Niveshak October 2021 Issue

FINANCE & INVESTMENT CLUB

NIVESHAK

COVER STORY

FINVIEW

FINSUPERVISE

Coal: The Chronicle of a Supernova of the Black Gold

Mr. T.S Anantakrishnan, CEO, Varanium Capital Advisors

Retirement Planning: A Train not to be Missed

ISSUE II • VOLUME XV • OCT'2021

NIVESHAK

OCT'21

E D I T O R ' S N O T E QUI N'AVANCE PAS RECULE

Dear Niveshaks, We are delighted to present to you the October edition of Niveshak. This edition has an optimistic view for future growth, with production levels exceeding pre-pandemic levels. India has hit a critical milestone in the fight against COVID-19, with 1B+ vaccinations administered across the country. Clouds of covid, on the other hand, have returned to loom over China.

This edition begins with the month of October, covering significant news stories of the month, including the Pandora papers, the largest of the three breaches, Air India's rebirth with the iconic Tata deal, and global fears about electricity shortages and rising coal and oil prices.

The pharmaceutical industry saw a correction this month. Despite the tumultuous overall markets, Indian oil and gas companies consistently emerged as top bulls for the month.

1 | EDITOR'S NOTE

TEAM NIVESHAK

Aagam Parikh

Aayush Jain

Akriti K.

Akshat Sharma

Darshan K.

Nikhil Chadha

Shashwati A.

Shreyansh D.

Unnati Tanwar

Aritro Dutta

Arushi Mathran

Hardik Goyal

Manish Kumar

Nihar Mehta

Pratyush Kumar

Rakesh M K

Sandhaan G.

Vasundhra Misra

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The consumer durables sector increased by 5% month over month. The IT index dropped 1.07% MoM as a result of many IT companies' results falling short of expectations in Q2.

The cover story discusses the global coal scarcity, which is the result of a demand-supply mismatch.

In India's thermal power plants, there has been a severe coal scarcity.

Consequently, there has been discussion over various economies' inefficient roadmaps to renewable and unconventional energy sources.

In the Finview section, we bring you the insights of Mr. T.S. Anantkrishnan, CEO Varanium Capital Advisors, who shares his views on portfolio management, importance of ESG Score, SPAC, funds of fund and much more.

OCT'21

‘FinSupervise’ of this edition talks about retirement planning.

Finally, test your finance, economics, and market awareness with this edition's newly designed crossword for you. Don't have a physical copy? Don't worry, scan the QR code and 'Go Digital'!

We would love to hear your thoughts, feedback, and ideas.

Please feel free to reach out to us to let us know what you think!

We hope you derive something from this edition and that you stay safe and sound in these exciting times!

Stay Invested, Team Niveshak

Know Your Sector focuses on the less well-known Specialty Chemicals Industry, primarily in the Indian context, and the subsegments of the industry, key evaluation metrics, a focus on sustainability, and the fall of China in the sector.

Markets being bullish and there being so many deals coming up, continuing with our newly introduced ‘Deals Brewery’ section, we cover strategic partnership between Reliance Brands Limited with Manish Malhotra with a 40% stake.

All images, design, and artwork are copyright of IIM Shillong Finance Club © Finance Club Indian Institute of Management, Shillong

Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.

EDITOR'S NOTE | 2

CONTENTS The Month That Was

Niveshak Investment Fund

Know Sec

Monthly performance of NIF

Speciality Indu

7-8

18-1

The Finance Bulletin

5-6 7-8

13-17

9-12

Coal Crisis

Cover Story

13-16of Views Mr. T S Anantakrishnan

FinView

20-2

Excess L its effec mar

Arti of t Mon

w Your ctor

Chemicals ustry

19

23

iquidity & cts on the rket

icle the nth

FinSupervise Deals Brewery Reliance & Manish Malhotra Deal

Retirement Planning

Let's Fin Up

26-27

The Crossword

24-25

30

24

28-29

Paras Defence Blockbuster IPO

Something New Something Offered

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T H E M O N T H T H A T W A S THE FINANCE BULLETIN

Pandora Papers Leak Obtained by The International Consortium of Investigative Journalists (ICIJ) in Washington DC, Pandora Papers is the biggest leak in history, with almost 12M documents revealing hidden wealth, tax avoidance, and money laundering evidence by some of the world's richest and powerful.

Even though some of these may be backed up by valid legal reasons, the prospects of ending such practices have been accelerated with an aim to curb tax avoidance, strengthen international financial regulations, and severely restrict the ways in which the wealthy can hide assets.

Increasing concerns of r i soi n g o i l a n d c o a l p r i c e s Oil prices jumped 14% to ~$83 per barrel and coal prices jumped 15% to ~$200 per metric tonne, posing increased macro risks. This is leading to higher inflation and slower growth with the potential to lead to a disruptive monetary policy 5 | THE MONTH THAT WAS

policy tightening. Owing to this, inflation is destined to move back to 5.5% levels by March 2022.

Assuming a complete passthrough, a 10% rise in oil prices can increase CPI inflation by 0.40%, while on the current account balance side, given India imports 80% of oil demand, a 10% rise in oil prices can widen the CAD by 0.30% of GDP.

India Sovereign Rating m omvoevs e sf r o m N e g a t i v e t o Stable From the threshold of being downgraded to the 'Junk' status, India’s long-term sovereign rating has moved up from 'Negative' to 'Stable' investment grade class.

Receding financial sector risks, rising vaccinations, and broadening of economic recovery are the primary reasons for this upgrade, as cited by Moody's, a global rating agency. The current rating stands at Baa3, which is the lowest investment-grade rating subjected to moderate credit risk.

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OCT'21

Air India Sold to Tatas foF r o₹r1 8 , 0 0 0 C r o r e s

Disinvestment delay by B PBCPLC L

Tata Sons beat the ₹15,100 crore offer made by a consortium-led Spicejet promoter, Ajay Singh, and emerged as the bidding winner for India's flagship carrier, Air India.

The $2.4Bn deal concluded decades of attempts made by the government to privatize a moneylosing and debt-laden airline, potentially ending years of taxpayer bailouts that were keeping the company alive. The deal doesn't include Air India's non-core assets like land and buildings, and as per a deal covenant, all the employees have to be retained for at least a year.

With Vistara, Air Asia, and now, Air India, Tata's strategic move is yet to unfold amidst the upcoming 'Akasa Airlines' - the big airline move by the Indian investor, Rakesh Jhunjhunwala.

India’s plan to privatize Bharat Petroleum Corp. is facing delays with bidders struggling to find partners.

The three main contenders - the Vedanta group, Apollo Global Management and I Squared Capital - are trying to loop in global energy giants and sovereign & pension funds, with no success yet. Sustainability rules have further complicated the process of finding investors to buy a stake in an oil refinery.

Reliance to complete t h et hFeu t u r e G r o u p d e a l Reliance Retail Ventures (RRVL) has extended the timeline for completing its Rs. 24,713 crore deal with Future Group as it awaits regulatory and judicial clearances. Alongside, dismissing Amazon's application for opposing the scheme of merger of Future Group companies, NCLT has allowed Future Group firms to hold meetings of shareholders and creditors to seek approval for the sale of assets to RRVL. The new deadline for this deal to go through is March 31, 2022.

India ranks 40th among 3 ePnesni os n i oS n ySs yt es m t esm s 4 34P According to the 2021 Mercer CFS Global Pension Index survey, India has ranked 40th out of 43 Pension Systems in the world.

India secured an overall index value of 43.3 (2020: 45.7) among the countries analyzed. Iceland was ranked first with an overall index value of 84.2 and Thailand had the lowest overall index value at 40.6. The index highlights key strengths of retirement pension systems around three sub-indexes - adequacy, sustainability, and integrity where India scored 33.5, 41.8, and 61.0 respectively. This suggests a strong need for a strategic reform in India (which also includes 90% of the workforce in the unorganized sector), to revamp the pension system, hence ensuring an adequate retirement income for all.

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N I V E S H A K I N V E S T M E N T F U N D PERFORMANCE EVALUATION

NIF SINCE INCEPTION

Sensex Scaled Value

Portfolio Scaled Value

Return measures Total investment value: ₹10,00,000 Current portfolio value: ₹29,52,015 Change in portfolio value: 0.34% Change in Sensex: 0.92 %

NIF OCTOBER PERFORMANCE

Sensex Scaled Value

Portfolio Scaled Value

Risk measures Standard Deviation NIF: 42.84% Standard Deviation Sensex: 38.91 Sharpe ratio: 4.87 (Sensex: 4.99) Cash remaining: ₹1,84,140

Comment on equity markets & NIF performance Equity markets saw stable growth in the first half of the month but the later half witnessed a slump owing to the spate of FPI downgrades citing expensive valuations vis-a-vis other emerging markets, resulting in reallocation of money from secondary to primary markets.

Barring financial and IT, most sectoral indices traded in positive territories with metal, pharma, and auto indices recording smart recovery. Indian markets are also likely to witness a series of IPOs in the upcoming months, most of them from expensive digital properties.

NIF saw a portfolio change of 0.34% (Sensex: 0.92%) and stood at a net value of ₹29,52,015 7 | NIF

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OCT'21

INDIVIDUAL STOCK WEIGHTS & MONTHLY PERFORMANCE Portfolio Weight

Performance

TOP GAINERS - SEPTEMBER 21

20.14%

- Speciality Rest

10.16%

- Titan

9.44%

- Avenue Supermarket

TOP LOSERS - OCTOBER 21

(16.16)%

- Asian Garnito

(13.59)%

- Manappuram Fin

(11.85)%

- Thirumalai Chem

NIF SECTORAL WEIGHTS

NIF | 8

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OCT'21

C O V E R S T O R Y COAL: THE CHRONICLE OF A SUPERNOVA OF THE BLACK GOLD

The Black Gold India has the world's fifth-largest coal reserves and is the secondlargest coal producer. It produces about 725M tonnes of coal annually.

However, domestic production has not been able to meet the demand for coal in the country.

Hence, India imports around 240M tonnes of coal, mainly from Indonesia, Australia, and South Africa. Coal provides about half of India's commercial primary energy supply today and is the country's dominant fuel for power production.

Apart from power, it is used in other major industries such as steel, cement, textile, chemical, and fertilizers.

The coal industry is deeply knit into the fabric of the Indian economy. Levies on coal are an essential source of revenue for the central government and coalproducing states, which are among the poorest in the nation. Indian Railways' freight charges for coal subsidize passenger transport.

9 | COVER STORY

Passenger fares only cover 57% of the average cost of passenger transportation, and the rest is subsidized by fare collected through freight. Coal bears the most considerable burden of this subsidy because of its high freight rate and volume. It is the highestvolume commodity carried by Indian Railways at about 40% freight volume and 44% revenues.

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Coal India Limited (CIL) is the world's largest coal mining company and produces over 80% of India's thermal coal.

The central government holds over 75% of CIL, providing significant revenue to the national exchequer through dividend payments.

Besides rich dividend payouts, it pays around ₹40,000 crore annually in royalties, cesses, and levies to the government. CIL is also a significant employer and, in many parts of India, the largest one. In all, it employs over 270,000 departmental workers.

Current Crisis & Structural Issues India is witnessing a crisis in coal availability, which has resulted from lackluster domestic production and a steep decline in imports over the past few years.

Stagnating supply had not caused trouble last year as the economy was shut down to tackle the COVID-19 pandemic. However, this year's rise in power demand has

OCT'21

exposed the government's inability to push or compensate for insufficient domestic production by increasing imports.

Several factors have been responsible for the insufficient supply of coal this year, including flooding in coal-mining areas, transport issues, labor disruptions, and the sudden surge in power demand as the economy revives from the pandemic.

Consequently, many of the thermal power plants in the country have been operating at coal inventory levels that could last just a few days. States like Punjab and Rajasthan are witnessing partial load-shedding aimed at saving power. Any power cuts to the industry will damage India's rebound as the economy is recovering from a historic 7.3% contraction in FY21.

Deeper structural problems have plagued the power industry in general for a long time. Populist politics has ensured that the tariff rates paid by consumers are not commensurate with the production costs of power, while the revenues of distribution companies (DISCOM) cover only about 70% of their total costs. It has also resulted in an increased debt burden on public sector DISCOMs as they have not been compensated for their losses while selling power at subsidized rates, discouraging private investment in power generation and distribution even as the power demand rises each year.

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The Transition Coal plays a vital role in India's ongoing efforts to achieve its Sustainable Development Goal of ensuring access to affordable, reliable, sustainable, and modern energy for all. The nation has more than doubled its installed coal-fired thermal power plant (TTP) generation capacity from 94 GW to 192 GW between March 2011 and 2017, which has enabled the government to increase per capita electricity consumption by 37%, at the same time reducing peak demand deficit from about 10% to about 1.5% However, the negative externalities of coal-fired TTP have led to extensive environmental pollution, adverse health impacts, and climate change and have thus made a phase-out of coal inevitable.

Hence, primarily driven by economics and climate considerations, India's energy sector is experiencing a shift towards renewable energy (RE), backed by ambitious government policies. India has been able to beef up its capacity from 10 GW to 100 GW in just 15 years, from 2005 onwards, representing about 26 % of the total installed capacity.

Interestingly, new solar installations have also achieved a relatively lesser average cost compared to the average cost of running existing coal-fired power plants, which has further elevated the incentives of installing RE plants.

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Installed power generation capacity in India:

% share in 2006

2020

Per Capita Consumption in major coal producing countries in 2019: India 0.7 Australia 4.5

China 2.7

Germany 2.7

USA 1.9

Today, solar energy contributes approximately 46% share in the total RE segment, making it the major contributor followed by wind energy (39%), BioPower (10%), and Small Hydro (5%). The union government aims to achieve 227 GW of RE capacity (including 114 GW of solar power capacity addition and 67 GW of wind power capacity) by 2022, more than its 175 GW target as per the Paris Agreement.

By 2030, the government plans to establish a renewable energy capacity of 450 GW, thus forming 50% of its energy requirement capacity from renewables.

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These developments fall in line with India's India pledge of a 33%–35% reduction in the emissions intensity of its economy by 2030.

What lies in the Future?

The current fiasco has brought forth severe shortcomings in the overall power generation capabilities of India.

It has reinforced the fact that notwithstanding the impressive work done in installing renewable energy power generation capacities, the economy is still largely dependent on coal, and thus its phase-out would entail dealing with bumpy roads ahead.

Further, ramping up RE generation capacity without commensurate growth in electricity demand has resulted in lower utilization of thermal power plants, whose fixed costs must be paid by the distribution companies (DISCOMs) and passed through to the final consumer, a highly politicized subject.

India's dependence on the coal economy has created lock-ins to specific spillovers.

Whether renewables will have the same implications for industrial development, employment, and economic structure is contested.

The transition will essentially require unwinding those lock-ins to the coal economy and planning an alternative, inclusive, and sustainable development trajectory around new energy sources.

For a country that aspires to be a future economic superpower, securing its energy supply and having requisite capacities is paramount. For the current revival of the economy and realizing its long-term economic aspirations, the supply of uninterrupted and quality electricity is an essential prerequisite for the Indian economy. Any further botch-up can jeopardize growth prospects, thus requiring serious deliberations from the policymakers in solving the complex issues pertaining to structural and transitional challenges concomitant to energy security.

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OCT'21

F I N V I E W SPOTLIGHT ON SUCCESS

Mr. T.S Anantakrishnan CEO, Varanium Capital Advisors

As the founder of Varanium C aC pa i tpailt,a h o w has your role evolved since its inception and what is the way forward for the company?

Varanium Capital was incorporated in its current avatar around 2016.

When I initially started, I was involved in everything from operations to investments to marketing and sales to compliance.

It was hands-on involvement, including the hiring of all staff within the firm.

Obviously, that has changed as we have expanded and we have got key personnel who are looking at various aspects of the business itself. There is an investment head, operations head, and so on and so forth. My involvement has changed from being more handson to being more strategic in giving direction to the company.

13 | FINVIEW

Effectively, what you have is the role of being more motivating, mentoring and making sure that the strategy of the firm is geared towards whatever changes are happening in the market you are operating in. That's really how things have changed. When you start off, it is very specific to the business line that you are addressing.

As we grew, the business line problems were being addressed but how do you actually grow to the next stage? How do you actually look at what the competition is doing and how do you kind of devise products, devise instruments which would help in addressing a specific business need? That’s how the roles have changed since I started this business.

One of your offshore product offerings: “Segregated Portfolio Company” offers structured investment opportunities. Could you please throw some light on its functioning?

Yeah, this is out of Cayman Fund.

Essentially, what an SPC stands for is a “Segregated Portfolio

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Company”. What happens in an SPC is, it's an umbrella fund and within that you can launch multiple funds. And why do you need this? Say you have a fixed income strategy which is a closed-ended strategy for three years, and another fixed-income strategy which is an open-ended strategy and you manage your bond portfolio there. Then you have your equity strategies, which could be just specifically for India or Asia. So, if you did not have this SPC, you would have to launch separate funds for each of these strategies, which is timeconsuming and quite onerous. But with a SPC, you are registered with the regulator, and it is simpler for you to launch various strategies and funds and it's easier to manage, because, at the end of the day, private placement memorandum is broadly the same.

The compliance functions across multiple funds are the same and therefore give flexibility. Another good thing about this SPC structure is that each strategy is incorporated in a specific “SP”, which is called the Segregated Portfolio. There, your assets and liabilities are just specific to that "SP". So, if there is a mishap in one of the funds or SPs, it does not have a contagion effect on others. That's the benefit. It gives you effectiveness in terms of quick launch of new products, cost savings, etc. Imagine if you had to launch separate funds for each of these strategies, the costs would balloon out there.

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Varanium Capital has a unique f ufnudn d– H o s p i t a l i t y f u n d w h i c h caters to the Hotels and hospitality sector. What were the roadblocks/challenges seen last year with reference to its functioning?

The biggest issue was obviously COVID hitting nations and the whole service industry, in general, got affected. In hospitality, you did not have occupancies in the hotels.

You had many of these hotels essentially being financed through debt, given the fact that the occupancies were not there as people weren't visiting. But the debt meter had not stopped today and has continued for many of these hotels. It also means that there are opportunities for funds like us who can bring in the equity capital and can right-size the capital structure in terms of converting some of the debt into equity and given the turnaround that we are seeing in the hospitality segment, I mean, it's practically impossible to get hotel rooms now because everybody is looking to go out, having been stuck in their respective places and hence a lot of the domestic hotels in India have started to get quite a bit of traffic.

One important fact that you should know is that the number of threeto-five-star hotels all over India does not amount to the number of hotels in a single city like Shanghai. Therefore, there is huge scope as far as financing these hotels is concerned. We believe

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the opportunity set right now, is even more attractive than it was earlier. We have opportunities in both debt and equity in this space.

One of the most pertinent q u e sqtui e o sntsi of n o sr i n v e s t o r s t o d a y i s how important are ESG scores?

Are there any disadvantages for the companies with low ESG scores?

ESG has increasingly become important and investors across the world have realized the importance of sustainable investments.

Michael Friedman had made a very interesting comment that, “The sole purpose of businesses is to make money for the shareholders”. That has now changed to, “the sole purpose of business is to make money for its stakeholders”, stakeholders being your customers, employees, shareholders, and the general society at large within which one operates. That change which has happened along with greater emphasis on ESG, whether it be from an environmental standpoint, or a governance standpoint, will elevate businesses to a more sustainable growth trajectory.

Initially, that may not help in terms of boosting growth because it's going to be a little bit more costly but in the medium to long term, it is going to bear fruit. It is, at a fundamental level, a play off between short term gains versus long term gains. In my view, a more sustainable approach is beneficial for all the stakeholders

15 | FINVIEW

OCT'21

and ultimately shareholders.

benefits

the

What opportunities do you s esee ei n t h e u n l i s t e d o r p r e - I P O companies in India and what is your take on the SPACs’ impact on the same?

A very vibrant form of entrepreneurship is seen today as a function of the environment that we are living in. We used to see this, especially in the West and particularly in Silicon Valley, but you've also started to see it now in emerging market countries like India. If you look at the number of unicorns that are being created, India is the third-largest, after US and China and this leads to very good development in terms of job creation and innovation.

The SPACs play to it because they give an exit to the existing investors and allow for permanent capital to come in through the listing process. This is also because there is a lot of money chasing growth at the moment due to the liquidity which all central banks have pumped. When you have a lot of liquidity, you are essentially making possible technologies that otherwise would not have been viable.

All booms inevitably lead to innovation which at the end may not necessarily benefit the companies, but will benefit the society at large. A case in point is the dot.com era or even the biotech boom and today we are seeing the whole fintech boom. I think it's great and obviously, as long as the liquidity lasts, all

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these IPOs and pre IPOs would do extremely well.

From an investment standpoint, one needs to make sure that we identify companies, who have big prospects and at the same time, when the liquidity dries up, can survive. That is going to be very critical. I think that the boom is there to stay. It is good in terms of innovation, but it's also important for one to understand who's going to survive once the liquidity dries up.

Given the opportunities in t h et h eI n d i a n m a r k e t s , w h a t d o you think would be an ideal allocation of Indian equities in an ideal global portfolio? Also, how do you perceive the increasingly bullish equity markets? Is it something that has real value or is it pumped up to a considerable extent?

I'll take the second question first.

By any stretch of valuation metrics, we are much above what the averages are. I was reading a stat, and this is not just true for India, it's true across the world, that if you look at the number of companies which are trading 10 times sales in the U.S.; it's greater than 25% M-cap. It's never been the case that companies have traded at such high valuations and even during the dot.com bubble, they did not reach such levels.

Thus, absolutely, there is a valuation bubble relative to what it was historically. When we started in 2006, five to six times EV/EBITDA used to be the normal.

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Today everybody is talking anywhere between 14 to 15 EV/EBITDA and transactions are happening at these valuations. It’s just the nature of interest rates, given the fact that, they are at such low levels and therefore the multiples are looking quite high.

But the Fed will start tapering and continue to raise rates, as we’ve already seen in Brazil which started to significantly raise rates this year, and I expect the same across emerging markets. These valuations are not sustainable and will start to come off and therefore we would advise a barbell approach where you take good quality companies and while they may be expensive, you may still want these good quality companies to form the core of your portfolio and at the other end, you essentially look at a growth stock at reasonable valuations. These markets favor growth and will continue to do so till liquidity persists.

Therefore, you take a barbell approach of looking at good quality companies, perhaps at high valuations, and then go for high growth companies on the other end at reasonable valuations, which today becomes a little difficult to identify because most of them are way above their normal pricing, but relative to the market, there are still some opportunities out there. So that's how we would advise constructing a portfolio. As far as India's allocation in a global portfolio is concerned, given the fact that you

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are going to have the thirdlargest GDP by 2050 after US and China, it is obviously a geography that one has to stay invested in.

The world itself, in its global allocation, is underinvested in India. Therefore, if you look at medium to long term, I think India is the place to be, given the innovation and the changes which are happening in the country.

With a special focus on im clic ml a t ea t e change, countries like China are expected to favour green-tech in their economic plan, do you think Indian startup ecosystem has a conducive environment for the growth of Green-techs in next 5 years?

This has the biggest potential out there. As per COP 26, India has essentially adopted a goal to be carbon neutral by 2070.

The amount of investment in these green technologies is going to grow exponentially. Whether it be green hydrogen, which a lot of people are talking about as the new clean energy and other alternates in terms of solar, EV, and various other aspects of what I call environmentally sustainable kind of technologies. I think that is going to happen.

Today you are seeing focus from oil companies, coal companies in terms of ESG, in terms of how do you make that process cleaner or how do you make sure that your carbon footprint gets lowered.

There are a whole host of opportunities in this space.

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OCT'21

There is nothing that is in the listed space, which is where I think in the next three to five years, you will see a few players coming.

In India, I think that momentum is picking up. You are seeing a lot of investments from fund managers who follow ESG practices. There are policies that need to be created, but you have to match it off with the underlying need for your economy to grow. So, you can't suddenly say, I'm going to ban coal. Well, that's fine. But you still do not have an alternative for coal at this stage. What happens then to the economy? You have to kind of attain a fine balance. It will happen, and that's where I think much of the funding for start-ups will come about.

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OCT'21

K N O W Y O U R S E C T O R SPECIALTY CHEMICALS INDUSTRY

Overview The Global Chemicals Industry is worth over $4T and is divided into Commodity Chemicals (80%) and Specialty Chemicals (20%).

Specialty Chemicals is a low volume, high margin business as it requires a high level of R&D and innovation and has a greater impact upon the performance of the end product in comparison to commodity chemicals.

The Industry The Indian Specialty Chemicals Industry today stands at over $32B and has grown faster than the commodity chemicals sector, recording a CAGR of 11% in the last 5 years.

This growth can be attributed to increasing domestic demand for end products and export growth.

The industry is subdivided into various subsegments. Some of the most important subsegments within the Indian Specalty Chemicals Industry (SCI) are:

Agrochemicals At $9.2B, agrochemicals are the largest sub-segment of the Indian SCI. It manufactures fertilizers, pesticides, adjuvants, and other agri-related chemicals. About 45% of the production is exported and the industry is dominated by domestic players accounting for 80% of the production in this industry.

F&F and Nutraceuticals The Flavours and Fragrances industry along with Nutraceuticals amount to 7.5% of the Indian SCI and are estimated to grow at a staggering 17.1% CAGR for the next 5 years.

The F&F industry is dominated by MNCs, whereas Nutraceuticals is dominated by domestic players.

Dyes and Pigments At $7B, D&P forms the second largest sub-segment of the Indian SCI. With strong demand from end-user markets such as textiles, this industry is estimated to grow at an impressive 10% CAGR for the next 5 years.

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Key Evaluation Metrics In such a competitive and complex industry, evaluating financials is not enough.

A more holistic evaluation of operational and regulatory capability entails looking at the following metrics: EBITDA/PAT CAGR This ratio measures the YoY growth in profitability of a company and is a good metric to model bottom-line growth.

ROCE This indicates how well a company is employing its total capital in order to generate profits. A high ROCE indicates robust capital and managerial efficiency.

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The Fall of China China currently constitutes about 36% of the global chemical industry revenue and gained dominance due to government initiatives to attract foreign investments and improved selfsufficiency in petrochemicals feedstock. However, due to the highly polluting nature of this industry, China decided to slow down its chemical sector growth by tightening financial availability for the sector, changing environmental regulations and introducing an environment protection tax. Additionally, the US-China trade war and Covid-19 outbreak further emphasised the need for MNCs to rethink supply chains and reduce reliance upon China.

Degree of Vertical Integration Staying cost-competitive is crucial for companies in this industry and thus the degree of vertical integration and control over input prices can provide a strong competitive advantage.

Moat A moat is a competitive advantage that acts as a barrier to entry.

Differentiated product offerings and strong industry relations are crucial moats for companies operating in this industry.

Focus on sustainability This is paramount for companies in this industry as the production of chemicals is a high pollution process and often subject to strict regulatory oversight.

19 | KNOW YOUR SECTOR

Conclusion A combination of favorable events along with inherent advantages such as low cost of production and highly skilled labour provides the Indian SCI a chance to grow at an unprecedented rate. However, an increase in R&D investment is needed since Indian companies only invest 3-4% of their revenue in R&D as compared to the global average of 6-10%.

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OCT'21

A R T I C L E O F T H E M O N T H EXCESS LIQUIDITY AND ITS EFFECT ON MARKETS

BY NAYAN PAKHALE, JBIMS MUMBAI

The Trade-off between Growth and Inflation and relevance of Liquidity In economics, there is an inverse relation between growth and inflation. The aim of any economy is growth. But the inflation should remain under control. The central banks control them using interest rates. They promote borrowing money by keeping interest rates low. This increases liquidity in the market and thus supports growth.

But, due to this liquidity, general demand for products increases, which shoots up the prices. This results in high inflation. So, the central banks again have to increase the interest rates to control inflation.

What is Excess Liquidity In any economy, banks always need some liquidity, either to serve cash requirements or to maintain minimum liquidity in the form of SLR and CRR. If there is more liquidity than needed, it increases the inflation rate of the country. So, the central banks usually allow only the required liquidity to flow, to support growth.

However, in times of crisis, people lose their earning potential. They don’t have enough money to spend, which results in lower growth of the economy. In such situations, the central banks allow excess liquidity to flow in the economy, so that people have enough money to spend, thus restoring growth. Central banks usually reduce interest rates to do this.

Recently, due to the coronavirus pandemic, many people lost their earnings potential. So, the central ARTICLE OF THE MONTH | 20

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banks in almost all countries have reduced interest rates to promote growth. For example, the RBI reduced the repo rate from 5.15% in January 2020 to 4% in May 2020, lowest in two decades.

OCT'21

A Flood of NFOs, OFSs and IPOs Due to this excess liquidity and increasing attraction towards Indian equity markets, many private companies are considering this as a perfect chance to come up with an IPO. Similarly, many Mutual Funds are coming up with NFOs. All of these are getting sufficient response from institutions as well as public.

Reduced policy rates all over the world after the start of pandemic

The effect of Excess Liquidity on Equity Markets Lower Fixed Deposit rates is another outcome of reducing policy rates, which makes FD investments unattractive. Along with excess liquidity, this is one of the main reasons why equity markets have witnessed such strong liquidity in the recent past.

This has resulted in unprecedented bull runs in equity markets. Indian equity markets have become even more attractive as India is one of the fastest growing economies, with a comparatively higher risk-free rate.

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New IPO listings in 2021

Where does the problem lie?

Due to this excess liquidity, there are two kinds of problems which can arise. Before delving deep into these problems, let’s have a look at an interesting survey carried out by UBS. The survey concludes that, while the pandemic severely affected the average earning potential of consumers, rich and upper middle-class consumers weren’t impacted much.

49% of the respondents witnessed a stable or increasing income. The inference of this study is that- Rich people and big institutions have benefitted from the rate cuts, being able to borrow at much lower rates. Let’s see how this can further aggravate the risks listed below.

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1. Inflation Risk As discussed earlier, due to lower interest rates, demand in the economy increases, which leads to inflation. However, this is not a major reason to worry, because RBI keeps a close eye on inflation.

RBI follows a range of 2%-6%. If it goes above/below that, then RBI takes action to bring it back into the range. According to its recent disclosure, RBI expects inflation to range between 4.4% to 5.2% from Q4FY21 to Q4FY22.

So, inflation risk may not be something to worry.

OCT'21

In India, the market is considered undervalued when this ratio is below 70, fairly valued when it’s between 70 & 86 and overvalued when it’s above 86. On 4th June 2021, this ratio had touched 115, highest since 2008. This clearly states that the markets are overvalued.

Buffet Indicator over the years

2. Market Bubble (Overvaluation) Broadly speaking, the stock markets are driven by fundamentals. But, eventually it all boils down to demand and supply.

As discussed earlier, Indian equity markets are getting an abundance of inflows from FIIs, FPIs, DIIs and also retail investors. This has created an additional demand, which has fueled the stocks much above their fundamental valuations. This overvaluation can be proved by multiple methods.

Stock Market to GDP ratio (Buffet Indicator)This ratio is calculated by dividing the total stock market capitalization by GDP.

Nifty PE ratioThis ratio is calculated by dividing Nifty value by earnings of companies under nifty.

Historically speaking, this ratio has always peaked in the range of 24-29.

During famous stock market bubbles in 2000 and 2008, Nifty PE was 28.47 and 28.29 respectively. This was followed by a big fall (Bursting of the bubble) and the Nifty PE stood at 12.96 in 2001 and 10.68 towards the end of 2008.

In 2021, this ratio had peaked at 42 in February. After that, its cooled down to 26.5 in August, due to amazing earnings performance shown by companies.

But this still shows ominous signs of overvaluation.

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Nifty PE ratio over the years

Key determinants in future As discussed earlier, the main reason behind the excess liquidity is lower interest rates. However, the Federal Reserve of US forecasts at least two rate hikes by the end of 2023. Most of the countries all across the world will follow the same, with faster vaccinations and growth getting back to normalcy. Crisil expects the Repo rate to increase by 25 basis points by the end of FY22.

After the rate hikes, two things will happen. The excess liquidity in the markets will reduce. So, people will have lesser money to invest, resulting in lower demand.

Secondly, with increasing Fixed Deposit and T-bill (Risk-free) rates in developed countries like US, the FPIs and FIIs will withdraw their money from Indian markets and invest in developed markets.

This will put a strong resistance to the current bull run in the Indian markets.

Who is at risk and what should they do?

The investors who have recently entered the stock markets are at excessive risk.

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OCT'21

In last one year, Nifty itself has given 46% returns. Due to such amazing performance, new investors have started looking at stock markets as a money-making machine and have put their hardearned savings into stocks without detailed analysis. This is definitely something to worry about.

In current situation, the best course is to invest in quality companies at fair valuations. This can be achieved with detailed analysis of important metrics such as ROCE, ROE, PE, EV/EBITDA, Debt/Equity, Pledged%, etc.

Investors who are unaware of these metrics should go for Mutual Funds or professionally managed portfolios.

Conclusion As discussed above, the world is witnessing excess liquidity currently due to policies set by key economies. This will surely promote growth and well-being of people affected due to the pandemic. However, these policies come with certain risks such as inflation and formation of market bubbles. People should be aware of these risks and take their financial decisions accordingly.

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OCT'21

D E A L S B R E W E R Y RETAIL GIANT ON AN ETHNIC WEAR SHOPPING SPREE

Deal Highlights Adding to its Indian ethnic wear basket, Reliance Brands Limited announced a strategic partnership with brand ‘Manish Malhotra’ to accelerate the couture house’s growth in India and across the globe. As per the deal, RBL will have a 40% stake in the luxury brand while designer, Manish Malhotra will continue to lead the brand as Managing and Creative Director. However, the deal size was not disclosed. This deal was followed by RBL buying a 52% stake in ethnic wear brand Ritu Kumar, placing RBL at a competitive position in the $20B Indian ethnic wear market.

The collaboration is all about taking India international. It’s not just about going and doing a show abroad, the vision is to become a truly global player on international fashion platforms. We’d now want to see a designer from India on the global map.

- Manish Malhotra (Founder)

About RBL A subsidiary of Reliance, the largest conglomerate of India, Reliance Brands Limited (RBL) was established in 2007 with the intent of marrying global brands to the evolving Indian consumer.

So far, RBL has dominated luxury retail in India and has brought home 35 international brands, some of which have their largest markets in India. It sits at a favourable spot with the expansion of Reliance’s retail and e-commerce business.

About MM Styles Launched in the year 2005, Manish Malhotra is a luxury Indian couture whose work has been prominent with the Bollywood industry as well as international celebrities.

Its luxury-retail footprint extends across four flagship stores besides an elaborate virtual store and 12M+ social followers across various channels.

The brand’s design language is brought to life by a team of 700 artisans, led by Manish Malhotra himself.

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A two player battle?

The Indian ethnic wear market has seen a lot of traction from prominent retail chains. Only 12% of the $20B industry falls in the organized sector, offering a glorious opportunity for big companies. Aditya Birla Fashion and Retail Limited (ABFRL) has been a significant player along with RBL, both of which have been trying to make the most of this gap in the industry.

The increasing demand and lack of competition from international companies in this market has led to these two companies betting big on the Indian brands. Their investments leave them head locked as they venture deeper into the industry and try to establish themselves as leaders.

Comparing company portfolios:

OCT'21

Need for the deal Over the past few years, the consumer preferences are witnessing a shift from West to East. The Indian consumer is more confident of the traditional art, culture, and design. The JulySeptember 2021 quarter sales for luxury ethic wear overshot the 2019 levels by 20%. The big spend events like weddings are adding fuel to this tremendous growth.

This creates a demand gap for RBL where a homegrown luxury brand like Manish Malhotra walks in.

Lately there has been a huge change in the fashion industry, technology and sustainability have been the driving forces. This opened door for business verticals for Manish Malhotra and thus made a collaboration essential, a partnership which would help the fashion label grow not only in Indian markets but also represent India on the international stage.

Plans for the future The major goal of this partnership is to take be a major fashion player on a global stage. It’s going to be an amalgamation – from having their own international stores, to being part of stores that have a cultural mix of designers, from using technology and e-commerce to hosting trunk shows all over the world. It is about representing Indian tradition and fashion in a very millennial and a globally understood way.

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OCT'21

FINSUPERVISE RETIREMENT BENEFIT: A TRAIN NOT TO BE MISSED

Overview Retirement planning involves preparing for a steady stream of money after retirement. It entails setting aside funds and investing specifically with that goal in mind.

The retirement strategy will depend on one's final goal, income, and age.

A rightly executed retirement plan can provide with enough money to cover all the later-year living expenses. It will ensure maintenance of the standard of living of an individual.

To have the best time during retirement, it is always advisable to start as early as possible.

Pillars to Total Wealth Human Capital Human Capital refers to the present value of future labor income of an individual. This value is the highest when someone is young and it starts decreasing as the person ages because of the cap on the working age.

Value of human capital is also affected by the occupation in which the individual is involved.

Assuming equal expected income and everything else constant, a stock trader’s human capital would be lower than a state university professor because of the higher uncertainty involved in the income level, thereby attracting a higher discount rate.

Financial Capital Financial capital includes all the assets such as stocks, bonds, land and property that an individual owns. Typically, when we start our career, we start with human capital. Financial capital is built over a period of time as we start to save and invest.

Human Capital and Financial Capital are complement to each other. A person's financial capital should be managed based on the return and risk characteristics of the human capital.

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Steps to planning Assessing Time Horizon Current age & Expected retirement age play a pivotal role in creating retirement strategy. Based on the current age, asset allocation would be decided. A 25-year old person would have an equity dominated portfolio for its ability to generate higher returns in long term.

Similarly, if a person is closer to retirement age, his portfolio would be more focused on income and preservation of capital.

Retirement Spending Determining retirement spending needs is important because it will affect how much one needs to invest to meet goals and how much one needs to withdraw.

Empirically, people tend to underestimate their retirement spending, hence it is suggested to save a buffer amount. Expenses such as children's education, home purchase and medical emergencies should also be taken into account.

Asset Allocation After the expected time horizon and spending requirements are determined, it is time to put the financial capital into use by choosing the best combination of assets that will help the individual to meet his spending needs with the contribution in stipulated time period. Portfolio should be created based on after-tax return from each of the assets.

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OCT'21

As one ages, the return threshold goes down, as low-risk portfolios are largely composed of lowyielding fixed income securities.

A popular heuristic followed by finance professionals is "100-Age" rule. If one is 20 years old, their equity allocation will be 100-20 = 80% of the total corpus.

Estate Planning Having both a proper estate plan and life insurance coverage ensures that one's assets are distributed in a manner of his choosing and that his loved ones will not experience financial hardships following his death.

Rebalancing the portfolio As the investments change in value, they move away from the decided asset allocation targets.

Assets are transacted in order to adhere to these targets. The targets change due to factors such as market expectations, person's age and emergency events.

To minimize tax and transaction costs, designated intervals such as quarterly, semiannual periods are used for rebalancing the portfolios.

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OCT'21

SOMETHING NEW SOMETHING OFFERED PARAS DEFENCE AND SPACE TECHNOLOGIES LTD.

Overview Paras Defence and Space Technologies Limited (PDSTL) is a private sector company in India. It deals with designing, developing, manufacturing, and testing a wide range of defence and space engineering products and solutions. It is one of the leading ‘Indigenously Designed Developed and Manufactured’ (“IDDM”) category private sector companies.

PDSTL generates around 80% of its revenues from defence-related products and 20% from spacerelated products. It has five major product category offerings: Defence & Space Optics, Defence Electronics, Heavy Engineering, Electromagnetic Pulse Protection Solutions, & Niche Technologies.

It is also the sole Indian supplier of critical imaging components such as large size optics and diffractive gratings for space applications in India.

M-CAP: ₹ 3138 Cr (as of 10 Nov'21)

SUBSCRIBED: 304.26 times

IPO: ₹ 170.78 Cr FRESH ISSUE: ₹ 140.60 Cr OFFER FOR SALE: ₹ 30.18 Cr

PDSTL delivers customized turnkey projects in the defence segment. The goal of PDSTL is to become one of the leading global companies for optics for the defence and space sector. The consolidated profit after tax for PDSTL was ₹15.79 Crore, ₹19.66 Crore, and ₹18.97 Crore for the fiscal years ended in 2021, 2020, and 2019 respectively.

19.66 18.97 15.79

PAT

2019

2020

2021

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Paras Defence IPO Paras Defence IPO created a record-breaking response and the issue was subscribed 304.26 times during the offer period. It created history in the Indian stock market.

The 170.78 crore IPO included a fresh issue of up to ₹140.6 crores and an offer for sale of up to 17,24,490 equity shares. PDSTL collected over ₹51 crores from anchor investors ahead of its IPO. The quota reserved for the Qualified Institutional Buyers (QIB) category was subscribed about 170 times.

The noninstitutional investors and the Retail Individual Investors (RIIs) subscribed 927.70 and 113 times, respectively.

The Paras Defence IPO made a stellar debut as the price rose 171% to list at Rs 475 on the BSE over its issue price of Rs 175 per share on 1 October 2021.

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OCT'21

The fresh issue proceeds are to be used to fund capital expenditure needs, support incremental working capital requirements, and repay or prepayment of loans the company avails.

Conclusion PDSTL is highly dependant on business projects and programs undertaken by the central government and other entities like the defence Public sector undertakings and government organizations involved in space research. It has no comparable peers. Most brokerages had a subscribe rating to the IPO. Given its wide range of products & niche presence in the defence/space segment with high barriers to entry, PDSTL is seen as the major beneficiary of GOI's "Atmanirbhar Bharat" and "Make in India" Initiatives.

As the government is looking to reduce import dependence, the company is well-poised to benefit in the future.

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OCT'21

LET'S FIN UP! THE CROSSWORD

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Across 1. Buying or selling securities to maintain desired asset allocation (11) 4. Wall Street of India (11) 6. Shares offered by a company to its shareholders for free (5) 7. Sales book used by bankers to sell products and services (9) 9. Distributed computers in a network that possess blockchain (5) 11. Difference between gross profit and operating expenses (6) Down 2. Recent PayU acquisition - one of the largest Indian FinTech deals (8) 3. Difference between your assets and your liabilities (8) 4. Sensitivity of a price of a bond to changes in interest rate (8) 5. Inability to pay all debts (9) 8. Accounting standards adopted by companies in India (5) 10. Investing fixed sum of money at regular intervals (3) LET'S FIN UP! | 30

ANNOUNCEMENTS Team Niveshak invites articles from participants from all colleges across India. We are looking for original articles related to Finance and Economics. Participants can also contribute puzzles and jokes related to Finance and Economics. References should be cited wherever necessary.

The best article will be featured as "Article Of The Month" and would be awarded a cash prize of 3000/- along with a certificate. The runner-up article would be awarded a cash prize of 2000/- along with a certificate.

INSTRUCTIONS Send in your articles to niveshak.iims@gmail.com Mail subject line must be "Article For Niveshak_<Title>" Mention your Name & Institute Name along with the article Ensure that article has a word count between 1200 - 1600 Please DO NOT send PDF Files and stick to the format Number of authors is limited to 2 for each article Also certain entries which could not make the cut to the magazine will get featured on our website

FORMAT Microsoft Word Font: Times New Roman Size: 12 Line Spacing: 1.5

ISSUE II • VOLUME XV • OCT'2021