LONG POST: #EconomicTimes article
Why does the India bull look tired?

Over the past week, Indian equity markets are up almost 2% with the Nifty trending at 23,589. Retail investors are happy and renowned experts are going out and claiming it to be the ‘start of a new bull run’. However, there are a few who feel the next 10 years will be different from all the past boom periods that India has witnessed so far.

In the past two decades, the #Nifty50 has returned 12% annually. Smart investors believe the country can do far better than this number in the coming decade. But markets are cyclical in nature. There is a high chance that we might actually get lower annual returns compared to the past.

Markets have had a sizeable correction from the highs seen in last September peak. It has been a painful grind in the last six months for investors. For nearly 80% of them, the correction is somewhat a new phenomenon, and totally unexpected. These new investors had come in for linear returns and were trained to ‘buy the dips’. They had the best for the past 5 years, up until now.

When the story was about demographic dividend and companies rising to fulfill the unsatiable demand from young India, why should that come to a halt? Why do stocks correct after all when the going is so good? And why would foreign investors want to leave in such a hurry?

All great questions. For those who started after 2020, there are some valuable lessons to learn here. Well before they prepare for the next bull run.

What was driving the rise?
When you buy a stock, you buy a share in its earnings. The earnings per share (EPS) decides the price it should trade at (at least some of it). The other element comes from the market sentiment, which relies on future prospects for the current earnings. What India witnessed last five years was the boost on both these elements. Let us look at earnings first.

Nifty EPS was around INR430 by end of 2019. During the next 4 years, by the end of 2023, it rose to INR950. That is an astounding CAGR of 22%. If you looked at the historical 10-year trend till 2019, the range was much below 10%. This earnings surprise increased valuations. Common sense would tell you that Nifty should double too. And it did. From 12,500 to neat 25,000 rise was largely justified. At least in theory!

If we broaden this story and look at the entire listed corporate space, corporate profits jumped from around INR4 lakh crore (USD45 billion) to INR16 lakh crore (USD170 billion) during the same duration. This was nearly 4.8% of GDP. No wonder, we saw a bump in valuations across Nifty 500 Index.

Markets assumed the similar rate of growth and priced the stocks accordingly. Not to forget, the flow of domestic money to mutual funds provided more gas to stocks outside of Nifty 50. The mid- and small-cap stock prices grew significantly higher, at almost 30% CAGR for 4 years. This was far in excess of the EPS growth in these stocks.

This super growth phenomenon however is always shortlived. We’ve had these phases before. There is nothing new about this.

Look at the above chart for corporate earnings to GDP ratio, which is a very reliable indicator of how well the listed market is doing within the larger economy. We see that corporate earnings grew from 2.1% of GDP to 4.8% of GDP between 2020 and 2024. However, we can also see a similar rise to peak between 2003 and 2008, after which a period of slowdown began till 2019. While this doesn’t imply that the path will exactly be the same now, the key message is that earnings are cyclical. And so is the Indian economy.

Why did the markets fall and why now?
Though the market had accounted too much exuberance in 2024, it failed to recognise this EPS growth was never sustainable.

So, why did the earnings spike post 2020?
A confluence of factors resulted in earnings growth post 2020. Firstly, banks’ balance sheets were already clean after years of NPA write-offs post 2014. After pandemic, we had a sudden demand surge — IT services got huge demand boost from US, there was discretionary revenge spending by consumers & finally the govt capital expenditure increase 4 times to INR11 lakh crore (USD125 billion). All of this happened within 3 years. Indian retail credit penetration increased from 20% of GDP to 43% of GDP. So much of the consumer spending was done with credit binge too.

All that spending is behind us now. So, unless you have a reason to believe that the economy has drastically improved after 2020, it is safe to assume that the earnings growth will also correct. And this is already underway since 2024. Estimates for Nifty 500 companies is at 7% topline growth. This is just about keeping up with inflation.

For context, look at the topline growth for #Nifty500 companies below. It tells a similar story since 2010 where sales growth slowed after 2009. And then the huge spike after 2020.

While sales growth slowed by 2022, margins expanded, which concealed the slowing topline. That provided some cushion to the EPS story for a year. However, EPS can’t grow continuously if topline stagnates.

When will markets capture previous peaks?
Depends on your outlook on earnings and India’s economic growth. It is worth noting that after 2009, corporate earnings grew at single digits for next 10 years. Nifty 50 and Nifty 500 returns were in the range of 8% and 7%, respectively for the next decade.

The situation was not exactly the same then, and reasons may be different now. But the economy does go through a period of moderation after every exuberant cycle. So do markets.

The current correction should not be seen as a minor blip that recovers fast. It is unlikely to be a V-shaped recovery because it is not driven by a special event. It is a sales slowdown which has been in the making for 18 months now. Just that the earnings took some time to reflect that.

Thus, the recovery may take as much time as it takes for the consumer to recover. Also remember, the market slowdown impacts gross spending levels too. If you don’t have stock buoyancy, you are unlikely to buy bigger homes or take that exotic holiday. As government tries to contain fiscal deficit from 4.8% to 4.4% of GDP this fiscal year, the spending boost from the Centre may become difficult.

With history, it is safe to assume that junk stocks will not gain the glory they did. But eventually, markets do recover if the economy continues to march forward. That is the key here. If the GDP growth stays in 6% range, corporations will figure out a way to come out of the earnings stagnation. And some new winners will emerge.

My sense is that next 5 years may be a period of moderate growth in #India , wherein market absorbs the current high valuations. They may appear cheap on current earnings but are probably not accounting for likely slower growth in future.

Eventually, the returns from Nifty 500 are likely to be around 10% for the decade between 2021 and 2031. So, you will be fine as long as your portfolio is well balanced. Ignore the noise and get back to work. If you were expecting this to be a linear rise, then that assumption was never right to begin with.

One last thing
The comparisons that forever bullish gurus quote from US markets don’t apply to any other country. If you pick a historical point from US markets, you can prove almost anything. India story works differently too, unless the economy undergoes a drastic transformation, something like China had for last 30 years. While that is possible, it is also extremely rare.

And this is exactly where the bulls and the bears begin to differ substantially. You can take your pick. The perma-bulls continue the story of India imitating China growth. The story has been alive for 25 years now. Evidence and experience do not justify this thesis.

A healthy dose of realism is always good in investing. Else, you end up buying expensive con stories from faceless sellers who get rich with your money. Some of you may have realised that by now.

The India bull ran fast as it could. But it needs some well-deserved rest. Let it rest for now. The chart is “corporate earnings to GDP”. Pls ignore the header. Numbers are fine.

Follow up Thread 🧵: Farmers Protests:
They’re back!
If Karl Marx were to hear about the farmers protests today, there is a chance that he would be back too. Just like the farmers are back with the same old MSP demand, that is not only un-justified but unethical too.#FarmerProtest2024 See the picture above Does the farmer in the picture needs a govt subsidy or support?
The gentleman circled in red is a typical rich farmer. What about those circled in blue, that are almost forgotten in background. Now who needs govt support? Who needs the MSP?

Short Thread: HDFC BANK
Why are the FIIs selling the largest bank?

A classic case of different paradigms – You have a framework of valuation & begin to wonder why the world is not getting it? There are 2 options – Either understand the other paradigm or change yours. #HDFCBank I’m not sure if you will change your valuation framework. But at the end of this post, you will definitely understand why FIIs may be selling.
I’ve always been perplexed by this comparison that I’ll share now. Let's take a quick dive -

LONG THREAD: SBI Cards IPO Follow-up:
Revisiting the #SBIcards IPO thread (Mar-2020). IPO price - 755, price today - 768.
In Mar'20, I quoted "They say market is a great teacher. If this one makes money for investors, I definitely would have missed some lecture in investing". Well, looks like some of us did learn something. Markets at all time highs, SBI cards is still flat since 3 years. I don’t want to sound arrogant claiming victory. We are all learning here. So let's revisit what SBI cards promised (or implied) & what it delivered. Here we go -

LONG THREAD: Golden Era for Indian Equities - Behind or Ahead ?
As Nifty crossed 20K, time to take stock of what returns to expect in future?
Examine the journey so far & a critical analysis on CAGR returns which are not quite the story we’re sold. Let’s go for a ride:
1/n We’ve all heard this story. Had you invested in Sensex at inception in 1979, you got 660x returns, CAGR of ~17% . Simple math- Sensex started at 100 & now is hovering at 66,000.
If only making money was that easy. Argument is not that strong if we scratch below the surface.
2/n

The golden era of Indian stock markets - Behind or Ahead of us?

My piece for ⁦⁦@EconomicTimes⁩ analysing Indian markets since inception in 1979.

economictimes.indiatimes.com/prime/money-an… I’ll post a thread later if you can’t read behind the paywall.

#Blinkit & #Zomato – Long thread:

1/n
Blurred to Opaque to Muddy
How to leverage a listed company to recover losses from failed ventures/adventures?

Danny DeVito famously said in namesake movie – There is only one thing I love more than my money -
"other people’s money" 2/n
Zomato announced that it plans to acquire Blinkit for a “consideration” of $ 578 Mn. We will revisit valuation later. Below is the snapshot of financials.

Who pays $578 Mn on unaudited financials of just 2 mths ? Not even even 1 quarter nos are provided.
@SEBI listening?

LIC IPO - Long Thread:
This could be the most hated thread of mine, coz who can argue with LIC fan base? But if your money is not going the right way, I’ll raise questions like I always do. With $3BN riding on #LICIPO , this could be the saving bet for many. Or so you hope…🧵 2/n
India’s Insurance density (Premiums/population) is very low & you will hear this most from insurers. India at $59 per capita premium appears to be in its "infancy" with huge upside ahead. Even with a base of 1.4 Bn people, this does look attractive for high growth. Right ?

#PayTmIPO – Long Thread:
There is a new game in town. The rules are “well laid out” by VCs – Report just 3 yr financials, blame flat sales since 2019 on covid, pick consultants to project fancy story, price IPO at 45 times sales, create scarcity of “limited offer” of 12% shares” 12% stake sale ~matches the “principal investment” by VCs. Oh, by the way, get some tranches of funding just before IPO that values your company closer to issue price. It’s like you buying your own house again for 2x price. May not work for you but somehow seems to work for VCs.

#PolicybazaarIPO Long thread: There is monetary printing by RBI, there is lending by banks & finally there is the Indian IPO. “Foreign owned” company with ~1 Bn investment is selling “Indian” unicorn to “savvy” Indians for $ 6.2 Bn. Want to know how this printing works? Let’s go- The basics: Rs 6017 Cr being raised by new shares (Rs 3750) & re-selling (Rs 2267). Face value Rs 2 offered at Rs ~1000 per share is one of a kind. Who decides the price? Examine the valuation ladder below.
With ~$ 150 Mn invested till 2017, we see $ 525 Mn rushes in after 2018

However, despite all this, Zomato’s valuation grows from $ 3 BN to 8.6 BN in 18 mths. Now that’s an innovation at Zomato that I’m not willing to pay for. I’m sure they’ll find many who would like to own “fools gold”. I’ll pass. Zomato listing – Follow up:
So what does an analyst do when listing surprises everyone. Well, he digs more.
At PE of 350, #ZomatoIPO beats DoorDash of US hands down. And we thought DoorDash is overpriced at PE of 143. Is it pricey?

1)#ZomatoIPO : LONG THREAD: Once in a decade opportunity…. for some?

Is the IPO the golden opportunity for investors, as claimed by many? How much appreciation can one expect? A multi-year holding story or just a listing pop. This time it’s different, or is it? Let’s evaluate: The authorized share capital of the Company is divided into 880 crore Equity Shares of face value Rs 1 each, paid-up share capital of the Company is Rs 666 crore.

IPO size: Rs 9,350 crore or $ 1.3 BN USD
Valuation of Zomato : Rs 66,000 crore or $ 8.8 BN USD

Ownership as below

Long Thread on Farmers protests & Agri reforms: What is the protest all about? Who gets impacted & how? Why are protests concentrated in Punjab & Haryana? Are these really farmers or traders losing grip on monopoly? Are farmers being misled? Let numbers do the talking. Here we go A top-down view of Indian production is in order here. What does India’s agriculture produce in a year? I like the below chart for FY 2015. Now to understand the complexity, we’ll have to work with one crop & dig details. Let’s work with Wheat.

SBI Cards IPO: long thread on valuation disasters in Indian markets & how these rip off the retail investors: Basic stats first:
13 crore shares offered out of total of 93 crore stocks. 14% float at Rs 750 per share is valuation of Rs 70 thousand crore to SBI Cards. #sbicards This US $ 10 Billion market cap. They say this is the only card company getting listed so a great opportunity. We’ll see some numbers & benchmarks internationally. At FY'19 profits of Rs 862 crore & EPS =Rs 9.43, we get a Price Earning ratio of 80 !!

Why do people buy #LIC policy when returns are so bad? Long thread: As LIC goes towards divestment, let’s see what makes it policies click. It could save you a fortune, if you get the spirit behind this thread. Please keep your humor cells intact while reading. Let’s begin: (1) Indian custom to buy LIC, passed through generations: LIC has the most entrenched network of 12 lac advisers & a legacy of 60 plus yrs. It has become customary to buy LIC. Your dad is bound to recommend the you same once you get your first salary.

Long thread on Indian Budget 2020-21. Let’s be cynical for a change & question the rationale of initiatives. Because I can’t understand some things the way they are. I’m sure however that we as a nation do believe in good luck. Else we seem to be cruising without compass. If you couldn’t understand why we needed 2.5 hours speech to convey this budget, you’re not alone. To simplify, GDP = Consumption + Investment + Govt spends + (Exports – Imports).We need all cylinders to fire, for #India with highest working age population in the world.Let's see

Long thread on Budget FY-2020: How difficult is finance minister’s job in #India. If you’re amongst those who think the budget doesn’t do much for people, you need to understand this in detail. Why do we struggle to solve national problems? #Budget2020 #NirmalaSitharaman Let me simplify things for the readers as to how the budget looks like & what the numbers mean. Below is the graphic that I have created for the revenue & expense heads for govt of India.Left side is govt INCOME & right side is how it SPENDS for the year. Size Rs 27.8 lac crores

Why is Air India always in a loss? Long thread explaining root causes. This is a lesson in economics on why socialism looks like a beautiful concept in theory, except that it doesn’t work in practice. Let’s start with a related story that has strikingly similar context.@TheJaggi I witnessed an interesting incident long back in Delhi when private buses were introduced and Delhi Transport Corporation (DTC) started making even more losses.I observed an interesting pattern wherein the DTC buses were almost running empty & the private buses were over-crowded.

Long thread on Jamia protests: So why is Jamia protesting? I will not attempt a political commentary that mainstream media is already immersed into. A critical question is - why do students spend so much energy to protest on #CABBill2019 that doesnot not impact them in any way? My last article on #JNUProtests tried to connect dots on the overall lack of accountability of students to their careers,a general mis-direction of energy,absence of realism on current economic issues & the low fee structure that creates absence of urgency for anything productive

JNU thread part #2 : Have explored questions raised by many. Do JNU students really need financial support to sustain? Are they really meritorious & top talent ? Do they complete their study in time or is the perception of overstaying correct ? Why do majority students think on socialistic lines at JNU when students at other places don’t? Finally, why do they keep protesting on every govt decision ? What decisions are hurting the university & what is the protest all about?Lets explore with more data at hand. Here we go

A long thread on JNU fee hike. Is the protest justified ? Some data points can help us analyze. Step-1: Do you know how many courses are there at JNU & what is the student strength? Here is how it looks. @monikahalan @gchikermane We see that there are a total of ~8000 students at JNU. Of this, the lion’s share of 57% students is of social sciences, language, literature & arts (4578 students) & International studies 15% ( 1210 students). Almost 55% of the total i.e. 4359 students are doing M.Phil. or Ph.D