Hope and Despair - The Unmaking of India

Why I’m losing Hope in India – By Andy Mukherjee

No single essay has captured my life's experiences, hope and despair, and articulated it this verbatimly. Wanted the same to be on my timeline permanently. Taking the privilege to share. -manu

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My generation of Indians has often been disappointed in our country, and we have sometimes despaired about the direction it was taking, but it’s been impossible for us to stop hoping.

Our own past has trained us to see the silver lining.

Opportunities we couldn’t imagine growing up in the 1970s and ’80s emerged from nowhere and changed our lives, and many of us believe history will keep repeating, with the pain of the pandemic shocking the economy out of its pre-Covid inertia.

So it breaks my heart to have to suggest to today’s rising generation that this crisis is different than others we have weathered, that the walls are closing in again, and the opportunity set for India is shrinking, perhaps for a very long time. The national dream of emulating China’s rapid growth is receding — by some economic yardsticks, we can’t even keep up with Bangladesh.

A disturbing arbitrariness has crept into policymaking, institutions have decayed and the economy’s structural deficiencies have worsened. Animal spirits have been sucked out of all but a handful of firms. Zombie business groups are perched atop the debris of debt-fueled expansion, waiting for politicians to signal what role they still have, if any. The defeatist slogan of self-reliance, which blighted our parents’ generation, is back. Politicians are using religious discord and caste conflicts to drive a wedge in the society.

To make matters worse, India has handled the coronavirus pandemic with the same inept authoritarianism that’s come to define its approach in all spheres, economic, political and social. With more than 9 million infections, India is the second-worst affected country after the United States. The economy slipped into an unprecedented recession last quarter.

The post-lockdown economy will simply not have enough demand to consume what can be produced. There’s some attempt to reform the supply side — labor and farm markets, in particular. But not much is being done to revive demand, either in the short or the long run. Some of us are wondering if this callousness will cause India’s demographic dividend — two out of three Indians are still in the magic age group of 15 to 64 years — to go unclaimed.

Yes, there’s time. If India stops turning inward and embraces an open, transparent partnership with global investors, hundreds of millions more would get a shot at prosperity. A stagnant world economy could tap a new source of future demand. The West might win a strong and reliable security partner in Asia. The ’90s optimism will renew itself. But if India remains stuck in a middle-income trap, people will soon stop asking if it could be the next China. My generation already has.

Stagnation

A previous generation of Indians also knew violent change. My parents went from being British subjects to citizens of an independent republic. They carried the trauma of partition and lived through four post-World War II armed conflicts, one with China, three with Pakistan.

They recoiled in horror when Prime Minister Indira Gandhi — the child of the great democrat and freedom hero Jawaharlal Nehru — suspended democracy for two years in the mid-1970s.

Amid this turmoil, they underestimated the shadow on their lives of the mid-’60s economic crisis, when after a bad drought, India devalued the rupee by 37% because that was the World Bank’s condition for assistance.

The promised funds didn’t arrive in full. Indira Gandhi, too new to power to be in control, took a sharp pro-Moscow turn and rejected the capitalist path that South Korea, almost as poor as India back then, was choosing for itself. She raised tariffs, nationalized the banks, but failed to democratize credit. The government bloated up; small firms remained stunted.

The “developmental enthusiasm” of Nehru’s idealistic socialism gave way to political expediency and policy incoherence. The post-colonial dream of rapid industrialization faded. India remained agrarian and poor, led by a tiny English-educated urban elite. At the top of the order were bureaucrats with the power to say “no” to any expansion in the private sector. The economy’s speed limit was 3.5%, pejoratively described by scholars as the “Hindu rate of growth.”

To those of us whose families neither owned rural land nor had secure urban jobs, life was about making the most of a heavily state-subsidized education. Very few experienced upward mobility, and often only when the U.S. or U.K. embassy stamped their passports. The friends and family who came to see off the newly minted doctor or engineer at the airport went back to their unchanging lives.

Rebirth

All this ended when Manmohan Singh, the economist who became finance minister in 1991, devalued the currency to stanch the bleeding of foreign reserves, made the rupee convertible for trade, dismantled industrial licensing and began slashing import duties.

After the Soviet Union disintegrated in 1991, our politicians ran out of their anti-imperialist excuses. India engaged with a victorious West, my elder brother got a job in New Delhi with AT&T Corp., and he brought home a shiny red push-button telephone.

A hook-up from the state phone company still took years, so we borrowed the neighbor’s line. But there was no time to brood over what we lacked — or what our parents had lost to autarky and state planning. Somehow we knew that our shortages were ending, and our choices were expanding. India’s ruling elite had run out of options for self-preservation. It had to open the doors to a better life to more of us. There was work to do.

Fledgling software firms got down to it with the help of a colorful lobbyist. Dewang Mehta sported a luxuriant crop of hair — it was a wig — and went around selling a puffed-up story to global corporations that their computers were going to crash at midnight on the new millennium because of the Y2K bug. Outsourcing of code-writing, at a fraction of what it cost in the West, began in earnest. Jobs were created in telecom, media, technology, finance and newly denationalized aviation industries; the median home-buying age began to fall. Global carmakers came to India, inspired by the popularity of a small hatchback, the Maruti 800, made locally by Suzuki Motor Corp.

China’s example beckoned. After the June 1989 Tiananmen Square massacre, Beijing wouldn’t brook political freedoms, but the economic reforms begun by Deng Xiaoping were deemed irreversible and foreign investors were mostly welcomed. The economy took off. China joined the World Trade Organization in 2001 and grew at 10%-plus rates for 20 years.

It was never going to be easy for India to emulate its neighbor, whose single-party state struck a bargain with foreign investors, while discriminating against its own business class. Such stratagems weren’t possible in India’s noisy, federal democracy. Politicians couldn’t ignore local businesses that gave them money to fight elections. So India cleaned up the stock market and opened it to overseas investors. This made sense. Unlike China, which was saving more than half of its national income before the 2008 global financial crisis, India lacked the capital to sustain a liberalizing economy through messy cycles of coalition politics, let alone to build the roads, power plants and other basics of missing infrastructure.

So we put our faith in institutions. Our heritage of English common law, independent courts and regulators held the promise of fairness and protection for all stakeholders, and we thought these would get stronger over time. The state, we hoped, would shrink as an economic player, and become a more robust referee. Governance would improve, endemic corruption would recede. The anonymity fostered by urbanization would smash the regressive caste system. We liked it when scholars such as Yasheng Huang, a professor at MIT Sloan School of Management, said that India could overtake China.

To me and many of my generation, Manmohan Singh was a savior, someone who carried the scars of partition and had known poverty as a child. He was one of us. Our disillusionment with him was 20 years in the future.

Unfinished Reforms

The 1990s reforms in India began with trade and investment liberalization. Tougher “second generation” reforms in markets for land, labor, capital, energy and goods were to follow.

However, myriad interest groups captured the weak coalition governments that became a norm after 1996. Even as India’s openness grew, the larger project of boosting competitiveness kept getting shelved. Internal markets continued to malfunction.

An additional problem arose: Now that the government was retreating from being a producer, it had to give land, energy and commodity rights, wireless spectrum and other concessions to the private sector and procure — on behalf of the public — electricity, roads, ports, telecom services and jobs. The opportunities for corruption swelled, and a nexus of businesses, politicians and criminals coalesced to exploit them.

By 2004, the once-dominant Congress Party’s Manmohan Singh was prime minister, leading yet another ragtag coalition. He returned to power in 2009, but the triumph of his victory didn’t endure. With the world economy entering its post-2008 funk, India’s unreformed markets, political opportunism, fiscal profligacy and the private sector’s unregulated greed overwhelmed Singh’s second term.

Around 2010, I was heading up editorial operations for a business TV station in Mumbai. That’s when, surrounded by the nouveau riche (my toddler’s return gift from his host at a birthday party was an iPod), I began to notice cracks in the enterprising spirit of the ’90s. Peeking from those gaps was a business class seeking riches in private rents. Praful Patel, the then-aviation minister, gave me an interview at the newly modernized Delhi airport, which was going to replace the shambolic terminal that used to frustrate and embarrass us. The private consortium that had won the 60-year management contract wangled a passenger fee to cover a big part of the cost of the upgrade — after snagging the project. “This important condition should have been known upfront to all the bidders at the time of bidding,” the government’s auditor noted.

Public-private partnerships of all hues proved problematic. Uttar Pradesh, the most populous Indian state, made a special zone for alcohol distribution and gave it to an Armani suit-wearing businessman named Ponty Chadha, who on a November day in 2012, went to his farmhouse on the outskirts of New Delhi with his security detail. His brother arrived with his own henchmen. The two sides were there to sort out a property dispute. Before long, they were shooting at each other. Both brothers ended up dead.

The vulgarity of crony capitalism became a lightning rod for mass mobilization. An “India Against Corruption” movement fed a frenzy of disgust against crooked politicians and businessmen who were usurping farmers’ land, promising to create jobs and then not delivering. But most crucially, people’s anger was aimed at the Nehru/Gandhi dynasty. Even as Singh nominally ran the government, Indira Gandhi’s daughter-in-law, the Italian-born Sonia, and her son Rahul wielded real power, as Singh’s former media adviser Sanjaya Baru claimed in “The Accidental Prime Minister.”

Scandals surfaced and metastasized. In 2012, the Indian Supreme Court cancelled 122 telecom licenses. The government’s auditor said that the granting of those licenses had cost the country $23 billion. This debacle was soon dwarfed by what the auditor said was a $42 billion scam in allocating coal mines to private firms. Those were also scrapped.

Wounded and cornered, Singh’s government lashed out. It began to hound long-term investors like Vodafone Group Plc for outsized tax liabilities, charged retrospectively. It passed a law that made it prohibitively expensive for private businesses to acquire land. None of this helped politically. Singh’s failures, meanwhile, were helping to make Narendra Modi, a leader of the opposition Bharatiya Janata Party and chief minister of Gujarat state, look good. Although his stint there had begun with huge Hindu-Muslim riots in 2002, Gujarat’s economy grew 10% annually through the first decade of the millennium, faster than the rest of the country. 

As the 2014 general election approached, many voters thought that only muscular leadership could end India’s economic paralysis and social stasis. Even those of us who found Modi’s Hindu right-wing politics abhorrent thought his development record as an administrator had earned him a place in federal politics. In our impatience for growth, we ignored the warnings of scholars such as Indira Hirway that Modi’s capital-intensive “Gujarat model” was built on generous subsidies to businesses, and that the state was slipping in poverty reduction, human development and hunger removal. I wrote that Modi could be like Japan’s Prime Minister Shinzo Abe, a leader who would suppress his nationalist instincts, and use his popularity to drive hard economic reforms.

Modi’s “Permanent Revolution”

Modi came to power promising business-friendly policies and an end to “tax terror.” But when he tried to undo the previous government’s land acquisition law, the opposition attacked him for being anti-farmer. Modi had to drop the plan.

Vodafone’s troubles in India didn’t end. In fact, harassment by tax authorities intensified. “Sab chor hain,” Hindi for “Everyone’s a thief,” became the state’s informal motto for dealing with the private sector.

Then, in November 2016, Modi performed a high-voltage stunt: He outlawed 86% of the country’s cash, presumably to unearth illicit wealth. People queued up for days to return their worthless notes. New currency was in short supply. Small businesses in my hometown — a shoe-making hub — couldn’t pay workers. Women-run micro enterprises on the outskirts of Mumbai later told me that their going rate for weaving golden threads into a sari crashed to 4,000 rupees ($54), from 7,000 rupees.

Ultimately, demonetization was a fruitless exercise. Most of the outlawed money came back to banks, but the pain Modi inflicted on society helped launch his cult. As Arvind Subramanian, then Modi’s chief economic adviser, would argue later in a book, sacrifice, “as a necessary condition for achieving a larger, loftier objective,” resonated with the population because it harked backed to Mahatma Gandhi’s strategies during India’s freedom struggle. That elevation of Modi in the public consciousness was a turning point in the citizen-state relationship. Unquestioning devotion was in; critical examination was out. Gone was the pre-poll promise of “minimum government, maximum governance.” The dirigisme of the ’60s and ’70s was back. “We are now entering the politics of ‘permanent revolution’,” Pratap Bhanu Mehta, a political scientist and commentator, presciently warned after Modi’s currency ban.

Since then, the government’s whimsical decision-making has intensified. Don’t like what a consumption survey shows? Suppress it. Getting flak for a slowing economy? Publish unbelievably rosy GDP data. Think Covid could get out of control? Impose a nationwide lockdown on four-hours notice.

“Sab chor hain” now defines most interactions. Homebuyers don’t trust builders to deliver homes; financiers don’t trust property developers to repay loans. The government doesn’t trust either the builder or the lender. Nobody trusts politicians, though Modi, like all strongmen leaders, can elicit any response he wants from the public. During the coronavirus lockdown he asked Indians to light candles, go on the terrace and bang utensils. They did, as told.

True, some bottlenecks have eased. After failing to double in size in the four decades before 1991, the national highway network has quadrupled since then. From less than 65,000 megawatts in 1990, power generation capacity has surged to almost 375,000 megawatts. Half of it is in the private sector. A further doubling by 2030, without setting up any more polluting coal-fired plants, is possible, thanks to investor interest in solar and wind power.

But therein lies a problem, a variation of the old resource crunch. A large section of the capitalists to whom a cash-strapped government outsourced roads, ports, airports, power stations and mobile towers is bankrupt.

Bag a concession from the state, inflate costs, pay bribes, get financing from dominant state-run banks, fleece consumers, siphon off funds into private accounts in Singapore or Switzerland. This, with some variation, was the business model. In 2012, Ashish Gupta, a banking analyst at Credit Suisse Group AG in Mumbai wrote a report, titled “House of Debt.” The last eight years this house has burned. It’s still aflame and singeing the banking system.

The IL&FS Group, an infrastructure financier-owner-operator I’ve tracked since I was a newspaper intern in Delhi in 1992, enriched a small cabal by taking everyone — its partners, consumers, capital providers and regulators — for a ride. I described its 2018 bankruptcy as India’s “mini-Lehman moment.” The sudden collapse of a highly rated institution with billions of dollars of unpaid debt froze credit markets. The psychological impact ran deeper. Before IL&FS went belly up, the overextended Indian private sector was putting up a brave face, chanting “Modi, Modi,” and trying to retain its best assets with cheap refinancing. Now the entrepreneur just wants to avoid going to jail. Economic power is concentrating in fewer hands.

When I was growing up, telecommunications was a government monopoly. Then came a bustling wireless market hosting a dozen operators. Now the player count is once again down to three effectively. One of them is in serious stress, and the other says it may not be able to bid for 5G spectrum next year. Another private group is establishing a chokehold on seaports and airports, which also were once the state’s preserve. Conglomerates may also be allowed to enter banking because government-run lenders don’t have capital to grow. For my generation, swapping one form of concentration with another doesn’t look like progress.

The rest of the economy is still highly informal, and inefficient: 80% of the output of farms and by small businesses goes to pay for capital, which is scarce. Labor’s share is 20%. Workers are liberally rewarded only in a bloated public sector, much of which ought to have been privatized long ago. Because it wasn’t, taxpayers have to keep alive debt-addled firms such as Air India Ltd.

The push toward higher wages should have come from higher farm productivity, which would have raised the price of migrant labor coming to cities. India missed this page of the East Asian playbook and failed to create a permanent urban working class.

Instead, it went straight to global services like computer software. For a while, this shift papered over the cracks, even though the billion-plus-people economy only worked to meet the demand of 150 million top income earners.

My father’s small firm made shoe uppers, my mother knitted sweaters. There are millions of families in similar circumstances today, with two differences: Prices of everything (including education, which was almost free for us) are decided by a small consuming class, and a billion others must struggle to afford them. Second, there are now gig economy jobs and microcredit, even though the income to sustain borrowing eludes most families.

The structural demand deficiency, as Rathin Roy, an economist at the London-based Overseas Development Institute, describes it, was a problem even before Modi’s Covid lockdown in March left millions of scared migrant workers without jobs, shelter or food. Their long, lonely journeys to the safety of their village homes revealed the shaky legs of India’s urban growth story.

Workers will eventually return. But getting back to pre-Covid levels will only pull 40% of a billion people of working age into the labor force, Mahesh Vyas at the Centre for Monitoring Indian Economy says. At least 10 million jobs are needed annually — matching China’s rate between 1990 and 2014 — to raise the participation rate toward the world average of 66%. But the post-pandemic developed world will nurse a massive unemployment hangover. The “End of History” ebullience that greeted my generation of Indians in the early ’90s is unlikely to repeat. Besides, creating jobs amid rising automation will require heavy spending on social security, healthcare, childcare, housing and education. Four out of five women in Indian cities weren’t in the workforce even before Covid. China, Bangladesh and Sri Lanka are all doing better.

Entrepreneurs Redux?

It would be cynical of me to believe that another entrepreneurial explosion isn’t around the corner, and that a larger number of Indians won’t be kicking in the doors to progress than in the ’90s.

In 2001, the telecommunications firm run by Sunil Mittal, a former bicycle-parts trader and manufacturer of the plastic Beetel phone my brother brought home, won its millionth mobile customer. Today, Mittal is a billionaire, and Bharti Airtel Ltd. has 293 million users in India, and another 116 million in Africa.

Crashing data prices and cheap smartphones give India a chance to spawn its own large internet businesses. Facebook Inc. has bet on Mukesh Ambani, India’s richest man, to build the country’s most valuable digital carriage, content and commerce triple play. The 152-year-old Tata Group might create its own rival “super-app” to compete against Ambani’s.

Perhaps digital capitalism favors “winner take all” monopolists. Rather than bemoan the concentration of economic power, maybe I should look at the bright side?

 

India could also attain the productivity boost China received from the likes of Alibaba Group Holding Ltd. and Tencent Holdings Ltd. The country has built a robust real-time mobile payment system, dominated by Alphabet Inc.’s Google and Walmart Inc.’s PhonePe. October saw transactions on the network doubling from a year ago to 2 billion. E-commerce and payments data could come to replace collateral in loan contracts, offering small borrowers like my dad’s erstwhile shoe-upper firm a chance to get around their perennial shortage of marketable assets.

 

The China-U.S. cold war — in trade, technology and finance — comes with its own rich prospects. Indian-born executives such as Microsoft Corp.’s Satya Nadella, Alphabet Inc.’s Sundar Pichai, International Business Machines Corp.’s Arvind Krishna and MasterCard Inc.’s Ajay Banga are in a position to drive investments and jobs to their country of birth.

Of late there’s also progress on long-pending reforms. In a shakeup of rural power structures, the Modi government has taken a political gamble by freeing farmers from the institutionalized tyranny of having to sell their produce in designated market yards, where they get shortchanged by middlemen. It’s also possible to be tentatively hopeful about labor reforms. Merging 44 federal labor codes into four, for instance, may see more workers on formal contracts, a privilege that eludes most Indian wage earners.

But there are questions: One, how will supply-side reforms fill the demand gap? Two, when will the broken financial system be made whole? Finally, will the narrow elite running India by proxy agree to compete fairly, or will it simply hijack the direction and pace of reforms for its own advantage, leaving a majority of people behind? Modi’s government adopted a bankruptcy code in 2016, and bandied it as a weapon against crony capitalism. But after the domestic business class lobbied hard against losing prized assets, the insolvency reform lost its sting. Once the Covid-19 disruption began, the bankruptcy tribunal closed its doors to new cases. Out-of-court restructurings are a mess. A resource-starved country is unable to free the capital trapped in dying firms.

Meaningful correction would involve more than tweaking laws. The Indian state must put limits on its powers, end its overreach and rebuild trust. It must clarify if the goal is to remove “socialist” from the preamble of the constitution, something India’s economic conservatives have always wanted, or if it is to drop “secular.” Turning a 14% Muslim population into second-class citizens is hardly a recipe for peace and prosperity.

Resuscitating society’s trust is more crucial now because New Delhi can’t put itself back in the driver’s seat. The pandemic has sapped the little fiscal strength it had. The investment-grade rating, which took the country more than 15 years to reclaim, looks increasingly vulnerable.

But trust requires honesty. Indians are surrounded by social media spin and empty slogans like “$5 trillion economy by 2024” — from $2.7 trillion before Covid. How exactly will this miracle happen? When Toyota Motor Corp. recently said it was halting expansion because high taxation is suppressing demand, ministers rushed to do damage control by calling it fake news. To acknowledge and fix shortcomings in the 2017 goods and services tax — the five-rate GST is a compliance nightmare — is to doubt Modi’s acumen.

Independent voices that could challenge the official narrative are being muffled; institutions that could force the executive branch to right its wrongs have been defanged. All this runs contrary to our hopes that our media, judiciary, regulators, professional bodies and civil society groups would get stronger over time.

India’s central bank has seen off two governors in the last four years after unsuccessful attempts to force bankers and their politically connected borrowers to clean up their acts. Electoral financing is now via anonymous bearer bonds, with no checks on the source. Recent judgments of the top court, as well as its dithering on important constitutional issues, have invited criticism that its approach is “more executive-like than the executive itself.”

In the absence of institutional protection — not even of habeas corpus — trying to engage with the state has become a crime. Protesting peacefully, demanding rights, exposing wrongdoing by powerful people, criticizing policies have all become risky ventures.

 

The prime minister has made his core supporters ecstatic by breaking up Jammu & Kashmir, India’s only Muslim-majority state, into federally administered territories, but the move hasn’t exactly buttressed India’s image as a multi-religious, secular democracy.

The West will be prepared to overlook much of this. As Ashley Tellis, an analyst at the Carnegie Endowment for International Peace, puts it, the exigencies of balancing China would force the West into a “constrained acquiescence to partnership.” That’s a poor substitute for “the enthusiastic boosting of India that would otherwise occur if its liberal credentials were not contested.”

The Indian middle class, though, may be less forgiving. In economist Albert Hirschman’s framework, the “exit” from India option was only for a minority. Others had to stay, and it was their “voice” that kept alive Indian democracy.

Now a Muslim friend from my hometown says he wants to emigrate because his seven-year-old daughter is being reminded by her classmates that she’s different from the Hindu majority. A bank analyst in Mumbai wishes he’d left long ago. He reckons on many years of sub-5% GDP growth. The U.S. investor visa program saw a 400% jump in demand from Indians between 2016 and 2019. Modi’s supporters troll dissenters on social media, and ask them to “go to Pakistan.” As many as 7,000 high net worth Indians left in 2019, according to Global Wealth Migration Review. That’s 2,000 more than in the previous year. It’s unlikely any of them went to Pakistan.

Wither India?

My mother’s side of the family comes from Faridpur, in what is now Bangladesh. Once a part of India, Bangladesh will overtake it in current per capita dollar income this year. When and how did we lose the plot to be the next China?

The problems began in the complacency of the mid-2000s. That’s when India should have looked beyond software and semiconductor design and doubled down on shoes, shirts and toys — manufacturing that took advantage of the less-skilled workforce. Rather than turning special economic zones into a land grab, India should have created a few large enclaves. Demonetization and the flawed GST made things worse, and Modi’s campaign of self-reliance may do yet more harm.

Why’s the public not angered by it all? In the dirt-poor, northern state of Bihar, almost as populous as Japan, Modi’s Covid lockdown forced migrant workers to return, fearful and jobless. Yet while interviewing voters before elections for the state legislature, Bloomberg News reporters found no dent in Modi’s appeal. People’s ire was reserved for his coalition partner, the state chief minister. And even he managed to retain power thanks to the prime minister’s boundless popularity.

When Manmohan Singh’s government was in office, it was preoccupied with people’s rights to education, food, work and information. Modi, on the other hand, identified touchpoints in everyday lives — a bank account opened with a unique identification, cooking gas to replace a coal- or wood-burning stove, a toilet in the village home — and delivered, up to a point. Whether there’s money in the account, running water in the toilet or the means to replace the empty gas cylinder isn’t something for which people blame him. Not when he has a bigger civilizational agenda, like building a temple for Ram, the Hindu God, in the same place where a mosque once stood until it was razed by Hindu mobs in 1992. As a 22-year-old student, I didn’t fully realize what its razing meant. We were still giddy about the Berlin Wall coming down. The next generation of Indians, I’m afraid, will have to pay a price for that injustice.

The better-governed, faster-growing southern states of India have mostly shunned Modi’s strongman cult, but they’re bit players. It’s the poor, over-populous northern states that matter disproportionately in Indian politics, and it is there that Modi has managed to shift the Overton window, supplanting material prosperity — which no party has delivered since the ’90s — with chest-thumping nationalism and an atavistic yearning for a pre-Islamic past.

It’s no coincidence that Modi’s ascendancy in public life began after the 9/11 attacks in the U.S., and export of terror from across the border in Pakistan. In the last parliamentary election following one such attack, Rahul Gandhi, the opposition Congress Party leader, couldn’t even retain his family borough in Uttar Pradesh, previously won by his mother, father and uncle. And that was after he promised the equivalent of $1,038 a year to each of the country’s 50 million poorest families. The losers of development have turned skeptical even of compensation.

Sadly, I don’t see northern India’s economic pessimism — or its caste enmities, religious hatred and deep-seated misogyny — making way for a less toxic, more aspirational politics. I say sadly, because I have always been secretly hopeful about India, even when criticizing its cumbersome red tape, crumbling infrastructure or clumsy policymaking.

But the 1990s dream has ended, the world has changed, and so have we.

Just typing that previous sentence feels like betrayal. India is where I was born, grew up, started work and got married.

I have left the country for long stretches, and my teenage children don’t have any feel for its culture, cuisine or languages. Yet India and I have never let go of each other. When I write about other places, it’s as a foreign correspondent. The India stories are different. They aren’t all strewn with the first-person pronoun, but they’re all personal. Increasingly, they’re also bitter. Like this essay.

 

Call it buyers’ remorse. Those of us who thought that muscular leadership would revive India’s dream of mimicking Chinese-style double-digit expansion are not just disappointed. For many of my generation, our long-cherished hope for a better, greater India is all but gone. We wanted to trade some of our democratic chaos for a little bit more growth. We ended up with less of both.

(Updates in 6th paragraph with India slipping into recession. Corrects the cost to India of licenses in 30th paragraph and the number of high net worth individuals in 66th paragraph.)

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Originally published on Bloomberg

PVR Cinemas - House Empty - Future Bleak - Retail Shareholders Euphoric

Warren Buffett’s seemingly most popular quote “Price is what You pay and Value is what You get” doesn’t seem more destroyed or intrigues the patron more, when one pays ~Rs300 / USD 4.5 for a 100 gms box of popcorn at an Indian multiplex, whereas in India 700 million people earn less than Rs 100 per day or say ~USD1.4 / day

But this piece isn’t about the Indian Economy, its about the market darling - PVR Cinemas.

Allow me to place a disclaimer right here – I love PVR Cinemas, I along-with my wife and mother almost never miss a movie at PVR and she loves the popcorn - being from the old school. If I were to tell her that the ticket costs 2000 Rs a piece in Gold with green tea (that she loves) (a Twinnings tea bag worth Rs 3 dipped in hot water sold at some 80 times the cost) she might have a heart attack. But this is a secret between PVR and me. Mom never gets to know of it.

The purpose of this piece is to inform the gullible minority shareholder that while all the institutions are dumpin the favourite PVR stock, You are being made the muppets and when the music stops, you will have nowhere to run. Its pertinent to mention that the shareholding of people with less than 20,000 shares has shot up from 3.5 – 10.5% in a matter of just 9 months.

Lets analyse the company that’s now more expensive than TESLA - already trading at some 800 PE

PVR generates an EBITDA of Rs 60 per patron / movie watcher

Sale of F&B is Rs. 948crs or ~ 28.8% of total sales and 55% of Movie Sales Revenue or Rs. 93/patron.

Cost of F&B is 8% of sales thus 72.5% Profit Margin on Popcorn or say Rs. 67/Patron comes from F&B

Which means EBITDA Loss of Rs. 7/patron is generated by (Sale of tickets + Advertisement Income + Convenience Fees + Other Operating Income) the core business.

SO ITS SAFE TO ASSUME THAT PVR IS JUST A POPCORN AND A NACHOS COMPANY

I feel sorry for the shareholders of the company that places its QIP at Rs 1719 and within a few months has to come up with a rights issue at Rs 784 because the ever burgeoning debt, is unmanageable, future is uncertain and probably the promoters have to be paid arrears of their handsome increments even while the wealth of minority shareholders is being blatantly destroyed – some by pandemic – some by the promoters. 

Here are the statistics

As per the management, in a recent concall in May, the breakeven of PVR is at at 20% occupancy and Average Occ that PVR enjoyed is 35% in precovid times (And achieved an 18% EBIDTA and 0.8% PAT margin), One question that comes to mind is – if capacity utilisation in the best of the times is 35% generating such abysmally low PAT, what effect will a lower occupancy have on the P&L and the Balance Sheet

And the EBIDTA sucks because the promoters who own a mere 18.79% of this company draw a cumulative salary (besides all other perks and privileges) of ~ 28 Crores that is slightly more than the PAT of the company. A back of the envelope calculation pegs the EPS for promoters and family at approx Rs 32 per share while its a paltry Rs 4.95 for other shareholders.

It’s a shame – more so in India – because stockmarkets are shallow, lack depth, and most shareholders have no access to genuine research on the basic and key metrics of the company, intention of the management, and self centricity of the promoters at the cost of minority shareholders.

PVR has been incurring ~ monthly expenses of 63 Cr (assuming 50% waiver on rent and CAM charges) so if this year is more or less a washout, it would have burnt approx. 750 Cr without any mentionable revenue in FY 2021) And that explains the short runway of the amount of Rs 300 Cr collected thru the rights (in Aug 2020) that might not have lasted beyond 5 months.

“The business is under a grave irreversible threat”

Ask a producer of a film and he/she is under permanent nervousness till one week after release of his movie - not knowing whether one would be able to recover costs, make profit or lose the skin.

The immense sense of freedom that most of the producers such as Ronnie Lahiri have found by releasing movies on OTT is heartening. Gulabo Sitabo was a great hit, made him the money and de-risked his investment. Top OTT players are happy to buy movies at a cost + basis, thereby de-risking the producers and the OTT players such as STAR, Amazon, Netflix have pockets tens of times deeper than the size of Indian film industry at ~13800 Cr (1.8 B USD) where the Bollywood is a mere ~1000-2000 Cr per annum

For the record Amazon and Flipkart burn a combined sum In excess of Rs 1,500 crores just during their Diwali sale alone.

OTT is really the future because a family can watch a movie in the convenience of ones Living room where the annual subscription of the most expensive platform is less than the cost of “just one” movie with the family at a multiplex. We haven’t yet discounted the pain of navigating the traffic, parking, lack of social distancing, risk in the AC (after Corona) world where the human psyche has got permanently mutated because of the present unexpected vicissitudes. The brilliant analysis by Seetharaman in The Ken sums up the dilemma and the zero sum game for the cinema halls.    

No wonder that the sale of large TVs and projectors that cost as little as Rs 10 K on amazon has shot up in the recent times because of the newfound freedom by the movie buffs.

Low budget films, some of these dramatically  awesome in content and direction, that cannot afford a big budget theatre release have found a new freedom and recognition and have been able to shed the risk bias of the patron because the incremental cost of watching this movie is almost nil for a family (if at all the same turns out to be a dud or below expectations). Not that the wounds inflicted on the populace by Salman Khans Tubelight or Aamir Khans Thugs of Hindostan  can ever be healed. And on top of that the Rs 300 popcorns.

OTT reduces/almost-eliminates piracy and provides a reach to the most under provided sections of society where access might be a problem, but internet works at a good speed.

The demise of Cineworld with 9500 screens was a shock that had to down its shutters on almost 90% of its business due to the pandemic. And the hunger of retail shareholders to lap up the PVR stock seems unsatiable.

If this virus - that has permeated such degrees of fear in the society is here to stay for a foreseeable future then the future of multiplexes is in grave danger and that explains why the institutions or the big boys of the stock markets are strategically reducing their stake while holding the price at present levels and retail muppets (shareholders) are hungrily buying the stock to take the retail shareholding up from 3.55% in Dec 2019 to 10.32% by Sep 2020.

Unless another equity infusion takes place, The PVR debt will continue to burgeon, for many many years, to its peak of approx. 2100 Cr by Mar 2022.

Its loss might peak out at Rs 566 Cr by the end of this FY 2021

But the fact remains that – at the CMP of 1250 and FY 21 fwd PE of ‘maybe’ 1000, this is the most expensive stock on the planet beating Tesla dry and hollow and far ahead of its global peers such as AMC, Cineworld, Cinemark and Cineplex most of which have corrected by 60-90% while PVR is being distributed to the minority and gullible retail shareholders. (As there is absolutely no certainty on quantum and timing of full recovery, we have used Trailing numbers to benchmark globally. Also, a size discount is applied)

Going by these calculations and benchmarks, PVR (ceteris paribus) while deserving its rich valuations should slide down to under 400 when its performance, reasonable valuations meets to say hello to its eventual fate.

Minority shareholders singed by the narrative built around a stock always almost are left holding a rotten tomato.

Looking fwd to gain some confidence post this Virus, when I can again take my loving mom to get her favorite popcorns at PVR – in the meanwhile sell the family silver to check-in into PVR ‘only if' there is no other show going on.

Co-authored with 
Ravi Sharma @caraviusharma ; https://www.linkedin.com/in/ca-ravi-u-sharma-65901b97/

 

10 Blunders - 1 Arrogant Company - Millions of Shareholders Suffering (The story of ITC)

 

Dear Board Members,

As a minority shareholder while I sift thru the 368 page Annual Report (AR) of my company, it seems and appears to be a manifesto of a large political party that is proud of what its done in the past and what it hopes to do even if nothing sounds or appears to be value accretive for the shareholders. 

Markets are wise and perceptions are strong and the 1.5 million investors who have reposed their faith and trust in you, seem to be losing the confidence in Your leadership. Else ITC that was once the most respected company wouldn’t have performed so miserably on the bourses inspite of the 368 page chest thumping manifesto.

I must say you are failing miserably while sitting in the comfort of your mahogany and leather lined offices, a mutual appreciation club of 14 people presiding over an annual revenue of over 50,000 Crores each one building large personal empires thru generous grant of stock options and over the top compansation while I am seeing my wealth erode by the hour.

ARE YOU ANSWERABLE?

The unbridled power that you wield without being questioned by a real promoter / entrepreneur has spelt a real disaster as I fear that my company is being taken on the same self destruct path that General Electric, Nokia, Blackberry and Exxon Mobil have been taken in the last 2 decades and the less said the better as to how value destructive this journey has been for them because there was no one to shake up Jack Welch at the right time (he became the greater God without being one). For way too long these companies and their respective managements suffered from Hubris not able to see a fast approaching train while being frozen on tracks, not able to course correct - eventually leading to their demise. 

While I will ask some specific questions, the crux of this note is that if you cannot protect my wealth thru the alleged magic of your strategy and leadership – You don’t have the moral right to hold these positions and lead my company.

ARE YOU ANSWERABLE?

The First Blunder 

The biggest blunder of diversifying into hospitality and continue to burn cash and capital in this black hole using cash generated by the cigarette business (which is the only meaningful cash flow division) is nothing short of financial hara-kiri on minority shareholders. You have acted no differently than most of real estate developers who want to own a hotel / hotel chain from their free cash flows because its sexy to own one when it’s the most unprofitable industry and most susceptible to economic mood swings. 'Dala Bhukara' is fine – I appreciate it and love it too, You should have stopped at that, but then it was simply stupid to burn thousands of crores of my money by assuming that every hotel will be as successful as dal bhukara. I would like You to share with the public – Who is advising you to spend thousands of crores of shareholder wealth to build these large hotels (and overspending on most of these).

Who (employee or consultants) is regurgitating on excel sheets - the potential of new hotels and how are these people made accountable? The AR must include a detailed P&L and BS of each of my subsidiaries hereafter clearly mentioning the ROCE on a quarterly basis.

At Rs.17.9 lacs revenue per room per annum of revenue you have missed the bus of being any formidable hospitality brand even while you can't stop gloating on all the award and accolades that the hotel division has got. Mind You - most of these are all subscription based awards (awards and accolades is a paid international scam at the cost of the hospitality industry) the sooner we realize this the sooner we will stop burning cash. I would like to know how much money has been burnt in annual subscription of these awards.

ITC Grand Bharat with 104 keys is generating a mere revenue of 28 Cr p.a, that’s is lesser than some successful Lemon Tree Hotels on a revenue per key per annum basis.

It is pertinent to ask what’s the spend per key of all the hotels that have been built grounds-up in the last 10 years. If it is anything more than 2 Cr per key (all in) there is something dramatically wrong with our projects team and financial forecasters. How many hotels have performed in line with approved financials from the time of board sanction of these projects within the next 5 years. This is an important analysis that You should seek and make the same public.

ARE YOU ANSWERABLE?

The entire rigmarole of Fortune Hotels with 4000 rooms is generating a mere profit of 2.76 Cr – who is responsible for this and why is this abysmal performance being tolerated at my cost?

Welcome Heritage does a NP of  a mere 40 lacs with 36 hotels , 900 rooms and the management bandwidth at my cost.

Which international brand / concept are we benchmarking ourselves against to justify our investment in the business and which of my employees has his/her skin in the game in this business and how is the executive compensation tied to the performance of the Hotel Division.

ARE YOU ANSWERABLE?

The Second Blunder

Small irrelevant businesses that we have ventured into must be taking immense bandwidth and time (board meetings, audits, finalization of accounts, consolidation) why are we in the businesses such as Antrang Finance that generates a mere 6 lacs a year. I would like to know the details of every business / subsidiary that generates less than 50 Cr of NP after taxes. In the scheme of things and larger objectives there should be a board resolution passed that defines / disallows continuity, if certain thresholds aren’t met by any subsidiary.

The Third and Series of Blunders

Our acquisition history and parameters are abysmal. That eeks of internal misjudgements. I might not need to tell you that a series of these judgemental calls, gone wrong with alarming regularity, might be perceived to be fraud. Nimyle, B Natural, Savlon – have you ever calculated the price paid for acquiring these businesses and the value accretion/destruction that these businesses are doing for me. Your endeavor to build on these brands might be noble but the subsequent performance is abysmal.

Enron wasn’t a fraud at the beginning , But they lost their way alongside because they didn’t know when and where to diversify and how to wisely allocate capital and burnt cash and rapidly eroded shareholder wealth. Don’t take my company down that path or history will find it difficult to forgive You.

When I read about the ITC Sangeet Research Academy I couldn’t stop laughing for 5 minutes. The cacophony of the music of frustration is still ringing in my brain. While I would like to know the total cumulative annual spend in this musical initiative since 1977, I kept wondering that the music for all the gurus and the budding musicians is playing fine while the music for the shareholders is dimming with an alarming speed or might already have stopped a few years ago. What a paradox..

BECAUSE YOU ARE ANSWERABLE

The Fourth Blunder

The FMCG division launched in 2000 generates just 3-5% PBT, thats a meagre 6% segment ROE (vs >35% of other FMCG players) – put Your hand on your heart is this justified. The QOQ and YOY narrative, propagated by You that 'we are becoming a global FMCG brand' is fine – how is it value accretive for me – because our operational performance is miles short of our competitors.

Are our employees lackadaisical and suffering from sloth because they don’t have a real BOSS or there is something drastically wrong with our strategy and execution. How have we benchmarked ourselves against the top 5 competing FMCG companies?

I would like to know if the salary growth of all the people earning over 35 lacs per annum is directly correlated to Revenues and EBIDTA of those divisions and if NO – it tantamounts to the very premise where we begun – My cash business is being used to fund the inefficiencies of the entire company without a credible benchmarking against other brands / businesses that are doing well. How are we different today from an inefficient PSU. 

The so called Dividend Yield is a paradox - How would You justify the same to investors who entered the stock on ~14th July 2017. Yes agreed i am getting some 7-10 Rs a year in dividend while losing a major part of my capital. 

The Fifth Blunder

For a Balance Sheet of my company’s size you have failed repeatedly to disclose Your CAPEX plans and capital allocation plans in advance – isn’t that taking the executive power to a level of unsanctioned discretion? While I am suffering with my capital erosion you guys are building personal empires of reputation and brand building.

ITC Infotech @ 2300 Cr per annum of revenue and single digit PAT must be the most underperforming IT company in the country. Do we take pride in investing businesses that underperform and continue to make the shareholders believe that the future is bright (why has the board not thought of divesting this and all such small divisions) and if NO – what’s the boards commitment on revenues and PAT in the next 5 years for this company.

The Sixth Blunder

You recently acquired Sunrise at approx. 3.7 X the FY 1920 revenues of 591 Cr at a PE of 37.

How does this deal add to my geographical diversification? How is this value accretive to me? And why would you pay this valuation when you aren’t able to sustain a 15 PE for my company? How did the board approve an acquisition at 37 PE while struggling to keep my valuation even at 15 times.

Why could we not expand our own spices division to strategically expand our geographical reach with internal talent and resources and had to go thru the path of an expensive acquisition.

Norway’s food major Orkla acquired Eastern Condiments (almost double the size of Sunrise) at 2.1X Sales and at 18.5X earnings. Which team was responsible for the due diligence of Sunrise and it would be in the interest of the shareholders if the negotiation documents and files are brought out in public domain.

For a minority shareholder watching from a distance, this is nothing short of an internal fraud. If my company is receiving Outstanding Performance Award by CII for its spices, does our management not have the wherewithal and talent to setup and expand our products’ geographical reach rather than paying a hefty premium just to capture a market share.

ARE YOU ANSWERABLE?

The Seventh Blunder

The executive compensation keeps going up and shareholder wealth keeps coming down. It’s a shame that in the last approx. 12 years the revenue has gone up from 16000 Cr to 50000 Cr and the employee cost is almost stagnant at 9% or has marginally inched up. Where is the operational leverage? Where is the demonstration by the management to incrementally and geometrically increase revenue and thereby profitability for every additional crore spend in Executive Compensation?

Some of the most progressive companies on the planet (such has Amazon) have a cap on executive compensation at less than 160000 USD per annum and all additional comp is through stock awards.

Our compensation system acts as a disincentive for executive outperformance and in the absence of a real my-baap of my company, I – THE MINORITY SHAREHOLDER am suffering.

In 12 years the revenues are up approx. 3.12 times and employee cost is up 3.26 times. And most likely the perks, hidden benefits, Pension Plans, Travel Plans, Drivers, Cars, Leave Encashments are not even a part of this metric. I would like a declaration / system – where every penny spent on every employee is a function of CTC that’s declared and filed without any benefit being accrued under any other account head.

Do you – dear Board Members understand the concept of operational leverage?

ARE YOU ANSWERABLE?

The Eighth Blunder

Our stakes in EIH and Leela have a MTM loss of approx. 1250 Cr in just one last FY. What's the rationale in holding onto these investments when we don’t really know how to manage our own hotels in the first place or make them world class by any stretch of financial performance. Not a single rupee should be allowed to be invested in the hospitality business to fund losses or any further CAPEX. And every business balance sheet should fend for itself for its OPEX and CAPEX without dipping into our cash generated from the primary business – Cigarettes.

The Sri Lanka investment of 1800 Crores (~236 M USD) so far, baffles me as a shareholder. And I understand that the project is far from complete. Who are we building this empire for and how will we get our investment back? Do You have a plan besides just an excel sheet to justify this black hole.

ARE YOU ANSWERABLE?

The Ninth Blunder

Our abysmal ability to engage with capital markets / investors / analysts is nothing short of abject neglect (no mybaap syndrome). If you had succeeded in creating any mentionable shareholder value – this attitude is pardonable. But while You are all doing exceptionally well, with your compensation and hefty sitting fees and perks, the lack of investor and market engagement is taking me and my shareholding for a ride. Why cant we have a mature set of professionals who have the knowledge and the art of engaging with investors and the media.

ARE YOU ANSWERABLE?

The Biggest Blunder

You are conducting an average of 41 committee meetings a year. Take out the weekly offs and holidays, You are meeting approx. every 5^th day. FOR WHAT? And what are you achieving for me? Except strategically destroying my wealth and value of my shareholding at my cost and charging exorbitant sitting fees? Gentlemen the average age of my board is approx. 65.6 Yrs. God give You all a happy healthy life but don’t treat my company like a retirement resort.

You talk of Triple Bottom Line repeatedly trying to be the 'pallbearer' of goodness – While every section of society gets a mention – the shareholder is left out of that focus - high and dry. If I was on Your mind – You wouldn’t waste a single rupee in reputation management through charity and social activities and alleged multiple bottom-line spiel till the interest of minority shareholder is protected and demonstrably served.

While every corporate house has declared salary cuts in view of the pandemic – there is no evidence of any salary cuts in my company. on the contrary you have recently chosen to reward yourself for destroying shareholder wealth. Is that morally and ethically correct even while the latest Tax filings reveal that our advance tax returns are lower by almost 50%. That portends that the Net Profit is likely to fall dramatically - At whose cost?? – MINE!

Another large conglomerate / business house indulged in empire building, international acquisitions at obnoxious valuations, over leveraging, failed product/car launches all at the cost of minority shareholder and to sate the ego of a few top guys in position of authority and they have reached a precipice of existential crisis.

Its becoming increasingly irritating to be repeatedly reminded through media, about the deep value and future potential of my company under Your leadership – Lets stop behaving like the state that talks of glorious vision in year 2050 (safe distance away) – because by that time none of us will likely be alive. Its not to take the credit away for many good things that are happening in my company but pls remember Good is not Good enough because we need to be Great. I must confess we are far from Great and not even looking in that direction.

Pls get Your act together and don’t allow my company to get to a point of no return. A few more mistakes and a little more neglect – And you would have succeeded in destroying one of the finest companies in the country to a mere HAD BEENS…… Remember markets are unforgiving and it would take no more than a few quarters to get our share-price to double digits.

God Bless You and God bless ITC

A distraught shareholder…………

Co authored with 
Ravi Sharma @caraviusharma ; https://www.linkedin.com/in/ca-ravi-u-sharma-65901b97/
Uday Bhaskar https://www.linkedin.com/in/uday2210/

Investors are Dancing - But no music can be heard

Is a Financial Tsunami Building up?

Just as the stock price of Tesla kisses $2000 (and by the time i finish writing this piece, it might be $2200) and Apple is way past the 2Tr$ Marcap, I receive a text message from an enthusiastic friend of mine who first started investing a few months ago (March 2020) after being forced to work from home and shared his stellar success at his new-go at the markets. He shared his desire to be a professional fund manager and started exploring ways to get a SEBI license to be a RIA (Investment Advisor) or a Portfolio Manager.

Being an investor since 1992 when I made my first investment and having managed funds for family and friends all life and now as a professional Fund Manager since the last few years, and having seen euphoria and fear again and again, I can say with some degree of confidence that this time it isn’t different and something is about to give way.

Covid has been the most unfathomable disruption, the likes of which hasn’t been seen by anyone alive today. The concept of Black Swan stands redefined which – till now – was an unexpected and improbable event and people would often relate to it by comparing it with a Tsunami or an accident or a sudden unexpected failure of an enterprise with global ramifications.

No one had ever imagined that within days, the global borders would be closed, airlines across the planet would be grounded (95% still remain grounded as I write this), and all levers of the global economy (travel, trade, manufacturing, shipping) would come to a grinding halt. ‘Sudden Stop’ in global economy was an academic expression that became a reality almost instantly.

Some 30 million Americans lost their jobs (more than 3 times than the previous highest), markets crashed by about 40% in 3-4 trading sessions, China got blamed for its alleged Chinese Virus, oil hit (-) 37 $ while the global leaders remained clueless and the only policy response was a complete lockdown of nations as leaders grappled with the  enormity of the situation.

Hundreds of millions of people have lost their jobs and millions of small businesses have shut down forever and the economic contraction has been so secular that some of the most high flying businessmen and executives have resigned themselves to the new normal only yearning for their basic needs to be met for their families and themselves.

While some countries have shared the real data and the extent of severe and unprecedented economic contraction, most have conveniently chosen not to release the same either to avoid embarrassment or to avoid panic. But imagine, for a second, that everything (revenue, earnings, profit, salaries, rentals, commoditiesetc etc etc) gets deflated by 40-70% - what effect it is likely to have on the global economy.

If the savings rate from income varies from 1% to 25% in different parts of the globe (it is believed that more than 70% Americans have less than $500 in savings and the max savings rate is about 25% in China and India), it is safe to assume that every person on a monthly salary / entrepreneur is already digging into life investments and assets to keep afloat as the inflow (after salary cuts or loss of income) is far lesser than the outflow. Majority of my friends and acquaintances have either stopped their SIPs or redeemed their Mutual Funds. I read that last 2 months have been the worst for the MF industry because of incessant redemptions and negligible inflows.

And Yet…

The Indian and global stock markets have shown immense resilience making these an easy ATM to churn out daily profits for Robinhooders.

Human memory is short and 10 years is a long time to lose and gain confidence all over again and the stars (Corporations and Executives) of yesteryears fade away while the new ones emerge on the evolutionary principles of Creation - Preservation and Destruction

It is believed statistically that 95% of market participants and fund managers have less than 12 years of experience which implies that only 5% have seen the crash of 1987, 2000, 2008 and a few other mentionable flutters in between. And human mind is generally tuned to be optimistic as hope and evolution trains the mind to expect a better future always in every which way. Little credence is given to people who invoke caution and sometimes border pessimism as a result of lifelong experiences and perhaps that’s the reason the world is deriding WarrenBuffett for having lost a decade by underperforming and not investing in Tesla and Amazon and all the 30 yr olds have seemingly outperformed by simply investing in Tesla or Kodak or Overstock kind of shares.

Parameters such as performance Ratios, Profits, Real cash in the hands of shareholders have lost every mentionable significance and price earnings of 200/300 or even 1000 in case of Tesla seems like 'THE' new normal.

And while the bears have been irreparably scathed in this recent melt-up, it would be prudent to remember that over long periods of time, either the price catches up with the fundamentals of a stock or the fundamentals catch up with the price,  but just to put the things in perspective (and I know nothing about Tesla and am not a Tesla basher sitting here in India – but it’s a good example) if Tesla was to maintain its present earnings, it would take about 1000 years to fully recover ones investment through Tesla s present earnings. Anyone who buys a Tesla stock now is valuing it at approx. a million dollars for every car sold.

Markets are a beautiful place that allow immense wealth to be created and accumulated for people who have patience and discipline but history is replete with examples of more than 70% of investors of all times to have permanently lost capital by chasing garbage (aka penny stocks) that seems to provide short term euphoria.

Lets talk of a few Indian stocks and themes or should I say wealth destroyers.

Between 2003 and 2008 Infra and Housing was a great story and a mere ‘infratech’ (use of tech and infra) in a company s name would get it rerated. Unitech, IVRCL, HCC, NCC, Sintex, DLF, …………… have destroyed almost 99% of shareholder wealth and most of these names have got delisted leading to permanent destruction of wealth. During hay days these were stocks that were the market darlings

Then came the era of banking and finance. Between 2009 and 2018 NBFC s and Banks had a dream run before the euphoria and invincibility of the sector was popped by the ILFS, Yes and DHFL type of fiascos and recently while a top outgoing CEO dumped his entire shareholding and ESOPS of 26 years in a jiffy (perhaps to pay for the expenses of grocery, maids and electricity bills during tough times amidst the pandemic), the gullible public and minority shareholders will be the last to keep holding the hot potatoes and the music would stop suddenly.

And Now

We have the API and the pharma theme on an assumption that all the medicine factories on this planet will stop production and all pharma orders will come rushing to Indian companies and the world population might start eating medicines instead of fruits and vegetables all produced by Indian pharma companies.

The same story gets repeated again and again. While the robinhooders are gloating in the wealth created by some new age, recently discovered pharma companies doubling in the value in less then 2-3 months, the end is always painful when the music or the party stops. And by the way graphite was the pharma of today or pharma/API was the graphite of those times.

The 5% people who have been around, all of them understand this, having gone thru cycles, but the 95% neither have the wherewithal or the research to truly fathom the depth or the lack of it in the present euphoria.

Every crop must be harvested at a specific and optimum time, lest it should rot. Same goes for ones stocks, corporations, businesses. Buying or creating is natural to ones instinct of evolution, letting go / harvesting is an art which very few understand or develop. And most end up in a feeling of regret esp small and minority retail investors who fall in love with their stocks, cannot sell and take the profits home.

The trouble is that most fund managers are obliged to be eternally optimistic (ignoring the risks) else they would face redemption thereby leading to lesser fees for the fund-house. Very few investors realize that cash in itself is a strategy and a position worth considering and to be in from time to time.

As Howard Marks says “To be a disciplined investor you have to be willing to stand by and watch other people make money on things that you passed on”.

Irony of the markets is well evidenced, rather strongly in just this one case in point :- PVR Cinemas

PVR used to be a perfectly fine and a successful popcorn and coke reseller till the pandemic struck and just 11 days of disruption in March saw its profit fall thru the floor. The future is bleak with zero sale in first 2 quarters and any of the movie buffs whom I have spoken to in Delhi, Bangalore and Bombay (where PVR has max screens) are not going back to a cinema hall as people have found a new freedom on OTT platforms and using affordable projectors at home and replicating a cinema hall effect without risking oneself to the virus-exposure. 

Producers are preferring - selling to and releasing movies through OTT platforms as that reduces their risk to zero. And yet retail investors are finding virtue in this company that has zero sales, bleak future, debt ridden and trading at 300 times its trailing earnings and no visibility of the future earnings. Some PVR stock lovers say – all will be well in a few years, we are looking at 2030.

CNBC has single headedly taken it upon itself to create a euphoric environment shrouded by global liquidity and has allowed all dubious promoters to talk up their stocks only on the base of 'positive commentary' as if the alchemist in them can turn just commentary into profits, cash and dividends.

On the other had a company like ITC that produces more cash and profits than all the other 6-7 top FMCG companies, is debt free, is trading at abysmally low valuations (15 times trailing earnings) and yet the robinhooders find it less appealing.

This dichotomy will self correct sooner rather than later and will come with its own collateral damage which most new entrants in the markets aren't ready to handle.

Harvest Your crop, take profits off the table, let some notional profits be lost along the way but evaluate the risk and reward that any company, valuation, story, potential – offers.

If this fine art of valuation equilibrium can be discovered, small investors would do themselves a great service of increasing their longevity in the markets and protecting their capital.

Enjoy the party, stay close to the door, so when the stampede starts, You can safely escape without being trampled.

My twitter handle @manurishiguptha

www.manurishiguptha.com

www.mrgcapital.in