Russia-Ukraine War- Wars and Mis-calculations (Part 2)

 Please Click here for earlier Post

Ukraine is still standing; not sure whether on one leg or two but the same is irrelevant in the face of great fighting spirit shown by Ukraine. This we can say is a fantastic fight back. When US and NATO declared that they won’t support Ukraine against Russia; Russia was smiling at that time at the pitifulness and helplessness of Ukraine and just like Russia everybody discounted them as a loser without any will left to fight. But these types of events are the reason that history books have something interesting to tell; these are the events where they don’t need historians to create (Read fabricate) a narrative to generate/justify/impose an alternate reality. It would be interesting to see how Russian history books would narrate (read downgrade) this tremendous fight back.

So as I have explained in the earlier post- Strong and prolonged resistance by Ukrainians have disrupted the Russian plans for regime change and now Russia has to reassess and recalculate the inflow matrix. Russia and Ukraine are going to have another round of talks today although just a week back Russia was not even picking their calls and it had no interest in talks. So it means Russia has lost because now it can only destroy Ukraine but can't win and that's why we are seeing them talking. The deal point at the talking table now is- Russia won't destroy Ukraine and in return it will take something from Ukraine and what Ukraine can give is a wild guess because I don't think Russia's sole purpose for war was not allowing Ukraine to join NATO. As I have shared earlier- I feel Russia doesn't want democracy near its borders and Putin wants to revive the USSR before he is gone from this world and he knows he is losing time. Putin wanted to make Russia a big economic power when he started in 1999, even wanted to Join NATO. But as of now we know Russia is still far from being a big economic power. Its exports are mainly natural resources (not high value added products). So there are more political aspects to the current quagmire than security aspects. Why did (what fear) small eastern European (earlier USSR members) countries join Nato? Whether NATO was really interested in Russian territory (NATO expansion card)? Whether Russia ever counted NATO as a big threat to its security and whether there is any doubt that NATO was on its death bead two months back so as to pose any real threat to Russia (now revived by Russia)? Anyone who feels there are real/genuine answers (Not just speculations) for these questions can understand that things are much more complex than a feeble NATO expansion Card being cited as a reason for this war. So as of now, I can't say that Russia was only worried about NATO expansion and we are not really sure what further destruction he can do (or he is already having plans). Putin has been successful in creating an image of an unpredictable fellow who can take irrational actions and that's why west is feeling a bit constrained in its reaction and planning to counter Putin. But I don't think that he is that irrational fellow because the same recklessness and irrationality is not on display in other spheres of his life and relations with other countries whether it is India or china; Putin has always taken rational decisions when it is with India or china so I think west has to plan their answers treating his as a rational fellow and then this bloody game is a great Game theory stuff- who will take what actions and strategies to counter the others. 

Russia is our greatest friend but that doesn't mean that friends can't make mistakes or dangerous miscalculations. However in geopolitics we don’t raise a finger towards the mistake of friends because most of those who want us to raise our finger also have bloody hands and nobody is interested in us and our security. Truth (Realty) is never linear and one dimensional. In a more logical world, Russia can't justify its invasion pointing out that the likes of USA have also done it many times. Russia said that Ukraine People are dying under Nazis and that they wanted to save them; but now they are the ones who are killing them and destroying their schools/hospitals/everything so that they can bring them to the table to have a deal to save their face. So Russia has done something which has weakened it (and India also) and I just hope that a more weakened Russia due to economic sanctions doesn't strengthen China too much. A weak Russia will find it tough to support India. So we can't really be certain in whose interest this war started- Ukraine, Russia or just Putin but one thing is looking certain that it will hit Indian interests and that's what matters the most for an Indian. Rest all becomes secondary in this weird and imperfect world. Pakistan who once was a fierce Russian enemy and the one responsible for their defeat in Afghanistan and then subsequent division of the USSR is now an ally of Russia. So Russia will ensure its interests before supporting India. The good thing is that India understands that It can't really count others in its fights; if anyone can join then good but India doesn't and can't really expect too much from others and that's why we are neutral and don't mess with the affairs of others.

So in a more logical world we can expect that as Russia really doesn't have anything to gain by winning or destroying Ukraine and costs and other economic, political and global implications are very harsh and hence we could expect both Russia and Ukraine to break a peace deal today or in near term...this is no brainer (in a logical world). But Putin has shown we can't really expect him to follow the logic- otherwise he doesn't have anything to justify the war/invasion. But still I really feel and hope that by now the ensuing Russian fall might have forced Putin to reassess, recalculate and recalibrate his much bigger and ambitious plans and we can expect some peace coming soon.

A big positive (feels good to talk about positives amid this catastrophe) I see after any such peace deal is that the World may witness a longer peace period. For a long time, I have been feeling that some big war may happen at any time in the world because there is too much negative energy buildup. We have countries like China who are ready to create nuisance all the time. We have too many conflicts everywhere. Everybody feels that they are strong enough to destroy the others...so the likes of China are doing nonsense everywhere in every possible way and world really was/is like a dangerous volcano waiting to erupt any time. But this war has shown the fragility of power and the strength of the weak. So people have seen the destruction they wanted to see for a long time and also understood the results that in today's world nobody is really that weak. The war has sort of released the pressurized energy and people should focus on peace. Hence I feel if both can find a peace deal then we may see the world becoming a peaceful place...in a sense that it has avoided a more serious, destructive and bigger war.

Although the likes of China may emerge stronger due to a weak Russia and they will try to create nuisance but I feel a silent Chinese decoupling from the global supply chain is already underway and then even China won’t be able to withstand economic sanctions if they try anything similar to Russian misadventure. But India will always be alone to fight China though the QUAD presents some hope because out of sheer foolishness China (most dictators are foolish or turned foolish over time) has created an enemy out of India and forced India to join hands with USA when China’s main adversary in realizing its global dreams (starting from Taiwan and South china sea) is USA not India. China doesn’t have any serious conflicts with India which can hit its economic or security considerations. India has even allowed China to get away with Tibetan occupancy. So India was always ready to achieve peace and that’s where China has miscalculated- to consider the peace willing fellow as weak. India is willing to flex its muscles now (Especially under Modi) and is not ready to accept any Gunda-gardi.

But we may see some dramatic realignments happening in the geopolitical arena in the next 2-3 years. Pakistan will destabilize and we may see it changing parties and the same may end at either loosing POK to India or closing a peace deal with India although before that India needs to oust China from POK and so we can see that India-China rivalry may take center stage and Pakistan will be just waiting in the corner and thus we have entered a period where Pakistan as an adversary is going out of the way. And that’s why this Russia Ukraine war is so important for India as this will also direct/impact Chinese strategy. China is predominately an export based economic power (with many challenges inside) and the people who earn money from others don’t fight with them. One reason the likes of USA who are big customers for many (They import big from everywhere) can wreak havoc by stopping/shifting their imports and as USA is the biggest trading partners for most of the world so it is very tough for anyone (like China) to ignore USA economic sanctions….USA is the biggest consumer in this world…a consumer with one very valuable commodity-Dollar. So India just needs to strengthen its economy and defence capabilities and creating strong allies and there may come a situation for India even to reassess its relations with Russia if the question is to counter China.

We will start investing again once some peace is emerging on the horizon...preferably next week

(oscillationss@yahoo.in)

Russia-Ukraine War- Wars and Mis-calculations

 Dear All, I am regularly receiving messages to share my views on Ukraine-Russia war. First of all I am extremely sorry for not being able to post updates/studies on this blog for a long time. Actually I am working on something related to stock analysis/advisory work and hence not getting time for posting the studies as of now. But I will start the same shortly.

About the war- I am sharing my messages on this which I am regularly sharing with the newsletter club of this blog. Please note that I am not a war or geopolitics expert and my views are constrained/limited to my very limited knowledge of the subject. Still as the issue was related to our stock Investments so I have shared my views and we will take the investment calls accordingly. So please ignore my views if you find them inaccurate/illogical (or funny). Ever since the war has been started by Putin I have been feeling that although Russia looks perfect to win the War but some of its calculations- like easy and fast win  without much of Ukraine fight back, less harsh economic sanctions as it has some European countries to support it and their reliance on Russian oil/Gas may not happen as per their calculations and we may see some unexpected and unwanted surprises. So I still feel that Russian mis-calculations can lead this war into something very catastrophic and that’s why even though Russia is our friend I am not supporting this war (As Russia could have easily avoided the war and still emerged victorious achieving objectives).  A stronger China emerging from this war is not good for India. The need is to see this war from Indian, Human and Global peace perspective first rather than Russian perspective alone. Reality is always multi-dimensional and multi-polar.

From: Oscillations  Date: Sat, 26 Feb, 2022, 13:03
Subject: Market fall and the way ahead

Dear All, 

Surprisingly Kyiv is still standing and Ukraine is giving a very tough fight. Their president is acting brave and he is in Kyiv and leading from the front and even refused US help to evacuate. Ukrainian people are also ready for right. This man was supposed to act like a comedian ( he was a comedian before) but now he is some sort of a global hero...and wars are fought on these emotions and motivations. Ukraine was supposed to surrender on the first day but they still are giving a bloody fight. This man made a mistake earlier for not strengthening borders earlier when Russians were at the door...but at that time he was sort of assured of NATO and US support.

Ukraine never supported India at UN/kashmir...sold arms to Pakistan. As Russia is our partner and a time tested friend in tough times so India should not Vote against Russia now and should keep a neutral view. But we just hope that their miscalculations shall not hit our interests. Like more than a Russian win India should be more concerned about stronger China emerging out of this war as a reliable Russian partner and china will try madly to replicate Russian style invasions in India and other countries and Russia will support them even if they are against India. So I believe India must have or still been trying to make Russia accept peace. So the need is to see this war from Indian (indirectly not any direct action though), Human and Global peace perspective first rather than Russian perspective alone. Reality is always multi-dimensional and multi-polar. One linear perspective is never absolute. India needs to see this fight from its own perspective first-  how it will affect India from Russian angle/actions and that's why this war is not good for India...if Russia wins it is Bad but if it loses then the worst...along with a chance of a world war any time, India getting hard pressed to choose Russia or others, India getting involved in senseless and dangerous cold war for a long time, pakistan and China becoming stronger especially when a weak Russia needs their support for its economy. 

The earlier Narrative that Russia is doing this to counter Nato efforts does not look credible at all. Russia was supposed to hit and weaken Nato but Nato was a dying alliance before this war and present russian actions has in fact reignited the alliance and EU is now following and buying the US narrative of Russian danger. I don't think that Putin was such a fool to not understand this...that nato will get alert and will strengthen themselves and their security and expansion. Still he chose the war and this is what worries me of his true intentions. I feel US and NATO announced earlier not to send armies in order to stop Russia from launching a war...their involvement means sure shot world war so in spite of public humiliation it looks like they have tried to avoid the global war. At that time, Russia was also having an opportunity to leave war plans on a high claiming a win which would have still served its objectives. But sadly for unknown reasons he chose the opposite.

Russia missed the opportunity on the first day when Ukraine was not ready for the assault. I think attacking from 3-4 positions/sides may be one reason. Russia is still an expected winner but it has a very bloody nose with large no. of casualties and if the number rises further then this will be sort of a humiliation for the very strong Russian army. This has given time to Ukraine to get their act and supplies together and get arms from other countries and now things will be more dangerous for Russia. The Russian supply chain is not doing good and it is an old weakness...so there are tanks and vehicles left without fuel...their soldiers are asking for food from local people. Most are just kids (18-20 years) pushed/forced into war. They are crying after they are captured.

The Ukrainian people are all ready for a fight. Quite the opposite of what Russia was thinking or declaring. Russia/Putin said that Nazis are ruling Ukraine and Ukraine people will cheer and embrace Russian army...to see themselves getting liberated. So much disillusion and histeria if Putin really believed in it or was made to believe!! But this hasn't happened at all and Ukraine's president is now a global Hero and if there was even a small contribution of this illusion in their motive behind the attack then Russia will be in some very difficult time.

We can assume that Russia will now become more deadly but the time lost has given Ukraine much time to regroup and also given fire to the protests in Russia which is very bad. Surprise attack element and quick capture of Kyiv and dislodging of the Govt was the key which didn't happen at all as per expectations. Russia is hitting civilian targets although Russia was supposed to liberate these people earlier who as per its understanding were living under hell. But there are nobody in local buildings anymore...they were supposed to be in there on the first day of the surprise attack and subsequent expected control of Ukraine...which never happened as per calculations. This is why war calculations are always wrong... because they are mostly based on underestimating the opponent and over-estimating themselves.

There are numerous examples in Vietnam, Afghanistan that the will/motivation to fight for freedom is more important (for a win) than a strong army and great high tech arms. Even if the invader succeeds in placing a puppet government the same never succeeds in controlling/running and it always needs support from the invader and is always ousted by local people whenever they get stronger. That's why the Russian puppet govt if they can install one stands no chance and perhaps Russia does or will realise this. Economic sanctions will hit Russia very hard in spite of whatever plans they are having to counter it. SWIFT ban if happen will be very bad for its economy. I hope that effectiveness of these sanctions may deter  China from invading Taiwan but they will intimidate India and chances are very less that any West/US country will come for our help. So a stronger China (Most probably in case of a Russian Win) may chose first to target India than Taiwan.

Russian real win was a win without much opposition and blood bath…that Ukrainian people/other countries don't have any reaction time and govt/regime is changed in Ukraine...but this is not what is exactly happening. Russia have to inflict a lot of damage to Ukraine infrastructure and general public. And so their win isn't going to be that effective...the destruction they have inflicted is not what a supporter does and Russia was posing like the one to their people. The initial plan was perfect to change the regime without people understanding much but with destruction the narrative and scenario has completely changed for Russia...and that's why chances of any misstep by Russia are higher now. All Russian calculations about getting less harsher sanctions or global outcry or its oil/gas bargain over EU was dependent upon quick capture of Ukraine but as it has not happened so all calculations are going wrong. Russia must have calculated EU countries like Germany/Italy/France supporting less harsher sanctions (like SWIFT ban) and caring for Oil/Gas supply from Russia but the delay and destruction will force these countries to change their stance and actions. I think these countries earlier supported Russia thinking that Russia will not wage a war after Ukraine agreeing to its demands for not joining Nato but now with so much destruction and fear of a global war these countries will see things differently and may make things very hard for Russia as far as Sanctions/Oil Gas import/Helping Ukraine are concerned.So Russia may be in some very tough times.

About NATO enlargement Issue- So far I have refrained from touching this topic as my knowledge in this respect is very limited. I don't like reading political documents/history at all. But still i feel if there was any such assurance then where is the document? Actually here are disagreements among scholars and is highly debatable but the then Soviet leader Mikhail Gorbachev had also confirmed that the Nato expansion topic was never raised. In fact, Russia also (including Putin) wanted to join Nato in 1990s and 2000s. But I feel in case such assurance was indeed given to Russia then they would have wanted to get the same in writing. However, I don’t think that there is any such written assurance available. Further, NATO is a formal alliance of countries/members with written rules so unless all members give their consent for any issue I don't think anyone from NATO can give such non-expansion assurance and there is no such written formal documents from NATO members also. So we can’t say what was promised and what not. But there is one written document between Russia and Nato- NATO-Russia Founding Act, 1997 an agreement on mutual relations, cooperation and security and that NATO and Russia do not consider each other as adversaries. But there is no mention of any such Nato expansion stoppage (as far as I can see after a hurried glance at such a boring political document). NATO-Russia Council was also founded in 2002. Nato expanded in 2000s and if there was any such non-expansion assurance then the same would have been invoked by Russia at that time. I feel at that time, Russia was more concerned about leaving Russia out of the crucial decisions (I think like Serbia/Kosovo) but Russia was never worried that Nato was a threat to it. Also, if both take actions where they pose that they are a danger to each other then it is natural that both would take actions to enhance security (by alliances also) and so in this regard we can’t say that Nato alone is responsible for creating such threat.So common sense says that both Nato and Russia need to sit peacefully and try to find a final solution for the betterment of humanity. We are tired of this nonsense mess.

Russia does have a strong army but I think they may not be having relevant ground war experience and this is why they are not successful in capturing the territory...they are doing deadly air/missile attacks but not on the ground. They tried to took one airport near Kyiv (Hostomel) but met with heavy Ukraine attack and destruction. This may be their hurried effort or lack of planning I don't know but their ground work capabilities are not looking good.

Just like most Indians, I also like our Friend Russia and Putin...Russia still plays our songs (They are crazy for Mithun/Bappi da song "Jimmy Jimmy" from Disco dancer movie and you can still see them using/enjoying this song in their shows/remixes...I have so many russian versions with me and they are just fantastic). One version:

https://www.youtube.com/watch?v=2P09ow9sY6Y

(Just see the passion, joy and energy). That's why I am very concerned about Russia doing anything costly.

Still hoping for an end to this nonsense war and peace prevailing and praying that this war does not turn into something catastrophic.

Regards

Gurpreet singh

From: Oscillations  Date: Fri, 25 Feb, 2022, 20:02
Subject: Market fall and the way ahead

Dear All,

I got some msgs as to why I don't support this Russian invasion even though I am saying that Russia is our friend. Actually let me tell you one thing- Ukraine joining the Nato narrative is given by Russia for the attack but I have a feeling that Russia is using this as a pretext...it was going to invade anyhow. Putin always wanted to merge Ukraine into Russia as it never recognized its independence and one valid reason for Ukraine to tilt towards the west. Putin is looking to have much bigger ambitions and he has taken the gamble now thinking US is tired and weak after the Afghan meltdown...but my worry is that his madness can turn this war into world war any time and this is the big risk for this small victory...and the reason I don't support this move. So i feel that this Ukraine joining Nato narrative is just on the surface...it is for bacha party...Putin might be having much sinister plans or ambitions to make Russia a big power again. But this may cost Russia dearly and when I say this I am not talking about their defeat in Ukraine but over a much longer period. EU and US will see the re-ignition of Russia threat and whole world will be dragged into a nonsense cold war and a potential world war at any time. And India will face some very tough and complex scenarios- it won't be able to decide whether it needs strong Russia or weak Russia. And that's why time has come for India to upgrade its defence manufacturing and luckily they are trying to focus on that. 

Actually earlier Russia was a counter balance for India to US support to pakistan so Russia had a big role in our strategy. But time has changed now- US is no longer an adversary but a potential big partner and Pakistan is going to be dead on its own on one fine day. India's most decisive and existential fight now is with China against which Russia may not help much. Russia now is also building ties with Pakistan. As they say in geopolitics- there are no permanent friends but permanent interests. I still want a stronger and wise Russia as they have supported us during tough times and they understand the evil designs of China. So still hope that better sense prevails and war ends soon and the Nato Narrative is real.

So I only hope that this war ends in the manner everybody is expecting- Russia wins and controls Ukraine...but destiny has the reserved right for the unexpected.

From: Oscillations  Date: Fri, 25 Feb 2022
Subject: Market fall and the way ahead

Dear All,

I hope you all are in fine shape as far as market mood is concerned. I hope nobody has done panic sale. Last day reaction from Indian market was way over-reaction as we were the biggest loser. Last day got many msgs from Indian brokers and many have advised selling after last day's fall...members/friends asked my opinion on the same and I told them that It (brokerages’ decision to sell) was a bit ill-timed and shared with them that we are not selling. Nobody was anticipating that Russia will do this step as Ukraine and Nato was ready for a talk as EU was not in favor of a conflict with Russia. So it was a sort of shock for the market but i think Putin gave a clear war signal last week when he said in anger that Ukraine was doing genocide. But I was not expecting this much fall/reaction from Indian market as long as there is any sign from US and Nato to engage directly as they have already shared that they won't fight directly. Many from US called me when US market was down but I told them to wait for Biden's message and if he was not engaging directly then there is nothing to worry ( As of now). 

Ukraine is doing a fine job and they have given a strong resistance...which nobody was expecting. Russia has suffered heavy damage...Ukraine MOD says that 800 russian army are killed which is a big number if it is true. Last night some reports were for 3200. Ukrainian are taking back the posts captured by Russian army and this is going to be the order for quite some time as long as Kyiv is standing. Sanctions are going to hit Russian very hard and If EU agrees on SWIFT removal then Russia will be in a very big trouble though the likes of Germany/Italy are opposing ( Still sanctions on Russian banks are a very big blow). Quite surprisingly, Russian people are on the street opposing russian invasion and as number of Russian causalities grow, the situation can get worst any time in Russia. In fact, last night I was really thinking that Russia may see another division in the next few years even though they want to annex Ukraine. 5-10 years are a big chunk of the life of an individual but for a country's journey 20 years are also a small number. Countries plan for 20 years strategies. So Ukraine needs to create a noise around Russian causalities as Russia will not disclose this number and economic sanctions will hit the morale of Russian population and this can create serious riot like situations. I am sure the likes of US/EU are contemplating this.

If US can force EU to leave Russian Oil/Gas then the US will be very happy. China looks like a winner but it is mainly about US response for any future Taiwan invasion and China has to take a big risk in assuming that US will not react. Putin I still feel acted more like a Gambler, to show Nato/US its power but he has already achieved the same without war. last day, Biden was smiling during address...people told me that he was looking confused but I did not feel like that. There are stories of valor of Ukrainian soldiers (like 13 soldiers in snake island) which will inspire Ukraine to fight tough, Russian soldiers are not looking in good shape, Ukraine president is still in Ukraine...so very tough fight. Today is the DAY...if Ukraine can survive today then Russia will be in BIG trouble. I expected Russia to be smart as we (India) need a strong Russia...I still feel that some of the Russian calculations may go for a big toss. A strong Russia may not help India against China but a weak Russia is good for China (although Russia gave India S-400 in spite of heavy Chinese opposition). So let's hope and Pray for Ukrainian people.

From: Oscillations Date: Thu, 24 Feb 2022 at 21:11
Subject: Market fall and the way ahead

Everybody knows that Ukraine army is no match to Russia and that's what Russia has taken into its calculations. But they are much bigger now than 2014 and they will make Russia to pay a price. They can give them a bloody nose. Everybody knows that Ukraine can't win but the thing is the damage calculations may go wrong and by damage i mean all sorts of damage- economically. Russia might have calculated OIL/Gas as bargain but EU will act differently. They will bear the cost of high gas and give subsidy to its people (and still the cost will be lesser than a Russian threat)...Everybody feels that US will ignore Russia as it wants to target China but this is where the things can turn speculative as US may choose the other and US has every logic to choose the Russia along with China at a same time. Russia has done the same thing- it has tried to pose as a Madman and unpredictable ( this is what Putin portrays himself...that he can do anything and he is unpredictable). Russia can't think that It can achieve everything easily. Earlier Russia was hiding the death of Russian soldiers in separatists parts as death of separatists but now they have declared an armed conflict...and Russian people won't like the dead bodies of their soldiers coming in heap. The surprise is not about that Ukraine can win but Russia may have to pay much bigger price then it must have calculated. I am also hoping that as expected Ukraine will surrender in two days and as Putin has said that he has no intention to Occupy Ukraine so all ends in lowest possible damage. But my worry is that there may be some nasty surprise. And weak Russia (I hope they are not Mad Russia) is not good (at least for India)...a multi-polar world is needed not uni-polar (US) or Bio-polar (With nonsense China as the other).

Regards

From: Oscillations Date: Thu, 24 Feb 2022 at 20:09
Subject: Market fall and the way ahead

Dear All,

So Russia has finally opted for the ultimate and war has begun. But I still feel that Russia may be in for some big shock...although Russia feels that they have done all the calculations but there is never a perfect plan. Perfection is the right, domain and capability of the Almighty. Who is right and who is wrong is always the most complex thing in this world- Still, as I have shared earlier I think Russia has the right to protect itself from west/Nato missiles placed in Ukraine borders against Russia just like US had during the Cuban missile crisis. Russia sees Ukraine as extremely crucial for their survival against western attacks. The mode of ensuring the same by Russia is debatable but the world is never a perfect place. Some Indian newspapers/scholars are asking India to take a firm stand...and preferably against Russia in this issue. I am surprised to see this, by not condemning the Russian attack India has already announced its stand. Then, India needs a Strong Russia and I don't think that Russia will ever discount or denounce India. India is a rising power...and a very credible and ethical partner/power so Russia needs India. Russia as a younger brother to China is not good for India and a weaker Russia engaged in a prolonged war with Ukraine is good for US and then US can target China. So things are really complex in this multipolar and multidimensional world and we just hope that the crisis is over soon. 

I wonder whether Russia has made calculations to seize the entire Ukraine as this will prolong the crisis and inflict significant damage on Russia. Throwing missiles or bombs from aeroplanes can't make you own a territory...for that you have to enter the territory and that's where the things can go wrong for Russia. Ukraine must have been having large anti tank ammunations and night vision abilities supplied from the west and it can damage russian air supplies to its forces. Any large russian casualties at the front will result in massive outcry in russia. The issue was lingering for a long time and it is the failure of western powers in not being able to stop it...looks like world may be a far unstable place in the near future if this war does not end soon and on something ensuring long term peace.

From: Oscillations Date: Tue, 22 Feb 2022
Subject: Market fall and the way ahead
Dear All, 

So looks like Russia has already made its calculations and Ukraine joining Nato was not the main issue- it appears it doesn't want democracy in Ukraine. It has chosen to sent army to its areas of Influence in separatists regions of Ukraine which it is already supporting for a long time...by this it has so far chosen limited invasion but this may come at a huge cost. Ukraine not joining Nato was never a big issue and Russia could easily get the negotiations as other Nato nations have no intention to focus on Russia. But by declaring to undermine the democracy and independence of Ukraine, it appears that Russia has ventured into a danger zone and it may help US. Ukraine is not a soup and it will give a long bloody fight to Russia in separatist regions...in fact the same is already going for long. So if this issues is not resolved then russia needs to be ready for a long period of Guerrilla war in unstable regions and it will have huge economic and military costs for Russia. More economic sanctions will be imposed on Russia...now US can force EU to follow the same as Russia has chosen a different path away from Nato/ukraine issue. Nato will deploy more forces near Ukraine/Baltic seas and I don't think having them so near will settle any of Russian security fears. 

So looks like Russia has tried to get too much too soon and it may not yield best results. Western powers were already ready for the deal and Russia could claim victory by getting the Nato deal. But we poor people never know what these big people plan and why they plan so. Only Russia knows what it is planning to achieve. Russia must have counted China as a place to trade its Oil Gas/wheat...so it has chosen to embrace China (smelly) and only time will tell what was costliest for them. But China may not be a long term source for Oil/Gas as China is trying and investing big in renewables to be self sufficient in energy needs and it may happen quite sooner than anybody has anticipated. China is a tough negotiator and there is not any easy lunch for Russian firms in China so far and they could not get much market in China in spite of huge expectations. The trade is big now but limited to Energy and agriculture. Russia used to treat China as a younger brother but now China is behaving like the other. Russia has chosen to ignore many of China's actions like theft of technology and china is forcing it upon Russia in some ways like it forced Russia to avoid contracts in Vietnam/Taiwan. Russia doesn't deploy Chinese tech in critical areas like defense and communications. Russia does not allow Dalai lama in Russia so its Buddhist people travel to India for that. So Russia reacts too much to small useless statements from US/EU but ignore harsh China actions.But even here, Russia couldn't ignore India even as China is not happy. China is hoping that Russia may support it in Taiwan against US but Russia has not done the same so far as it also fears a nuclear war with US just like US fear now. So the conflict has its costs for Russia. 

So things are quite strange- Russia needs china for trade (Military support may not be the case)...China also needs Russia as it is feeling the heat from US led alliances ( India is already a part of one)...so Russia may feel it has power to make china check its arrogance. China US tussle is good for Russia but now Russia occupied in Ukraine may help US. Russia wants to show that it is not a declining power but China wants to take on US position and impose itself on the globe. So US will not care much for Russia and China is the target. Trade dependency on China is not good for Russia ( It needs to be seen what sanctions are imposed upon Russia)   Assertive Russia is not good for Europe and they will try to break away from Russian Gas (Only a matter of time). Russia now has some $630 billion (some $140-150 B in Gold) and it may feel that it can withstand the gas export stoppage for a long time but he is not the only smart guy in this world. Once EU finds a new gas supply (may be from Middle east/US) then the Russian threat/bargain is gone forever and then this $600 billion is only a matter of time.

World leaders don't always do the smartest- in fact they do the dumbest most of the times. The world is a chaotic place (politically and religiously) only because of these smart leaders. Like China wants to take on US at the world stage and needs Russia in its side but it has created a big enemy in India by creating border issue. China underestimated India completely and now it will pay a heavy price...India is a serious threat to Chinese because India has never been into any alliance so it knows how to trade alone. Sometimes back, a young girl told me that she wanted to be a writer and writing a book on how to live a great life (Motivational/self help/spiritual). I asked her why she wanted to be a Guru as she herself needed to see and live the real life first...why not to be a student first (and always) and then just share your experiences...why this nonsense to be a Guru...to lead people into nonsense ideology. World is tired of Gurus.

Once I was listening to one such Guru who was explaining the Ahimsa (Non-violence) and hailed it as mark of Indian way of life and ideology. But I told him that linear/blindfold Ahimsa is not Indian way....Lord Krishna told Arjuna to fight for the Dharma while Arjuna had chosen the path of so called Ahimsa. So Hinduism is not about Ahimsa but to fight when it is required to establish Dharma ( reaction not an action). Ahimsa is misrepresented- our infected bodies fight and kill bacteria so what is micro and macro level Ahimsa? So it is good that India is getting more assertive and China has made a big mistake in taking India lightly....in its calculations to show India its place and all its calculations went into haywire. So Russia has also made some calculations and chances are high that most of those will be wrong. Right now, only Russia knows what are these calculations and we will know after most of them are failed.

Indian markets should recover after a brief period of variability...then the issues like Oil gas prices will be back and market will choose its direction accordingly. So as i have shared earlier- it is better for members with moderate financial profile to wait for some more time. Let market stabilize when it is assured about the Russian routine course of action.

From: Oscillations Date: Wed, 16 Feb, 2022, 02:14
Subject: Market fall and the way ahead

Dear All, 

One fellow just called me and told me about the cyber attacks on Ukraine defence/banks. He further told that Indian news channels are saying that this is the first sign of war sign. I told him to stop watching Indian news channels...they are jokers. They are good for fun-shun but no serious matter. I don't remember when last time I have watched an Indian news channel ( I like WION ( Palki Sharma) News though...owned by Zee). I feel Russia knows that Ukraine and West are listening to its demands so it has also started easing the tone down...giving soft signals. Cyber attacks may be another sign of showbaazi by Russia...of its capability. Russia has shown its military might by amassing more than one lac troops.

Somehow I feel, Europe & US understand that Russian worries about Nato coming near its borders are genuine...they know from inside that what they are trying is a real potential threat for Russia- Taking Nato near Russian borders. Nato can pose that they are for the security of the alliance members but in their heart they do understand that Russian unease is genuine. Why would Russia want its old and potential adversaries planting missiles near its border? And that's why I think most of the Nato members have distanced themselves...US also knows this. It is just like Bangladesh allowing china to place missiles near India border...and India will never allow this to Bangladesh.

So I still feel that chances of Russia-Ukraine all out war are very less. We will see some tough negotiations between Russia and Nato (US)...Ukraine was never the target but Nato. Russia would ask for the lifetime guarantee from Nato and Nato in order to save their face may opt for deferring the new membership for the next 20-30 years. This is a very interesting game theory stuff- and if you understand game theory then we will see a Zero sum game. Both Russia and Nato will gain something and lose something.

Let's hope for the best.

From: Oscillations Date: Tue, 15 Feb 2022
Subject: Market fall and the way ahead

With European countries and the US keeping a distance from the war, Russia understands that it will gain more from the diplomatical solution rather than war. So the solution can take its time...Ukraine is also giving mix signals...and US sounding alarms at war on 16th- If it doesn't happen tmrw then I think It won't happen at all. So let's wait for one day.

From: Oscillations Date: Mon, 14 Feb, 2022, 22:17
Subject: Market fall and the way ahead
Dear All,

Investors live in a very tough world- recently everybody agreed that rising US interest rates were not good for the stock market and now US yields are down and markets are crashing worldwide. And strangely it appears that investors don't know what they really want. That's why stock markets are the toughest place to make money. Stock market always has this view that there is always a world war coming. And Now even when the US is saying that they won't send troops to Ukraine; it doesn't believe them. 

So just when we were trying to solve the Fed interest rate puzzle, market has found another bomb. I don't really have much interest in politics/geo-politics but here I feel that chances of something bigger are less. There were risks for the same some time back (and the market was calm at that time) but now the US has clearly expressed that it has no plan for sending troops to Ukraine. Actually the US and Russia never fight directly- both understand that the same will be catastrophic for the entire human race, leave alone both. So they always fight indirectly through others- Afghanistan, Vietnam, Arab world etc. No war happened when Russia invaded Ukraine in 2014 (Russia is even stronger now). Perhaps, 2014 has forced Ukraine to partner Nato while for Russia it might be just show of power. I don't know what made Nato (US) to select Ukraine as a new member and what Ukraine was thinking. Because now Ukraine has understood clearly that no Nato country will send its troops to help them against Russia. Germany, France have no interest at all. Europe is terrified of their choked gas supply from Russia ( it is surprising to see the impact of old world Oil/gas still having so much bargain power. European countries like Germany were really fool to not to address this issue while running after renewables). So Ukraine might be thinking of its decision to go for Nato.

In fact, I feel that Nato countries don't want to follow the US narrative anymore- they sent their armies in Iran and Afghanistan (for US only) and now they  have nothing to show for that...they were literally humiliated. They looked like fools. So I don't think we will see any Europe country fighting russia; they won't even vote for Ukraine entry. Europe may not want an enemy in Russia. And perhaps Putin knows this and that's why he has taken calculative risk to announce the arrival of Russia. US I think is trying to hit Russia hard by instigating a war with Ukraine. After seeing no mood of Nato members to fight, US has also decided to stay away from this war but creating a noise and fear about Russia invasion. And this may disrupt Russian calculations because Russia has nothing to gain from Ukraine invasion as Ukraine is having much stronger army than 2014 and this would hit Russia hard and holding back invasion in a hostile country is not an option. So with Nato not supporting Ukraine with army, Russia has already got what it wanted- to make Ukraine understand the reality and Russian might in trade with Europe and domestic support for Putin with this power pack show. But US would love to see both of them fighting. Russia can do some small "Phuljhadi" but not an all out war with Ukraine. 

China may be watching with interest the US response to see what US can do for Taiwan. But Ukraine is no Taiwan- US needs Taiwan who is its biggest trading partner and the core of the US semiconductor industry. Ukraine is nothing in the world supply chain but Taiwan is an economic force and a very key strategic asset for China if it can capture it just like Russia is having big bargaining power with Gas. Infact, US leaving Ukraine can be a bad news for China because US must have left Ukraine as it want to focus on Indo-pacific (China) where it has created a new Quad with India, Aus and Japan. Russia is a spent and declining force and all it wants is just to show its might ( Russia is a poor fellow now and Poor can't rule others) but China has much bigger ambitions- as it wants to own territories and Sea. US don't really care for the poor Russia so it is better to keep Russia where they are. So last week Quad meet was a sort of warning to China- what US really wants.

So we will get to know soon what Russia actually wants.

( Contact at oscillationss@yahoo.in)

 

Healthcare Global Enterprises Ltd.- Data is God- Updates on stake sale in Strand Life

Click here for last year post on HCG

Today HCG has sold its stake in Strand life to Reliance Industries. HCG had 38.4% stake in Strand and it has sold it for Rs. 158 cr. Reliance is paying Rs. 550 cr for 80% stake in Strand. I always liked the work being done by Strand in Genomics, Genetics and diagnosis and I was thinking that HCG would sell their IVF business (Milann brand) and use the same for increasing their stake in Strand. But looks like the focus has changed after the arrival of a new majority shareholder in the form of CVC and they want to focus only on Cancer care. I have no problems with them selling strand but I also want them to exit this IVF business.

But they have done one good thing while selling stake in Strand- strand has hospital Labs and Clinical research business and HCG has bought the same from Strand as a part of the deal for 81 cr (setting off 7 cr against receivables so net outflow is 74 cr). In my last year article on HCG I have mentioned this clinical research business. I think due to inherent strength of HCG in cancer care and their huge database of cancer patients they can do great in clinical research in India. If someone wants to do research for cancer treatment/diagnosis in India then they need the genetic and cancer related data of Indian patients only and that’s where HCG can contribute big. Acquisition of Hospital labs will help HCG to grow its diagnostics business.

So after paying for Labs and clinical research businesses it has got 83 cr cash which is good as they are focusing on paying off debt and expansion also which requires funds. I like businesses when they take tough decisions and this stake sale is a tough decision by them. But I think they don’t have any other choice- Strand was a research heavy business and only recently they started focusing on growing their revenues. But they are still making losses and require regular capital inflows which I think is something that HCG cannot do right now as they are trying to generate capital for expanding their cancer care business and reducing debt. HCG needs to cut its debt but they can't take their eyes of the business expansion because India is still having massive unmet cancer care needs. So they need to be extremely careful in capital allocation.  Hence in these circumstances this looks like a wise decision and I like their single minded focus on growing their cancer care business in India.

In last 2 years, we have picked three healthcare stocks as our healthcare Trinity- Max healthcare (click here for article on Max Healthcare), Narayana Hrudayalaya (Click here for article on NH) and HCG. Max Healthcare has already been almost a 10 bagger for us (adjusted for demerger) while NH and HCG are a double right now but I always have a feeling that HCG may outperform all in the next 2-3 years as their expansions of last 2-3 years are going to bear fruits in the near future. So HCG at 240 is still looking good.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post.  Reach me at oscillationss@yahoo.in)

Growth in a Finite World

These days I get a lot of queries on whether the stock market is overheated and is going to have a crash. I think people are expecting a crash since Sep-2020 but we have been investing regularly and never stopped. This strong journey has taken many by surprise as market is not seemed to be in any sort of negative mood. Every fall witnesses strong buying afterwards. I see reports about the linking of USD, Bonds, Oil, Gold, Interest rates/yield curve, FED policy, inflation etc. with the stock market and all try to conclude the coming crash (sometimes jump) of the market. In this crowd of variables; one can conclude anything and these days they are forecasting a crash. Many times, I ask these people what drives the base interest rate and there is no confident answer except some murmurs about inflation rate but I see them shouting on the top of their voice about yield curve and coming market crash.

But Stocks, Dollar, Oil, Gold, Bonds etc. don’t derive majority of their valuations from their inter-relationships. Most of the time and most of their valuation is impacted by their individual demand supply dynamics not the demand supply dynamics of other counterparts. Like, most of the valuation of the Bonds is impacted by its own demand supply dynamics rather than money from stock market entering bond market. Most of the money circulating in Bond market is meant for Bond market only and same is true for the stock market. Overlapping part is very less and shifting takes place mainly for short time. Like for example, the prices of Onions are settled based on its own supply demand dynamics. I call this price as Base price which is based on its own supply demand dynamics. Now suppose there is a big shortage of Tomatoes so people will shift some demand from tomatoes to onions and this will raise the price of onions over and above the base price. But the individual base price of the onion will still comprise the majority of the total price and for the purpose of long term decision making (like fresh cropping) the price impact due to tomatoes is not relevant and should not be considered.

Like for Interest rates, I always say that above everything, money is first a commodity...a commodity for enabling trade and exchange. Unlike other commodities like Onions money is not capable of satisfying any needs/desires directly by direct consumption as its primary function is to enable exchange. So in case I don’t need any commodity or service in exchange of my money I would keep the spare money with me. But other people needing money for the exchange of goods/services they don’t have create the demand for this spare money available within the economy and this demand of money as debt creates a price for the money in the form of interest rates. In case there is no demand for money as debt then we would in fact be required to pay some charges for keeping the money safe in banks etc. (regardless of whether inflation rate is high or low). So Interest rate is not the "cost of money" as is always said but a “price” which is a function of demand supply dynamics of money. So just like an onion, every asset has its own very individual base price upon which further layer (or layers) of price comes due to overlapping part (temporary shifting of money from one asset class to another).

So most important factor for interest rate is demand supply dynamics of money itself. Inflation is not the primary motivation behind interest rate. Inflation does impact the interest rate but it is not responsible for the establishment of base interest rate. Inflation can impact the portion of interest rate over and above the base rate. In my view, base rate is a function of opportunity cost of the money but base rate just takes the clue for the "Price" from the opportunity cost. Opportunity cost is not the reason for the emergence of the price (int rate) because price emerges due to its own demand supply dynamics. So Gold or real estate can play that role (opportunity cost). Somehow I feel that the corporate earnings and stock market returns are more relevant opportunity cost for interest rates for a fairly stable and strong economy. But inflation is not the opportunity cost of the money. There may be a situation where inflation is high but there may not be much demand for money from businesses or individuals as they mayn’t want to take risks for new investments etc. Hence even with higher inflation the rate of interest will still be low. Just consider the current issue of short supply of semiconductors which has raised the prices of cars worldwide (second hand cars also). So is it possible to reduce the resultant inflation by rising rate of interest? No, not at all. In fact, I think the solution is quite the opposite- Governments need to give low interest loans to corporates to build new capacities for semiconductor manufacturing. So in real life, economics principles are very different. 

Once one analyst told me that market would fall as interest rate was rising (money would shift from stocks to bonds). But I asked him why Interest rate was rising at first. Interest rate rise is not some isolated individual act of God like heavy rain which can cause floods and loss of crop. But the rise is a reaction to a number of events. Interest rate may rise- Due to rising demand for loans by corporates as they are investing big or due to risk of loan defaults by most of the corporates due to economy shuffle or earlier mis-allocation of credit (like happened in India in Infrastructure few years back). Stocks will fall in the later situation while in the former more money will come both to stock as well as Bond market. This more money will either come from other assets class or new money will be created by banks.

So every commodity or asset class has its own demand supply dynamics. Similarly, stock market also has its own demand supply dynamics and it is the earnings growth/future earnings growth (GDP growth) potential that drives the demand (base) for equities. And the issue is- how growth happens? And the bigger issue is that current GDP calculations are not more than a crude proxy for the real growth. Growth is much more comprehensive and multi-dimensional and much bigger phenomenon than summation of total income produced in a given period (GDP).

Here I remember one interesting book “The Limits to Growth” which was published in 1972 by a group of thinkers called “The club of Rome”. The book was an attempt to forecast the outcome of massive scale consumption of earth’s resources by humanity and the capacity of Earth to withstand such consumption as our Earth is a “Finite sphere” with a limited supply of resources like minerals. The club worked out a model based on five basic variables affecting the resources of Mother Earth industrialization, population, food, use of resources, and pollution. They modeled data up to 1970, and then developed a range of scenarios out to 2100, depending on whether humanity could took serious action on environmental and resource issues. If that didn’t happen, the model predicted “overshoot and collapse” – in the economy, environment and population – before 2070.

Their main point was Earth being Finite has limited capacity to provide resources for the huge growing population. Hence our quest for unlimited growth by over-production and over-consumption of resources will eventually lead to a crash. But we never grow only by over-consumption and it is the emergence of new innovative technologies which bring more growth. As we can see much of our growth in the last century was mainly related to “Invention of New and Substitute technologies” like the invention of Aircrafts and transportation technology which made possible the exchange of goods/services across the globe, telephone and then Mobile phones, Computers and then softwares. Their model was not well accepted as Population, capital and pollution all grew exponentially in all their models, but technologies for expanding resources and controlling pollution were permitted to grow very marginally.

But I feel their model has one very valid hidden (implied) statement- that unless we create and discover newer, innovative, clean and efficient technologies we can’t afford to grow by consuming the finite resources of the earth as one day they will be obsolete. And good thing about technology is that they have INFINITE possibilities and potentials. Technology does not create linear growth opportunities but even a small innovation can bring massive growth and revolutionize the existence of entire humanity. Here, I remember one such small innovation-Elevator. It was a very small technological breakthrough but just imagine the world without it. Real estate sector’s massive growth has been possible only because of elevators so as of mining sector. Elevators have made it possible to construct massive vertical buildings resulting in the most efficient use of available land. Just imagine the cost of land and houses in the absence of elevators as we could have only made 3-4 storey buildings not 50 storey now.

So technology is transformative beyond imagination. Technological innovations can create new products/services classes, can result in more efficient use of existing resources, and can create new resources. Another massive but less talk about transformative impact is on the even distribution of income and resources. This distribution pattern of production and wealth is the biggest limitation of our current GDP calculation measures as they don’t (can’t) take into account the decline in the “value” of marginal production when it flows only to a few people (unequal distribution of income). Right now, we are at that stage of our evolution that only technology can create next leg of growth and save the humanity from pollution and destruction. I find it funny to see words like “sustainable growth” because unsustainable growth is not growth but short term exploitation of resources and we count this short term exploitation of resources as production (extracting coal is production but the resultant destruction of forests and water resources is not “deducted” from the value of production) is the biggest mistake ever committed by humanity (of course after Religion). I call this like having a “Profit & loss account without a Balance sheet”.

And right now, we are witnessing a period of major technical innovations which will result in the next long leg of growth and luckily it appears that this time the growth will also extend and save the humanity and this earth also. This growth is going to be led by clean technologies in the form of solar, wind and Hydrogen power. These are going to transform the current energy dynamics across the globe and will also solve the existential threat in the form of pollution. These clean technologies will result in the even distribution of resources (energy) because wind and solar are evenly distributed among nations as compared to oil which is concentrated only to a few countries which has made many countries poor as they are dependent upon costly imports for their energy needs. But this clean energy is more democratic and this will change the distribution of wealth also. Just imagine the scale of income generation in India if our energy needs are satisfied in house from wind/solar/hydrogen rather than costly imports. It also means that India can’t afford to lag behind in this race of clean technologies and we need to up the ante for developing these in house.

After clean technologies, there is a massive growth in communication technologies in the form of 4G/5G and space tech and these new age communication tech is going to create the next industrial revolution. 5G is going to reduce the latency to just 2 milliseconds which means that networks will almost be latency free and information will be exchanged between devices in real time. New age communication technologies will result in the growth of IOT, factory automation, autonomous vehicles, augmented reality, remote healthcare etc. New age communication technologies, automation and AI are also going to bring next revolution in agriculture which is hampered by the negative impacts of 3^rd agriculture revolution in the form of chemical fertilizers. Then we have genetic engineering revolution which is developing higher yielding and disease-resistant crops. Similarly Genomics and Genetic engineering is going to transform our healthcare.

So we are now at a very critical juncture in the journey of humanity and earth and our actions are going to be critical. Good thing is- Humanity is looking good for most of the part…people are surprisingly more aware and conscious about everything which is negative and inflicting damage. World has taken a good start in the form of huge growth in clean technologies and this is going to be the norm for the coming decade. So we are going to witness a period of growth which has the capability to bring comprehensive prosperity across the globe and it appears that market is aware of this high growth phase and this is why we are seeing continuous rise in the stock market and looks like it is not going to witness any major correction.

India in particular has done some major policy reforms which are going to result in high growth in manufacturing in India which was the major pain point for India. Agriculture as of now is not capable of transforming India into another leg of high growth as it is hampered by political, technological, economics (small size) and supply chain issues. But this Void is also an opportunity and recent start of policy reforms is a good step. India’s focus on policy support in the form of PLI schemes and Make in India for local manufacturing of electronics goods, medical devices and chemicals is going to result in high growth in GDP even at the same consumption levels because the money will be spent in india not on imports. This will also create demand for new investments and incremental job growth. The focus on growing Ethanol production is also going to create the same impact of high growth in GDP even at the same consumption levels also raising the income levels of farmers which is the long targeted objective of the Government but which has taken a quite a bit of time (of course due to politics).

So the time is to be optimistic about the growth potential and India is also in a very sweet spot. Clean energy technologies and new age communications technologies are going to lead the next leg of growth.

( Reach me at oscillationss@yahoo.in)

  

Heritage Foods Ltd: Worthy Portfolio Candidate

Stock Idea: Heritage Foods Ltd

CMP: 410

Heritage Foods is a Hyderabad based dairy company operating predominately in AP, Telangana, Karnataka, Tamil Nadu but off late expanding in Maharashtra, New Delhi, Haryana and Punjab.  Its topline is 2473 Cr and NP of 148 cr in Fy-2020-21. At CMP of 410 it is trading at 12 PE whereas Dodla dairy which was listed two days back is trading at a PE of 25. In the IPO analysis reports from brokers, they were surprisingly comparing the PE of Dodla to Parag milk who is trading at a PE ratio of 32 but whose business is very different from Dodla as Parag is predominately a Value added dairy player(70%-75%). They have not compared the valuation of Dodla with Heritage foods (12 PE) which is also a southern India player with almost similar business model (fresh Milk heavy). The size, margin and net profit profiles of Dodla and heritage are almost the same though i think Heritage has a better brand recall and higher share of Value added products (VAP) (30-33% vs 25% of Dodla). I am yet to do a detailed analysis of both Heritage and Dodla...this note is just a compilation of my preliminary study.

The margins in fresh milk business are low but the ROCE is high due to lower capital requirements if the firm can manage working capital issues. But for Value added products like Ice cream, Ghee, Curd, Milk shakes etc. margins are high but ROE is lower until the firm reaches a critical large scale of operations to drive the economies of scale because the shelf life of these products is much longer requiring investments in working capital and then capital investments in the form of plant and machinery is also high. But brand connection in the form of fresh milk drives the sale of VAP as customer who are using fresh milk brand are more likely to use the VAP of the same brands. The higher investments by Heritage in assets shows the under-utilization of VAP capacity and margin profile as of now of VAP must have been quite weak but the same will improve once the economies of scale kicks in. Working capital days in case of Heritage are 11 which is one of the best in the industry (Dodla also has similar levels). Heritage is the second biggest private sector dairy player after Hatsun and they have done well in building long standing relationships with farmers amid tough competition from milk co-operatives.

Last year due to covid, farm gate milk prices were low so dairy companies earned much higher profits which may not happen in the future although though milk prices are still low this year. But I am more interested in the growth of value added products which in the case of heritage is going good and they have very strong brand recall. Heritage belongs to Chandrababu Naidu (Former CM of AP) so this political link forced me to wait for the last 3-4 years. Current Jagan govt  tried hard to prove some foul play at Heritage growth but nothing came to materialize and Heritage is growing strength by strength even when Naidu is not in power. So this has made me to have a relook. They are paying good dividends and i have a feeling that they are the most liberal here and after Hatsun they have the best books. They have grown the share of VAP to some 33% last year. FY-21 there was low share of VAP due to covid as the sale of VAP products like Ice cream was hit hard. But this year the same will grow fast and Heritage is quite aggressive in the branding and distribution. So I feel that at 12 PE Heritage is trading cheap and rerating may be fast.

Heritage is also into cattle feed business with turnover of 120 cr and NP of 7 cr. Its topline has doubled in the last 4-5 years and it is a fantastic fit for them as they can use their milk procurement supply chain to sell these products to farmers. It is all about relationships in Indian Dairy. Here farmer is the producer and the relationship with the farmer in the form of milk sourcing tie up acts as a big entry barrier. It is very costly to run a dairy farm in India due to high land prices etc. That's why global giants couldn't do well in India as their global model of having large farm houses will not work in India. So the milk supply chain is a high entry barrier business.

Also, Heritage has almost paid the entire debt of some 260 cr last year (35 cr now). So this will save interest cost of around 20 cr which means its effective PE is just 10. With cash balance growing in the future we can expect more liberal dividends and some good acquisitions. keeping in view that it is yet to grow its VAP share to a meaningful levels, volatility in fresh milk margins, still some sort of political overhang please treat this one as risky business. Tier 3 Investment as of now.

(This study is a business analysis of Heritage Foods ltd.  Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post.  Reach me at oscillationss@yahoo.in)

UTI AMC: Significant Re-rating Candidate

Stock Idea: UTI AMC

Grade: TIER 2

(This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021.)

UTI AMC is a melodrama but the drama started with the debacle of US-64 fund of UTI in early 2000 forced Indian government to split UTI in 2003 into UTI Asset Management and Special Undertaking Unit Trust of India (SUUTI, having the junk/illiquid assets of UTI). First melody was tried with the likes of SBI, PNB, LIC and BOB acquiring 25% stake in the troubled (reputation) UTI AMC bringing in 500 cr.

Things were going fine but it still had the trauma of US-64 and then in 2009 these 4 decided to sell 26% stake to the US investment giant T Rowe Price who manages more than $1 trillion globally for $ 140 million (Rs. 650 cr). I think this was done to do some image makeover by bringing in global giant as largest investor as this would make people to have trust in UTI as global giant was picking a stake. This was a good move or we can say a perfect move. But these 4 could not leave the greed to manage one of the biggest AMC in India (holding some 10% (4^th biggest) share of Indian market at that time, now 6% share and 8^th biggest). They continued to interfere in the working of UTI along with government who wanted to dominate and control the board of UTI which was just the opposite of what had been promised to TR Price that UTI AMC would be a professional firm.

On the contrary except PNB, the rest three were having their own AMC businesses and they owned 18.5% stake each which clearly was a case of conflict of interests. After the initial stage, these 4 were not interested in running the UTI. In fact, LIC and SBI who were having relatively very small AMC business even tried to acquire the stake of others to control and merge UTI AMC with their own AMC business. It was without the head for two years and so could not introduce new schemes because SEBI rules do not allow a new fund offer without the approval from the head of a fund house. Even around 2018 TR Price took these four gentlemen to court. As the three gentlemen (except PNB) were running their own AMC businesses so they were not that much focused on growing UTI AMC as they were  having just 18.25% share in UTI so their only attempt was to merge it with their wholly owned AMC business.

The association of these three investors (LIC, SBI, BOB) having their own AMCs with UTI was a clear case of conflict of interests which was badly hurting the growth of UTI which was losing market share continuously (SBI now is the biggest AMC in India). So things were terrible for the growth perspective although the schemes of UTI AMC were doing well and they have done well in last 20 years. But then amid this tussle over controlling UTI; SEBI happened as a blessing. In 2018, SEBI in order to control the conflict of interests made a regulation that a sponsor of a mutual fund, its associates, group company and its AMC cannot hold 10 per cent or more stake in a rival AMC. They also can’t have a representation on the board of another mutual fund house. This regulation forced these three investors to sell their stake in the recent IPO and brought the same to 10%.

In the recent IPO, TR Price and PNB also sold 3% of their stake bring down their stake to 23% and 15%. So this is a significant event in the journey of UTI and in my view this is going to change the fate of this company.

In all research reports, I have seen issues related to high employee cost and high operating expenses eating out the profit margins so these reports conclude that UTI deserves lower valuation due to these issues impacting profitability and they declare it is working just like a PSU. But its historical ROE was around 16% and it is around this level in Dec-20 and Nippon is also having the similar ROE. HDFC is having high ROE of 31% but this is due to the fact that HDFC can distribute its funds from its vast banking channel at much lower costs and at a much bigger scale. Bank brand name also helps. Same has happened with SBI with highest market share although it is also a PSU. Also, low dividend payout and large cash in the books is one of the reasons for lower ROE for UTI and recently it has approved dividend policy for much higher dividends (50% of profits) so this will improve the ROE. Dividend payout ratio of UTI was around 20%-30% while the likes of Nippon and HDFC have much higher dividend payout ratios (80% and 50% respectively). Even due to growing net worth the ROE of HDFC has also fallen from 40% in 2018 to 36% in 2020.

Further, banks distributing schemes of AMCs related to their group are a clear conflict of interest as banks are forcing their group mutual funds on the customer rather than really giving honest advice and in this process they are earning huge commissions from the group AMCs. But I think SEBI is going to tighten the things more here in the near future. Direct schemes (Online sale without any intermediary) are gaining momentum as current investors are well informed and they don’t need to go to some selfish intermediaries for deciding their choice of fund as they can do the research on their own in this digital age. So things are going to change in the fund distribution very fast. Already direct channel has grown to 50% share from some 30% 2-3 years back. In today’s world, investors can find the information related to consistent fund performers like UTI against others and they can take independent decisions so due to this there is a possibility of smaller funds growing faster than the other big brands. Like, UTI is one of the best performer in the retirement solutions (pension funds) and its funds under this are growing faster. Its retirement benefit pension fund is the largest in its category.

I was looking for the performance evaluation of UTI AMC schemes and luckily I found the recent report from CITI which has very detailed data and I found the same in their report saving much of my time. UTI schemes have done much better. In last one year, UTI Equity schemes have outperformed the benchmark index in 63% of their schemes. The same figure is 10% and 30% for HDFC and Nippon. Axis is the leader with 78%. The equity schemes of HDFC are performing badly and it is losing market share (at 13.6% from 15.8% last year Dec-19). Its stock price is also doing badly with negative returns in last one year. Actually people do not realize that AMC is a knowledge based business and skills of managers matter the most rather than their costs. UTI has higher employee costs as it got large number of employees from the erstwhile UTI in 2003 split and management is working on it to reduce it. In next 5 years the retiring employees will reduce some 80-90 cr payout.

But if it has legacy issues then it has some high growth catalysts also. First, most of these problems were related to past and already happened in time and space and current board run management is working to resolve these issues. Second, UTI AMC has strong distribution strength in Tier 3 cities (B30) having the largest share. Future growth in the AMC/Mutual fund industry will be driven by these small cities. These cities have higher focus on equity schemes where charges are higher than debt funds so UTI can earn higher than other due to its strong presence in these cities. But for me the most important event is the coming possible restructuring in the ownership of UTI. I don’t think the likes of LIC/SBI/BOB have any scope left to acquire it or mismanage it. In fact, they have sold their stakes in UTI Trustee Company to TR Price in line with their stake sale in AMC business. A Mutual fund trust holds assets of the fund on behalf of investors and monitor performance and compliance with regulations.

So trustees have significant control over the working of an AMC due to regulatory powers. After the stake sale by these three; now TR Price holds 51% stake in Trustee Company which enables it to indirectly control the operations at AMC also. TR Price is a global giant and is waiting patiently for the things to turn good in India as India is the next high growth market. It has waited 11 years for the things to take shape in india which shows its commitments to India. So my feeling is that very soon something is going to happen in UTI AMC shareholding. It may be that these four may sell their stake (or part) making TR price the majority holder running the show. TR Price can channelize huge funds from its US business to India for investment through UTI.

UTI AMC has big business in PMS where it manages the funds of Employees Provident Fund Organization (EPFO), Postal Life Insurance (PLI), National Skill Development Fund (NSDF) etc. UTI manages the largest share of the funds of EPFO. SBI is the second AMC who manages the funds of EPFO. Earlier it was only SBI who was managing the funds of EPFO but it was performing very badly (not being able to beat the bank FD rates). I think the likes of EPFO may opt for an independent AMC like UTI rather than corporate owned AMC like HDFC AMC where there is a clear case of conflict of interest as they may be biased in their EPFO fund investment strategies.

Summary of Analysis levels Involved in the study of UTI AMC:

1. Level 1 (Lower relative valuation) – Low valuation (18 PE and 2.4 times book value) keeping in view the established brand, expertise, market share. Underlying performance metrics are not that weak as compared to other two listed players. It is more the result of market perception.

2. Level 2 ( Industry level growth and restructuring)- Mutual fund industry will grow fast in India as people are getting aware of the financial assets and planning for the same quite early.

3. Level 3 (Forecasting of management decisions which may result in massive future growth and value unlocking) – However, the most value will come from the actions of the management in shedding the Government control, PSU work culture and becoming more professional, TR Price acquiring majority shareholdings or some other private player coming by acquiring the share of other PSU investors. 

This one is a Tier 2 grade stock as of now but once it implements dividend policy distributing liberal dividends, management becoming more independent and professional in approach and any stake sale by 4 PSU shareholders this will be transformed into Tier 1 quite fast and aggressively. 

(This study is a business analysis of UTI AMC. Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. For subscribing to the monthly Newsletter reach at oscillationss@yahoo.in).

 

Newsletter Club of this Blog

Dear all, Off late receiving many queries regarding lesser stock ideas/studies being posted at this Blog in the last 5-6 months. Actually as I have shared earlier, we have started a monthly newsletter of this Blog in Sep-2020 and most of the stock analysis reports and ideas are being shared with the Newsletter club. The main focus of the Newsletter is on the education and learning part related to equity research covering financial and fundamental analysis. In case anybody wants to join the club please send an email at oscillationss@yahoo.in giving brief introduction. I am sharing the names of some of the stock ideas shared with the Club since Sep-2020:

Apart from the above stocks, we are investing in many other promising stories. Also, we continue to buy many of our old stock picks whose studies have been shared at this blog like HCG, MCX, Godrej Agrovet, Zydus wellness, ABFRL etc. while many of the stocks advised in the last one year have performed well hence we are not adding them anymore like Tata power, Borosil Renewable, Laurus Labs, BEL,BEML etc. I am also receiving regular requests for sharing the performance of all the stocks shared at this blog in the last 4-5 years and the future course of action for these stocks. I have started the work on the same and will share the same very soon. 

Thanks very much for your support.

Tata Coffee Ltd: The Arabica has Matured with Intense Flavors

Grade: TIER 1

(This business study of Tata coffee Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021.)

Coffee: A global Drink

1) Coffee truly is a global drink and a global commodity. However there are disputes related to this being second most traded commodity after oil. Many argue that this is not the case as agro commodities like Wheat or rice are having much bigger trade value. But I think, Coffee may be a big trade commodity if we take into account only the international trades as other agro commodities like wheat or rice are mostly traded in the production country and international trade may be much lower than the total production. Even on standalone basis the value of international trade (exports) is significant at USD 30 billion.

Coffee generally is of two types-Arabica and Robusta. Arabica is of premium quality with half of caffeine levels as compared to Robusta. So it has much deeper, smoother and sweeter taste with notes of chocolate and hints of other fruits flavor. So Arabica has much higher and intense flavors. Robusta is much stronger in taste with almost twice the caffeine levels. So due to higher caffeine levels, it is much bitter and harsher in taste with notes of grains. Robusta is much easier to cultivate, has almost double the yield and less prone to insect attacks (due to high caffeine) so all these factors makes it to cost lower. But Arabica beans are sold at double the price. The instant powdered coffee we find in all the retail stores is all robusta coffee. In order to drive up the profits, producers are using more and more of robusta coffee whether it is instant coffee or a coffee retail chain.

Across the globe, Arabica accounts for some 75% production share while Robusta is 25% share. Brazil leads the globe with Arabica production (70% of its total coffee production) while Vietnam is the leader in Robusta (95% of its total coffee production). The global coffee production data is as follows:

2) Europe accounts for some 35% consumption with nil production. Europe and North/South America account for some 65% of total global coffee consumption. Europe and USA are fairly stable in coffee demand so now it is India and China which are the new coffee hot spots. India’s coffee consumption is concentrated to southern India but off late with the growth in coffee retail chains like CCD and Starbucks a strong coffee culture is happening in India which is going to enter their houses also. With the availability of premium coffee beans and electric roasters and coffee makers the home consumption is going to increase significantly in India.

As of now, India exports around 70% of its production of 3 lac-3.5 lac MT. Karnataka accounts for 85% of Indian production while the rest comes from Kerala. So with rising consumption in India, India has sufficient local production to cater to the demand. And now the trend is clearly towards coffee consumption in India and this will grow much faster than tea. In fact I feel we may see coffee plantations growing up in India even in the Himalayas where the black pepper plantations may bend towards coffee. So i think slowly more and more Indians are moving towards coffee. I like it when in movies and TV Shows they show actors holding a large coffee mug (though may be empty) because this is subtle marketing and it hits the cords more effectively...though i am not sure whether it is deliberate or not but if it is not then i think coffee marketing companies should think over this seriously.

3 Coffee beans (though Coffee beans are not really “beans” but seeds of the fruit of the coffee tree) are just like any other agriculture commodity with limited pricing power but when we move up the value chain the dynamics of this industry changes to one with premium pricing power with premium brands like that of Starbucks or Cafe Coffee Day (CCD). So the value proposition changes relevant to the type of producer like a plantation company is prone to boom and bust cycles of all commodities and Coffee is not an exception. Right now, coffee industry is witnessing bust cycle and prices are trending lower.

In last 10 years or so, the cost of inputs for coffee production has increased by some 250% however the prices have been increased only by 175% so there is a clear over supply of coffee beans in the global market. But coffee production is not that easy to start and stop. Unlike other commercial crops like Wheat/rice where crops are planted every year the plantations like Tea, Coffee etc. take much longer time to start producing and in the subsequent years it is not beneficial to stop production as massive investments have been made in the initial unproductive years.

It takes four to five years for a coffee tree to start producing coffee fruits, while the land on which it grows will produce fruit for about 25 years. Hence apart from routine inputs in the form of fertilizers maximum annual costs are in the form of labour only.

The likes of Starbucks and other retail chains brought a revolution in coffee drinking habits of the people and this spurred the demand for coffee across the globe especially in Europe and USA and more and more farmers started cultivating coffee as prices were at life time highs. This started in Mid 90’s and culminated around 2007-08 and since then global supply has outpaced demand by fair margin putting pressure on the prices.

In the last 4-5 years, Brazil and Vietnam are producing more and more coffee even when international coffee beans prices are lower. In fact, in dollar terms the cost of producing beans is higher than the prices but still the poor farmers of Brazil and Vietnam are being able to support even with these lower prices is only due to the fall in currencies of these countries to Dollar. Fall in currency has enabled these farmers to earn something more than their cost of production. However, Brazil is mainly responsible for this supply glut in the global markets.

As Brazil produces massive 35% of the global production (25% of global export market), so it is the main force behind the rise and fall of global coffee prices. No other country has this much power in controlling the coffee prices. Here, Brazilian currency Real has major impact because Real is falling as compared to USD every day and this is making Brazil coffee suppliers to sell more and more coffee even at lower prices in Dollar terms because they are getting more Real for every ton of coffee sold in international markets. The exchange rate of USD to Real was 1.68 Reals in 2011 but the same now is 5.3 reals!!! More than 3 times fall. The weak real is putting more pressure on the global coffee prices.

4) So even when coffee prices are ruling at 13 year ($1 per pound) low Brazil farmers were still able to extract something but the situation is grim across the world for coffee producers. Coffee producers across the globe are abandoning their coffee farms or turning to other crops like Cocoa in Colombia which is the supplier of world’s best quality coffees. So sooner or later coffee production is going to come down and this will raise the prices to more reasonable levels.

But I feel there is another crisis which may come with current situation. The countries where coffee farmers are abandoning their farms are some of the best quality coffee producers like Colombia, Guatemala, Kenya which means this will reduce the supply of premium quality Arabica coffee and this may result in very high prices for premium coffees and very low prices for Robusta coffees.

But still, even now people can create the demand for premium quality coffee as prices are low. Low quality coffee does not make people to consume more coffee but a cup of premium Arabica coffee can make people to consume 3 cups in place of 1 cup of coffee and this may create or raise the demand for premium coffee which is not within our reach mainly because of low quality instant coffee used by most people so far. They are no aware of the fine taste of a premium coffee.

Amid all this mayhem in global markets, India is facing shortfall in its coffee production due to pest attacks, climate issues. But this year is going to be good for Indian coffee production and production will be higher. Also, Global coffee beans prices has firmed up recently due to harvesting and supply chain issues faced by farmers across the globe due to covid restrictions. So I think we may be near the end of bust cycle of coffee and prices may start firming up from now on as supply is going to shrink especially for premium Arabica coffee the prices may go up much higher. So this year should be good for Indian Coffee plantation industry including Tata Coffee Ltd.

5) But things are different for instant coffee or retail coffee chain branded players like Nestle, Bru or Starbucks. As for these retailers, the low prices of coffee beans are good as the prices of their end product are driven by suppliers not by consumers as demand is stable at current price. This is because they are not selling a homogenous commodity but a branded product with distinct attributes, quality and taste so producers are price settlers.

Tata coffee Ltd: Indian Coffee story

Tata coffee is India’s largest coffee producer. Indian coffee production is mainly about small farmers holding small land holdings and instances of large corporate producers like Tata coffee are very few. Tata coffee deals in coffee in all combinations- it has plantation business producing raw coffee beans, it has instant coffee production capacities, It has retail presence in USA through Eight O’ clock coffee brand, sells instant coffee in India under “Tata coffee Grand” band, it supplies roasted coffee beans to all Starbucks chains in India, it has also developed Indian coffee blend for Starbucks chains across the globe.

 

Tata coffee owns around 8000 hectares (around 20000 acre) of Coffee plantations in southern India. If we take Rs. 4-5 lac price per acre then the valuation of these coffee plantations will be around 800-1000 cr. However, normally prices for Coffee estates are in the range of Rs. 10 lac to Rs. 20 lac per acre especially in tourism heavy areas like Coorg where Tata coffee owns around 11000 acres and this will make the valuations anywhere near 2000 cr to 3000 cr!!! And we are still left with 2400 hectares (6000 acres) of tea estates. Recently Tata Coffee was looking to acquire 12000 hectares of coffee plantations owned by troubled Café Coffee Day for Rs. 1200-1500 cr (while CCD is asking for some 2000 cr) which supports our calculation of minimum 1000 cr value for coffee plantations. Tata coffee has entered into partnership with group hospitality company Indian Hotels for managing its coffee heritage resorts for hospitality business. This also have the potential for a good business going forward and this will further establish the valuation of its coffee plantations.

Its recent expansion (invested some 400 cr for new Instant coffee plant) in Vietnam has started performing this year and mainly due to operation of its Vietnam plant  its PAT for the first half is Rs. 59 cr vs 47 cr even during covid crisis which is an indication towards things to come in the near future.

Merger with Tata Consumer to unlock big Value and Synergy for Both

Tata coffee has 50.08% holding in Eight O'Clock Coffee (ECL) which is a famous American retail coffee brand (Arabica roast and ground coffee) dates back to 1859. Before Vietnam plant, ECL was accounting for 60% of the total turnover- 1120 cr out of 1966 cr in 2019-20. ECL’s net profit in 2019-20 was 117 cr but due to its 50% share only 58 cr accrue to Tata coffee. But after Vietnam plant, NP will grow much faster as the same is 100% subsidiary of TCL. Its NP for the first half this year is 59 cr and I think the same may touch 150 cr this year.

CCL Products India Ltd. (Market value 3200 cr, PE 20) is another listed coffee player but it is more of a wholesale producing instant coffee and does not own plantations but still its valuation is same as of TCL. But I think both can’t be compared- Tata coffee also has large Instant coffee business but it has much higher brand strength in both B2B and B2C. In B2C it has a great brand in Eight O’clock coffee which is growing fast in USA now so it should be valued as an FMCG brand. In 2006, Tatas paid $ 220m (Rs. 1000 cr as per 2006 exchange rates and 1600 cr as per current exchange rates for ECL acquisition. Tata coffee contributed 50% of the amount ($110m). At that time, ECL was having revenues of $110m and the same right now is around $160m so as we can see not that much high growth by ECL. And this may be one of the reasons for the underperformance of Tata coffee because biggest revenue contributor was not growing that much. But ECL once was top coffee brand in USA and Tatas are now working on revamping the brand and supply chain and this should show the impact pretty soon.

I have not done its valuation exercise comprehensively but 50% stake should value around 1500 cr Rs. (at 20-25 PE). 1500 cr value for 50% stake in ECL is still at the lower end as it would make for just 2 times returns for Tata coffee in ECL in last 14 years. US is still and will be the biggest coffee market globally (70% consumption at home which augurs well for ECL) and that’s why ECL is critical to Tata group and they are restructuring its business in USA and this year the growth is good in ECL and looks like the strategy is working. Total Income of Eight O'Clock Coffee Company for the Six months ended September 30, 2020 was USD 87 .81 Million compared to USD 76.48 Million for the corresponding Six months of the previous year. Further, I think as demand for premium coffee will rise in India for home consumption there is a possibility that Tata may introduce ECL in Indian market. And I feel Tata should make the first move rather than waiting for other brands like Nestle. Recently, many brands have started offering premium coffee beans in India for home consumption like Blue Tokai which are witnessing high demand. Though Tata Coffee has also introduced their single estate coffee brand “Sonnet” but still I feel ECL is an established brand and have time tasted blends for USA market and these blends should do well in India markets with some tweaking for Indian tastes (though I think there is nothing like Indian taste in Indian coffee as of now). ECL can benefit from vast supply chain and distribution reach of Tata consumer which is way bigger than ECL in USA.

Balance 50% holding in ECL is with Tata consumer which is also the holding company of Tata coffee (57% holding) and that’s why I feel Tata coffee may be merged with Tata consumer and at that time there will be value unlocking for plantations of more than 25000 acre (coffee and Tea) which are not valued much in the current valuation but for merger they should get the valuation of around 1000 cr.

Tata consumer is already doing the distribution and marketing for “Tata coffee Grand” brand owned by Tata coffee Ltd. Tata group is on a great value accretive restructuring path simplifying ownership, supply chain and management structure and there is no reason for Tata consumer to leave Tata coffee alone when they have already restructured the FMCG brands of Tata chemicals.

Tata Starbucks- Emerging Giant of Indian retail coffee

Tata coffee is the exclusive supplier of coffee beans to Tata-Starbucks (50:50 JV) in India and has also started supplying the same for their global business and this is going to make a mark for Indian coffee blends in the global market just like Indian single malt whiskies by Amrut/Paul John/Rampur. Tata Coffee has revamped its plantations into 8000 micro grids to cater to the premium beans requirements of Starbucks. Growth of Starbucks in India means growth for Tata coffee. It is for the first time in the history of Starbucks that they are procuring coffee from the roasting facility owned by its partner. This shows the expertise of Tata coffee in producing premium quality coffee. This localization also saves the costs for Tata-Starbucks as they are not required to import costly coffee. Coffee drinking in India is moving beyond south Indian states and coffee retail brands are going to see big growth in the future and Starbucks should be the leader of the pack. Tata-Starbucks turnover last year was 540 cr and it is already profitable and Starbucks is very aggressive about Indian market growth.

Indian coffee market is still in its infancy just like China. Just like India, China was a country of tea drinkers. But Starbucks happened to china in 1999. Starbucks has succeeded in blending coffee culture into Chinese culture and it has done the same by relentless attention on details in creating Starbucks a place where Chinese people love to enjoy best coffee, sit, relax and enjoy with their friends. Starbucks has focused on integrating local customs and designs in its cafes. Starbucks were aware of the growing middle class in China and its powerful impact on demand and need for new recreational places. Coffee is a western drink but young Chinese considers coffee culture sophisticated and to influence. It is normal for people in China these days to have business meetings and even job interviews at Starbucks. So with great execution, Starbucks has been successful in creating its cafes as place to go after home and office. The same thing happened in Japan which was another tea drinking nation and now a big coffee nation with Starbucks having more than 1000 stores. Starbucks is having some 4400 stores in China, the largest outside USA and it is betting big on China as next big market after USA. Its China revenues are around 6000-7000 cr which are only going to grow bigger in the next 2-3 years as Starbucks is looking to double the store count.

So India is going to follow the footsteps of Japan and China in adopting the coffee culture and Tata coffee as a supplier of premium coffee beans will be one of the major beneficiary of this shift. Starbucks has worked out a great marketing strategy for Chinese market and developed and created products keeping in view the Chinese tastes. Chinese are much more serious about their culture and family value and social status. So Starbucks did some great marketing there- No aggressive Coffee promotions to avoid being treated as a threat to their tea-culture, blended Coffee culture with tea culture initially, engaging annual family programs etc. Starbucks is a giant success in creating great and innovative coffee products and it is doing this for decades. Starbucks had partnered with local partners for China market in order to address the complexity of massive china market. The same thing it has done for Indian market which is going to as massive as China and after a lot of search it partnered with India’s most trusted and iconic brand Tata. The selection of Tata itself shows the brand strength, trust and customer loyalty it has in Indian market. If you ask any Value investor- China was not a market where Starbucks could achieve any sort of success but with their superior executing skills they have made it their biggest outside USA and may one day even bigger than USA. So I have no doubts that they will do the same in Indian market also.

As of now, Tata-Starbucks operates 200 stores in India across 13 cities. Tata’s stake is owned by Tata consumer product ltd (TCPL) and as of now they have invested around 300 cr in the JV.

But if you ask me the creation of a coffee culture by Starbucks in India will have multi-dimensional impact on coffee demand in India not just for retail chains of Starbucks but also for home consumption and Tata coffee is going to be the major beneficiary here also as it is focusing on developing premium Coffee products for Indian markets. Recently it has launched premium single estate retail coffee brand “Sonnet” which is available online.

Tata Coffee being an integrated coffee player is going to be a major beneficiary of coffee industry growth in India as it can restructure its product offerings as per the requirements of the market like it can shift the export of its premium quality coffee beans to meet the higher demand of Starbucks outlets in the future. For any premium coffee retail brand like Starbucks the supply of uniform premium quality beans is the foremost requirement and Tata coffee can maintain this supply through premium coffee produced in its coffee plantations.

Troubled Cafe Coffee day- An opportunity for Tatas to acquire assets and Relative strength

Troubled Cafe Coffee Day enterprise is looking to sell various assets/businesses to pay off the debt. Promoter family is also selling their assets to reduce the debt at promoter level. Tatas are interested in their Coffee plantations spanning 12000 hectares and Coffee vending machine business. Talks were at advanced stage and are taking time due to issues related to valuations and some creditors asking for more. I think we will see something on this very soon... may be within a month or so. Tata coffee and Tata consumer will do anything to acquire these assets. The acquisition of coffee plantations will make Tata coffee a substantial player in Indian coffee beans market and it will be an integrated coffee player- all the way from plantations to retail sale and coffee chains.

Some analyst friends have questioned this asset heavy approach but I think owned plantations are a key to ensure and control the coffee bean quality and Tata coffee is eyeing premium-ness in its products now. India is going to witness a coffee culture at home and out of home and this will create massive demand for quality coffee beans and that’s why having its own plantations will ensure the supply without any worry of the beans prices. Now, Tata coffee wants to be established as a premium brand. Brand strength and loyalty in B2B is more strong and relationships like supplier of Starbucks are tough to create and are long lasting (Just check the valuation of recent IPO of Mrs Bectors).

Tata coffee was in restructuring mode for last 5-6 years and the stock has not performed at all during this period. It is still available at 2014 valuations. So it has gone nowhere. I think as of now, market has valued it as some sort of plantation company but the share of plantation business and its impact on NP has come down to great extent in the last 4-5 years and now it is more of coffee product company so its re-rating catalyst are just nearing now and it may get the re-rating quite fast just like the same has happened in many tata group stocks- Tata consumer, Tata Motors, Tata communications, Tata chemicals and Tata power (we hold all).

I think things are nicely shaped for Tata coffee to witness a high growth phase and at a valuation of 2000 cr I think market is not valuing its various businesses adequately.

Summary of Analysis levels Involved in the study of Tata coffee:

1. Level 1 (Lower relative valuation) - Current stock price is not reflecting the value of its coffee and tea plantations, value of its overseas subsidiary Eight O’clock Coffee.

2. Level 2 ( Industry level growth and restructuring)- Tata coffee is going to see massive growth in its premium coffee beans and instant coffee business due to growth of coffee demand in India both for home consumption and Coffee retail chains.

3. Level 3 (Forecasting of management decisions which may result in massive future growth and value unlocking) - (a) Merger of Tata coffee with Tata consumer products Ltd (b) Acquisition of Coffee plantation assets of CCD.

(This study is a business analysis of Tata Coffee Ltd. Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. This business study of Tata coffee Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. For subscribing to the monthly Newsletter reach at oscillationss@yahoo.in).