are some of the salient features:

541 beds
51,200 square feet
Completed in a record 124 days.
At a cost of Rs 60 crores
Expected life: 30 years
With proper maintenance could be extended up to 50 years.
Units include: air conditioners, fans, separate toilets, air purifiers and air vent ducts.
Units made of styrofoam puffs filled between layers of steel.

Reading my blog for the first time? Check out my last blog article on my investing lessons here. Also, feel free to share your thought in the comments below.

The post Top 5 LinkedIn posts from August 2020 appeared first on E S Krishna Ram.

The EIA 2020 draft notification was published by the Ministry of Environment, Forest and Climate Change (MoEF&CC), intending to replace the existing Environmental Impact Assessment Notification, 2006 under the Environment (Protection) Act, 1986. Ever since it was published, the draft was subjected to criticism and debate over its departure from existing regulations. Here is an overview.

What is EIA?

Environmental Impact Assessment (EIA) is a decision-making tool based on the study of the effects and impact of a particular proposed project on the environment. The EIA compares various alternatives available for a project, to identify the best option in terms of both financial and environmental costs, while ensuring they meet the desired objectives of the project.

EIA tries to predict both the positive and negative consequences even before the actual execution starts, so that these impacts can be mitigated by setting mitigative measures, both preventive and corrective.

By proactively considering such environmental impacts early in the planning process and setting up mitigative measures leads to benefits on multiple fronts such as:

• Environmental protection and sustainable development
• Optimum utilization of resources
• Public awareness
• Lesser conflicts later on during execution
• Increased project acceptance

History

The concept of EIA was first introduced in the US back in the early ’70s. Until then, projects were analysed only from a technical and economic feasibility, with little to no thoughts about the potential environmental impacts of the same.

Though, we in India started looking at projects from an environment angle back in 1976-77. It further took us nearly 20 years to make Environmental Clearance (EC) mandatory.

It was only on 27 January 1994, by the Assessment Notification by the Government of India’s Union Ministry of Environment and Forests (MEF)on Environmental Impact Assessment of Development Projects under the Environmental (Protection) Act 1986, Environmental Clearance (EC) was made mandatory for expansion or modernisation of any activity or for setting up new projects.

The current form of EIA is from 2006, with amendments made till 2015.

EIA 2020 Draft Notification

The Ministry of Environment, Forest and Climate Change (MoEF&CC) has published the new draft Environment Impact Assessment (EIA) Notification 2020, intending to replace the existing EIA Notification, 2006 under the Environment (Protection) Act, 1986. And along with it came an array of criticism and debates over its deviations from existing regulations and dilution of major clauses, including those of Public Consultations. Let’s take a look at some of them.

Key Issues

Well, if everything about the EIA is about protecting the environment and on benefit of it, why such an uproar about the new EIA 2020 Draft Notification?

The fundamental problem with the new EIA Draft 2020 is that it dilutes the underlying objective of having the EIA in the first place. And this they say is to improve ease of doing business, more transparent and expedient through implementation of online system, further delegations, rationalization, standardization of the process, etc, but at the cost of weakened environmental regulations, decreased community involvement and knocking off the balance between sustainable development and environmental protection.

Post-facto Clearance

Post-facto clearance makes it possible for projects that are already in violation of the Environment Protection Act to apply for clearance.

This is despite the Supreme Court ruling on April 1 on the Alembic Pharmaceuticals Ltd. versus Rohit Prajapati & Ors. case that issuing of ex post facto clearances is contrary to law and held that the concept of an “ex post facto environmental clearance” was not sustainable with reference to any provision of law.

Dealing with violations

The draft EIA states that notice of violations i.e cases where projects have either started the construction work or installation or excavation, whichever is earlier, on site or expanded the production and / or project area beyond the limit specified in the prior-EC without obtaining prior-EC or prior-EP can only be made on the:

• By the “suo moto” application of the project proponent or
• By any Government Authority or when
• found during the appraisal by Appraisal Committee; or
• found during the processing of application, if any, by the Regulatory Authority.

This is like saying if a thief had committed a theft, he/she should report the crime at the nearest Police Station pro-actively!!

Also, the quantum of penalties levied on notice of violation is too small to deter project proponents from committing such violations.

On cognizance of violation through suo moto application (by the violator itself), a late fee of Rs. 1,000/- per day in case of Category ‘B2’ projects; Rs. 2,000/- per day in case of Category ‘B1’ projects; and Rs. 5,000/- per day in case of Category ‘A’ projects. And double that amount, if reported by a government authority.

Also, all a violator needs to do in case proven guilty are two plans for remediation and resource augmentation corresponding to 1.5-2 times the “ecological damage assessed and economic benefit derived due to violation”

Dilution of Public Consultations

One of the greatest strength of the current EIA norms is that it encouraged public participation in the process through public hearings to be arranged in a systematic, time bound and transparent manner ensuring widest possible public participation at the project site(s) or in its close proximity.

The new draft dilutes this objective in the following manner

• The project proponent shall arrange for “one” hard copy and one soft copy of the draft EIA Report, whereas in the earlier amendment this number was “10”
• Reduced the time allocated for responding from 30 days to 20 days.
• There is no minimum attendance requirement to start the proceedings of the public hearing.
• The draft allows for conducting the public hearing through any other appropriate mode, as recommended by the Appraisal Committee, or the Regulatory Authority.
  • But this is not a very solution because, if the authority decides to conduct the meeting via Video Conferencing, it might not be possible for all the community members to take part in it.

Baseline data from only one season

An EIA report needs baseline data to predict the impact of the project on the environment. The current draft proposes to assess data for a single season, excluding monsoon for this purpose. This will lead to less reliable data and projections for the EIA report, causing it to be misleading.

Relaxed Norms for buildings

Confederation of Real Estate Developers Association of India (CREDAI) an association comprising all big players of India was against the EIA rules on buildings since the 2006 amendments that brought all projects between 20,000 square metres and 1,50,000 square metres within the ambit of EIA. The real estate industry supported the environment ministry’s proposal to relax the area criteria from 20,000 square metres to 50,000 square metres.

This was an attempt to extend the limit of 20,000 sq meters to over 50,000 sq meters and thus make the EIA process ineffectual for buildings as over 90% of buildings fall under that category.

The Union Ministry of Environment and Forests issued the January 19, 2009 draft notification of Environment Impact Assessment (EIA) rules to exclude construction projects including the housing projects, commercial and retail construction that are less than 50,000 sq. mt. of built-up area from the ambit of the Environment Impact Assessment and the Environment Protection Act 1986.

This limit was further increased to 1,50,000 sq meters in the current draft, virtually rendering the EIA process useless for buildings in the EIA Draft 2020,

Strategic Label

The current draft allows for certain degree of relaxation of EIA for any project that has been classified as “Strategic” and in “National Interest” This allows for labeling projects as “strategic” to bypass the EIA norms. The draft does so by saying that “no information relating to such projects shall be placed in the public domain.”

While these hold acceptable for projects concerning national defence and security, the lack of clarity around projects “involving other strategic considerations, as determined by the Central Government” is a cause for concern.

Relaxed Post-Approval Monitoring

The frequency of post approval monitoring has been reduced from once in six months to once in a year. Also, the project proponent can delay the submission of submission of yearly compliance report for 3 consecutive years by paying small amounts of fine amounting from 500 to 2500 rupees a day.

EIA Exemptions

Under clause 26 of the EIA draft, over 40 exceptions including, but not limited to the following are proposed:

• Solar Photo Voltaic (PV) Power projects, Solar Thermal Power Plants and development of Solar Parks
• Coal and non-coal mineral prospecting
• Secondary metallurgical foundry units
• Manufacturing and processing of a variety of chemicals

Suggestions

1. Projects should not be granted post facto clearances.
2. Ensure local affected persons or others who have a plausible stake in the project to report violations rather than suo moto applications and by governing authorities.
3. Ensure greater public participation by increasing the time allowed for responding from 20 days to a minimum of 45 days.
4. Ensure the number of hard copies of the EIA report to be maintained for public consultation to be not less than 10.
5. Ensure the public consultations take place physically rather than through alternate methods as recommended by the committee.
6. Set in place, a minimum attendance requirement for public consultations to be considered valid.
7. Other than projects concerning national defence and security, clearly define which projects make up Projects of Strategic Importance.
8. Continue enforcing EIA norms on building projects greater than 50,000 square metres.
9. When calculating baseline date, ensure data is collected all year and not just for a single season to ensure data reliability.
10. Ensure compliance reports are submitted bi-annually and revoke EC/EP if violations continue for 2 consecutive terms of 6 months.

What can you do?

The draft itself encourages public participation, and as responsible citizens, it’s our duty to raise concerns regarding such a sensitive topic concerning our environment. We need to involve ourself in such issues and not wait for another tragedy to strike to raise our voices.

Any person interested in making any objections or suggestions on the proposal contained in the draft notification may forward the same in writing for consideration of the Central Government within the period so specified to the Secretary, Ministry of Environment, Forest and Climate Change, Indira Paryavaran Bhawan, Jor Bagh Road, Aliganj, New Delhi 110 003, or send it to the e-mail address at eia2020-moefcc@gov.in

Last date for submission of objections or suggestions: August 11, 2020.

Conclusion

The fact that we are even discussing administrative and judicial notification on public domain shows how concerned people are over the impact of such a diluted EIA notification can have on our environment and future generations. A lot of young students, activists, environmentalists, social media influences etc have taken up this issue seriously and are doing a magnificent job at informing and educating the general public about such a move.

Let’s hope with the kind of public participation currently seen, a better and comprehensive Environmental Impact Assessment norms will be set in place, where both development and environment are equally winners and ensure environmental damage does not end up as an acceptable collateral cost for development.

Have I missed any of the key issues? Have a difference of opinion on any of the issues raised? Have a great suggestion? Do let me know them in the comments below.

References

1. EIA Draft Notification 2020 (Important points highlighted)
2. Environment Impact Assessment for Buildings: Kid’s gloves
3. EIA Draft 2020: All the ways it weakens an important environmental safeguard
4. Why draft EIA 2020 needs a revaluation
5. Centre for Science and Environment: Understanding EIA
6. Draft EIA notification fosters non-transparency, encourages environmental violations
7. Draft EIA notification institutionalises 1 season data for baseline
8. Primer on the Draft EIA
9. Civil Appeal No. 1526 of 2016, Alembic Pharmaceuticals Ltd. versus Rohit Prajapati & Ors

Request to readers: EIA needs your attention, if you think so too, read about it, engage in discussions, make up your mind and add your inputs to the public consultation process by sharing your thoughts to eia2020-moefcc@gov.in by August 11, 2020

The post EIA Draft 2020: An overview appeared first on E S Krishna Ram.

Looking back at the top 5 posts from the month of July 2020. All these posts were originally published in LinkedIn as part of the daily content I have been posting.

Mirror AI

An AI for interview preparation.

Mirror AI is an android application which helps students and professionals in interview preparation. This is done by assessing how one communicates based on speech and video.

During the current period when interviews are mostly on digital platforms, preparing oneself for such a medium would be essential.

The application gauges the audio and visual aspects in terms of your Smile, Eye Contact, Calmness, Pronunciation, Pauses and Fillers used.

So, would you give such an AI a shot before an interview or would you do a mock with your trusted friend?

India’s second ever REIT offering

The Mindspace Business Parks REIT (Real Estate Investment Trust) is opening its IPO for retail investors from 27-29th of July 2020. 

The company plans to raise Rs 1000cr inform of fresh issue and another Rs. 3500cr in form of offer for sale taking the total deal amount to Rs 4500cr.

The minimum amount of investment needed is set at Rs 55,000 for 200 shares at Rs 275 each, which was earlier fixed at Rs 2,00,000.

This is the second ever REIT offering in India till date after Embassy Parks Office REIT back in 2019, which has been doing relatively well even in these uncertain times.

Most Innovative Companies of 2020

The Boston Consulting Group (BCG) released its annual report defining the world’s most innovative companies in 2020. Technology giants, Apple, Alphabet, Amazon, Microsoft and Samsung take the top five spots for 2020.

A key insight from the report is “The companies most committed to excelling at innovation prioritize advanced analytics, digital design and technology platforms to strengthen their specific initiatives and create new ventures”

Following similar lines, I hope Reliance Jio finds a mention in the coming years with the innovations and prioritizations following the recent AGM as an Indian representation on the list.

We are preparing for the future by looking at the past.

A huge percentage of our actions are based upon data from our past. Experiences of those who walked the same roads, did the same things, made the same mistakes, or even our own past experiences.

But when you base your future actions on your past, your future will always have a shade of your past.

The greatest innovators, inventors, leaders and people who were called ahead of their times had the vision of a different future. Making it possible to come with original thoughts, ideas and inventions.

Design the future, from scratch.

Debt trap diplomacy

Guess what these red dots represent and then read along

The following is a screen grab from an online web map by AidData, a research lab based of the United States.

The website consolidates locations of Chinese-funded development projects around the globe. The data set includes over 3,485 Chinese Government-financed projects in 138 countries and territories.

The debt-trap diplomacy, especially with the developing and under-developing countries in Africa and with the countries neighbouring India, has been raising questions on various fronts. But to see data visualized like this gives a better understanding of the impact it will have on the geo-political front.

Thoughts on debt-trap diplomacy?

Honorable Mention: The New Pamban Rail Bridge

India’s first vertical rail-lift bridge

Construction on India’s first vertical rail-bridge started on the New Pamban Rail Bridge connecting Rameswaram to the mainland. 

The 2.05km bridge will replace the over 100-year-old Pamban Bridge dating from the British era because of speed and weight restrictions.

A vertical-lift bridge design planned is a type of movable bridge in which a 63m span rises vertically while remaining parallel with the deck, unlike the double-leaf bascule section which exists in the old bridge, allowing vessels to pass through.

The Rs. 250cr project is an undertaking of Railway Vikas Nigam Limited (RVNL)

Reading my blog for the first time? Check out my last blog article here. Also, feel free to share your thought in the comments below.

The post Top 5 LinkedIn posts from July 2020 appeared first on E S Krishna Ram.

Like any other young dude doing his engineering, I started tinkering with the idea of investing stock markets, back in my engineering days. What started as an endeavour to make some quick bucks turned out to be a much more entertaining, fulfilling and learning experience.

Five years of investing is by no means a colossal amount of time in the investing universe. However, I’m still sharing my experiences, learnings and mistakes over this time frame.

Introduction

My investing journey started somewhere in the last weeks of May 2015 by filling out forms and signing out countless times in the application form at Geojit – a broker based out of Kerala. It was my lack of knowledge (at the time) that led me to believe that you needed to be at least 18 years old to get a PAN Card which was necessary for opening a Demat account.

The actual investing process started a few days later when my papers were processed and they have activated my account. On the Wednesday of June 10, 2015, I finally made my very first investment in a relatively unheard company, which I held on for nearly 4 years along with 5 other companies.

Like many others, I made some money, lost some money, made mistakes and did stupid things. But most importantly, learnt a lot during the process. I’ve summarised some of them below, not in any order.

Learnings

Quality first, always

Initial years saw me chasing the so-called “hot stocks” which “seemed like” having huge potential to generate tremendous returns. But I really ended up eroding capital in the process. The argument I had against excellent quality stocks at the time was: This company (share price) is already doing good, so I don’t see much opportunity in it anymore. I wasn’t more wrong. In fact, an elite company has better chances of, say, doubling from the CMP than a cheap but questionable company. Example: Reliance doubling in the past couple of months.

Don’t judge a company by its share price.

A lot of beginners (including me back at the time) make the mistake of judging companies by its share price. You and I make the mistake of thinking say, an HDFC Bank trading at 1200 is expensive. Whereas a Yes Bank trading at 25 is cheap. But one should never gauge a company by its stock price alone. Companies trading at tens of thousands of rupees might be cheap from a valuation perspective when compared to a cheap penny stock trading at expensive valuations.

You cannot time the market

You can often see discussions on “if it is the right time to enter/invest the market or not.” In my experience, there is no right or wrong time, the best time is when you have the means to do it, without trying to time the market. The primary reason one tries to time the market is because of a short investment horizon. If you plan to hold on to a company for years, it doesn’t matter if you buy it today or 2 weeks later at a 2% discount. The issue with trying to time the market is that you never know for sure and you’ll always end up questioning yourself.

Returns come from patience

One of the most overlooked aspect of investing is the investor’s patience. The difference between an average investor and a brilliant investor is the ability of the latter to sit on his investments for interminable periods of time, allowing it to compound. One should also note that sitting blindly on a terrible investment hoping that tides would turn in your favour is also a grave mistake.

The 80/20 Rule in Investing

One of the mistakes early investors makes is to sell their winners and hold on to the losers. Some make it even worse by selling the winners to buy the losers. Even I have been victim to this mentality. The primary reason for such a thought is that one often thinks of an investment as a one time instrument and once a certain return is achieved, we must replace it with another instrument. But the reality is far from it. A fundamentally sound company, with a proven track record, can generate returns year after year.

Stock markets are volatile, and there isn’t much you can do about that.

Stock markets are volatile, it doesn’t work like fixed income assets such as debt or FD. It is also wrong on our part to expect it to behave like one. And more often than not, it takes a toll on you. You’ll definitely be stressed to see wild swings in your portfolio over time. But that doesn’t mean that you must take action or monitor it daily.

To visualize the nature and volatility of markets and expectations, consider the following. A hypothetical price movement of a share from 100 to 200.

Expectations: 100->110->120->130->140->150->160->170->180->190->200

Reality: 100->130->110->96->78->130->155->181->177->186->200

Say, you’ve correctly identified and picked a stock at 100 and know it has the firepower to reach 200. You need genuine conviction to hold on to it when it has corrected 20% just when you bought. And boy does that happen.

Cash is king

Consider the following situation: The markets have corrected heavily, say 20%. You suddenly needed some amount of money for an emergency. If all your savings were invested, with no emergency fund in cash, it would force you to exit at a terrible time. Leaving you with no other option than an untimely exit. Hence, one must only invest in equities after having an emergency fund which can take care of your immediate needs if the case arises.

Also, if you allocate a percentage of your portfolio to be liquid cash, it gives you the opportunity to deploy it at a stage when the market has corrected because of a temporary event. Example: Markets corrected heavily in 2020. But as I was fully invested and had no spare cash lying around. Hence, I could not take advantage of the opportunity financially by averaging down.

Trading is not for you, if you don’t know what you are getting into

Almost everyone starts off as a trader. Almost no one starts investing with the mindset to hold an investment for years. The problem starts when you get lucky with a few trades and think trading is easy.

When investing, remember that Rome was not built in a day. When trading, remember Hiroshima and Nagasaki were destroyed in one.

Vijay Kedia, Veteran Investor

But that’s not to say that making money by trading is not possible. Trading like long-term investing has lots of nuances and there are a lot to be studied and understood. One must know this before becoming a trader.

Mutual Funds Sahi Hai

The aim of investing in equities is to generate wealth over time, and mutual funds do just that. But they do it with much less risk than individual stock picking. MFs are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income on your behalf.

The Mutual Funds Sahi Hai campaign had a huge positive impact on demystifying mutual funds in India. This led to a lot of investors seeking Mutual Funds as an investment tool, especially through a Systematic Investment Plan. With the flexibility and options it offers, there is a fund for everyone!!

Mistakes

Not diversifying enough

The saying “Don’t put all your eggs in one basket” seems like such a cliche. But the truth is cliches work. Diversifying with respect to investing is a risk management strategy that limits the exposure to any single asset or risk. An example of not diversifying would be stuffing your portfolio with a lot of sector specific stocks.

There are various types of diversification even within investing, some of them are among:

• Different sectors
• Different countries
• Different asset classes/instruments

Not exploring other instruments

Investing in equities is not the only form of investment, there are various other avenues. These includes:

• Bonds
• ETFs
• REITs
• Commodities such as Gold, Silver

With the unpredicable nature of the markets, it is always in the best interest that you diversify beyond equities. Also, a mixture of multiple asset classes greatly help in reducing the volatility in one’s portfolio.

Portfolio churning

Portfolio churning is in simple terms nothing but “over trading” with the expectation of better returns. If your stock picks are into decent companies with a proven track record, portfolio churning only helps the broker to rake in additional income in terms of commissions and brokerages from your returns.

Example: My very first investment, on day one, was into 6 companies, which I have sold off at various timings. I checked for this article, what would that holding have returned if I had still continued to hold on to them even today. Surprisingly, the combined returns from those six holdings is not much different from the returns from my current holdings. Not to mention all the savings from the various fees, brokerages and tax paid while buying and selling in the second case.

You can only beat the market, if you first match it.

It’s only natural that one aims to generate alpha. I.e. the returns one generates over the returns generated by the benchmark. However, what you forget is the fact that you can only beat the market, if you first match it.

In my initial days, with the aim of “beating the market” I started betting on riskier bets, in hopes of better returns and to some degree found success. But as the Warren Buffet saying goes, “Only when the tide goes out do you discover who’s been swimming naked.” This was exactly what happened when the market cycle took its course and my riskier bets got exposed.

The simple learning from the above chart is that, numbers wise, I would have been far better off just investing in a Sensex ETF or Index fund instead of taking the risk and effort of finding individual stocks and investing.

Investing in Penny Stocks

We should read the mistake of investing in penny stock in conjunction with the learning “Don’t judge a company by its share price” Nearly for the entire first year, I never invested in a company with a share price over Rs 1000 due to the misunderstanding mentioned above. Also, my google searches would be along the following lines: “Best stock under Rs 50/100/200” This is not to say that there are no good stocks under 200, but a flaw in the thought process while picking stocks.

Conclusion

The first five years of one’s investing journey is barely just the beginning. But, all the mistakes, experiences and lessons over this time makes him a better investor from 5 years ago. If you want to learn the craft, make mistakes and make mistakes in the beginning, when the stakes are low.

A man should never be ashamed to own he has been in the wrong, which is but saying… that he is wiser today than he was yesterday.

Alexander Pope – English Poet

I’m sure you too might have had some of these experiences and have came to your own conclusions. Let me know in the comments what are some of your key takeaways from your investing experience. If you found this article interesting, you might also like my article Investing, Why should you start now. Also, don’t forget to subscribe to our newsletter to receive the latest updates on our latest articles.

Announcement: Myself along with 2 of the most passionate guys out there, Padmadip Joshi and Gokul G Kumar have launched a podcast series: Conversations with Reinforced Engineers. Do check it out here (YouTube) or on Spotify by clicking the web-player below if you haven’t already. The podcast is also available on all the leading podcast applications.

The post What I learned after 5 years of Investing appeared first on E S Krishna Ram.

Looking back at the top 5 posts from the month of June 2020. All these posts were originally published in LinkedIn as part of the daily content I have been posting.

1. L&T’s commitment to Self-Reliant India

L&T affirms its commitment to Self-Reliant Indian Industry

Indian construction giant and conglomerate Larsen & Toubro reaffirmed its commitment to building a strong and feasible “Make In India” ecosystem.

The company aims to drastically reduce its dependency on imported products including those from China. This is done by putting processes and systems in place to develop a large scale, efficient and cost-effective domestic industrial ecosystem over a medium to long term.

The company has also been involved in developing a strong supply chain of local vendor partners in its businesses, nurturing the local manufacturing and construction ecosystem.

A welcome move from one of the big names in our industry, hoping other players will follow suit, making self-reliant India a reality.

2. Reliance becomes Net-Debt free

Reliance Industries Limited becomes Net-Debt free, keeps promise.

Indian conglomerate, Reliance Industries under the leadership of Mr Mukesh Ambani has become net-debt free. The company achieved this feat by raising over 1.68 lakh crore rupees in just 58 days.

The company usually follows a high debt, high cash strategy. Leading to a debt of over 1.61 lakh crore rupees as of FY20.

They raised the cash in way of 11 deals for 24.7% of the Jio Platforms and a rights issue for Reliance.

The plan to go debt free was first announced during the company’s 42nd AGM in August 2019. Having set March 2021 as its target, they achieved this status a full 9 months in advance.

On back of the powerful sentiments from investment firms, the stock has also doubled from 52 week lows. Making it the first Indian company to have a Market Capitalization of $150 Billion, which it achieved on 22^nd June.

The company also plans to list Jio and Reliance Retail within 5 years.

3. Atmanirbhar Bharaat

Atmanirbhar Bharat, but how?

The recent news of Delhi-Merut RRTS Tunnel Project where a Chinese firm has become L1 over an Indian firm has received a lot of attention in wake of the current tensions between the two countries.

The difference between the L1(Chinese) and L2(Indian) bidders is just 44 crores or less than 4%. And yet the contract might go to the lowest bidder, because of our love for the “lowest bidder”

A workable solution on how this can be tackled can be found in Kerala, in its nearly 100-year-old cooperative company that an IIT Professor has called as a mini-Kerala version of L&T: ULCCS.

Because of its status as a cooperative entitles it to various benefits from the government.

1⃣ If the bid price of ULCCS is higher than a private contractor’s but the difference is within 10%, the project can be awarded to the cooperative. 

2⃣ Exempt from depositing earnest money or a performance guarantee 

3⃣ Award projects up to a certain amount directly to it without calling for a tender 

Given the renewed interest in self-dependence, it is prime time that such steps (especially 1) that favour and makes Indian companies more competitive over others are taken.

4. 5 C’s of Wisdom

5 C’s of Wisdom

Collection: Everything you experience forms a collection of data, the books you read, movies you watch, conversations you have, everything. This is raw Data.

Categorize: Data in itself may appear meaningless, so you categorize based on its type and your experiences you’ve had with them. This is Information. 

Criss-Crossing: Once you’ve categorized the information, you see patterns emerging, intertwining and relationships between them. This is Knowledge.

Couple: Somewhere you find that there is a link between 2 data sets, but you don’t know how they are connected, yet. This is Insight.

Connect: Then you develop an ability to connect 2 seemingly random dots to an untrained eye with logic, reasoning and meaningfully. This is true Wisdom.

Further Reading: DIKW Pyramid

5. Leveraging LinkedIn

The 90-9-1-0.1 Rule

Once you’ve set up your profile and is optimized, the next thing to do is to start posting content on the platform and I’ll tell you why it’s important.

The 90-9-1 Rule applies to online communities, with the numbers showing the percentage of its users falling into 3 broad categories

90% Lurkers: Users that just scroll through content without engaging with them.

9% Contributors: Users that engage with content in some form, through comments or re-shares often by adding their own thoughts. 

1% Creators: These are the group of people that actively create content on the platform.

The easiest thing to do to set oneself apart from others is to “CREATE”. With the participation inequality so stark, creating has become quite rewarding.

So which category do you fall into and which category do you want to be in?

Still wondering who the 0.1% users are?
They are people who create content daily!!!

Honorable Mention: Networking lesson from Mr. Dhirubhai Ambani

Perspective Matters: A Lesson on Networking from Dhirubhai Ambani

Came across this crazy story of why Dhirubhai Ambani, in his earlier days used to go to Taj for a coffee, a very expensive place even at the time. A coffee at Taj would cost 50 odd rupees whereas coffee at a roadside shop would have only cost a couple of rupees.

A friend who noticed this asked, why so? He replied:

“I am paying 5 bucks for the coffee and another 45 bucks because the Taj gives me an opportunity to connect with the city’s most influential people! It’s not about the coffee; it’s about acquainting myself and developing relationships with the people who really count”

Not sure if he ordered coffee or tea, but that mindset sure is a lesson in networking and why having a unique perspective on life is such a superpower.

Reading my blog for the first time? Check out my last blog article here. Also, feel free to share your thought in the comments below.

The post Top 5 LinkedIn posts from June 2020 appeared first on E S Krishna Ram.

On Monday, 20^th April 2020, something very weird happened. For the first time in history, US oil price nose dived into negative territory. Of all the unprecedented news coming from capital markets, bond markets, central banks, economic outlooks, due to the Corona virus, this one has to be the craziest (yet?)

It is hard for anyone to imagine a commodity price to fall to zero, let alone being traded at negative prices. It becomes even harder to wrap your heads around the fact that that commodity is oil. However, that is exactly what happened on 20^th April 2020 when WTI (West Texas Intermediate) Crude futures expiring in May plunged 321%, to -$40.32 a barrel.

Negative oil price: What really happened?

Crude oil prices have corrected heavily on the back of the coronavirus pandemic. But yesterday’s was not like that, both on nature and scale. Such a drop happened because of multiple issues overlapping, which has been long coming.

Low Demand

The latest Oil Market Report by International Energy Agency estimate that demand in April 2020 to be 29 million barrels/day lower than a year ago. Down to a level last seen in 1995. This is because of the near complete shutdown of entire countries, transport sector, airlines, industries, etc.

High Supply

The Saudi-Russia Oil Price War leading to excessive supply by two of the biggest oil producers post mid-march has led to huge amounts of low-cost oil flooding the markets. This comes especially at a time when demand is already very low.

No storage and Futures expiry.

A futures contract is a financial derivative that oblige the contract holder to buy (or sell) the specific commodity by a future date (on contract expiry date). In the current scenario, WTI crude futures were supposed to expire on 21^st April 2020. A peculiarity of WTI is that if you are holding futures on expiry date, you must take physical delivery of oil.

On a regular expiry day, this would have been a normal affair. Traders (who are not interested in actual physical delivery) would sell those contracts to players who would require physical oil. Since there was no demand for physical oil from such players, there were no buyers for these contracts. This led to the traders panicking and wanting to get rid of the contracts at cheap prices.

The situation was so bad that the prices not only reached so low and ultimately zero, the prices still fell into negative territory, meaning that the sellers were paying money to buyers to buy the contracts from them to take physical delivery of oil.

Besides this, most of the oil storing facilities in US were already nearing capacity (due to the already available cheap oil). This meant that even if one wanted to take physical delivery, storage was a problem.

Are we to benefit from this “Negative oil price”?

If one expects this fall in oil prices into negative to fully translate into a fall in petrol and diesel prices, you are in for a disappointment. This is primarily because:

• India imports Brent Crude and not WTI Crude
  • WTI Crude is oil that has been extracted from oil fields in US and is a price benchmark for US customers. India has been importing crude form OPEC. For whom Brent Crude is the benchmark (which was still trading around $20 at the time).
• This is temporary and has got more to do with trading than with oil
  • Oil being traded at negative prices is a temporary event and possibly a onetime event (unless the situation is similar at next expiry). Such prices are unlikely to continue and will definitely bounce back.
• Oil prices likely to fall though
  • Even Brent Crude prices are likely to fall due to the underlying issues. Consumers can expect some fall in petrol prices over the weeks. However, the fall in prices need not transferred to the customers fully.

Final Thoughts

Given the severity of recent events, its natural for oil prices to be stressed. That being said, it is also unrealistic to expect such prices to sustain. Countries such as USA, Russia and Saudi Arabia must come together to ensure stability in markets. India (mostly through our government) have been enjoying the falling crude prices over the years. However, taxes still account for a huge amount in our fuel spending. Any reduction in taxes would definitely act as a catalyst to economic activities once the economy restarts besides the various stimuli.

The post Negative oil price: What it means for you and me. appeared first on E S Krishna Ram.

After stellar gains from the likes of D-Mart and IRCTC, markets seem to be excited again for another much awaited Initial Public Offering from a well-renowned subsidiary of State Bank of India: SBI Cards and Payment Services.

Prelude

SBI Cards & Payment Services (SBI Cards) is the leading issuer of credit cards in India. Incorporated in October 1998 as a joint venture between State Bank of India, India’s largest commercial bank in terms of deposits, advances and the number of branches and GE Capital. Later in December 2017 State Bank of India and Carlyle Group acquired GE Capital’s stake in the company.

The company offers Indian consumers access to a wide range of world-class, value added payment products and services. At present SBI Cards operates through a footprint of over 130 cities in India.

It is the second-largest credit card issuer in India, with a 17.6% and 18.1% market share of the Indian credit card market in terms of the number of credit cards outstanding as of March 31, 2019 and November 30, 2019, respectively, and a 17.1% and 17.9% market share of the Indian credit card market in terms of total credit card spends in fiscal 2019 and in the eight months ended November 30, 2019, respectively, according to the RBI

Issue Details

• Date of Opening: 02nd March 2020
• Date of Closing: 05th March 2020
• Total number of Shares offered (Cr): 13.71
• Post Issue Number of shares (Cr): 93.89
• Price Band: ₹ 750- 755
• Face Value: ₹ 10
• Bid Lot: 19 shares
• Minimum application for retail (Upper price band for 1 lot): ₹ 14,345
• Maximum application for retail (Upper price band for 13 lot): ₹ 186,485
• Listing: BSE & NSE

SBI Cards shares are proposed to be listed both on the BSE and NSE. The listing of shares is expected to happen on 16th March. Investors can invest in the IPO through their respective brokers or through the BHIP UPI application.

The Good

Let’s see some positives of SBI Cards that makes it a good target for long-term investment.

• Low penetration
  • Credit card penetration in India is very low compared to other developed countries. For example, in the US there are 300 credit cards per 100 people. Whereas in India, that number stands at 3 per 100 people.
  • This exposes the huge opportunity for the industry to grow and expand in the coming years.
• Growth opportunity without Capital
  • A salient feature of the credit card industry is the ability to grow without the need for much capital. Since it’s a tech based financial service, they could easily accommodate additional customers.
• Only listed card company
  • At the time of listing, SBI Cards will be the only listed company in the credit card sector. Investors aiming to benefit out of the growing sector will be left without much option.
• Demographic Dividend
  • In the coming years, India will have the youngest working population in the world. This huge number of working population willing to spend is a boon for the credit card sector. You can read more about demographic dividends here.
• Budget encouraging spending
  • In the latest budget, there has been a tonal shift to encourage people to spend more rather than saving. Such a move is positive for credit cards.
• Growth of E-Commerce
  • Another area which have been playing a significant role in the boost for adoption of credit cards is E-Commerce. Ease of purchase and better payment terms in websites such as Amazon and Flipkart clubbed with Zero percent EMI should be seen as an accelerator.

Raamdeo Agarwal, MD Motilal Oswal and veteran investor in fact rates SBI Cards as a “lethal combination of quality and growth”

The Bad

Risks are an indispensable part of running a business. SBI Cards too face certain risks, some of them are highlighted below.

• Dependent on SBI
  • Though a boon and a bane, the card subsidiary depends on the promoter group SBI heavily. And, any risks affecting SBI may impact SBI Cards badly in the future.
• Competition from UPI and other credit card companies
  • Something that recently gained traction is Digital Payments. The fact that the Unified Payment Interface makes it very easy to do online transactions may deter customers away from credit cards. Also, competition from other leading credit card issuers such as HDFC, ICICI and Axis Bank must not be ignored.
• Heavily regulated
  • SBI Cards being an NBFC, it is subjected heavily to regulation by RBI in areas such as interest rates, interchange fees, etc.
• Working with co-brand partners
  • One of the primary reasons people use credit cards is because of their association with co-brand partners. SBI Cards have positive tieups with partners such as Amazon, IRCTC, Ola, Tata. However, any deviation from such partners in future might pull back customers.
• Seasonality
  • The thing with consumer spending in India is that, its seasonal. People spend more during festivities such as Onam, Diwali, and business might not be as strong during the other periods in comparison.

The Ugly

Here are some of the biggest drawbacks considering investing in the IPO of SBI Cards:

• Lack of collaterals
  • Since the company deals with unsecured loans, the inability to recollect unpaid debt from customers might turn out to be a big issue.
• Ugly timing?
  • The IPO comes at a stage where markets are heavily bleeding on account of Corona Virus’s fears. Markets have already been corrected by around 10% from all time heights. Reduced investor sentiments may play spoil sport for anyone expecting huge listing gains. However, this is only a short-term factor and might not impact investors going forward.

SBI Cards: Ratios and Valuation

The key ratios and valuation multiples for FY20 (9M) are as below:

• Earnings per share, EPS: ₹ 12.5
• Book Value. BV: ₹ 51
• Return on Equity, RoE: 27.9%
• Return on Assets, RoA: 5%
• Price to Earnings, P/E: 61x (46x if annualized)
• Price to Book, P/BV: 14.8x
• Revenue growth FY 17-19: 44.6%
• PAT growth FY 17-19: 51.2%

Though the valuation seems expensive at the current multiples, the fact that the company holds a moat in the sector it’s in and the growth the company has achieved, it seems like a safe bet. Similar international companies such as Visa and Mastercard having delivered 832% and 1350% returns over a 10-year period also adds to the confidence.

Final thoughts

Given the opportunity, growth prospectus and being a relatively untapped sector, I personally believe that SBI Cards is a hold for the long term. However, given the strong grey market demand seen for the IPO, short-term players can go for booking listing gains and possibly re-entering at a lower price if interested.

Disclaimer: I am not a financial planner or investment advisor. The contents of this blog are purely for educational purposes and should not be taken as financial advice.

The post SBI Cards IPO: A Complete Overview appeared first on E S Krishna Ram.

National Institute of Construction Management and Research (NICMAR), Pune conducted its first ever E-Summit as part of its annual techno-cultural fest Technikala. The event conducted in association with NICMAR Startup Club saw huge participation from students and by eminent personalities from the construction industry with a taste for entrepreneurship.

Theme: Capitalizing on demographic dividends: Entrepreneurship and the way forward.

Demographic Dividends

According to United Nations Population Fund (UNFPA), demographic dividend means, “the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older)“.

Economically, demographic dividend refers to the growth in an economy that results from a change in the age structure of a country’s population.

To receive a demographic dividend, a country must go through a demographic transition where it switches from a largely rural agrarian economy with high fertility and mortality rates to an urban industrial society characterized by low fertility and mortality rates.

There are four main areas where a country can find demographic dividends:

1. Savings—during the demographic period, personal savings grow and can stimulate the economy.
2. Labour supply—it adds more workers to the labour force, including more women.
3. Human capital—with fewer births, parents can allocate more resources per child, leading to better educational and health outcomes.
4. Economic growth—it increases GDP per capita because of a decrease in the dependency ratio.

Indian Scenario

India has one of the youngest populations in an aging world. In 2020, the median age in India will be just 28. Compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan.

Since 2018, India’s working-age population (people between 15 and 64 years of age) has grown larger than the dependant population — children aged 14 or below and people above 65 years of age. This bulge in the working-age population will last until 2055 or 37 years from its beginning.

Demographic dividend has historically contributed up to 15% of the overall growth in advanced economies. Many Asian economies such as Japan, China, and South Korea were able to use this ‘demographic dividend’ positively.

China is a well-known example in this regard. In the 16 years between 1978 and 1994 (post-reform, pre-dividend) China saw eight years of double-digit growth. In the 18 years since 1994, there have been only two years when China could not cross the 8% growth mark. 

According to Economic Survey 2018-19, India’s Demographic Dividend will peak around 2041, when the share of working-age, i.e. 20-59 years, population will hit 59%

India has 62.5% of its population in the age group of 15-59 years which is ever increasing. The figure will be at the peak around 2036 when it will reach approximately 65%.

Challenges

• Jobless growth– There is mounting concern that future growth could be jobless because of de-industrialization, de-globalization, the fourth industrial revolution and technological progress.

As per the NSSO Periodic Labour Force Survey 2017-18, India’s labour force participation rate for the age-group 15-59 years is around 53%, i.e. around half of the working age population is jobless.

Every year, 12 million people are ready for the workforce in India. Out of this 12 million, India produces 1.2 million engineers every year, and most of these engineers go to work for IT multi-national corporate (MNC) giants or other service sectors of India which doesn’t need the engineering degree in the first place.

Moving forward Entrepreneurship will be the answer: One cannot expect governments to create jobs for such a huge population. As torch bearers of future and young India, we must take up entrepreneurship and be job creators ourselves rather than being job seekers.

Key takeaways

Highlighted below are some of the key takeaways from the sessions by our guest speakers.

Skill vs Knowledge

A person’s competence may be defined with 2 words, his skills and knowledge. Knowledge refers to the information, concepts, theories, etc learned over time and Skill refers to how one puts the knowledge into practice.

While knowledge is definitely important, it will be how you execute them that will be on demand in the coming years.

Connecting Dots

This one goes in line with the above takeaway, dots itself aren’t important anymore, it’s how you connect them to find meaningful output that matters. However, the issue as Steve Jobs once said is “You can’t connect the dots looking forward; you can only connect them looking backwards.”

Never say no

Mr Chetan Tolia explained how never saying “No” got him to where he is now. While making the statement, he specifically mentions why one should never say no at-least in the initial years of one’s career to any opportunity coming his way.

Get the foundation Right

People nowadays look for shortcuts everywhere. They set goals unrealistically be it career, financial goals, etc. This in turn will be met with negative results. Take the time to set your foundations right, and result will follow.

Plentiful Resources

Going forward, resources such as capital, ideas, and talents would be in plenty but what is lacking is experience. Efficient utilization is difficult in its current form. Jobs must be redesigned to incorporate the experience of seniors along with the enthusiasm and experimentation by youngsters.

Sectors to watch out

Mr Vinit Dungarwal, a NICMAR alumnus during his address, shared some light on the sectors to watch out for in the coming years.

Travel

The total contribution by travel and tourism sector to India’s GDP is expected to increase from Rs 15,24,000 crore (US$234.03 billion) in 2017 to Rs 32,05,000 crore (US$492.21 billion) in 2028. That’s a growth rate of 6.7% and accounting nearly 9.2% of the total economy by the time.

It should also be seen that travel and tourism sector is a great creator of jobs across multiple segments. With approximately 4.2 crore jobs created as of 2019, the sector accounts for about 8.1% of total employment.

Real Estate

Real estate as a sector to watch out for may come as a surprise given the current slowdown and the problems the sector is facing. However, the future seems bright with the new optimism seen in areas like co-working, co-living, student housing, senior living, etc.

Other sectors to watch out for in the coming decade include:

• Education
• Healthcare
• Retail
• Manufacturing

Investing

Mr Manan Mehta shared some light into Why Investing early matters, which a previous article already covered. You can read that here. He also discussed about the opportunities of being a RealPreneur – A Real Estate Entrepreneur.

The summit, a long-standing dream of NICMAR Startup Club, is finally a reality. I too am personally happy to have played a small role in the event’s success. Hope the E-Summit and the Startup Club at NICMAR scales new heights in the years to come and serve as a platform for many startups in the construction sector.

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