Thoughts on Iran war. How do conflicts affect Indian equity markets

The world we live in today has been rocked by many wars; the Indian equity market has largely under-performed US and other Western markets in the past 2 years.

With multiple mini battles all around, a key question to ask is how the markets have behaved in the immediate term and how they have behaved 3-months and 6-months after the event. In the long term, what impact does this have on the earning potential of companies?

Sensex Behaviour During Geopolitical Events:

Geopolitical Events Often Cause Short-Term Market Volatility

History shows that geopolitical shocks typically affect markets for a short period, while long-term market direction continues to be driven primarily by economic growth, corporate earnings, and liquidity.

Recent developments in the Middle East have already caused a spike in oil prices and temporary weakness in global equities as investors assess supply risks. However, markets have repeatedly demonstrated the ability to absorb geopolitical shocks relatively quickly, once the extent of disruption becomes clearer.

Stock prices over the long term are always slaves to the earnings – they follow an uncanny ability to follow earnings trends. One positive I am seeing in India today is the strong earnings growth, which has started returning to mid-cap and small-cap stocks.

The Iran Conflict: What Matters and How Does India Get Impacted?

The primary channel through which the Iran conflict affects markets is energy prices. The Strait of Hormuz handles a significant share of global oil shipments, making it a critical chokepoint. Even in scenarios where oil spikes temporarily, markets historically normalise once supply chains adjust or diplomatic de-escalation begins.

There are some key unknowns:

·        How does Trump react to the approach by Iran of bombing US bases in the Middle East?

·        Will he call it a win by accepting the death of Khamenei Senior as a huge achievement as his son Khamenei Junior takes over!

·        Does sanity prevail? Will the US keep it to aerial bombing instead of sending ground troops?

Well, my guess is just as good or as bad as yours to the questions above. However, the key to any escalation is a ground invasion, where the US has been known to make a mess of a prolonged war, like fighting the Taliban in Afghanistan for 20 years, just to let them come back again! I’ve written previously about this – you can read more here.

I hope enough sense prevails in the US war department to persuade Trump on how difficult a place Iran is to send ground troops.

Just for comparison – Iran is half the size of India! Just imagine someone trying to conquer the whole of South India, crossing the Aravalli-Satpura mountains! Aurangzeb tried doing that and caused the eventual downfall of the Mughal empire! Sheer land masses are always difficult to conquer and hold.

The US sneezes, and India catches a cold! This is the age-old reality. However, the Indian economy has navigated global shocks relatively well due to a) strong domestic consumption, b) diversified energy sourcing (except where transportation is concerned) and c) increasing domestic investments with government push through regulatory and tax concessions (GST reduction is a point in this direction).

What Matters to Stocks in the Long-term?

Essentially, very few metrics define how a portfolio performs over the long term –

·        High earnings yield, which indicates that our stocks are earning well, and a resulting low P/E ratio that shows potential for re-rating,

·        A higher projected earnings growth, which indicates we are holding good companies

·        And finally, a favourable market condition with good liquidity, low interest-rate/inflation environment, positive outlook and stable government

We should buy the stocks at a dip. The dip occurs when market conditions are somewhat depressed, i.e., due to global shocks/pandemic/local conditions.

Earnings growth and visibility: This is the key to the valuation of any company. In India, the earnings growth has picked up, and P/E’s in many mid/small cap stocks are in single or low double digits.

Earnings Trend of 4-Quarters (YoY Growth) for BSE Midcap 150:

Interest rates, Inflation and liquidity: The interest rates in India are in a downward trend, from a high of 6.5% a year ago, it has now come down to 5.25% and might even go down lower to encourage more credit uptake. Again, the inflation – has reduced from a high of 6.7% in 2022 down to mid-2% range now (CPI), which is quite comforting. With oil price hikes, CPI might climb higher, but in general, the trend has been clear and lower. Food is usually 50% of the CPI inflation, and the prices there have been very stable.

Liquidity issues? Usually, when there is a shock, liquidity evaporates. I think we are seeing the impact of liquidity not being there, leading to the artificially low prices of some of the smaller and mid-cap stocks.

I had written a detailed commentary on how I look at interest rates (discount rates) and liquidity, comparing that to Gravity and Oxygen. This time, it is no different.

Should You Invest in Markets Now?

As I’ve often said, periods of market volatility frequently create some of the best opportunities to invest in high-quality businesses at attractive valuations. 

While short-term uncertainty may unsettle markets, it also allows disciplined investors to accumulate strong businesses at prices that offer a greater margin of safety.

I'll sign this off with a quote -

"In bear markets, stocks return to their rightful owners." — J.P. Morgan

P.S.: I need to disclose that I am the Principal Officer of a  SEBI registered PMS, Dwaith. Views expressed here are my personal views and are not a recommendation to buy or sell. 

Ciao till next time...Harsha

HAL – Dream to fly. Why vision is so important!

I haven’t updated my blog in quite some time. As Benjamin Franklin wisely said, “Write only when something is worth reading.” Recently, I took my kids to the HAL Heritage Centre and Aerospace Museum. Although the star attraction—the flight simulator—was closed, the experience was a treasure trove of aviation history, rekindling my interest in the early evolution of aircraft in India. It inspired me enough to write about it!

Being a World War II enthusiast, I was surprised to see some of HAL's early endeavors in building a fighter jet in the 1960s with the help of Kurt Tank—one of the original pioneers of jet design in the 1930s. I suspect this blog will be a lengthy one. So, if you have an interest in aerospace history and India’s fluctuating role in it, stay on to read.

From envisioning an aircraft manufacturing facility in the mid-1940s to developing the first jet in Asia during the 1950s and 1960s, HAL lost its way for the next 50 years, only to recover slightly post-2010s. At a high level, the loss of vision that the founders once had, coupled with a profound sense of inferiority and an inability to focus on continuous innovation, is the main reason for its confused standing today. The story mirrors that of India: initial promise, followed by decades in the wilderness, and a reluctant rise after a deep slumber.

The Beginnings – Walchand and Wodeyar

Walchand Hirachand, one of India’s maverick industrialists, sought to create Hindustan Aircraft Limited in 1939 and was in search of funds. Incidentally, the young Maharaja of Mysore, Jayachamarajendra Wodeyar, had a chance mid-air meeting with William Douglas Pawley (an American businessman and aircraft enthusiast who was en route to China at the start of World War II). During their conversation, the Maharaja recognized the strategic long-term importance of having core industries and decided to help establish the aircraft manufacturing plant in his state.

Walchand’s creative genius combined with Wodeyar’s financial backing resulted in the formation of HAL. Their vision was clear: to develop an aircraft manufacturing facility indigenously.

India was short on technical skill sets, so they took measures to bring in foreign talent. Dr. Ghatage was the sole Indian aircraft designer responsible for HAL planes such as HT-2, Pushpak, Kiran, and Krishak. 

Despite the socialist mindset of the early Indian government—nationalization of HAL and indifference from government officials—the involvement of visionary founders, Hirachand and the Wodeyars, managed to attract Kurt Tank to lead aircraft-building efforts.

Who is Kurt Tank?

Kurt Tank was one of the original aircraft pioneers, designing the Focke Wulf range of airplanes in the 1930s. His Focke Wulf Condor was the first plane to make a transatlantic journey as a passenger jet. It is unclear how he came to India to design an aircraft. There is very little literature about who negotiated his entry into HAL. Was it the Wodeyars? Or Nehru? Did he express interest in developing an aircraft in a third-world country (highly unlikely)? We don’t know. Secondary sources usually credit the government with success and everyone else with failure. However, early photos from the founders' era until the 1960s show active involvement of the Wodeyars and Hirachand families, with minimal political involvement in HAL's activities.

Kurt Tank entered the landscape in the early 1950s. He had to not only design the original aircraft jet but also build a modern industrial complex capable of developing and building one. Unlike his Indian employers, Tank understood the entire process of designing, building, testing, refining, and mass-producing aircraft from his time at Focke Wulf. His Fw-200 Condor, a four-engine commercial transport for Lufthansa, first flew in 1937. When WWII began, the Condor was modified into a highly successful maritime patrol bomber. Tank was also responsible for the Ta-154 Moskito, a high-performance, twin-engine, multi-role combat aircraft built entirely of wood. Production of the Ta-154 was canceled when the factory that produced the special glue required for the wooden airframe was bombed, cutting off the supply.

Despite the rudimentary nature of HAL’s facilities, work on the Mach 2 fighter—designated HF-24 and named Marut—proceeded at a relatively brisk pace. A full-scale wooden glider version of the HF-24 began aerodynamic flight trials, towed into the air by a Douglas DC-3, on April 1, 1959. Assembly of the first prototype commenced in April 1960. It was flown for the first time on June 17, 1961, by Wing Cmdr. Suranjan Das. A little more than a week later, it was demonstrated for the Minister of Defense, V.K. Krishna Menon. A structural test airframe was completed in November, and a second flying prototype took to the air in October 1962.

The performance of the Marut, however, did not meet HAL’s ambitious promises. Its projected performance depended on the availability of the Rolls-Royce Bristol Orpheus BOr-12, a British-designed afterburning turbojet engine. The Marut was intended to be powered by two of these engines, each delivering 8,170 pounds of thrust. However, the British government canceled its financial support for the development of the Orpheus BOr-12, and the Indian government was not prepared to cover the costs, leading to the project's termination.

Consequently, the Marut was fitted with non-afterburning Orpheus 703s, the engines HAL was currently building under license for its Gnat lightweight fighters. The Orpheus 703 produced only 4,850 pounds of thrust—44 percent less than the engine for which the Marut had been designed. As a result, the Marut was underpowered and unable to fulfill its performance potential.

Missing Vision: Socialist Culture of Embracing Mediocrity and Low Self-Esteem

In the early 1960s, Rolls-Royce asked the Indian government to fund the development of the Orpheus BOr-12 turbojet engine—a total of $1 million. Our socialist government flatly refused to spend this amount and instead chose to purchase fully built foreign planes rather than developing one in-house.

It’s worth noting that Rolls-Royce was building the engine based on needs from two countries—India (for Marut) and Egypt (for its fighter jet E-300). After Egypt faced significant setbacks during the 1967 war, they canceled their fighter jet program, leaving India as the sole customer.

What does $1 million translate to today? At a 6% inflation rate over 50 years (from the mid-1960s to the 2020s), it would be a 20X increase in value, equating to about $20 million. Considering the USD to INR drop from the 1960s to the 2020s (1 USD = 5 INR in the 1960s to 82 INR in the 2020s), it would still amount to approximately $150 million in today’s terms.

Losing Its Way Through the 1970s

Despite an underpowered engine, the Marut proved to be a highly maneuverable aircraft during the 1971 India-Pakistan war. No mid-air combat losses were reported during the conflict (out of the 145 aircraft in use).

Was it the lure of kickbacks that led to the closure of the Marut program? Or was it the inability of government bureaucrats to design products, which led to the eventual acquisition of Soviet MIG-21s in the late 1960s? Since then, India has spent tens of billions of dollars on jet purchases. I sometimes wonder where we went wrong.

Kurt Tank seems to have left HAL immediately after the closure of the Marut program in 1967. He offered to design the HF-73 in 1973, but the Indian government ignored him. Having grown accustomed to buying planes from the Soviet Union, our jet aircraft program appears to have been placed on the back burner.

It is a lesser-known fact that one of Kurt’s students at the Madras Institute of Technology was the missile man of India, A.P.J. Abdul Kalam. As they say, when you have great teachers, you are bound to produce great students.

The inability to think big seems to have led to a decline in HAL’s capacity to design any new fighter jet until the 1980s, when the LCA (Light Combat Aircraft) program emerged. Jaguars, Mirages, Sukhois, and Rafales have been the primary focus since then.

Continuous Innovation: Overcoming Setbacks and Laboring On

No product is perfect. Everything is a labor of love and requires continuous innovation. We seem to be unwilling to invest in building core technologies and designs. They need continuous focus, not a start-stop approach.

Will we change? Hopefully, yes. Building aircraft is a costly endeavor. However, not building one is an even costlier proposition in the long term.

Being dependent on the West for our fighter needs is a losing proposition. Building technologies from the ground up within India should be our focus. We lack visionaries like Walchand and the Wodeyars who started HAL. As long as we do not encourage capitalists like Walchand and support them in their ventures to dream big, we are bound to repeat stories like HAL.

Vision seems to be lacking. Somehow we seemed to have lost our ability to take risks. Innovate. Fail. Make it better. 

I just felt that we could do better. I hope we stay on course. HAL - continue to dream to fly!

P.S.: I need to disclose that I have held a large position in HAL since Covid. Of course, my views are biased. I am a SEBI registered Investment Advisor and I also run a SEBI registered PMS, Dwaith.

Ciao till next time...Harsha

Charlie Munger - A life, well lived

It is sad seeing one of your heroes pass away. One usually wishes that they sort of live on forever. If you have not heard of Charlie Munger, I suggest you stop reading and spend time reading about him. It will be time well spent.

A wonderful summary - Who is Charlie Munger?

Don't forget to listen to this long meandering speech when you get the time. It is a wonderful compilation of mental models in a speech Charlie gave in 1995 at Harvard.

Charlie just passed away a few weeks shy of 100th birthday. Well.. what a life, a life truly well lived. Reading about him, my son was asking me yesterday why he was only worth $2.6B while his partner at Berkshire, Buffett is worth many times more, $100B+? 

Well, it seems to me that he has given away a large chunk of his wealth over the years. From the days when he held over 2% of Berkshire Hathaway (which will make him slightly shy of $15B), he seems to have over time sold his shares to fund various philanthropic activities. Who cares if it is $1B, $10B or $100B....at the end of the day, it is what legacy you leave behind that matters. 

Since I do not have a whole lot of time, I have compiled a list of his writings from various books. Let him speak for himself here -

Charlie on Family, Finances and Savings

He wanted a large family. He eventually had 8 children.

Losing his first son. A nasty divorce. Picking the straws after he was 30. Never self-pitying. Play with the hand you are dealt, as best as you can.

Playing a game that fits your talents, he says.

First break in real estate. Interestingly, he constantly avoided that for much of his later life. Having great partners.

Some old takes on Buffett. Munger. Guerin (third partner who over-leveraged and was not in the league of Buffett and Munger post 1980's).. Take on their earlier partnerships. Why only partner with great people.

Munger and his association with Buffett. How Buffett tells Munger to move into investments and start treating law as a hobby :-) 

Law as a hobby...

Initial days.

Munger-Tolles Lawfirm. Wheeler-Munger Money management.

Leverage. Why we do not know about Guerin - it's very interesting.. 

He might have been as popular as Buffett-Munger if he had not leveraged and lost out.

Berkshire thoughts

Their first big buy - See's Candies.

Wesco Control.

Committing large capital to great ideas.

Delegation.

Bet sizing. Big Ideas.

Concentration.

Reading.

On opportunity cost. Having no master plan.

Crisis. Solomon - LTCM - Accounting - Finance. etc..

Leadership mistakes of Gutfreund.

Fed loses faith. 

LTCM post-Solomon. Intellect is not key for investing.

Options. 

Teaching Finance.

Incentives and biases.

Career choices. Starting early, fooling yourself.

First Million.

Taking difficult jobs.

Fooling yourself.

Philanthropy and Ben Franklin.

A modern-day Ben Franklin.

Take a bow. What a man. What a life well lived. This blog is more a note to myself than anyone else. 

Ciao till next time...Harsha

Year two out of corporate job - An update

I had written about leaving my corporate job and how I was doing a year ago. Too many things have happened since then and I'm excited every day. A former colleague was asking what is my year two update. I had brushed it aside that now I am not having time to write.

I noticed that this year has been super busy and my blog has gone un-updated. Either I was too busy to write or I did not feel the urge to pen down anything. I have to at least make one customary update so I continue my blog for the 19th year with at least one blog post. Likely, I will make this a short post... not one of those meandering blogs I've penned down before. Time is in short supply.

So, with that, here goes my story. For those who are new, here's my blog post of last year - Financial Independence: A year after leaving a corporate job. 

A one-sentence summary is - I've gotten more busy than when I was working at Enphase. I've become a reluctant entrepreneur and gotten involved in a few companies. 

My activities

First, an update on Dwaith. As I had written previously, one of my main reasons for charting out was to create a company (Dwaith), get a portfolio management service (PMS) license, and actively manage money.

I've realized that I cannot fight SEBI and bureaucracy. The best way to navigate is by becoming entrenched in the system. Dwaith has become a full-fledged SEBI-registered Investment Advisory service. I've actively refused clients so I can focus on giving quality returns to the ones I have until I can convert this operation into a PMS (or an AIF Cat 2/3). The PMS/AIF is just around the corner at the end of the year.

I am very thankful for some of my ex-colleagues who became my first customers. The returns have been phenomenal, but - more importantly, I get to interact with them on a regular basis which is even better. A lot more people have started approaching me now through word of mouth. 

Secondly, I've got two great partners in the two businesses I'm closely involved in - Ramesh @ Zepco and Rajesh @ Power One. One is a startup and the other is a well-established company that is poised to take off. Both companies play in excellent fields with large opportunities set ahead of them. 

We have a clear strategy and goalposts ahead at both these companies which is keeping me busy. From a five-day work week - I've suddenly got into a six-day workweek mode. I am not complaining.

That apart, I continue to meet quite a few new people and companies. I've realized that when people come to know that they can bank on you and will not take them for a ride, quite a few quality people approach you for an association. I've got a lot of good luck and help from people, so helping others is a way of paying forward. 

Innovation and Entrepreneurship 

Most importantly, I've realized India is poised for growth this decade. Nobody; not even ourselves can stop the growth. Young people with immense talent and potential are looking at creating new companies and sometimes, I wonder how people fresh out of college have the guts and gumption to start companies. I've become a reluctant entrepreneur by chance (I'm first to admit, it was not planned), and more importantly, I'm seeing young people around me being a lot more innovative and risk-taking. 

Energy, power electronics, manufacturing, motors, and associated industries are poised for enormous growth. These are the areas where I am focusing on. I cannot comment on others. I think we in India will slightly tweak the China growth model to make it our own. Our opportunity set is even bigger than China's. 

I was in China a few months back. I was completely taken aback at the kind of response a show like SNEC had. I was used to visiting Intersolar, REI, All Energy, etc in various countries before - but the sheer number of people attending the show in Shanghai blew my mind. Somewhere down the line, a hockey stick-type growth curve is waiting to unfold in countries like ours.

India is just getting started. Five years out, it would be interesting to see how things pan out. 

I am super excited about the things I'm involved in. I think in some of the cases, we are charting out a new destiny. Here's a quote to sign off that I keep on my desk -

As your desire is, so is your will

As your will is, so is your deed

As your deed is, so is your destiny

Your deepest desire is your destiny

- Brihadaranyaka Upanishad

Ciao till next time...Harsha

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

Continuous Education: A Point of View and a Thank-you! Note

A friend of mine recently joined an Education start-up, he sees huge growth there. He's got a healthy stock package (I felt it was over-valued). Anyway, today, most Edu-start-ups are high flyers. Who's to argue with him!

Another friend sends his kids to a high-cost online tutorial.. after all, who would want to penny-pinch for education, right? He made a point that he will spend all that he can, to get his kids the best education there is.

It made me think. I was not sure if I had to write about it. But, then again, I felt I should pay my thanks to two teachers who thought me a lot. For free. No noise, no fees.

Well, read more to find out.

Now, let me come back to my story. 

Mentally, yesterday, I got transported to around 2012 when I was seriously considering whether I do a second MBA - Stanford or INSEAD (1 year MBA which they offer). That's exactly 10 years back!

I was in Germany working then and I started seeing some of my Indian friends do a second foreign MBA. Mostly, they were unhappy that they did not get a globally recognized name tag like an IIM when they did an MBA at NITIE. 

A NITIE MBA was cheap. I spent around Rs. 2L (~$4000 then), of which I majorly recovered the cost by winning B-School case study competitions that offered handsome cash prizes over the 2 years. I had no major loans when I came out unlike some of my counterparts from other B-Schools when I joined the workforce. 

A marquee MBA is not a bad thing. I pondered if that will help me. I called my former manager who I admired, who had also taken a similar path by getting a 1 year MBA at Stanford. 

He was at best 50-50. His thoughts were neither for nor against doing a second MBA. I came out more confused after speaking with him. I thought he could give me a clear yes or no answer.

Most things in life don't have a simple yes or no. Now, that's entering the real world. Bummer...

That's when I was somewhat unclear on what path I foresaw my career growth, over the next decade.

My motto at that time was - "I am on the highway, and I love driving"! I literally had that piece framed on my office desk in Munich. I was traveling to customers every day. Meeting companies, trying to grow Cypress's business. That was super fun. I loved it.

Well, on the other hand - I had saved up enough to get a 1-year INSEAD MBA without loans. It was in France after all. Not a bad idea to just remain in Europe, and get an MBA when I am there. On the other hand, when I looked at their average salary post MBA - I felt that was lower than what I was making already.

Anyway, what I realized is, that I had some time on my hands when I was traveling. I felt I was not learning anything. Seeing people go back to do an MBA made me think about that.

Somewhere in the back of my mind, I felt - somewhere down the lane, I wanted to learn more about finance. NITIE unfortunately did not offer the best of the teachers. It was not known for Finance. 

I was 30, and I decided I might not want to work at all, by the time I was 40. So, spending a year on MBA was not really worth it. I just loved to invest and pulling money out for an MBA was not something I wanted to do.

So, that gave me an answer on the MBA part. Now, I got looking at how to go about learning Finance - portfolio management, security analysis, and valuing companies. 

Of course, I googled it. I bought a few books. Also, I religiously downloaded Buffett's annual letters. Read them all that year. 

Enter Gurus: Prof Aswath Damodaran and Prof. Sanjay Bakshi

There appeared to be two names that always popped up when I searched on these topics. Prof Aswath Damodaran of NYU Stern and Prof. Sanjay Bakshi of MDI, Gurgaon. 

The greatness of these two gentlemen was that their teachings were all there on their websites! All their class notes, lecture notes, and even the question papers were uploaded on their websites. 

Having a mentor is great when you are on the path of self-education. Having two is even better!

Years 2012, and 2013 on and off were spent heavily doing every single case study, and question paper and reading through their courses - Valuation, Corporate Finance (Damodaran), and Behavioral Finance and Business Valuation (Bakshi).

You see, I was working, so most of my learning was slow. You could ask - how I took 2 years doing a few courses. But, then again I was not in a race. I thought I was giving myself 1 hr here or there to do this reading. I was also reading a bunch of letters/memos from hedge fund managers, investment partnerships, etc (which I continue to read even today).

The basic foundation I received from both these professors is something I would be forever grateful for. I tried emailing and providing my answers to the professors once (for their question papers/case studies), but I never got an answer - I realized that the courses were a year old, so my answers were probably a year old. So, I stopped doing that. But, who cares, if I got graded or not! 

Around the same time, I did get an executive management program at Santa Clara as part of Cypress's CYPA. But, that helped mostly to meet and know people. 

Also, later in California, it was great to take courses on and off at Stanford Continuing Studies (also sponsored by Cypress - could that get better!). Now more recently - I've taken NISM Courses and now enrolled for a CFA this year (kinda late - doing that mid-life you'd say!... but, who cares? I am in no race).

Continuous education is very important. To be a lifelong student is one of the joys of life!

In Summary

I know, I am meandering. Let me come back. 

I felt I have to write a blog post to thank both Prof Damodaran and Prof Bakshi for their generosity. Their courses are fundamentally the building blocks for anything I've learned in security analysis. 

I have sent them my own annual letters - on my investments which I started writing ever since 2016. I have got a warm short reply sometimes. 

I have got a world-class securities valuation education from these two gentlemen for no money at all. They've never looked at monetizing their courses. Courses are even today available on their websites (I've linked the latest classes above). 

Here's just a note to thank you. That $100K saved then on a second MBA is worth far more than $1M today.

Professors, If ever, we meet in person - I would love to thank you in person. Your work has helped one individual (me:-)) to learn. That individual is very grateful for your efforts.

Ciao till next time...Harsha