Showing posts with label Covid-19. Show all posts
Showing posts with label Covid-19. Show all posts

Tuesday, July 26, 2022

Green Hydrogen: My views on the sector. A story to unfold?

During Covid, I had looked at buying some Bloom Energy shares when it was trading around $3/share with a Price/Sales of 0.4x or thereabouts. I did not feel strongly about their Hydrogen story, but, who was to doubt that it was a steal at that price. After all, they had growth ahead, and eventually, they would start making money! I did not have enough cash in the US, so never acted on it.

I never really understood the hydrogen story. I always felt it will never be produced cheap enough or in a distributed fashion that will make it usable with PV (using Solar PV for generation at low operational prices once Capex is done). 



More recently, I got interested in this sector after speaking with a few knowledgeable friends who piqued my interest. I had really not given Hydrogen a thought as I felt Solar (PV) + Storage (Lithium) is the only way to go. You see, I'm a Solar guy. I feel strongly about the growth prospects there. It had blinded me to certain other possibilities.

At the end of the day, PV + Storage alone has some drawbacks. Especially for a country like India. 

I'll try to articulate my thoughts below in this long article. I don't know how this post will unfold, but I'll try to solve this interesting problem here. 

I have a rough framework. What I normally write down in my sector analysis notebook, I'm putting my thoughts in a blog post. It may be better this way if someone watching this sector comments. I'd love to engage with people more knowledgeable in this space!

For starters, I read Modi's Green Hydrogen policy that was released earlier this year. You can download it here if you are of a curious mind!

I missed the entire idea of Green Hydrogen until now. The news articles or policy documents do not articulate why "green hydrogen" is important. Or, why, anything, that is taking India a step closer to "energy independence" is of utmost interest.

What's the big problem in India?

Let's start with the problem statement. India, since independence, has acted on reforms only when it has been forced to act. Mostly. The 1991 balance of payment problem forced reforms upon our throats. Read more about that in this longish RBI article for background. 

The real problem for India is twofold: 
(1) Increasing fiscal deficit: we are spending more than earning. That has always been a problem, there are various reasons. I'll not get into that. 
(2) Trade imbalance (leading to current account deficit i.e., CAD): India imports more than it exports, which is a problem as we pay in USD. High capital inflows (FPI's pouring money), Remittances (NRI's pouring savings back) have been funding/financing this.

The problem has escalated as foreign investors have pulled back money when interest rates have increased in their home countries (like the US) just when Oil prices have gone up.

This is the main reason for INR falling sharply versus USD. It's a vicious cycle and will take time to correct itself. Either inflows (remittances, capital inflows) have to increase or outflows have to reduce. I am not an expert on the economy and cannot predict what will happen here. 

The larger problem of fiscal deficit (a) may not get solved anytime soon. The grip of socialism is not easy to loosen. Either the country has to grow its way out or the political will needs to be strong enough to cut down the deficit spending (reduce subsidies in various forms).

So, what's the way out: Increasing growth within the economy and reducing (or altogether eliminating) trade imbalance.


Source: Financial Times

The largest bucket under imports is "Oil". A third of India's imports are always oil. The latest breakdown of imports is as below:


The balance of trade (difference between exports and imports) for June 2022 is -$26B. Essentially the difference between exports of $40B and imports of $66B.

The difference between being a net exporter to a net importer for the past few decades has consistently been "oil". If the government of our times in the long term (decade of the 2020s) solves this one critical problem - it would have lifted the country from a low-income, emerging nation to a strong mid-income growing nation.

So, anyway - I have tried to provide a picture of why "energy independence" (self-sufficiency in terms of energy needs) is important. 

Off course, one could try to find more oil fields in India to increase oil production. After all, that's a possible solution. I always wonder if the deserts of Saudi Arabia or Africa (Libya) can store great oil reserves, why not the deserts of Rajasthan? That's probably a wrong comparison. We should try to explore more.

But, oil is a dying fuel. It's unloved. Causes pollution. Increases greenhouse emissions. It's a fossil fuel. 

Just like the stone age did not end for lack of stones, so too the oil age will not end for the lack of oil.

We need to leapfrog ahead.

What are the possible solutions?

Many countries use oil imports to augment electricity generation. That was the case with India before where Diesel and natural gas were used for electricity generation. Quite a lot (up to 30% of generation in the past).

It has been reduced significantly now. Less than 10% of electricity generation is today through diesel/natural gas (source: power ministry). Fossil fuels (mainly coal) still account for ~60% of energy generation, while renewables form the rest. Back-up power (when there is a grid failure) is predominantly diesel gensets in India.

Solar is still <15% of generation while plans for 100GW+ Solar generation have been doing the rounds for quite a while now. I will not go into the details of the 100GW+ Solar generation plan. That might take a whole lot of space.

Essentially the grid needs to be capable of handling that much amount of energy produced by solar PV. It will need its own overhauling. India's power distribution is much weaker than many peer nations. Our utility distribution companies (mainly state DISCOMs) are money-losing enterprises as farmers/consumers alike try to either get free electricity or steal electricity.

Generating energy locally (in a distributed fashion) is the best way of powering local communities. Generating local solar power and using battery storage (either large lead acid-based systems or other technologies) is likely the most cost-effective way instead of creating multi-$B distribution networks from centralized power stations leading to further distribution losses (India loses 20% of generated electricity while distributing energy).

Providing solar water pumps (for farmers), and using local distributed solar PV might become the norm going forward. That's clear in the various government schemes for rural electrification.

We need to note, that India's energy consumption per capita is much lower than the western nations and will continue to grow. Massively adopting solar PV is a no-brainer. I think that's already clear to most. Baby steps in the right direction have been taken, but they need to leapfrog massively over time. 

But, even as that happens, this addresses only <10% of oil imports.

Transport - The Elephant in the room accounts for 85%+ of India's Oil imports

That's the key. Road transportation. 

Today the largely noted alternative to oil usage is EV adoption. That's not a bad alternative. City transportation where range anxiety is not an issue can be addressed with EV vehicles.

The issue again becomes that of charging the EVs. Today many of my friends are buying EV cars and charging the vehicles from the grid (at their homes or offices). 

It is no surprise that our coal/gas powered generation units (read again that 60%+ of power generation happens through fossil fuels) are transported through leaky distribution networks (with 20%+ leakage in distribution) further weakening the already suspect grid through the massive consumption posed by EVs!

The only way to counter that is through super sweetened net energy metering programs (government funded) for residential rooftop solar PV adoption. This, along with home energy storage (lithium-ion-based systems with at least 10+ year life, 4000+ cycles are much needed.

Storage systems that are lithium-based will have two issues:

(a) sourcing of lithium on large scale (that is low-cost, sustainable, and environmentally friendly)
(b) re-use or disposal of used batteries

Today, China controls most of the battery cell market and indirectly the lithium production. Three countries - Chile, Australia, and China account for 98%+ of Lithium production. 

White gold (as it will soon be known) exploration is widely conducted in many countries. It is expected that Russia, Argentina, and other South American countries will likely hold the majority of lithium deposits.

The more I think about this, adopting large-scale EVs might lead eventually to replacing oil imports with lithium imports! These are large-scale future second and third-order impacts. I am no expert - but, this does not look sustainable unless we find large local reserves or come up with alternate storage technologies (both seem far-fetched today).

We may replace our Middle east dependence (Oil) with China's dependence (Lithium). We'll likely move from multi-sourced procurement to single-source procurement. That might not work out well. Alternatively, India must already make heavy commitments (buy mining rights) in countries like Chile, Argentina, Russia, Afghanistan, etc.

Also, the disposal or reuse of lithium is a big question. Lithium is highly combustible. Unlike lead acid batteries, a lithium-based battery is not easily re-usable. Read this article to understand some problems associated with the disposal/re-use of batteries.

Lithium batteries are extremely heavy. No doubt an EV car is super heavy today. A 100kWh battery-powered Tesla is basically transporting a large battery that's otherwise useless (but for its stored energy)! Gasoline is lightweight in comparison.

Gasoline energy density is 47.5 MJ/kg (34.6 MJ/liter); the gasoline in a fully fueled car has the same energy content as a thousand sticks of dynamite. A lithium-ion battery pack has about 0.3 MJ/kg (0.4 MJ/liter. Gasoline thus has about 100 times the energy density of a lithium-ion battery! 

No doubt, oil has been powering cars for over a century because of its super high energy density! Human progress has been based on improving the key parameters in every sector. It's interesting that in Fuel-cell, we seem to be going backward.

One should always understand that oil = fuel, lithium = storage. Lithium is not fuel. Fuel will be Solar PV / Fossil fuel / Hydroelectric generation. 

Hydrogen as fuel?

Let us again look at the specific energy density. That is the key metric.

Hydrogen has an energy density of 120 MJ/Kg i.e., ~3x gasoline. Of course, that's a no-brainer. The Japanese with their first hydrogen-powered Toyota's were always right in their argument!

A single Kg of hydrogen roughly is equivalent to 33.6kWh or 1 gallon (around 3.7L) of diesel in terms of usable energy.

The problem for Hydrogen has always been the extreme difficulty of producing and transporting that at prices that are less than that of diesel.

I will not go into the full arguments about producing hydrogen that requires more energy today. Today's electrolyzers use about 50kWh of energy to produce 1Kg of Hydrogen. Note again, that 1Kg of hydrogen in terms of energy density is equivalent to around 33.6kWh (i.e., 3.7L of diesel).

So, that was my argument that today - you are using more energy to just extract hydrogen and it's not sustainable! 

Also, transporting hydrogen in liquid form is difficult. It's like transporting more metal than hydrogen when transporting between fuel stations. Basically, the heavy pressurized metal container holding lightweight hydrogen gets transported in trucks. Transporting diesel by the way is super simple and easily done.

What's different now? Why the hydrogen policy may have long-term implications?

If local solar PV stations power small distributed hydrogen electrolyzer stations (that will also act as future fuel stations), that solves both generation and distribution problems! The generation will depend on Solar (abundantly available) and if they are distributed enough, they can also act as fuel stations! So, essentially grid power is not used in the generation process. That's the key. 

Or even if transportation is complicated, hydrogen can be produced very cheaply (since the raw material is water!) using large utility-scale solar farms. Getting to scale at a generation cost of less than $1 per Kg - will simply obliterate the case for EV cars or the current diesel cars/trucks. 

A barrel contains roughly 160L of oil. At $100/Barrel of oil, it translates to $0.625/L i.e., $100/160L which is equal to Rs. 50/L of diesel. Diesel that gets procured at Rs. 50/L in international markets gets sold at Rs. 90-100/L in our local retail outlets. 

At $1/Kg (Rs. 80/Kg) of Hydrogen, in specific energy density terms, you are getting energy equivalent to roughly 3.7L of diesel. So, essentially it's like producing 1L of diesel for Rs. 80/3.7 = Rs. 21/L. Even if international crude prices drop to $50/Barrel (i.e., Rs. 25/L), locally produced hydrogen will win hands down.

This solves the oil problem. That, I think is a huge step. 

There need not be a single winning technology. But, I do believe that this decade will be the decline of oil as the primary fuel source!

Hydrogen will find a place in the scheme of things. It's a busy place today with many technologies. There might not be a single winner here. Through this decade, we'll come to know how the story unfolds. 

Ciao till next time...Harsha

Wednesday, June 22, 2022

Investing Errors - Inability to Gauge Margin of Safety

2020 was a great time to invest. All that I touched, turned to gold and there seems to be a touch of hubris that affected me post that. People panic all the time. Somehow, I thought that Covid was a virus after all and was crazy enough to be in good equities and bought more exhausting all my liquidity. 

That was a great year. But, then again, buying in 2020 is not a skill. It is purely buying at the right time. It is luck. 

I think I mistook that for skill. I was wrong.

Many of the stocks I touched in 2021 are trading at lower prices in 2022. At least till now. I deeply looked at each one of my mistakes. Most of my picks don't have anything bad in their fundamentals. But, I have been woefully wrong in gauging their strengths. Overpaying for them.

Most company strengths are based not just on the skills of the management, the market they play in, competitive strengths, or their past successes but driven in part by external factors. That they play in friendly playgrounds. A lot of factors help their growth: Government support, Liquidity (a rising tide lifts all boats), Lure of a recovery spurring short-term demand (and then, you consider that as a given for a number of years ahead), and Low-interest rate environment continuing, etc...

These, and many more, are errors I fell prey to in 2021. I wish I had been more careful. But, I cannot go back to change what has happened. Not jumped into buying. Waited.

I recently read a wonderful book written by Adam Mead - The Complete Financial History of Berkshire Hathaway. Adam analyses basically everything Buffett did at Berkshire for the past 55 years. And even a historical perspective of Berkshire right from the 1930s. 

I think he wrote it for Buffett aficionados. It's a rather dry, long, rambling book, but I rather enjoyed it. I re-read the lines I marked out and cross-referenced Buffett's biggest successes and failures and some patterns which led to them being successes or failures.

One thing that clearly strikes me is the unwavering discipline that was maintained by Buffett in any of his buys. The clarity of thought of understanding the downsides more than the upside is very clear in all his successes. 

Where he missed analyzing the downsides/risks (Dexter shoes with Chinese competition, Gen Re with its derivative book, IBM with tech obsolescence and changing direction), etc. are clearly the ones where he missed something vital in analyzing the ecosystem. And hence he overpaid. 

If I have to point out what I did not do well in 2021, it is summarized by three words: "Margin Of Safety". I basically failed in looking for risks that warranted an extra margin of safety.

Buffett bought Gen Re in the late 1990s and it took a long time for him to set that business on the path to success. 

In doing so, he talks about the characteristics of a sound insurance operation (quoted from page 546, footnote 2 of Adam's book):

1) An understanding of all exposures that might cause a policy to incur losses;
2) A conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does; 
3) The setting of a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered; and
4) The willingness to walk away if the appropriate premium can't be obtained.

These principles apply not just to insurance companies, but to all companies in general. All you need to do is, replace some of the specific terms he has used with more generic terms.

I put my guard down in buying some (good) companies at prices that were not discounting all the potential and probable risks. I am paying the price for that error. 

Here is an old Graham quote that is so apt:



The problem overlooking the margin of safety is: that you'll have to wait much longer for recovery. You have to go through the pain. There are no shortcuts. 

There is no place for hubris in investing. You cannot correct mistakes already committed. Sometimes, if the money supply is plentiful, liquidity + low-interest-rate environment hides many of these errors. I reflected on that in my last post - Gravity and Oxygen: Makes all the difference.

Even if you buy good companies at prices that do not discount all risks - it is a bad buy. I hope that I never make this mistake knowingly again.

Ciao till next time...Harsha

Tuesday, April 26, 2022

Exponential Growth: A Curious Case

I hate popping pills. Especially if something needs to be taken regularly. All sorts of pills have taken a foothold into our lives. Pills for blood pressure, diabetes, fat burn, protein supplements, and so on and so forth. It is like someone controlling our lives, and you can do nothing about it.

A magic pill that can cure anything is just what we are looking for. Though I hate pills, I love the pharma business. It is here to stay, and it is here to grow. Exponentially.

Here is a curious case of the Dolo-650

The one magic pill for fever, body aches, general weakness, or anything which causes you discomfort, is not there. 

But the belief is: if you're not really sure of what caused it.... take a Dolo! It might just help you. 

Or so, some of us believe. Yours truly included. I've popped a Dolo in the past year like so many others.

With Covid raging, the only over-the-counter drug that seemed always available, readily trusted, and used was Dolo. I was surprised how it became a household name in India.

I tried purchasing generic paracetamol when my mother was having a bout of Covid in 2020. I was told to only trust the one highly effective paracetamol, by the local pharmacist - "Dolo". 

When you need medicines for your family, you don't typically bargain on price, you go by what works. 

If the guy selling medicines says it works, you tend to believe him and pay a premium (50% more than the generic 500 mg Paracetamol).

I decided to dig a little deeper after the incident. It turned out to be a very interesting case indeed. I wanted to write on this topic since last year but kept putting it off. Well.. I've got to write it now. 

I recently read an article on Micro Labs in Fortune and it triggered back what I had researched myself.



Micro Labs (a privately held company based in Bangalore), was one of the many manufacturers of the common paracetamol. Their foray seemed quite unspectacular until the mid-90s. They were one of the many paracetamol manufacturers in the already crowded space.

Their "Aha!" moment came up when they differentiated their product by introducing a rather queer product size. The 650 mg Paracetamol product, christened "Dolo-650".

All Paracetamol products were sold in the standard 500 mg packaging. 

The brilliant idea of a 650 mg dosage was the result of focusing on the small set of people who really needed to take a dose of paracetamol due to high fever! 

Most people with light fever tried not to take pills. High fever warranted a higher dosage, and an extra 150 mg really helped!

Anyway, where is the growth?

Though Dolo was an effective fever reducer, it was a fairly steady product that sold a million strips (of 10 tablets) every year until 2019 for the Suranas (the family that owned Micro Labs).

All that changed, when Covid hit. I read estimates that they sold 3.5 Billion pills during Covid and are growing rapidly in high double digits YoY since.

They seemed to have now cornered a crowded generic paracetamol market with a slightly differentiated, modestly innovative product. 

Dolo is no longer a paracetamol 650 mg pill, it has got a brand of its own.

Paracetamol in India is now called "Dolo". This seems like the Xerox moment for them. A photocopier even today is called a Xerox machine. 

What got me really interested, is the philosophy of the Surana family (Dilip Surana) in a recent interview which I want to summarize here:
  • Differentiation and branding (in this case, with medical advisors and doctors)
  • Consistent quality
  • Consistent messaging
Nobody can predict when exponential growth can hit in, but it was interesting to see a small domestic manufacturer corner a commodity market in the face of strong overseas competition (GSK) which had 10X more firepower.

Indian Pharma is ripe for more 10X's - I wonder who is next? The search will always continue. 

I just wanted to stop by, and tell you the unexplained story of "Dolo", the magic pill!

Ciao till next time...Harsha

Sunday, August 30, 2020

What a garden teaches you. And, the stories we tell ourselves.

This blog is  vaguely divided into two parts. One on gardening. The other on stories we believe in. Both are relevant; as living through Covid-19, life has made me think about both. So, here goes..

The recent Corona scare and ensuing lockdown has given me some much needed time to reflect and ponder. What am I doing, where am I heading, am I... doing the things that matter and, finally, am I doing them correctly.

These and many more would come to mind when you are able to spend time with yourself. 

2000 yrs ago, Marcus Tullius Cicero said something which comes to mind - "If you have a garden and a library, you have everything you need in life". Cicero was a champion of the Republic in the late Roman republic era 100BC. His works on philosophy, rhetoric and general cultural humanism rediscovered in the middle ages were one of the key ingredients for the Renaissance in Europe..



Since, we never really had a house which we could call our own... living in rented houses - I never really got the time and energy to grow a garden. I never had a way prove if Cicero was right. Two things changed that over the past year - 1) Buying a house 2) Getting the drive to do something useful.... especially, when you don't have anywhere to go through the week - for many, many weeks. Painful weekends with no activity.

Yours truly can safely confirm, that, what Cicero said long ago is 100% true. A library was my prized possession - having always treasured the fact that learning.. is a lifelong pursuit. Garden, on the other hand - usually, was restricted to some potted plants in balcony (that typically, struggled for life... with limited sunlight, and as I realize now, some over-watering).

Anyway, coming back to the Garden. Gardening is truly a pleasurable and a learning experience. Gardens are truly a representation of paradise on earth. Paradise, by the way, comes from the Persian word - "Paradizia", which essentially refers to the mythical walled garden during the classical, Achaemenid times. 

Here are my learnings from growing and maintaining a garden - 
  • Sunlight, water and nutrition - are the three most important ingredients - 95% of the equation of life
  • There is magic in life - when you create the environment - all sorts of life comes in..
  • Beetles, song-birds, spiders, all sorts of insects and butterflies find their way - all they need is food to eat
  • We had song-birds - pair of nightingale, lay eggs in their nest in our garden.. what a beauty... A thing of beauty is, indeed, a joy forever
  • Opportunity and environment comes first. Performance comes with opportunity (that's a big lesson for me)
  • What you sow - is truly, what you reap.. effort comes before result. Always. 100%
  • Same plants can grow differently depending on what ingredients you provide - one can turn into a bonsai, and the other into a larger plant (I am trying my hand at creating bonsai's - if you want to learn - Ayan's a great coach)
  • Anyway, there are no shortcuts - if you plant fruit trees - they take a year to give first fruits. No way on earth - can they bloom faster.. just because... 'you' provide extra nutrition
  • There is no way around waiting. Once the environment is right, nutrition is right - you need tons of patience. Just because its your garden... the plants don't bloom faster
Anyway, let me come back to the other theme I want to touch upon today.  The last 6 months has busted some stories, which I think, we are used to. 

We tell a lot of stories to ourselves. We need $x million..., kids are costly..., social life is super critical..., Govt has the power.., authorities know better than common man (especially this is untrue..), remote work is not possible.., yadi yadi..

Most things are untrue. Man is a very adjustable animal. Technology can change things very, very fast. Much more than we can imagine. Amazon can take over the whole of retail - hell, they just did. In 6 months. Boom.

If its not for technology.. we are all monkeys playing around. Technology will change the world. Old business models need to give way to new. Moats can evaporate. Just like that. Be careful, what you think are the worst case situations, or the best case. Is it really that? 

Be careful of the stories we keep telling ourselves. Some learnings for life, living through Covid-19 times:
  • Most things, which we are used to collecting: hoarding money, things we need, etc are more than sufficient to lead a good life. We over-estimate what we need
  • 5 pairs of clothes are more than sufficient. So, too with shoes
  • Home food is good. Eating at home, 7 days a week is totally fine...
  • Pareto rule - 80% of the things that matter, take up 20% of time.... is 100% true. It is important we do that 20% though
  • Kids don't need too many toys. They need our time
  • Clarity of mind is very important. Sometimes, work from home - becomes 90% work, 10% home. Balance is important, we need to find our balance
  • If you spend sometime on what you truly, truly want - world conspires to assist you
  • Helping others, gives you immense satisfaction - you have to try that often, very often
I hope, you are encouraged to create your own garden. Always be clear of the stories you tell yourself. They are truly powerful, as mostly; we believe in them. What we truly believe - we have the power to make it happen.

Ciao till next time...Harsha