April 23, 2018

The Headwinds faced by Indian Equities

By Manish Bhandari, Vallum Capital

In many of my writings on the blog and public discussions. I have sounded a note of caution that Indian economic growth and its reflection in the stock markets is masked more by economic value shifts rather sustained value creation by the economy. The shift of value from PSU Bank to Private Sector Banks and NBFC, MTNL/BSNL to private telecom players, Air India to private aviation players,Railways to private logistic players, SME/MSME to large Industrial duopolies, etc. The market economics should have had addressed supply constraint in each industry.

Secondly, over that last one and half decade, our country has become a sustained consumer rather the producer of technologies thereby leading to ever-increasing trade deficits. Such inefficiencies and inability to create cutting-edge businesses are reflected in the jobless growth of India.

Thirdly, Indian equity market is facing a shortage of regular supply of high quality globally competitive businesses. On the domestic front, many MNCs are on the path to delist,and upcoming global businesses in India are held in the private domain.



In many cases, MNCs operating in private domain are gaining market against much-listed entities. The money is getting crowded into a fewer set of listed opportunities. I should put this Ancillary Conundrum; where ancillary businesses have started trading at a huge premium as the main businesses are not listed. Let’s take the example of Car or TV, Consumer durable business manufacturers. As many of them are not listed, a market participant is left with no choice to pay a huge premium to ancillary businesses.

Lastly, the convergence of technologies like Artificial Intelligence, Gene Technology, 3D printing,  Robotics, etc. with manufacturing and services have started invading traditional businesses. India has also missed the evolution of new edge technology and commercializing on a global scale.

You all may be surprised to know that Softwear Automation Inc. has developed a robotic table which uses machine vision to adjust to fabric stretching. Assisted by this technological innovation, a Chinese apparel manufacturer has opened a factory in the US which will produce 23 mn T-shirts/p.a at a cost of Rs 25 per T-shirt. I would call this as the emergence of Made in the US by China. This indicates deflation of wages for many industries to come by. An estimate suggests that worldwide only 1600 out of 1.63 mn robots were engaged in textile and leather trade. This sends a shiver down my spine, when I think of the full-scale impact on emerging economies like India, in future. The challenges of rising Current account deficit leading to capital account imbalances also exist for India.

Source: http://www.vallum.in/wp-content/uploads/2018/04/VallumDiscovery-Stakeholders-Letter-March2018.pdf

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