Weekend reading links

1. On the NHAI's growing pile of debt and its asset monetisation estimates. 

In the current financial year, for instance, the NHAI was able to monetise only 840 km. Of this, 390 km was under the Infrastructure Investment Trust (InvIT) model and 450 km through the Toll Operate Transfer (TOT). The expected backlog is about 4,912 km... The projects it has bundled out under InvIT are the older ones where traffic has expanded. Even among them, those which found bidders were the ones where the revenues have crossed Rs one crore per km. Of the eight bundles bid out, only three have seen such levels of traffic and were picked. Three other fell through since the toll collections, though growing healthily, still average less than Rs 70 lakh per km. Those would improve with the growth rate of the economy with larger demands for freight and passenger traffic. NHAI data shows as of now about 38 per cent of its projects with a history of over six years of toll collections have reached this magic figure.

2. Another article on the travails of the other major source of off-balance sheet debts, FCI. The basic problem has been the growing excess of procurement over the requirement. 

Last year (2020-21), the FCI and state agencies procured more than 132 million tonnes (mt) of cereals from Indian farmers at the minimum support price (MSP), consisting of 89 mt rice and 43 mt wheat. This was twice the average procurement of a decade ago. As a result, FCI had a record 110 million tonnes of rice and wheat in its stock this summer (including rice from unmilled paddy), or 2.5 times the buffer norm of 40 mt. On the other hand, the annual requirement under the National Food Security Act (NFSA) is not more than 65 million tonnes... the record 2021 summer stocks of more than 100 mt are despite the 31 mt free giveaway under PMGKAY... the giveaway under the temporary scheme will be smaller in 2021-22, but the procurement of paddy and wheat may again be a record this year.

In case of rice

And wheat

3. Debashis Basu writes about the last IPO boom,

The abolition of control of capital issues removed all checks on IPOs, allowing a free for all. The IPO market peaked in February 1995 with the infamous price rigging and misstatements in the prospectus of MS Shoes. In January 1995, 145 equity issues opened for subscription. In one frenzied week in February that year, 78 companies went public, crowning a financial year of 1,400 issues, most of them small and shady companies that vanished with investors’ money. When you consider the period between 1998 and 2001, when only 219 companies went public, you begin to see the farce of the 1994-95 IPO boom. The regulation of the primary and secondary markets was so lax that just about anybody could raise money with false statements and rigged-up prices in the thriving pre-IPO grey market.

And the dominant role of retail investors in the ongoing boom,

In the two decades till 2019-20, some 40.8 million demat accounts were opened. And in just 20 months after the 2020 lockdown, that figure had almost doubled to 74 million at the end of November 21.

He points to the reasons for the post-pandemic boom,

Four factors were behind this retail boom: One, online sign-ups for broking and demat accounts; two, continuously booming capital markets in India and around the world; three, retail investors having more time, money, and the opportunity to trade as they were forced to stay at home; and four, for the first time an explosion of easy to consume information on stocks, including videos. The net effect was enormous. For the first time in decades, retail investors as a group came to dominate cash market trading — some 45 per cent in FY21. The share of foreign institutional investors and domestic institutional investors is down to single digits.

4. Highlighting the enormity of the global debt binge,

Twenty-five countries including the US and China have total debt above 300 per cent of GDP, up from none in the mid-1990s.

5. Highlighting the problems with MSP, Ashok Gulati and Ranjana Roy use the NSO's latest Situation Assessment of Agricultural Households report to show that only about 5.6% farmers benefit from MSP and only 2.2% of agricultural produce by value is covered under MSP. Besides the benefit is cornered mostly by farmers from Punjab and Haryana. 

6. Mahesh Vyas on the Indian labour market,

The unemployment rate rose to 7.9 per cent in December 2021. It was 7 per cent in November. A year ago, in December 2020, the unemployment rate was higher at 9.1 per cent... In 2018-19, the unemployment rate was 6.3 per cent and in 2017-18 it was 4.7 per cent... In 2019-20, India employed 408.9 million... In December 2021, employment was 406 million. This was 2.9 million less compared to the employment in 2019-20. The shortfall was not evenly spread at all. The biggest fall in employment was in salaried employees. This class saw a loss of 9.5 million jobs. Another 1 million jobs were lost among entrepreneurs. This massive 10.5 million loss of jobs was offset by gains in employment among daily wage labourers and more so among farmers. An industry-wise break-up of the difference between employment in December 2021 and 2019-20 shows that the manufacturing sector has lost 9.8 million jobs. But, construction jobs increased by 3.8 million and agricultural jobs increased by 7.4 million. Services sector lost 1.8 million jobs. Within services industries, hotels and tourism lost 5 million jobs and education lost 4 million jobs but retail trade gained 7.8 million jobs... It is disappointing to see the sustained weakness in salaried jobs. These had risen to 84 million in September and October 2021 but have since fallen to 77 million in November and December 2021. In 2019-20, there were 86.6 million salaried jobs in India. In December 2021, while India added 3.9 million jobs, it did not see any increase in salaried jobs.

7. Merryn Somerset Webb attributes the ongoing natural gas price rises in Europe to a decarbonisation shock,

The Bank of America reckons that the average European household spent about €1,200 on electricity and gas in 2020, a number that, based on current wholesale prices, will rise to €1,850 by the end of 2022 — up 55 per cent. Next year is unlikely to be much better. Energy prices will keep on rising. Why? Because too many governments have jumped the gun on renewables — thinking that we can phase out fossil fuels in favour of deeply unreliable renewable energy significantly faster than we actually can — if indeed we ever can. This is a decarbonisation shock — which one fund manager tells me could even end up causing as much pain as the Opec-driven oil shocks of the 1970s...

It is, say analysts at JPMorgan, a simple matter of supply and demand — as ever . . .  There has been a collapse in investment in oil and gas production — capital spending on new projects is 75 per cent down from its peak. But at the same time global demand for thermal energy sources as a whole has “barely declined” — and the demand for oil just keeps rising. JPM expects global oil demand to grow by 3.5m barrels per day in 2022, ending the year both slightly above 2019 levels and at a record high. There will be a new record high in 2023 — there are a lot of record highs in today’s column — more unwanted inflation I’m afraid. JPMorgan’s various research teams forecast oil prices in 2022 to range from $80 to $125 a barrel. The world’s efforts to energy transition are obviously well intentioned. But good intentions often come at an unexpectedly high price.

She quotes Charles Gave of Gavekal Draganomics to argue that energy prices induced inflation can have adverse consequences on the economic output. 

All “structural bear markets in the US have all started when the S&P 500 was significantly overvalued versus energy”, says Gave. This was the case in 1912, 1929, 1968 and 2000. In each of those years valuations reflected investors underestimating the future cost of energy and hence overestimating the future profitability of listed companies. Those who aren’t nervous enough yet might also note that all these bear markets, bar that of 1929-34, took place with inflation on the up and “lasted as long as inflation endured”. This makes sense if you think of it in terms of rising energy prices pushing up costs and companies then not being able to add value or improve efficiency fast enough to absorb the costs without raising prices or suffering severely collapsing profits. The first creates inflation and causes a fall in demand — which hits profits anyway — so either way stocks valued with low energy costs baked into the models begin to look nastily overvalued.

One additional point to make here. For the past few decades, one of the disinflationary impulses in the west has been the cheap goods coming out of China. Those goods were cheap partly because they were made with cheap labour — now getting more expensive — but also because they were made with the cheapest thermal fuel there is — coal. That’s something that is also shifting. China, keen to reduce pollution and maybe even to decarbonise, aims to get coal down to 20 per cent of its energy mix by 2026. This is far from certain of course, given the domestic political and economic pressures, but you can see which way things are going. The key point here is that energy prices matter even more than you think. Bull markets start when energy is plentiful and cheap (1922, 1949, 1982, 2010 says Gave). Bear markets start in times when it is not. Times like these.

8. As Apple touches $3 trillion in market capitalisation, FT has a story on Tim Cook's role since taking over in August 2011. 

During his time at the helm, Apple’s annual revenues have ballooned from $108bn in the year he took over to $365bn in 2021. Net profits have grown 3.7 times, from $26bn to $95bn. But more significant is how Cook has built a services juggernaut to eke out every penny of the Apple ecosystem, garnering a steady stream of recurring revenues from App Store fees and nearly 800m customers paying for digital media that expanded during his tenure. That substantially reduced Apple’s dependence on the iPhone — and propelled the company’s share price to a level where its price-to-earnings ratio is now three times higher than what it was a decade ago. “Tim Cook’s biggest success is the cultivation and the fostering of services, and the degree to which he’s been able to revolutionise the way that the company is perceived in the eyes of investors,” says Mickle.

Two major products have emerged in Cook’s first decade, AirPods and the Apple Watch — big successes with market shares of 25 per cent and 31 per cent, respectively. But the services division has proved far more significant. Last year it delivered nearly $70bn in revenue — roughly double that of the Mac, iPad or wearables divisions — and margins were 70 per cent. “We’re not going to credit Tim with coming up with the next innovative idea, but what you can credit him with is that you have a platform of hardware that suddenly has services that will be 25 per cent of revenue by 2025,” says Ray Wang. “You’ve got an ecosystem that’s unparalleled to any. A supply chain that is unparalleled to any. And of all the different attacks on Big Tech, Apple has weathered it the best.”

This about his diplomatic dexterity,

Cook has also proved to be a skilled diplomat. His focus on consumer privacy has helped Apple avoid Brussels’ ire amid widespread anti-tech sentiment. In China, he signed deals to expand a massive manufacturing footprint while building up a $68bn business in the country — far more lucrative than any of its tech rivals. And in Washington, he avoided tariffs on Apple products by appealing to Trump’s narcissism.

This is stunning,

Apple has produced a regular cadence of product iterations impressive enough that consumers are willing to pay premiums the rest of the industry can only marvel at. The iPhone held a market share of 17 per cent last year, but it accounted for 80 per cent of global smartphone profits, according to Counterpoint Research.

This about why Wall Street loves Tim Cook,

Wall Street loves Cook for two reasons. One is buybacks. Apple’s sharecount in the past decade has been cut 37 per cent, from a split-adjusted 26bn to around 16bn today. As a result, earnings-per-share are up 5.6 times. So while Apple’s market cap has grown nine times over 10 years, share prices are up 14 times in the same period. Second, Apple started paying dividends in 2012, following a 17-year gap. So on a total return basis, shareholders in the Cook era have earned 33 per cent a year for a decade. If someone had invested $10,000 the day Cook was anointed CEO, and reinvested all dividends, that sum would be worth more than $200,000 today.

As the article alludes to, there are question marks about how much of Apple's valuation is also about the times - emerging technologies, globalised markets, cheap money, pandemic induced tech adoption etc.

9. NYT has an article on re-shoring of manufacturing in the US hastened by the disruptions to supply chains due to the pandemic. As the article notes, businesses have started to prefer the security of supplies over cost. 

This is an interesting observation. 

Repositioning the supply chain isn’t just an American phenomenon, however. Experts say the trend is also encouraging manufacturing in northern Mexico, a short hop to the United States by truck. Called near-shoring, the move to Mexico is paralleled in Europe with factories opening in Eastern Europe to serve Western European markets like France and Germany. 

Every now and then, there opens up new opportunities which, if encashed, can have transformative effects. With some luck, if built-on with strategic policies, this may well be Mexico and Eastern Europe's springboard moment for an East Asian Miracle type movement.

10. In a data rich article, Apoorva Javadekar casts doubts on the return of the investment cycle in India. 

First, India’s fixed capital formation rate has steadily fallen from 36 per cent of GDP in 2008 to 26 per cent in 2020, while China and the US registered improvements in the capital formation ratio from 37 per cent to 42 per cent and from 18 per cent to 21 per cent, respectively. For a set of 718 listed companies for which data is consistently available from 2005, the capex growth rate has dwindled from 7 per cent in 2008 to around 2 per cent in 2020. The return on invested capital in FY21 is still low at 2-3 per cent compared with 16-18 per cent returns in 2005-08... As per CMIE data, the quarter ending in June 2021 saw Rs 2.72 lakh crore worth of new projects announced. This fell to Rs 2.22 lakh crore for the September 2021 quarter and to Rs 1.80 lakh crore between October 1 and December 14, 2021. This is much below the average of Rs 4 lakh crore a quarter of new project announcements during 2018 and 2019. Further, new projects are concentrated in fewer industries (power, and technology) with the top three accounting for 44 per cent of the total of new projects announced. Importantly, capex stood at 16 per cent of total government expenditure for Apr-Sept 21, which is not higher than in previous periods.

At the same time, capacity utilisation for corporate India is at an all-time low. From a peak of 83 per cent in 2010, when capex was running hot, utilisation levels declined to 70 per cent just before the pandemic, and further to 60 per cent in June 2021 as per the RBI’s latest OBICUS data... historically, higher cash does not predict higher capex. For the 718 firms considered earlier, cash has increased from Rs 1.95 lakh crore in March 2017 to Rs 2.50 lakh crore in March 2020, without a corresponding pick up in capex. So the fact that cash has further increased to Rs 3.21 lakh core in March 2021 does not necessarily lead to higher capex.

Underlining the point is this graphic from the RBI's recent report on the health of banking sector.

My larger point from all these is that without broad-based revival of aggregate demand, a capex cycle may remain elusive. 

11. Interesting graphic that captures the dominance of US, Japan, South Korea, and China in 25 cutting-edge digital technologies in the 2013-16 period (HT: Adam Tooze)