The Markets Hit Fresh Highs
The markets resumed their upward run on Monday, though somewhat slowly
On Episode 389 of The Core Report, financial journalist Govindraj Ethiraj talks to Narendra Solanki, head of fundamental research at Anand Rathi Investment Services as well as Dr Arunabha Ghosh, founder-CEO of the Council on Energy, Environment and Water (CEEW).
SHOW NOTES
(00:00) The Take
(05:09) The markets hit fresh highs
(07:13) Is the Bajaj Housing IPO the last best opportunity there ever was to make money?
(13:34) The Government sharply hikes import duties on imported palm oil, a move bound to hit consumers
(14:55) Why opportunities for generating renewable energy in India are lesser than you might think
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, its Tuesday, the 17th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital
The Take:
What should you do now, asked a financial newspaper last evening ? It seemed like the end of the world was almost here and you had to make some tough choices, about life and of course about investing.
Given the euphoria that drove the Bajaj Housing Finance IPO and then the subsequent listing bump, perhaps the question was quite accurate in its framing.
What indeed would you do now ?
And why are people asking this question ?
Because the stock listed at a premium of 114% yesterday and then rose close to another 10%.
It is perhaps the biggest existential question in recent trading days, should one invest now or not ?
Just to track back a little, Bajaj Housing Finance, a subsidiary of Bajaj Finance came out with a roughly Rs 6,500 crore public issue and was subscribed nearly 64 times in three days. That amount added upto Rs 320,000 crore.
So what does this company whose stock is so valuable do ?
Well, it provides home loans, loans against property, lease rental discounting, and developer financing.
Remember another well known non bank finance company did the same thing, roughly. That was HDFC which then merged into HDFC Bank in July last year because it is more efficient to be a bank than a non bank finance company in the housing business.
Because, among other things, banks can access lower cost funds than non banks.
Which is not to say there is no market opportunity but there is nothing rocket scientists in this business except of course for the strong track record and the Bajaj brand name.
But even more are saying that there are better bets in the market.
A veteran investor told The Economic Times that apart from the rate of loan and quality of service, housing finance is a commoditized business. So I would rather buy the other housing companies - PNB Housing, LIC Housing - rather than try to buy now. If you are lucky enough to have gotten the IPO, then I would be a seller on listing," Chakri Lokapriya said.
Another said that conservative investors should sell as the listing gain was over and above expectations.
He did say that long-term investors could continue holding for long-term growth as the sector outlook remains very optimistic given the company's well-positioned business model.
The other question of course is whether investors are paying attention to the details or jumping blindly on every IPO that hits the market ?
Remember, the IPO of a two wheeler showroom was oversubscribed 400 times, then what is 64 times in contrast you might ask though the amounts were vastly different.
Such euphoria is precisely the green light that companies have been waiting for. Including those who I am sure did not have such near term fund raising plans.
More and more large cap IPOs are lining up. The latest news is that LG Electronics is looking at an IPO for its India arm, on the heels of another Korean giant Hyundai.
These are companies who have been in India for several years and run mostly profitable businesses.
But no one ever thought they would IPO in India.
Remember it is rare to see multinationals listed in India in recent decades.
Jumping onto the bandwagon are obviously the tech IPOs which are mostly loss making but will ride the frenzy nevertheless and thus provide far quicker exits for their investors and founders than surely they would have imagined.
Where all this leaves Indian smaller investors who are rushing in today is a little difficult to say right now.
Most are betting on short term returns but you have to remember that not all get allotments and those who do will not succeed every time. At some point, the musical chairs slow down.
Particularly when stocks of them start quoting below water after a year, as many previous IPOs are.
It's of course tough to predict the turning point as I will happily confess.
One indication of its arrival is of course when investors start moping about a lost IPO and wondering if they will ever get such an opportunity again.
Which brings us to the top stories and themes.
The markets hit fresh highs.
Is the Bajaj Housing IPO the last best opportunity there ever was to make money ?
The Government sharply hikes import duties on imported palm oil, a move bound to hit consumers.
Why opportunities for generating renewable energy in India are lesser than you might think.
Markets & More
The markets resumed their upward run on Monday, though somewhat slowly.
The 30-share Sensex was up 97.84 points to close at 82,988 Meanwhile, the NSE Nifty50 closed at 25,383.75, up 27.25 after hitting an all-time high of 25,445 during intra-day trade.
The stock price of Bajaj Housing Finance surged as much as 135 per cent from the IPO issue price of Rs 70 to hit the upper circuit of Rs 135.7 on the BSE.
The company’s shares listed at a premium of 114.28 percent at Rs 150 on the BSE today.
The NSE Midcap100 index scaled an all-time high of 60,408.25 before its record high close of 60,259.75.
Oil Prices Steady
Oil prices steadied around $72 a barrel after rising slightly as traders contrasted a drop in Libyan oil exports against signs that an economic slowdown in China is deepening.
Brent futures traded near $72 a barrel, while West Texas Intermediate was near $69, Bloomberg reported.
Libyan exports have declined markedly as United Nations-led talks failed to break an impasse over control of the central bank, which has spilled over into its oil industry.
Chinese data over the weekend showed industrial output in the longest slowing streak since 2021 and investment falling more than expected, with the official economic growth goal of 5% for this year looking increasingly out of reach.
China is the world’s largest crude importer and the slowing economy has pushed Brent crude prices down about 17% in this quarter, to near the lowest since late 2021, Bloomberg said.
Was This The Last Money Making IPO
Back to Bajaj Finance, it joined the Rs 100,000 crore or Rs 1 trillion market capitalization club with market capitalization at Rs 1,37,414 crore, according to data from the National Stock Exchange, reported by NDTV.
So how should investors read this blockbuster opening, in the context of the company in specific and the markets in general.
I reached out to Narendra Solanki, Head of Fundamental Research at Anand Rathi Investment Services and began by asking him whether this was an outlier ?
INTERVIEW TRANSCRIPT
Narendra Solanki: It's a combination of both. Definitely the IPO markets for so to say, primary markets are sorry, and the sentiments are very good right now, as we have seen in past, IPOs once, if you see about the Bajaj housing finance, the company has a tremendous good drive record in terms of its performance execution, as well as the kind of management team is having, the kind of balance sheet it is having return ratios you talk about net NPAs, which are lowest in the industry. You talk about ROAs roes, so everything is very good as far as financials are concerned, and execution is concerned, and the market it is operating in, which is the housing finance, which is considered as one of the best electric business in terms of overall lending business. So combining all these factors, the IPO has started out tremendous response from all the different categories of participants. And hence we have seen the kind of response. What we have seen.
Govindraj Ethiraj: Okay,so the next question, obviously, is the value. So one view is that it's already at a price to book multiple of 6x which doesn't leave much scope for potential, at least as things appear. The second of course, is that it listed at 114% premium and then went up further after that. So the real question is not whether the business is good, which it is the company is good. It has strong backing, brand and execution history. But whether this is the price that one should pay, and whether this could last,
Narendra Solanki: definitely most listing the price to buy, people have rerated, and it is now somewhere between between 6.2 to 6.5 and maybe it can increase further, because today was the first day, and we have to see for next few days where the price settles. So maybe we could settle around somewhere. These guys maybe plus minus few percentage points more in terms of valuation. The fact with the valuation is that, yes, definitely you are paying a free book for a work business, but you have to see what kind of a growth at what kind of return ratios you are getting, or you may be getting in the -. So right now, to talk about the ROAs currently, are just paid below 2% I think 1.8-1.9% in the ROAs, and just shade below to 1% in the ROAs for the next two years. I think there's no doubt about who will be going but definitely in terms of valuation. So if you are buying a stock which is trading at a significant premium to experience, then you must have a long holding period scenario in your mind. So it's not a buying it Bajaj housing means, right now Also, you must have a long horizon voting period to keep in your mind,
Govindraj Ethiraj: Right, And which brings me to a slightly larger question. I mean, you also said that, you know, there's a lot of IPOs which are still lined up, and every week we are seeing at least one, perhaps big IPO. How should investors look at this? I mean, because there's a little bit of history now. I mean, we've already seen so many months of active IPO markets, including in the SME IPO market. We've seen some real wild cases. And as more and more money is collected from the IPO market. Presumably investor appetite also goes down to some extent.
Narendra Solanki: I think IPO, or to say primary market in India, is going to flourish. And it is having a very huge value to see the net mutual fund inflows month over one data. So you are getting a significant secondary market in flow solution. It is good that lot of IPOs are coming so they are absorbing the net inflows, and we are not seeing so much of high multiples in the secondary market. But yeah, there are definitely lot of good IPOs coming, and in between, there may be some IPOs which may not be worth investing. So what you have to do is you have to look at stock specific, business specific opportunities. You definitely don't have to sideline the valuations just because everybody is about the IPO market. So definitely business matters, Fundamental Matters, balance sheet profit involves overall business quality and valuations does matter, both in the short term as well as in longterm. So every IPO one must definitely do a due diligence before trying to invest either for a short term or for a long term perspective.
Govindraj Ethiraj: So most investors actually don't do all of this, and despite you saying it or I saying it, I mean, eventually, I guess most people will just hit the swipe button on their smartphone and buy through a stock looking app. But my question really is, if they were just one or two things that you feel investors should, you know, focus on even those who are impatient and so on. What were those one or two things be, at least in the light of the IPOs that you seen in the last or at least in this bull run?
Narendra Solanki: So I would like to see that when valuations are rich, or when valuations get rich after listing, so definitely you have to keep in mind that your return or your holding period is going to increase because markets are not linear right now. It may rise for next three months, two months, one month, but there's going to be a period when you have to see underperformance. So whenever valuations are rich, you have to beep in back or find that at any given point in time by holding period might increase in that second point is I would like to say that if you're investing in a company which is currently loss working, then definitely the business will be good, and the company may perform very well, but since it's a loss working, it does take a lot of time to cloud around a business and to scale up the business, like in the case of some new tech companies which are coming on the it also it might be a good investment, but how to keep in mind that holding period is going to increase to see their business to its natural future? So that two, three things so to keep in mind, and if solutions are decent, and the business have been saying that they'll be going for the IPO,
Govindraj Ethiraj: Right?. Thank you so much for joining me.
Narendra Solanki: Yeah. Thank you. Bye.
India Lends A Helping Hand To Farmers
India has opened up exports further, remember we spoke of basmati rice floor price being removed for more commodities and now onions too which can be exported freely and with a lower export tax of 20% versus 40% earlier.
Moreover, the Government has also limited, somewhat surprisingly, imports of vegetable oils.
The moves surprised the market, as the Government usually looks out for consumers' first, particularly during the festival season which has just kicked off.
However, this year, it prioritised supporting farmers, setting aside inflationary concerns, Reuters said.
India is the world's biggest edible oil importer and has now imposed a 20% basic customs duty on key edible oils.
Effective import duty on crude palm oil, crude soy oil and crude sunoil rose 27.5% from 5.5% as they are also subject to India's Agriculture Infrastructure and Development Cess and Social Welfare Surcharge.
The import tax on refined palm oil, refined soy oil and refined sunflower oil is upto 35.75% import, from 13.75%.
India meets more than 70% of its vegetable oil demand through imports and palm oil constitutes more than 50% of total imports.
The Big Renewable Energy Charge
Reliance and Adani, among other firms, have committed to help India reach its goal of 500 gigawatts (GW) of clean energy by 2030, while financial companies pledged $386 billion in funding, India’s renewable energy minister said on Monday at an annual Renewable Energy Investors Meet and Expo.
India added around 18 GW of renewable energy capacity in fiscal 2024, compared with 15.3 GW a year earlier, taking its total to 153 GW, Reuters reported.
The government also received an additional 570 GW of power generation commitments, while manufacturers committed additional capacities of 340 GW in solar modules and 240 GW in solar cells, the minister said.
Interestingly, while India has a renewable energy (RE) potential of over 24,000 GW, even reaching the ~7,000 GW required to achieve net-zero emissions by 2070 will require a holistic approach to addressing challenges such as land access, climate risks, land
conflicts, and population density, according to a new independent study by the Council on Energy, Environment and Water (CEEW).
According to the CEEW, upto 1,500 GW, the constraints are relatively manageable but after that it gets tougher as multiple constraints intensify.
This is a key finding in a study titled ‘Unlocking
India’s RE and Green Hydrogen Potential: An Assessment of Land, Water, and Climate Nexus’, highlights that deployment beyond 1,500 GW could face critical challenges as
Renewable energy, including solar, wind, and green hydrogen, is crucial to realise India’s climate goals, but scaling up these technologies will require strategic land use, improved
water management, and resilient power grid infrastructure, the study says.
The CEEW study maps India’s RED and green hydrogen potential by
analysing the entire country’s landmass and applying real-world constraints.
For instance, the CEEW study finds that population density significantly limits the realisation of India’s RE potential, with only 29 percent of onshore wind potential and 27 per cent of solar potential located in areas with a population density lower than 250
people/km
Land conflicts further restrict deployment, with only about 35 percent of onshore wind potential and 41 per cent of solar potential located in areas free from historical land conflicts.
The CEEW study also identifies states with high unconstrained RE potential such as Rajasthan, Madhya Pradesh, Maharashtra, and Ladakh. Rajasthan (6,464 GW), Madhya Pradesh (2,978 GW), Maharashtra (2,409 GW) and Ladakh (625 GW) have significant low-
cost solar potential, while Karnataka (293 GW), Gujarat (212 GW), and Maharashtra (184 GW) offer considerable wind potential.
I reached out to Dr Arunabha Ghosh, CEO of the CEEW and began by asking him what were the key takeaways from his report.
INTERVIEW TRANSCRIPT
Arunabha Ghosh: So Govind, first of all, thanks for having me on your program. We, as you said, we've got about 150 gigawatts of solar and wind and other renewable energy resources. These have traditionally been deployed where, you know, the land is more easily available, you know, in open desert areas, or, you know, along the coast for wind power and so forth. So our analysis was more to look at, you know, what kind of constraints will we face as we scale up the renewable energy requirements to move towards our net zero targets? So right now, the way we've done this analysis is we've looked at what's the unconstrained potential and the unconstrained potential of India is over 24,000 gigawatts of RE capacity, renewables capacity that can be deployed. But life is not unconstrained. So we start looking at various different aspects. First we look at land. You know, when you run out of desert areas, etc, in more population concentrated areas. Then you look at where you have the maximum amount of sunshine or the high intensity winds. So then you move into lower solar radiation or lower wind areas. Then you look at also population concentrations and the potential land related conflicts, because there are alternative users to the land. And often what is described as wasteland is never really wasteland. There's some some work that the land is being put to. Then we get into other types of climate risk. You know, is that area going to be exposed to storm surges or sun or droughts where you need water for your green hydrogen projects. We even look at seismic zones, you know. So the more and more areas that you deploy, is there a seismic threat. So once you look at all of these different parameters, and we've done it in a very granular way, we've converted the entire land mass of India into a five kilometer by five kilometer grid, what are called rasters. So that gives you a very, very detailed analysis of where you have the potential and how do you get and based on that kind of constrained analysis, we still see that India has the potential for well over 7000 gigawatts of renewables capacity, and that is enough to meet our net zero goals. So really, what we did was, you know, what? What does India need for net zero? We had done a previous study on this, and then we asked ourselves, okay, these are the goals. How do we get there? Do we have the land and the sun and the wind and the water to deliver and the answer is, at least in potential, yes.
Govindraj Ethiraj: So incrementally, where would as projections stand? How would this be split between, let's say, solar and hydro and wind, among others. Yeah,
Arunabha Ghosh: the bulk of this will still come from solar, and then comes wind. So I would say India, 20,000 gigawatts of solar potential is there. But then we also face, you know, constraints of high seasonality of solar, etc. But even then, the bulk of it is going to be solar followed by wind. We've got about onshore wind potential, about 1800 gigawatts, but again, looking at constraints where it's located, in croplands or rangelands, et cetera, we've got about 2400 gigawatts of offshore wind capacity, but only 30% of that is within waters that's less than 500 meters deep. So it will really what the way we see it is at least up to 1500 gigawatts of solar wind combined. We don't see so many constraints kicking in we, you know, so that's 10 times more capacity than what we have today. What we can do is then start looking at, are there ways to still keep scaling up beyond that 1500 gigawatt level, up to say that 7000 gigawatt level by rooftop, using agro photovoltaics, using horticulture farmlands, to also combine with renewable energy projects to do wind and solar hybrid projects, where you get higher efficiencies and so forth.
Govindraj Ethiraj: So as people, including companies, plan their future renewable energy projects, one of the things that your study says is that there are clearly states, for example, Rajasthan, Madhya Pradesh, Maharashtra, which have higher renewable energy potential than other states. Is there an approach here that should be different, or ought to be different, from what it was earlier?
Arunabha Ghosh: I think one of the things that the study reveals is a little bit of a surprise. I mean, we always knew Rajasthan had huge potential, even now, our analysis shows it has the maximum potential for low cost solar generation over 6000 gigawatts. But Madhya Pradesh is a surprise a little bit. You know, it's nearly 3000 gigawatts. Karnataka shows up as offering considerable wind potential of nearly 300 gigawatts. Odisha jumps out as another unlikely state that has very high RE potential. So once we internalize that there are these surprises, you also realize that the Renewable Energy story and the transition energy transition story for India can actually be much more distributed in terms of its benefits than maybe the traditional energy approach. You know, you have just a few states where you dig up the coal, even fewer places where you can dig up oil and gas. So you can have a more balanced economic development approach. You can bring the energy transition closer to people, also from a policy perspective, I think it gives these states an outlook that it's not just the energy transition but also how the energy transition benefits their own development trajectories, because that power is not going to be all consumed within their own region. So then there's going to be more of the trading of the power from one part of the country to another, which is why I said the grid planning is important. But that also then creates new power markets of the future do more spot trading, rather than the long term contracts that have been traditionally the approach in our power markets. So there's going to be a lot more dynamism in the power markets. There's going to be, therefore, a need for a different approach towards power regulation, how tariffs are set, but also how tariffs are determined, how you use this variability of our solar and wind, but also the opportunity to draw on it from different parts of the country to design the load curves, to create incentives for when households or factories or shops and commercial establishments how they use power at what times of the day. So it really opens up a lot more opportunity in what we imagine. Power system to look like in future than what it is has been in the past.
Govindraj Ethiraj: Your report also touches on green hydrogen. So why is green hydrogen defined by location? Or, yeah, I mean, why is it defined by location, or what is going to define its production and distribution? So firstly,
Arunabha Ghosh: for your viewers and listeners, green hydrogen basically uses clean energy to split water into water and into hydrogen and oxygen, and then that hydrogen can serve as an industrial fuel. Therefore, that clean energy you can get from wind and solar or a hybrid of the two, but you also definitely need the water to actually split, which is why it's not just the land needed for the renewable energy projects, but also the water availability. We estimate that our wind and solar hybrid potential can produce up to 80 million tons of green hydrogen production in India. About 56 million tons, mostly in Western Southern India can be produced in areas that do not face water related issues. Now, put this in context, we currently use about five and a half million tons of hydrogen in the country. Right? Our green hydrogen mission has a target of 5 million tons by 2030 so having the potential of 80 million tons, of which 56 million tons can be produced in areas which do not face significant water related issues means we've already taken into account high agriculture industry household needs for the water in those areas. That actually, again, tells us that we can actually genuinely become a major superpower in the green hydrogen ecosystem, right? But again, to do that, you've got to cite the projects correctly. You got to then use your tenders to encourage siting in those areas accordingly you get the best revealed prices and where you still have constraints, then you have the incentive to establish the water storage infrastructure, which has other co benefits for a water constraint or water stress region. So I think this also explains why, both as an industrial fuel, as a driver of new renewables growth, but also a driver of a way to optimize the not just the land, but also the water resources. Can be a way in which this study can help to guide the policy makers and development trajectories that different states take off.
Govindraj Ethiraj: Arunabha, it's been a pleasure talking to you. Thank you so much for joining me.
Arunabha Ghosh: Thank you, Govind.
