Weekly reading links

1. Mint quotes a Jeffries report to highlight the overvalued Indian equity markets,

“Nifty’s premium over EM and AxJ (Asia, excluding Japan) index has risen to near the all-time high of 68%/50% as compared to the average of 37% and 25%, respectively. We also find that our favoured valuation gauge of yield gap (1/PE less 10-yr G Sec yields) has spiked to a high of 165 basis points (bps) as against the long-term average of 95bps."

2. Carlyle is raising $1 bn in debt from a group of international banks like Nomura, HSBC, Goldman etc to acquire Hexaware Technologies, an IT services firm owned by Baring Private Equity Asia for $3 bn in a competitive bidding. At a time when equity deals by foreign PE firms are taking centre stage, this LBO will be among the biggest debt deals by a PE firm in India. The debt is likely to be structured as a one year bridge loan, to be later taken out by an international bond offering. 

3. Apple's India manufacturing performance in perspective,

Faisal Kawoosa, founder of Techarc which tracks volume production, says that in 2017, the volume of Apple phones made in India as a percentage of the total sold here stood at only 5 per cent. In 2020, it went up to 60 per cent. Currently, it is 75 per cent after the Apple 12 also started being manufactured in India. According to sources in the know, Apple value addition in the country for mobile devices currently was around 15 per cent. However, the three contract manufacturers have committed to the government that they will raise this figure to 30 per cent in five years under the PLI scheme. To provide a reference point, Apple’s value addition in China is around 40-45 per cent... the company will hit revenues of $3 billion in India by the end of its fiscal year which has just ended in September... However, despite the sharp increase, India still accounts for less than 1 per cent of Apple’s global revenue which is expected to hit $330-$340 billion.

4. Scott Galloway has this graphic which shows the shrinking of corporate taxes as a share of all US government tax revenues,

5. The long-term damage of school closures will be large. India has had the longest school closures.

The article has links to the research on harmful effects of school closures. Sample more,

The study revealed that only 8 per cent of children study online in rural areas and 24 per cent in urban areas. In rural India, just 28 per cent of students are studying regularly and 37 per cent aren’t studying at all. The figures were slightly better but scarcely encouraging for urban underprivileged households, with about 19 per cent not studying at all and 47 per cent studying regularly. Strikingly, smartphone ownership did not guarantee access to learning in these households, either because they are used by working adults, or due to poor connectivity or lack of money for data networks.

6. AK Bhattacharya analyses the recent improvements in India's exports, which comes after a near lost decade in export performance.

Between 2011-12 and 2020-21, they remained range bound within $262 billion and $330 billion a year, with the annual export number falling below $300 billion on as many as three occasions. Worse, from a high of 17 per cent, the share of exports in India’s gross domestic product has seen a steady decline to about 11 per cent during the last ten years.

He points to the rising share of China in India's exports and the tepidness in automobile exports, and the rebound of pearls, gems, and jewellery exports.  

7. Interesting snippets on global cuisine trends from an oped by Krishendu Ray

By the 17th century, the European appetite for spices and aromatics peaked. With spices so accessible in Europe, the elites started pulling away. French countesses travelling on the peripheries of Poland and Spain could be heard complaining about the unpleasant reek of saffron and cinnamon in their foods. The 17th-century French writer Nicolas de Bonnefons asserted the new orthodoxy: “Cabbage soup should taste of cabbage, leeks of leeks, turnips of turnips.” The rejection of spices and vinegar-based sauces for more butter-and cream-based herbed ones marked the shift within French gastronomy towards a new essentialism, the sine qua non of European haute cuisine... elites in Arab, Persian, and South Asian courts, who would continue to prefer complex, aromatic and sweet-and-sour culinary constructions. Here, elevation was not in the use of spices per se, but in the selection of prohibitive ones — saffron as opposed to the cheaper turmeric to lend a vibrant colour — and labour-intensive techniques: Rice dishes bejewelled with pomegranate seeds, stuffed and layered breads, hand-squeezed sherbets, and finely-ground koftas and kebabs... French, Japanese, New American, and Italian top the list that American customers are willing to pay well for, while Indian, Chinese, and Thai round out the bottom. Thus, it is not surprising that the World’s Top 50 restaurant lists are dominated by French, Italian, New American, and Japanese restaurants while we see almost none from mainland China, sub-Saharan Africa, South Asia or the Arab world, home to more than half of the world’s population and more varieties of cuisine, including court cuisines, than elsewhere.

8. Times points to how educational attainment and college education is contributing to political preferences in the US,

When the Harvard-educated John F. Kennedy narrowly won the presidency in 1960, he won white voters without a degree but lost white college graduates by a two-to-one margin. The numbers were almost exactly reversed for Mr. Biden, who lost white voters without a degree by a two-to-one margin while winning white college graduates. About 27 percent of Mr. Biden’s supporters in 2020 were white voters without a college degree, according to Pew Research, down from the nearly 60 percent of Bill Clinton’s supporters who were whites without a degree just 28 years earlier. The changing demographic makeup of the Democrats has become a self-fulfilling dynamic, in which the growing power of liberal college graduates helps alienate working-class voters, leaving college graduates as an even larger share of the party... College graduates attribute racial inequality, crime and poverty to complex structural and systemic problems, while voters without a degree tend to focus on individualist and parochial explanations. It is easier for college graduates, with their higher levels of affluence, to vote on their values, not simply on economic self-interest. They are likelier to have high levels of social trust and to be open to new experiences. They are less likely to believe in God...

The concentration of so many left-leaning students and professors on campus helped foster a new liberal culture with more progressive ideas and norms than would have otherwise existed... As college graduates increased their share of the electorate, they gradually began to force the Democrats to accommodate their interests and values. They punched above their electoral weight, since they make up a disproportionate number of the journalists, politicians, activists and poll respondents who most directly influence the political process. At the same time, the party’s old industrial working-class base was in decline, as were the unions and machine bosses who once had the power to connect the party’s politicians to its rank and file. The party had little choice but to broaden its appeal, and it adopted the views of college-educated voters on nearly every issue, slowly if fitfully alienating its old working-class base. Republicans opened their doors to traditionally Democratic conservative-leaning voters who were aggrieved by the actions and perceived excesses of the new, college-educated left... Environmentalists demanded regulations on the coal industry; coal miners bolted from the Democrats. Suburban voters supported an assault gun ban; gun owners shifted to the Republicans. Business interests supported free trade agreements; old manufacturing towns broke for Mr. Trump.

9. FT has a graphical story on the supply chain constraints faced by manufacturers. This from Europe,

Nearly half of EU rubber, machinery and computer producers, and most electrical equipment makers, and nearly 60% of carmakers report supply shortages. 

Transport costs have surged

Fares between China and Europe have risen seven-fold compared to August last year. 

10. The framing of insurance policies as also an investment in India has always intrigued me,

Everywhere else in the world, insurance is sold as insurance and not as an investment. In India, unfortunately, it’s the other way around. Aggressive agents and “relationship managers” in banks mis-sell insurance as an investment product. Life insurers and, indeed, the government itself, are party to this mis-selling. As far as the government is concerned, the Life Insurance Company of India is a cash cow, and so it has no incentive to stop mis-selling of life insurance as an investment. The tax code is designed to aid this mis-selling, with life insurance premiums and unit-linked insurance plans traditionally classified alongside tax-saving investments such as the provident fund in Section 80C. (Health insurance is deductible up to Rs 20,000 under Section 80D.) There is thus an unhappy equilibrium in India where everyone is served but the customer. Insurers are focused on remunerative segments or mis-selling; and neither the regulator nor the government has an incentive to change things.

The insurance penetration remains stubbornly low. The ratio of insurance premium paid to GDP is 3.76%, of which a percentage point is non-life insurance. And the annual growth rates have remained stuck in low single digits. Another pointer to the "missing middle class"?

11. More missing middle class indicators come in the form of news that Ford is shutting down all its manufacturing activities in India and take a $2 bn write down,

Ford will wind down an assembly plant in the western state of Gujarat by the fourth quarter, as well as vehicle and engine manufacturing plants in the southern city of Chennai by the second quarter of next year... Foreign automakers have found it difficult to gain a foothold in the value-conscious Indian market dominated by Maruti Suzuki India Ltd.’s cheap cars. The government’s high tax regime, which imposes levies as high as 28% on gasoline vehicles, has also been a major roadblock. Toyota Motor Corp. last year said it won’t expand further in India due to high tariffs, while Harley-Davidson Inc. has exited the market. General Motors Co. pulled out in 2017... The local units of Japan’s Suzuki Motor Corp. and South Korea’s Hyundai Motor Co. together control more than 60% of the market.

Reinforcing the point on the size of the market,

In fact, the number of cars sold a year is broadly the same as it was in 2014. CMIE data indicates that “car sales between 2011-12 and 2018-19 grew at the rate of 1.3 per cent per year”

TN Ninan too weighs in on the issue, pointing to why the top four global manufacturers have just 6% market share in India. This too is important,

India is a market for low-priced cars with low running costs. The global majors don’t have models that fit into that framework because most of the world goes for larger cars. Only Maruti and Hyundai (which between them command two-thirds of the market) have successful entry-level models.

12. Interesting article on the use of recycled plastics in fashion industry. Recycled polyethylene terephthalate (rPET) is used in everything from clothing to sneakers and consumer goods packaging.  

Globally, plastic recycling rates are estimated to be between 14-18 per cent, according to the OECD. In the US, only 30 per cent of PET bottles are recycled, according to the US Environmental Protection Agency... Even if fashion brands fulfil their recycled content targets, and the world ups its recycling capacity, there is another looming long-term problem: recycled polyester is not itself mechanically recyclable. Just like most virgin plastics, it will probably end up in landfill. The only way to achieve circular textile-to-textile recycling at scale is through chemical recycling, a process in which plastic waste is broken down into chemicals or oils, providing raw material for future plastics.

13. FT has a good article that points to the trade-offs in the use of biofuels.

A search for lower-carbon motor fuel is pitting food companies against the energy industry over tightening supplies of a humble commodity: vegetable oil... The raw materials are typically edible oils extracted from plants or animal fat. The push has alarmed food companies coping with record prices for many edible oils this year... Food groups have long opposed biofuels targets in the US, notably over corn ethanol mandates that were sharply raised in 2007... In food and agricultural circles, “it’s become the diesel vs doughnuts debate as food and fuel compete for that oil”, said David Widmar, an agricultural economist and consultant. The US Department of Agriculture predicts the price of soyabean oil will average 65 cents a pound this year, more than double the price of two years ago... Tensions are at their highest in the US, where federal policy and low-carbon fuel mandates in states such as California are driving heavy investment in renewable diesel production capacity. The amount of soyabean oil used to make biofuels in the US is expected to total 11.5bn lbs this year, up by a third from 2019 and more than 45 per cent of domestic soyabean oil consumption, according to USDA estimates... Sky-high vegetable oil prices are also having a global impact, recently forcing Brazil and Argentina to reduce biodiesel mandates and putting Indonesia’s fuel-blending plans at risk, said Michael Magdovitz, analyst at Rabobank...

Oil companies have flocked to renewable diesel markets over the past two years. Last month, ExxonMobil proposed a renewable diesel investment in Canada. Independent oil refiners Marathon, Phillips 66 and HollyFrontier are also pursuing projects. Some oil companies are adding agricultural processing to their assets. Marathon and Archer Daniels Midland have formed a joint venture to crush soyabeans in the farmlands of North Dakota, sending the soyabean oil to a new renewable diesel plant that Marathon is developing. Chevron last week said it planned to invest $600m in a soyabean joint venture with Bunge, the world’s largest oilseed processor, to create what the two companies called a “reliable supply chain from farmer to fuelling station”.

Clearly, there are no free lunches. The promise of biofuels come with a trade-off on food prices.

14. Long read on the plight of rural schools in the US,

Most of the country’s poorest counties are rural... decades of population loss and divestment by state governments has left many rural communities facing “nothing less than an emergency” when it comes to educating children. Nationwide, more than 9.3 million children — nearly a fifth of the country’s public-school students — attend a rural school... Not only are rural communities more likely to be impoverished, they’re also often disconnected from the nonprofits and social-service agencies that plug holes in urban and suburban schools. Many don’t have access to broadband internet, and some don’t even have cellphone service, making it hard for young people to tap outside resources. Rural schools have a difficult time recruiting teachers and principals... rural children were learning in aging buildings with broken HVAC systems and sewers too old to function properly.

The problems are similar to those faced by schools in developing countries. The solutions too are unlikely to come from just pouring more money into inputs.

15. Good primer on account aggregators in India.