Hello, this week we explained why Coal prices are sky rocketing and why Coal India was the top NIFTY gainer in September, share our three favorite charts of the week, along with some curated reads. Happy reading! Please share and subscribe if you find these helpful đ
Outline
1. Market snapshot
Last week, Telecom & IT sectors closed weak down -4.5% & -4.8%, as the old economy tries to make a comeback. Power/ Utilities and Energy/Oil & gas gained 4.6% and 3.4%, with companies benefiting from a surge in prices due to global shortage. Consumer staple also gained 1.6% last week. See snapshot:
Last 6 months: In the last 6 months: Real estate, Telecom & IT have been the top performing sectors and have given returns of 33%, 31% & 28% respectively.
2. Whatâs âupâ: Coal?
Coal India hit UC earlier this week, Yes you read it right! Coal prices have nearly tripled in 2021, fueled by a supply glut and an energy crisis in China, threatening the supply chains of manufacturing companies.
Global coal prices
What triggered this?
In Summary - Short supply of coal and voracious post-Covid demand. We tried to understand the root causes, and it made us go âshoddy planningâ! Letâs explain
Coal contributes ~70% of its power generation in China. In late 2020 China, the largest coal consumer, producer & importer of coal, banned coal imports from Australia (second-largest exporter of coal) after Australian PM Scott Morrison demanded an inquiry into the origin of Covid-19. China switched to Indonesia, Russia & South Africa for imports, but this could not compensate for the earlier supply from Australia.
Even domestic coal supply in China has been subdued due to:
1. Focus on steep carbon emission reductions by Beijing leading to delays in coal mining
2. Hoarding of coal by municipalities ahead of an often-harsh winter season
This has led to Coal and power shortages in China, shutting down factories. Further, these shortages could not be compensated by global supply, given limited investment in new coal mines due to longer-term expectations that green-energy sources will replace coal.
While supply is short, there has been a strong demand recovery post covid. In effect, severe depletion of coal inventories has contributed to low stocks at many power plants and upward pressure on coal prices.
Whatâs happening in India?
In India, Coal India constitutes 80% of the total production. Coal prices in India are set by the company itself and till recently, it kept the prices stable in spite of high global prices. As cheaper coal is available in India itself, power generation companies shifted from imported to domestic coal, thinking the supply should ideally be very comfortably available as India is the 2nd largest coal producer, right?
Wrong. Coal India has not been able to meet the entire demand now more than half of the power plants are at the verge of the end of their coal stocks.
Our view:
This seems to be a short-term supply-demand issue and will self-adjust. As per Tata Power CEO and MD Praveer Sinha, coal shortage issue should get resolved in 2-4 weeks. On-off trades are fine, but core investment decisions should be driven by business economics and not macro-economic variables đ
3. Visual weekly – Some interesting charts
3.1 IT weight in index highest since 2006 | Auto at lowest since 2008
3.2 Estimated RoE and RoA for various loan products given by Banks
3.3 Market cap of big giants as a % of total market cap of BSE
Above chart denotes the contribution of these giants in the overall listed markets and we can see here that only Relianceâs contribution has been stable. Market cap of HDFC, HDFC Bank & Asian paints has increased as a % of total market cap which indicates value creation by these companies.
4. Founder series #2: Journey of Fittr with Jitendra Chouksey
As investors, we often tend to over-emphasize wealth, but disregard the secrets of health. There are many common principles between the two critical aspects of life. This week on the 2nd episode of our âFounder seriesâ, we discussed many interesting topics with Jitendra chouksey (Founder, Fittr) – his personal journey from being a fat kid to under 10% body fat and Fitterâs journey from a whatsapp group in 2016 to help friends become fit to becoming the largest online fitness community in India. Listen here or watch here to understand how he turned a simple idea into a $100 MN dollar business. You will also learn many fitness and life lessons along the way.
5. Good reads and company updates
5.1 You are only good as your worst day by Shane Parish (link)
5.2 Maharaja comes back home: Tatas winning back Air India has brought back the much-needed competition in Indian aviation. Read on “Tata vs IndiGo: Indian aviation set for a royal duel” (link)
5.3 A simplified explainer of the Electricity Amendment Bill, 2021 by Multipie (link)
5.4 Nuclear energy production in Indian to increase three times in 10 years to 6.8 GW (link)
5.5 OYO filed DRHP with SEBI as it aims at raising ~8,000 crs via IPO. It will be repaying the debt and invest in other growth opportunities from the proceeds. We will be reading it this weekend and will share a note soon!
5.6 Reverse merger of DHFL into Piramal and settlement of creditors of DHFL (link)
6. Twitter highlights for investors
- Thread on How every annual report tells a story
- Thread on advice based on few excerpts for earning more than average compounded returns consistently.
Thatâs all for this week. Please share with your peers if you found this helpful and subscribe to start receiving the weekly digest in your mail! Happy weekend!