Why Your Doctor Is Blind (Statistically)

Does your doctor understand the test results he has of you when he writes a prescription? Along with that does he understand the higher consequences of writing inaccurate prescription in his ignorance of interpreting the data incorrectly? We as normal people are supposed to rely on the experts for complicated matters. But what if the evidence suggests that on the face of increasing medical complexity and lack of statistical training it has become more arduous task. 
I have always got a kick out of finding flaws in doctors recommendations and their understanding of probability in their profession. It started when I went with my brother for treatment in Asian Hospital for frequently running nose. The doctor in the otorhinolaryngology (ENT) department after initial inspection told us to get the x-ray done which upon later examination convinced the doctor that operation is needed (by then I already had a sensation of the something wrong, I was amateur at this but sometimes I read extensively sometimes on the subject) to straighten the bent ‘septal cartilage’ (middle top of the nose). We checked with another doctor and he gave a kind of nasal spray and all was good within a month. That day we had a huge discussion in the family about the ills of medicine as a profession but I knew that something else was at play. I intended to find out and came to conclusion that: Medicine is a field of uncertainty and probability and it is a prerequisite for doctors to think in probability (which they clearly are incapable of) to justify their practice. Medical, it seems as profession is not too different from investment field.
   Experienced doctors begins the process of diagnosis upon first laying eyes on the patient and probability is what they use (although it can begin even before laying eyes). Based upon the expertise, he can expect the type of patient to come during the whole day and has some idea of the diagnosis he is about to prescribe. These starting-point likelihoods are called “anchor” probabilities (i.e, based on previous information). These probabilities gyrate based on subsequent history, examination and supplement testing (if necessary) according to what the patient has to say and what does or does not come to knowledge upon physical examination and testing. But strange as it may sound most doctors write more tests than what might have been justified only if he knows about the anchor probabilities. Apart from this there is another medical principle in diagnosis called ,’Bayes Theorem’. It states that the probability of a diagnosis after a new fact comes to light dep
ends on what its probability was before the new fact was
added. More simply, upon knowing the history of disease or physical examination or a dark spot on MRI testing might change the conclusion of a diagnosis from an earlier ‘yes’ to ‘no’. Each additional information means different in different context. Yet another implication of Bayes’ theorem is that one can’t skip past the history and examination by ordering a test in isolation and expect it to make an accurate diagnosis. A test is an answer to a question. If there was no question, how could test be an answer? Nevertheless, a doctor’s insistence on getting the tests done may mean that the doctor has ‘Skin-In-The-Game’ ( the idea as proposed by the author of Skin In The Game, just in a negative sense).
    In yet another case of amateurishness is with a little known simple statistical but intuitive concept known to non-medical population is ‘Number Needed to Treat’ (NNT) which even to medical people is a bit difficult to grasp. It is well known that with any type of medicine-some are befitted, some are harmed and some are unaffected. NNT shows the impact of medicine by estimating the number of persons that are to be treated in order to have one positive impact of the medicine. Say, if 1 patient
 is benefited out of every 2 patients treated the NNT is 2. Let’s take a hypothetical situation (real example is taken later on): The disease is fictional heart attack and the treatment we have is called ‘Medicine-1’. Imagine that 75% of heart attack victims who take Medicine-1 survive but only 25% survive
if they don’t take Medicine-1 (See figure 1 ). The upper 25% of the people will survive irrespective of treatment. Similarly, the lower 25% will die irrespective of the treatment. The people in the middle are the ones affected by Medicine-1 which in this case reduces the mortality rate by 50% (also called Absolute Risk Reduction or ARR). (Hint: NNT is reciprocal of ARR).

Figure -1

The catch here is that we don’t know in which category the patient will fall into (benefited, not affected or harmed). So the ethics if the profession tells us to be realistic and estimate the likelihood of each one of the possibilities. The estimation works like this: The NNT of the medicine is 2 because the medicine affected 50% of lives. This means that “1 in 2 heart attack victims are affected by Medicine-1, or that “there’s a 50 percent chance that treatment with Medicine-1 will save a heart attack victim’s life.”
   Simple, huh? But wait the 2nd order consequences are even more fascinating. Let’s take another scenario in which 10% of people (out of 100% of population) die of heart attack if they don’t take Medicine-2 (in this scenario) and 8% die if they take Medicine-2. This is an ARR of 2% which means 2 out of every 100 are saved by using Medicine-2, for an NNT of 50 (=100/2). See figure 2. So, just like scenario 1, a significant number of people will be unaffected by the treatment (90% survive & 8% will die irrespective of treatment). Effectively, 98% of the people subjected to it are unaffected by it. Here’s comes the interesting part: the estimation of the 2nd scenario can also be stated as there is 20% relative reduction in risk (RRR) by taking Medicine-2.  The problem with this type of description is that, although it is semantically correct it is profoundly misleading. This is because before a treatment begins patients and doctors don’t know whether a patient will be helped, harmed, or unaffected by the treatment. If, in a conversation with a patient, we use the 20% to describe how likely it is that Medicine-2 will work (i.e. “Medicine-2 reduces your chance of dying by 20%”) then we have ignored the much greater possibility, 98% as we calculated above, that a patient will be unaffected. When we use the 20% to describe an effect of treatment we have concentrated only on the people who will die and ignored all of the people who will live. And we don’t know which group a patient will fall into until they have the treatment. Therefore using a description before the treatment that ignores the much larger chance that they will be in the group that survives regardless of the treatment (while still being subjected to the potential harms and side effects of the treatment) is very misleading. Actual picture will be like (Figure 3) an image that shows everyone (rather than just those may die).




One can see how using the RRR to describe the potential effect of a treatment would be enticing, particularly if someone wanted to exaggerate the potential benefit of a treatment. For Medicine-2 the RRR was 20% while the ARR was 2%, a ten-fold difference. Therefore people and groups that are trying to emphasize beneficial effects (groups that have a profit motive, doctors that are attempting to sway a patient in one direction, etc.) can use this logic.
The problem is that our brain has not been evolved to think in probabilistic terms. The coding of our DNA for the past millennia has been to hide and dodge the predators not to calculate, how much there is a possibility that a hungry lion staring at our face is likely to leave us in peace. We didn’t have the tools. But the irony of the situation is that we still couldn’t think probabilistically when we have the tools and can, even more so the professionals, leave alone the journalists, politicians and patients. A more surprising fact (less surprising by now, to be frank) is that most of the doctors don’t understand the concept of survival rates (its not opposite of Mortality rates – number of people die from a disease). I means the number of persons who have survived for a certain number of years (usually 5 years) after being diagnosed with a disease. In a survey of 412 doctors done in US by Gerd Gigerenzer, director of the Harding Center for Risk Literacy in Berlin, shows that 2/3 doctors mistakenly believed that higher survival rates means more lives are saved, which is wrong. The survival rates doesn’t count the patients who die from disease afterwards. The reason for this is we automatically think probability as a percentage. How? Here’s a question Gigerenzer asked to a group of more of 160 gynecologists: (give it a try and see how much you can make sense of it):
A 50-year-old woman, no symptoms, participates in routine mammography screening. She tests positive, is alarmed, and wants to know from you whether she has breast cancer for certain or what the chances are. Apart from the screening results, you know nothing else about this woman. How many women who test positive actually have breast cancer? What is the best answer? Options : (a) nine in 10, (b) eight in 10, (c) one in 10 & (d) one in 100.
He also supplied additional data women of this age group to help them answer:
  • The probability that a woman has breast cancer is 1% (“prevalence”).
  • If a woman has breast cancer, the probability that she tests positive is 90% (“sensitivity”).
  • If a woman does not have breast cancer, the probability that she nevertheless tests positive is 9% (“false alarm rate”)
More than 50% chose option (a) and 21% chose option (c) which is the correct answer. This is where Gigerenzer works focuses. He tries to make probability-oblivious doctors understand it through numbers. The fact that 90% of women with breast cancer tested positive (sensitivity”) from a mammogram doesn’t mean that 90% women have breast cancer. That’s an answer in ignorance of the other two additional information. When (“false alarm rate”) combined with (“prevalence”) roughly 9 out of 10 women don’t actually have the cancer even after tested positive (Figure-4). Since 1% is the prevalence rate (percentage of people having disease at a particular point of time) 10=1% of 1,000, out of which 9=90% of 10 are tested positive and 1 negative, there are still 89 women who doesn’t have cancer and will be going home with feeling of anxiety. Further, the research also suggests that months after a mammogram false alarm, up to a quarter of women are still affected by the process on a daily basis.
Cancer Test

   To quote Scot-Irish mathematical physicist Lord Kelvin, “If you cannot measure it, your knowledge is of meager and unsatisfactory. ” Anyone should be condoned in his ignorance of the fact but it would be more regretful of someone’s getting acquitted even after a mountain of evidence staring at his face against him, especially when a decision can have the profound consequences. The fact that more people are killed in US from medical errors than road accidents than plane crashes, terrorist attacks, and drug overdoses combined. And there’s collateral damage that can go unnoticed: Every day, doctors and nurses quietly live with those they have wounded or even killed, it would serve good for the society as a whole if it is made mandatory for the doctors to take elementary classes in medical-probability specially revising premedical education standards to incorporate training in statistics in favor of calculus, which is seldom used in clinical practice. Unsurprisingly, statistical probability is not taught perhaps because  many students in such programs already have an advanced science degree. But that doesn’t mean that they actually understand statistics. Yet another research had showed something called Dunning-Kruger effect among the doctors which means that doctors who weren’t good at statistics were more likely to say that they had good training in statistical literacy than those who did not. Doctors who didn’t knew statistics were so inadequate that they didn’t realize there was any more to know, whereas those who did know some statistics at least had a faint inkling that something was missing.
It’s not a problem of the medical mind. It’s a problem of training at the universities, in the medical departments where young doctors are trained in everything except statistical thinking.”– Gerd Gigerenzer
Similar to doctors, patients’ misconceptions about health risks are even further off the mark than doctors. Gigerenzer and his colleagues asked over 10,000 men and women across Europe about the benefits of PSA screening (prostate cancer test) and breast cancer screening respectively. Most overestimated the benefits, with respondents in the UK doing particularly badly – 99% of British men and 96% of British women overestimated the benefit of the tests. A quarter of British women went so far as to guess that 200 women out of every 1,000 screened have their lives saved by mammograms. But Gigerenzer says the real figure is about one woman in 1,000 – four out of every 1,000 screened women (Medicine-2) die from the disease, as opposed to five out of every 1,000 unscreened women (No Treatment). He says that this benefit has been represented as a “20% mortality reduction”, (20% of 5 is 1) which might explain why many women in the UK seem to think that 20% of women are saved by undergoing the procedure.
    In the face of increased risk of being sued for unintentional and unforeseen consequences majority (93% in a 2005 survey) of the doctors like to play ‘defensively’ (recommending treatments that are less likely to get them sued). In order to get them out of defensive behavior it would be useful if you were to ask questions in a mitigated speech because asking directly may infuriate the doctor (in which case it is better to switch the doctor given his disinclination which might change his behavior from defensive to aggressive) like,”I have been doing some research on my own and have stumbled upon some controversial facts. Can you guide me through some of them? “It’s surprising that in the 21st Century, many still think of doctors as Gods  and still they don’t ask the Gods” says Gerd. In medical ethics there’s a principle called ‘principle of informed consent’, which obligates the doctors to (a) disseminate the information which he knows about the diagnosis in a comprehensible way & (b) come clean about which he don’t know.
    “Have you done your body checkup? if not, Hurry! 30% discount on full body checkup till 31-May-2018.” Most probably you would go for similar type of tests (if you haven’t gone through it recently and cost is not a resisting factor) since it is recommended all over the place to get tested on a regular basis. If you ever come across these words like these never lull yourself into these misleading advertisements. Did I say ‘Misleading’? Before you start to loathe me let me make it clear that it exactly is what a recent research (and many others too) shows. The reason is that a large number of screening tests give false positives (the idea that a test comes out positive but the chances of having the disease is very less). Its mind boggling to think something like this exists and the doctors and patients have no inkling of this. In the research paper that described a test for ‘Mild Cognitive Impairment’ (MCI), a condition, that may, but often isn’t, a precursor of Alzheimer Disease (AD). The test was published in  the Journal of Neuropsychiatry and Clinical Neurosciences by Scharre et al in 2014. It had a Specificity of 95% (means 95% of people who are healthy will get correct diagnosis, i.e, tested negative) & Sensitivity of 80% ( means 80% of people who have MCI will get correct diagnosis,i.e, tested positive) & Prevalence of 1% (% of population that is affected with a particular disease at a given point of time). Using Gerd’s idea of thinking in images and numbers the calculation is shown below (Figure 5). 1% (100 people) will have MCI of which 80% will be tested positive and 20% will go undetected even when they have MCI. Similarly, out of 9,900 healthy people, 95% will be tested negative (correctly) and 5% positive (wrongly). Consequently, total number of people tested positive are 80+495=575 out of which 495 are false positives which is 86% of total. More simply, there is only 14% chance of actually having MCI if tested positive and 86% chance of not having it. To get the feel of this, think if a person sitting nervously in front of a doctor waiting for the results and the doctor says either of the two statements (a) there’s a 95% chance of you having it (doctor-fool) & (b) there’s only 14% of you having it (doctor-cool). One of them can make his day and another will wreck havoc on his family.


After having spent enough of my time understanding human folly believe me it gets frustrating some times thinking inadvertently of the errors (only probabilistically). Very recently I realized that more of my energy is used in trying to stop my impulsive observation of bêtises than volitional ignorance of it. Learning a little bit of statistics can avoid millions of unnecessary tests and deaths all world especially if concerns you and your dear ones life. Now that I’ve got the sensationalism, try this simple question yourself and test if your brain has understood what you have read :

If a test to detect a disease whose prevalence is 1 out of 1,000 has a false positive rate of 5 percent, what is the chance that a person found to have a positive result actually has the disease?

P.S:  If you couldn’t get the answer the first time, don’t worry. Of 61 physicians, hospital staff and medical students asked only 14 gave the correct answer — 2 percent.

  1. http://www.dcscience.net/2014/03/10/on-the-hazards-of-significance-testing-part-1-screening/
  2. http://www.dcscience.net/2014/03/24/on-the-hazards-of-significance-testing-part-2-the-false-discovery-rate-or-how-not-to-make-a-fool-of-yourself-with-p-values/
  3. http://www.cordingleyneurology.com/probabilitydiagnosis.html
  4. http://www.thennt.com/thennt-explained/

The Information Seduction


When I was in high school there was an exercise in which the whole school participated (not sort-of which gets you a memento). At the end of the lunch break three bells rang: the first one indicating the lunch time was over followed by 2nd sound at which whole school would stop in their position instantly like a statue. It was a hilarious moment to see, children making funny positions with their mates, others falling on the ground as if they were in the middle of the fight with funny faces. The seniors, didn’t caring about this would go on with their movements as if they are not afraid to break the rules (including me) or the reverse can also be said, they were afraid what others might think of them (social proof) if they would do the same. Well, the purpose of the exercise was to slow down our senses for the moment and take a look around and observe what is happening all around us. It was more of a mental exercise than a physical one. The world is moving so fast that we rarely pause for a moment and think what is happening and investment is no exception. That was 8 years ago. How all this connects to the investment in particular and life in general? Investment is like that, if you don’t understand the information you already have, you will be flooded with it by searching for more. 

It’s relevance has very much to do with the returns in the investment field. With all the marvels in the information technology that are supposed to make the information availability faster (speed) and with more ease than before (quantity) to rule out any insider advantage to the information and bring transparency, things have gotten much difficult in totality. We are more distracted than ever before with continuous bombardment of information. Simplification too, has a threshold limit. To borrow a phrase from Michael Bhaskar’s book Curation :  In fact, we have solved it (information scarcity) so well that there’s a new kind of problem: not information poverty, but information overload.


Gekko very clearly says it but didn’t say that the information he was talking about was curated information.

The logic behind superior investment results is simple, yet majority either doesn’t get hold of the idea or it is too incomprehensible for them. There can be innumerous other explanations for this but, that is not our concern here. Back to basics, superior investment results comes from information. Information has value in two ways: (1) Information that has not reached to many people and will have significant affect on the business (Insider information) and (2) Not everyone has access to the insider information, so what special insights we can develop from the information at our disposal. This article is about the second option by taking an example.

As it happens quantity matters but, to the extent it doesn’t lead to over analysis. It doesn’t require much empirical evidence to show that there is an inverse relationship between quantity and quality of information. More precisely said by the 19th century play-writer Douglas William Jerrold: Quality, not quantity is my measure. We all like to think that the more information we include in our analysis the better will be our decision for investment. Neurologically, information is addictive. Information is the most important commodity, but what if each extra information reduces rather than increases the quality of decision making. This question was raised by Stanford and Princeton university scientists in a fascinating study titled On the Pursuit and Misuse of Useless Information. Following is an observation from the study:

Decision makers often pursue noninstrumental information—information that appears relevant but, if simply available, would have no impact/less impact on choice.

The case explored here are motivated by the assumptions: (a) The pursuit of missing information can lend greater weight to that information, relative to the attention it might have received had it simply been known from the start; & (b) the longer the time to clear the uncertainty, higher the weightage is given to the missing information. These two factors are mutually enhancing.

The Curious Case of Vakrangee Ltd.

The company has been in news very recently for rumors of stock manipulation by the promoters group. Here is company that just before the crash (29-Jan-2018) was a total rage among investors. There were all sorts of media reports saying how the company has been a wealth creator for its investors over the last 10 years and how it’s earnings will double/triple over the years. Then, came the tide and everything was turned upside down. A market analyst was quoted as saying (after the alleged article came out):

“How the company makes money, God only knows. It is a case where promoter himself gives money to people to purchase shares of his own company. Perception of Vakrangee is bad in the market, but surprisingly, the stock prices are going up without any fundamentals and big names are seen in its shareholding list.”

All this was due to a article in a regional Mumbai newspaper claiming SEBI investigation into the company. Almost overnight the company went from wealth creator to  wealth destroyer falling as much as 70% within a span of 32 days. Brooding one’s mind over this fiasco should make anyone question: How is it that a near 50,000 crore company at its peak got reduced to 15,000 at its low within a period of 32 days? Did, its fundamentals change or the business was already in the sinkhole? The answer is NO! The reason is above two assumptions. As per the first assumption, the pursuit of missing information (some HNI’s even started their own private investigation) lead to downfall of the price which was more than substantiated. The information was relevant but non-essential for the price fall. During the uncertainty period more weight-age was given to a single information than all other information. I am no researcher but relying on the research, I can say that: had this information been available from the start, things would have been quite different. Try answering the following question:

Q: For sometime you have considered buying into this company but couldn’t due to high price. The company is good with great ROE, Sales CAGR & Profit CAGR for the last 10 years with reducing debt on the verge of becoming debt free with great future prospects. The price is down 50-70%. However, there are rumors in the news about some price manipulation in the price 3-4 years back by the promoters. You will not know until the end of the week whether the rumors are true of false. Do you

a)  Decide to buy the stock during the week?

b) Decide not to buy the stock during the week?

c) Wait until the end of the week, to decide whether or not to buy the the stock during the week?

If you choose (c) in the above question, answer the following:

It is the end of the week. You learn that the rumors are true and the promoters has been charged by SEBI. Do you

a) Decide to buy the stock?

b) Decide not to buy the stock?

I don’t have the resources to conduct the survey ( being a teacher would have helped) hence, I have no actual results for the questions. But I rest my answer on the rationale that, to any savvy investor it was clear enough that after 50-70% fall in prices based on a rumor which even if was proved right couldn’t justify the swing of the pendulum at the extreme pessimistic end, especially after knowing that there has been no disruption in the growth of the company as per the latest reports of the company (of course, unless you don’t believe in that too).

Bottom line: All else being equal, the probability of a stock going south of a good company by 50-70% within a short period is less (except the bad ones) and the probability of going it further down by 50-70% on a piece of information that turns out to be true (excepting the exceptions) at a later date is even less. As Howard Marks says: Any asset, no matter how low the quality is, can be cheap enough to be a good investment. How low the price should fall to be a good investment is a matter of personal judgement and second level thinking.

Hence, although the actual results of the survey might be different from what one would conclude by himself, it is clear enough going with option ‘a’ would have lead to a better investment results.

The second assumption relates to the time factor. Consider the following improvisation to the above case:

(a) Had the article about the company been based on actual information and the allegations were true right from the start or if the rumors were discarded in the beginning?  or

(b) Actual time it took for the uncertainty/rumor to dissipate.

Would the percentage of fall have been quite similar in both the cases to the actual fall. Well, the studies show opposite of that. The answer could have varied by 30-40% on either side.

Again, with the risk of being proved wrong, I believe that the fall wouldn’t have been so steep. The time it took to clear the rumor was enough for people to discuss and gossip among themselves enough that they started believing it to be true. Anyone with not much of expertise could have figured it out. To state that, this is not surprising, is to state the obvious. Some of the best ideas can come from special situations like this provided one has a grasp of the gravity of the situation.

Another aspect of the business model of Vakrangee is that, it is service based company and majority of the service is availed by the lower sections or middle class of the society that have no idea about stock manipulation (unless they happen to watch the business channels) and if they did somehow watched the news still won’t have much idea about what it means. A question that Warren Buffett used years ago when buying into American Express company, can be again repeated here: Does people mind/stop using services of the company after this. Till people are getting the best of services, they don’t care much about any scandal in the company. They are too busy in their life to stop and think about some mischief done a promoter of the company.

Conclusion: The research underscores a sobering message: We’re fascinated with filling information gaps and that obsession can lead us astray. Especially today, when reducing uncertainty has become all too easy. Getting something meaningful out of the information at our disposal is the first step towards investment. In a world where every click brings the promise of a discovery, we are all at risk of becoming information addicts. The challenge lies in differentiating between questions worth exploring and questions best left unasked.

Disclaimer: The author holds shares in the above mentioned company and hence, the opinions expressed might be biased. Do your own homework, before coming to any conclusion. This is not meant to be a solicitation or recommendation of stocks.

 P.S: I want to leave with one question as a thought: PNB Bank has been hovering around its 52 Week low for few weeks. Consider the following facts about the bank and then answer the following questions: PNB is the (as on 23 March, 2018):

  1. 2nd largest bank in India by total assets
  2. 3rd largest bank by Market Capitalization and Net Sales
  3. 4th largest bank by Net Profit and Cash and Bank Balance and EPS
Question: (a) How much more lower it can go? & (b) Is the probability of the stock going lower more than that of going higher in the next one year? 

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The Debt or Death Clock

National Debt

                                                          Source: http://www.commonsenseevaluation.com

There is an interesting website National Debt Clock which shows the world debt on real time basis and interest accumulating on it. Data for individual countries is present too. Clicking on India will show interesting facts about Indian debt. As of writing this $69.7 trillion dollar is the world debt figure. Just like time goes in one direction, so does the total debt of the world. The real question is, will it stop? If yes, when? If no, then one thing is certain, the next crisis. Then the only question remains is, when will it occur? The clock is ticking. Every second, it seems, someone in the world takes on more debt. 

Does it matter? After all, world governments owe the money to their own citizens, not to the Martians. But the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as various euro-zone governments have done, and the country (and its neighbours) can be plunged into crisis. (Source: Economist.com)

Capital is at the heart of modern economy. Virtually every growth metric in the world is somehow dependent on this measure of growth (GDP of a country). However, this growth has also lead to some disasters felt few times (more often than few times) in the history and that experience is now what calls for the caution when everything gets to extreme. Consequently, where does that capital come from and where does go is a matter of grave concern.

There are few references in life so common as that to the lessons of history. Those who know it are not doomed to repeat it.

Perhaps the greatest gift to the financial field is the fractional-reserve-system, wherein banks can keep a fraction of the original sum deposited and lend the rest of it. That has a multiplier effect. For simplicity, if 100 rupees is deposited in a bank account and 10% is reserve mandate then, the money multiplier would be =100/ reserve ratio, i.e. 10 times. So, 1000 rupees is created out of 100 intial deposit into the system. Extra 900 is nothing but credit granted to the borrower out of thin air.

Economist Hyman Minsky argues that excessive debt is the reason for most of the financial crisis in the history of the world from Tulip Mania (1637) to South Sea (1720) to Great Depression (1929) to Sub Prime (2008). Debt has left deep marks in our history of the world. According to him there are three types of debt.

  1. Hedge Financing: This is the safest debt of all. This is the primary reason for giving credit. The borrower invests capital in productive economic activities, from which cash flows are generated which pays interest and ultimately the principal. This was how the system was meant to work, at least at the start. Everything goes good till here.
  2. Speculative Financing:  Although the first stage is the most obvious but with a drawback. The speed of growth is slow. To its rescue comes the speculative financing. Under this the credit growth is achieved often through government by making policies that makes taking on debt less costlier through subsidies and priority-lending schemes. This is often achieved through relaxing lending norms. More people are now can under the umbrella of debt. More lending means more spending means more growth.
  3. Ponzi Financing: This is the most dangerous of all because borrowers use the capital not to invest in productive assets, but to buy assets in hope of selling it at a higher price in the future, repay the debt and book a profit. A good example of this comes from my personal experience. A friend of mine suggested a mechanism to make money very easily. His proposition was: Take a 5,00,000 personal loan from the bank with the cheapest interest rate (SBI February rate 12.55%-17.65%)for tenure ranging from 1-5 years. Assuming 20% is the minimum average return he can make and average rate of interest is 15% applicable, he will have to make money. His idea was good or bad is a matter of seperate discussion. But it gives us a pretty good idea when surplus capital is spent in frenzy.

Bottom line: He is in the third category of debt financing with the ultimate result being a disaster.

Minsky also concluded that long periods of stable economic growth where everything good happens leads to gung-ho situation on a wider scale and this fuels speculative and ponzi financing to dominate. This leads to inflation in prices, especially of stocks and real estate. Ultimately, when prices stop rising, debt defaults goes up and bubble pops and the economy goes down with it like house of cards.

An example is the 1997 Asian crisis that destroyed wealth across many countries including Thailand, South Korea, Indonesia, Malaysia, Singapore, Hong Kong, Taiwan and, to some extent Japan. These countries saw rapid economic growth in 1980’s and 1990’s, which lead to higher risk taking. Government banks started giving risky loans with less stringent repayment provisions to less reponsible borrowers. When there is excess capital it finds it’s way to the financial assets creating inflated asset prices. When asset prices stopped rising borrowers started defaulting on their loans. Foreign investors began to flee. This put pressure on local currencies. Thailand’s baht was the first to crumble, and as the dominoes started to crumble, panic spread. In 2012 Japan made headlines when the government’s debt reached 997 trillion yen, that’s 200% of GDP which turns to be $80,000 per capita. Similar to this was the 2008 crisis when $20 trillion was wiped out within a few days.

The drop in real estate prices has in a way exposed the Indian banking sector ways of lending. As per the RBI data published in December last year total NPA stood at 7.34 lakh crore of which PSB’s account for 87%. The NPA of SBI alone is more than the combined total NPA of private banks. With yields rising in USA, foreign investors will flee and RBI will be left with no choice but to let the rupee tumble- as it did in 2013 when the rupee dropped from 54 to 68. All that the central bank can do is increase the interest rate which is not a viable option when the banks are already reeling with the NPA issue.

The inflated asset prices in US, negative interest rate in EU, the looming crisis in China and NPA in India is something more than a short term problem at hand. Without the discipline imposed by risk based lending, excess supply creates asset bubbles. The Minsky moment is looming larger than ever on India  and China, with Debt to GDP ratio of China reaching 260% of GDP. Historically, any country’s ratio crossing 200% is a sign of future crisis in that country. The next financial Crisis may very well start in Asia more specifically China. Below is a snapshot of Debt to GDP ratio of India.


Bottom Line: Debt is like double edged sword which we know by experience where way it will fall. We better prevent it from falling before it takes lives in the next financial fiasco.

Further reading: How India’s Debt Could Kill Its Growth

Stock Analysis- Meghmani Organics

The company is comprised of four subsidiaries: Meghmani Finechem Limited (57%, 25% by IFC Washington, 18% by individual promoters), Meghmani Organics USA INC. (100%), PT Meghmani Organics Indonesia (100%) and Meghmani Overseas FZE (100%). The company is involved in the manufacture of pigments (51%), agrochemicals (46%) and basic chemicals (3%). The company began in 1986 with the production of Phthalocyanine Green 7 (Pigment Green 7) then later on expanded into the manufacture of agrochemicals and basic chemicals.

The pigment industry can be segmented into following:

By Product Type:

  • Organic Pigments
    • Azo Pigments
    • Phthalocyanine Pigment
    • Quinacridone Pigment
    • Other Organic Pigments
  • Inorganic Pigments
    • Titanium Dioxide
    • Iron Oxide
    • Cadmium Pigment
    • Carbon Black
    • Chromium Oxide
    • Complex Inorganic
    • Other Inorganic Pigment
  • Specialty Pigments
    • Classic Organic Pigments
    • Metallic Pigments
    • High-Performance Pigments
    • Light Interference Pigments
    • Fluorescent Pigment
    • Luminescent Pigments
    • Thermo-chromic Pigments

By Application:

  • Paints and Coatings
  • Printing Inks
  • Plastics
  • Construction Materials
  • Others

By Color Index:

  • Red
  • Blue
  • Green
  • Orange
  • Yellow
  • Brown
  • Others

Meghmani is involved in the segments bolded above.

Pigment Segment: The global pigment industry is expected to rise to $32 billion by 2023 growing at a rate of 4% approximately with Asia Pacific region contributing to the majority of the global demand, approx. 50%. The Indian dyestuff and pigments industry is highly fragmented with a large number of small players in the unorganized sector. There are around 50 players in large-scale and organized sector, located mainly in Gujarat and Maharashtra. The highly fragmented Indian colorant industry, valued at $6.8 billion (FY17), exports nearly 75% of its production. Exports have grown in double-digits over the last few years.

In the pigments category, the company manufactures Phthalocyanine pigment with the use of raw material CPC Blue which results in pigment blue and green. The production is done at three locations with a total capacity of 31,140 MTPA. In a simplified way:

Pigment Blue: is a bright, crystalline, synthetic blue pigment from the group of phthalocyanine dyes. Its brilliant blue is frequently used in paints and dyes. It is highly valued for its superior properties such as light fastness, tinting strength, covering power and resistance to the effects of alkalis and acids. It has the appearance of a blue powder, insoluble in water and most solvents. It is used as a colorant Due to its stability, it is also used in inks, coatings, and many plastics.

Pigment Green:  is a synthetic green pigment from the group of phthalocyanine dyes, a complex of copper with chlorinated phthalocyanine. It is a very soft green powder, insoluble in water. Due to its stability, phthalo green is used in inks, coatings, and many plastics. In application it is transparent. The pigment is insoluble and has no tendency to migrate in the material. It is a standard pigment used in printing ink and packaging industry. It is also allowed in all cosmetics except those used around the eyes and is used in some tattoos.

Due to the vertical integration of all the business segments the company uses the CPC Blue for its own use and it to other pigment manufacturers. The end product is sold to the industrial users. As per the latest information the company is having a global market share of 14% (Q2 FY18) up from 8% (FY2016-17) and is among the top 3 global pigment players (capacity wise). The company has got presence in 70 countries and derives 75% (Q2 FY18) up from 68% (FY 2016-17) of its revenues from exports. The clients’ retention ratio of the company is good with 90% repeat clients.

Capturing the market share: Any company in any segment has to have some strategy for capturing additional market share. The winning strategies followed by the global companies in this segment include product launch, joint venture, acquisition, partnership, expansion, and investment.



The company has decided to increase its business through a higher focus on domestic markets, focusing on untapped export markets and expanding value-added products which fall in the 46% category. Due to the increased demand, the utilization levels of the company have been increasing for the past few years. The pigments plants were running at capacity of 66% in FY17 and in Q2 FY18 the capacity levels are at 84% from 56% in Q2 FY17. Total sales of pigment for the FY17 was increased by 4543.75 lacs (9.69%) out of which exports grew by 997.94 lacs (2.87%) and domestic sales increased by 3545.79 lacs (29.40%). Last year the company’s Beta Blue plant was involved in fire and has now been revamped with full capacity in the current year.

2nd Quarter Update:


(Note: Q2FY17 Includes Exceptional item of Rs 24 mn wrt est. loss in Beta blue plant Fire)

Agrochemical Segment:  The agrochemical business is quite an interesting one. The fact that the world population is 7.6 billion as of December 2017 (Wikipedia), will reach 8.5 billion by 2030, 9.7 billion in 2050 and 11.2 billion in 2100, according to a new UN DESA report, “World Population Prospects: The 2015 Revision” makes the case for increased future demand for agrochemicals. The biggest driver for this sector will be the limited land area getting more limited due to increasing population, driving the pressure to produce more in much less land than before. The global agrochemicals industry is expected to reach $266 billion out of which $188 billion will be for the fertilizers market, a CAGR of 4%. Similarly, the market for pesticides is expected to grow to $78 billion with CAGR of 6%.

India is the fourth largest producer of agrochemicals and growing at the rate of 10-12% will make it the 2nd or 3rd largest within few years. The growth of the Indian agrochemical segment is largely dependent on two things the monsoon and as a consequence of which farmers income. Last year was pretty good for the Indian agrochemical sector due to healthy monsoon after 2 years of drought and same is expected in 2018. As far as farmers income is considered, Niti Ayog in its report released in March 2017 ‘Doubling Farmers Income: Rationale, Strategy and Action Plan’ the government is focusing on increasing the sources of income through increase in agricultural productivity, improvement in total factor productivity, diversification towards high value crops, increase in crop intensity, improving terms of trade for farmers and shifting cultivators to non-farm and subsidiary activities. The important thing to understand here is that agrochemical business is highly dependent on monsoon. Around two-thirds of India still depends on monsoon for its irrigation needs. Last year has been good due to good monsoon after two years of drought. This in some way limits the company’s ability to expand the capacity.

Under this segment, the company manufactures insecticides, herbicides, fungicides and mixtures of insecticides, herbicides and fungicides. This is the fastest growing segment of the company with increase in revenue by 4679. 50 lacs (10.98%) in FY17 comprising domestic sales increment by 4541.80 lacs (33.75%) and export sales by 137.70 lacs (0.47%).

Q2 FY 18 Update:     

                                                                                                    Consolidated, figures in Rs mn


Net Sales increased significantly led by robust growth in Domestic and Exports market, up 42% and 26%, respectively. The domestic market now contributes 44% to Net Sales compared to 41% in Q2FY17. Dispatch/Sales up 10% coupled with robust growth in blended realizations on account of increased sale of higher margin products. EBITDA increased 64% on account of higher realization on products; EBITDA Margin up at 20%. Utilization at 78%, Production up 43% YoY.

Basic Chemical Segment:

In this segment, the company is involved in the manufacture of Caustic Soda, Caustic Potash, Hydrogen Peroxide and CMS with the total capacity of 187,600 MTPA up to the second quarter. Out of this, the caustic soda and hydrogen peroxide capacity are to be increased by 2,50,000 MTPA and 25,000 MTPA by June’2019. The product structure of the company is as shown in the figure below:


The company has already spent 6.5 billion rupees over the past 5 years and the company has now decided to invest 5.4 billion rupees over the next 2-3 years to expand the chemicals business which will add a total of 4 billion revenues to the company in their full year of operations. The expenditure will be done in three out of four products. Dichloro Chloromethane (CMS Project), hydrogen peroxide project and Caustic Soda. The expansion will be done through MFL (Meghmani Fertilizers Limited) in which MOL (Meghmani Organics Limited) holds through the following way:


Out of the four CMS related to product and service both. The company manufactures the chemicals and provides CMS (Chemical Management Services). Here’s a brief about the CMS:

CMS: Every time you reduce chemical use, you reduce cost, emissions, and exposure to liabilities. Beyond the tangible benefits of reduced costs and waste, there are not-so-quantifiable benefits to well-managed chemical programs: reducing accidents; maintaining a good reputation in the community; staying clear of environmental agencies’ spotlights, etc. These are all positive aspects of sound chemical management.

Chemical management services (CMS) involve a strategic, long-term relationship in which a customer contracts with a service provider to supply and manage the customer’s chemicals and related services. Under a chemical services contract, the provider’s compensation is tied primarily to quantity and quality of services delivered, not chemical volume. Chemical services go beyond invoicing and delivering product to optimizing processes, continuously reducing chemical lifecycle costs and risk, and reducing environmental impact. These chemical services are often performed more effectively and at a lower cost than companies can do by themselves.

The chemical services model delivers results by aligning the incentives of chemical suppliers and their customers. The supplier’s profitability is independent of the volume of chemicals sold. In other words, the suppliers no longer get paid based on how well they can sell, but how well they can manage. This model changes the traditional relationship between chemical suppliers and their customers. Here’s how this shift works. In traditional supplier-customer relationships, the chemical supplier’s profitability is a function of the volume sold. The more chemicals sold, the higher the revenue for the supplier. Meanwhile, the buyer has an opposite incentive – to reduce costs or the amount of chemicals purchased. In the chemical service model, suppliers become chemical management providers and are paid for successfully delivering and managing chemicals. Thus, the supplier’s profitability is based on better performance, not on selling more chemicals (see Figure 1).

This shift is accomplished by basing supplier compensation on performance-based metrics and fees, not chemical sales. The customer gains a partner in its efforts to manage chemicals more efficiently; the supplier becomes an integral part of the business by providing a differentiated, value-added service.


This area of management is new and not many companies are equipped to handle this. Generally, chemical service providers begin by offering a narrow range of chemical management services. That is, they don’t start out in client companies by taking over management of all chemical needs. For example, a chemical service provider might purchase and deliver chemicals, manage MSDSs, pick up waste, and provide data for some environmental reports. Later, they might expand their work scope to include such services as research for chemical substitutes and process efficiency improvements. Following is the type of CMS of services:


The global Chlori-Alkali (Chlorine based chemicals) market is expected to grow at a CAGR of 5% and 5.5% from 2016-2022. Chlori-Alkali value chain industry includes the following activities:


Indian Chlor-Alkali Industry (from Annual Report): According to the IMF, India’s FY18 GDP growth is projected to increase to 7.2%. Basic Chemicals – Chlor- Alkalis and PVC are basic building blocks that find application in products of everyday use, including aluminium, paper, textiles and plastic. These industries are expected to witness increase in volume consumption of chlor-alkali chemicals, which will boost the Indian chlor-alkali market in the coming years. Moreover, with growing aspirations of a rising middle class, higher disposable incomes and the current low level of penetration, demand for these products is bound to grow. There is a vast untapped market, especially in the rural areas, which will significantly drive demand. To illustrate, India has a low per capita consumption of 1.85 kg of caustic soda compared to 32 kg in the US and 12 kg in China. Similarly, the ‘Make in India’ programme of the Indian Government is expected to provide a fillip to domestic manufacturing and value addition, provided the right ecosystem is put in place to bring in investments and augment the domestic manufacturing capacity.


                                                                                            Source: Annual Report 2016-17

On an average power cost consumption accounts for 60% of the cost of manufacturing in Caustic Production, hence almost every company in this production has a captive power plant to reduce the costs and improve the margins. Last year the company has ramped up one of its plants Dahej with the capacity of 60 tons per day. The current expansion capacity which was expected to be commissioned by march 2018 is now postponed to June’19.

The chemical segment is growing steadily with not much higher rates y-o-y.DSFDSFDSF

2nd Quarter Update:



Stock Analysis – Suzlon Energy Limited

Rising Seas

The following is my views on disruptive innovation in general and renewable sector in particular which is disrupting the world. There is not much of a need to mention that the world is shifting towards renewable energy from the traditional sources of energy ranging from oil to batteries, coal to solar, from electricity generation by power companies to household electricity generation. The effects can be seen everywhere.

It doesn’t take much effort to think about sequence of events which had lead to the Tipping Point for any revolution/innovation (disruption) to take and and how the consequential events leads to downfall of the previous empire industries and gives rise to another. For ex: Tesla is disrupting the existing car companies with its premium electric sedans and SUV’s and similarly power companies are being disrupted. (Tesla is worth more than Ford and GM, despite having just 1 percent of their sales.) An innovation may not be disruptive at the beginning but at the right time. 

[Disruptive innovation is a term in the field of business administration which refers to an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products, and alliances.] -Wikipedia

Innovations happen all the time but, not all innovations lead to disruptions. For ex: Computers were present in the fifties and sixties but they were not disruptive enough. They were innovations but not disruptive to the other existing companies. Same is the case with alternative sources of energy. They were present long before but they were not disruptive enough. Now is the time they have gained attention with the countries and it seems this shift is more of a 11th hour call than a voluntary act. The shift has started, only the pace is needed which in my opinion is happening at a much faster rate.

Almost 150 years after photo-voltaic cells and wind turbines were invented, they still generate only 7% of the world’s electricity. Yet something remarkable is happening. From being peripheral to the energy system just over a decade ago, they are now growing faster than any other energy source and their falling costs are making them competitive with fossil fuels. BP, an oil firm, expects renewables to account for half of the growth in global energy supply over the next 20 years. It is no longer far-fetched to think that the world is entering an era of clean, unlimited and cheap power. About time, too.

Bottom Line:
The era of long company life cycle that has not been challenged is now being challenged. Consequently, the way we have been analyzing companies from investment perspective also have to be changed. Most of the metrics that we use for analyzing companies are based on established companies that are now becoming obsolete if not already half of it is irrelevant. Every new force has to measured in some way, but the question is how do we measure. How do we measure artificial intelligence company or a data driven company. Data, artificial intelligence and renewable energy is the new oil.

(Here is an excerpt from the book ‘Sapiens- A brief history of humankind‘ by Yuval Noah Harari: Industrial Revolution has been a revolution in energy conversion. It has demonstrated again and again that there is no limit to the energy at our disposal. Or, more precisely, that the only limit is set  by our ignorance. Every few decades we discover a new energy source, so that the sum total of energy at our disposal just keeps growing.

Why are so many people afraid that we are running out of energy? Why do they warn of disaster if we exhaust all available fossil fuels? Clearly the world does not lack energy. All we lack is the knowledge necessary to harness and convert it to our needs. The amount of energy stored in all the fossil fuel on earth is negligible compared to the amount that the sun dispenses every day, free of charge. Only a tiny portion of the sun’s energy reaches us, yet it amounts to a 3,766,800 exajoules of energy each year ( a joule is a unit of energy in the metric system, about the amount you expend to lift a small apple one meter straight up; an exajoule is a billion billion joules – that’s a lot of apples). All the world’s plants capture only about 3,000 of those solar exajoules through the process of photosynthesis. All human activities and industries put together consume about 500 exajoules annually, equivalent to the amount of energy earth receives from the sun in just 90 minutes. And that’s only solar energy. In addition, we are surrounded by other enormous sources of energy, such as nuclear energy and gravitational energy, the latter most evident in the power of ocean tides caused by the moon’s pull on the earth.” 

I would like to put my views here on Suzlon Energy Limited, one of the largest wind power suppliers in the country and would like to come to a conclusion about the future of the company. Here is the video that i got on the company website.

Since the company is engaged in wind power hence it didn’t mentioned that solar power is in more abundance and less capital intensive than the wind power. There can be no denying that solar power will be winner of all the other sources of energy (in terms of deployment). A company that doesn’t deal in solar power will be behind other companies that does deal in it. This doesn’t mean that wind has no good future, its only relative to solar.

Following is the another video from The Economist channel posted on Sep 20, 2016 which shows what is happening in the renewable sector and how value of oil and gas companies has halved during the last 8 years. What needs to be understood from the video is that : the next reduction in valuation by half won’t take eight years, its gonna get faster a lot. 

While everywhere only the benefits of the renewales are being counted very few are aware of the fact that its impossible to run our world only with renewables energy (at least as of now). If all the capacity of the world is to be used today then also the contribution will be much less. Wind and solar has got their own limitations and of which storage of energy is another. But the advancement in tech mainly due to need of the hour and plain advancement of the same will keep companies on their their toes to keep inventing.

Suzlon Energy Ltd. is a company engaged in Sale of Wind Turbine Generators and related components of various capacities which comprises 94% of the total turnover of the company the rest comes from the solar energy business in which the company has recently forayed. It also provides service and maintenance to the towers it installs. From the outset it seems to be a turnaround company. At one time the company used to be the fifth largest supplier of renewable energy company but now it has slipped out of the top 10 ranking and now ranks 67th in world.

History: The Suzlon Energy Ltd IPO opened on 23 September 2005 and closed six days later, oversubscribed by more than 40 times and raising $340 million (around Rs.2,213 crores as of today). Shares of the wind turbine maker listed at Rs.510 at the upper end of the price band, then surged to Rs.1,407.60 in six months before the stock split, turning founder Tulsi Tanti into a billionaire. At the height of the company Tulsi Tanti once said in his interview (which sadly, i couldn’t locate) that to grow a company one has to do one thing: take loans and invest in the company, that’s how a businesses grow. Didn’t realizing that good and bad times doesn’t stay for long. (I have skipped the part of the origins of the company for the sake of mentioning it here.)

By 2009 the company had drowned in debt so much that it seemed inevitable to come out of it and hence it has to go for CDR (Corporate Debt Restructuring) to take it out of the ocean of debt. It is almost always bad to take on debt when the it fells like taking on debt is good.

If you are not ready to hold a company for six or seven years, don’t even think about it for one year.     -Peter Lynch

Industry: According to a new report from the World Energy Council, renewable energy now accounts for over 30% of the total global installed power generation capacity, and 23% of total global electricity production. Specifically, over the last decade, wind and solar PV have seen a meteoric rise, representing 23% and 51% respectively in terms of average annual growth in installed capacity — although, to temper that somewhat, their combined contribution to the global electricity production is only around 4%. This 4% means that total contribution till date from this sector has been this much only, mainly because during the initial years installed capacity was very less. Wind and solar share a major chunk of the invested amount each year, for 2015-16 it was 76%. The combination of improving technologies and reduced cost of production are the major factor behind declining capital expenditure and operational & maintenance costs of variable renewable energy technologies, with solar PV being a prime example.

The report also concluded that by the end of 2015, 164 counties had renewable energy support policies in place, with 95 of them identified as developing countries — not bad, considering that number was only 15 developing countries in 2005.

Below is the investment in assets and and growth in 2016 over 2015 all around the world:

Renewable Industry

                                                                                      (Source: Annual Report 2016-2017)

The above graph demands an inevitable question, since there is a reduction in investments, do we have to fear that it will affect the future investments? A plausible answer would be that only the growth in investments would fluctuate, investments wouldn’t. The fall can be attributed more to the reversion of mean than to the uncertainty involved in the sector. It is clear from above that China is the biggest investor in renewable sources of energy  India being the 6th largest investor and other countries following the lead. The investment is so much in this sector that in some countries, specifically in China, that the traditional thermal power companies are lobbying the government out of worry to stop providing subsidies to the renewable sector. The recent downfall can partially be attributed to the uncertainty regarding Donald Trump policies and balance to the government heeding to the company’s pressure to minimize the subsidies. Globally, (CY) 2016 witnessed a record Renewable Energy (RE) capacity addition of 138.5 GW up from 127.5 GW in 2015. Following is from the annual report :

The capacity addition in 2016 was equivalent to 55% of all the generating capacity added globally and investment in new renewables capacity was almost double that in fossil fuel generation for five years in succession….There was a record acquisition activity in the clean energy technologies in 2016 which totaled to USD 110.3 billion up by 17%.
Assets acquisition in solar and wind parks reached a record figure of USD 72.7
billion. Corporate takeovers reached USD 27.6 billion; 58% more than 2015….Solar attracted a new investment of USD 113.7 billion down 34% from 2015 due
to significant cost reductions and also due to slowdowns in China and Japan.
This was followed by Wind which attracted an investment of USD 112.5 billion,
down by 9%…. However, investments in RE excluding large Hydro fell by 23% to USD 241.6 billion. This decline in investment was primarily due to sharp reduction in the capital costs for Solar PV, Onshore and Offshore wind.’ 

Hydro is simply the hydro power from water. As mentioned in bold above the reduction in other renewable sources is due to the increased investments and subsidy in solar capacity and wind power than other sources of energy. Other RE sectors comprise of very small fraction of the overall renewable market. Bio fuels (USD 2.2 billion), Bio Mass and Waste (USD 6.8 billion), Geothermal (USD 2.7 billion), Small hydro (USD 3.5 billion) and marine saw a mixed fortune in terms of investment.

Very recently the government has decided to firm up plans to increase bidding of wind power contracts as much as 33 GW over two years. The Centre auctioned two GW of wind power contracts in October 2017. A total of five GW of wind projects will be put up for bids by March 2017. This will be followed by bids for 10 GW each in 2018-19 and 2019-20.

An insight : Wind power is more capital intensive than solar power. Hence, a company involved in the solar sector is more likely to grow faster than wind. Also, India being more a solar country than a wind country, if a company has to grow it needs to enter into solar. Since, investments in both the sources are at nascent stage both are growing at good speed. Suzlon would have doomed itself if it hasn’t realized that solar is important to be profitable and sustainable. 

There’s another hitch in the green energy sector. The more it is deployed, the more it reduces the pricing power from all other sources. That makes it hard to manage the transition to a carbon-free future, during which many electricity generating technologies, clean and dirty, need to remain profitable if the lights are to stay on. Unless the market is fixed, subsidies to the industry will only grow.

Company: 94% of the turnover of the company comes from sale of Wind Turbine Generators and related components of various capacities (this includes Operation and maintenance) and the remaining 6% comes from solar business in which the company has forayed last year only. For the solar part business, the company is in the turnkey projects business, wherein it creates a company and after completion sells the same company. Here is the list of work done in 2016-17:


Figure below shows solar delivery volume of wind and solar for the first quarter of 2017-18 taken from the investor presentation:


Coming to the wind part, below is the total wind capacity additions during the CY 2016-2017 for whole world.

Gloabal Wind Capacity Additons

Cumulative global total at the end of CY 2016 stood at 486.8 GW. That turns out be market growth rate of 12%. India continued to be the second largest wind market in Asia and now ranks in top 5 markets of the world. In FY 2017 the company installed all time high of 1,779 MW, taking its cumulative installations to over 11 GW in India and 17 GW globally. The company achieved 100% growth rate in annual installations. The  Indian market grew @ 61% to touch an all time high of 5.5 GW. The company has increased its market share during the year from 19% in 2015 to 35% in 2016. Also the renewable market grew by 48% in India but Suzlon grew by 98%. A company that is growing at double speed than the market is worth considering. Last year has also been exceptional year because for the first time in the history of India capacity additions from renewables surpassed installations from fossil fuels technologies.


On the product and technology front the company has three types of wind mills S97, S111 and S128 each successive tower is better than the previous one. The last one being the latest one to be launched in the market. Talking about the risks, there are two types of risks operational risks (every company has to manage this) and financial risks (foreign exchange risk, interest rate risk, credit risk and commodity risk) which history suggests company is lousy in maintaing, but it has come to its senses and now is reducing its debt. Recent measures taken by the government is  already charted a strong programme to do a five-fold ramp up in renewable energy of 175 GW by CY 2022. It includes ramping up the Solar to 100 GW, wind to 60 GW, and biomass/small hydropower to 15 GW. French president Macron and Indian prime minister Modi are likely to be launching the International Solar Alliance (ISA) in full at Re-Invest to be held from December 7-9. India’s new power minister R.K. Singh has said that India’s power needs will double in the next 6-7 years, while India is committed to reaching 40% renewables in its energy mix by 2030. Further, the tariffs has been reducing to record lows. The tariff-based competitive bidding for 1 GW wind projects brought down the tariff to a record low of Rs 3.46 per unit in February this year which further dropped to all time low of Rs 2.64 per unit in a similar auction in October.

Before coming to the numbers of the company we need to keep in mind that : just like better companies can be found in good industry, good companies can be found in lousy industries. For example: textiles is a lousy industry yet the industry will exist and some companies will flourish. Except that, in the renewables industry there are not that many companies which increases our chances of finding better companies. 

Peers: None of the listed peers are in situation to be compared because their financial conditions are not sound and they trying to get some leg space in this segment. In my view, these are still not viable to hold. Major listed peers are:

  2. Indo Wind Energy Limited

Numbers:  I wouldn’t be digging deeper into the numbers because as i already said there are some special situations where numbers are not as much of help as much as a story. In those cases we need more than ratios and numbers.

One thing that has to be understood is that the usual metrics that we apply to the companies doesn’t apply to the companies like Suzlon (turnaround or asset plays). Also its very difficult to analyze a company if they are in the turnaround phase. A better way to understand this is by looking at companies like Symphony. Yesterday’s weeds that has become today’s flowers. Means companies that we are willing to buy today, we wouldn’t have touched yesterday. Thought experiments are a better way to understand a complex situations like this:

Price of Symphony Limited (turned around company) as on 13-Oct-2010 was 57 and as of writing this (13-Oct-2017), it has increased 25 times in exactly 7 years. If we were to go back in 2010 (not knowing about the future) and look at the report, would we be still confident about buying the stock as we are now. Seven years is a long period to estimate about the future of a company. The answer is we wouldn’t. 

Now think about Suzlon. If we were to stand 7 years down the line and its 2024, we need to answer some of the questions:

  1. Does the renewable sector will be up or down? Will the companies be up or down?
  2. Which companies are in the sector and which of those will be in advantages position to take first-mover advantage?
  3. And how to find those companies?
  4. If we were to use the multiplier of Symphony (25 times), is Suzlon not in a position to make at least 25 times money in the next 7 years? Can it not reach market price of 379 (=15.55 X 25 times)?

Answering these questions is very important to know about the future potential of the company and the returns (of course).

Financial Highlights

Observations: The revenues of the company has been decreasing for the last 7 years except 2017. The significant reduction in 15-16 is due to the sale of Senvion business to reduce debt which contributed almost half of the revenues. It is commendable that revenues has increased by almost half over 2015-16 after selling which contributed half of revenues. Conversely, EBITDA has been increasing. In fact, in 2017 it has the highest EBITDA on revenues of 12,714 when compared to 1,821 on revenues of 21,082. Interest has more or less been stable. But now the management has said that it is coming out of CDR which was to happen in 2017 but it didn’t and now it aims to exit in 2018. What’s more important here than the year of exit is the intention of the mangement to exit it. This is what the Tulsi-Tanti the founder promoter, chairman and managing director of the company said in an interview :


Extract from the financials mentioned about this is:


In addition to that its valuable to know, how the company is going to increase its revenues from the increase in wind capacity (its core product) not to mention that it has entered into solar power too. Again from the interview:


The Net Profit row shows that the company is now turned to profit from a loss of  479 crores to 1,000 crores of profit. Net worth of the company that has been very much in negative is now reducing with the company turning into profit. Another aspect is that Net fixed assets of the company has reduced significantly in 2015-16. This is due to the sale of its one of the biggest acquisition Senvion in 2015-16 to pare some of the debt (See above in image). The EPS has been increasing and EBITDA margin is at near to its all time high of 20% the level last seen in 2005-06 (before the crisis).

SEForge is one of the best performing units of the company. Full description as per the company report is as here:


The good thing about SEForge is that it has exited CDR last year and is growing @ 25% organically. It’s key focus is now on exports mainly to the European and North American markets. Its portfolio includes prestigious customers such as General Electric Company (GE) USA, GE Jenbacher Austria, GE Transportation USA, SKF, Kaydon USA, Max Boegl Germany, IMO Germany.

R&D: This is the only company in India that does R&D and at such level. If there are others also doing, then its difficult to find them if not possible. Certainly none of the peers are doing this. Here are some of the latest ones being done by the company. R&D for the current year is 0.79% of turnover compared to 5.13% of last year.


Service Business:  The silver lining in the business is that every turbine sold by the company till date is under its service fold and the good thing is, OMS (Operation, Maintenance and Service) contract is for the whole life of the tower. This is because the company is able to persuade the buyer that the tower which is so complex will be best serviced by the manufacturer than third party. Also value added services are being launched like Quick Climb (to help engineers to climb quickly and safely to the towers)  and Quick Sense ( to identify the wind direction).

Bottom Line: Moat can come in any form. It can be monopoly, service, patent protection, better product, economies of scale etc. Suzlon is having moat by scale of operations and R&D. Only Suzlon is in the manufacturing and R&D of wind mills, all others are buyers from it in whole of India. Considering the option of importing mills from abroad is a costly affair as of now. Also, other than competitors who operate wind farms as a business everyone else is under the OMS contract of the company. Because it has a huge scale of operations, it is in a strong footing to drive out its competitors by reducing costs. Recently the company has realized that solar is less capital intensive business and government is putting more focus on solar auctions, hence it entered into this business. Question: If any opportunity comes up, how Suzlon is not able to grab it?

Others: The company has been merging and demerging various subsidiaries within it which has lead to increase in authorised number of shares. The paid up capital of the company has been increasing due to the conversion of convetible bonds issued by the company in the past. A company that keeps on increasing its share capital is not good for a company. Below is the details:


Accordingly, the paid-up share capital of the Company as on the date of this Report is Rs 1058.16 Crore divided into 529,07,99,122 equity shares of Rs 2/- each. Promoters holding in the company as on 31-March-2017 is 20.82. The holding has been getting less not due to selling of the holdings but due to conversion and allotment made to non-promoters. Of all the reasons not to invest in the company, this is the major reason and important one. This is usually a sign of danger (Tanti must have learned his lesson).

IndebtnessTotal indebtness of the companys been reduced during the year and as said by Tanti himself, he intends to reduce it further. As of 2016-17 total indebtness is 6,096.42 crores which is approximately $1Bn.

Remuneration: Tulsi Tanti has been authorised in the shareholder meetings to remuneration fully allowed by the Companies Act 2013 from 2014 to 2017 which is 3 crores. However, due to losses the management decided to restrict their payment to Rs.1,70,50,000/- in the respective financial years, as approved by the Central Government. Considering adequate profits for financial year 2015-16, the differential remuneration of Rs.1,29,50,000/- for that financial year was paid to him post finalization of accounts during the next financial year, i.e. 2016-17. Similarly, the differential remuneration related to financial year 2016-17 has been paid in financial year 2017-18. This is not a very good sign of management having receiving balance payment when he could have said that, it’s okay if he didn’t want his payment just because the company turned into profit. Tulsi tanti is taking almost 3% of the profits as remuneration. If remuneration of MD,WTD, Manager and other KMP were to be added total comes to be 14.43 crores out of which 9.8 crores is to the outsiders other than promoters. On the flip side what is good is that other than the two promoter,the median remuneration of each director is almost equal to the remuneration of employees.


What is interesting to find is that there has been no increase in remuneration of the KMP’s during the year. It remains to be seen whether this increases in the next year substantially or not. In-fact there is reduction on remuneration.



Bottom Line: There is no familiar cases against any management personnel. They have been focused all these years on only wind and related services, only recently they have forayed into solar business. Only aspect that i didn’t like about is that Tanti have agreed to take previous years salary when the company was not in profits when he could have said that he didn’t needed that (he was getting part of salary).

Now to conclude in the end, i’ll be answering the questions raised above:

  1. After reading about almost any report on the future of renewable energy it doesn’t much time to convince me and anyone by me that things are changing fast. The capacity installation that took in the last 10 years won’t take another 10 years, it will take almost half of it. Consequently, when an industry goes up some are going to be lifted up. Some due to actual reasons and some due to rise of the tide.
  2. Since we are talking about energy, not only solar and wind, all other industries related to this are also going to up. For example, battery companies, car companies, power transmission companies, battery charging station companies (now in nascent stage in US), companies that we couldn’t conceive of. If all other companies are below Suzlon in all respects, the probability that Suzlon will be the winner is higher that other companies. This doesn’t mean other companies won’t be successful, it means we are betting on higher probability than lower.
  3. If we were to use the multiplier of Symphony (25 times), is Suzlon not in a position to make at least 25 times money in the next 7 years? Can it not reach market price of 379 (=15.55 X 25 times)? I would answer the question in two ways: Those who think 25 times is not possible for a company like Suzlon and those who think it is possible. First, if Suzlon is not the company then which else company can it be? A good analysis would be preferred, for or against, is preferred. It’s better to be openly wrong than privately right about my analysis and valuations. Second, for those who think it is possible, 7-8 years is long period especially when the prices doesn’t show any movement in the first 2-3 years. Hence, its very easy to loose patience and exit very early. Do simple mathematics, 15000 shares @16.50 amounts to 2,47,500. If you have enough money then leaving 2,50,000 is not a such big deal. And, if turns 25 times the amount would be 62,50,000 in 7 years, that’s a CAGR rate of 58%. Recently, a news has gone viral about a person becoming crorepati because of 20,000 shares purchased in 1990 by his grandfather now worth 130 crore. A little surprising fact would be, only if the grandson had known about the stock earlier, he would have sold it much earlier than this much late.

It would be beneficial if we take help from one of the management guru ‘Michael Porter’. He said,”Would you be willing to invest in the company if you didn’t own the company right now?” A little improvisation will do a better job for us ‘How would you be analyzing the company if you didn’t already know about the company.’ Because what happens more often is that we compare ourselves with others by looking at the Instagram photos of ourselves and not in the mirror in front of us.

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Long Is The New Short

On Stock Market

(source: Dilbert.com by Scott Adams)

It has always amazed me to see that how people can easily fall for the same error that they seem to correct at other times. The current writing is a consequence of an article I read recently in the last issue of DSIJ (Dalal Street Investment Journal) were in the editor-in-chief V.P. Padode said:

“Markets are poised in a such a way at this juncture that indexes may move sideways but there could be a lot of stock specific actions. We expect indexes to be in sideways trend for the coming couple of months at least while maintaining our targets for Sensex at 36000 levels by March 2018.

Giving targets works like placebo to the people to make them believe that they can measure the temperature with their tongues out even though scientifically that’s not possible. This reminded me of newspaper articles few years back making rounds at that time. I will go in ascending order year wise to make others understand how at different times widely followed and interviewed fund managers and CEO’s said and what happened in reality (or will happen). Taking a look at their predictions and analysing it will give us some answer to the predictive abilities of financial gurus even though there is none.

This news appeared in Business Standard on 5th June, 2014 (results of the general elections were declared on 16th May, 2014 in which BJP government won with wide margin) where Varun Goel, head of PMS, Karvy Stock Broking (there is something peculiar about names like these which makes us believe that the person behind the table must be knowing something, when in reality all he does is making people believe in something of which he isn’t sure of himself) predicted that Sensex could touch 100,000 by 2020. Another article on the same day in the same newspaper appeared wherein five reasons were given (I didn’t read them, not because I was overconfident that they would be worthless but because I was confident that, it just couldn’t happen)  as to why Sensex can touch 100,000 by 2020.

Here’s another one: On October 5th, 2015 an article appeared on Money Control  in which Utpal Seth, CEO of Rare Enterprises mentioned that Sensex can touch 50,000 by 2020. Many more can be mentioned but considering the effort and time, it would be a pointless exercise to mention them all.

Now let’s check what has happened since then and how much of that seemed plausible with the help of elementary mathematics in hindsight.

On the day of news article (first of the above) Sensex was at 25,019. To touch 100,000 within next five years, following needs to happen:

The market capitalization has to increase by 3.0517 times the market capitalization for the year 2015. The expert making this futile prediction also said that 3x is not very unlikely given that from 6,602.69 (2004) it reached 20,286.99 (2007) and went down to 9,647.31 (2009), then again touched 20,509.09 (2010) and reached 25,000 up until 2015.


Market capitalization to GDP ratio is one the most tracked ratios to find out the valuation of the market. As a general rule a result of greater than 100% is said to show that the market is overvalued, while a value of around 50% is said to show undervaluation, not to mention that determining what percentage level is accurate in showing undervaluation and over valuation has been hotly debated. As per the projected valuations of 2015 the ratio came at 1.028 times of 2015 data. Below is the trend of the past:


For those who said that its very much possible that mark of 100,000 can be achieved didn’t have a good look at this chart or they were the victim of self-denial. They didn’t understood that the economy of a country doesn’t increase at such a rate that the market would increase 3 times within five years. We can see at the past trend to see what happens when it does. Looking at the chart it becomes clear that from 2004 until late 2007 was the phase of extreme bull period buoyant by the cheer of housing prices in the USA and (in the not-so-extreme sense) 10 years was over since the the economic reforms and it started to bear fruits ten years after (yes, reforms like that takes this much time to show its signs on economy), so the bull of privatisation that was unleashed in 1991 was at its full speed after 2000 (Sensex reached 20,286.99 from 3,972.12 within a period of 7 years, 5x within 7 years). After the fall of 2009, it more than doubled the next year and for the next five year it increased by 1000 points per year.

The bottom line is that: For Sensex to reach 100,000 by 2020 it needs to grow by 25% CAGR per annum. The so called financial gurus prophecies were/are wrong for two reasons:

  1. The data they were referring to were picked at the wrong point in the history’s time line. A period when everything seemed good and nothing could go wrong (remember Reliance Power, the big one).
  2. For the financial market to grow at 25% per annum, all the other metrics of the economy (GDP growth, Credit, Savings, Per Capita Income, Employment, etc…) also has to grow around that rate to support the financial system. Because stock market is like the mirror of the economy, it depends on economy not the otherwise. Think about it, when was the last time our economy grew at that rate (China did it at that rate for at least a quarter of century and see where it is, China’s GDP for 2015 was $10.87 trillion, around 10 times of India). The answer becomes clear when we ask very plausible question, can India become a $10 trillion economy in the next five years? Is it able to grow at the rate which can justify a market capitalization of 100,000 points? The answer is no.
  3. An increase in index 3-4 times within few years (100,000/25,000=4) is exactly the thing that takes the market at the extreme end of the pendulum and it’s reversion causes people to loose their patience.
  4. An analogy: An economy is like the company and indexes (BSE/NSE) are its price. There’s a fundamental rule of investment i.e, a security cannot be worth more than the asset underlying that security, the spread between the price and value will converge over a long period. The increased indexes cannot remain sustainable if the growth rate of the economy isn’t on par with the indexes.

The problem with people is that they make analysis based on the long history of the company, forecasting it long into the future, then taking short term decisions  based on price gyrations…..As Howard Marks said “ The problem is not of informational or analytical but psychological.”

The Present:

As of today Sensex is at the peak of 31,138 and Nifty at 9,574 both of which are at their near highs. If the discussion going round the news is to be believed, both of the indexes are touching the clouds and there is a paranoia in the market that it is nearing its correction while some believe that still some gas is left to push it further near 36,000 or 38 or 40. I never understood hoe people come up with numbers like this. I mean one can only give a range of something like that but not a specific number.

Before making any assumption about the crest and trough of the market we need to understand the reasons behind it. Much of the people rely on their instinct or media clutter on which I have little faith.

In my opinion the markets are rich but not extended to such a point where a correction or crash is eminent. I can’t say where the market is headed (up/down) but, I can come up with a satisfying conclusion for no-fall-yet in market based on some some numbers:

  1. For the past few months, on an average 4000+ crores of money are flowing in SIP’s every month. That’s approximately 48,000 crores.
  2. Since EPFO was given the liberty to invest in the equity markets more than 10,000 crores have been invested by it and there is a plan to invest 18,000 in the current fiscal adding fuel to the stock market that is already on fire.
  3. Increase in NPS schemes is also adding around 2,000 crores a year.
  4. At last, the retail investor who were siding on the sidelines till now will also jump on the bandwagon to get the benefit of rising fortunes. Not to forget that more people will come to senses that stock holding is better way to stay wisely wealthy.
  5. All of the above turns out around 70,000 crores in the current fiscal. Amount of this much when poured in the markets will eventually push the markets in the north.

At the end the only thing that can increase the chances of being correct is that; no matter what or where the stock market is, the only thing that matters is that you have purchased an undervalued company at such low price that it will go up in with time. The fall in market shouldn’t be the concern of investors and when it does, only to the point that it gives us more opportunity to buy of what we already know is good at reduced prices.

Perils to Understanding

” A learned block head is a greater block head than an ignorant one” – Benjamin Franklin

These words of Ben Franklin echoes with greater force when it comes to making people understand the investing ‘process’ (emphasis is needed on the word). People are trained all through their schools that everything can be reduced to the extent that it can be applied by everyone and that’s the wrong way to think. You cannot reduce everything to some formula. I have been trying to make people understand (I gave few classes to students) that there is no standardized ‘process’ to investing. Its an art that needs perfection every time and the way to do it is to realize in the first place that there is no formula for success in investing. Then the most plausible question that they ask is “How can not understand something it you haven’t done it?” The way I explain it to them is that you don’t have to do operation in a lab to know that you cant do it. Here is a comic strip which best tells more incisively the mindset of today’s educational system be it any field:


Prediction Begets Prediction:

Investors try to emulate the big investors of all time trying to predict or making speculations about what they are buying or selling. They try to know the exact procedure of how they go about making investment. The banality of the situation is that the very same celebrated investors in their investing carriers have denounced predictive value of such future prediction and yet people go on predicting what they are doing. Chris Davis of Davis Funds explains in this video in a very intelligible way about why the prediction business goes on and on: Davis Funds.

What people don’t get to understand is that no one can become the person that they are following. Thinking like Einstein you won’t become Einstein, you become only the best of who you are. We can read anyone’s investment philosophy about how they did this and that, but that wouldn’t be our own. The key to understanding the markets is to have your own philosophy of investment and that will come from what we have learned through our parents and teachers and what our experiences teach us about what we have been taught by our parents and teachers.  The bottom line is that there can be only one Warren Buffet, only one Howard Marks and one Peter Lynch and only one Ray Dalio and they have already walked the earth. There is not going to be another of anyone of them. Also all of them were unique in their own way. The world will continue to produce someone with great record like them but they wouldn’t be the same as these people. What we cannot do what they did nor can anyone else, on the contrary what we can do is to learn from them these great  people is how to be successful at what we do, not them and that’s what they have been teaching all their life.

Only when we understand this, that we will stop asking all the pointless questions and start discussing meaningful questions that not everyone asks every time. This will finding stocks where no valuable investment is made.

The following is a modified version of one of the best books by Peter Thiel “Zero to One” that best describes the point of this blog:

The next Warren Buffet won’t be running another Berkshire Hathaway. The next Peter Lynch won’t be picking stocks in Magellan Fund. If you are copying these guys, you aren’t learning from them.