Economy

Before we proceed with the answer to the question ‘What is Sensex and Nifty?’ it is important to understand two important terms associated with it, BSE and NSE.

What is BSE?

Established in 1875 as the Native Share and Stock Brokers’ Association, the Bombay Stock Exchange (BSE) is India’s oldest stock exchange and ranks among the ten largest stock exchanges in the world with the New York Stock Exchange (NYSE), Nasdaq, London Stock Exchange Group, Japan Exchange Group, and Shanghai Stock Exchange among others in the top 10 list.

Based in India’s financial capital Mumbai, the BSE received its official recognition from the government of India under the Securities Contracts Regulation Act on 31^st August 1957.

There are over 5500 companies listed on BSE and is considered to be one of the fastest stock exchanges in the world with a median response time of 6 microseconds.

What is NSE?

Incorporated in 1992, the National Stock Exchange or NSE received its recognition as a stock exchange from SEBI in April 1993 and commenced operations in 1994. NSE is India’s largest stock exchange in India and has over 1700 companies listed on it. Due to its gigantic trading volumes, greater transparency, and efficient employment of automated systems, NSE is considered a premier marketplace for companies preparing to list.

Now that you have understood the difference between BSE and NSE, let’s take a look at

What is Sensex and Nifty?

The BSE SENSEX or BSE Sensitive Index refers to a free-float market-weighted stock market index of the 30 biggest, well-established, and financially sound companies listed on BSE. These 30 stocks which constitute the Sensex are some of the largest and most actively traded stocks and represent the various industrial sectors of the Indian economy.

Published since 1 January 1986, with its base year as 1978–79, the BSE SENSEX is considered as the barometer of the domestic stock markets in India.

The term Sensex was coined by analyst Deepak Mohoni and is derived from a combination of the words Sensitive and Index. In simple words, the BSE Sensex is a benchmark index that collectively showcases the performance of the biggest and well-established companies listed on the exchange.

Constituents of BSE Sensex

Constituent	Industry
Asian Paints Ltd	Paints
Axis Bank Ltd	Financial services
Bajaj Auto Ltd	Automobile
Bajaj Finance Ltd	Financial services
Bajaj Finserv Ltd	Financial services
Bharti Airtel Ltd	Telecom
Dr. Reddy’s Laboratories Ltd	Pharma
HCL Technologies Ltd	Information technology
HDFC Bank Ltd	Financial services
Hindustan Unilever Ltd	Consumer goods
Housing Development Finance Corp	Financial services
ICICI Bank Ltd	Financial services
IndusInd Bank Ltd	Financial services
Infosys Ltd	Information technology
ITC Ltd	Consumer goods
Kotak Mahindra Bank Ltd	Financial services
Larsen & Toubro Ltd	Construction
Mahindra & Mahindra Ltd	Automobile
Maruti Suzuki India Ltd	Automobile
Nestle India Ltd	Consumer goods
NTPC Ltd	Power
Oil & Natural Gas Corp Ltd	Oil & gas
Power Grid Corp of India Ltd	Power
Reliance Industries Ltd	Oil & gas
State Bank of India	Banking
Sun Pharmaceutical Industries Ltd	Pharma
Tata Consultancy Services Ltd	Information technology
Tech Mahindra Ltd	Information technology
Titan Co Ltd	Consumer goods
UltraTech Cement Ltd	Cement & cement products

NSE Nifty or the National Stock Exchange Fifty (Nifty) refers to the stock market index of 50 most actively traded stocks on the National Stock Exchange (NSE) computed using the free-float market capitalization-weighted method.

Constituents of NSE Nifty

Company Name	Industry
Adani Ports and Special Economic Zone Ltd.	Services
Asian Paints Ltd.	Paints
Axis Bank Ltd.	Financial services
Bajaj Auto Ltd.	Automobile
Bajaj Finance Ltd.	Financial services
Bajaj Finserv Ltd.	Financial services
Bharat Petroleum Corporation Ltd.	Oil & gas
Bharti Airtel Ltd.	Telecom
Britannia Industries Ltd.	Consumer goods
Cipla Ltd.	Pharma
Coal India Ltd.	Metals
Divi’s Laboratories Ltd.	Pharma
Dr. Reddy’s Laboratories Ltd.	Pharma
Eicher Motors Ltd.	Automobile
GAIL (India) Ltd.	Oil & gas
Grasim Industries Ltd.	Cement & cement products
HCL Technologies Ltd.	Information technology
HDFC Bank Ltd.	Financial services
HDFC Life Insurance Company Ltd.	Financial services
Hero MotoCorp Ltd.	Automobile
Hindalco Industries Ltd.	Metals
Hindustan Unilever Ltd.	Consumer goods
Housing Development Finance Corporation Ltd.	Financial services
ICICI Bank Ltd.	Financial services
ITC Ltd.	Consumer goods
Indian Oil Corporation Ltd.	Oil & gas
IndusInd Bank Ltd.	Financial services
Infosys Ltd.	Information technology
JSW Steel Ltd.	Metals
Kotak Mahindra Bank Ltd.	Financial services
Larsen & Toubro Ltd.	Construction
Mahindra & Mahindra Ltd.	Automobile
Maruti Suzuki India Ltd.	Automobile
NTPC Ltd.	Power
Nestle India Ltd.	Consumer goods
Oil & Natural Gas Corporation Ltd.	Oil & gas
Power Grid Corporation of India Ltd.	Power
Reliance Industries Ltd.	Oil & gas
SBI Life Insurance Company Ltd.	Financial services
Shree Cement Ltd.	Cement & cement products
State Bank of India	Financial services
Sun Pharmaceutical Industries Ltd.	Pharma
Tata Consultancy Services Ltd.	Information technology
Tata Motors Ltd.	Automobile
Tata Steel Ltd.	Metals
Tech Mahindra Ltd.	Information technology
Titan Company Ltd.	Consumer goods
UPL Ltd.	Fertilisers & pesticides
UltraTech Cement Ltd.	Cement & cement products
Wipro Ltd.	Information technology

Difference Between Sensex and Nifty

Both BSE Sensex and NSE Nifty are stock market indices, which indicate the strength of the market.

Here are the key differences between Sensex and Nifty:

• While NSE Nifty tracks the 50 most actively traded stocks on the National Stock Exchange (NSE), the BSE Sensex represents 30 of the largest and well-established companies on BSE.
• The base index value of Sensex is 100 whereas the base value index of Nifty is 1000.

Key takeaways

Sensex and Nifty are benchmark indicators that indicate how the stock market is performing. It does not matter whether you invest in the Sensex stocks or Nifty stocks or even other BSE stocks or NSE stocks as long as you invest in fundamentally sound companies.

Click here to invest in a portfolio of 20-25 fundamentally sound companies with the potential to multiply your wealth by 4-5 times in 5-6 years.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

When it comes to investing in stocks, the majority of investors make a grave mistake of investing by looking at the share price than the value associated with it. As a result, they often end up losing their money in the stock market.

We often come across investors who claim that a stock trading at Rs. 50 appears to be a better buy than a stock trading at Rs. 1000. Their argument to support this claim is that they can simply buy more quantity of stock trading at Rs. 50 than the stock trading at Rs. 1000 without looking at the actual Intrinsic value associated with the stock.

There are many banking stocks available in the banking sector for single-digit and double-digit prices such as Dhanlaxmi Bank, South Indian Bank (SIB), and Jammu & Kashmir Bank. On the other hand, the market leader in the segment HDFC Bank is trading at a four-digit price and there is a reason why value investors still consider a good buy.

HDFC Bank’s consistent growth in market share, pan-India presence, lowest NPA, asset quality control, significant deposit, and market credit share are some of the factors which make it a value buy.  All these fundamental strengths justify the high stock price of HDFC Bank. However despite being a consistent compounder for last few decades it is equally important to look at the stock’s instrinsic value to avoid overpaying for it.

In this article let’s take a look at ‘What is intrinsic value’ and how investors can use intrinsic value as a measure to choose the right stocks for wealth creation.

Before we proceed further let’s take a look at why buying an asset without looking at its intrinsic value may end up creating a bubble, especially when everyone else around is also doing the same.

The best example of this is the ‘Tulip Mania’ during the Dutch Golden Age considered to be one of the most famous market bubbles of all time.

In 1636, speculation raised the value of tulip bulbs to extremes levels in Holland.

As the word about lucrative profits from tulip trading spread quickly, people from different walks of life from cobblers, carpenters, maids, mechanics, farmers, and nobles, started buying and selling tulip bulbs, taking prices sky-high. According to estimates in the year 1633, a single bulb of a rare variety of tulips was worth a whopping 5,500 guilders. By the year 1637, the price doubled, to almost 10,000 guilders, a princely sum that could buy a luxury home in Amsterdam then.

And then one day in February 1637, the market for tulips collapsed as fast as it had risen. The demand for tulips disappeared overnight. With no buyers, sellers who had invested heavily in buying tulip bulbs were left high and dry resulting in a financial disaster for many.

Today the term “tulip mania” is often symbolically used to describe a large economic bubble when the price of the asset varies too much from its intrinsic value. The underlying reason for the collapse of the bubble was the fact that there was no real value associated with tulips which warranted its extra-ordinary price. In simple words, there was no intrinsic value associated with tulips and due to high demand and low supply prices of tulips were touching new highs before the bubble burst.

In Berkshire Hathaway’s annual meeting notes for the year 2007, there is an excellent example by Warren Buffett where he describes in with a simple example the significance of intrinsic value.

In the example, Buffett gives the reference of buying a farm which generates a revenue of $70 per acre for the owner. He asks how much would a person wanting to buy the farm, pay per acre for the farm. He says if the yield will get better, prices will increase and it would generate a 7% return, so a payment of $1,000 per acre would be fine. If the same farm is available for a sale for $800, it is worth buying but if the price is $1,200, it is not worth buying.

Now that you have understood ‘What is intrinsic value?’ let’s proceed to the next step

How is the intrinsic value of a stock calculated?

Investors and analysts use different valuation models based on both quantitative and qualitative factors to calculate a stock’s intrinsic value. One of the most popular approaches towards calculating the intrinsic value of a stock is the Discounted Cash Flow analysis model.

There are three key steps involved for calculating a stock’s intrinsic value such as estimating all of a company’s future cash flows, calculating the present value of all those future cash flows, and adding up the present values to calculate a stock’s intrinsic values.

Another popular approach used by experts for calculating the intrinsic value of a stock is the Gordon Growth Model (GGM.

In this model, the intrinsic value of a stock is determined on the basis of a future series of dividends that grow at a constant rate. While using this model for calculating the intrinsic value it is assumed that the dividend grows at a continuous rate in eternity and solves for the current value of the endless series of future dividends. As this model is based on the assumption of a continuous growth rate, it is mostly used only calculating the intrinsic value for companies that have stable growth rates in dividends per share.

Calculating the above values does require a thorough understanding of the financial statements of a company and a decent amount of time. In case you do not have the time for the same or lack the necessary skill to study financial statements, you can always rely on experts like Research & Ranking to make investing a hassle-free experience.

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Key takeaways

Intrinsic value is a key metric that helps an investor to identify the real worth of a stock. Legendary investors like Warren Buffet and Benjamin Graham have created immense fortunes through value investing based on the intrinsic valuation method.

No matter how good a stock is, it makes absolutely no sense to buy it at the wrong price. The basic objective of calculating a stock’s intrinsic value is to purchase it when it is trading at a lesser price than its real worth.

Read more: About Research and Ranking.

The investing world is constantly disrupted by new trends every few years. From ESG investing to crypto-currencies to “Robinhood investors” to “Reddit-empowered” Gamestop investors, we have seen quite a few trends in the past five years. Another trend that is catching up fast is the emergence of “SPAC” or Special Purpose Acquisition Companies. The trend is emerging fast; from one SPAC-led IPO in 2009, the number shot up to 248 in CY2020. SPACs have been the rage in the USA and Europe mainly. But before we move on, a bit more on what is a SPAC?

What is a SPAC?

• A Special Purpose Acquisition Company (SPAC) is basically a “black-cheque” company that is set up with the sole aim of raising money through an IPO (Initial Public Offering) to acquire another company, going ahead.
• A SPAC, by itself, has no commercial operations, products or services. This company’s only assets are money raised during the IPO.
• A SPAC contains investments from its founders and general public. Once the money is collected, the SPAC gets listed. On listing, the SPAC looks to buy other private companies.
• This way, the investors see a significant rise in the value of their stake in the SPAC.
• The acquired company finds an easier way to get listed rather following the traditional IPO route.

Looks like a win-win for both parties, doesn’t it?

The rise and rise of SPACs

While SPACs have existed for several years, with not necessarily the same name, CY2020 has been the most dramatic year for SPAC IPOs, in terms of number of issues. Also, the average size of a SPAC IPO has been steadily moving up year after year.

SPAC IPOs in the USA by year	Avg. SPAC IPO Size ($mn) by year
Source: Statista	Source: Spacinsider
Note: *Data as on 21st February, 2021
Market share of US-listed SPAC IPOs versus total US IPOs
Source: Nasdaq website

 

Why are companies preferring the SPAC route over routine IPO listing?

A regular IPO involves a list of procedures prior to actual listing – doing roadshows, convincing a wide variety of institutional investors regarding future business prospects, determining optimum valuations, etc.

All these take time and are fraught with uncertainties. With COVID pandemic, the convincing bit became all the more difficult and meeting investors a challenge.

This is where SPAC has an advantage. With SPAC listing already done, half the hassle gets taken care of. Also, the negotiation works faster since only one party has to be convinced.

Retail investors do not know the type of company that will get acquired when they subscribe to the SPAC IPO.

However, these investors can draw comfort from the fact that the SPAC has on board a team of institutional investors, fund managers from PEs and hedge funds and many other high profile entrepreneurs.

The SPAC mechanism chart

Source: Nasdaq

• Once an IPO is done, the proceeds are put in a trust account. The SPAC is given 18 to 24 months to scout for a suitable acquisition / merger.
• If it is not able to find a target within the stipulated time, the SPAC gets liquidated and IPO proceeds are returned to the investing public with pre-decided interest.
• If the merger/acquisition goes through successfully, SPAC promoters (also called sponsors) typically get 20% stake in the final, merged company.

Is there a flip-side to SPAC IPO?

• At the time of its IPO, investors in a SPAC are not aware of which company will get merged / acquired. The target company may or may not match their investing choice or horizon.
• Many sceptics argue that SPAC sponsors do not undertake thorough due diligence as much as an IPO.
• There could be a lag time of as much as 24 months from the time of listing of a SPAC till it acquires a suitable target. During this time, the money could simply be sitting in an escrow account, earning no returns.

So there are no doubt, risks associated with this new form of investing. As with all other financial instruments, only time will tell whether this is a trend which will stay for the long term or fade away eventually. Regulators and lawmakers, will have to tweak laws appropriately from time to time to keep the instrument simple and low-risk.

Are there any SPACs in India?

One word answer to this question is – NO!!

Indian laws currently do not define SPACs clearly in any way.

On the other hand, the current Government has been going after shell companies very aggressively. Between 2017 and 2020, it cancelled registrations of nearly 4L shell companies.

SPACs have no business of their own and they collect public money at the time of IPO. The money is kept with the SPAC (in an escrow account) for about 18-24 months.  Hence, according to current Indian laws, SPAC could qualify as a shell company.

Current Indian laws will have to be modified to bifurcate definition of a shell company from that of a SPAC. However, SPACs are surely getting noticed by Indian investors and will hopefully also get noticed by lawmakers and regulators. It’s not that Indian companies have not had any SPAC connection at all.

E-grocer Grofers is said to be seeking a SPAC deal to list on the US bourses.

In 2015, a SPAC named Silver Eagle Acquisition, acquired 30% stake in Videocon d2h for ~$200mn.

In 2016, Yatra Online Inc, parent company of Yatra India, listed on NASDAQ, by way of a reverse-merger with another US-based SPAC, Terrapin 3 Acquisition.

Final Thoughts

The writing on the wall is clear – SPACs are here to stay alongside traditional IPOs.

The spike seen in 2020 may or may sustain going forward. However, Indian regulators need to sit and take notice of this innovative form of investment that is taking the investing world by storm.

As stated by CNBC website, “Goldman Sachs estimates that 93 SPAC funds are currently sitting on $63 billion in search of takeover targets. As an illustration of their potential, this implies a buying power of some $300 billion since a typical SPAC merges with a company five times its size once institutional investors buy-in”.

Given the enormous size of this capital that is waiting to get deployed, India cannot afford to miss the bus.

Even a small percentage of this money, if diverted to India, could lead to a huge capital inflow into the country and provide avenues for Indian companies to grow, expand and flourish.

Crypto-currencies have for long been the subject of intrigue and adventure for speculators. Presently, there are more than 5,000 crypto-currencies (also sometimes called digital currency) globally with a whopping market cap of $1.52tn. Crypto-currencies so far have had a stormy relationship with Indian regulators.

RBI tried to ban crypto-currencies in 2018 fearing frauds and lack of regulatory framework. However, the Supreme Court revoked this decision in 2020, allowing the market to restart. The RBI then thought of taking a step further by introducing its own digital currency, which is still in the policy framing stage. Let us understand what this means.

What is a crypto-currency?

Investopedia defines Crypto-currency as a “digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend”. Crypto-currencies are generally not issued by any country’s Central Bank, hence they are shielded from government interference or manipulation. Bitcoin is the most popular cryptocurrency. The Top 10 most popular Crypto-currencies are as follows:

Top 10 global Crypto-currencies by Market Cap

Currency	Symbol	CMP ($)	Market Cap ($bn)
Bitcoin	BTC	51,239	946
Ethereum	ETH	1,805	206
Tether	USDT	1.00	32
Polkadot	DOT	31	28
Cardano	ADA	0.85	27
XRP	XRP	0.53	24
Binance Coin	BCH	130	20
Litecoin	LTC	216	14
Bitcoin Cash	BCH	704	13
Chainlink	LINK	31	13

 

The rise and rise of Bitcoin (USD)

Source: Coinmarketcap

Indians join the party, albeit late

Indian investors joined the crypto-currency party a bit late. Bitcoin, the most popular crypto-currency was launched in January, 2009. However, Indian interest in the currency picked up only in 2017, when it saw a huge breakout. It rallied from $964 on 1^st January 2017 to $19,167 on 17^th December 2017, a mind-boggling return of 20xs in less than a year. People started speculating in the currency and looked at it as a way to make a “quick buck”. Back then, no one looked at Bitcoins as a serious investing option, partly because very few people understood the concept fully.

RBI proposes an Indian crypto-currency, Supreme court disposes

The demonetization exercise of 2017 drove a push towards digital transactions, increasing Indians’ appetite for crypto-currencies. After remaining largely silent for few years, RBI finally issued a statement in 2017 highlighting the concerns associated with the sudden rise of crypto-currencies. In 2018, RBI passed a circular preventing all banks from dealing in crypto-currencies. However, in 2020, the Supreme Court of India lifted the ban on crypto-currency trading in India, citing a lack of sufficient proof of damage suffered by RBI due to trading in crypto-currencies. It also said that the RBI had not explored any less intrusive alternatives such as regulating crypto-currency trading or exchanges.

The pros of crypto-currencies………..

Crypto-currency offers several advantages vis-à-vis trading in equities or debt.

• • Easy and transparent transactions – Minimum paperwork, complete transparency with audit trails
• • Less transaction fee – compared to traditional forms of investing
• • More security – A crypto-currency transaction is almost impossible to hack or tamper (till now). Also, the transaction cannot be reversed
• • No need for third party – A crypto-currency transaction involves only two parties – sender and receiver. No third party is involved. Also, no monitoring happens.
• • Swift international transactions – People across the globe can make one-to-one transactions without complicated formalities or fees.
• • Round-the-clock availability — Available for trading all 24 hours a day, 7 days a week

 

The Cons of crypto-currencies………..

• • Scalability – There is currently a mismatch between number of digital coins, adoption of the currency, and increasing number of transactions. It is still much lower than the number of transactions processed by VISA compared on a daily basis. The ramping up will take time.
• • Lack of inherent value – A crypto-currency is not linked to any tangible or intangible asset, hence there is no basis for the valuation (prices) of a currency, apart from demand. Hence, volatility is high. Legendary investor Warren Buffet has been strongly against any form of crypto-currency, saying “Crypto-currencies basically have no value and they don’t produce anything. I don’t own any crypto-currency and I never will”.
• • Lack of regulations – Presently, crypto-currencies are not regulated by any Governments, hence changing of rules or protocols, especially when any new technology gets adopted, can become an issue.
• • Potential security threats – While there have not been many hacking incidents till now, one can’t refute it totally going ahead.
• • Anonymity could be a threat – Complete anonymity offered by crypto-currencies can be an issue in case of threat or fraud detection.

RBI and Government step in

The Government recently announced that it could ban private crypto-currencies in India. It plans to introduce an Indian cryptocurrency and Regulation of Official Digital Currency Bill to ban private crypto-currencies in India. RBI announced that it would bring in a new official digital currency for India. While RBI will think of a name for the currency when one is introduced, such type of currency is called central bank digital currency (CBDC).

While the nature of such a currency is not yet known, CBDC will be backed by the Government and RBI. Lawmakers could think of bringing a large part of the current Indian Rupee into the digital domain. This will be a push further towards a cash-free economy. Currently, we have moved in this direction somewhat through digital payment systems – UPI, credit and debit cards and QR codes. However, even these transactions finally relate to fiat currency. CBDC will take it a step further whereby even the underlying will not be INR currency.

A technology totally new to India? Not really!

According to RBI’s February, 2020 paper titled “Distributed Ledger Technology, Blockchain and Central Banks”, block-chain, the technology behind most digital currencies is not entirely new to India. The paper gave several examples of block-chain technology usage in India

• • State governments like Andhra Pradesh and Telangana have started blockchain-related solutions in the areas of land registry, digital certificates, electronic health records, etc.
• • Yes Bank issued commercial papers using blockchain technology in July, 2019
• • Axis Bank launched its international payment service using Ripple’s enterprise blockchain technology in November, 2017
• • HSBC India and Reliance Industries Ltd. executed blockchain-based trade finance transaction in November, 2018

Is RBI the only central bank looking at CBDC?

RBI is not the only Central Bank looking at introducing a digital currency. China has been working on a CBDC since 2014 and has termed it as DCEP (Digital Currency Electronic Payment). Many such other projects or studies have been going on across the world

 

Some Central Bank Projects to test Distributed Ledger Technology

Country Body Name of Project Platforms Tested Canada Bank of Canada Project Jasper Ethereum, Corda, Quorum Singapore Monetary Authority of Singapore Project Ubin Ethereum, Quorum, Hyperledger Fabric, Corda, Anquan Europe & Japan (Joint) European Central Bank and Bank of Japan Project Stella Hyperledger Fabric, Corda, Elements Thailand Bank of Thailand Project Inthanon Corda Brazil Central Bank of Brazil NA Hyperledger Fabric, Corda, Quorum, Ethereum South Africa South Africa Reserve Bank Project Khokha Quorum England Bank of England NA Ethereum, Interledger Protocol, Corda

Source: RBI paper titled “Distributed Ledger Technology, Blockchain and Central Banks” dated February, 2020

 

Final Thoughts

It is hard to say when RBI will come out with its own digital currency, how the whole system will be implemented and how India, with its huge digital divide, will adopt the technology. However, a Central bank based digital currency does have some advantages such as:

• • Being regulated by a Government authority
• • Reducing physical contact, critical in a post-COVID world
• • Decline in use of cash
• • Reduction in fraudulent transactions and fake currency used for “not-so-good” activities
• • Increase financial inclusion in a country like India where internet penetration is higher than banking penetration.

RBI has been agile enough to read the writing on the wall – digital is the future. It also paves the way for Modi Government’s favorite tag-line, “Minimum Government, Maximum Governance”. Watch this space for more updates on RBI’s Indian crypto-currency initiative.

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India is standing at the cusp of a new growth cycle. There are many enablers that will set the tone for this growth. The biggest enablers, Government and its reform-oriented approach are the most important. These are very much in place. Let us take a look at what other data points are pointing in the direction.

Pointers which reveal India’s giant leap towards becoming a USD 5 trillion economy

Corporate Profit to GDP (%) is at a multi-year low

 Source: Business Today. Numerator is PAT of BSE 500 companies

Corporate Profit to GDP ratio has been on a continuous slide since FY2008. This fall was mainly led by four sectors – PSU Banks, Oil and Gas, Metals and Telecom. PSU banks suffered due to rising NPAs, higher provisions, higher slippages and lower loan growth. Metals suffered due to wild swings in global commodity cycles. Telecom suffered due to declining profitability as numerous players were engaged in a suicidal cost cutting race which destroyed profitability and resulted in many players exiting the market.

One needs to note that consumption has risen as the new champion of growth in past few years. It has outpaced old-world and commodity-driven sectors such as metals and oil and gas. However, consumption is a scattered activity. A large number of giants that emerged over past few years which contributed to GDP did not contribute to BSE 500, which is the numerator in our metric. Large retail giants (Amazon, Flipkart), fintech companies (PayTM), aggregators (Ola, Uber), food delivery (Zomato, Swiggy) and numerous others are not listed. They generate significant employment, pay taxes and hence contribute handsomely to the GDP.

As more and more of these “new-world” businesses get listed, the Corporate Profit to GDP ratio will move higher.

High growth to offset Government Debt to GDP

Source: Tradingeconomics.com

India’s Debt to GDP is neither too high nor too low. It lies somewhere in the middle. Economists have been divided whether India’s debt level is comfortable or a matter of concern. However, India’s (high) growth is a safe hedge against the debt. India is expected to grow much faster than the rest of the world and hence we can sustain higher debt levels. During the Asian crisis of 1997, India’s debt to GDP ballooned from 67% to 83%, GDP growth was just 3.9%. Post that, we had several years of high growth and the metric came back to 66%.

The interest rate paid by India has been historically lower than India’s growth rate and hence we can rest assured that India will never default on its debt repayment. It has never defaulted in the past as well. Hence, we don’t see India’s debt-to-GDP ratio a being a concern.

Bank Credit to private sector as % of GDP at multi-year low

Source: theglobaleconomy.com

Credit given by banks to private sector has slowed down over past 4-5 years. This is because of two reasons:

• Lower demand for credit amidst an economic slowdown
• Banks have been reluctant to lend to corporates fearing defaults by clients

Owing to these reasons, bank credit as % of GDP has gone lower, despite adequate liquidity maintained by RBI. At the heat of the COVID crisis, banks were unwilling to lend to companies as most businesses were closed and overall demand in the economy was abysmally low. With recovery now in sight and things beginning to move on the ground, credit is expected to pick up.

GST collection (Rs. Bn.) highest ever

Source: Government Data

GST collections hit all-time high levels in December, 2020 and January, 2021 owing to following factors:

• Government has been going after tax evaders for the past few months. The jump in collections could be due to more people falling in line and complying. Nearly 1.6L Company registrations were cancelled in October 2020 and November 2020 which could have prompted many others to make timely GST payments.
• Closer monitoring against fake-billing, deep data analytics using data from multiple sources including GST, Income-tax and Customs IT systems and effective tax administration have also contributed to the steady increase in tax revenue over last few months
• Apart from the above, companies have pushed sales harder in the past few months and consumers have gradually started spending money.

Indian household exposure to equities is among lowest in the world

Source: Motilal Oswal

Despite having a very regulated stock market that has created wealth for decades together for those who have stayed invested long enough, Indians have not yet fully opened up to the concept of equity investing. Only 14% of Indian household savings are invested in equities, which is among the lowest in the world. This is due to perception of equities as instruments of “excitement” and “instant gratification” rather than “long term wealth creation”. The Indian market needs measures such as further deepening of the bond market. An overall development of all facets of markets – equity, derivatives and bonds is necessary to boost participation.

A reform–oriented Government with the guts and intent to take unpopular decisions

Ever since the Modi Government took charge in 2014, it has taken some bold decisions – on the economic and non-economic front. We shall take a look at only the economic decisions. We shall not get into the argument whether a decision was right or wrong; or how right or how wrong. We only wish to take a look at the positives of the decision. The point that we are trying to drive is that the Modi administration does not shy away from taking tough decisions.

Some of Modi administration’s unpopular decisions were:

GST implementation 

The Goods and Services Tax is an indirect tax which replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. Goods and Service Tax (GST) is levied on the supply of goods and services. Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. GST is a single domestic indirect tax law for the entire country. (Source: Wikipedia)

The Insolvency and Bankruptcy Code

IBC is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The bankruptcy code is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome (Source: cleartax.in)

RERA 

Real Estate Regulatory Authority was formed to bring about transparency in the real estate sector. It aims to reduce project delays and mis-selling. At present, it is compulsory for all builders or developers to carry out RERA registration before they start a project. (Source: Economic Times)

Demonetization

The process was implemented in India in November, 2016 to withdraw all Rs. 500 and Rs. 1,000 banknotes. The Government claimed that this was intended to curtail the parallel (shadow) economy in India and reduce use of fake cash used to fund terrorism.

To conclude, India has got all the right ingredients to take off in a big way – market of nearly 1.3 billion consumers, growing income levels, young population, action-oriented Government that has an absolute majority to pass key Bills.

In our opinion, there shouldn’t be anything that to come in the way of India and its ascent towards becoming a USD 5 trillion economy. This will throw enormous opportunities at investors who are willing to be patient, not timid. Take correct calculated risks and wait for the story to mature. Your future generations will certain say, “This guy / girl had the guts to slug it out, which made my life much easier”. Money can’t buy happiness, but it can certainly facilitate it. 

To invest in 20-25 high growth stocks with the potential to generate tremendous wealth as India leapfrogs towards becoming a USD 5 trillion economy.  

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

Hello and welcome back to the fourth edition of our Budget Analysis series.

The Budget was bold and beautiful – Bold because the Government did not pay heed to rating agencies’ advice for pruning fiscal deficit.

Beautiful because the wide array of reforms suggested in the Budget encompassed all areas of the economy and public life. We have shed light on the “beautiful” part through the earlier articles. Let’s focus on the “bold” part in this one.

This Budget had many “firsts” to itself –

1. Raising revenues without raising taxes – A combination of strong GST collections and personal income tax is set to boost revenues for the Government. Corporate profitability has seen a huge turnaround from Q2FY21, which has improved fiscal situation dramatically.
2. Higher than anticipated capex – The Budget set capex target at 2.5% of GDP for FY22BE against expectation of 2% of GDP and against the range of 1.6% – 1.8% seen over FY18-FY20.
3. Setting a fiscal deficit target higher than even the most pessimistic street estimates – Analysts were expecting fiscal deficit target of 6% – 6.3% for FY22. However, the Government indicated it needed more fiscal space and set it at 6.8%, higher than any estimates.
4. Not paying heed to rating agencies – FM did not pay heed to rating agencies warnings of high fiscal deficit, caused as a fallout of the pandemic. Instead, the Economic Survey lashed out at global rating agencies for their abysmally low sovereign ratings.

On the whole, the Budget’s motto was – “Under-promise and over-deliver”, “don’t promise the stars, neither the moon; remain grounded on earth itself”.

Let us take a look at these facets one by one.

Shoring up revenues without raising taxes

The Honorable Finance Minister (FM) did not raise corporate or personal tax rates, much to the relief of businesses and common people.  Corporates had already received a bounty in 2019, when the FM slashed corporate tax rate from 30% to 25%. The importance of this move was further realized in 2020 when companies reported miniscule profits or even losses due to effects of COVID-19 pandemic. The saving in tax outgo could be ploughed back into business for further growth or for shoring up the balance sheet.

For common people as well, there was no tinkering with personal income tax rates.  There was no imposition of COVID tax cess, as was widely feared. Surprisingly, all of this came at a time when the Government was in dire need of boosting its revenues.

A combination of strong GST collections and personal income tax is set to boost revenues for the Government.

GST collections hit all-time highs in December, 2020 and January, 2021, indicating sharp recovery post lockdown and better compliance. Corporate profitability has seen a huge turnaround from Q2FY21, which has improved fiscal situation dramatically Analysts expect even higher GST collections in the new calendar year as recovery gains pace.

While most Budgets tend to over-estimate revenues and receipts, this one preferred to err on the side of caution.

Instead of burdening corporates or common people, the FM resorted to proceeds from disinvestment and privatization, asset monetization (roads, DFC, sports stadia, airports, transmission assets, etc.) and large market borrowings to fund its balance sheet.

We feel this was a big sentiment booster and conveyed the message that Government revenues can be shored up without taxing corporates or common citizens.

Leading from the front

What does a captain of any sports team do when the team spirits are down and players are demotivated? He / she takes the onus of performing on himself/herself and facilitates a victory or at least a fighting performance for the team. This is called “leading from the front”. India’s economy has hit de-growth levels, probably for the first time in recorded history. Consumer sentiment is down, as people have lost jobs or are unsure about job stability. Several companies have announced pay cuts. On the whole, consumers are a worried lot.

At such times, it would be unfair and unrealistic to expect consumers to come out of their homes, shop, then shop some more, keep shopping and stimulate demand for goods and services. Reading the pulse of the nation, the Honorable FM took it upon the Government to boost the economy.

The Budget set capex target at 2.5% of GDP for FY22BE against expectation of 2% of GDP and against the range of 1.6% – 1.8% seen over FY18-FY20.

Capex target for FY22BE was set at Rs. 5.54tn, a whopping 35% increase over FY21BE. FY21 capex target was revised to Rs. 4.39tn, 7% higher than FY21BE and 31% higher than FY20 actual. Consequently, Capex which is usually in range of 12-14% of expenditure was raised to 16%.

Most of this money would go into building infrastructure which will have two effects

• Reduce (somewhat) the infrastructure deficit problem (over the longer term) that corporates have always complained about
• Generate direct and indirect employment across a wide array of sectors
• Have a multiplier effect on the economy

A closer look at the Capex (Rs. Bn.) Bounty

Capital Expenditure Change FY2022BE vs FY2021RE 26% FY2022BE vs FY2021BE 35% FY2021RE vs FY2021BE 7% FY2021RE vs FY2020 Actual 31%	Capital Expenditure	Change	FY2022BE vs FY2021RE	26%	FY2022BE vs FY2021BE	35%	FY2021RE vs FY2021BE	7%	FY2021RE vs FY2020 Actual	31%
Capital Expenditure	Change
FY2022BE vs FY2021RE	26%
FY2022BE vs FY2021BE	35%
FY2021RE vs FY2021BE	7%
FY2021RE vs FY2020 Actual	31%
Source:  Budget Documents

A fiscal deficit target that factors in the worst

The FM, in her Budget speech, outlined a moderate fiscal deficit target of 6.8% for FY22. We say “moderate” because we feel that this much is required to pump-prime to economy from record low growth levels in the current year (FY21). India has an opportunity to run a significantly high deficit for couple of years and spend money aggressively to push growth. Assuming a low double digit GDP growth, even if fiscal deficit touches the 10% mark, debt-to-GDP ratio will still remain close to last year level of 85%. This leaves some room for comfort and spending.

Fiscal Deficit – Government unafraid to paint a more realistic picture
Expectations prior to Budget 2021 FY2021 FY2022 ICRA 7.5% 5.0% India Ratings 7.0% 6.2% CARE 7.8% – 8.4%   Phillip Capital 7.0% 5.0% DBS 7.5% 6.3% Budget 2021 9.5% 6.8%	Expectations prior to Budget 2021	FY2021	FY2022	ICRA	7.5%	5.0%	India Ratings	7.0%	6.2%	CARE	7.8% – 8.4%		Phillip Capital	7.0%	5.0%	DBS	7.5%	6.3%	Budget 2021	9.5%	6.8%
Expectations prior to Budget 2021	FY2021	FY2022
ICRA	7.5%	5.0%
India Ratings	7.0%	6.2%
CARE	7.8% – 8.4%
Phillip Capital	7.0%	5.0%
DBS	7.5%	6.3%
Budget 2021	9.5%	6.8%
Source: Press articles sourced from web search

According to economists, India’s high fiscal deficit traditionally has been due to lower tax collections rather than high Government spending. Hence, kick starting the economy through higher spending on capex is the only way to improve GST collection. Also significant to note is the fact that there is nothing off balance sheet in the Fiscal deficit target, everything is on the balance sheet. This kind of transparency is more than welcome.

Fiscal deficit (as % of GDP) over the years

Source:  Budget Documents

We will spend — Global rating agencies can go take a walk

India’s sovereign rating has for long been a matter of debate between the Government and global rating agencies. For long, global rating agencies have kept India at lowest investment grade, despite it being the 5^th largest economy in the world. Reasons that have been given for abysmally low ratings are – weakened growth outlook, high public debt, liquidity and NPA issues for NBFC sector, recent geo-political flare-ups and others. The Economic Survey, an exercise whose results are tabled before the annual Budget, slammed rating agencies’ methodology that determines India’s ratings.

According to the Economy Survey, “While sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy, opaque and biased credit ratings damage FPI flows. Sovereign credit ratings methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations by becoming more transparent and less subjective”

“India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history. India’s ability to pay can be gauged not only by the extremely low foreign currency denominated debt of the sovereign but also by the comfortable size of its foreign exchange reserves that can pay for the short term debt of the private sector as well as the entire stock of India\’s external debt including that of the private sector”

Running high fiscal deficits are considered taboo by rating agencies. However, the FM refused to toe global agencies’ line and instead held her own. Fiscal deficit as % of GDP will run high at 9.5% in FY21 and 6.8% in FY22BE, with a plan to reduce it to 4.5% of GDP by FY26.

All in all, the Budget presented several “firsts”, intended to support and boost the economy. The FM was unafraid and experimentative. Results will be visible only after few years once data starts coming in.

This was it with Part 4 of the Budget Series. Thank you so much for reading it till the end

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

In India, unlike other western countries, Budget is not just an episode of reading accounting statements. It\’s much beyond that.  

We have seen governments, understood their budgets; however, this was one of the best budgets we witnessed in recent times. 

The Budget FY2021-22 has set a process for achieving significant economic freedom, faster and more rightful economic development and maturity. 

In the second chapter of the budget series, we informed you about the government\’s steps for building infrastructure to set the economy in action. This chapter can be considered supplementary to the earlier one.

A look at various reforms undertaken by the government for India’s growth

Domestic Manufacturing

For long, India has been a net importer of electronics, crude oil, automobiles and several other products. To change that face of the country, as part of the AtmaNirbhar Bharat policy, the Finance Minister has earmarked Rs 1.97 lakh crore over the next five years under the Productivity-Linked Incentive (PLI) scheme covering 13 sectors. 

This move will attract global players to set up factories in India and export products to other countries.

The government will facilitate it by protective measures for the domestic industry by levying customs duty on various products, including electronic items, compressors for refrigerators and ACs, automobile parts such as electric motors and relays, etc.

India is aiming to be an integral part of the global supply chain. Considering this, the country is about to witness tremendous growth in the coming years.

Scrappage Policy

A much-awaited scrapping policy for personal and commercial vehicles is also expected to boost demand for automobiles. Personal vehicles over 20 years and commercial vehicles over 15 years will have to undergo a fitness test to run on roads. 

The scrapped vehicle will further provide low-cost raw material to Auto OEMs, thereby reducing the cost of vehicles. This will also help the country in reducing its environmental footprint and boost production of EVs. 

According to FADA President Mr Vinkesh Gulati, “If we take 1990 as the base year, there are around 37 lakh commercial vehicles (CV) and 52 lakh passenger vehicles (PV) eligible for scrappage. 

As an estimate, 10% of CV and 5% of PV may still be plying on the road.” As a direct result of implementing the policy, up to 50,000 jobs and investments of around Rs 10,000 crore are expected to be generated.

FDI In Insurance

With the intent to attract Foreign Institutional Investors (FIIs), the Finance Minister increased the foreign direct investment (FDI) limit in the insurance sector to 74% from 49%. Along with other disinvestments announcements, one state-owned general insurance company is likely to get privatized and boost government revenue. 

The COVID-19 pandemic has proven that we have long overlooked the concept of having insurance. The penetration of insurance in India is much needed, and for that capital infusion is required.

Earlier, the government had raised the FDI limit from 26% to 49%. The further hike will allow foreign promoters to buy a stake in their Indian partners if required and provide the needed cash infusion.

The entry of a foreign partner will improve efficiencies, bring in greater transparency and align India\’s insurance sector policies in line with global standards.

Bad Bank

After years of delay, FM announced introducing an entity to address the stressed assets banks through Asset Reconstruction Company (ARC) framework. Although it\’s not clear who this entity will be, the government is calling it “Bad Bank.” 

This step is going to be a significant boost for inefficient asset resolution in the financial system. This entity will purchase distressed assets from banks at a discount. Then it will attempt to recover maximum possible value through a professional approach. 

Tax Simplification

From a compliance and litigation perspective, there have been crucial changes. It is proposed to bring income tax appellate tribunal (ITAT) proceedings under the faceless regime.

To ease litigation for small & medium taxpayers (with income up to Rs 50 lakh), a dispute resolution committee is proposed to be formed. 

Time limits & due dates for compliance have also been revised. The time limit for completion of regular & best judgment assessments has been reduced by three months. Duration for reopening of assessment has been reduced from 6 years to 3 years. Due dates for filing of revised belated returns are reduced by three months.

One Nation One Ration Card

Focusing on the migrant worker class, the government has implemented ‘One Nation, One Ration Card’ in 32 States and Union Territories, reaching about 69 crore beneficiaries. This scheme allows its beneficiaries to claim their rations anywhere in the country.

Migrant workers, those staying away from their families can partially claim their rations where they are stationed, while, their family in their native places can claim the rest.

Moreover, minimum wages will apply to all categories of workers, which will all be covered by the employee state insurance corporation.

One Person Company

The Budget proposal to allow forming One-Person Company (OPC) will push entrepreneurship in the country. OPC eradicates the requirement of traditional time-consuming and cumbersome methodologies like board meetings and financial statement inclusions.

The changes are sought to benefit approximately 200,000 companies in India in easing their compliance requirements. Earlier with the threshold of existing as an OPC was lower, converting to a private or public limited company meant more restrictions on the company’s trade.

Reducing Food Subsidy

For the first time, the government has acknowledged the use of extra-budgetary and other resources like the National Small Savings Fund (NSSF) for meeting the requirement of food subsidy. FCI has unpaid bills of Rs 1.8 lakh crores and lower provision of food subsidy in 2020-21 means that the government will see for options other than borrowing from NSSF at 8.4% interest to reduce the burden food subsidy.

Cutting the food subsidy can help provide more fiscal room.

This subsidy has seen a massive almost Rs 70,000 crore reduction in allocation this budget to Rs 1.15 trillion against the expectation of Rs 1.84 trillion for 2019-20. In the current year itself, the revised estimate of food subsidy has reduced to Rs 1.08 trillion. 

Securities Market Code

The FM has proposed to bring together the provisions of SEBI Act, Depositories Act, Securities Contracts (Regulation) Act and Government Securities Act under a rationalized umbrella of securities markets code.

To best protect the investors’ interest, FM also proposes establishing an investor charter as a right for all investors in financial products.

A single code would provide more operational efficiency to the regulator, regulating various forms of securities like equity, commodity, currency and interest rate. Further, it also regulates stock exchanges, which provide a trading platform for government and private sector bonds.

Ujjwala Scheme

Ujjwala scheme is being expanded to cover over one crore more families. India will have 100% blue fame coverage of all willing household access to clean cooking fuel, up from 55% of households with access in 2014. 

This was a long read right, but I’m sure it was a good one! To conclude this chapter, I want to leave you with a question. 

We have long been telling investors about a golden period that is approaching after the one that we during 2003-07. 

Hadn’t it been for Covid, we would have seen more exponential growth in the market. 

This budget has undoubtedly laid the foundation for the India’s growth that we all are eager to see. 

The question here I want to ask you is-

“Will you now want to play an instrumental role in the growth story of our country and benefit from the opportunities that we see arising or will you again be speculative and turn away from the stock market?”

If you choose the latter, be ready to answer your children when they ask you what stopped you from investing in India’s growth story.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

Budget 2021 – A fearless FM targets a limitless growth

“The ground of fearlessness is fear. In order to become fearless you have to stand in the middle of fear” – Larry Rosenberg – American Buddhist Teacher

Today, we are going to talk about the Budget.

Budget 2021 marked a landmark shift in thought and attitude of the Indian Government. It was a shift from a conservative, deficit-fearing, voter-focused and populist Budgets that this and previous Governments have traditionally tabled. The recent Budget transitioned towards greater transparency, fearlessness, re-building, growth and muscle flexing. We say muscle flexing since the Honorable Finance Minister did not pay heed to calls by global rating agencies on capping fiscal deficit. Higher or lower sovereign rating, we will push for growth, even if it means relaxing fiscal deficit targets for some time. This was the message that the FM drove through. And that is what we feel will drive growth for “Naya India” in the years to come.

While others were just feeding you with key takeaways and overview of the budget, we put our brains to study the transformative, bold and beautiful moves taken by the government, and coined this budget series titled “You Owe This To Your Next Generation”.

In a series of articles on Budget 2021 we will cover-

1. Monetization, Privatization and Disinvestment (MPD)– a drive to privatize PSUs resulting in value unlocking, this will help shore up Government revenues, bridge fiscal deficit and improve efficiency of PSUs. 
2. Boost to infrastructure activities –This Budget did not limit infrastructure creation to roads, highways, ports and railways but extended the same to clean water, sanitation, education, healthcare and proposed creation of Development Finance Institution to mobilize money for funding projects.  
3. Reforms – Major reforms were initiated in areas of domestic manufacturing (Atma Nirbhar Bharat), insurance (higher FDI limit), One Nation One Ration, tax simplification (reduction in time window for re-opening of assessment, faceless appealing), Dividend Distribution (avoid paying interest on advance tax), fast-tracking case resolution at NCLT, setting up of a “Bad Bank”, scrappage policy for phasing out old vehicles, ease of setting up One Person Companies, single Securities Market Code and many more.  
4. Some “First time ever” moves by the Government– For the first time, the Government under-promised with an intent to over deliver!! Government Fiscal deficit target was way ahead of street estimates, moderate tax growth targets, an unprecedented increase in capex spends, not heeding credit rating agencies’ warnings on fiscal deficit, preference for growth over fiscal prudence.  
5. All of this is happening when……Corporate Profit to GDP ratio is at multi-year low, NPA cleaning is in full force, credit growth is at multi-year low, only 5% of domestic savings are in equities, GST collections are at highest levels, interest rates are at multi-year lows, Debt to GDP is lower compared to advance countries and most of our debt is domestic.

These reforms have set the ground for multi-year cycle of growth and expansion. This will no doubt set a virtuous cycle for economy and equity markets. This is the best time to be in India and more an equity investor in India.

Given the explosive growth opportunity that lies ahead of us, you simply cannot overlook it. You certainly owe this to your future generations. Come and be a part of this journey and grow with us.

In the first part, we will focus on the privatization and disinvestment targets that have been laid down.

What is disinvestment?

Simply put, disinvestment is selling or liquidating assets of a State or Central Public Sector enterprise in order to raise money. This money is used by Government for bridging fiscal deficit, funding welfare schemes, Capex or other activities that the Government undertakes. It is also done in order to reduce inefficiencies at PSUs and make them more competitive and business-oriented.

“The Government has no business to be in business”

The Budget 2021 laid great emphasis on these aspects. The key highlights were a large disinvestment target, public listing of insurance behemoth LIC, and privatization of certain PSU banks and monetization of non-productive, unused public assets.

Disinvestment in key PSUs

• The Government has budgeted disinvestment target of Rs. 1.75tn for FY22 and a revised target of Rs. 320bn for FY21 (versus earlier budgeted Rs. 2.1tn and achieved till date Rs. 195bn).
• The process got disrupted in FY21 due to the COVID 19 pandemic.
• Government plans to sell stake in PSUs such as BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, NeelachalIspat Nigam and several others in FY22.

Disinvestment in PSU Banks and insurance company

• Apart from IDBI Bank, Government plans to privatize two public sector banks and one general insurance company.
• Smaller banks which have not been merged till date are likely candidates — Bank of India, Bank of Maharashtra, Central Bank of India, Indian Overseas Bank and UCO Bank.
• If corporates are allowed to enter the banking field, they can look at acquiring majority stakes in these entities. The exercise will also improve professionalism and accountability in PSU banks.

Listing of LIC

• If the Government is able to successfully bring an IPO of this behemoth, it will achieve a substantial part of the target in one go.
• The process will improve efficiency of LIC, bring in more transparency in processes and pricing of products.
• According to Department of Investment and Public Asset Management (DIPAM), the IPO could likely markets post October, 2021.
• Experts predict valuation of LIC at Rs. 8-10tn, hence even a 10% stake sale will yield Rs. 800bn – Rs. 1tn of divestment proceeds.

Monetizing non-core assets

• Asset monetization program for oil and gas pipelines of GAIL, HPCL and IOCL will be launched.
• States will also be incentivized for divestment of idle assets.
• REITs and InVITS could be used more aggressively for monetizing idle public infrastructure or land.
• NHAI operational toll roads, dedicated freight corridor assets, airports, transmission assets, gas pipelines, warehousing assets and sport stadiums could be monetized.

Will they or won’t they?

Source:  Budget Document

Government’s track record in meeting disinvestment targets has been patchy. Over the past seven years (FY14-FY20), it has surpassed the budgeted figure only twice.

• A major reason for disinvestments not going through is lack of political will – it is quite un-populist to put employees of a PSU into hands of corporates. The difference in level of professionalism, accountability, ownership and productivity is huge.
• The current Government is known for taking bold (and sometimes un-populist) decisions – demonetization, GST, CAA, NRC, farm bill being examples. Hence, we do not see political will as an impediment.
• The strategic sale will require amendments to law to enable M&A transactions of such companies. This is unlikely to be a hindrance.
• The current market mood is very positive and FII / DII flows have been very encouraging. There is ample global liquidity, looking for good returns. With developed economies hardly providing any returns, money is finding way into Indian equities and leading them higher.
• DIPAM is working on a new structure whereby incentives for PSU executives will be linked to factors such as
• Profitability
• ROE, ROCE
• Frequency and quantum of dividends
• Market Capitalization
• As mentioned earlier, 10% stake in LIC itself will release Rs. 800bn – Rs. 1tn in one go. This will ease pressure on other assets.

Given these factors, we feel that there is a high probability of achieving the set divestment targets. If these targets are achieved, they will help bridge fiscal deficit to an extent, increase confidence of the Government in undertaking more such exercises in future and improve productivity of PSU companies.

Hindustan Zinc – the poster boy of successful disinvestment and privatization in India

Incorporated as a PSU in 1996, Hindustan Zinc Limited (HZL) is an Indian integrated mining and resources producer of zinc, lead, silver and cadmium. The Vajpayee Government, in 2000 sold 26% stake in the company through a strategic sale. Sterlite Industries emerged as the highest bidder and the transaction was completed in 2002. The Government sold 45% stake in the firm for Rs. 7.69bn. As on date, the Government owns 29.45% stake in the company, which is valued at Rs. 312bn. This implies a whopping 62xs returns in 19 years, CAGR of 24%.

HZL’s successful wealth creation
Stake Valuation (Rs. Bn.) Year CAGR 45%                            7.69 2002   100%                          17.09           29.54%                             313 2021   100%                          1,060 24%	Stake	Valuation (Rs. Bn.)	Year	CAGR	45%	7.69	2002		100%	17.09						29.54%	313	2021		100%	1,060	24%
Stake	Valuation (Rs. Bn.)	Year	CAGR
45%	7.69	2002
100%	17.09
29.54%	313	2021
100%	1,060	24%
Source: Yahoo Finance, BSE Website

During this period, its Revenue, EBITDA and PAT have grown at 13%, 20% and 28% CAGR respectively.

Particulars FY2002 FY2020 CAGR Revenue (Rs. Cr.)      1,929       18,561 13% EBITDA (Rs. Cr.)         291        8,847 20% PAT (Rs. Cr.)           67        6,805 28%	Particulars	FY2002	FY2020	CAGR	Revenue (Rs. Cr.)	1,929	18,561	13%	EBITDA (Rs. Cr.)	291	8,847	20%	PAT (Rs. Cr.)	67	6,805	28%
Particulars	FY2002	FY2020	CAGR
Revenue (Rs. Cr.)	1,929	18,561	13%
EBITDA (Rs. Cr.)	291	8,847	20%
PAT (Rs. Cr.)	67	6,805	28%

Currently, HZL is the world’s second largest zinc-lead miner behind Glencore (Swiss firm), and fourth largest zinc-lead smelter globally. It also features in the top 10 list of silver producers in the world.

So this shows that there is a track record of fantastic turnaround of operations of company post disinvestment. The Government will be wanting to replicate this success in many more PSUs in the times to come.

While aiming for growth, Government has also extended the infrastructure activities to the pressing needs of clean water, sanitation, education, healthcare and proposed creation of Development Finance Institution to mobilize money for funding projects. These beautiful moves evoke a sense of inclusivity.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

It is said that “old is gold”. But it is not true for older vehicles, especially commercial ones that are more than ten years old and pollute a lot.

Rising air pollution is a significant cause for concern affecting both health and the environment. Older vehicles are one of the most significant contributors to air pollution. Air pollutants emitted by vehicles can cause asthma, heart disease, congenital disabilities and even some types of cancers.

In the Union Budget speech for 2021-22, Finance Minister Nirmala Sitharaman has announced the much-awaited vehicle scrapping policy.

“We will be separately announcing a voluntary vehicle scrapping policy to phase out old and unfit vehicles. This will help encourage fuel-efficient and environment-friendly vehicles, thereby reducing vehicular pollution and oil import bills” stated Nirmala Sitharaman.

Under the proposed voluntary vehicle scrapping policy, personal vehicles would undergo fitness tests in automated fitness centres after 20 years. In contrast, it will be after 15 years in the case of commercial vehicles.

Many developed countries have scrappage policies to ensure old polluting vehicles are replaced with less polluting vehicles. For example, in 2009, America had introduced a Car Allowance Rebate System popularly known as the \’Cash for Clunkers\’ under which car owners would be eligible to receive around $4,500 for their old vehicles if they buy a more fuel-efficient vehicle as a replacement. According to popular estimates, around 700,000 vehicles were scrapped in America under this program.

Many other countries like Canada, China, USA, UK, Singapore, Germany, etc. who have rolled out scrappage programs for old vehicles have achieved good results. Apart from stimulating their auto industry, there has been a significant reduction in vehicular emissions resulting in better air quality.

Besides the air pollution caused by old vehicles, there is another strong reason why vehicle scrappage policy was just the need of the hour. The current vehicle scrapping structure in India is highly unorganized and dangerous for both humans and the environment.

Whether it is the scrapyard at Pangarh in Kolkata or the one at CST Road, Kurla in Mumbai, workers across vehicle scrapyards in India can be seen dismantling cars with zero safety gears using hammers and gas cutters. There is no proper disposal mechanism for liquids like engine oil, brake oil or coolant and are often dumped on the ground leading to high groundwater pollution.

Auto parts from scrapped vehicles that can be reused are resold while other parts are disposed of carelessly and release harmful pollutants such as asbestos and mercury.

As per a detailed study by the Central Pollution Control Board, there would be an estimated 22 million obsolete vehicles in India by 2025, requiring recycling. The study also pointed out that around 25% of the waste material generated from these obsolete vehicles would pose a potential environmental threat, due to heavy metals, ozone-depleting substances, and waste oils lubricants and other liquids etc.

Due to the absence of adequate incentive to scrap obsolete vehicles in India earlier, many car owners would simply dump their car on roadsides or open spaces leading to traffic congestion.

Last week, Nitin Gadkari, the Union Minister for Road, Transport and Highways, approved the scrappage policy of Government department and PSU vehicles that are older than 15-years.

The ministry had also recently approved a proposal for levy of a ‘Green tax’ on older vehicles recently. As per the proposal, the ‘Green tax’ would be charged for commercial vehicles older than eight years during the time of renewal of fitness certificate at the rate of 10 to 25% of the road tax. On the other hand, personal vehicles are to be charged green tax when renewing registration certification after 15 years. Public transport vehicles like city buses will be charged lower rate, while a higher tax will be imposed for vehicles registered in highly polluted cities.

Under this policy, vigorous hybrids, electric vehicles and those running on alternate fuels like CNG, ethanol and LPG will be exempted. Both these moves are expected to boost auto stocks in India which was adversely impacted by the pandemic last year.

Auto stocks in India which will benefit the most from auto scrappage policy and green tax

Maruti Suzuki India is likely to emerge as one of the biggest beneficiaries of the proposed green tax on vehicles. The auto giant has the most extensive portfolio of CNG vehicles compared to all other auto manufacturers in India. With diesel and petrol prices at record highs and the ‘Green tax’ on vehicles running on these fuels, a significant chunk of car buyers may opt for CNG vehicles. As per media reports, the company\’s first electric vehicle, the Wagon R EV is currently in advanced stage of development and may be launched within the next few months.

According to data of countries which had announced similar scrappage policies in the past, it has been observed that it was manufacturers of compact and fuel-efficient cars which had benefited the most, while manufacturers of luxury cars had little benefit from the program.

Tata Motors is also expected to gain from this new policy as its Nexon EV is one of the best-selling cars in India’s EV segment.

Overall, the proposed new scrappage policy for vehicles and the ‘Green tax’ will provide a much-needed impetus to auto stocks in India and the entire eco-system of auto ancillaries and auto component manufacturers in India. At the same time, it also offers an incentive to owners of old vehicles to upgrade to newer and better vehicles, a win-win situation for all.

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