💎Ola, Banks & Rice (08 May 2022)

Taking risks does not guarantee you success every time, but isn’t that absolutely fine? If not anything, it might open up those unseen doors for you, where you have the opportunities waiting.

This week, let’s read through the stories where we saw the risk game playing out in some way or the other.

Approaching its goal of rolling out a scooter every 2 seconds, Ola Electric outpaced Hero Electric and became the top Electric vehicle (EV) seller in the two-wheeler segment last month. For April, Ola sold 12,689 units, and Hero did just half of it.

Ola’s story is different because unlike Hero and other automakers, Ola started through cab aggregation. And that’s the catch — it was dealing with the end customers directly, something crucial that helped it to shape up the EV business.

A glimpse of the journey

‍In India, Ola was doing new things in new ways. For EV, it retained most of the supply chain right from engineers to manufacturing, distributing, and even building the charging stations.

Further, it took the B2C route, directly delivering to the customers, and skipping the conventional dealership network. Customers could pay a token as low as Rs.500 and register for the vehicle. Twitter was used as a means to communicate and address order inquiries.

Here came the rocky roads...

‍- There was a delay in deliveries but there were no dealers to give assurance. Customers had to turn to Twitter, which many in tier 2/3 cities were not comfortable with

- Phishing scams, where crooks reached out to potential customers pretending to be Ola employees, spoiled the image of the company

- It had to recall more than 1,400 electric scooters in the wake of a couple of incidents of two-wheelers catching fire

Our take

‍EVs in India was an undisrupted space until Ola made the first move. While something similar has been done by others like Tesla abroad but India as an ecosystem is a different story altogether. Extreme weather conditions, poorly maintained roads, and not-so-informed users make it a tough market for automakers.

Stringent regulations, especially around safety and extensive testing before their rollout are the need of the hour for this new experiment that companies like Ola are carrying out.

Lately, the Indian banks have turned a bit conservative in their lending approach.  As per the latest RBI report, the ratio of risky assets declined to 9% in FY 22 from 11% in FY 21. And how was this accomplished? By lending more to retail and government than the corporates.

Retail loans grew by 14%, lending to the government through bonds grew by 22%, while on the other hand, corporate loans declined by 4%.

Why shy away from corporates?

‍While the corporate segment has been reeling from bad asset quality and banking frauds, retail lending helped the banks drive profitability. For instance, IDFC First, a retail-focused bank, saw its profits grow by 45% last year. For the coming year, they expect retail loan growth of 25%.

Not just retail is less risky as a segment but also there is a huge untapped opportunity to cater to. 50% of Indian adults are credit unserved and another 20% are credit underserved which means they have credit but not enough.

Recent trends that changed it all

‍- Credit score reports act as a reliable source for the banks to understand the paying ability of the borrower and accordingly extend the loan

- Earlier to service the retail segment, banks needed to spend on physical branches and employees but with digital banking ramping up that's not a case anymore

- Bundling up of offerings has helped increase the revenues for banks. To the same client, you can sell a credit card, personal loan, insurance, or wealth management services

Our take

‍Post covid, the retail story played well for the banks. But now with rising interest rates and inflation picking up, the retail investors might find it not so easy to service their loan commitments(hefty home loans form a major chunk here). The asset quality of the banks should be under the radar of the investors.

Also, the banks with a considerable portion of lending to government bonds will lose the opportunity to earn higher interest rates that corporates might be willing to pay. Hence determining the right mix of retail, corporate and government bonds will be crucial to sustaining their profitability margins.

Last week, Adani Wilmar (AWL) acquired Kohinoor, the popular rice brand from McCormick Switzerland. This gives AWL access to the basmati rice portfolio of the Kohinoor brand.

Talking about the grain, rice is a staple food for more than half the world’s population and makes up 20% of the global calorific intake. Across the Middle East, USA, and EU, basmati rice is extensively used in a number of lavish dishes. India is a leading exporter of basmati rice, along with Pakistan. But recently, the dynamics seemed to have shifted towards non-basmati rice.

The demand side of the grain

‍For the third consecutive year, exports of basmati saw a fall. In FY 22, India exported USD 3.5 billion worth of basmati, the lowest in the last 3 years. Annual exports to the EU had dropped to 200,000 tonnes from 500,000 tonnes due to high levels of fungicide.

Another reason was Iran opting out of Indian exports (one of the big markets for Indian basmati) due to US sanctions, which is an annual loss of 1.2 million tonnes. But that got reversed a few months back.

...and the supply side

‍- To choose between which variety to grow, farmers would compare the minimum support prices (at which the government will buy if the market price falls) and the market prices of the basmati versus non-basmati

- For the market prices, the difference between basmati versus non-basmati is shrinking big time. From 153% in 1996, it has currently come down to just 20%

- Also, the minimum support price of non-basmati varieties is inching to find equilibrium with the basmati. All in all, non-basmati seems to be a better proposition for farmers

Our take

‍In the past three years, 20% of the agricultural area has shifted from basmati to non-basmati in the main producing states of Punjab and Haryana. Consequently, the export of non-basmati saw a growth of 110% from FY14 to FY 22. And we already discussed, how exports of basmati are on a declining spree.

With inflation inching higher, globally, consumers might find non-basmati easier on pockets than basmati. And since the packaged food category is picking up post-pandemic, this might be a trend that brands like Kohinoor would want to monetise upon.

In the Explainer series, we discuss two very common investment myths:

• Mondays are the best days to invest
• Fridays are the best days to sell