Expert Analysis of the Global Macro Events & News affecting the Indian Markets

Weekly Synopsys

Upcoming Economic Events

Looking Past the Gloom – Let’s look past all the negativity for once

Post COVID euphoria, just as everyone started adhering to the rhetoric “This time it’s different, global markets witnessed a sharp correction – forcing many so-called investors to exit the markets.

Why did the markets fall? Inflation, interest rate hikes, relentless war, fear of recession, supply chain bottlenecks, banking crisis, so on and so forth. There’s a plethora of negative factors being priced into the markets with very little positivity. Moreover, we need to understand that a large reason why markets do what it does is because of liquidity. Let’s discuss this at length, and I will try my best to plug in charts wherever possible 🙂

Looking past the negativity, what’s there to be optimistic about?

• US Debt Ceiling Impasse

This is something I had written about last week at length. Even though markets are pricing in a default probability of 0.9%, this is much lower compared to what we saw in 2011 and 2013. In simple words, its highly likely that the impasse will be solved and they will raise the debt limit like always – this has been the case since the 1960!

• Liquidity is back in the Markets

Higher the liquidity (in terms of lower interest rates and higher lending by the central bank), the higher the market climb. Lower liquidity (when central bank begins to rise interest rates) means its bad for the markets. This is all that this chart is saying.

• Major economies in the world aren’t fearing a recession

India, South Korea, Japan, China and Brazil, these countries combined contribute 34.2% to world GDP as of 2021, and these countries are expected to witness growth. Let me frame it another way, the country’s contributing only 34.3% of global GDP are expected to enter a recession this year – this includes Germany, US, New Zealand, Italy, and the UK.

• Supply Chain Bottlenecks have eased

Supply chain bottlenecks and delivery delays were a huge issue a year back, and now as seen from the above chart, supply chain pressure has fallen, and is well below its all-time average. This is great for the markets and the global economy – in a way.

• India Specific – Domestic Consumption

GST collections are at an all time high. 12% higher compared to April of 2022.
Airport passenger traffic is back at pre-COVID levels
Despite the rise in interest rates, credit offtake (borrowing by consumers and corporates) in FY23 was 15% higher than in FY22.
Indigo, Maruti Suzuki, and Lemon Tree Hotels, which are in pole position to benefit from discretionary spending are reporting multi-period high profits if you look at December 2022/March 2023 results.

• Capped Oil Prices

Despite the 1.16 million barrels per day output cut we saw from OPEC+, this hasn’t impacted oil prices severely. A major problem we faced last year was with commodity prices led by oil prices, and it has corrected 42% from its 2022 highs. Similarly, if you look at commodity prices, they have corrected significantly, and are below average as a composite.

Industry Specifics – Infrastructure

Infrastructure has been the talk of the town lately and we aren’t any different. In our previous newsletters you must have heard us talk about the India story plenty of times. But do you know what backs it up? Its Infrastructure.

This industry is our topic of discussion today. Second largest, yes, India has the second largest road network in the world after the USA. But to save you some time, we’ll be keeping our discussion to infrastructure models only. Let’s understand the models these infra companies essentially operate on.

• EPC- Engineering, Procurement and Construction

Under this model, the government gives contracts to a private player to construct the roads. After the completion, it is handed over to the government. The catch is, here, private players have no role in ownership, maintenance or toll collection.

It’s like hiring a contractor to construct a commercial building which you can rent out further to tenants. Easy to understand, right? Let’s move on to the second one.

• BOT- Build, Operate and Transfer

This is an interesting one. It is an intriguing example of PPP i.e Public Private Partnership Model in which the government gives concessions to private players to build, own and operate the project for a specified period of time say 20 to 30 years. The private company can collect tolls to cover its initial investments and other costs like operation and maintenance. But after the agreement period ends, the project is transferred back to the government.

It’s like hiring a contractor to construct a commercial building which he can further rent out to tenants for 20 years to cover his investment and then transfer to you.

If you’re a business geek who likes numbers, you must be wondering if companies actually make money while operating under this model? In FY 12, 96% of the road projects were contracted under BOT but ultimately the government had to introduce the third type to “revive infrastructure projects” in India.

Every model-be it any fee structure (yes, we have this in our PMS :)) or infrastructure, has a hybrid structure. Hence, let’s move forward with our third model which is HAM.

• HAM- Hybrid Annuity Model

As the name suggests, the HAM model is a combination of EPC and BOT. As far as India is concerned, it was launched in 2016. It is in a 40:60 ratio, where 40% is EPC and the rest is BOT. In this, 40% construction cost is paid by the government and the rest 60% of the cost is recovered through toll revenues in specified time by private players. After its launch, half the projects awarded in FY 17 were HAM based.

I assume you don’t need an example here. If you need one, let us know and this ends our discussion on infrastructure projects in India.

Why did we choose this topic? The answer lies in the stock that we will be discussing in our next week’s newsletter. Stay Tuned!

Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst based at Ground Floor, 7/7, Darya Ganj, Ansari Road, New Delhi, 110002. For more information and disclosures, visit our disclosures page here