Rupee, where to?

A news item caught my attention recently, which seem to have escaped all the mainstream media. It appears that last quarter, India might have turned into a current account surplus country from a current account deficit country. The biggest reason for Rupee's fall in recent times has been the huge current account deficit, which was threatening to go close to 5% of GDP. From there, moving to current account surplus will be quite a feat, which India seems to have achieved.

To start with, let us look at trade deficit numbers for various months of last quarter.

Sep 2013 - 6.7 billion USD

Aug 2013 - 10.9 billion USD

Jul 2013 - 12.27 billion USD

Total trade deficit for the quarter ~ 30 billion USD

Indian services have always been surplus in the range of 5-6 billion USD on a monthly basis. That gives us approximately 15-18 billion dollars from services export for the quarter. If we reduce this number, we get a deficit of about 12-15 billion USD.

India is the largest recipient of inward remittances. Indians staying abroad sent approx. 70 billion dollars to the home country last year. That gives us a rate of almost 17-18 billion USD quarterly. If we add that number to the deficit of 12-15 billion USD, we get a net positive number. So, looks like India has finally turned into a current account surplus country. The exports have also grown by double digits in percentage terms for all the three months. If this is sustained, the days of Rupee depreciation are over.

Corrigendum: The calculation above does not take into account outward remittances. Outward remittances are almost to the tune of 35-36 billion USD per annum. So, net inward remittances are approx. 36 billion USD p.a. or 3 billion USD p.m.. So, from the services export and net inward remittances, we get an amount of approximately 8.5 billion USD per month. That will give us a quarterly income of around 25 billion USD. That still leaves us with an current account deficit, but with a much smaller number of 5 billion USD. Even if this rate is retained for next 2 quarters, our current account deficit for the year will be less than 40 billion USD, out of which 20 billion will be done in the 1st quarter. and remaining 15-20 coming in the last 3 quarters. 40 billion USD is just 2% of Indian GDP of 2 Trillion, which is a far better number compared to the 5% that we had. And if the same rate continues in the next year, our current account deficit should be less than 20 billion USD or less than 1% of the GDP .

Rail Gaadi Rail Gaadi, Chhuk Chhuk Karti Rail Gaadi

Yesterday, I was discussing the status of railways in India and other countries with my friends. Apparently, European countries are way ahead in the cleanliness and beauty of railways. India is also chugging along and making some interesting changes in its railways. Here are some of the interesting things worth noting.

Shatabdi Trains

Shatabdi trains have much nicer looking coaches. They also have television sets in each coach(two of them for people sitting in opposite directions). Newspaper, dinner, breakfast and snacks are provided in the train, making it feel more like an airplane. These trains also run between metros (mostly just two stations) only, so people can't get inside the coaches anywhere. E.g., a Shatabdi starting from Bangalore stops directly in Chennai and nowhere else in between.

Double Decker
The thought of trains between Bangalore and Chennai reminded me of double-decker trains. It is a new experiment done to carry more passengers in the same number of coaches. I think a coach contained more than 120 passengers in a nice comfortable sitting position. Here is how they look from outside and inside.

Bio-Toilets
The ugliest thing about the Indian railways is the filth on the tracks that gets deposited through old age Hooper style toilets. This aspect of cleanliness is being addressed using bio-toilets. Bio-toilets emit only water on the tracks thus keeping the stations and railway lines clean. As of now, only 1400 coaches have been fitted with Bio-toilets, which would represent almost 1% of all the running coaches, but it is a step in the right direction and may enhance cleanliness substantially going forward if implemented in all the coaches. Here is one economic times article describing their current status.

Railways adds more bio-toilets

Freight corridors
In one of the letters to his shareholders, Warren Buffet talked about his huge investment in BNSF(Burlington Northern Santa Fe), one of the largest rail networks in the USA, and said that Rail transport is at least five times more fuel efficient than road transport. On top of that, rail freight can be carried on electricity, which is not possible with Road Transport. As electricity can be produced using different types of raw materials (Coal, Hydro, Wind, Solar, Nuclear etc.), one need not use Diesel or its derivative. Thus more usage of Rail Freight can save a lot of foreign exchange for a country like India, which has to import most of its petroleum requirements. Also, rail transport carried on electricity is much more environmentally friendly compared to the freight carried on the roads. Sadly, for last many years, India moved in the wrong direction. The percentage of freight carried by Road has gone up from 35% to 65% in last 30-35 years, while the freight carried by Rail has gone down from 65% to 30%. Slow movement of freight on rail tracks and pilferage of the transported goods is the main reasons behind this decline. As India needs to carry more and more passengers on its existing rail network, the time available for freight movement is going down substantially, thus causing delays in Rail freight movement, and making it commercially unviable for businesses. To solve this problem, Indian Railways have started implementing dedicated freight corridors for freight movement. The corridors are built roughly on the lines of Golden Quadrilateral and North-East South-West corridor put together. Essentially, there will be 6 corridors running like the following.

a. Mumbai (JNPT)- Delhi (Khurja,Dadri)
b. Ludhiana (Passing via Delhi/Khurja/Dadri)-Dankuni (Near Kolkata)
c. Kolkata- Chennai
d. Chennai-Mumbai
e. Kolkata-Mumbai
f. Delhi-Chennai

First four corridors represent the sides of the quadrilateral, while the last two are diagonals. Out of these six, first two are in some stages of implementation, while last 4 are still on paper and studies are being conducted on them. For the first two, a two-line specially dedicated freight corridor will be created in roughly 3300 km long route. Financing for both these have been secured(Japan as well as the World Bank), Land acquisition has been done for quite a large section and contracts have been awarded to players to build these. Good part is that the players who have got these awards are not Ambani types and may finish the project on time. Roughly one third of contract work has already been awarded for around 1000 Kms. Here is the link to the announcement.

Contract awarded for Freight Corridor

Jammu Udhampur Srinagar Baramulla Railway Link
Even though we keep talking about Kashmir to Kanyakumari and has even a hit song by that name, the Indian Railways do not connect Kashmir to Kanyakumari. The trains from the rest of the India could only go up to Jammu Tavi. A large project to connect Jammu Tavi to Srinagar and extending that link to Baramulla has been taken up. This involves various technical challenges like building World's highest railway structure (higher than the tip of the Eiffel tower) and making third largest tunnel in the Asia and so on. The work on this stretch is in Progress. Whenever it gets completed, it will be a marvel worth seeing. It also has high strategic importance as it will allow us to later connect Kargil/ Leh/ Laddakh with the railway line, thus providing us some equality with China, which has a railway link very close to the border. Please read more about this line at the following Wikipedia link.

Kashmir Railway

Railway lines of Strategic importance

Recently India announced a very ambitious plan to connect both Leh/Laddakh as well as the Arunachal / Tawang side of the Indian border with Railway line. Once completed, these will be both a strategic asset as well as tourist destinations of the country. But given the delays that we see in such initiatives, this may take quite some time. Read more about these in this article.

Indian Railway along the borders


Edit : 24th Jan 2014
While I was writing on the progresses made by Indian Railways, a new move was made by Railway ministry. They have constituted a new body to study and implement bullet trains across India. As this is currently at pre-feasibility study stage, there is not much talk about it, but it looks like Mumbai-Ahmadabad, Delhi-Amritsar, Delhi- Jaipur and Chennai-Bangalore routes are under consideration. The biggest problem will be financial viability as travelling by the train may cost more than airplane. Following are the two links about this project, with second one having more details.

http://www.hindustantimes.com/india-news/plans-to-run-bullet-trains--re-activated/article1-1140942.aspx
http://onrails.in/content/proposed-bullet-trainhigh-speed-rail-network-india.html

Indian Export Composition

Recently, with rupee depreciating, there was a lot of talk about Indian export competitiveness. This prompted me to look into the Indian export composition. There were some interesting findings that I would like to share.

To start with, Indian exports can be divided into two categories; Merchandise and Services. For Jan-Mar 2013 quarter, they stood at 84 and 37 billion USD respectively. If I annualize these numbers, I get roughly 500 (484 to be precise) billion dollars in exports. That sounded like a lot, until I saw the US and China numbers, which were two trillion USD plus and almost four times that of Indian number. Anyways, this is how the composition of these two broad categories looks.

Further, services export has following composition.

It is interesting to see the Indian software story in full glory here. Software exports are almost half of all the services exports and it stands close to 70 billion dollars annually as of now.

Now, coming back to merchandise (goods) export, we see the following composition.

It is interesting to note that the largest Indian export sector, as far as merchandise is concerned, is petroleum. One would think that India is petroleum deficient and hence there should not be any exports of petroleum products from this country. But, the numbers tell a different story. Actually, many Indian companies purchase crude oil from other countries, refine them and export them. Reliance is one of the biggest players in this field. IOC, BP, HP also has their own refineries and they may also be in this business. It will be interesting to know how much each of these companies export. But, that will be a topic in itself and we will get back to this in a future blog. For now, it is sufficient to point out that petroleum exports out of India is roughly 80 billion dollars and this sector's export are bigger than much fabled software sector. Sad part is that this industry employs very few people compared to millions employed by software, and hence does not have too much impact on the economy. But these exports are a cash cow and the empire of Reliance Industry is built on it.

The second biggest goods export sector is Gems, Jwellery and Pearls. This is a traditional area, where Indians always had the upper hand and very few countries compete with us in this area. But, the problem is that with the falling global growth, the demand for these items drop and hence it can't be scaled heavily.

The third biggest goods export sector is textiles. Here, cheap labor and high productivity (longer number of hours put up at the job) play a major role. China is the leader here (they force people to work 14 hours a day) and India gets competition even from countries like Bangladesh (cheap labor). This sector hardly requires any specialization and hence India can't improve quite a lot here because of democratic society and inherent laziness ( partly because of more respect for the smarter kind of work) . The good part of this sector is high employment for low quality employees, and hence it could improve the poverty levels quite a lot, if employed in rural areas.

From here onwards, the story becomes more interesting as the next five sectors are chemicals, raw Agri products, transport equipment, machinery and base metals. These are new industries, which are not talked about quite a lot in the media, but has been doing better over time. So, let us look at their composition one by one.

Chemicals: Here is the break up of the chemical sector.

Interesting thing to note here is the contribution of pharma sector. India is quickly becoming a generic drug making hub of the world. India has many companies in this field and many more are getting acquired by international pharma giants.

Agri Products: Here is the breakup of Agri sector.

Whenever we thought about Indian Agri exports, we always thought about tea. But the graphic above gives a completely different picture. India's biggest Agri exports are cereals. These could be wheat, rice, corn or similar stuff. For a country, which has world's second largest population to feed and which was dependent upon imports of cereals from other countries around 40 or so years back, this is remarkable.

Transport Equipment:

Notice the 50+% percentage contribution from Road sector. Companies like Maruti and Hundai export almost 15-20K cars monthly from India. There are others like Renault and Ford who are planning to start exporting from India. This is one sector, which is looking hot from export perspective. Among the two wheeler manufacturer, Bajaj has already been a major exporter. With Hero calling off its JV with Honda, it is also opening its doors for exports.

Another interesting industry is shipbuilding industry, which has a lot of opportunity and many companies tried to become large corporations in this area but they did not go very far. Some of the heroes of the pre 2008 era (ABG Shipyard, Bharati Shipyard) have not gone anywhere and still remain small fries. This industry also has large potential as in this arena competition is mostly from Asian counterparts.

Machinery:

The interesting part here is the electric part. China is the King in this area and manufactures almost 80% of the things that world consumes. This portion is also related to chip manufacturing as most of the electric and electronic things nowadays are based on chips. Another thing to be noted is that India imports these items way more than it exports, thus causing a huge net outflow. This field alone represents a huge opportunity, if someone wants to exploit it.

Base Metal:

The graph clearly shows the effects of huge iron ore reserves that India has. It also shows that there is a lot of potential in the Iron and Steel sector in India. Several problems in recent time (Iron ore mining ban and other thing like land acquisition for large projects) have slowed down this sector, but long term potential remains huge.

The Power Of Compounding

The Power of compounding keeps surprising me every now and then, even though I am familiar with it for quite a long time. Today, while calculating the returns made by Page Industries (The franchise owners of Jockey in India) in last 4 years, I realized that it has gone up by more than 5 times (from 800+ to 4300+). What intrigued me most was the fact that this share was a costly share even four years back. It used to trade at 25+ pe even in 2009. Of course, 25 pe is much lesser than the 40 pe at which it trades now, but the valuation expansion because of pe re-rating is just about 50%. The remaining 4x expansion in the valuation has actually come through profit growth.

As I have been tracking this stock from 2009 onwards, I knew that this stock was never one of those high fliers who grow their profits by 70-80%. It was much more of a compounding story. So, I decided to look back at the compounded annual growth rate (CAGR) in the profit of this company. For the last 3 years the profit CAGR of this company is 42%, while for the last 5 years it stands at 37%. I realized that the company might have grown its profit by an average CAGR of 40% for last 4 years. This 40% profit growth is definitely not a very high flier number, but done for 4 years consistently can take the profit to 4x in 4 years. And, that is what explains the rise in the price of Page Industries share.

Sometimes, when a lot of hype is created around a stock, we pay attention only to the hype and consider that to be the only reason for the rise. But, a little careful analysis can throw such insights like "A company growing its profit by 40% for 4 years can rise by 4x without any hype attached to it". Whether the market discovers such stocks or not, by sheer power of compounding and consistency they can be multi-baggers.

The implication of such insights for our portfolio of stocks is quite profound. If we can find a stock that can consistently grow its profit by 40% CAGR, we have a 4 bagger in 4 years without any pe rerating. This means that such shares should not be sold even if they become slightly costly in the near term. This also reaffirms my belief in shares like Ajanta Pharma (49% profit CAGR in the last three years), Kaveri Seeds (67% profit CAGR in the last three years), and Cera Sanitryware (34% profit CAGR in the last 3 years). These are horses for quite a long run and should not be sold even if they become slightly costly in the near term (they are far from being costly at current valuations). Of course, past performance is no guarantee of the future performance, but if they continue to perform like they have been doing till now, investing in them could be quite satisfying.