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Beyond Market 16th - 31st Dec ’19 It’s simpli�ed...3

DB Corner – Page 5

Closer To RealityFY21 could witness an economic revival in India, taking the growth rate to nearly 6% if not more – Page 6Big PushIncreased infrastructure spending by the government will not only boost the sector but also buoy the economy – Page 9Flight Of UnicornsThe number of unicorns is likely to rise this year, but global and domestic slowdown may lower the tempo – Page 12Crystal-gazingPrivate banks will increase their market share, while PSBs will further consolidate in 2020. Credit growth is a challenge, but banks may sustain NIMs in the New Year – Page 16Sustaining The FutureFavourable monsoon and increased rural spend are likely to bene�t the agrochemicals industry in the country – Page 20Readying For TomorrowYear 2020 will be driven by technological advancements in the area of AI and machine learning as well as automation, 5G and blockchain, among others – Page 23Right BiteQSR chains defy slowdown with steady growth – Page 26Moving SluggishlyFMCG companies tweak product mix and cut prices to drive sales – 0

Hindustan Oil Exploration Co Ltd: Exploring The RichesHOEC is likely to grow in view of addition of new oil �elds, increased production and change in top management – Page 33

A Small AntidoteInsurance companies are o�ering bite-sized products to millennials who are seeking pocket-friendly coverage for short-term needs – Page 38Continued OptimismAlthough mid- and small-cap funds are not doing well at the moment, they are likely to recover and give better returns in the near future – Page 41

Mutual Fund Recommendations – Page 44Technical Outlook – Page 49

Cyclical TrendsStudying market behaviour and cycles helps understand consistent and recurring swings in the markets – Page 50

Important Jargon – Page 53

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Research Team: Sunil Jain, Vikas Salunkhe, Swati Hotkar, Nirav Chheda, Amit Bhuptani,Runjhun Jain

Volume 12 Issue: 01, 16th - 31st Jan ’20

BEYOND THINKING

BEYOND BASICS

BEYOND NUMBERS

BEYOND ANALYSIS

BEYOND LEARNING

BEYOND BUZZ

CONTENTS

Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Growing concerns over the spread of the coronavirus in China and its likely impact on global economies have rattled the stock markets around the world. It could also impact international trade to a large extent.

The earnings results of India Inc for Q3 FY20 have been in line with market expectations. Commentaries by company managements have also been indicating improvement.

In the coming fortnight, the Indian stock markets are likely to remain range-bound. The Nifty Futures is likely to remain in the range of 12,100 and 12,330. However, if the Nifty Futures crosses the 12,330 level, then the stock markets look good. Among sectors, cement looks promising.

Market participants are urged to look out for government initiatives in the upcoming Union Budget 2020 as well as how fiscal deficit will be managed by it, and the announcements in the monetary policy meet of the RBI as the markets will look for direction on inflation and interest rateS.

In the coming fortnight,the Indian stock markets

are likely to remain range-bound.

Sensex: 41,155.12Nifty: 12,119

(As on 27th Jan ’20)

5

DB CORNER

Beyond Market 16th - 31st Jan ’20 It’s simpli�ed...

CLOSERTO

REALITYFY21 could witness an economic

revival in India, taking the growth rate to nearly 6% if not more

BEYOND THINKING

Beyond Market 16th - 31st Jan ’20 It’s simpli�ed...6


The first advance estimates released by the Statistics Ministry are in line with the Reserve Bank of India’s figure of a 5% growth rate for this fiscal. The estimates are based on the growth numbers of the first two quarters of the current fiscal as well as other higher frequency data.

According to an estimate, the country’s manufacturing sector is likely to grow at 2% in FY20 as against the 6.9% in the year-ago period while the crucial agriculture sector is expected to grow at 2.8%, a tad lesser than the 2.9% of the previous year (FY19).

While a lot of discussions have centred around growth, inflation has slowly edged up and in December, retail inflation moved northward to 7.35%, which is the highest in more than five years. This is much higher than the Reserve Bank’s medium- term target of 4%.

As a result of this spike in inflation, the Reserve Bank may not impose any more rate cuts in the near to medium-term. Here, it must be pointed out that the RBI has slashed rates five times in 2019 by 135 basis points (bps) or 1.35%.

The repo rate presently stands at 5.15% while the reverse repo rate stands at 4.90%. While India Inc might continue to clamour for further rate cuts, it looks unlikely that the Reserve Bank will be in a mood to oblige corporate India, at least over the next few months; certainly not with inflation at over 7%.

The Gulf region is tense following an American strike, which killed a top Iranian general. Iran has vowed vengeance and if it strikes at American targets or America’s allies such as Saudi Arabia, then it could heighten tensions in the region, affecting terribly the global oil trade.

recent months to rejuvenate the economy are beginning to reap dividends.

Now India’s central bank, the Reserve Bank of India (RBI), has revised drastically downward its GDP growth forecast for FY20 to 5% from its earlier projection of 6.1%.

The country’s GDP growth for the first-half of the current fiscal stood at just 4.8%. Other reputed institutions, including global ones, have in recent times, reduced their growth forecasts for FY20.

Early in January, a United Nations study lowered India’s GDP growth rate to 5.7% for this fiscal from its earlier higher forecast of 7.6%. The report pegged the country’s growth in the last fiscal (FY19) at 6.8%.

For FY21, the report pegs growth at 6.6%, which is a healthy figure, though, it must be highlighted that it is much lower than its earlier forecast of 7.4%. Nevertheless, a growth rate of over 6.5% will be very much welcome indeed.

The World Bank has also lowered its India growth figure to just 5% from its earlier projection of 6% on the back of what it terms as the lingering weakness in credit from Non- Banking Finance Companies (NBFCs), which it says is a major cause for the country’s economic slowdown.

The World Bank, however, expects the Indian economy to recover, going forward, and has forecast a 5.8% figure for the next fiscal (FY21).

An interesting highlight here is that the World Bank points out Bangladesh as a bright spot and pegs its growth for FY20 at 7.2%. For the next fiscal, it pegs the Indian neighbour’s growth at 7.3%.

Are the first green shoots signifying an economic recovery in India visible? Is the downtrend in the country’s economic growth over the last nearly one-year likely to be reversed soon? Will India’s growth this fiscal (FY20) be close to the 6% mark or just be above the 5% mark?

Will it even touch the 5% mark or fall below that? And perhaps the most important question on everyone’s mind presently is - will India’s economic growth begin to pick-up, at least from the beginning of the new fiscal (FY21) commencing 1st Apr ’20. The answers will be known over the next few months but indications available now reveal that things are, perhaps, not as bad as are being made out. True, growth will be much below the 6% mark that was forecast till just a few months ago.

Growth might just about touch the 5% mark or at most be marginally a tad north of it. But given the prevailing circumstances not just domestically but also globally, a 5% GDP growth for this fiscal (FY20 ending 31st Mar ’20) would be something the Indian government will take gratefully.

Anything above that will be a matter of celebration and will vindicate the Narendra Modi-led government’s stand that the measures taken by it in


BEYOND WORDSTrue Cost Economics

True cost economics is basically an economic model that tries to include the cost of negative externalities into the pricing of goods and services. Experts feel that products and activities that directly or indirectly harm living beings and/or the environment should be taxed in such a manner that it reflects their hidden costs. If prices of goods and services do not factor in the negative externalities or the cost of harmful effects they have on the environment, people may misuse them and instead use them in large quantities without thinking about their ill effects on the environment.

A sharp spike in oil prices, which is what a military action in the Gulf region will bring about, will affect the global economy adversely.

For India, it has the potential to feed into inflation, which could then spiral to unhealthy heights in the short term. The Reserve Bank may then be forced to up interest rates which, in turn, could put the brakes on economic growth, which is the pressing need.

It may be recalled that just a few months ago, a couple of Saudi oil installations were hit, allegedly by Iran or its allies.

A war in the region leading to a sharp zoom in oil prices is the last thing the world wants at this juncture when the global economy is on the verge of beginning a slow recovery.

Things are difficult presently but the first green shoots of recovery may just have made their appearance in India in the form of a healthy Goods and Services Tax (GST) collection for two consecutive months.

The last two months of the last calendar year (2019) witnessed GST collections breaching the `1 lakh crore-mark. While in November ’19, the figure stood at `1,03,492 crore; in December the collection again was a healthy `1,03,184 crore.

Before this, it was as far back as July ’19 that GST collections had crossed

the `1 lakh crore-mark. This is the ninth time since the inception of GST in July ’17 that its collection has crossed the `1 lakh crore-mark.

GST growth in December ’19 from domestic transactions has shown an impressive growth of 16% over that of the year-ago period, that is, December ’18.

If Integrated GST (IGST) collected from imports is taken into account, the total revenue during December ’19 has moved northward by 9% as compared to the same month in 2018.

The CGST figure stood at `19,962 crore, the SGST at `26,792 crore, IGST at `48,099 crore (inclusive of `21,295 crore collected on imports) and cess is `8,331 crore (inclusive of `847 crore collected on imports).

The total number of GSTR 3B returns filed for November up to 31st Dec ’19, stood at `81.21 lakh. The government has settled `21,814 crore to Central GST and `15,366 crore to State GST from IGST as regular settlement.

The total revenue earned by the central and state governments post regular settlements in December ’19 stands at `41,776 crore for CGST and `42,158 crore for SGST.

The upward movement in GST collections in November and December ’19 is significant in that it

shows that the Indian economy is still resilient and that its fundamentals continue to remain strong.

The rise in GST collections reflects a small pick-up in consumption, which was low for the last several months and a prime reason for the economic slowdown.

Festival sales appear to have been healthy and the pick-up in consumption, although still small, augurs well for the next fiscal, which begins in April. The higher GST collections also reflect an improvement in compliance, which is very encouraging indeed.

The government over the last few months has announced a slew of measures designed to perk up consumption and help crucial sectors grow. The results of these measures should begin to kick in by the time this fiscal year ends.

The government has been proactive in dealing with the bottlenecks confronting India Inc and provided unforeseen external developments such as a war in the Gulf don’t take a hand, then FY21 could witness an economic revival in India with a growth rate of close to 6% if not a tad over it.

But in FY20, which is drawing to a close, one should not be too optimistic of a growth rate above the 5% to 5.5% rangE.

BIGPUSHIncreased infrastructure spending by the government will not only boost the sector but also buoy the economy

BEYOND THINKING

The government has shown a keen interest in infrastructure in the past five to six years. The National Highway Authority of India (NHAI) awarded infrastructure projects worth `56,400 crore in FY19 as against those worth `7,400 crore in FY14.

This is even more evident from the fact that the government recently announced that it would be investing `102 lakh crore in the next five years ending FY25 to improve the country’s infrastructure, raising hopes in the market.



• Eastern Dedicated Freight Corridor (EDFC) and Western Dedicated Freight Corridor (WDFC) fully operational with the construction of planned Dedicated Freight Corridor (DFCs): East-West, North-South, East-coast and South-West underway

• 100% electrification of the existing railway network

Power In the power sector, the government is more focussed on conventional and renewable energy. In the renewable energy space, the government plans five times jump in its investments. It plans to achieve the following: • 24x7 clean and low-cost power availability to all households, industry, commercial businesses and agriculture

• Increasing total capacity from 356GW to 619GW

• Reducing the share of thermal power in favour of renewable power

• Substantial increase in per capita electricity consumption

• Lowering AT&C losses through increased PPP in discoms

• Smart metering to be implemented for all categories of customers Urban Infrastructure In the urban infrastructure sector, the government plans to achieve the following:

• Connecting close to 100% of urban and rural households to piped-water supply

• Treating and re-using most of the waste water in rural and urban areas

According to the data presented by the National Highway Authority of India (NHAI), the total construction of national highways has improved to 9,000 km in FY18 from 6,500 km in FY16.

It is estimated that for FY19, the total construction of national highways is expected to go up to 12,000 km from 9,000 km in FY18, thanks to massive improvement in execution. This is reflected in the revenue growth of construction and road companies, which have recorded 15% to 35% growth in revenues in the past two years. Here is a detailed investment plan of the government across key sectors: a) Roads In the roads sector, the government plans to achieve the following: • Enhancing the total length of National Highways from close to 0.13 million km to 0.2 million km

• Improvement in length of Expressways from around 1,600 km to close to 20,000 km

• Improving share of private sector participation with asset ownership to tilt in favour of financial institutions b) Railways In the railways sector, the National Infrastructure Pipeline (NIP) plans to achieve the following:

• Increase the share of railways in freight traffic from 33% to more than 40%

• Healthy private sector participation with 30% of net cargo volumes, 500 passenger trains privatized and 30% of 750 stations privatized and rolling stock to come from the private sector

What needs to be seen is whether infrastructure can trigger the next rally in the markets or is this just a big bang announcement with little impact on the markets? This article attempts to answer these and more such questions. THE BASICS The government has ambitious plans for the infrastructure sector. The country’s infrastructure has to be developed to achieve high and sustained GDP growth in the coming years.

Any improvement in the infrastructure sector will have a healthy impact on infrastructure in other sectors. This is to say that it will have a multiplier effect as infrastructural development will result in increased demand for goods and services, and subsequently aid job creation. As per government estimates, total investments in the past six years ending FY19 were `51 lakh crore. Of the estimated `102 lakh crore worth investments, the centre and the state are expected to finance 39% each, while the private sector is expected to finance the remaining 22%.

Of the overall plan, 42% infrastructural projects are under implementation and will support investment in FY21-22.

Only 19% are under development, with the balance 39% at conceptual/ unclassified stage presently. These include expressways, freight corridors, interlinking of rivers and renewable energy projects. Massive execution in the order book of national highways has boosted the construction of 27 km of roads per day in FY18 from 16.6 km of roads per day in FY16.


• Using advanced scientific techniques to treat almost 100% of the municipal solid waste that is generated

• Low proportion of population living in slums with implementation of PMAY

• Metro rail transit system to be made available in more than 25 cities

Rural Infrastructure In the rural infra sector, the government plans to achieve the following: • 100% of rural population to have access to pucca houses with basic civic amenities

• Under the Jal Jeevan Mission, all rural households to have piped water supply by 2024

• 100% of rural households to have access to individual household toilets Irrigation In the irrigation sector, the government plans to achieve the following: • Increasing the irrigated land to close to 85 million hectares (close to 61% of total) from close to 68 million hectares (49% of total)

• Micro irrigation to cover 28% of total National Irrigated Area (NIA), which will lead to efficient use of scarce water

• River inter-linking to increase overall area under irrigation, domestic and industrial water supply THE WAY AHEAD The question that needs to be asked is can infrastructure companies

trigger the next rally in the benchmark indices or in broad markets in this calendar year?

There are a few fundamental reasons that highlight why infrastructure companies are likely to trigger a broader rally outside the benchmark index the Nifty 50 instead of the Nifty 50 index. Firstly, the weightage of infrastructure companies in the key benchmark index, the Nifty 50, is too low to trigger a meaningful rally.

The weightage of infrastructure companies in the Nifty is 5.8%. Hence, it does not offer much scope for infrastructure companies to enhance Nifty’s earnings.

Secondly, the rally in the Nifty can be triggered only if the appetite for Build Operate and Transfer (BOT) or asset owners in the infrastructure sector shows pronounced improvement.

High appetite for BOT projects improves credit growth in the economy as lending from banks improves. This high credit growth translates into pronounced growth in earnings of benchmark indices since banks or financials have weightage in benchmark indices. The share of BOT projects in the total awarding of NHAI came down to 14% between FY14 and FY19 from 88% between FY11 and FY14.

This fall in share of BOT projects of the total awarding by NHAI is largely due to economic slowdown, which impacted traffic estimates, stretched balance sheets and consequently, weakened the ability of companies to service interest on debt. Hence, it seems unlikely that infra companies will trigger a rally in the Nifty.

The situation is more propitious for infrastructure companies to participate or trigger a broader market rally outside the benchmark Nifty 50 index. Outside the Nifty 50 index, the weightage of infrastructure companies in indices such as the next Nifty 50, Nifty 100, and Nifty 500 is in the range of 7% to 13%. This provides a reasonably good scope for earnings’ growth in these indices given their weightage.

Hence, savvy fund managers and analysts believe that the market cannot be excessively dependent on expensive top ten quality companies by weightage in the Nifty 50 index. They strongly believe that the next rally in the market has to be broader and outside the Nifty 50 index. And in this rally, infra stocks are likely to have a stronger participation. Over 60% of the total investments in infrastructure sector are divided among roads, energy and railways. Rest all covers urban infrastructure. In these investments, close to 42% of the projects are already under implementation. This shows that the execution of order book in the present calendar year and the next fiscal is likely to see extremely high improvement. In the listed space, only a select few companies have distinctive operational factors such as high order books, superior execution capabilities, relatively lighter balance sheets, and high promoters’ holdings in their favour to merit exposure.

Larsen & Toubro, PNC Infratech, KNR Constructions, and Dilip Buildcon are companies that can be looked at by long-term investors. Investments in infrastructure are also likely to have a multiplier effect on related sectors. Hence, sectors which are proxy to infrastructure are also likely to benefiT.


Total revenues from 16 unicorns, however, increased by 86% in fiscal 2019 to `23,119 crore, up from around `12,425 crore reported in fiscal 2018. Total expenses across the 16 unicorns rose by 77% in fiscal 2019 to around `39,492 crore over `22,314.81 crore in the previous fiscal.

FUNDING

Despite the cloud over global start-up world last, funding in India did not drop significantly. Investors pumped in $11.10 billion last year, down from $11.30 billion in 2018 and $12.34 billion in 2017. Last year saw Series B, C and D rounds crossing more than $1 billion in total funding, unlike 2018, where only Series C saw over billion dollars fund flow.

Paytm, Udaan, and Delhivery were the top-funded start-ups last year beating Swiggy, Oyo and Byju’s, which were the top companies in 2018.

However, the volatile political environment punctuated with a tussle over Citizenship (Amendment) Act and economic slowdown may force global venture capitalists to keep their purse strings tight this year.

Still amid constraints, experts said, start-up investors are likely to increase the pace of investing in early-stage companies this year since many investors now have experience in creating unicorns. Also, as capital flow into venture capital and private equity will run on a 7-year to 10-year period, investments in start-ups will continue.

Experts said sectors like manufacturing and logistics will experience slower growth in the later stages while essential services like healthcare and education will be

unicorns in 2019, including online grocer BigBasket, fantasy gaming platform Dream11, logistics start-up Delhivery, eyewear retailer Lenskart, trucking logistics firm Rivigo, cloud-based contract management firm Icertis, data protection and management firm Druva, Ola Electric, the electric vehicle arm spun off from the ride-hailing platform, and Zoho, a business and productivity software firm.

Unicorn is described as a firm with over $1 billion valuation. At present, there are 25 unicorns in India with HighRadius becoming the first Indian unicorn of 2020 when it raised $125 million at a valuation of $1 billion in January.

And there is a potential to create 52 more unicorns, according to Nasscom. Though barring Oyo and Ola, none of the Indian unicorns have made a global brand appeal in the segments they operate.

There is a possibility of the emergence of new unicorns this year, especially in the B2B space, including software and robotics platform GreyOrange, payments provider Pine Labs, online car marketplace CarDekho, health tech platform Practo, online furniture company UrbanLadder, online grocer Grofers, fintech start-up LendingKart and online truck aggregator Blackbuck.

However, on profitability front, unicorns and the wannabes paint a worrisome picture.

The collective net losses posted by top 16 unicorns in India increased by 80% year-on-year in fiscal 2019 over the previous fiscal. In FY19, top 16 unicorns posted collective losses of `15,171.60 crore, up from around `8,424 crore losses posted in fiscal year 2018.

As they were looking for a bright New Year, scores of employees of Oyo Hotels were hit by a check-out call on a cold January morning.

In a sudden move, the marquee home-grown unicorn, battling headwinds in its key India and China markets, laid off about 2,400 people and planned to fire more in the year, sending ripples in the domestic start-up world.

“Oyo is doing everything it can to ensure that the outgoing colleagues receive as much assistance and support as possible through this transition,” Ritesh Agarwal, the 26-year-old founder of one of the largest hotel groups in the world, who had a ‘done-it-all moment’ with the sackings, said.

However, Agarwal will not need to help them much as most of the fired staff may find many opportunities in the domestic market that remains sunny despite the economic slowdown, charged up the political environment in India and troubles at global start-ups, highlighted by the issues at WeWork and fiasco of the Uber IPO.

So, how will the dawn of the new decade fare for start-ups?

UNICORNS

Year 2019, especially the first half, was a good year as India created nine


evergreen will see strong momentum, though non-essential sectors such as furniture may experience a funding crunch.

Fintech was the top-funded sector last year with $2.5 billion fundraising, closely followed by transportation and logistics, which raised $2.05 billion while e-commerce remained third. Software-as-a-Service (SaaS), which has never figured in the top ten funded industry for the last three years, entered the top ten.

According to a report by Venture Capital firm InnoVen Capital, the quantum of funding secured by early-stage companies doubled last year at `693 crore in 2019 compared to `334 crore in 2018, on the back of a 22% increase in the number of deals and a 70% jump in deal size.

The competitive intensity in early-stage start-ups has gone up, with a large set of institutional and angel investors looking to find the right opportunities, Innoven Capital said, adding that the trend is only expected to continue this year. ROAD FOR EXITS

While the number of unicorns is rising, profitable exits remain elusive for investors, with the last year even seeing a fire sale of a former unicorn Shopclues to Singapore’s Qoo10 Pte Ltd. Shopclues had a valuation of $1 billion in 2016, which dropped to $80 million post the deal.

Since most of the start-ups in India, including notable ones like Oyo and Ola, do not meet the three-year profitability criterion for coming out with an initial public offering, that route is largely barred. However, profitable SaaS companies have an option to list this year. While experts see about 10-20

unicorns going for IPOs ahead, a Reserve Bank of India study of 1,246 ventures finds that nearly 58% of Indian start-ups are planning to list on the domestic bourses in the coming five years.

A majority of these start-ups aiming for listing belonged to healthcare, software development, and IT consulting sectors and were started less than three years back.

FINTECH

Amid the funding boom, Indian fintech start-ups are likely to see a relatively tough 2020 as competition and consolidations grow and the number of financial fraud cases sees a spike.

While last year saw the emergence of new verticals such as neo-banking, enterprise accounting for small businesses and a jump in digital payments, many fintech start-ups struggled due to NBFC liquidity crunch.

Also, the fund flow is skewed towards winners, and with too many copycats, consolidation is on the cards. Among segments, insurance is likely to see strong growth and fund flow this year.

DESTINATION

Hyderabad may emerge as a big start-up destination this year with T-Hub’s investments into the ecosystem and the presence of firms like Jay Robotix, True Push, Neeman’s, AuthBlue, and SkinCraft, The city is likely to get more attention than before, which will further encourage new firms and talent to relocate.

Bengaluru regained its top spot in funding in 2019 as it raised $4.3 billion with 273 deals when

compared to Delhi, which raised only $1.3 billion in 73 deals.

EDUCATION TECH

Despite the sizeable number, all start-ups in the education space, including upGrad, Avani Learning, Byju’s, and InterviewBit, are likely to see growth.

As focus grows on skilling and up-skilling workers, start-ups that teach, train and engage the working population in improving their skills will do very well. The popularity of platforms like TikTok and YouTube will see a trend of content creators delivering educational content on OTT platforms to improve discoverability, reach and scale.

Also, Artificial Intelligence will be used to improve pedagogy. Regional language learning will be one of the biggest trends this year. Learning programmes that cater to non-professional interests, or those that work with passion projects and hobbies, will see a rise, say experts.

EMERGING TRENDS

Remote Healthcare that involves solutions for tracking and monitoring a person’s health in real time using scalable technologies would see traction this year. Many start-ups are set to focus on retail distribution and supply chain management as distribution and delivery has emerged as a key need of businesses across the board.

Start-ups that can bring out content consumption behaviour analytics and provide the new-age firms with insightful solutions will emerge this year. Workspace as a Service, where start-ups and established corporate will not only be able to plug and play in terms of infrastructure but will also get to collaborate using shared


teams, will emerge this year. Experts also see markets deepening in the digitisation of small and medium enterprises, financial services and education, which were also among the top themes last year.

The first year of the new decade is likely to put a stronger focus on India versus global, while SaaS and core technology companies that target markets outside India continue to scale.

E-commerce giant Amazon upping its game with the sourcing of fresh produce from farmers in the grocery delivery business, and increasingly

promoting its own products in categories that do well on the platform is set to turn a new flashpoint, especially after the Union Minister voiced concerns over it.

CHALLENGES

Even as funding grows, the financial metrics and growing competition among the new-age firms remain a worry. As the number of companies multiplies and huge money is ploughed in, there is no clear path to how they would ever generate big profits.

While early-stage start-ups will see

growth, late-stage start-ups are likely to be scrutinized closer this year. And this cannot be attributed to the WeWork effect alone with several start-ups like Dunzo, Grofers and InMobi are filing for losses that raises the question on their profitability.

Investors are cautiously bullish on the Indian start-up ecosystem and are focusing on more capital-efficient business models. According to several start-up founders, investors have started scrutinizing deals closely and looking at unit economics, margins, and profitability more closelY.


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from 10% in FY18 to around 13% in FY19. But, credit growth for November stood at just 7.2%.

Some credit growth in the retail segment is visible, while credit growth to industry and services is muted. Loan growth has been skewed heavily towards large borrowers. There is some risk aversion by banks.

Banks prefer parking money with the RBI rather than lending it to the various sectors of the economy. Unavailability of credit can impact economic activities. As such a slide in economic growth will also mean lower credit growth.

However, deposits with banks are growing at a healthy 10%. This means that banks will have to eventually lower their lending rates. Lower lending rates can lead to more credit growth in the system. But this is subject to improving sentiment in the economy.

Bottom line: Weakness in credit growth may persist in 2020.

NIMs & POLICY TRANSMISSION

Surplus liquidity in the system, coupled with a loose monetary policy stance of the RBI, has translated into lower cost of funds for banks. Since, deposit growth is healthier, banks have opted to cut deposit rates before lowering lending rates. This has saved their NIMs.

To illustrate, the RBI has cut the repo rate by 135 basis points (bps) in 2019. But banks have transmitted just around 40 bps to borrowers: private banks have transmitted even lower than PSBs. On the contrary, banks have undertaken a cut in deposit interest rates across maturities.

net interest margins (NIMs) – difference between what a bank earns by lending and spends by taking deposits. Also, 7 out of total 12 banks have exited the RBI’s prompt corrective action (PCA) framework in 2019.

But, all through, there existed a trust deficit in the system. Depositors worried about the safety of their deposits, while banks were selective while lending. They feared delinquencies in agriculture, retail, and real estate portfolios in 2019.

With this as the backdrop, what’s in store for Indian banks (schedule commercial banks) in 2020? RBI’s financial stability report (FSR) and Trends and Progress report on Indian banking, both released in December ’19, can help assess the past and crystal-gaze the future for the banking industry.

Here’s how a few banking parameters may look like in 2020.

CREDIT GROWTH

Incremental lending will be the biggest challenge for banks in 2020. To be sure, credit growth improved

Indian banks have exited 2019 on a negative note. Latest data show that credit growth for scheduled commercial banks has decelerated to 7.2%, a multi-year low. Another negative is the sharp fall in economic growth to 5%, which can limit credit uptake and recovery efforts of banks in the future.

Clearly the undercurrents are weak for banks even as the year gone by had some positives. Take for instance, 2019, which saw acceleration in recognition and resolution of stressed loans. Upfront recapitalization of public sector banks by the government to the tune of `70,000 crore was another positive.

Banks could also keep healthy their

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

H1FY

20

Outstanding Deposits - ` bn - LHS Deposit Growth - in % - RHS

Movement In Deposits

Source: CMIE, RBI


Since banks have shifted to external benchmarking of lending rates, which is expected to be more receptive to policy rates, the year 2020 may see further policy transmission, while banks may retain their margins in the range of 2.5% to 4% as in 2019. Bottom line: With no compulsion to transmit policy rates in the absence of credit growth, banks may see NIMs sustaining in 2020. ASSET QUALITY AND HEALTH

On one hand improving NIMs have ensured profits for banks, on the other hand lower slippage of bad loans have ensured lesser money set aside for provisioning.

Thanks to Insolvency and Bankruptcy Code (IBC) and other reforms even recovery from bad debt has improved in 2019. Higher profits have lead to better capital position of banks. All this has translated into healthier banks.

For instance recovery from bad debt has improved due to IBC to 43% as against 26% in pre-IBC days. The gross non-performing assets (GNPA)

ratio has fallen from 11.7% in 2018 to 9.3% in September ’19.

Provision coverage ratios (PCRs) – money set aside for bad debts – have improved from 60.5% in September ’18 to 61.5% by September ’19. Capital adequacy ratio (CAR) is expected to be around 14% by March ’20 as against the RBI mandated 11.5% for all commercial banks.

Clearly, banks are healthier today as compared to few years back. But will this trend continue in 2020 as well?

There are some red flags. Experts caution the next wave of bad debt crisis may emerge from agriculture, retail, MSME, real estate and Mudra loans. Reflecting this caution, the RBI expects GNPA to be 9.9% by September ’20 from 9.3% last year.

Bottom line: Banks are not out of the woods as far as bad loans are concerned. Banks will have to watch out for any slippage in the mentioned portfolios.

NEW MARKET STRUCTURE, PSB CONSOLIDATION

The domination of PSBs will

continue to be challenged by private banks in 2020. In recent years, private banks have been garnering higher share in incremental lending and deposits.

For instance, every `100 loan advanced in 2019, `70 came from private bank. The share in overall credit outstanding of PSBs has fallen from 75% in 2012 to 60% in 2019. The share in the deposit of private banks has gone up from 19% in 2012 to around 30% in 2019.

Additionally, the government has announced a merger of 10 PSBs into 4 banks. Clearly, the government wants more of bigger banks than too many smaller banks. This will lead to consolidation of PSBs.

Bottom line: The trend of market share (in credit as well as deposit) shifting from PSBs to private banks is likely to continue even in 2020.

IN A NUTSHELL

No doubt banks in India have entered the year 2020 on a low note on various fronts. By capitalizing banks upfront, the government has made right choices.

But, more reforms and policy support is needed for banks to stick out their neck and lend.

After all, banks are the fulcrum over which the economy moves. If India wants to be a $5 trillion economy, support of banks is needed.

While banks may sustain NIMs, the core business of lending is unlikely to pick up due to weak sentiment in the economy.

After improvement in health of banks in 2019, it is important to see if banks are able to sustain that momentum in the year 2020.

Movement In NIMs

2.3% 2.2% 2.2% 2.2%2.3%

2.3%2.4%

3.4%3.5%

3.4%3.4%

3.3% 3.3%3.3%

2.6% 2.5% 2.5% 2.5% 2.6% 2.6%

2.7%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

Y15 Y16 Y17 Y18 Y19 H Y19 H Y20

PSBs PVB SCBs

SUSTAININGTHE FUTURE

Favourable monsoon and increased rural spend are likely

to bene�t the agrochemicals industry in the country

BEYOND THINKING



and 20%, respectively.

The share of insecticides declined from 69% in FY04 to 54% in FY17. There are a number of factors causing this fall. These are increase in horticulture production and rising rural wages.

These factors have led to significant changes in the consumption pattern in other categories of pesticides such as herbicides (also called weed- killers) and fungicides (chemicals which kill fungus that obstruct growth of crop).

There has been an increase in the consumption of herbicides and fungicides owing to factors such as rise in horticulture production, labour cost, contract manufacturing, and exports.

Horticulture production in India is higher than the production of foodgrains. This is mainly due to the government push to encourage and promote exports and provide better returns on investments for the vast majority of farmers in the country. It must be noted that sales of herbicide and fungicide are still lower than insecticides. But sector analysts believe that in the near future sales of herbicide and fungicide will grow.

It has been observed that a large number of farmers deploy manual labour to clear weeds. With rising costs of labour and increased awareness, herbicide usage is set to increase significantly.

The share of fungicides in total agrochemical consumption in India has expanded in recent years on the back of higher horticulture production.

It has grown at a CAGR of close to

domestic agrochemical market recorded a CAGR of close to 7.5%, while exports rose at a higher CAGR of close to 13.5%.

Analysts tracking this sector expect the demand for agrochemicals to increase at a CAGR of 8% to 10% in the next two fiscals ending FY21. In India, the consumption of pesticides is largely concentrated in cotton and rice-producing states.

The top five states account for more than 65% of the domestic consumption. The states which were untouched by Green Revolution lag behind those states, which benefited from green revolution.

States such as Karnataka, Rajasthan, Bihar and Madhya Pradesh did not benefit from the production growth resulting from pesticides-infused Green Revolution.

On the other hand, Indian states such as Maharashtra, Telangana and Punjab have high pesticides per hectare usage, higher than the national average.

This is one of the key reasons as to why agrochemical companies are focused on those states that have benefited from Green Revolution. According to various estimates, the domestic market consumed over 62,000 MT of technical grade pesticides in FY18.

Farmers used a few prominent agrochemicals such as Acephate, Chlorpyrifos, Imidachloprid, Glyphosate and Acetamiprid. In India’s crop protection market, insecticides form the largest share. It accounted for 54% of the pesticides consumed in FY17. Fungicides and herbicides accounted close to 21%

Good monsoon in 2019 has enhanced the prospects of earnings in rural India. One of the sectors that could benefit is agrochemicals.

India’s agrochemicals industry has traditionally been one of the important indicators of the direction in which the country’s Gross Domestic Product (GDP) and economy would move.

It is estimated that the agriculture sector contributes close to 15% to the country’s GDP.

Hence, it is important to understand what changes have been transpiring in the industry as doing so will enable us to know the earnings prospects, the pattern of the GDP and economic growth to a considerable extent.

Let us understand these aspects in detail through India’s agrochemicals or crop protection industry. THE BASICS India is the fourth largest producer of agrochemicals globally. The country’s crop protection market has recorded a Compound Annual Growth Rate (CAGR) of close to 11% in the past five years to `39,500 crore in FY19. Nearly 56% of India’s crop protection market’s products are from exports.

In the past five years, the size of the


3.5% over 2011–19. This increase was aided by the shift in focus of several farmers from cash crops to fruits and vegetables.

Further, with government support for increasing horticultural production, fungicides are expected to grow at a faster pace than the overall crop protection business.

Let us understand the business situation in terms of imports and exports. As regards exports, due to low manufacturing costs, India has become one of the largest agrochemical exporters globally.

Over the years, India’s generics exports and contract manufacturing have increased significantly. The quality of products manufactured and the expertise available in the country are comparable to the best in the world.

India exported agrochemicals worth `22,000 crore in FY19 to more than 150 countries. This makes India the fifth largest pesticide exporter.

Also India’s agrochemical exports increased at a CAGR of close to 13% by quantity and close to 20% by value between 2011 and 2019.

The share of insecticide exports declined from 51% in 2012 to 34% in 2019 due to increased herbicide exports during this period. Now, as regards imports, India is among the top 10 countries, which imports agrochemicals heavily. India imported agrochemicals worth $926 million during 2019 from around 40 countries. This was largely raw materials and technical products.

Import demand increased 10% in terms of quantity and 16% in terms of value between 2011 and 2019. It must be noted that the top five

importing nations constitute close to 47% of India’s exports. Analysts say that import volumes are likely to decline with the promotion of the ‘Make In India’ policy encouraging indigenous manufacturing, and supply chain issues from China forcing companies to pursue backward integration and reduce their dependence on China.

This is important because more than 52% of India’s imports are from China.

THE OPPORTUNITIES Given these facts, analysts and sector experts believe that India’s agrochemicals or crop protection market has quite a few opportunities for growth in the coming quarters. These are: The China Factor The Chinese government’s environmental clampdown has led to the closure of environmentally non-compliant agrochemical manufacturing facilities. This has resulted in short supply of key technical and intermediates over the past two years.

Besides, there has been a sharp increase in their prices in the international market. This provides strong opportunities to Indian players who are technically well-equipped and have backward integrated facilities. The Domestic And Global Factor Back home, there is a favourable regulatory environment. Pesticide production was included in the ‘Make In India’ initiative. This will help increase self-reliance and Research & Development (R&D) of pesticides, thus benefitting Indian

agrochemical companies.

Also, the government changed registration policy to reduce imports and boost domestic manufacturing. This will further boost domestic production.

Domestic agrochemicals are likely to benefit from global agrochemical demand, which is expected to grow close to 3% in the next five years.

The Government’s Policy The government has very high focus on agriculture to drive domestic consumption. The focus on doubling farmer’s income by 2022 will result in higher Minimum Support Price (MSP). Besides, the government has clearly shown its commitment in considerable public investment for improving rural infrastructure.

These include awarding higher number of irrigation projects, increased crop insurance coverage, and raised agricultural credit.

Many feel these efforts are likely to boost crop yields and farmers’ awareness regarding crop protection benefits. This will drive domestic demand for agrochemicals products. Given these facts, it is quite evident that the industry is experiencing a structural shift.

Analysts have high inclination towards companies, which are backward integrated, have strong domestic presence, robust product launch pipeline, tie-ups with innovators for new products, and growing exports market.

This clearly shows that the industry is set to benefit from increasing rural income and good monsoon, which in turn will boost demand for agrochemicals productS.

READYING FOR tomorrow

Year 2020 will be driven by technological advancements in the area of AI and machine

learning as well as automation, 5G and blockchain, among others

BEYOND THINKING

Year 2020 is here. And it brings with it

decade.

Artificial Intelligence (AI) and machine learning (ML) will be even more popular among businesses, which want to boost productivity, increase customer engagement, or drive digital transformation.

According to research and advisory firm Gartner’s 2019, AI and ML Development Strategies survey, 59%

new technology trends. Some of the trends are at the global level right now; others are visible in India. Machines are taking over tasks right from window cleaning to inventory management. No wonder, taking over of jobs by robots is definitely a trend to watch out for. It is predicted that a lot of people with transaction-based jobs or businesses will be forced to change careers by the end of this



organizations have automated at least 20% of the service desk work and some have automated up to 80%. However, there are still many processes that can be automated. The global market for Robotic Process Automation (RPA) services will reach $7.7 billion in 2020 and will grow to $12 billion in 2023, “propelled by a need to establish governance and operating models around RPA platforms,” says Forrester.

“RPA is a form of business process automation that allows anyone to define a set of instructions for a robot or ‘bot’ to perform,” says Aaron Bultman, Director of Product at Nintex. “RPA bots are capable of mimicking most human-computer interactions to carry out a ton of error-free tasks, at high volume and speed.” RPO can be used to automate repetitive, high-volume tasks.

“My prediction is pretty simple: More RPA bots will be deployed in all industries where manual, repetitive actions are being performed by human resources,” says Vishnu KC, Senior Software Analyst Lead at ClaySys Technologies.

Forrester, however, warns that automation can be hazardous. In a report titled, ‘Beware The Automation Paradox,’ Forrester warns that automation can be “like a chainsaw in untrained hands.”

The prime example of this is the two crashes of the Boeing 737 Max. The cockpit crews did not understand what the automated system was doing because the development and implementation of these automated systems neglected to take into account that humans must step in when they cease functioning. “This is why every automated system must be designed with humans at the center,”

adopters of AI technology because such companies would have an edge over their competitors.

In the year 2020 autonomous things too will take off. Autonomous things are physical devices that use artificial intelligence to automate functions previously performed by humans such as robots, drones, autonomous vehicles, and appliances. Autonomous things use Artificial Intelligence to deliver advanced behaviours that interact more naturally with their environments and with people. An example of this is autonomous driving, which is gaining traction though fully autonomous driving is still not possible.

Technology for understanding detailed road conditions by AI is being developed by companies such as Prophesee (France), Perceptive Automata (US), and Humanising Autonomy (UK), which will help in achieving fully autonomous driving in 2020.

Automation is another technology, which will progress in 2020. Thanks to automation, the US today has 18 cashierless Amazon Go stores, which is expected to reach 3,000 stores by 2021.

Research firm Forrester’s report titled ‘Predictions 2020: Automation,’ predicts that over 1 million knowledge-work jobs will be replaced in 2020 by software robotics, virtual agents, chatbots, and machine-learning-based decision management. The good news is that around 3,31,500 net jobs will also be added to the US workforce in 2020. These would be human-touch jobs that require intuition, empathy, physical and mental agility.

Forrester estimates that most

of respondents said they have deployed AI, and those companies that have, on average, are running four AI or ML projects.

Big corporations such as Apple, Amazon, Facebook, Google, and Microsoft have been acquiring AI and ML companies for a decade and with good reason too. AI is now part of our everyday lives thanks to technologies such as Alexa, Siri and Google Assistant.

In 2020, AI will be used big time in manufacturing thanks to emotion recognition and computer vision. US start-ups such as Kindred have started using AI technologies for manufacturing.

Robots are already being used for manual and tedious tasks. In the year 2020, we could see robots taking on semi-skilled and skilled work as well such as filling forms, creating reports, making animations, giving instructions, etc. The world is moving from partial automation to complete automation. A study predicts that in Japan, by 2025, more than 80% of elderly care would be done by robots and not caregivers.

Companies that are not known adopters of AI are expected to rethink their decision. Industries such as waste management, oil and gas, insurance and telecommunications are expected to start using AI technology.

In fact, companies which don’t adopt AI could see tough times in the future because AI is known to increase productivity, operational efficiency gains, market share and revenue.

In 2020, AI will no longer be limited to industries within the Silicon Valley. Investors in the stock market would do well to watch out for new


says Forrester.

Gartner has highlighted another trend called hyperautomation, which is the combination of multiple machine learned, packaged software and automation tools to deliver work. While automation will be a huge trend in 2020, there will be no large scale job losses as expected by some because the adoption of automation takes time.

5G is another technology to watch out for. This Next Gen technology gained some traction in 2019. 5G is an upgrade to 4G but it is better because of its ability to enable connectivity amongst a wide variety of devices and services such as smart-home devices, Internet of Things, and smart cities.

The technology can possibly support a million devices per square kilometre when compared to 4G that supports up to 1,00,000 devices per square kilometre. 5G is expected to

deliver 10 Gbps of average download speeds on a handheld device, higher than 8 Mbps to 10 Mbps available on a 4G network.

In April ’19, South Korea became the first country to deploy 5G on a large scale. India is looking at deploying 5G technology too. Telecom companies and equipment makers such as Bharti Airtel, Reliance Jio, Huawei, Ericsson, Nokia and Samsung, have conducted initial 5G tests. However, given the delay in spectrum allocation, the technology is not expected to reach consumers for another two years.

5G technology is expected to be a game changer. Mobile networks based on 5G technology are expected to give a push to self-driving cars and smart city projects. According to a report by Deloitte, 5G will fuel the growth of digital economy in India. “While 4G was a clear upgrade in technology from 3G, 5G is more

focused on incremental enhancements on existing Long Term Evolution (LTE) technology, thereby allowing operators to evolve their LTE networks. As telcos are deploying these enhancements on LTE, new service dimensions are opening up. This incremental approach makes the transition logical and telcos are already on the path to 5G,” the Deloitte report said.

In 2020, the Indian government will begin spectrum allocation, which will allow telecom companies and equipment makers to conduct full-fledged trials. But given the fact that telecom companies in India are struggling with low revenue, it will take years for this technology to reach masses.

In China and South Korea, operators like AT&T, China Mobile, SK Telecom, Sprint, and Verizon are deploying 5G networks. Australia, Argentina, Canada and Japan will also deploy 5G technology this yeaR.

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RIGHTBITE

RIGHTBITE

QSR chains defy slowdown with steady growth

BEYOND THINKING



countries such as Nepal, Sri Lanka and Bangladesh. On the other hand, rivals Burger King and Westlife Development Ltd are confined only to India, with Westlife operating only the South and West India business of McDonald’s, industry experts said. In India, QSRs have shown faster growth trends as compared to other consumer categories. The Indian QSRs provide a multi-decade growth opportunity, with global brands exhibiting strong scalable and profitable franchises. In fact, the total fast food market is pegged to be around `162 billion. Even amid a slowdown, while consumer companies have taken a toll in sales growth, growth across QSR players has moderated but appears to be steady, experts feel. Moving strong on the growth path, Westlife reported a healthy same-store-sales growth (SSSG) of 7% in Q2 FY20, over a high SSSG of 25.7% in the same quarter, last year.

The company’s revenue grew 13.3% to `396.53 crore as it continued to execute strategies to deliver improved customer experience and provide everyday value to consumers. The company also maximized operational efficiencies and reported more than 200 basis points jump in Restaurant Operating margins. The net profit of the company jumped by 217.5% in Q2 FY20 to `12.91 crore.

Amit Jatia, Vice-Chairman of Westlife Development Ltd said, “We are pleased to report strong financial results despite market headwinds. Over the last few years, we have constantly anticipated our customers’ needs, substantially innovated on menu, launched the Good Food journey, maximized efficiencies and integrated technology across our

Shyam S Bhartia, Chairman and Hari S Bhartia, Co-Chairman, Jubilant FoodWorks, said, “In the face of a challenging external environment, we are glad to report that our strategy of offering value for money and superior customer experience has resulted in a strong, double digit revenue growth, along with a sequential improvement in margins. We believe that the Indian food services industry is structurally attractive and we have the right strategy and levers in place to help us drive profitable growth.” Commenting on the performance for Q2 FY20, Pratik Pota, Chief Executive Officer and Whole-time Director, Jubilant FoodWorks, said, “We delivered a strong performance in Q2 FY20 with a revenue growth of 12.1% and a sequential improvement in margins. We stepped up the pace on network expansion, opening 40 new Domino’s Pizza stores during the quarter, the highest in the last 15 quarters. Other emerging growth drivers such as in Bangladesh, and Hong’s Kitchen also recorded a strong performance.” While the entire QSR segment is performing well, Jubilant FoodWorks is performing better than its peers in this segment. Other than the aforementioned reasons for Jubilant’s success in the QSR segment, Jubilant also enjoys larger penetration in tier-I and tier-II towns as compared to its peers.

On the other hand, Westlife Development Ltd and Burger King are more concentrated in metros. In smaller towns, profit margins may continue to be good due to lower costs, but revenue per store is likely to be lower.

Moreover, other than India, Jubilant FoodWorks also has rights for Domino’s franchises in neighbouring

While most sectors in the country have witnessed a significant slowdown, the fast food business in India continued to perform well with companies like Westlife Development Ltd, Burger King and Jubilant FoodWorks, reporting strong performance. Industry experts said the trend is likely to continue in 2020 as well. According to experts, Quick Service Restaurants (QSRs) with mass-target audience and the ability to attract the younger generation are performing better than restaurants focusing on the niche segment.

Players like Jubilant FoodWorks, which operates Domino’s and Dunkin Donuts’ India businesses, Westlife Development Ltd, owner of Hardcastle Restaurants Pvt Ltd (HRPL), the Master Franchisee of McDonald’s restaurants in West and South India, Burger King have got strong unit economics, better profitability and the ability to invest for growth. Margins of these companies have scope to expand further in the coming years. Jubilant FoodWorks has reported a double-digit growth and a five-year sales CAGR of 15%, which is double the rate of other consumer staple companies. Jubilant has also expanded its network faster than peers Westlife Development, which operates McDonald’s restaurants in South and West India and Yum! Brands, which manages KFC, Pizza Hut and Taco Bells, experts said.


business. This has helped us create a solid foundation and navigate challenges effectively. We will continue to delight our customers and move ahead on our growth journey to achieve our Vision 2022.”

GROWTH COMPARISON

Growth across QSR brands has been stronger than most consumer categories, with both QSR and the chain market growing at 18% CAGR over the last five years. Jubilant FoodWorks and Westlife have recorded a five-year CAGR of 15% and 14% accordingly while consumer staples grew around 7%, thereby making QSRs an extremely attractive play in the consumer space.

SSSG trends across QSRs have been more volatile but longer-term trends indicate growth has been faster than most consumer goods. After strong SSSG of 15% in FY18 and FY19, growth across QSR players has moderated but appears to be steady, compared with other consumer categories despite high comparables and demand slowdown.

Both Jubilant FoodWorks and Westlife reported mid-single-digit SSSG in H1 and the demand trend is likely to remain steady even in Q3. Due to strong growth and a healthy new store expansion, double-digit sales growth momentum is likely to sustain across QSRs. Lower comparables from Q4 are also likely to benefit, which may surprise SSSG positively. Though average revenue per store for Jubilant FoodWorks is lower at `2.9 crore than `4.9 crore from Westlife Development and `4 crore for Burger King, capital expenditure required for Jubilant is lower, resulting in higher fixed-asset returns.

Store operating margins for Jubilant

FoodWorks is more than 20%, the best in the industry due to higher gross margins and better scale efficiencies. Also, Jubilant enjoys a higher presence in tier-I and tier-II towns than its peers.

Despite this, unit economics and operating profitability are better than Westlife and Burger King, which have a richer mix - more concentrated in metros.

Westlife Development Ltd and Burger King have 70% stores in metros while Jubilant has 60% of its stores in metros, which record higher store revenues than smaller towns. Although profit margins in smaller towns may continue to be good due to lower costs, revenue per store is likely to be lower.

Cost comparison indicates Jubilant’s overhead spends excluding advertisement and promotions are lower than Burger King but marginally higher than Westlife, as proportion to sales provide some scope to expand margins in the future.

However, Jubilant’s average cost of employee is surprisingly higher than both, despite its higher presence in smaller towns. This can possibly be due to the steep inflation in delivery employee wages due to food aggregators.

Royalty is largely the same for all three players. But store opening fees are higher for Burger King at $15,000 till FY18, rising up to $35,000 by 2022. Westlife’s opening fees was $20,000. Though Jubilant has not disclosed its store opening fees, it may be around a third of these.

Yum! Brands, which operates Pizza Hut, KFC and Taco Bell restaurant chains in the country, saw lower sales

growth compared to its peers. Pizza Hut plans to set up 100 new stores in India this year after a flat 2019 due to multiple challenges including slowing consumption. Last year, it had opened only 35 new stores.

For the last reported third quarter ended 30th Sept ’19, Pizza Hut India had reported a slower sales growth of only 2%. India contributes 1% to Kentucky-based Yum! Brands’ global sales. There are 460 Pizza Hut outlets in India, and dine-in accounts for more than half its revenues.

While its store operations are split more or less evenly between franchisees RJ Corp-owned Devyani International and Sapphire Foods, Pizza Hut India manages marketing, operations, strategy and supply chain. The firm is expanding touch points, upgrading delivery and apps and working on sustainable growth. ETHNIC QSR BRANDS

Ethnic cuisine and QSR chains like Haldiram and Bikanervala have also been reporting strong growth for the last several years. These chains will increasingly be present in organized and hygienic set-ups.

Haldiram and Bikanervala are a case study for the marketing of ethnic food to customers in an organized set-up. Both have successfully transitioned from small-time sweet shops to full-fledged QSRs. Their success has inspired others to expand and increase penetration across Indian cities.

Goli Vada Pav is a classic example. Goli Vada Pav started its operations in 2004 with a single store in Kalyan, Mumbai. Since then Goli Vada Pav has become the largest chain of ethnic QSRs with over 300 stores in 100 cities and 20 states in India, according to a Technopak reporT.


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MOVINGSLUGGISHLYFMCG companies tweak product mix

and cut prices to drive sales

BEYOND THINKING



the pattern of consumption, going forward. One is the mix of the portfolio, which companies enjoy between super-premium, premium and mainstream products. According to Suresh Narayanan, Chairman and Managing Director, Nestle India, the company will be expanding its portfolio, but will execute it judiciously by combining premiumization with more mass-oriented products, in a bid to de-tangle growth from the grip of a slowdown.

The second factor is the demand for a variety of products that consumers seek at different occasions. Nestle India focused on aggressive innovation and renovation programme that have had on 61 products in the last three years an increase of three times the company was innovating earlier. The pace of innovation is going to play an important part, said Narayanan.

Third is consumer centricity of a brand. Those companies which are more consumer-centric and anticipate products that consumers might need are ultimately going to win the game with their agility and responsiveness, he added.

Today’s consumer, whether rural or urban, is seeking not just good price value but also trustworthiness and sustainable quality. Consumers are looking at brands that are relevant to them. Narayanan further said since Nestle has only 20% to 25% exposure to the rural markets, and a strong presence in small towns apart from the urban centres, coupled with better aspirational products, it has managed to sail through tough times.

A number of companies are said to be going back to focusing on the core. L’Oreal India, which had ventured into low-unit-price packs a

powder and milk also dropped in the same period.

PERFORMANCE OF FMCG COMPANIES

HUL which had seen an 11% revenue growth for the first nine months of 2018, saw revenue growth slipping to 7.5% in the same period in 2019. Dabur’s revenue growth declined to 6% for the first nine months of 2019 from 10.2% year-on-year (y-o-y). Nestle also saw growth rates slip over 400 basis points.

Experts said FY20 was likely to be the year of worst revenue growth for India’s FMCG sector since 2000-03. The liquidity squeezes, slowdown in the agri-sector, uncertainty over sustainable incomes and job stability have made people cautious about their consumption habits. Taking this into account, market research firm Nielsen revised the growth forecast for the Indian FMCG sector to 9% for calendar year 2019, from the earlier forecast of 11% to 12%.

STRATEGIES

FMCG companies are now focusing on tweaking product mix to lure customers and are offering discounts.

The country’s largest FMCG company by revenue, Hindustan Unilever (HUL), which is already well entrenched in both urban and rural India, continue to focus on both premium segment as well as affordable segment to make its presence felt across categories. Players like Nestle India that have a greater emphasis on urban market (75% of its sales) than rural, are looking to strengthen its portfolio mix with a clear focus on the core.

Experts said three factors will define

To mitigate the impact of the slowdown, Fast Moving Consumer Goods (FMCG) companies are redefining their product and marketing strategies, trying to lure customers to loosen purse strings. However, it would take at least six months for FMCG companies to see a revival in the sector, experts opined.

FMCG companies are likely to continue facing headwinds of an economic slump for at least another six months as revival is only expected after Q3 FY21, experts said adding that companies were tweaking product mix to boost sales and ride the slowdown.

“With few definite signs of improvement in the economy in the myopic future, we do not expect much improvement in Indian FMCG sector until Q3 FY21,” said a recent report by ratings agency CARE Ratings.

While categories such as dairy and consumer goods are under pressure, the personal care category is expected to bear most of the brunt of the demand slowdown and its revival is expected at least after the next six to seven months, the report added.

The production growth of products such as soaps, hair dye, hair oil and toothpaste has fallen sharply from Q2 FY19 to Q2 FY20. In the dairy segment, production of butter, milk


few years ago, has withdrawn the sachet strategy and plans to remain focused on the premium play. SLOWDOWN

Rural India, which accounts for 37% of overall FMCG spends, has historically grown at almost twice the rate of urban India. But in 2019, rural growth hit a seven-year-low. And, this was a cause of concern for several FMCG companies. “Market has witnessed a slowdown in the quarter, particularly led by rural. The rural market was to grow 1.3-1.4 times, urban has only been growing 0.5x of urban,” said Srinivas Phatak, Chief Financial Officer, HUL.

Godrej Consumer, which manufactures products like Goodknight and Cinthol, said that it was disappointed by growth in rural markets but was optimistic about recovery. “Rural has been marginally ahead of urban and so in that sense it has been a disappointment. Typically, we like to see rural at 1.4x-1.5x urban growth … rural has been a challenge,” said Vivek Gambhir, Managing Director and Chief Executive Officer, Godrej Consumer Products Ltd.

Even historical drivers of growth in the FMCG industry showed a decline during the year. Small packs, which make up 25% to 30% of overall sales for FMCG companies, showed a decline in volume growth on a y-o-y basis. According to research firm Nielsen data, three out of the top five high contributing categories for small packs have seen a decline in overall volume growth.

Small pack categories for segments such as biscuits, soaps and potato chips saw a decline in volume growth in the January ’19 to July ’19 period on a y-o-y basis. In such a scenario, FMCG companies turned

with relief to benign commodity prices, especially palm oil prices.

They were happy to pass on benefits they received from this corner to the consumer in the form of price cuts, if it would translate into higher volumes. For instance, HUL, GCPL and Wipro Consumer Care cut prices between 4% and 6% in the soaps category. A few of the players even offered bulk pack discounts and promotions to drive volumes.

However, for a full-fledged revival in the sector, tweaking product mix is not enough. A lot would depend on government initiatives in the forthcoming budget to be announced on 1st Feb ’20, which will play a major role in shaping consumer sentiments over the course along with the way monsoon pans out.

Government measures such as tax rate cuts - including GST and personal income tax and announcements in the upcoming Union Budget 2020-21 in favour of rural economy will play a crucial role in uplifting consumer sentiments and bringing demand revival.

Moreover, the government also needs to look into improving rural infrastructure such as roads, electricity and power, among others, as FMCG companies reel under challenges posed by distribution. One of the largest FMCG companies considered to have the largest rural penetration has a reach of about 50,000 villages, while India has close to 7 lakh villages, showing how underpenetrated rural India is, the CARE report said. Parle Products, makers of Parle-G and Hide & Seek biscuits, said a full-fledged recovery should come by the second or third quarter of the next calendar year, but inflation could be a dampener. “We have seen

some green shoots post Diwali such as improvement in sales from low single digit to mid-single digit,” said Mayank Shah, Category Head at Parle Products. “It should reach normal level in another 4-6 months. Inflation is right now the only major concern.”

The share of purchase of FMCG products from e-commerce is, however, on the rise as consumers preferred shopping from the comfort of their homes and getting the products delivered to their doorstep.

Nielsen India expects FMCG sales coming from the e-commerce channel to grow to $4 billion by 2022. The channel contributes 2% to the current FMCG market. These are insights from Nielsen’s recently launched E-Trak Index - a measurement solution that tracks the FMCG e-commerce industry.

Metros lead the e-commmerce FMCG race with a 6% contribution from the channel to total FMCG sales. Amongst these, foods is the biggest contributor with 44%; then it is personal care (40%) and household care (13%). Narrowing in on the value contribution of e-commerce to Metro sales categories with the channel, diapers contribute 26% to the sales; followed by skin creams (12%) and shampoos (10%).

Since liberalization, the sector has made significant contributions to growth persistently maintaining high double-digit growth. Contrary to this stellar record, the slowdown, driven by broader macroeconomic factors, coupled with tepid consumer sentiment, is noticeably impacting growth now, experts said adding that FMCG companies are pinning hopes on the forthcoming budget and are expecting some positive measures by the government, which would help in revival of demanD.

HOEC is likely to grow in view of

management

ExploringThe Riches

BEYOND ANALYSIS

Hindustan Oil Exploration Co Ltd (HOEC) is a pure Exploration and Production (E&P) player with a diversified mix of onshore and offshore fields. It was the first private sector on-stream company founded by late H. T. Parekh.

As a strategic move, HOEC is focusing on Discovered Small Fields (DSF), which has low risks in order to reduce uncertainties involved in pure exploration businesses. This enables the company to fast-track its projects and monetize resources at a much faster pace.

In 2008, ENI (Italian O&G major) became the promoter of HOEC with a stake of 47.18%. However, post Mr Elango Pandarinathan and Mr Ramasamy Jeevanandam joined the company in 2016 and stabilized the company’s operations. ENI exited the company in FY17 and new financial investors such as Ashok Kumar Goel (holds 14.15%), Rohit Dhoot (2.33%), Dhoot International (4.7%), Vijai Shree Pvt Ltd (Promoters of Poddar Pigments Ltd, 3.54%) invested in HOEC. Later, Mr Elango and Mr Jeeva also acquired shares, and both collectively hold ~7.6% stake in the company. At present, the company has requested SEBI to declassify any entity



as promoter. All the above investors still continue their holding in the company. Post HOEC’s management change in early 2016, the company has turned around its strategy to focus on onshore assets. The strategy has worked for the company. This is evident from the fact that post-stabilization of business, the company witnessed a five-fold increase in its gross operated production to 2,428 barrels of oil equivalent per day (boepd) and doubling of revenues in FY18 over FY17.

Gross production further increased nearly four-fold in FY19 to 8,508 boepd, reflecting the management’s strong operational capabilities. Going forward, the potential from the available developmental fields is much larger and puts the company in a sweet spot.

Currently, the company is earning revenues from 5 fields with majority of revenues coming in from two fields i.e. Dirok (Phase I) and PY-1. Other three are marginal fields in the Cambay basin. Additional revenue from other available fields is expected to start contributing in the coming years in a phased manner, keeping the cash cycle running.

INVESTMENT RATIONALE

Huge Reserves Available For Development

1. B-80 – Discovered Offshore Field The GoI came up with the Discovered Small Fields (DSF) bid rounds to take advantage of the many unexploited

discoveries, which needed impetus to put into production. B-80 is situated at prestigious Mumbai-High basin.

It is currently the most important field, which is near production. HOEC has 50% Participating Interest (PI) in this field. The field has Stock-Tank-Oil-Initially-In-Place (STOIIP) at 40.9 million barrels (mmbbls) and 44.5 billion cubic feet (bcf) of Gas Initially In Place (GIIP).

HOEC needs to spend around $45 million to $50 million (gross) towards capex, mainly on drilling wells, constructing a pipeline and erecting a Mobile Offshore Production Unit (MOPU). The company is targeting 5,000 gross barrels-of-oil-per-day (bopd) and 15 million-standard-cubic-per-day (mmscfd) gas from June this year.

With B-80 coming onboard, the company’s dependency on two assets – Dirok/PY-1 and single product - gas (87%) is expected to reduce, providing it with the benefit of diversification. Revenue contribution from oil currently stands at 13%, which is likely to go up to 36%.

2. Dirok Commercial production from Phase 1 of Dirok started from FY18. The economic life of the field is ~20 years. It is currently the major contributor to the company’s revenues and profitability. The facility is working at its full capacity of 35 mmscfd gas.

Phase II - The company is working on the next phase involving drilling of 4 development wells, Hollong Modular Gas Processing Plant (HMGPP) expansion,

Source: Company Data | PI = Participating Interest | * Both Directly & Indirectly

ASSET PORTFOLIO

Block Name

DirokPY 1CB-ON-7North BalolAsjolKharsang

B-80KheremUmatara

PY-3

AA-ONHP-2017-19

Operator

HOECHOECHOECHOECHOECGeoenpro

HOECHOECHOEC & ONGC

ONGC

HOEC

Oil/Gas

GasGasOilGasOilOil

Oil & GasOil & GasOil

Oil

Exploratory

PI

27%100%35%25%50%30%*

50%40%10%

21%

100%

Partners

Oil India, IOCNAGSPC, ONGCGSPC, GNRLGSPCOil India, Geoenpro,Geopetrol

AdbhootOil India, Prize PetroleumIOC

ONGC, Inverie, Hardy Oil

NA

Location ProducingOnshoreOffshoreOnshoreOnshoreOnshoreOnshore

DevelopmentOffshoreOffshoreOnshore Development DefferedOffshore ExploratoryOnshore


Experienced Management

In 2015, new management – Mr Elango (MD) and Mr R Jeevanandam (CFO) joined the board and turned around the company. Both of them are O&G industry veterans.

Mr Elango has spent almost 30 years in upstream O&G sector and has held many leadership roles in different areas of the business. Prior to joining HOEC, he was the CEO and Whole-time Director of Cairn India. He started his career with ONGC in 1985.

Mr Jeeva (as he is famously known in the group) also has almost 30 years of experience in various aspects of finance and taxation of upstream O&G industry. Before joining HOEC, he worked as VP at Aban Offshore and functioned as CFO and Director at Hardy Exploration and Production Inc. He started his career with ONGC in 1982.

HOEC has benefitted immensely from the expertise of both the industry veterans and has become a stronger company.

RISKS AND CONCERNS

• Regulated Industry

Oil & Gas is a highly regulated industry with immense level of government interventions. For any new field, companies need all sorts of government permissions and licenses. Then there is royalty, cess, and revenue-sharing agreements with the government.

• High Rate Of Uncertainties

O&G is a technical sector and involves expert know-how at every step. Despite following all the correct steps, there can be many challenges in extracting fuel like lower-than-expected availability, quality of hydrocarbon not being up to the mark, etc, extraction process itself is dangerous, which increases the overall uncertainty of the success of the project. In addition to this, the whole process is highly capex-intensive with a long gestation period, making the space suitable only for technical and financially sound companies such as HOEC.

VALUATIONS

The company is gaining strength with each passing year following the change in management. Average production has increased multifold in the last 4 years. In addition to this, new fields would provide incremental growth for the future. The management’s experience and expertise is

which would increase the capacity from 35 mmscfd to 55 mmscfd (in addition the company is likely to get 800 bopd of oil) and laying of 35 km pipeline from Kusijan to marketing hub of Duliajan (to de-risk from already 100% utilized Oil India’s existing pipeline and to have direct access to customers). The proposed capex for phase II is $30-35 mn (gross). The production is likely to commence from Q1FY22.

3. Other Fieldsa. PY 1 - The field is in Cauvery basin and was put on production in 2009. It has a large reserve base. However, due to various issues, the output was limited to 10 mmscfd, which was further affected in 1HFY20 due to an issue at the customer’s end (whose plant was closed due to pending maintenance issue). Nevertheless, the customer has recently re-started the plant and HOEC is in the ramp up phase to take the production back to levels of 10 mmscfd. For further expansion, it requires additional capex.

b. PY 3 (21% share) - This was another operational asset of the company but closed down due to various factors. HOEC along with its other partners are in the process of re-starting the well. This is likely to take another 18-24 months. The company need not invest significantly in capex and would be a direct beneficiary with its share of ~600 boed

c. Kharsang - HOEC has acquired entire 30% (direct and indirect) share capital of M/S Geopetrol International Inc. in the field. The average gross production for FY19 was 662 bopd. The field has received Forest Clearance and its mining lease approval is under process with the government of Arunachal Pradesh. In the proposed plan to augment production, the company is looking to increase oil production to about 1,800 bopd and drill a deeper well to explore gas potential by Q2FY22

Positive Policy Changes

In the last 5-6 years, the oil and gas industry has undergone a sea change. The government has been highly supportive; more opportunities are opening up and investor-friendly policies are being announced, among other initiatives.

The government has moved from profit sharing to revenue sharing model, making it easier for companies to operate and run their fields. This has also reduced the tussle between the government and the players, thus paving the way for faster decision-making as the government is not involved in cost-related decisions.


Source: Company Data, Nirmal Bang Research

FINANCIALSYear

FY16

FY17

FY18

FY19

492

403

2428

9170

Revenue

48.7

25.5

48.7

265.1

Growth

-18.2%

-48%

91%

444%

EBITDA

8.6

3.7

30.7

187.1

Margins

17.6%

14.6%

63.0%

70.6%

APAT

-0.1

7.1

37.5

156.7

Margins

-0.3%

27.9%

77.0%

59.1%

EPS

0.0

0.5

2.9

12.0

P/E

NA

191.9

36.4

8.7

ROE

0.0%

1.3%

6.9%

29.0%

making the company move strategically with caution.

Despite being a capital-intensive industry, the company is debt-free and has ~`200 crore cash on books and the

management intends to remain debt-free in the foreseeable future, as well. The existing fields are funding new fields’ capex and cash flow from those new fields is likely to fund further expansioN.

Avg GrossProduction (boepd)

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Nirmal Bang Commodities Private Limited CIN: U67120MH1995PTC093213


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NEWS INA FLASH

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related

documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment .The securities

quoted are exemplary and are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – BSE (Member ID- 498): INB011072759, INF011072759, Exchange Registered Member in CDS; NSE MEMEBR

ID- 09391): INB230939139, INF230939139, INE230939139; MSEI Member ID-1067) : INB260939138, INF260939138, INE260939139: Single Registration No.INZ000202536,PMS Registration No:

INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99. NIRMAL BANG COMMODITIES PVT LTD – MCX (Member ID -16590 /NCDEX Member ID -0362

/ICEX Member ID -1165) : Single Registration No. INZ000043630; NCDEX Spot: 10084; Comtrack Participants: CPID -5040; CDSL Commodity Repository Ltd: 12013300 Nirmal Bang Securities Private

Limited CIN: U99999MH1997PTC110659; Nirmal Bang Commodities Private Limited CIN: U67120MH1995PTC093213




by insurtech firm Toffee Insurance in collaboration with insurance company Apollo Munich.

The product offering in this space mirrors customers’ needs and can be categorized into three broad categories – health insurance based on specific needs, event-based coverage and lifestyle-driven need-based coverage.

Health Insurance Based On Specific Needs

Traditional health insurance products aim to provide end-to-end hospitalization along with other associated medical costs. On account of the comprehensive coverage offering, premiums are typically on the higher side, which may disincentivize customers because there is no payback unless a medical event occurs. So, youngsters would prefer products that are low on premium and/or cover specific ailments/diseases. That’s where bite-sized insurance comes into play. To meet this need, products have been launched. Insurance player, Max Bupa and online mobile service provider, Mobiwik have partnered for the ‘HospiCash’ plan that provides daily cash allowance of `500 for up to 30 days for hospital stay at an annual premium of `135.

Event-based Coverage

On account of likely cancellations of an event such as flights, insurance offerings that cover these events are gaining popularity among buyers. Customers believe there is a risk and they would like to cover the perceived risk.

One of the products covering event risks include ‘marathon insurance’ launched by Reliance General Insurance in collaboration with

products that offer protection for things that cover risks, which are now important.

They are looking for personalized products with a caveat that these are without long-term commitments meaning that they have the option to cover risks that are short-term in nature while being pocket-friendly at the same time.

The insurance industry along with fintech and insurtech firms has begun taking note of the shift in customers’ needs and preferences. They have taken a leaf out of FMCG companies that launched sachets to make their products more affordable and to reach maximum number of people by launching bite-sized insurance products also known as sachet insurance or insurance-on-demand.

Bite-sized insurance is offered for short periods of time to fulfil needs that are short-term in nature at a price point that is very appealing.

For example, you are on a holiday and are carrying your laptop on your trip. In this context, buying an insurance protection to cover the risk of carrying the laptop is a need that bite-sized insurance companies address. Bite-sized insurance has made it possible to offer products, which no traditional product is able to offer at low premiums, thus attracting customers.

Some of the current interesting offerings in this space include fitness insurance, mobile insurance, home protection insurance, cycle theft insurance, mosquito-borne disease insurance and daily commute insurance, among others.

A lot of these products are offered by insurtech companies in collaboration with insurance companies. For instance, fitness insurance is offered

The insurance industry in India has been buzzing on account of noteworthy performances by companies from this sector on the bourses as well as the emergence of insurtech firms, which are altering the landscape.

Insurance companies are known to be rigid when it comes to following paperwork. Not only this, they are expensive too. But all this is beginning to change, albeit gradually. They are educating customers about the importance of insurance in financial planning; insurance still has to be sold to customers rather than customers looking at buying them.

But since a while, the dynamics have been changing. These days customers seek products to cover risks that traditional policies don’t offer. Millennials on the other hand want short-term, affordable solutions that do not require commitment.

So, what do lifestyle-related changes mean? Today, we see more and more millennials using ride-hailing app-based services, Ola and Uber to commute instead of buying cars. Similarly, this generation is opting for rentals instead of buying a house.

People are looking to cover risks associated with these changes for which traditional policies do not provide an answer. So, while traditional policies do not appeal to them, there are lots of takers for


Symbo India at a premium of `49, covering loss of shoes, trip cancellation, accidents, etc.

Lifestyle-driven Need-based Cover

Lifestyle-related changes have resulted in a shift in the need for protection. For example, with more and more customers going on long holidays, they would like to protect their house for potential burglary as well as protect their travel bags.

To address this need, Digit Insurance has launched a holiday home cover, which protects customers from such a risk. Premium starts at `199 for a sum insured of `2 lakh.

On the other hand, Toffee Insurance has a backpack policy where the premium is dependent on the value of the bag. For bags valued up to `2,000, the premium is `25. And for bags in the higher range, the premiums are higher. There is a cover for laptops and mobiles too.

What Bite-sized Insurance Offers

• Covers Seasonal Needs: Certain diseases are widely prevalent during a particular season. For example, the occurrence of dengue and malaria is high during monsoon season. Bite-sized insurance model enables customers to get a cover for these seasonal diseases. Max Bupa has tied up with insurtech firm Mobikwik to cover vector-borne diseases.

• Nominal Insurance: The premium amount for bite-sized insurance tends to be very low, thus making it affordable and attractive. For example, for a cover of `10,000 against vector-borne diseases, Max Bupa charges a premium of `49. Short validity, affordable premium makes it attractive for customers.

• Easy To Purchase: Unlike

traditional insurance policies that require a lot of paper work, bite-sized insurance policies are offered online through insuretch firms and can be purchased with a few clicks. There are no hassles of a medical test or mundane paperwork. This is because underwriting requirements are totally different from traditional insurance products. Thus, this product offers convenience to its users.

What Should Customers Know

• Limited Cover: The unique selling proposition of bite-sized insurance products is that these products are short-term in nature with low/ affordable premium and cover.

The focus is to cover short-term needs and not provide a comprehensive cover. So, it can be used to enhance insurance coverage. It does not replace the need for a full- fledged insurance cover. But one should be aware of the exclusions and inclusions .

• Product Sustainability: Bite-sized insurance is relatively new and the products are primarily offered through the group platform. One is not certain about their long-term availability, the sustainability of lucrative pricing and one does not know what will happen if the partnership between the insurance company and the insurtech firm fails.

As an enhancer or a stop-gap arrangement, this product offering serves its purpose. But revisiting traditional insurance products makes sense for long-term insurance needs.

Is Bite-Sized Insurance Any Good

While bite-sized insurance products can be used as fillers or enhancers or a short-term solution, it should not be used to substitute for a full-fledged life and health insurance cover. For

example, the vector-borne disease cover is quite specific and will not cover any other treatment or surgery that you may have to undergo. Only a comprehensive medical insurance policy can help.

Premiums for both life and non-life policies tend to go up with age. Therefore, if you lose time by resorting to short-term arrangements when you go to buy a full-fledged policy, the premiums will become higher, making them a costly proposition.

For first-time buyers, these can be used as starters, and for existing policyholders, bite-sized insurance can be used to enhance their existing coverage. So, look at bite-sized insurance products more as an add-on rather than a go-to product.

IN A NUTSHELL

Necessity is the mother of invention. This is clearly evident from the response by the insurance industry that was once perceived to be very rigid. The evolving needs of customers primarily driven by lifestyle changes have resulted in insurance companies launching bite-sized insurance products, which until a few years ago was unfathomable.

Bite-sized insurance has all the features to attract millennials - easy to buy, smaller premiums and no long-term commitments. It is an excellent entry point for new customers who have been staying away from traditional insurance products and for existing customers to enhance their coverage.

In an era of doing things on-the-go, the personalization and ease of purchase of bite-sized insurance products is just what will entice customerS.

CONTINUEDOPTIMISMAlthough mid- and small-cap funds are not doing well at the moment, they are likely to recover and give better returns in the near future

BEYOND BASICS



the NSE Nifty Index gained 13.4%, while NSE Midcap Index and NSE Smallcap Index were down by 3.7% and 9.2%, respectively.

While several large-cap funds delivered higher returns, many mid- and small-cap funds continued to give negative returns or low single digit returns. Large-caps should continue to do well, going forward.

Mid- and small-caps could catch up and their relative underperformance can see reversal. There are chances we might see it transitioning from a narrow rally to broader market participation, which provides an opportunity in the event of a convergence.

WHY HAVE SMALL- AND MID-CAP FUNDS FAILED TO DELIVER

Large-caps continue to rise. But several small- and mid-cap stocks failed to deliver strong returns. In the past the Nifty mid-cap and small-cap indices usually outperform the benchmarks over a longer time frame as investors were concerned about subdued growth in corporate earnings and slower growth in gross domestic product (GDP).

Generally, small- and mid-cap stocks deliver when there is clear visibility about growth in the near term. But India has been going through fundamental changes in the past few years. Also, between 2013 and 2018 valuations of mid- and small-cap stocks have gone up fast.

A recent data shows that out of 24 mid-cap schemes, only five schemes managed to give lower double digit returns in the last one year; others gave single digit returns. Due to the sharp rally in the equity markets, these numbers look positive in the last one year.

many top-quality, mid- and small-cap stocks are available at very cheap valuations and can give better returns in the next three to five years.

In this article we try and explain why large-caps rallied and why mid- and small-caps have failed to deliver. How should investors decide their strategy as staying invested in mid- and small-cap schemes will pay-off in the long run.

WHY LARGE-CAP STOCKS CONTINUE TO RISE

Over the last two years, fund managers have undergone significant pain because the markets have been polarized due to a narrow rally limited to a handful of large-cap stocks while the broader market has not performed.

The key reason for the rally in few stocks is the sharp slowdown in the economy, mainly arising out of stress in the banking, non-banking financial companies (NBFCs) and real estate space.

Liquidity tightening post- demonetization and the announcement of GST has impacted SMEs and the unorganized segment. Increase in risk aversion led to a decline in credit growth, which is the lifeblood of an economy.

Due to weak economic growth, quality has gone down. Expensive stocks have become more expensive, leading to a divergence in the market. Also, mid- and small-cap earnings were downgraded. Even excess liquidity in the global markets helped the Indian markets to attract foreign flows.

Even within large-caps, demand was restricted to stocks such as Reliance Industries, HDFC Bank, TCS and ICICI Bank, among others. In CY19,

In the last few months, investors have started redeeming money from mid- and small-cap equity schemes. This is to do with the poor returns from those schemes and strong outperformance of large-cap funds. Of late, many investors have been shifting money from mid- and small-caps to large-cap funds.

But with sharp upmove in the large-cap segment in the past few months does it make sense to move to large-cap from small- or mid-cap schemes? In the last one year, the BSE Sensex has gained by around 15% and BSE Mid-cap and BSE Small-cap have given returns of 0.62% and -2.60%, respectively.

Mutual fund investors have continued to show their faith in Systematic Investment Plans (SIPs) as monthly inflows have been over `8,000 crore for the past few months. Even in the month of December, monthly inflows through SIPs was at an all-time high of around `8,500 crore. While investors are not stopping their SIPs, they are moving away from mid- and small-cap funds to large-cap funds.

It is said that smart investment decisions are always taken when times are bad. This is the time one should show faith in small- and mid-cap schemes and continue with their investments rather than moving to large-cap funds. The valuations of large-caps have run faster while


With poor returns coming in from mid- and small-cap schemes, investors started redeeming money from these categories and moved to large-cap or multi-cap schemes.

The data from the Association of Mutual Funds in India (Amfi) shows that in December inflows into mid- and small-caps stood at `796.08 crore and `421.63 crore, down from previous few months. In the month of June and July, it saw higher inflows. Inflows were over `1,000 crore in both the categories in May ’19.

WHAT SHOULD INVESTORS DO

With the likelihood of India’s GDP growing over 6% in the next two years, it would be better than other major countries. Also, corporate earnings growth in India, which was depressed earlier, could pick up in line with improvement in the economy. It is estimated that FY21 Nifty 50 earnings growth is projected to be around 23%.

A cyclical recovery should lead to improved investor sentiment. Global

risk on sentiment should also continue, driven by high global liquidity. With continuing FPI inflows, valuation multiples could remain elevated and the markets are likely to remain ahead of economic recovery. All these factors will lead to better returns from mid- and small-cap stocks.

In the past few months we have seen investors moving money from mid-cap and small-cap schemes to large-cap stocks. But this is the right time to continue investing in these categories. Times such as this will determine future returns in the mid- and small-cap category.

The benchmark indices have been rallying in the last two years and there are chances that with recovery in the economy, we may see a broad-based rally in the markets.

Investors should have patience and continue investing in small-cap and mid-cap schemes as long-term returns still look promising.

In the last 10 years, mid-cap and small-caps have given returns of 13.34% and 11.68%, respectively,

higher than large-cap category, which gave returns of 9.85%. Also, staying invested during a downturn adds to higher units - and its value goes up when stocks recover.

IN A NUTSHELL

Investors who are investing through systematic investment plans (SIPs) should continue with their investments. They could also increase their allocation in mid- and small-cap schemes as they are likely to deliver better returns in the next three to five years.

Even the valuation gap between large-sized companies and small- caps is higher than the historical average, which shows that mid- and small-cap companies are available at cheaper valuations.

Another factor which might improve the prospects of mid- and small-cap schemes is that after reclassification the small-cap universe has seen the entry of quality names, which offers reasonable scope for fund managers to spot interesting and profitable ideas and give better returns to the investorS.

Contact at: 022-6273 9600 | e-mail: [email protected]

www.nirmalbang.comFor free account opening, give us a missed call on 18003157577 |


Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment .The securities quoted are exemplary and are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – BSE (Member ID- 498): INB011072759,

INF011072759, Exchange Registered Member in CDS; NSE MEMEBR ID- 09391): INB230939139, INF230939139, INE230939139; MSEI Member ID-1067) : INB260939138, INF260939138, INE260939139: Single Registration No.INZ000202536,PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99. NIRMAL BANG COMMODITIES PVT LTD – MCX (Member ID -16590 /NCDEX Member ID -0362 /ICEX Member ID -1165) : Single Registration No. INZ000043630; NCDEX

Spot: 10084; Comtrack Participants: CPID -5040; CDSL Commodity Repository Ltd: 12013300 Nirmal Bang Securities Private Limited CIN: U99999MH1997PTC110659; Nirmal Bang Commodities Private Limited CIN: U67120MH1995PTC093213


Multicap Funds

SCHEME NAME NAVHistoric Return (%)

1 Year 10 Years5 Years 7 YearsAUM (Cr)

3 Years

Aditya Birla Sun Life Equity Fund - GrowthCanara Robeco Equity Diversified Fund - GrowthICICI Prudential Multicap Fund - GrowthKotak Standard Multicap Fund - Reg - GrowthS&P BSE 500 TRI

779 145 306

38 19,024

1213.9

9.614.5

11

10.715.210.713.613.2

9.98.48.7

10.38.6

15.712.213.716.112.3

11.711.411.613.510.1

11,856 1,634 4,745

29,598 -

Large Cap Funds



3 Years

Axis Bluechip Fund - GrowthMirae Asset Large Cap Fund - Reg - GrowthNippon India Large Cap Fund - GrowthNifty 50 TRI

32 55 36

17,156

19.913.8

913

19.614.913.315.1

10.1118.18.4

14.716.113.411.9

12.314.111.810.2

10,212 16,873 12,955

-

BEYOND NUMBERS


MUTUAL FUNDRECOMMENDATIONS

Here are a few mutual fund schemes we recommend you to consider from an investment perspective.

Mid Cap Funds



3 Years

DSP Midcap Fund - Reg - GrowthEdelweiss Mid Cap Fund - GrowthAxis Midcap Fund - GrowthKotak Emerging Equity Fund - Reg - GrowthNifty Midcap 100 TRI

60 28 41 43

23,267

16.912

18.316.7

4.4

1110.917.611.3

7.1

10.58.89.6

10.67.9

17.117.716.717.412.4

14.515.3

-14.610.1

6,957 935

4,141 5,888

-

Large & Mid Cap Funds



3 Years

Canara Robeco Emerging Equities - GrowthInvesco India Growth Opportunities Fund - GrowthPrincipal Emerging Bluechip Fund - GrowthNIFTY Large Midcap 250 TRI

100 37

111 7,620

12.113.811.9

10

13.415

11.712.8

11.310

10.69.5

20.314.618.313.9

17.812.514.4

11

5,339 2,239 2,117

-

FoF - Overseas


1 Year 5 Years 7 Years 10 YearsAUM (Cr)

3 Years

PGIM India Global Equity Opportunities Fund MSCI AC World Index*

22 -

24.3-

14.6-

6.1-

5.6-

--

34 -

Small Cap Funds



3 Years

Franklin India Smaller Companies Fund - GrowthHDFC Small Cap Fund - GrowthL&T Emerging Businesses Fund - Reg - GrowthSBI Small Cap Fund - GrowthNifty Smallcap 100 TRI

52 41 24 56

7,669

0-3.70.214

0

4.210.8

9.615.1

1.3

6.69

10.513.2

3.6

17.214.1

-23.2

8.6

14.511.6

-17.8

6.5

6,929 9,233 5,941 3,156

-

Dynamic Asset Allocation Funds



3 Years

ICICI Pru Balanced Advantage Fund - Reg - GrowthInvesco India Dynamic Equity Fund - GrowthNippon India Balanced Advantage Fund - GrowthHDFC Balanced Advantage Fund - GrowthSBI Dynamic Asset Allocation Fund - Reg - GrowthNIFTY 50 Hybrid Composite Debt 65:35 Index

38 30 95

202 14

10,679

12.18.49.37.55.6

13.7

10.29.5

10.611.9

1012.6

8.97.67.48.1

-8.6

11.911.511.110.8

-10.9

11.910

10.410.6

-9.8

28,528 893

2,694 44,498

677 -

Hybrid Aggressive



3 Years

ICICI Prudential Equity & Debt Fund - GrowthMirae Asset Hybrid - Equity Fund - Reg - GrowthSBI Equity Hybrid Fund - GrowthCanara Robeco Equity Hybrid Fund - GrowthNIFTY 50 Hybrid Composite Debt 65:35 Index

142 16

148 171

10,679

11.713

15.713.113.7

9.712.412.811.712.6

8.8-

9.48.78.6

13.8-

14.313.110.9

13.3-

11.7129.8

23,073 3,190

31,620 2,824

-

ELSS Schemes (Tax Saving u/s 80-C)



3 Years

Aditya Birla Sun Life Tax Relief 96 - GrowthAxis Long Term Equity Fund - GrowthCanara Robeco Equity Tax Saver Fund - GrowthInvesco India Tax Plan - GrowthMirae Asset Tax Saver Fund - Reg - GrowthS&P BSE 200 TRI

33 50 69 55 19

6,148

6.820.711.411.817.111.7

12.217.313.813.317.413.9

910.5

7.89.5

-8.8

15.519

12.615.3

-12.4

11.617.411.813.4

-10.3

10,029 21,473

1,005 988

3,066 -

Focused Fund



3 Years

Axis Focused 25 Fund - GrowthSBI Focused Equity Fund - GrowthS&P BSE 500 TRI

31 158

19,024

21.321.2

11

18.517.213.2

12.211.3

8.6

14.614.612.3

-16.410.1

9,110 6,924

-


Contra/Value Fund



3 Years

Kotak India EQ Contra Fund - Reg - GrowthInvesco India Contra Fund - GrowthUTI Value Opportunities Fund - GrowthNippon India Value Fund - GrowthS&P BSE 500 TRI

56 51 66 76

19,024

13.210.114.2

9.211

1514.211.711.613.2

9.210.3

5.77.68.6

12.916.110.812.312.3

10.712.610.610.210.1

882 4,596 4,560 3,133

-

Equity Saver



3 Years

Axis Equity Saver Fund - Reg - GrowthKotak Equity Savings Fund - Reg - GrowthCRISIL Hybrid 50+50 - Moderate Index*

14 15

-

9.18.3

-

9.18.3

-

-7.5

-

---

---

812 1,843

-

Sector/Thematic



3 Years

Canara Robeco Consumer Trends Fund - Reg - GrowthMirae Asset Great Consumer Fund - GrowthICICI Prudential Technology Fund - GrowthNippon India Pharma Fund - GrowthBNP Paribas India Consumption Fund - Reg - GrowthICICI Pru Banking and Financial Services Fund - RetailS&P BSE 500 TRI

43 39 61

156 13 70

19,024

14.813.8

1.64

22.814.7

11

16.418.716.3

5.8-

16.513.2

10.612.1

7.43.9

-12.4

8.6

14.916.116.112.6

-17.212.3

14.5-

15.213.5

-16.810.1

374 961 409

2,417 467

3,592 -

Arbitrage Fund


3 Months 3 Years1 Year 2 YearsAUM (Cr)

6 Months

IDFC Arbitrage Fund - Reg - GrowthKotak Equity Arbitrage Fund - Reg - GrowthNippon India Arbitrage Fund - Growth

24 28 20

4.44.64.3

55.25.1

6.16.16.1

6.26.26.4

66.16.2

11,944 17,486 10,528

Liquid Fund


2 WeeksYTM

3 Months 1 YearAUM (Cr)

1 Month

Axis Liquid Fund - GrowthIDFC Cash Fund - Reg - GrowthKotak Liquid Fund - Reg - GrowthCRISIL Liquid Fund Index

2,169 2,366 3,958

-

4.74.64.65.1

5.14.94.95.5

5.24.95.15.6

6.56.26.3

-

5.295.095.28

-

29,119 10,312 27,114

-



Money Market Funds


3 MonthsYTM

1 Year 3 YearsAUM (Cr)

6 Months

Aditya Birla Sun Life Money Manager FundFranklin India Savings Fund - GrowthNippon India Money Market Fund - GrowthCRISIL Liquid Fund Index

266 37

2,997 -

5.95.9

65.6

6.87.16.95.9

7.98.37.9

-

7.67.67.5

-

5.915.755.55

-

10,878 4,724 3,805

-

Ultra Short Term Funds


3 MonthsYTM


6 Months

IDFC Ultra Short Term Fund - Reg - GrowthSundaram Ultra Short Term Fund - Reg - GrowthL&T Ultra Short Term Fund - GrowthNIFTY Ultra Short Duration Debt Index

11 10 32

4,009

64.75.56.2

6.95.66.46.9

7.9-

7.47.7

--

7.27.6

5.785.57

5.8-

4,408 362

2,454 -

Short Term Funds


3 MonthsYTM


6 Months

Axis Short Term Fund - GrowthHDFC Short Term Debt Fund - GrowthIDFC Bond Fund - Short Term Plan - Reg - GrowthKotak Bond Short Term Fund - Reg - GrowthL&T Short Term Bond Fund - Reg - Growth

22 22 41 37 19

7.78.47.27.26.8

8.38.78.57.8

8

9.79.89.89.59.4

7.27.67.36.97.1

6.657.176.797.166.67

4,404 10,519 11,757 10,602

4,866

Low Duration Funds


3 MonthsYTM


6 Months

Axis Treasury Advantage Fund - GrowthCanara Robeco Savings Fund - Reg - GrowthIDFC Low Duration Fund - Reg - Growth

2,228 31 28

6.45.96.2

7.66.87.3

8.77.98.3

7.57.27.4

6.15.985.88

3,949 1,112 5,323

Banking & PSU Bond Funds


3 MonthsYTM


6 Months

HDFC Banking and PSU Debt Fund - Reg - GrowthKotak Banking and PSU Debt Fund - Reg - GrowthIDFC Banking & PSU Debt Fund - Reg - Growth

16 46 17

8.48.77.7

8.88.29.1

10.311

11.4

7.37.88.1

7.247.096.95

4,848 4,204

12,627

Corporate Bond Funds


3 MonthsYTM


6 Months

ICICI Prudential Corporate Bond Fund - Reg - GrowthL&T Triple Ace Bond Fund - Reg - GrowthKotak Corporate Bond Fund - Std - Growth

21 51

2,653

8.19.97.2

8.35.58.4

9.913.3

9.5

7.46.47.9

6.967.586.82

11,339 2,298 4,418



Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment .The securities quoted are exemplary and are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – BSE (Member ID- 498): INB011072759, INF011072759, Exchange Registered Member in CDS; NSE MEMEBR ID- 09391): INB230939139, INF230939139, INE230939139; MSEI Member ID-1067) : INB260939138, INF260939138, INE260939139: Single Registration No.INZ000202536,PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99. NIRMAL BANG COMMODITIES PVT LTD – MCX (Member ID -16590 /NCDEX Member ID -0362 /ICEX Member ID -1165) : Single Registration No. INZ000043630; NCDEX Spot: 10084; Comtrack Participants: CPID -5040; CDSL Commodity Repository Ltd: 12013300 Nirmal Bang Securities Private Limited CIN: U99999MH1997PTC110659; Nirmal Bang Commodities Private Limited CIN: U67120MH1995PTC093213


Disclaimer : Mutual Fund Investments are subject to market risks. Please read the offer document carefully before investing. Past performance is no guarantee of future performance. Returns are of Growth option of Regular plans. Returns which are below 1 year

period are Annualized Returns. Source: - ICRA MFI, NAV as on 20th Jan ’20

Dynamic Bond Fund


3 MonthsYTM


6 Months

ICICI Prudential All Seasons Bond Fund - GrowthIDFC D B F - Reg - GrowthKotak Dynamic Bond Fund - Reg - GrowthCRISIL Corporate Bond Composite Index*

25 24 26

-

10.34.27.4

-

7.13.85.7

-

10.411.611.2

-

6.96.87.8

-

8.247.067.58

-

3,071 2,025 1,030

-

Gilt Fund


3 MonthsYTM


6 Months

IDFC G Sec Fund - Invt Plan - Reg - Growth Nippon India Gilt Securities Fund - GrowthUTI Gilt Fund - Growth

25 27 45

5.34.63.1

43.21.4

13.812.712.4

7.77.56.9

7.096.866.35

462 1,118

531

Credit Risk Fund


3 MonthsYTM


6 Months

ICICI Prudential Credit Risk Fund - Growth Kotak Credit Risk Fund - Reg - Growth SBI Credit Risk Fund - Growth

21 22 31

10.99

6.4

9.99.37.3

9.69.16.6

7.57.16.4

9.448.948.69

12,126 5,043 5,076

Medium to Long Duration Fund


3 MonthsYTM


6 Months

IDFC Bond Fund - Income Plan - Reg - GrowthNippon India Income Fund - G P - Growth

48 65

3.63.8

2.83.3

1111.9

6.46.3

6.936.9

677 298

Medium Duration Fund


3 MonthsYTM


6 MonthsIDFC Bond Fund - Medium Term Plan - Reg - Growth 33 5.1 5.7 9.5 6.8 6.92 2,929

Beyond Market 16th - 30th Jan ’20 It’s simpli�ed...49

TECHNICAL OUTLOOK

BEYOND NUMBERS

level can resume the weakness.

Technically, as per the FR Theory (High- 12,103 Low-10,637), the Nifty is well placed above the 100% level, that is, level 12,100. But it faces a strong resistance at 12,410 level, indicating a cautious sign. Once it manages to surpass the 12,410 level on the closing basis and sustain for at least two trading sessions, an extension of the positive rally towards 12,660/12,800 levels could be witnessed.

Overall, the view is positive as long as the Nifty stays above 12,100 - 12,000 levels on the closing basis. On the flip side, any move below 12,100 - 12,000 levels might result in profit-booking, dragging the Nifty towards 11,800-11,640 levels.

The Bank Nifty is well-placed above its 100- and 200-day moving averages, indicating a positive sign. The Bank Nifty has made a smart recovery from the 30,600 level, which is approximately near its 100-DMA. The ongoing recovery may continue towards 31,700 as it is a resistance provided by 50-DMA. Any move above 31,700 may take the Bank Nifty towards 32,300 - 32,700 levels. On the flip side, 200-DMA will act as a strong support, that is, 30,150. Below this, 29,800/29,500 may be seen.

On the Nifty Options front for the February series, the highest Open Interest (OI) build up is near 12,000 and 11,500 Put strikes. On the Call side though, it is observed at the 12,200 and 12,700 strikes.

The month of January started with fairly less open interest in the indices, which led to broad-based buying as most shorts were covered

and new longs were built in stocks.

Stocks in Metals, Pharmaceuticals and Cement sectors have witnessed a build-up in aggressive long positions and may continue to witness buying in February.

India VIX, which measures the immediate 30-day volatility in the market, remained in the range of 11-16 for most part of January. Going forward, VIX is likely to remain high and track global markets.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been in the range of 1.00-1.75 in the month of January. Going forward, it is expected to remain in the range of 1.20-1.80 in February.

The markets are believed to remain bullish in the month of February with the likelihood of it touching impor-tant resistances of 12,500 and 12,700; while bouts of volatility are likely to come due to important global scenario where the index will find important supports at 12,000 and 11,800 levels.

OPTIONS STRATEGY

Long StraddleIt can be initiated by ‘Buying 1 lot 06Feb 12,250 CE (`70) and Buying 1 lot 06Feb 12,250 PE (`55)’. The premium outflow comes to around 125 points, which is also your maximum loss. One should, howev-er, place a Stop Loss at 75 points (50 point loss). Maximum gain is unlimited and one should place Target at 220 points (100 point gain). With more than 8 working days, the index is likely to move over 150 points in either direction, resulting in decent gains for the strategY.

ndia’s equity indices are likely to gain as investors bet on revivalistic measures in the February budget and a recovery in the economy to bolster sentiments. The year 2020 is also likely to mark a shift in focus to the broader market as investors become less risk-averse to mid- and small-cap stocks with a gradual recovery in the economy. The key events for February ’20 will be the government’s balancing act in the upcoming budget, some recovery in corporate earnings and continued momentum in global equity flows.

Technically, the market has formed a strong base at 10,700 - 10,800 for short term and is now preparing to hit 12,660/12,800 once it manages to sustain above 12,400 on a closing basis. Also, the positive momentum has already started. The index is expected to reach 12,660 - 12,800 levels in the coming months.

Recently, the Nifty snapped a four- day losing streak to end above the 12,150 level. Another interesting fact is that the Nifty has formed a bullish Harami Black Candle, indicating a positive sign. But this will depend on whether the Nifty is able to sustain above the 12,100 level. However, any trend reversal in favour of the bulls can be expected on a close above 12,240 - 12,270 levels. On the contrary, a close below the 12,100

I


make people illogically bullish. Without even a cursory glance at the fundamentals of a stock or the market as a whole many retail investors blindly plunge forward.

For instance, in the year 2000 market hype and optimism resulted in severe over valuation of several internet-based companies, which eventually came crashing down. The NASDAQ crashed by as much as 76.81%.

Companies such as NorthPoint Communications and Global Crossing went entirely bankrupt. Others like Cisco, Intel and Oracle lost as much as 86% of their value. Further, the share price of a company like MicroStrategy fell to $140 or 62% from $333 in a single day.

THE CONTAGION EFFECT

Nobody in life wants to be left behind or miss out on an opportunity. Investors are no different. When markets are rising, people discuss profits they’ve made and the news is full of stories about how the market is growing. In such a scenario, the natural tendency of most people is to invest in the markets as they fear they might miss out on a great opportunity. This, in turn, drives the market even higher.

Some of the smartest people in the world too are not immune to this behaviour. In the early 1820’s, none other than English mathematician and physicist Sir Isaac Newton invested in the markets and cashed out with an almost 100% profit in the South Sea company.

However, the bubble continued to grow and swept up in a rising tide of emotions. Owing to the fear of missing out on larger profits, Sir Isaac Newton invested again. This time he lost more than his original

EMOTIONS: THE MOST CRITICAL PART The most difficult and important part, which was introduced by Graham and considered to be the biggest invention in market theory, is emotions. Emotion is an important variable as it plays a huge role in forming cycles, making them hard to predict.

Individuals and markets as a whole suffer many emotions such as greed and fear. Benjamin Graham described it by saying: “The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism.”

Investors’ psychology and their behaviour play a huge role in the markets. Just after the First World War in 1918, a new wave started in the US, also known as roaring twenties, where economic prosperity, growing industrialisation, flow of capital and opening up of the society created a huge craze.

Investor behaviour was described as if they were on cocaine or they may be drunk all day. Investors bought any stock at any prices. The greed in the market spread and irrationality took over the wider market. From the year 1919 to 1929, the US Dow Jones jumped more than four-fold from the levels of 80 to 381 levels.

However when the cycle turned, the fear of losing money and other accompanied emotions led to a market crash. The US Dow Index crashed and formed a bottom at 41.22 by the end of July ’32.

SENTIMENTS: LIFTING ALL BOATS

Rising prices and positive market sentiments combined with an echo chamber of positive information

dangerous words in investing are: this time it's different.”

In markets it’s never different. Cycles are permanent and recurring in nature and investors who ignored cycles have done a huge damage to their own self and their investments.

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets,” Peter Lynch “Most of the great investors I’ve known over the years have had an exceptional sense for how cycles work in general and where we stand in the current one. That sense permits them to do a superior job of positioning portfolios for what lies ahead.

“Good cycle timing — combined with an effective investment approach and the involvement of exceptional people — has accounted for the vast bulk of the success of my firm,” says Howard Marks of Oaktree Capital Management in his famous book Mastering The Market Cycle. “The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions,” says Seth Klarman. WHY DO MARKETS FOLLOW A CYCLICAL PATTERN

Markets are not exact science. They are influenced by several factors. Benjamin Graham in his book Security Analysis, Chapter 3 described, “Market is not a weighing machine. It is a voting machine wherein countless individuals register choices, which are partly product of reasons, partly of emotions.”


investment. The point here is that even the most intelligent of investors cannot escape from the perils of emotional bias, which could be contagious in nature and drive markets in either direction.

THE LOLLAPALOOZA EFFECT

While emotions play a critical role, every boom and bust cycle is the result of several factors working together, which is also known as the Lollapalooza effect. It occurs when multiple factors combine and reinforce each other to produce an outcome

For instance, during the global market bubble of 2008, the availability of cheap capital, low interest rates, strong run-up in commodity prices, asset price bubble that made people rich overnight, strongest growth in the global GDP, relatively peaceful geopolitical environment and other factors like increasing financial leverage and investors’ risk appetite created a Lollapalooza effect, which drove the markets into a bubble.

THE ECONOMIC FACTORS

Among fundamental reasons, economic factors also play a major role in corporate performance. An improvement in economic fundamentals usually precipitates the first step of a cycle. For instance, in the build-up to the 2008 peak where Sensex made a seven-fold gain from the levels of 2,900 in 2003 to about 21,000 at the peak of 2008, India’s GDP during this period grew from a mere 4% in fiscal 2003 to 9.6% by the end of fiscal 2007.

At the low point of the Sensex in the year 2003, investment growth was negative at -0.4%, which in later years jumped to 24% in fiscal 2005 and further surged by 16.2% by the

end of fiscal 2008. During this period, inflation averaged at around 4% to 5%, thus allowing enough room to keep interest rates low.

Similarly, during the boom period of 1920 to 1929, the US GDP expanded by a huge 40% from $580 billion to $820 billion. But like in a bubble, economic factors could be equally responsible for the bust. India’s GDP growth slipped from 9.6% in fiscal 2008 to a low of 6.7% in fiscal 2009, when the Sensex hit the bottom at around 8,900 levels. EARNINGS AND VALUATIONS

When the tide is up and the economy is doing well, corporates start reporting strong earnings growth. As a result of economic factors like demand and other things, corporate profitability at an aggregate level starts to look better.

The market not only begins to factor in current earnings but also puts a lot of weight on expectations and probable earnings. In fiscal 2006, Sensex EPS grew by 22% and further by 31% in fiscal 2007 to `710.

Markets were expecting a similar growth for the next two years with the consensus expecting a `950- `1,000 EPS by the end of fiscal 2009. Based on historical earnings, the Sensex was trading at 30 times. However, investors were looking at market valuations based on 2009 EPS at around `950, thus valuing Sensex at 22 times its forward earnings.

On the contrary, when markets fell and the economy shrunk, Sensex EPS grew by negative 4% as against 16% to 18% growth expectations for fiscal 2009. The earnings and valuation cycle is important in determining the levels or the cycles of the market.

Higher-than-expected earnings boost valuations. When retail investors see this rise, they too are motivated to invest, thus driving up prices further.

AVAILABILITY OF CAPITAL AND RISK APPETITE

At times people do take extremely risky decisions to try and boost profits. They go to the extent of mortgaging their homes and vehicles, thus leveraging themselves further, without realizing that even a movement of 1% to 2% is enough to completely wipe out an overleveraged investor portfolio.

In 1998, the US markets tumbled by more than 20%. One of the largest hedge funds of that time - Long Term Capital Management, which primarily relied on leveraged trades - brought it to the brink of bankruptcy.

By August ’98, the fund lost close to 50% of the invested capital. Had it not been bailed out, the US economy would have faced devastating consequences. Too much availability of capital at too low rates is often associated with speculative trades.

When liquidity is high and cheaply available, markets tend to get influenced because of the flow. More often than not people are motivated to invest when they have the means to do so and the presence of excess capital can often make them rush into unwise investments.

The sub-prime mortgage crisis of 2008 is a great example of this nature. Banks with excess holdings gave out loans freely, which were then bundled and sold and resold without due consideration due to the availability of excess capital.

Eventually, due to the inability of debtors to repay dues, the bubble burst and markets crashed globallY.

Geopolitics has taken centre stage since the United States (US) killed a top Iranian military general with a drone strike on 2nd Jan ’20.

In response, Iran has targeted US military bases in the Middle East. The US-Iran conflict, which so far seems defused, is an overhang for the global markets.

How Have The Global Markets Reacted To The Rising Tensions Between The US And Iran?

Post the event, crude oil prices have surged by over 4%, which is approaching $70/barrel. Gold prices have increased by around 2%. However, reactions by the financial markets have been somewhat muted. Back home, the 30-index Sensex fell by just 2% in two days post the event.

Why Is Iran Important?

Iran is an important oil-producing nation. Iran has around 13% of global oil reserves. The country produces over four million barrels of oil per day, accounting for 4% of total global crude oil production.

However, because of the sanctions put by the US, oil exports from Iran have diminished in recent years. Reduced importance of Iran in the global oil market explains mild reactions by the global markets to the US-Iran conflict.

What Is The Current Status Of The US-Iran Conflict? What Can Be Expected If The Conflict Flares Up?

Till 20th Jan ’20, there has been no major escalation by either party. So the conflict thus far seems contained. But

IMPORTANT JARGON

if things deteriorate from here, a 1990-91 Gulf War crisis like situation could arise, where the entire Middle East area ended up taking sides of either the US or Iran and destabilize. This can lead to a one-way rise in crude oil prices.

How Can The US-Iran Conflict Impact India?

India is the world’s third largest importer of crude oil (around 4.5 million barrels per day) and depends on the Middle East for over half of its total needs. India imports more than 80% of its oil requirements.

Rising crude oil prices because of a destabilized Middle East could impact India’s trade deficit and exchange rate. Also, any increase in crude oil prices leads to higher inflation, mostly wholesale inflation.

What Will Be The Indirect Impact?

Indirectly, if global asset classes correct, investors would turn risk-averse on all emerging markets including India. This would impact foreign flows into India.

Also, as confidence dips, investors would prefer gold as a safe bet, thereby pushing gold price upwards. India is the world’s second largest importer of gold. Higher gold imports distort import bill, again impacting India’s trade deficit and exchange rates.

Are There Other Consequences?

More than 80 lakh expatriates in the Gulf remit around $40 billion per year. Any instability in the region can impact these flows.

Also, Gulf is becoming an import-export destination for India. India is clearly more exposed to the Gulf today as compared to any other period in the past.

US-IRAN CONFLICT AND INDIA

BEYOND BUZZ


Is There A Precedent?

The 1990-91 Gulf War sent the Indian economy into a tailspin as rising crude oil prices impacted India’s balance of payments, forcing the country to pledge its gold with the IMF to avoid a sovereign default.

Any increase in the price of crude oil is always a cause of concern for India. It is in the interest of India if Iran-US conflict is defused before it escalates into a full-fledged war in the Middle East.

‘OPERATION TWIST’ BY THE RBI

Recently, the Reserve Bank of India (RBI) announced a special Open Market Operation (OMO). This is akin to ‘Operation Twist’ undertaken by the US and other central banks in their jurisdiction.

The move is unconventional and was unexpected by the market. The RBI wants to ensure that the long-term interest rates are low in order to facilitate availability of credit for economic expansion.

What Has The RBI Announced?

Under its OMO exercise, the RBI has announced its intention to buy long-term maturity bonds while simultaneously selling short-term maturity instruments up to `10,000 crore for each leg.

So far four tranches (latest on 24th January) have already been undertaken by the RBI. Bond markets expect more such OMOs in the future.

What Are OMOs?

OMOs are a tool in the hands of the central bank to manage liquidity in the banking system. Liquidity along with RBI’s policy rates (among other things), influence interest rates in the system. The RBI undertakes OMOs with the intention to supply or absorb liquidity.

If the RBI wants tight interest rate regime, it will announce OMOs to absorb liquidity by selling securities to the market. If the RBI wants a loose interest rate regime, it will announce OMOs to supply liquidity by buying securities from the market.

Why Has The Move Been Dubbed As ‘Operation Twist’?

So far the RBI used to either buy or sell securities under

its OMO policy. It never did simultaneous buy and sell transactions. Such simultaneous buy-sell transactions have precedent in other matured economies, especially in the US.

The US Federal Reserve undertook ‘Operation Twist’ in 1961 and again in 2011 to lower long-term interest rates in order to counter a prolonged period of slow economic growth. It is a first for the RBI.

What Is The Purpose Behind India’s ‘Operation Twist’?

The purpose behind India’s ‘Operation Twist’ is the same: to cheapen long-term funds to boost economic growth. An ideal thing in the market is to have lower interest rates in the short term and slightly higher rates in the long term.

But in India, long-term rates had firmed up sharply (above 30-35 basis points) on concerns that the government may breach fiscal deficit target and undertake extra borrowing. This needed to be corrected.

How Have The Yields On 10-Year G-Secs Moved In Recent Times?

The 10-year benchmark G-sec was introduced at a yield of 6.45%. Till December the yields were range-bound. But, the yield rose sharply to 6.65% on 6th Dec ’19, and later to 6.78% on 12th Dec ’19 after RBI’s MPC surprised the market by not cutting policy rate in its December meet, as was highly expected.

So, Has The Purpose Been Achieved?

Higher long-term rate was cited as one of the many factors for incomplete monetary policy transmission. Even as the Reserve Bank’s MPC has cut policy rates by 135 bps last year, only 45 bps has been transmitted to new borrowers.

Now, following the RBI’s special OMO announcement, the yield of the benchmark 10-year G-Sec softened substantially to 6.57% as on 23rd Dec ’19. Lower long- term interest rates will probe corporates in India to borrow for expansion plans and boost the country’s economic growth, in turn.

However, the sustainability of interest rates for long-term remaining cheaper will depend on similar operations being conducted by the RBI in the future and the government’s borrowing plans in the next fiscal yeaR.


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