What We Are Reading - Volume 2.096

14th Jan 2022
What We Are Reading - Volume 2.096
The enclosed 2.096 version includes interesting set of reports by Antique ‘Decade of India’ Motilal Oswals ‘Eagle Eye’,
Credit Suisse’s ‘Global Equity Strategy’, HDFC’s industry report on ‘Buy Now Pay Later’, Jefferies’s ‘Greed & Fear’,
Howard Marks ‘Selling Out’, Morgan Housel’s blog ‘Does not compute’ and Shane Parish’s ‘Why Math Class is boring
and what to do about it’
 Decade of India! Antique
 Th Eagle Eye Motilal Oswal
 Global Equity Strategy Credit Suisse
 Buy Now Pay Later – Demystifying the table stakes HDFC Securities
 Greed & Fear Jefferies
 Selling Out Howards Marks
 Does not Compute Morgan Housel
 Why Math Class is boring and what to do about it Shane Parish

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 4 January 2022 | 1
INDIA STRATEGY
Decade of India!
2021 has been the year of Indian equities, outperforming both emerging
and developed markets globally. During the year, Antique model portfolio
outperformed Nifty-50 by ~560bps - helped by our a) Overweight call on IT
services, Metals, Real estate and capital goods; and b) Underweight call on
FMCG, Auto and Financials. Even as the world is yet again seeing surge of
Dhirendra Tiwari
Covid-19 infection caused by new variant, Omicron, there are reasons to be
+91 22 4031 3436
dhirendra.tiwari@antiquelimited.com
optimistic. Led by concerted policy initiatives and liquidity infusion post Covid-
19 onslaught in 2020, India seems to have found the way to profitable
growth, which can further accelerate over the next 4-5 years. We expect India's
Pankaj Chhaochharia GDP to grow at an average of 8% over FY21-FY24, fueled by ~15% nominal
+91 22 4031 3340
pankaj.chhaochharia@antiquelimited.com
GFCF growth. We expect Nifty-50 EPS to grow at a healthy CAGR of 16%
during FY22-24, after a strong recovery in FY22. While current equity
Moumita Paul valuation is reasonable (as Bond-Equity earnings yield ratio is near long
+91 98205 81846 term mean levels), if business cycle improves further, Nifty-50 may trade at
moumita.paul@antiquelimited.com 21-25x 1-year forward PE. We remain positive on the broad market despite
a strong re-rating in CY21. Our March 23 Nifty target stands at 20,100 based
on 21x FY24 EPS of 959.
Key themes to look forward to
1. Dream capex cycle finally unfolding: Strong global capex recovery, steady
commodity cycle, low interest rates supported by ample liquidity, and resurgent business
confidence - all are leading towards a heady capex cycle in India. We expect Nominal
GFCF to grow at a CAGR of ~15% over FY22-27, with upside potential.
2. Investing amid environment concerns: Recently, India has committed to becoming
carbon neutral by 2070 at COP26 summit in Glasgow. On balance, it is quite evident
that there would be focus on sustainability which will improve overall ESG scores for
corporates. Even though it is at a nascent stage, ESG will become a critical investing
factor in the current decade.
3. Strong tailwind to sustain growth & valuations for IT Services: Indian IT
sector is easily the hallmark of what has gone right in India's corporate sector since
March-20. We believe that the demand outlook for the Indian IT services will remain
strong led by digital and cloud applications. Antique called out IT sector to be 'the' best
performing sector over past two years. While the sector has re-rated meaningfully over
the past 18-months, given growth and sustainability, we continue to believe in potential
outperformance in CY22.
4. Internet - Technology meets Commerce: This is one space which has potential will
create meaningful investors wealth in 2020s. 2021 saw an impressive 42 start-ups turning
unicorns (valuation of USD1bn+), as compared to average of 8-10. Businesses across
Fintech, Ecommerce, Edtech, SaaS have cornered significant investments as demand
from homebound consumers soared. Valuations for certain Businesses kept soaring through
the year on back to back funding. International Funds like SoftBank, Tiger Global, Temasek,
Prosus, and Falcon Edge etc are pumping capital in Indian startups. Some of the startups
including Innovacer, Infra.Market, Meesho, CRED, PharmEasy, Groww, ShareChat,
OfBusiness have at least doubled their valuations within past one year itself. Indian
edtech giant Byju's went on to become the most valued startup at USD21bn, amid its
acquisition spree of Indian/global companies. IPOs of Zomato, Nykaa, Paytm, got
significant FII anchor investment amid flush of global liquidity. While there are limited
listed opportunities, but we believe that CY21 and beyond will see very interesting listed
landscape here.
5. Is there value at play? Its not as if all of the market has played out. 2021 saw
relative under-performance by Banks, Auto, Pharma and FMCG - which has led to valuation
discount relative to Nifty-50. Our analysis suggests that valuation discount results in out-
performance on 1-year basis (in banks & FMCG). We believe that there can be value-
plays in these sectors.
6. Mid-Caps - Look for multi-baggers: Midcaps was one of our preferred theme in
our CY21 annual strategy report - which has worked well, delivering a 20% relative out-
performance during 2021. Our empirical analysis suggests that economic recovery bodes
well for mid-caps. While we are now selective, given the rich valuation both relative to its
history and Nifty-50, we continue to believe that Indian mid-caps offer greatest wealth
creating opportunities. CY21 will not be any different!
Capex driven economic upcycle likely

India contracted the most in FY21 due to the nation-wide lock-down imposed in order to
prevent mortality due to Covid-19. Nonetheless, India is likely to return back to its pre-Covid
level by March-2022 - quicker than anticipated.
We have more reasons to be hopeful that the next 5 years will be a golden era for Indian
economy and will once again emerge as the fastest growing large economy (and labelled
by the "Shining star of the decade"). Our high conviction of an economic upcycle similar to
2003-07 hinges upon the multiple macro tailwinds which India currently enjoys, which is
actually much stronger than those existed during 2003. Accordingly, our growth projection
builds in a capex cycle recovery (with significant upside risk).
In terms of inflation, we are building in a minor moderation given the supply side normalization
as mobility restrictions get lifted in coming quarters due to Covid-19 reaching an endemic
stage and population reaches herd immunity (because of past infection and vaccination).
Accordingly, we are building a gradual policy normalization - thus expecting 3 and 4 rate
hike in FY23 and FY24 respectively. We believe that rate hike will have more impact will be
seen towards the shorter end, which will normalize the existing steep yield curve. Historically,
on average the spread between 10 year yield and repo rate is ~100bps as against the
current spread of ~250bps.
Macro-economic outlook: Expecting a strong growth trajectory

Particulars Mar-21 Mar-22 Mar-23 Mar-24
Real GDP (%) -7.3 9.3 8.5 6.7
CPI (%) 6.2 5.4 5.1 4.8
Repo rate (%) - year end 4.0 4.0 4.8 5.8
10 year yield - year end 6.2 6.4-6.6 6.4-6.6 6.8-7.0
Central Gross Fiscal Deficit (% of GDP) 9.5 6.6 6.0 5.5
Crude Oil ($/bbl) - average 45.8 75.0 70-80 70-80
INR - average 74.2 74.5 75-77 74-76
Source: Antique
Macro environment more conducive than 2003: #If not now, then when?
Particulars Jun'03-Sep'08 Current
Period of economic expansion (quarters) 22
Average real GFCF growth (%) 15.4
Macro environment before the start of a multi-year capex cycle

India Repo Rate, % 4.5 (400 bps rate cut between 4.0 (250 bps rate cut between Dec'18 till date)
(Domestic monetary loosening) Oct'01 and Aug'03)
US 10yr yield, % Yes (220 bps drop in US 10 yr yield Yes (175 bps drop in US 10 yr yield from Nov'18
(Global monetary loosening) from Mar'02 to Jun'03) to current, even post 100bps rise from Apr'20 lows)
Global liquidity (US Fed, ECB, US$0.9tn (during Jan'02 to Mar'04) or US$10.2tn (during Feb'20 till date) or 12%
BoJ Balance sheet expansion) ~3% of Global GDP of Global GDP
Domestic Liquidity (% of NDTL) 2.0-4.0 (Deficit) -4.5 (Surplus)
Note: -ve means surplus liquidity
Combined Domestic Fiscal Deficit (% of GDP) 9.3 (FY03) 12.5 (FY21)
US Fiscal Deficit (% of GDP) Increased from +2.4% in Jun'01 to -3.7% Increased from -3.6% in Jun'18 to -15.4% in Dec'20
in Jun'04
Banking Net NPA (%) 4.0 (FY03) 2.5 (FY21)
Banking Tier-1 Capital (%) 8.2 (FY05) 13.4 (FY21)
Corporate Leverage (ND/E) 1.3 (FY03) 1.1 (FY20)
Corporate Tax Rate, % 36 25
Reform intensity Yes (Privatization, Infrastructure push etc) Extremely Strong (GST, Bankruptcy code, Corporate
tax rate cut etc)
Unique opportunities Possibility of shift in Global Supply Chain in India
Source: Antique
Initial signs of capex revival visible

Multiple policy intervention (like low tax rate, interest rate, surplus liquidity, PLI scheme, buoyant
equity market etc) has helped in faster investment recovery. Various macro parameters (like
business confidence, tendering activity, central government capex, engineering goods export
& import, IIP capital goods) are hinting towards a pick-up in capex cycle finally.
Business confidence at an all-time high driven by multiple

Investment recovery has been sharper than consumption macro tailwinds
120 140
135
110
130
100 125
90 120
115
80
110
70 105
100
60
95
50 90
Nov-19
Jan-20
Mar-20
May-20
Jul-20
Nov-20
Jan-21
Mar-21
May-21
Jul-21
Sep-19
Sep-20
Sep-21
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Private Consumption GFCF Business expectations index Average
Source: CMIE, Antique Source: CMIE, Antique
Engineering exports growth is at 30 year high; likely

to surpass USD100bn in FY22 Strong traction also seen in Engineering goods import in FY22
70 70
Engineering exports (YoY % grow th) Engineering goods im port (YoY % grow th)
60 60
50 50
40 40
30 30
20 20
10 10
0 0
-10 -10
-20 -20
-30 -30
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22

New project announcements up 20% YoY despite New project announcement from private sector witness 84%
weakness in government projects YoY growth in 9mFY22
30,000
141
124
25,000
76
20,000
20
15,000
(10)
(2)
9
(18)
(18)
5
5
4
0
(35)
(34)
(53)
10,000
17,422
25,889
27,125
24,355
25,486
16,525
10,857
10,665
23,884
23,914
19,619
16,029
16,651
8,183
7,036
5,000
9m FY22
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
9MFY22
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
New projects Announced YoY(%) Government Private Total Grow th YoY (%)
Strong central government expenditure continues in FY22

35
30
25
20
15
10
5
0
-5
-10
FY 1 7 FY 1 8 FY 1 9 FY 2 0 FY 2 1 FY 2 2 TD
C e n t r a l g o v t c a p it a l e x p , % g r o w t h
Source: CMIE, Antique
Significant upside risk exist to our FY22-27 Real GFCF CAGR of 8.8%
Our high conviction capex recovery cycle over next 5 years is based upon:
a) Multiple macro tailwinds existing in unison;
b) Expected global capex up-cycle;
c) Ample availability of resources to fund upcoming capex recovery;
d) Low capacity utilization not a hindrance (it is driver of mid-late capex cycle);
e) Real estate recovery;
f) Domestic policy support in form of Production linked incentive and government infrastructure
push;
g) Global strategy to de-risk global supply chain and
h) Multiple supply side reforms undertaken over last few years.
Accordingly, we are penciling in 8.8% Real Gross Fixed capital formation (GFCF) CAGR over
FY22-27, higher than FY15-20 GFCF CAGR of 7.6% albeit substantially lower than 14.5%
CAGR over FY04-08 and 10.3% over FY09-12 - thus indicating significant upside risk to our
numbers. The higher GFCF growth expectation is largely driven by normalization of real
estate demand.
Why we believe in a strong capex revival?

1. Macro environment most conducive since 2003: #If not now, then when?
We believe that strongest macro tail winds exist at the current juncture - even stronger
than 2003, post which we saw the strongest capex cycle in India (with average real
GFCF growth of 15.4% during 2003-08).
Macro environment more conducive than 2003: #If not now, then when?
Particulars Jun'03-Sep'08 Current
Period of economic expansion (quarters) 22
Average real GFCF growth (%) 15.4
Macro environment before the start of a multi-year capex cycle

India Repo Rate, % 4.5 (400 bps rate cut between 4.0 (250 bps rate cut between Dec'18 till date)
(Domestic monetary loosening) Oct'01 and Aug'03)
US 10yr yield, % Yes (220 bps drop in US 10 yr yield Yes (175 bps drop in US 10 yr yield from Nov'18
(Global monetary loosening) from Mar'02 to Jun'03) to current, even post 100bps rise from Apr'20 lows)
Global liquidity (US Fed, ECB, US$0.9tn (during Jan'02 to Mar'04) or US$10.2tn (during Feb'20 till date) or 12%
BoJ Balance sheet expansion) ~3% of Global GDP of Global GDP
Domestic Liquidity (% of NDTL) 2.0-4.0 (Deficit) -4.5 (Surplus)
Note: -ve means surplus liquidity
Combined Domestic Fiscal Deficit (% of GDP) 9.3 (FY03) 12.5 (FY21)
US Fiscal Deficit (% of GDP) Increased from +2.4% in Jun'01 to -3.7% Increased from -3.6% in Jun'18 to -15.4% in Dec'20
in Jun'04
Banking Net NPA (%) 4.0 (FY03) 2.5 (FY21)
Banking Tier-1 Capital (%) 8.2 (FY05) 13.4 (FY21)
Corporate Leverage (ND/E) 1.3 (FY03) 1.1 (FY20)
Corporate Tax Rate, % 36 25
Reform intensity Yes (Privatization, Infrastructure push etc) Extremely Strong (GST, Bankruptcy code, Corporate
tax rate cut etc)
Unique opportunities Possibility of shift in Global Supply Chain in India
Source: Antique
2. Expectation of a strong global capex cycle driven by stimulus

Historically, global capex cycle was particularly strong during 2002-07 (11.4% CAGR),
driven by China, India, Brazil, Russia, Turkey, Indonesia, Australia, Spain & Mexico.
Fiscal, monetary and liquidity support globally was one of the key reasons for the start of
an upcycle. Strong fiscal and monetary support provided again post 2007-08 global
financial crisis helped initiate a capex upcycle during 2009-12 (8.1% CAGR).
Howver, global capex cycle had weakened over 2012-16, growing by a meagre 0.3%
CAGR - primarily due to fiscal, monetary, liquidity tightening and Euro-zone debt crisis.
Nonetheless, post that capex cycle picked up (2016-19 GFCF CAGR of 7.3%) primarily
due to US fiscal expansionary policy.
Going forward global capex cycle is likely to gain pace (at 9% CAGR - higher than
2009-12, albeit lower than 2002-07 period) due to a) Low base; b) Record fiscal &
monetary stimulus; and c) Infrastructure building to address climate change issue and
de-risking of global supply chain (China +1 global strategy). The current uptick in global
capex cycle over next few years are likely to be driven by US, India, Brazil, Italy, Australia,
Spain and Mexico.
3. Ample resources available to fund the upcoming capex cycle

We believe that there is no more a constraint in terms of capex funding as:
a) Central government has relaxed its fiscal deficit target in medium term (increased it to
4.5% as compared to earlier 3.0% target);
b) Corporate de-leveraging process over last few years have strengthened its balance sheet;
and
c) Higher provisioning over past few years and increase in Tier-1 capital position have
strengthened the banking system balance sheet as well.
Indian banking system well capitalized (Tier-1 capital %) to fund

Healthy corporate balance sheet to help fund capex the next capex cycle
1.5 20
1.4 18
FY03, 1.3
1.3 16
FY20, 1.1
1.2 14
1.1 12
1.0 10
0.9 8
0.8 6
0.7 4
0.6 2
0.5 0
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Debt to equity ratio (x) PVB PSB System
Source: CMIE, Antique Source: RBI, Antique
Note: Financial data is of ~25000 corporates from FY95-2020; for FY21 debt to
equity is 0.8x based on financial data is of 7500 corporates
Banking asset quality issue is behind us Relaxed Centre fiscal deficit to help capex funding
9.0 10 Fiscal deficit (%)
8.0 9
7.0 6.0 8
6.0 7
5.0 6
5
4.0
2.4 4
3.0
3
2.0 1.0 2
1.0 1
4.5
4.1
3.9
3.5
3.5
3.4
4.6
FY21RE 9.4
FY22BE 6.8
6.2
5.7
5.1
4.5
0.0 0
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY23e
FY24e
FY25e
FY26e
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Net NPA %
Source: RBI, Antique Source: CMIE, Antique
Government capital spending (including state) likely Government capex spending growth likely to accelerate on
to double in next 5 years back of relaxed central govt fiscal target
25,000 18%
Total Govt Capex (INR bn) Total Govt Capex
17%
20,000
16%
15,000 15%
14%
10,000
13%
5,000
10,374
11,942
13,989
16,417
19,301
22,732
12%
5,916
6,810
6,568
7,480
8,666
- 11%
16.1% 17.5%
FY16
FY17
FY18
FY19
FY20
FY21
FY22e
FY23e
FY24e
FY25e
FY26e
10%
FY18-22 CAGR FY22 -26 CAGR
Source: Antique Source: Antique
Central Government capex share likely to increase sharply due to higher growth in next 5 years
Share of FY21 Governm ent capex, % Share of FY26e Governm ent capex, %
Centre, 42.3 State, 45.1
State, 57.7 Centre, 54.9

4. Low capacity utilization not a hindrance; driver of mid-late capex cycle

Low capacity utilization is widely perceived as one of the key reasons why capex cycle
may not recover soon. Nonetheless, we believe that capacity utilization is not a factor
which help initiate a capex cycle, rather helps in creating a virtuous capex cycle. Our
empirical analysis suggest that corporate India fixed asset turnover (proxy for capacity
utilization) during FY02-03 was at 1.3x, slightly lower than FY20 level of 1.4x. Despite
low fixed asset turnover, we saw the strongest capex cycle in India during 2003-08 due
to host of macro tailwinds acting in unison (stronger macro tailwinds exist currently).
Low utilization levels exist towards start of capex Jun-21 capacity utilization stands at 60.0% due to 2nd
cycle as seen in FY03 Covid-19 outbreak
1.9 90
83.2
1.8 85
80
1.7
75 69.9 69.4
1.6
70
1.5
65 60.0
1.4 60
1.3 55
50 47.3
1.2
1.1 45
40
1.0
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Fixed asset turnover (x) Capacity utilisation (%)

5. Normalization of real estate to drive higher GFCF growth

Real estate is one of the key driver which may help in capex cycle revival in India.
Overall, we expect housing share in GDP (which is at the cyclically lowest level) to
improve growing forward (currently expect the share to improve to 8% of GDP by FY27
with significant upside risk) on back of high affordability (given low property prices and
steady growth in household income) coupled with record low interest rate. Accordingly,
we expect household dwelling GFCF may grow at 8.4% CAGR over FY22-27 as against
-0.1% over FY12-20.
Expect real Housing share to increase to 8% of GDP by FY27 Housing capex (real) may rise to INR17trn by FY27
14 18,000
13
11.5
16,000
11.1
12
12.8
10.3
11 14,000
10
12,000
8.1
8.0
9
8.0
7.9
7.8
7.7
7.7
7.7
7.7
7.6
7.6
7.5
8 10,000
7
11,223
10,628
10,882
10,864
10,095
11,369
11,127
10,185
11,281
12,359
13,335
14,437
15,627
16,914
8,722
9,426
8,000
6
5 6,000
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21e
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21e
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
Household dw elling as % of GDP Household dw elling (INR bn)

Likely to grow at 8.4% CAGR over FY22-27 Housing affordability is at an all-time best levels
9% Real Housing GFCF CAGR 9.5
8.3
8% 8.5
7%
7.5
6.6
6%
5.9
6.5
5%
5.3
5.1
5.1
5.1
4.8
5.5
4.7
4.7
4.7
4.7
4%
4.6
4.6
4.5
4.4
4.3
4.1
3%
3.8
4.5
3.7
3.5
3.3
3.2
2%
3.5
1% 8.4%
-0.1% 2.5
0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
-1%
FY12-20 FY22-27e Affordability index (x)
Source: CMIE, Antique Source: HDFC presentation, Antique
Note: Affordability equals Property price by annual income
Lower interest rate has helped reduce EMI by ~20%

EMI per lac 15yrs 20yrs 25yrs 30yrs
9.0% 1,014 900 839 805
8.5% 985 868 805 769
8.0% 956 836 772 734
7.5% 927 806 739 699
7.0% 899 775 707 665
6.5% 871 746 675 632
Source: Antique
Inventory overhang of sub 20 months is conducive for real estate pricing seen in CY11-12
35 16%
14%
30
12%
25 10%
20 8%
6%
15 4%
10 2%
0%
5
-2%
0 -4%
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21
PAN India (Avg Price) PAN India - Inv OH (months)
Source: PropEquity, Antique
6. PLI & Global supply chain diversification to drive Manufacturing

Manufacturing is likely to be another growth engine which may drive higher capex
growth over next 5 years on back of
a) India may be one of the key beneficiary of global strategy of de-risking global
supply chain;
b) Production linked incentive may induce private capex of INR 7.7 trn over next 5
years. In addition, the recent approval to provide INR 760bn fiscal support to set-up
semi-conductor and display manufacturing to help establish electronics manufacturing
eco-system in India;
c) Import substitution due to correction of inverted duty structure; and
d) Supply side reform measures undertaken over past few years.
Accordingly, we expect manufacturing GFCF may increase from ~5.5% in FY21 to ~7.0%
by FY27, thus growing at 11.6% CAGR over FY22-27.
Expect real Manufacturing GFCF to increase from

5.5% to 7.0% of GDP by FY27 Real manufacturing GFCF may double by FY27
8.0 16,000
14,763
7.5 7.4 14,000
7.0 7.0
12,000
6.5
6.0 10,000
5.5 5.5 7,464
8,000
5.0 5,063
6,000
4.5
4,000
4.0
1,621
3.5 3.6 2,000
3.0 -
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21e
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16
FY18
FY20
FY22e
FY24e
FY26e
Manufacturing GFCF as % of GDP Manufacturing GFCF (INR bn)
Expecting sharp growth supported by low base, Lower cost dynamics & China+1 strategy may lead to shift in
PLI scheme and global China +1 strategy global supply chain
25%
Real Manufacturing GFCF CAGR
20%
15%
10%
5%
20.9%
11.6%
3.9%
0%
FY02-08 FY08-20 FY22-27e
Source: CMIE, Antique Source: Antique

Continuous intervention in indirect tax to help correct inverted

Lower tax rate to help improve India cost competitiveness duty structure and promote domestic manufacturing
40 60 Changes in duty structure to prom ote dom estic
(%)
m anufacturing (nos)
35
50
30
25 40
20
30
15
20
35
34
31
31
30
30
30
28
27
25
25
25
25
25
25
24
22
21
20
20
19
18
17
17
10
Germany
Turkey
US
UK
France
Japan
Mexico
Canada
China
Indonesia
Russia
India (existing)
Netherlands
Italy
Brazil
South Korea
Spain
Singapore
Argentina
Australia
Saudi Arabia
India (new
South Africa
Switzerland
10
4
22
24
53
35
53
8
0
0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Antique Source: Budget documents, Antique
Labor cost in India is lowest in the world Power cost is comparable among manufacturing countries
6.0 0.18
(US$/hr) (US$/unit)
0.16
5.0
0.14
4.0 0.12
3.0 0.10
0.08
2.0
0.06
0.7
1.0 0.04
0.4
China 0.9
Mexico 1.0
Thailand 1.2
Indonesia 1.3
1.3
Malayasia 1.4
1.5
1.5
4.1
5.3
Indonesia 0.07
Turkey 0.09
Russia 0.09
Malaysia 0.10
China 0.10
India 0.11
Thailand 0.12
0.12
0.12
0.13
Mexico 0.16
0.02
0.0
0.00
India
Phillippines
Brazil
Vietnam
Taiwan
Turkey
South Africa
Phillippines
Brazil
Taiwan
Production Linked Incentive may help restart private capex?

PLI scheme may drive annual private capex to the tune of INR 1.5 trn over next 5 years
Particulars (INR bn) Electronics, Food Telecom & IT
White good, Products 2%
Auto &
Total direct PLI capex 2,209 Medical 3%
components
device
22%
Indirect capex in value chain 5,522 9%
Total capex linked to PLI over next 5 years 7,731 Pharma

9%
Total capex linked to PLI per annum 1,546
Solar PV
Modules
8%
Textile Speciality ACC Battery
Products Steel 20%
9% 18%
Source: Antique Source: PIB, Antique

PLI induced capex likely to the tune of ~9% of private capex over next 5 years
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
1,546
4,000
17,373
2,000
-
FY20 Private capex, INR bn PLI linked annual capex, INR bn
Source: PIB, CMIE, Antique
Overall Scheme
The PLI schemes are a set of well-planned schemes primarily focusing on attracting FDI and
promoting the 'Make in India' campaign. Although the schemes give more preference to
large scale enterprises, they also have special criteria with lower threshold investment
requirements for MSMEs, thereby aiming to make the entire scheme a holistic one.
There are certain bottlenecks in the production process of Indian Industries, for example-
production of drugs in the pharmaceutical sector which are exported, require imports of
starting materials and base drugs. These bottlenecks arise from infrastructural deficiencies in
the production process. Most of these bottlenecks have been addressed through the scheme
and it promotes huge investments in infrastructure by setting up greenfield and brownfield
projects.
The implementation of these schemes is very important to achieve the desired goals. One key
issue of the scheme is the allocation to each sector and whether enough allocation has been
granted to see the expected results. A total of INR 1.6 trillion is promised as incentives as of
now which would further induce Capital Expenditure of INR 2.2 trillion within the duration of
the schemes. Total incremental production is expected to be INR 30.1 trillion with INR 12.8
trillion as exports.
The scheme is expected to generate 4-5 million new jobs with the Mobile phone manufacturing
& textile industries expected to see 1.2 million & 750,000 new jobs respectively. As of now,
the scheme has seen a good response as many domestic and international firms have applied
to be beneficiaries.
Of all the schemes, only the Advanced Chemistry Cell (ACC) scheme is an upcoming scheme.
The Mobile manufacturing, KSI & API manufacturing, Manufacturing of Medical devices, IT
hardware & Pharmaceutical drugs have all had bids accepted and closed. The incentives
will be disbursed according to the first financial year, the details of which have already been
notified. Incentives shall be given either on incremental investments or on incremental sales.
Applications are open for White goods, High efficiency solar PV & Speciality steel. Applications
are under review under the Telecom and networking products, and the Food products scheme.
Bidding for the Automobile and auto components & the Textile products are soon to begin.
7. Government Infrastructure push to act as another trigger

Government focus on rapid infrastructure development is another trigger which may help
drive capex cycle in coming years. Sharp growth is expected especially in segments like
railway, airport, ports, water, urban infrastructure and defense.
We are currently building in a conservative real construction (ex-household) and machinery
GFCF of 8.3% & 9.3% CAGR respectively over FY22-27. We believe that there is an
upside risk to our estimates if our thesis of full blown capex cycle gains momentum.
Commercial construction GFCF may inch up to

7.8% of GDP by FY27 Construction capex may touch INR 16.4 trn by FY27
9.0 18,000
Total Real com m ercial dw elling and other Total Real com m ercial dw elling and other
construction, INR bn 16,000 construction, INR bn
8.5
14,000
8.6
8.0 12,000
8.0
10,000
7.9
7.8
7.7
7.5
7.7
7.7
7.7
8,000
7.6
7.6
7.5
7.5
7.5
7.3
7.0 6,000
7.0
4,000
6.9
10,120
10,851
11,525
10,214
11,056
11,968
12,956
14,025
15,182
16,434
6.5
6,014
6,717
6,830
7,848
9,733
9,822
2,000
6.0 -
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21e
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21e
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
Real commercial construction capex may grow by

~8.3% CAGR over next 5 years Expecting Machinery GFCF to reach 14.1% of GDP by FY27
25% 14.5
Real Com m ercial construction GFCF
14.0
14.1
20% 13.5
12.8
13.0
12.5
15%
12.0
11.5
10%
11.0
10.5
5%
10.0
22.5%
5.9%
9.3%
8.0%
8.3%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
0%
FY05-08 FY08-14 FY14-20 FY22-27e Machinery GFCF as % of GDP
Helping machinery capex to reach INR 30trn by FY27 Implying 9.3% CAGR over next 5 years
35,000 25%
29,559 Real Machinery
30,000
20%
25,000
20,000 16,656 15%

15,000
10,000 10%
5,000
5%
1.6%
-
22.3%
14.0%
11.1%
9.3%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
0%
Machinery GFCF (INR bn) FY04-08 FY09-12 FY12-15 FY15-20 FY22-27e
Any recovery on private side may drive upside risk

35 30
FY05-08 CAGR FY05-08 CAGR
30 25
25
20
20
15
15
10
10
5 5
13.5 16.0 33.3 17.7 15.1 27.7
0 0
Construction - Total Construction - Public Construction - Private Machinery - Total Machinery - Public Machinery - Private
Valuation reasonable despite impending rate hike

Fundamentally, we believe that two main factors which needs to be considered while ascribing
a forward multiple is:
a) Risk free rate as measured by 10 year yield has already increased by 50 bps in
2021 and we do not expect any major increase especially in 1H CY22 as we believe
that 10yr yield is already factoring in 4-5 rate hikes (as against our expectation of 3 rate
hike in FY23). Nonetheless, the impact will be seen towards the shorter end and thus
normalize the existing steep yield curve; and
b) EPS growth outlook has improved as macro risk in terms of health is subsiding as
population is gaining immunity through past infection or vaccination. Also economic
cycle may improve in 2022 given large macro tailwinds provided in 2020/21. Nifty-50
EPS saw sharp upgrades during the year (FY21/22/23 EPS got revised upwards from
446/613/745 in Dec'20 end to the current 516/713/844). FY22-24 EPS CAGR is
expected to be healthy 16% on a high base.
We believe that current valuation is reasonable (as Bond-Equity earnings yield ratio is
near long term mean levels) and post the recent correction is broadly in sync with the
macro and corporate fundamentals. We believe that macro and corporate earnings
cycle to further improve in next 3-4 years given strong macro tailwinds provided in 2020/
21, somewhat similar to the one seen during 2004-07. Previous economic upcycles have
helped push Bond-Equity Earnings yield ratio beyond +1 standard deviation above
mean. As business cycle improves further during the year (our base case), markets may
also trade at 21-25x 1 year forward multiple (implying similar peak Bond-Equity earnings
yield ratio).
Nifty trading at +1 Stdev on 1yr fwd PE basis Historical PE multiples are lower due to higher yields in past
30 (x) 10.0 10yr yield
9.5
25 9.0
8.5
20
8.0
15 7.5
7.0
10 6.5
6.0
5 5.5
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
5.0
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
1 yr fw d PER Avg Avg + 1 Stdev Avg - 1 Stdev
Source: Antique, Bloomberg Source: Antique, Bloomberg

Nifty trading at mean levels on Bond-Equity earnings

yield basis 10 year yield may remain flat despite impending rate hike
2.5 4.00
2.0 3.00
2.0 1.9 1.8
2.00
1.5
1.00
1.0
0.00
0.5 -1.00
0.0 -2.00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
BEER Average Avg +1 Stdev Avg -1 Stdev 10yr yield - Repo Average
Source: Antique, Bloomberg Source: Bloomberg, Antique
Policy normalization to help normalize yield curve;

impact to be seen at shorter end Impact of rate hike likely to be seen at shorter end
4.00 4.00
3.00 3.00
2.00 2.00
1.00 1.00
0.00 0.00
-1.00 -1.00
-2.00 -2.00
-3.00 -3.00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
10yr - 1 yr Average 1yr - Repo Average
Source: Bloomberg, Antique Source: Bloomberg, Antique
Nifty-50 FY22-24 EPS CAGR at healthy 16% on high base

1200 (INR)
959 50
40
844
1000
713
30
800
20
516
462
462
600
443
428
402
389
383
10
366
335
307
273
260
400
226
221
0
167
153
119
200
86
73
-10
0 -20
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
Nifty EPS % grth (RSH)
Source: Bloomberg, Antique

Theme 1# Dream capex cycle finally unfolding

Significant upside risk exist to our FY22-27 Real GFCF CAGR of 8.8%
Our high conviction capex recovery cycle over next 5 years is based upon a) Multiple macro
tailwinds existing in unison; b) Expected global capex up-cycle; c) Ample availability of
resources to fund upcoming capex recovery; d) Low capacity utilization not a hindrance (it is
driver of mid-late capex cycle); e) Real estate recovery; f) Domestic policy support in form of
Production linked incentive and government infrastructure push; g) Global strategy to de-risk
global supply chain and h) Multiple supply side reforms undertaken over last few years.
Accordingly, we are penciling in 8.8% Gross Fixed capital formation (GFCF) CAGR over
FY22-27, higher than FY15-20 GFCF CAGR of 7.6% albeit substantially lower than 14.5%
CAGR over FY04-08 and 10.3% over FY09-12 - thus indicating significant upside risk to our
numbers. The higher GFCF growth expectation is largely driven by normalization of real
estate demand. Accordingly, we are overweight on capex, real estate and related
plays in our model portfolio.
Key beneficiaries: L&T, Siemens, Honeywell Automation, LMW, Bharat Electronics, Ultratech,
Ambuja Cement, Brigade Enterprise, Century Textiles, Somany Ceramics, Crompton Consumer,
Asian Paints, HDFC Ltd, Can Fin Homes, Cholamandalam, ICICI Bank, Axis Bank, SBI.
Expect GFCF share may reach ~35% of GDP by FY27

36
34
34.8
34.3
32
31.2
30
28
26
24
22
22.8
20
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16
FY18
FY20
FY22e
FY24e
FY26e
GFCF as % of GDP
GFCF may reach by INR 73trn by FY27

80,000 73,073
70,000
60,000
50,000 42,205
40,000
30,000
20,000
10,000
-
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
GFCF (INR bn)

Expecting a conservative 8.8% GFCF CAGR over next 5 years

16% Real GFCF CAGR
14%
12%
10%
8%
6%
4%
14.5%
10.3%
3.0%
7.6%
8.8%
2%
0%
FY04-08 FY09-12 FY12-15 FY15-20 FY22-27e
Pick-up in capex growth largely driven by normalization of real estate demand

Real Real
Household Commercial
Real GFCF Real Real Dwelling construction
CAGR GDP Machinery GFCF GFCF
FY04-08 14.5% 7.9% 22.3% 5.8% 22.5%
FY09-12 10.3% 7.2% 14.0% 9.2% 5.9%
FY12-15 3.0% 6.4% 1.6% -1.1% 9.3%
FY15-20 7.6% 6.7% 11.1% 0.5% 8.0%
FY22-27e 8.8% 7.3% 9.3% 8.4% 8.3%
Source: CMIE, Antique; Note: * Household dwelling and Commercial construction CAGR is for FY05-08
PLI induced private capex expected to the tune of INR 7.7trn

Particulars INR bn
Total direct PLI capex 2,209
Indirect capex in value chain 5,522
Total capex linked to PLI over next 5 years 7,731
Total capex linked to PLI per annum 1,546
Source: Antique
Equivalent to ~9% of annual private capex may continue over

Auto, Battery & Steel constitute ~60% of direct PLI related capex next 5 yrs
Electronics, Food
20,000
White good, Products Telecom & IT
2% Auto & 18,000
Medical 3%
components 16,000
device
9% 22% 14,000
Pharma 12,000
9% 10,000
Solar PV
8,000
Modules
8% 6,000
ACC Battery
1,546
Textile 4,000
17,373
Products 20%
2,000
9% Speciality
-
Steel
FY20 Private capex, INR bn PLI linked annual capex, INR bn
18%
Source: Antique Source: CMIE, Antique
Relaxed fiscal glide path of 4.5% by FY26 vs earlier target of

3.1% by FY23 to be used for higher capital spending by Centre
Global capex cycle may also provide support government
12% Nom inal global capex, CAGR % 10 Fiscal deficit (%)
9
10% 8
7
8% 6
5
6% 4
3
4% 2
1
4.5
4.1
3.9
3.5
3.5
3.4
4.6
FY21RE 9.4
FY22BE 6.8
6.2
5.7
5.1
4.5
2%
11.4%
0.3%
0
8.1%
7.3%
9.0%
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY23e
FY24e
FY25e
FY26e
0%
2002-07 2009-12 2012-16 2016-19 2020-23
Source: World Bank, Bloomberg, Antique Source: CMIE, Antique
Lower tax rate in India likely to provide competitive edge Record low repo rate may help restart capex cycle
40 (%) 40 9
35 36
36 35 34 34 8
30 33 34 33 33
31 31
32 30 30 30 7
25 28 28 29 28 29 29
20 28 26 6
15 24 5
35
34
31
31
30
30
30
28
27
25
25
25
25
25
25
24
22
21
20
20
19
18
17
17
10 20 4
Germany
Turkey
US
UK
France
Japan
Mexico
Canada
China
Indonesia
Russia
India (existing)
Netherlands
Italy
Brazil
South Korea
Spain
Singapore
Argentina
Australia
Saudi Arabia
India (new
South Africa
Switzerland
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
GFCF as % of GDP Repo Rate (RHS)
Source: Antique Source: CMIE, Bloomberg, Antique
Global China +1 strategy may help shift global supply chain into India
Source: Antique
Theme 2# Investing amid environment concerns
Environment is emerging as one of the biggest risk which has forced government, companies,
investors and community at large to engage in all social and economic activities in a more
sustainable manner. India has in past 5-6 years undertaken several measures to safeguard
environment at large and honor its 2015 Paris agreement. Measures undertaken so far are
a) Reduction in price differential between petrol & diesel; b) Promoting usage of LPG; c)
Higher taxes on diesel engines; d) Increased coal cess; e) Faster adoption of Euro-6 norms; f)
Faster adoption of renewable energy; g) Electrification (rural, railways); h) Improving energy
efficiency standards; i) Ethanol blending of petrol; j) Increasing gas usage in energy mix of
the country; and k) Strengthening of mass transportation vehicles.
Recently, India has committed to become carbon neutral by 2070 at COP26 summit in Glasgow.
The commitment suggests that the above mentioned measures will gain pace along with
several other measures like a) Adoption of electric mobility; b) Usage of green hydrogen.
On balance, it is quite evident that there would be focus on sustainability which will improve
overall ESG scores for corporates. In recent past, we have seen stocks like Tata Power getting
re-rated on strategy announcement which will lead to an improvement in ESG score. Off late,
ESG funds are seeing record equity inflows and India is at a nascent stage in terms of ESG
investing. Recently, we have seen companies with high ESG score out-perform and have
lower stock volatility. Accordingly, one of our preferred theme for 2022 are
companies which may be a) Beneficiaries of India's commitment to become
carbon neutral by 2070; and b) Focus to improve ESG score over next 3
years.
Key beneficiaries: Siemens, GAIL, Gujarat Gas, HPCL, NTPC, RIL, Dalmia Bharat, Ultratech,
Ambuja Cement, Tata Motors
ESG investing at nascent stage, creating huge runway for growth
Source: Refinitiv Eikon

ESG investing in India has created alpha… … with lower volatility

250 1.4
200
1.3
1.3
150 1.2
100 1.2
50
1.1
0
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
1.0
MSCI India ESG leaders Nifty USD
MSCI India ESG leaders Nifty USD Standard Deviation of daily return
Source: Bloomberg, Antique Source: Bloomberg, Antique
Faster ESG adoption is a potent re-rating trigger

2.5
2.0 Tata Pow er unveiled Vision 2.0 on Aug’20

emphasizing the need for incremental capital
1.5 allocation to renew able w ith strong focus on ESG
1.0
0.5
0.0
Jan-2019
Mar-2019
May-2019
Jul-2019
Nov-2019
Jan-2020
Mar-2020
May-2020
Jul-2020
Nov-2020
Jan-2021
Mar-2021
May-2021
Jul-2021
Sep-2019
Sep-2020
Sep-2021
Tata Pow er NTPC
Source: Bloomberg, Antique
Theme 3# Strong tailwind to sustain growth &

valuations for IT Services
Rising demand for digital and cloud helping fuel growth

The coronavirus outbreak has accelerated the demand for cloud and cloud-enabling
technologies supporting the shift to remote working. In addition, the work around Cloud
migration, cloud-based data and innovative business models have also accelerated as
companies are looking to become more agile, reduce costs and capture the innovation of the
cloud. Also cloud adoption provides better and quick access to data for new business outcomes
and models. This acceleration of shift from traditional IT outsourcing to managed services is
positive for large cloud providers such as Microsoft, Amazon, Google etc. and this shift to
cloud is creating new opportunities for IT-services providers such as HCLT, TCS, Infosys. On the
negative side, the coronavirus pandemic could act as the catalyst to accelerate structural
decline faced by legacy IT infrastructure providers such as DXC and IBM. As per IDC, the
non-cloud legacy portion will see an acceleration in pace of decline in next few years and is
expected to drop to USD52 billion by 2023 from USD75 billion currently.
Recent results and commentary supports our view
Overall IT companies have been reporting better than expected revenues for the last couple
of quarters supporting our constructive view on the sector. We continue to remain positive on
the IT space with bias towards large-caps now. Most companies witnessed better than expected
margins despite record high hiring and wage hike. Moreover, with digital revenue growing
at double digit and contributing more than 50% of sales, it continues to offset pricing pressure
on legacy IT work. Most of the companies have revised the revenue growth guidance upward
in past quarters given the strong order book and deal pipeline.
New areas of spend adding to strong momentum
New areas of tech spending such as ESG and cybersecurity have increased the demand
further. All industries globally are looking to accelerate spending in new technologies as
cyber threats are increasing led by shift to cloud and ESG gaining importance.
IT Services industry growth expected to be at multi-decade high
Gartner projection of 9.1% CAGR for IT services till 2025 is at ~2x average of the past
decade. For FY22, overall worldwide IT spending to increase by 5.5% YoY in 2022 to reach
USD4.5tn with IT Services spending to grow at 8.6% YoY in 2022 to reach USD1.3tn.
Companies are looking to invest in technology that is link more to business outcomes. IT
services segment is among the top three highest growth areas in 2021; largely due to a boost
in infrastructure-as-a-service spending that supports mission critical workloads and avoids
high on-premises costs.
Worldwide IT services spending forecast

16% 15%
(% YoY) 14%
12% 12% 12% 12.0%
12% 11% 11%
9% 9% 9% 9% 9.1%
8%
10%
8%
6% 6.1%
5% 5% 5%
3.8%
4%
2% 2% 2% 2%
4% 2%
1%
2% 2% 2.2%
0% 1%
2020 2021 2022 2023 2024 2025 CAGR
-2%
-1%
-2%
-4%
Software IT Services Overall IT Devices Communication Services
Source: Company, Antique
Deal booking and pipeline continue to remain strong

Deal bookings and digital growth for IT companies in the past few quarter's positions them
for a potential strong growth over the next 12 months. In addition, digital revenue is now
more than 50% for most companies, which could more than offset pricing pressure on legacy
IT work. Deal wins have been robust for most companies with an increase of 15-20% in deal
wins in FY21. In addition, the commentary of most IT companies suggests the pipeline remains
at all-time high levels.
Deal bookings strong with lower ACV

10.0 9.2
(USD bn) 8.6
8.1
7.6
8.0 6.9 6.8 7.1
6.0
4.0 3.1 3.1

2.1 2.6 2.2 2.2
1.7 1.4 1.0 1.7
2.0 1.2 0.7 0.8
0.3 0.4 0.5 0.6 0.8
0.0
Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22
TCS (TCV) Infosys (large deal) HCLT (Net new) Wipro (Large deal) TechM (TCV)
688
645
800
(USD mn)
520
505
504
501
489
465
600
391
375
360
360
312
303
302
283
278
259
247
247
245
245
400
241
238
195
162
156
140
127
120
117
104
94
89
200
66
56
40
30
20
0
Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22
Coforge (fresh order intake) Mindtree (TCV) Mphasis (TCV) Cyient (order intake) Birlasoft (New deal) LTI (Large deal) Persistent (TCV)
Banking remain the largest vertical by spend for IT companies

Banking and Financial vertical remain the largest vertical for the IT services sector contributing
~30% of the overall revenue. The demand in the BFSI sector improved across all service
offerings sub segments like Banking, Mortgages, Wealth and Retirement Services. Large
banks like JP Morgan, Morgan Stanley and Goldman Sachs have been able to gain market
share over regional banks in the recent past with the help of better technologies; we believe
the regional banks will also follow its large counterparts which bodes well for the spending.
Technology spend by large US bank near all-time high
Technology spend as percentage of revenues for banks inched up to 6.7% of total revenues
versus average 5% for the past decade. The strong investment in technology has helped
large banks like JP Morgan to gain market share over regional banks in the recent past. In
the near to medium term we expect tech spending to remain strong on need to transform the
core and improve digital infrastructure that will make banks more efficient, more competitive
and significantly improve ability to serve clients.
IT Services BFSI revenue correlation with US bank revenue

25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
BFSI revenues Indian IT y-o-y Top US banks total revenues y/y
Tech spending of US banks remain solid

Tech Spending (YoY) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21
Citi Bank 5.7% 6.0% 2.4% 2.5% -2.2% -4.1% -1.3% 1.0% 0.2% 1.0% 6.1% 9.6% 7.5% 8.8% 5.6%
JP Morgan 12.4% 15.9% 12.5% 16.0% 15.1% 9.7% 12.4% 9.5% 9.1% 8.9% 2.8% 0.8% -2.3% -3.9% -3.5%
Morgan Stanley 11.7% 14.5% 11.8% 12.3% 11.3% 8.5% 8.6% 7.2% 5.8% 9.5% 10.6% 22.9% 30.2% 29.9% 27.9%
Bank Of America 18.3% 18.0% 17.5% 20.9% -0.1% 3.2% 4.5% 0.5% 3.9% 9.3% 14.6% 21.8% 17.9% 14.5% 6.2%
Goldman Sachs 12.6% 16.1% 13.6% 13.9% 13.9% 11.5% 13.2% 17.6% 12.2% 19.0% 20.1% 10.7% 16.8% 7.5% 16.8%
Wells Fargo 6.9% 2.0% 21.2% 5.8% 7.1% 10.4% 9.3% 24.7% 0.0% 19.2% 8.4% -0.6% 19.5% 6.7% -6.3%
Average 10.9% 11.9% 11.0% 11.4% 6.4% 5.3% 7.3% 7.8% 5.5% 8.4% 7.5% 8.3% 9.1% 6.7% 3.7%
Tech spending as %
of total spending 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 2Q21
Citi Bank 9.3% 9.7% 9.8% 10.7% 9.3% 9.2% 9.6% 10.1% 8.3% 8.8% 10.9% 12.3% 9.6% 10.8% 11.6%
JP Morgan 7.4% 7.8% 8.1% 9.0% 8.1% 8.3% 8.5% 9.1% 9.1% 7.9% 8.8% 8.9% 7.8% 8.2% 8.3%
Morgan Stanley 4.3% 4.7% 5.2% 6.2% 5.2% 5.3% 5.6% 5.2% 5.8% 4.4% 5.3% 5.1% 4.7% 5.2% 5.3%
Bank Of America 5.0% 5.0% 4.9% 5.1% 5.1% 5.0% 5.1% 5.2% 5.3% 5.7% 6.6% 7.0% 6.2% 6.7% 6.2%
Goldman Sachs 2.5% 2.7% 2.8% 3.2% 3.2% 3.1% 3.4% 3.1% 3.7% 2.6% 3.2% 2.9% 2.1% 2.4% 2.9%
Wells Fargo 2.8% 2.6% 2.9% 3.1% 3.1% 3.0% 3.3% 4.2% 4.0% 4.3% 4.1% 4.7% 4.7% 4.0% 3.9%
PNC Financial services 6.6% 6.5% 6.1% 6.6% 6.4% 6.7% 6.5% 8.1% 6.6% 7.4% 6.8% 7.0% 6.9% 7.0% 6.8%
Average 5.6% 5.8% 6.0% 6.6% 6.1% 6.0% 6.3% 6.7% 6.6% 6.1% 6.9% 7.3% 6.2% 6.5% 6.7%
Retail remain the key vertical for IT companies

Pandemic led to acceleration in trial and adoption of digital shopping by consumers. Most
large retailers benefited because of the technology investment made in the past few years,
large retail companies witnessed manifold increase in digital orders as consumers placed
larger orders or use the service to avoid store visits amid Covid-19 concerns. E-Commerce
sales have doubled since pandemic for most retail companies versus single digit growth in
same store sales. Helped by the strong digital sales, average revenues jumped to high-
single-digit levels, the highest levels since 2014.
IaaS/PaaS companies grew faster than SaaS as cloud infra spends reaches all-time high.
IaaS/PaaS 2019 Q1'20 Q2'20 Q3'20 Q4'20 2020 Q1'21 Q2'21 Q3'21 2019 Q1'20 Q2'20 Q3'20 Q4'20 2020 Q1'21 Q2'21 Q3'21
Amazon Web Services 35,026 10,219 10,808 11,601 12,742 45,370 13,503 14,809 16,110 36.5% 32.8% 29.0% 29.0% 28.0% 29.5% 32.1% 37.0% 38.9%
Microsoft Azure 16,416 6,413 5,961 5,962 6,605 24,941 9,619 9,001 8,943 64.8% 61.0% 50.0% 47.0% 50.0% 51.9% 50.0% 51.0% 50.0%
Google 8,918 2,777 3,007 3,444 3,831 13,059 4,047 4,628 4,990 52.8% 52.2% 43.2% 44.8% 46.6% 46.4% 45.7% 53.9% 44.9%
Oracle 21,134 5,173 6,238 4,844 5,229 21,485 5,380 6,612 5,086 -0.5% 2.0% 0.0% 1.0% 4.0% 1.7% 4.0% 6.0% 5.0%
Alibaba 5,125 1,725 1,747 2,194 2,470 8,136 2,558 2,486 3,105 60.4% 49.9% 54.1% 68.8% 60.4% 58.8% 48.3% 42.3% 41.5%
IBM 8,187 2,066 1,993 2,273 2,115 8,446 2,145 2,114 2,329 9.5% 7.0% 5.0% 6.0% -4.5% 3.2% 3.8% 6.1% 2.5%
Salesforce.com 6,979 2,078 2,258 2,398 2,674 9,408 2,642 2,837 3,183 46.9% 48.1% 47.8% 24.2% 26.3% 34.8% 27.1% 25.6% 32.7%
Total 1,01,786 30,451 32,012 32,716 35,666 1,30,845 39,894 42,488 43,747 30.3% 32.0% 26.8% 27.8% 28.0% 28.5% 31.0% 32.7% 33.7%
USDm
SaaS 2,019 Q1'20 Q2'20 Q3'20 Q4'20 2,020 Q1'21 Q2'21 Q3'21 2019 Q1'20 Q2'20 Q3'20 Q4'20 2020 Q1'21 Q2'21 Q3'21
Microsoft
--Office 365 commercial (2) 20,825 6,064 6,278 6,254 6,847 25,444 7,398 7,848 7,693 29.0% 25.0% 19.0% 21.0% 21.0% 22.2% 22.0% 25.0% 23.0%
--Dynamic 365 2,442 826 840 847 925 3,439 1,198 1,252 1,254 43.5% 47.0% 38.0% 38.0% 39.0% 40.8% 45.0% 49.0% 48.0%
--LinkedIn Commercial 7,137 2,016 1,916 2,108 2,371 8,411 2,520 2,797 2,993 25.7% 21.0% 10.0% 16.0% 23.0% 17.8% 25.0% 46.0% 42.0%
Orcale 11,652 3,011 3,112 2,934 3,054 12,112 3,162 3,454 3,169 3.0% 6.0% 1.0% 4.0% 5.0% 3.9% 5.0% 11.0% 8.0%
SAP 7,819 2,272 2,236 2,196 2,316 9,020 2,432 2,482 2,635 33.3% 28.8% 18.0% 10.0% 7.0% 15.4% 7.0% 11.0% 20.0%
IBM 4,094 1,033 996 1,136 1,058 4,223 1,072 1,057 1,165 9.5% 7.0% 5.0% 6.0% -4.5% 3.2% 3.8% 6.1% 2.5%
Workday 3,096 882 932 969 1,006 3,789 1,032 1,114 1,172 29.8% 25.8% 23.1% 21.3% 19.8% 22.4% 17.0% 19.5% 21.0%
Salesforce.com 9,064 2,497 2,582 2,687 2,802 10,568 2,894 3,077 3,196 18.3% 19.3% 16.5% 16.4% 14.6% 16.6% 15.9% 19.2% 18.9%
Total 66,128 18,601 18,892 19,131 20,380 77,004 21,707 23,080 23,276 21.3% 20.5% 15.4% 15.3% 15.0% 16.4% 16.7% 22.2% 21.7%
Source: Company Report, Antique;
Note: 1) AWS revenues are 100% IaaS/PaaS; 2) Commercial cloud revenue, includes Office 365 commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties.
3) We have used Subscription services revenues as SaaS revenues for Workday. Subscription services contribute nearly 85% to total revenues while Professional Services is rest 15%. 4) For Salesforce we have taken
Sales Cloud and Service Cloud revenues under SaaS and Salesforce Platform and Marketing and Commerce Cloud under IaaS/PaaS
We reiterate our overweight stance on Indian IT services in our model portfolio

and like HCL Tech, Infosys, TCS & Wipro among large caps, while mid-caps
should be added on corrections as valuations currently are rich.
Theme 4# Internet - Technology meets Commerce!
Pandemic induced growth

The pandemic has accelerated the e-commerce industry in India by many years, revolutionizing
the way brands operate, run, and grow their businesses, as well as how consumers choose to
shop and pay. E-commerce players are consistently evolving and transforming their operating
models (by bringing multiple segments, payment options) to cater to rapidly changing market
dynamics. Companies are expanding avenues to tap tier II and tier III cities and are now also
targeting global level expansion as well.
Categories of Ecommerce
Ecommerce can be broadly categorized into horizontal and vertical businesses. While horizontal
classifieds offer a range of products (like Amazon, Flipkart), vertical classifieds target niche
markets (like Pepperfry, Nykaa, FirstCry).
Indian eGrocery Business Models Shares of various segments in e-commerce retail by value (2020)
Model Companies 2%
Verticals Grofers, BigBasket
4%
Horizontals Amazon, Flipkart 7% Consumer electronics
Micro-delivery vertical Milkbasket, BBDaily, Supr
7% Appareis
Super-verticals Licious, Fresh to Home 40%
Food & grocery
Hyperlocals Swiggy, Dunzo
Jewellery
Furniture
40%
Others
Source: Industry, Antique Source: EY
Big headroom for growth in Food-Tech/Commerce segment

Food-tech startups have transformed the way Indians eat & dine. Covid-19 has further given
boost to online food ordering trend. While still far too underpenetrated, ordering food online
is now getting into a habit for many. Food consumption market stood at USD670bn in 2019
and most of this is driven by homecooked food. The restaurant food currently contributes
~10% to the food consumption market in India vs. 40-50% in other developed markets.
Further, only 8% of people on internet (in India) order food online compared to 38-50% in
other developed markets (Redseer estimates). We expect this ratio to increase going forward
as online food delivery users will grow at faster rate than internet users. Industry offers large
scope of growth as internet users are increasing as well as people in India are inculcating
culture of ordering food online.
FY21 saw a turnaround in unit economics for Zomato & probably Swiggy as well as contribution
margins turned positive on the back of lowered discounts and reduced overall Cost per order
including delivery cost, higher Average Order Value and commissions charged from restaurants.
All this happened amid increased acceptability of customers to order food online and
restaurants' compulsion to go online on a discovery platform like Zomato or Swiggy to able to
sustain business. Over medium to long term, growing scale of operations will drive improvement
in Unit economics; benefit of scale will show in profitability as fixed cost would remain stable.
New Trends: Quick Commerce

In 2021, online grocery and micro-delivery companies have ramped up their services and
have increased focus on convenience factor with promises of 10-minute deliveries to keep
consumers hooked to ordering online. Swiggy rolled out its Instamart services towards the
second half of 2020, which currently offers 15-30 minute deliveries. Dunzo also rolled out
19-minute delivery for consumables for its customers. Grofers which has now rebranded itself
to Blinkit is targeting 10-minute deliveries and has not stopped there - it plans to only operate
locations that can fulfil these criteria with rest locations to be shut down on immediate basis.
And, the latest to get on the band wagon is Zepto which also targets delivery in 10-minutes.
These developments indicate that Quick Commerce is here to stay.
Comparison of Quick Commerce companies

ompany Estimated Delivery Time
Zepto 10 minutes
Blinkit 10 minutes
BigBasket 10-20 minutes
Dunzo 19 minutes
Swiggy Instamart 15-30 minutes
Ola 15-30 minutes
Flipkart Quick 90 minutes
AmazonFresh 120 minutes
New Trends: Social and Live Commerce

Social commerce involves a middleman called a reseller; resellers buy goods in bulk and sell
them through social media platforms such as WhatsApp and Instagram by sharing curated
catalogues among their local communities. The line between e-commerce and social commerce
may soon blur and it will be a space to watch as Flipkart's Shopsy starts get a stronghold on
the segment.
Post emergence of formats like Direct to Consumer (D2C) and Social Commerce, brands are
now exploring Live Commerce as the space. In India, Bulbul and Simsim were early starters in
the space and primarily sold Fashion through this medium, though electronics is also gaining
traction. All sorts of Ecommerce companies have now joined the space: Nykaa running
influencer-led live shopping events as part of its 'Pink Friday Sale'; Flipkart-owned Myntra
through M-Live; YouTube through its acquisition of Simsim; Glance-through its short video
sharing platform Roposo; ShareChat also through its short video app Moj (with Flipkart
partnership). Media reports suggest, Meesho is building a live streaming platform, as it looks
to harness a new trend in ecommerce called Live commerce.
India's unicorn boom
2021 saw a mind-boggling 42 start-ups turning unicorns (valuation of USD1bn+). This compares
to 8-10 start-ups reaching unicorn mark in 2018/2019/2020. Businesses across Fintech,
Ecommerce, Edtech, SaaS have cornered significant investments as demand from homebound
consumers soared. Mensa Brands, which acquires D2C brands and help them scale, became
a unicorn in just six months. 2021 saw eight Fintech Companies (across payments, insurance,
Brokerage, Credit Cards) joining the unicorn list and a diversified E-shopping companies
making to the listing like in Online Pharmacy (PharmEasy), Social Commerce (Meesho), D2C
brands (Licious, MyGlamm), Groceries (Grofers) and B2B market places (Infra.Market, Moglix,
OfBusiness). Covid-led Edutech boom drove three of the EdTech Majors (Eruditus, upGrad,
Vedantu) turning unicorn. Despite the question around regulation on Crypto, 2 of the Crypto
exchanges (CoinSwitch, CoinDCX) turned unicorns. Amid rising market for used cars, three of
the startups in Used car space turned unicorns (Spinny, Cardekho, Droom).
Valuations for certain Businesses kept soaring through the year on back to back funding
International Funds like SoftBank, Tiger Global, Temasek, Prosus, and Falcon Edge etc are
pumping capital in Indian startups like never before. Some of the startups including Innovacer,
Infra.Market, Meesho, CRED, PharmEasy, Groww, ShareChat, OfBusiness have at least
doubled their valuations within this year itself in multiple rounds of fund raise. PharmEasy's
acquisition of Thyrocare will go down in history as that of the first unicorn/startup buying out
a listed entity. Indian edtech giant Byju's went on to become the most valued startup at
USD21bn, amid its acquisition spree of Indian/global companies. IPOs of Zomato, Nykaa,
Paytm, got significant FII anchor investment amid flush of global liquidity.
Number of Unicorns Annually Annual startup funding to surge 3x+ YoY

45 45
42 40.0
40 40
Number of Unicorn
35
Funding Amount ($ Bn)

35
30 30
25 25
20
20
15 13.2 11.9 12.8 11.5
15 9.3
9 10 10 5.7
8 5.4
10
5
4
5 1 1 1 2 0
0 2014 2015 2016 2017 2018 2019 2020 2021e
2012 2013 2014 2015 2016 2018 2019 2020 2021 Calendar Year
Source: Venture Intelligence Source: Inc42 Plus
Leading Funding deals of 2021

Startup Name Funding Notable Investors
Flipkart $3.8 Bn Walmart, GIC, Canada Pension Fund, SoftBank
BYJU'S $2.8 Bn Baron Funds, B Capital Group, India Infoline Finance
Swiggy $1.25 Bn SoftBank, Prosus, Qatar Investment Authority
DREAM11 $1.24 Bn DST Global, Tiger Global Management, Falcon Edge Capital
Pine Labs $985 Mn Baron Capital Group, Duro Capital
Meesho $870 Mn B Capital, Fidelity, Prosus, Facebook, SoftBank
Zomato $820 Mn Tiger Global, Kora, Morgan Stanley
PharmEasy $700 Mn Prosus Ventures, TPG Growth, Amansa Capital
OYO $672 Mn Microsoft, Hindustan Media Ventures
Eruditus $650 Mn SoftBank, Accel
Source: Inc42 Plus
INDIA OUTPERFORMS EARNINGS
EMERGING MARKETS IN CY21  Earnings growth for the Nifty to nominal GDP
multiplier to normalize in FY22/FY23
 India outperforms EMs in Dec’21 and CY21
 Nifty FY22/FY23 EPS estimates have remained
 Three-fifth of Nifty constituents clocked gains in
Dec’21 stable over CY21 despite several headwinds
 IT was the major outperformer in Dec’21,
followed by Metals and Healthcare
MARKETS MACROS
 Nifty posted its best performance in four years in
 India’s current account deficit touched a nine-
CY21
quarter high deficit of USD9.6b
CONTENTS
 CY21 sees the highest increase in India’s market
 Strong capital inflows helped increase forex
capitalization since CY17
reserves by USD8.9b in 2QFY22
MONETARY POLICY AND THE VALUATIONS, FLOWS

NIFTY  Market capitalization-to-GDP ratio touches
116%
 G4 central banks’ pace of incremental liquidity  The Nifty is trading at a premium to its LPA on
addition has moderated in CY21 a P/E and P/B basis
 During the previous US Fed rate increase cycles in
 FII outflows continue for the third consecutive
CY04-06 and CY16-18, the Nifty gained 41% and
month
14% CAGR, respectively
CHART BOOK | January 2022 2 June 2020

India ends CY21 on a high; outperforms EMs in CY21
World equity indices (MoM) in USD terms (%)
7 7
5 5 5 4 4 4
3
2 2 2
-2
S&P 500
MSCI EM
Nasdaq
India - Nifty
Taiwan
France
Brazil
Japan
UK
Germany
South Korea
China (HSCEI)
Russia MICEX
World equity indices in USD terms (%) in CY21
27 27 26 22 20
13
8 7
-5 -5 -6
-18 -24
S&P 500
MSCI EM
Nasdaq
India - Nifty
Taiwan
France
Japan
Brazil
UK
Germany
South Korea
China (HSCEI)
Russia MICEX
As of 31st Dec’21

2
Nifty-50
24
Nifty-50
3
Midcap 100
46
Midcap 100
6
Smallcap 100
59
Smallcap 100
CHART BOOK | January 2022

Sectoral performance MoM (%)
10
Technology
70
Metal
Sectoral performance in CY21 (%)

6
Metal
60
Technology
4
Healthcare
54
Real Estate
3
Auto
44
Bank PSU
2
Media
4
Nifty PSE 37
1
Consumer
36
Infra
0
Nifty PSE
35
Media
0
Infra
34
Oil & Gas

-1
Real Estate
19
Auto
-1
Oil & Gas

10
Healthcare
-1
Bank PVT
10
Consumer
-1
Bank PSU
5
Bank PVT
IT sector outperforms in Dec’21; Metals lead the gainers pack in CY21
June 2020
Three-fifth of Nifty constituents gain in Dec’21
 In Nifty, 32 companies posted gains in Dec’21. Tech companies led the gainers pack, with Tech Mahindra and HCL Technologies
leading with 16% MoM gains each
 In CY21, 14 companies have gained more than 50%. Tata Motors and Hindalco led, while Hero MotoCorp and Kotak Mahindra Bank
were the major laggards
Best and worst Nifty performers (MoM) in Dec’21 (%) – IT outperforms in Dec’21; Kotak Mahindra Bank and IOCL underperform (%)
16 16 15
12 12 10 10 9 8 8
2
-3 -3 -4 -4 -5 -5 -5 -6 -6
-8
Wipro
Coal India
Tech Mahindra
Asian Paints
HCL Technologies
Bharti Airtel
UPL
Eicher Motors
Cipla
Kotak Mah. Bank

Hindalco Inds.
Infosys
HDFC
Divi's Lab.
JSW Steel
Sun Pharma.Inds.
NIfty
HDFC Life Insur.
Bajaj Finserv
Tata Consumer
IOCL
Best and worst Nifty performers (YoY) in CY21 (%) – Tata Motors and Hindalco outperform, Autos (excluding Tata Motors)
underperform
162
98 85 84 84 75 73 69 67 61
24
1 1
-1 -1 -3 -4 -6 -6 -10 -21
Wipro
Tech Mahindra
Grasim Inds
St Bk of India
Tata Steel
Dr Reddy's Labs
Tata Motors
Maruti Suzuki
Kotak Mah. Bank

Hindalco Inds.
HDFC
Hind. Unilever
Britannia Inds.
IndusInd Bank
Bajaj Finserv
JSW Steel
Titan Company
NIfty
HDFC Life Insur.
Bajaj Auto
Hero Motocorp
39
Adani Gas Vodafone Idea
22
JSW Energy GMR Infra.
358 343
21
Adani Transmissi SRF
298
17
Adani Enterp. Deepak Nitrite
256
17
Tata Elxsi Mphasis
16
Tata Motors-DVR Max Healthcare
*List excludes Nifty companies

14
Max Healthcare Aditya Birla Cap
220 218 216

13
Tata Power Co. Tata Comm

12
IRCTC Pidilite Inds.

11
Mindtree Aurobindo Pharma
192 189 188

10
Deepak Nitrite Yes Bank
Top gainers from the BSE 200 pack in CY21 (%)*

10
L&T Technology Mindtree
164 139
10
Polycab India Godrej Industrie

Top gainers from the BSE 200 pack on a MoM basis (%)*
10
Mphasis Jindal Steel

10
SRF Siemens
138 121 117

9
6
Vedanta Piramal Enterp.
8
Apollo Hospitals Honeywell Auto

8
L & T Infotech IDFC First Bank

8
Adani Power ABB

8
111 108 100 100 90
IOB Natco Pharma

8
85
Oil India Bayer Crop Sci.

8
85
Piramal Enterp. Bajaj Holdings

8
84
ABB Gland Pharma

 In CY21, 20 companies have gained over 100%, while 60 companies have risen by more than 50%
77
Bajaj Holdings Torrent Pharma.

10% of BSE 200 constituents gain over 100% in CY21
75
Bharat Electron L & T Infotech

8
74
Torrent Power Adani Gas

8
73
GMR Infra. Lupin

7
71
Dalmia BharatLtd Ajanta Pharma

 Around three-fifth of BSE 200 constituents have gained in Dec’21. VIL, GMR Infrastructure, and SRF led the gainers pack
71
Astral Poly Tech Cummins India

7
69
Avenue Super. Aarti Industries

2
BSE 200 BSE 200

28
June 2020
2
28
BSE 200 BSE 200
4
MoM
-3
Sun TV Network Gillette India
2
-3
LIC Housing Fin. New India Assura
2
-3
Berger Paints Adani Transmissi
1
-4
Cadila Health. Info Edg.(India)
1
-4
General Insuranc Nippon Life Ind.
*List excludes Nifty constituents

0
-4
REC Ltd Sun TV Network
-1
Ipca Labs. M & M Fin. Serv. -4
-1
-4
Pfizer Federal Bank
-3
-4
Lupin Bank of Baroda
-3
-5
Kansai Nerolac Marico
-3
-5
Syngene Intl. Hindustan Zinc
-3
-5
MRF HAL
Biggest laggard among BSE 200 constituents in CY21 (%)
-5
-5
AIA Engineering Gujarat Gas
-5
-5
Sanofi India Bank of India

Biggest laggards among BSE 200 constituents on a MoM basis (%)*
7
-5
-5
Colgate-Palmoliv AU Small Finance
-6
-5
Natco Pharma -6 ICICI Pru Life

-5
Indraprastha Gas Cholaman.Inv.&Fn

-7
-6
Coromandel Inter Guj.St.Petronet

-8
-6
ICICI Lombard Oil India

-9
-6
Bayer Crop Sci. Godrej Propert.

-6
Gillette India Oracle Fin.Serv.

-7
L&T Fin.Holdings Tata Motors-DVR

Only 16% of BSE 200 constituents decline in CY21
-7
Petronet LNG Ruchi Soya

-7
-9 -11 -13 -15
M & M Fin. Serv. Bandhan Bank

-9
HDFC AMC TVS Motor Co.
Aurobindo Pharma Apollo Hospitals
Biocon Bharti Infratel

 Around 40% of BSE 200 constituents declined in Dec’21, reversing the trend of two consecutive months of an adverse
Yes Bank MacroTech…

-16 -20 -22 -23
-12 -13 -13
 In CY21, 33 companies declined. Bandhan Bank, Whirlpool, Yes Bank, Biocon, and Aurobindo Pharma, declined by over 20%
-33
-13
Whirlpool India Shriram Trans.

advance-decline ratio. Whirlpool, Shriram Transport, Macrotech Developers, Bharti Infratel, and Apollo Hospitals fell by over 10%
Bandhan Bank Whirlpool India

-37
-14
June 2020
Jan-18 426
Jan-18 4,442 Feb-18 380
Feb-18 3,770 Mar-18 354
Mar-18 3,946 Apr-18 340
Apr-18 3,342 May-18 352
May-18 4,117
Jun-18 312
Jun-18 3,787
Jul-18 331
Jul-18 3,635
Aug-18 368
Aug-18 3,526
Sep-18 417
Sep-18 3,983
Dec’20 levels (INR670b)
Oct-18 387

Oct-18 4,287
Nov-18 335
Nov-18 3,449
Dec-18 325
Dec-18 3,064
Jan-19 316
Jan-19 3,577
Monthly Avg. Cash Volume (INR b)
Feb-19 345
Feb-19 3,594
Monthly Institution volume (INR b)

Mar-19 410
Mar-19 4,043
Apr-19 366
Apr-19 3,549
May-19 385
May-19 4,401
Jun-19 3,140 Jun-19 344
Jul-19 3,788 Jul-19 349
Aug-19 3,932 Aug-19 363
Sep-19 3,822 Sep-19 403
Oct-19 3,856 Oct-19 403
Nov-19 4,570 Nov-19 446
Dec-19 3,392 Dec-19 346
Jan-20
8
Jan-20 4,243 374
Feb-20 4,325 Feb-20 426
Mar-20 6,581 Mar-20 518
Apr-20 3,873 Apr-20 528
May-20 561
Non Institution % to Cash Volume (RHS)
May-20 4,472
 Monthly institutional cash trading volumes declined by 21% MoM to INR5.7t
Institution cash volume as % of Mcap
Jun-20 4,802 Jun-20 664

Jul-20 4,194 Jul-20 621
Aug-20 4,454 Aug-20 655
Sep-20 4,539 Sep-20 588
Oct-20 4,150 Oct-20 551
Nov-20 6,523 Nov-20 704
Average daily cash volumes decline by 19% MoM
Dec-20 5,250 Dec-20 670

Jan-21 5,632 Jan-21 777
Feb-21 6,042 Feb-21 886
Mar-21 6,269 Mar-21 717
Apr-21 4,835 Apr-21 744
May-21 5,587 May-21 840
Jun-21 5,623 Jun-21 775
Jul-21 5,022 Jul-21 682
Aug-21 6,194 Aug-21 681
Sep-21 7,100 Sep-21 747
Oct-21 6,987 Oct-21 880
Nov-21 7,239 Nov-21 718
Dec-21 5,700 Dec-21 579
 Average daily cash volumes declined by 19% MoM to INR579b in Dec’21. Average daily cash volumes in Dec’21 were lower than
30
42
54
57 66
78
0.0
1.8
2.1 3.5
5.3
7.0
June 2020
Nifty’s CY21 performance has been the best since CY17
 Nifty delivered its best performance in four years in CY21, the sixth consecutive year of positive returns
 India’s m-cap rose 37% YoY, which is the highest gain since CY17
Nifty annual return YoY (%)

Four years of negative returns in the 1990s cycle Two years of negative returns in the 2000s cycle Two years of negative returns in the CY11 cycle
72 76
69 67
55
36 37 36 40
28 31 29
20 24
13 18 12 15
11 7
3 3 3
-1 CAGR of
-4
-15 -16 13.6%
-23 -18
-25
-52
CY91
CY92
CY93
CY94
CY95
CY96
CY97
CY98
CY99
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
-38 25 -10 37 -3 3 52 -13 3 17 37
3.5
India (USD t) YoY Chg (%)
India Market Cap
13.2% CAGR 2.5

2.4
2.1 2.1
1.6 1.5 1.6

1.3 1.1
1.0
CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21
Source: Bloomberg, MOFSL. As of 31st Dec’21.

Central banks taking away the punch bowl
 The pace of increase in the size of G4 central banks’ balance sheet has moderated in the past four months
 Fed’s Dec’21 announcement of doubling the tapering to USD30b/month would lead to the closing of quantitative easing by Mar’22
Increase in G4 central banks’ balance sheet size (USD b)
1,902
1,709
1,085
932
704
693
557
552
520
524
432
410
376
329
187
204
116
100
65
37
59
58
36
20
7
-25
May'20
May'21
Apr'20
Dec'20
Apr'21
Dec'21
Jan'20
Mar'20
Jun'20
Aug'20
Oct'20
Mar'21
Jun'21
Nov'20
Jan'21
Aug'21
Feb'20
Jul'20
Oct'21
Nov'21
Sep'20
Feb'21
Jul'21
Sep'21
Increase in G4 B/S size Avg. increase in B/S size/month in CY20 (USD b) Avg. increase in B/S size/month in CY21 (USD b)
Source: Bloomberg, MOFSL

Fed rate hike cycle has not necessarily led to an underperformance in the Nifty in the past
 In the previous two decades, there have been two periods when the Fed has raised interest rates (Jun’04-Jun’06) and (Dec’16-
Dec’18). The Nifty has performed well in those two periods, despite rate increases by the Fed
 The Nifty gained 41% CAGR between Jun’04 and Jun’06, despite the Fed raising interest rates 17x to 5.25%. The Nifty gained 14%
CAGR between Dec’16 and Dec’18 when the Fed raised rates from 0.5% to 2.5%
Nifty US Fed Rate (rhs) Repo Rate (rhs) 10.0

4,200
7.5
3,400
2,600 5.0
1,800 2.5
1,000 0.0
May'05
May'06
Dec'04
Apr'05
Dec'05
Apr'06
Jun'04
Aug'04
Mar'05
Jun'05
Aug'05
Mar'06
Jun'06
Oct'04
Nov'04
Jan'05
Oct'05
Nov'05
Jan'06
Jul'04
Sep'04
Feb'05
Jul'05
Sep'05
Feb'06
12300 Nifty US Fed Rate (rhs) Repo Rate (rhs) 9.0
11100 6.5
9900 4.0
8700 1.5
7500 -1.0
May'17
May'18
Dec'16
Apr'17
Dec'17
Apr'18
Dec'18
Mar'17
Jun'17
Mar'18
Jun'18
Jan'17
Aug'17
Aug'18
Oct'17
Nov'17
Jan'18
Oct'18
Nov'18
Feb'17
Jul'17
Sep'17
Feb'18
Jul'18
Sep'18
Source: Bloomberg, MOFSL

Nifty earnings growth to nominal GDP multiplier to normalize in FY22/FY23
 Nifty FY22/FY23 earnings growth is set to accelerate after posting the best-in-a-decade growth in FY21
 Earnings multiplier (Nifty EPS growth/nominal GDP growth) for FY18-23E is expected to mean revert
Actual Nifty EPS Implied Nifty EPS based on Nominal GDP growth 872
900
Nifty EPS trended higher than nominal
851
GDP growth between FY03 and FY08
650
415
400
Earnings remained subdued as a host of macro reforms and
150 73 a weak NPA cycle led to a disruption in corporate earnings
(100)
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
1.83 Earnings multiplier (five-year Nifty EPS CAGR v/s nominal GDP CAGR) 1.69
0.87
0.71
0.39
FY01-FY06 FY06-FY11 FY11-FY16 FY16-FY21 FY18-FY23E
Source: MOFSL

Earnings revision for Nifty remains steady for FY22/FY23
 Despite headwinds like the COVID second wave, input cost inflation, and supply chain disruptions in several sectors, Nifty EPS
estimates have been extremely resilient throughout CY21
Nifty FY22E EPS

746
742
733 732 730 730
726
720
699
Jan'21 Feb'21 Apr'21 June'21 Jul'21 Aug'21 Oct'21 Nov'21 Dec'21
Nifty FY23E EPS

872 874 873 872
868 865
858 861
830
Jan'21 Feb'21 Apr'21 June'21 Jul'21 Aug'21 Oct'21 Nov'21 Dec'21
Source: MOFSL

Deleveraging: Net debt of BSE 500 companies declines by 7% YoY
 FY21 would mark the year where corporates focused on profitability, cash flow management, and balance sheet deleveraging to
manage the fallout of the COVID-19 pandemic
 Of the BSE 500, 396 companies, excluding Financials, have seen a 7% drop in net debt in FY21 over FY20 levels. Net debt-to-equity
ratio declined to 0.59x from 0.73x, which is the lowest since FY16
Net Debt (INR b) Net Debt % YoY (rhs)

42
24 29
19 15 20
10 11 12
2 -7
10,590
13,671
15,077
15,434
17,688
19,661
23,600
26,336
24,437
6,264
8,892
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Net debt/equity ratio

0.73
0.65 0.68
0.61 0.59 0.63 0.62 0.59
0.55
0.51
0.39 0.41
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Capitaline, MOFSL

Macros: Current account in deficit in 2QFY22
 India’s current account deficit touched a nine-quarter high of USD9.6b (or 1.3% of GDP) in 2Q, following a surplus of USD6.6b (0.9%
of GDP) in 1QFY22. The wider CAD in 2QFY22 was mainly on account of a larger merchandise trade deficit
Merchandise trade deficit contributes to India’s CAD in Excluding gold, India’s current account surplus narrows to
2QFY22 2.2% of GDP in 2QFY22
(% of GDP) Goods Services Income CAB CAB ex fuel products CAB ex gold
8 6
(% of GDP)
4 1.2 3
3.4
0 0
-5.9
(4) (3)
(8) (6)
2QFY19 4QFY19 2QFY20 4QFY20 2QFY21 4QFY21 2QFY22 2QFY16 2QFY17 2QFY18 2QFY19 2QFY20 2QFY21 2QFY22
Strong capital inflows help increase FX reserves by With a marginal uptick in investments and a small CAD,
USD8.9b in 2QFY22 GDS up in 2Q/1HFY22
FX reserves* CAB Capital a/c CAB (RHS) Savings# Investments
40 36 6
(USD bn) (% of GDP)
(% of GDP)
20 32 3
0
28 0
(20)
24 -3
(40)
Q2 FY17 Q2 FY18 Q2 FY19 Q2 FY20 Q2 FY21 Q2 FY22 20 -6
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22
Source: MOFSL, Government of India. *(-) implies accretion to reserves, (+) implies withdrawal (reduction). #implied savings; does not include ‘errors and omissions’

Third COVID wave results in an exponential rise in cases
 The third COVID wave has resulted in a sharp increase in active cases to 591k v/s 91k as on 31st Dec’21
 Vaccination: 1.5b doses have been administered as of 8th Jan’22. The government has now expanded the scope of the vaccination
program to include those in the 15-18 year age group. It has begun administering a booster dose to healthcare and frontline workers
New cases on a monthly basis (in thousands) Total Active Cases (th)
3,669
9,009 1,902
6,944
454 254 586 529 418 386 591

1,209
1,124
2,237
1,244
1,156
169 165 282 159 101 91
894
459
351
955
508
315
251
689
May'21
Dec'20
Apr'21
Dec'21
Mar'21
Jun'21
Nov'20
Jan'21
Aug'21
Oct'21
Nov'21
Jan'22
Feb'21
Jul'21
Sep'21
May'21
Dec'20
Apr'21
Dec'21
Mar'21
Jun'21
Aug'21
Nov'20
Jan'21
Oct'21
Nov'21
Jan'22
Feb'21
Jul'21
Sep'21
First Dose Administered (m) Second dose administered (m) Vaccination: Seven day moving average
9.9
885.3
844.9
8.8
790.6
8.4
733.9
8.0
7.7
7.6
7.5
650.9
7.3
7.3
7.3
630.7
7.1
600.7
6.7
6.4
6.4
503.5
6.1
6.0
6.0
450.8
5.8
5.6
5.3
5.3
361.3
5.0
329.5
272.5
4.4
4.3
239.3
3.8
168.4
149.5
125.4
3.3
101.8
58.1
55.2
43.4
26.6
11.1
8.7
3.1
2.4
0.0
30'Apr'21
31'Mar'21
30'Jun'21
31'Aug'21
31'Jan'21
31'Oct'21
08'Jan'22
30'Nov'21
28'Feb'21
31'Jul'21
30'Sep'21
31'May'21
31'Dec'21
03'Aug'21
17'Aug'21
31'Aug'21
12'Oct'21
26'Oct'21
04'Jan'22
09'Nov'21
23'Nov'21
20'Jul'21
14'Sep'21
28'Sep'21
07'Dec'21
21'Dec'21
Source: Ministry of Health and Family Welfare, ourworldindata.org. MOFSL. As of 9th Jan’22

Nifty composition: IT remains the biggest outperformer
 IT’s weightage in the Nifty has increased by 280bp YoY to 19.1% in CY21, the highest since Dec’06
 The weightage of Private Banks, meanwhile, has declined by 280bp to 21.9% in CY21
 After its underperformance in CY21, the weightage of the Consumer sector in the Nifty fell 100bp to 9.4%
Weightage in the Nifty (%)

Sector Dec’04 Dec’08 Dec’12 Dec’19 Dec’20 Dec’21 SBI’s weightage rises
by 50bp from Dec’20
Automobiles 6.7 2.5 8.8 5.7 5.4 5.0
levels of 2.3%
Banks – Private 4.7 5.0 16.9 27.8 24.7 21.9
Banks – Public 5.8 5.4 4.7 2.6 1.8 2.3
NBFC + Insurance 2.1 2.3 7.9 11.6 12.3 11.4
Capital Goods 4.0 7.7 5.9 3.2 2.6 3.0 Metals weightage
Cement 2.8 1.7 4.2 1.5 2.2 2.4 has seen a 90bp
increase in CY21 to
Consumer 7.8 6.5 12.3 10.2 10.4 9.4
2.9%
Healthcare 6.3 2.6 5.0 2.1 3.6 3.4
Metals 8.2 4.8 3.8 2.4 2.0 2.9
Oil and Gas 27.1 24.5 12.3 12.5 12.5 12.3
Reliance 8.3 10.6 7.4 9.8 10.7 10.8
Telecom 6.3 11.6 2.0 2.2 2.0 2.1 Weightage of Autos
Technology 14.5 9.0 11.4 12.8 16.3 19.1 has declined by
Utilities 1.9 13.3 4.5 2.8 2.1 2.1 40bp in CY21 to 5%
Miscellaneous 2.0 3.3 0.5 2.6 2.1 2.6
Nifty 100 100 100 100 100 100

Market capitalization-to-GDP ratio at a record high since CY07
 Market capitalization-to-GDP ratio has been volatile. It fell to 56% (FY20 GDP) in Mar’20 from 79% in FY19 and has currently
rebounded to 116% (FY22E GDP) – above its 10-year average of 79%. It is at the highest level since CY07
 The ratio hit a peak of 149% in Dec’07 during the CY03-08 bull-run
Market capitalization-to-GDP ratio (%)

Nominal GDP in FY21/FY22E: -
GFC: Peak of 149% in Dec’07 3%/16%
Highest since
Lowest CY07
since
the GFC 116
103 104
95 Average of 79% for the period
88 80
83 83
82 81 79
69
71
64 66
52 55 56
42
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
10-year G-Sec increases to ~6.5%; EY/BY below its LTA
 The yield on the 10-year G-Sec rose 20bp to ~6.5%. Earnings yield remains unchanged despite upgrades to our FY22/FY23
estimates
 The EY/BY ratio is below its LTA on a forward as well as trailing basis
1.8 Earnings yield (12-month forward)/G-Sec yield
1.5
EY/BY spiked sharply
during the GFC It remained below 1x for the last
1.3
six years, except for a brief period
during demonetization 0.75
1.0
10-year average: 0.8
0.8
0.5
May'14
Apr'08
Apr'11
Dec'18
Dec'21
Jun'17
Jun'20
Oct'09
Nov'12
Nov'15
Sep'06
2.0
Earnings yield (12-month trailing)/G-Sec yield
1.6
1.2
10-year average: 0.71% 0.62

0.8
0.4
May'08
May'11
Dec'15
Dec'18
Dec'21
Jun'14
Jun'17
Jun'20
Oct'06
Nov'09
Nov'12

Spreads stable v/s the 10-year US bond; forex reserves at USD633b
 US 10-year bond yields rose 17bp to 1.5% as the Fed announced a change in stance to focus on inflation, while doubling the rate of
tapering to USD30b/month. Indian bond yields have risen to 6.5%, leading to spreads at 4.9%
 On the currency front, the INR appreciated by 0.9% MoM v/s the USD. Forex reserves declined by USD4b to USD633b in Dec’21
India 10-year yield US 10-year yield Fed cuts rates to zero Fed easing,
GFC after the GFC Fed raises rates US-Sino
12 India fiscal tightening,
5.4 trade war,
strong economic growth led by the 6.9
and the
global book, and Fed raising rates
8 COVID-19
6.0
outbreak
4
4.9
0.6 3.1
3.9 4.4
0
May'07
Apr'05
Dec'21
Mar'03
Jun'09
Aug'13
Oct'17
Nov'19
Feb'01
Jul'11
Sep'15
Forex Reserves (USD b) (RHS) USD:INR Low inflation characterized the
Eurozone crisis, taper tantrum, and
period post CY15. The INR has
Pre GFC peak devaluation of the RMB. The taper
The INR had its best run during the been relatively less volatile
in FX reserves tantrum episode in CY13 drove the
90 CY03-07 global bull-run when GDP and despite several global 700
USD:INR down sharply to 68 from 55
corporate earnings growth were high headwinds. Forex reverses surge
75 in just four months. This was a period 525
and the twin deficits – CAD and FD –
of high inflation and INR depreciation
were among the lowest in two decades
60 350
45 175
30 0
May'07
Apr'05
Dec'21
Mar'03
Jun'09
Jan'01
Aug'13
Oct'17
Nov'19
Jul'11
Sep'15

Valuations: Nifty forward P/E and P/B trade at a premium to its LTA
 Nifty 12-month forward P/E of 20.7x is at a premium of 14% v/s its LTA of 18x
 At 3.2x, the 12-month forward P/B for the Nifty stands at a 21% premium to its historical average of 2.6x
12-month forward Nifty P/E (x)
30
25.3
25
20.7
20
15 Long-term average: 18.2x

10
May'08
May'11
Dec'15
Dec'18
Dec'21
Jun'14
Jun'17
Jun'20
Oct'06
Nov'09
12-month forward Nifty P/B (x) Nov'12
4.4
3.6 3.2
Long-term average: 2.6x 2.6
2.8
2.0
1.2
May'08
May'11
Dec'15
Dec'18
Dec'21
Jun'14
Jun'17
Jun'20
Oct'06
Nov'09
Nov'12

Valuations | Nifty trailing P/E at a 27% premium to its LPA
 The 12-month trailing P/E for the Nifty stands ~25x, 27% higher than its LTA
 At 3.6x, the 12-month trailing P/B for the Nifty stands at 21%, above its historical average of 3x
12-month trailing Nifty P/E (x)

25
30
25
Long-term average: 19.6x
20
15
10
May'08
May'11
Dec'15
Dec'18
Dec'21
Jun'14
Jun'17
Jun'20
Oct'06
Nov'09
Nov'12
12-month trailing Nifty P/B (x)
5.5
4.5
3.6
3.5 Long-term average: 3x
2.5
1.5
May'08
May'11
Dec'15
Dec'18
Dec'21
Jun'14
Jun'17
Jun'20
Oct'06
Nov'09
Nov'12

6 January 2022
Equity Research
Global | Europe
Global Equity Strategy

FOMC: what does the pivot to a more hawkish
Fed mean?
Investment Strategy | Strategy
The FOMC minutes came out being hawkish last night, continuing the trend of the past 6
Research Analysts
weeks (dropping the word ‘transitory’ to describe inflation, 3 rate hikes in 2022, and now likely
to unwind their balance sheet after the first rate hike). The Fed also hint that they see maximum Andrew Garthwaite
employment as close. We think the key focus for Fed policy will be wage growth (which is at a 44 20 7883 6477
12 year high, at levels that are above the Fed’s make up target with lead indicators of wage andrew.garthwaite@credit-suisse.com
growth remaining strong). We see some signs that US wage growth should slow. Robert Griffiths
We believe that there is a clear risk that Fed funds rate has to end 23 at 2% (vs Fed 44 20 7883 8885
expectations of 1.6% and a market view of just under 1.8%). The output gap in 23 is expected robert.griffiths@credit-suisse.com
to be at a 20 year high (on consensus GDP growth), requiring neutral monetary conditions. Asim Ali
We see the US 10 year bond yield rising to 2%. There remains an abnormally large gap 44 20 7883 2480
asim.ali@credit-suisse.com
between PMIs and bonds that was driven by QE (with the Fed buying nearly half of net issuance
since May) and now this funds flow reverses. Normally, if the Fed have to tighten more than Nasr Islam
expected, long yields rise unless policy is tight. We do not think the Fed are ahead of the curve 44 20 7883 0451
and thus continue to believe that eventually the 10 year inflation breakeven will rise to 3% nasr.islam@credit-suisse.com
(reflecting fundamental changes in cost-push and demand-pull inflation; see our 2022 Outlook). Marc el Koussa
The key has been the TIPS yield. This has risen almost 30bps YTD (6 days in). Over the 44 20 7883 3896
taper tantrum the TIPS yield rose nearly 130bps. We can a small rise in the TIPS yield: 71% of marc.elkoussa@credit-suisse.com
the time headline inflation rolls over the TIPS yield rises (we see headline inflation peaking end Daria-Ioana Sipos
Q1 in the US) and there is a large gap between the 2y note yield and the TIPS yield. However 44 20 7888 4572
we do not see the 10y TIPS rising much further beyond -50bps given inflation tail risks and dariaioana.sipos@credit-suisse.com
Japanese yield curve control.
Growth: each 1% on the TIPS takes 1.5% off GDP growth but we see enough underlying
forces to leave US GDP well above trend this year at c4%.
Dollar: a rise in TIPS is good for the dollar with the ECB on a notably dovish path. The bear
market rally could drive the tradeweighted dollar up 3-5%.
Equities: we are now fair value on our P/E model driven by TIPS and high yield. Each 1pp. rise
in the TIPS takes 12% off P/Es at these levels. When QT previously started in ‘17, the market
made progress for a year until monetary conditions were tight. We stay positive on equities.
Regions: Europe and Japan are the winners if the cost of debt rises, GEM and the US the
losers. We reiterate our overweight of Cont. Europe.
Style: we stay overweight of value in Europe. Value to growth has been very closely correlated
to TIPS in the past 2 years.
Sectors: a rise in TIPS is actually problematic for non-financial cyclicals with the exception of
financials. We stay underweight non-financial cyclicals (they are pricing in much higher PMIs,
expensive, and have ignored the flatter yield curve) but more than offset this by being
overweight financials. At some point higher rates will be bad for banks (because of the negative
impact on loan growth, loan quality, and the yield curve will offset the positive impact on NIMs)
but that is only when policy returns to neutral levels or the yield curve inverts.
6 January 2022
A more aggressive Fed: what does it mean?

The Fed last night (05/01/2022) pivoted to be more aggressive. The particular surprise was
the start of the unwind of the balance sheet after the first rate hike at a faster pace than in
2017-19 (when the unwind was initially $10bn a month rising to $50bn but the balance sheet
then was half the size it is now) and some more hawkish comments on the labour market
(‘many participants saw the US economy making rapid progress toward the Committees
maximum employment goal’). This follows a more hawkish Fed generally in the past six weeks
(moving to three rates hikes in 2022, and dropping the word ‘transitory’ to describe inflation).
We think the key focus for Fed policy will be wage growth (which is at a 12-year high and at
levels that are above the Fed’s make up target with lead indicators of wage growth remaining
strong). We think only a third of the decline in the participation rate has been due to
demographics (hence there are some 3m people to return to the US workforce) and there are
some tentative signs of wage growth slowing in those states that ended unemployment benefit
early. So we would expect a mild decline in wage growth.
Figure 1: NFIB survey showing net percentage of firms planning to increase wages
implies a rise in wage growth (ECI)
5.5% ECI wages & salaries, % change Y/Y

33
5.0% US NFIB Survey: % of firms planning to raise worker compensation, rhs
28
4.5%
23
4.0%
3.5% 18
3.0%
13
2.5%
8
2.0%
3
1.5%
1.0% -2
1990 1993 1997 2001 2005 2009 2013 2017 2021
Source: Refinitiv, Credit Suisse research
2% Fed Funds by end-2023 potentially

We still think there is risk that the market is a bit sanguine on rates (the Fed is forecasting
1.6% Fed Funds and the market is pricing in 1.8% Fed Fund by end 23). By end-2023, the
output gap will be at a 20-year high (on consensus GDP estimates) but monetary conditions will
still be just below neutral.
Global Equity Strategy 2

6 January 2022
Figure 2: US monetary conditions are still very loose currently Figure 3: The output gap by end-2023 could be the highest for
and just below neutral by 2023 20 years
8 US output gap, % of potential
2.00 US MCI GDP
6
Bloomberg consensus forecasts
1.50 Projections for end 2022, end 2023*
4
1.00
2
0.50 0
0.00 -2
-4
-0.50
-6
-1.00
-8
*Assuming 3 rate hikes in 2022, 2 in 2023, M1 growth at
-1.50 c.10% in 2022, 5% in 2023, dollar depreciates 10% from -10
here by end-22
-2.00 -12
2001 2004 2007 2010 2013 2016 2019 2022 1949 1959 1969 1979 1989 1999 2009 2019
Source: Bloomberg, Refinitiv, Credit Suisse research Source: Bloomberg, Refinitiv, Credit Suisse research
10 year US bond yield to hit 2%

Typically, if short rates rise more than expected so do long rates unless policy is tight (which it is
not as shown above). Moreover, there remains a large gap between the global PMI new orders
and the 10-year bond yield. This was partly caused by QE (with the Fed owing to the wind
down in the Treasury general accounting buying nearly half of net issuance since May) which
now reverses (in 2017-19 the Fed sold $600bn against a balance sheet then that was $4.5trn
compared to balance sheet today of $8.3trn).
Figure 4: There is still a large gap between Treasury yields and Global PMI
manufacturing new orders
US 10y yield Global PMI manu new orders
5 66
61
4
56
3
51
2
46
1
41
0
36
2010 2011 2012 2014 2015 2016 2018 2019 2020
-1 31
Source: IHS Markit, Refinitiv, Credit Suisse research
TIPS yields to trend modestly higher

6 January 2022
The key focus has been the sharp rise in the TIPS yield on the pivot of a hawkish Fed.
Our view is that the TIPS yield is very unlikely to do what it did in 2021 and hit new lows and
trend modestly higher (but not rise above minus 50bp).
The key drivers of modestly higher TIPS are:
i. 71% of the time headline inflation falls, the TIPS yield rises (and CPI inflation
should peak in Q1 in the US and around now in Europe) as investors see less
need to ‘hedge’ inflation risk;
ii. As shown below there is a near record gap between the two-year note yield and
the TIPS yield;
iii. Post the GFC the TIPS yield troughed when US GDP was 4% above previous
peak (as it the case now).
Equally we do not see a large rise in the TIPS yield (i.e. beyond minus 50bps).
This is partly because we feel inflation uncertainty will remain high owing to the secular change
in cost push and demand pull inflation (see link to Outlook Part 1). We also still have a c1%
currency hedged yield pickup from JGB into Treasuries at a time when the BoJ is still
participating in Yield Curve Control and that caps nominal yields (which keeps real yields
artificially low) and above all, the amount of leverage in the system caps real rates (negative real
bond yields are required to stabilise government debt to GDP and unemployment).
We do not see this being like the taper tantrum when the TIPS yield rose 130bp over six weeks
in May/June 2013.
Figure 5: There has been a decoupling between the TIPS yield Figure 6: Inflation uncertainty leads to investors paying more
and the 2-year Treasury yield for inflation protection
TIPS yield US 2-year bond yield, rhs 1.3 -0.20
1 0.9
0.00
0.8
0.8
0.5
0.7 0.20
0.3
0.6
0.40
0
0.5 -0.2
0.60
0.4
-0.5 -0.7
0.3 TIPS yields, lhs 0.80
0.2 -1.2
-1 US FOMC Uncertainty about PCE 1.00
0.1
Inflation diffusion index, inverted, rhs
-1.5 0
-1.7 1.20
Jan-21 Feb-21 Apr-21 May-21 Jun-21 Aug-21 Sep-21 Nov-21 Dec-21 2014 2015 2016 2017 2018 2020 2021
Source: Bloomberg, Refinitiv, Credit Suisse research Source: Refinitiv, Credit Suisse research
The fact that in reaction to the hawkish FOMC minutes inflation expectations fell (from 2.6% to
2.55%) shows that the market believes that the Fed can control inflation.
What is the impact of all of this?

GDP: We estimate that each 1% rise in the TIPS yield takes about 20% off housing starts
which in turn would take about 1% off GDP directly and c1.5% overall (because of the indirect
impact of housing). We see enough underlying strength to lead to growth of c4% this year.

6 January 2022
Figure 7: The TIPS yield is inversely related to housing starts

50 -1.3
US existing housing sales, YoY % change
40
-0.8
TIPS yield, 3m lead, rhs, inv
30
-0.3
20
10 0.2
0 0.7
-10
1.2
-20
1.7
-30
-40 2.2
2010 2012 2014 2016 2018 2021
Source: Refinitiv, Credit Suisse research
Dollar: A rise in the TIPS yield typically means a stronger dollar especially against an ECB who
are only engaged in modest tapering. The stronger dollar in itself represents a tightening of
global financial conditions (because 80% of global trade and 61% of global FX reserves are
dollar denominated).
Regional performance: Regionally, if the cost of debt rises then Japan is the best performing
region (as it has short duration and the lowest leverage of any region). The US (with long
duration and high leverage) and GEM suffer most the worst.
Figure 8: A rise in the TIPS yield is positive for the dollar Figure 9: Japan performs best when the cost of debt rises.
30 1.5 Correlation to US HY, relative regional performance
0.8
25
20 1 0.6
15
0.5 0.4
10
5
0 0.2
0
-5 0
-0.5
-10
-0.2
-15 -1
-20
-0.4
-25 -1.5
1997 2001 2005 2009 2013 2017 2021
-0.6
Japan UK Europe EM US
Dollar tradeweighted, yoy % chg TIPS yield, rhs, yoy chg
Source: Refinitiv, Credit Suisse research Source: Refinitiv, Credit Suisse research
Equities: The TIPS yield along with high yield have been the key drivers of multiples. 1% on
the TIPS yield takes around 12% of fair value. Right now equities are at fair value.

6 January 2022
Figure 10: PE tends to rise as the TIPS yield falls Figure 11: Our regression model
24 S&P 12m fwd PE model R²: 84.9%
22
12m fwd PE model (2015 to present)
Variable Coefficient t-value Current
20
TIPS (price) 0.24 28.15 108.7
US HY -0.62 -12.70 5.0
18
Model 21.4 Intercept -2.1
Actual 21.3 R² 84.9%
16
Upside 0.2%
14
12
Jan-15 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21
Actual Model (linear;10y TIPS and US HY)
The last period of balance sheet reduction by the Fed began in 2017 and ran until 2019. Then,
balance sheet reduction didn’t commence until around a year after the first rate rise, with both
forms of tightening running concurrently until the dovish tilt of end 2018 which brought the rate
rising cycle to an end.
Figure 12: The last period of balance sheet reduction began in Figure 13: During which the Fed managed to raise rates up to
2017, running until 2019 2.5% before the dovish u-turn of January 2019
4600 3.0 Jan 2019: The dovish tilt, with
Fed Balance sheet, $bn the word 'patient' introduced
4500 to the FOMC statement
2.5
4400
4300
Oct 2017: Yellen 2.0
begins runoff, initially Fed Funds Target Rate
4200
$10bn a month. Says it
will be 'like watching
4100 1.5
paint dry'
Dec 2018: Powell says
4000
balance sheet
reduction on 'autopilot' 1.0
3900
3800
Oct 2019: money 0.5
3700 market rates spike;
Fed resume purchases
3600 0.0
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
Through this period, the equity market was relatively untroubled through the initial phase of
balance sheet contraction. Indeed the S&P rose by 14% between October 2017 and January
2018. The near 20% sell off in the S&P only occurred in the fourth quarter of 2018 when
Jerome Powell highlighted that QT was on ‘autopilot’, monetary conditions were tight and the
Fed Funds Rate had climbed to above 2%.

6 January 2022
Figure 14: The S&P 500 was relatively untroubled through the first 12 months of
balance sheet contraction in 2017-18, only declining sharply once financial conditions
were tight, rates above 2% and Powell suggested contraction was on autopilot
3,500
3,300 S&P 500
3,100
2,900 Balance sheet reduction begins
2,700
Purchases
2,500 resume
2,300 Powell's 'Autopilot' comment

Powell U-turns, says Fed
2,100 will be patient
1,900
1,700
2016 2017 2018 2019 2020
Source: Company data, Credit Suisse estimates
Style and sector

A rise in TIPS is clearly a warning on long duration and, combined with high valuation (P/E of
software in December was very close to all-time highs), is one of the reasons we took software
down to benchmark in December (the first time we had not been overweight for 15 years).
Figure 15: Tech outperforms when the TIPS yield falls Figure 16: Software is looking very expensive
2.6 -1.8 238%
US tech rel mkt Global software: 12m fwd P/E rel market
2.4 218% Average x bubble

TIPS yield, rhs, inv -1.3
198%
2.2
-0.8
178%
2
-0.3 158%
1.8
138%
0.2
1.6
118%
0.7
1.4 98%
1.2 1.2 78%

Jan-19 Sep-19 Jun-20 Mar-21 Dec-21 1995 1998 2002 2006 2009 2013 2017 2021
We can see that European value is nearly 3 sd cheap against European growth and in Europe
value to growth has simply been sensitive to the bund yield. We stay overweight European value.

6 January 2022
Figure 17: European value is very cheap against European Figure 18: Growth vs value has just moved with the bund yield
growth
1 45% -4.0%
MSCI Europe growth rel value price perf, % yoy chg
German 10yr bond yield, yoy chg, rhs inv
0.9 35%
-2.5%
0.8 25%
0.7
15%
-1.0%
0.6
5%
0.5
-5% 0.5%
0.4
2005 2010 2015 2020
-15%
European value 12m fwd PE rel growth Average (+/- sd) 2005 2007 2010 2013 2015 2018 2021
Source: Bloomberg, Credit Suisse research Source: Refinitiv, Credit Suisse research
A rise in the TIPS yield is typically less good for cyclicals with the clear exception of banks
(which have been performing sector when TIPS yield rise over the past 3 years) and life
companies.
Figure 19: Rising TIPS is generally negative for cyclical Figure 20: …with the clear exception of banks
performance…
0.85 -1.5 0.8 Global sectors: 3yr corr with TIPS yield
European cyclicals rel
defensives
US 10y TIPS yield, -1 0.6
0.80 rhs, inv
-0.5 0.4
0.75 0 0.2
0.5 0.0
0.70
1
-0.2
0.65
1.5
-0.4
0.60 2
-0.6
2.5
-0.8
0.55
Cons Mat
Autos
Fd Retail
Media
Banks
Div Fin
Insurance
Chemicals
Semis
HC Equip
Cons Dur
Metals & Mining
Utilities
HPC
Energy
Transport
Hotels & Leisure
Telecom
Pharma
Beverages
Fd Prds
Tech HW
Cap Goods
Pulp & Paper
Tobacco
Real estate
Retailing
Software
Comm Svcs
0.50 3.5
2003 2006 2009 2012 2015 2018 2021
Non-financial cyclicals are pricing in very high PMIs and also look expensive.

6 January 2022
Figure 21: European cyclicals are currently pricing in a very Figure 22: European cyclicals look expensive on P/B
high PMI
Europe cyclicals ex fin, ex tech rel defensives Price to Book - European Cyclicals( ex tech ex fin) rel. to
97% defensives
80% Euro area PMI manufacturing new orders, rhs Average (+/- 1 SD)
67 87%
75%
57 77%
70%
47 67%
65%
37 57%
60%
27 47%
55%
37%
50% 17
1995 1998 2001 2004 2008 2011 2014 2017 2021
2000 2003 2006 2009 2012 2015 2018 2021
Source: IHS Markit, Refinitiv, Credit Suisse research Source: Refinitiv, Credit Suisse research
Moreover, they ignored the flattening of the yield curve with earnings revisions that are now
worse than the market. Hence our view of being overweight of financials but underweight non-
financial cyclicals.
Figure 23: European cyclicals have ignored the recent Figure 24: European cyclicals’ earnings momentum has been
flattening of the yield curve negative recently
0.85 30 13%
1.5
0.8 European cyclicals rel defensives 20
1.3
US yield curve, 10y-2y 8%
0.75 1.1 10
0.7 0.9 3%
0
0.7
0.65 -10
-2%
0.5
0.6 -20
0.3
-7%
0.55 -30 European cyclicals price rel defensives, y/y%
0.1
European cyclicals earnings momentum rel defensives,rhs

0.5 -0.1 -40 -12%
Jan-20 May-20 Sep-20 Feb-21 Jun-21 Nov-21 2006 2008 2010 2012 2014 2016 2018 2021
Source: Bloomberg, Refinitiv, Credit Suisse research Source: Refinitiv, Credit Suisse research
At same stage a rise in yields would be a bad for financials relative to the market (the stage at
which the rise in yields leads to a deterioration in both loan growth and loan quality which more
than offset the boost to NIMs). We think this happens as the yield curve inverts or when policy
is tightened but not until then).

08 January 2022 FinTech Playbook
Buy Now Pay Later

De-mystifying the tablestakes Company
Mcap CMP
Reco.
TP
(INR bn) (INR) (INR)
India’s Buy-Now-Pay-Later (BNPL) is positioned as a source of gateway credit SBICARD 875 928 BUY 1,100
and poised to grow to USD56bn by FY26 (~5% of digital P2M payments) on
the back of rising ecommerce and digital payments penetration. BNPL players DID YOU KNOW?
are exploring multiple business models (interest-free vs. EMI, distribution vs.
balance sheet lending) and are yet to establish economic viability with limited
revenue drivers and high delinquencies (unsecured credit and higher mix of  BNPL has been in existence in
NTC customers). Although FinTech BNPLs enjoy favourable regulatory India for a long time (Credit
arbitrage, incumbents have an opportunity to expand their customer funnels cards and EMI financing)
either through in-house offerings (HDFC Bank FlexiPay, ICICI PayLater) or
partnerships. We expect regulatory convergence on the back of the RBI’s  BNPL is now the most
recent narrative for digital lenders although FinTech BNPLs are likely to preferred mode of ecom
sustain their superior user experience. Within a bouquet of BNPL options, payment in Sweden
credit cards remain the most exhaustive and profitable and, in fact, offer an
 >50% of consumers in US have
up-sell opportunity for credit-tested top-of-the-BNPL-pyramid customers.
used BNPL at least once,
 USD56bn BNPL market by FY26; ~5% of digital P2M payments: India’s according to Survey
BNPL is at an inflexion point with rising ecommerce and digital P2M
payments (FY21-FY26E CAGR of 28%/26% respectively) fuelling deferred  Cumulative no. of BNPL
payments. BNPL GMV is poised to exhibit ~74% CAGR and account for ~5% accounts in India are already
of digital P2M payments by FY26E. at ~50% of no. of credit card
 Multiple models at play; Zest and Slice emerge with early leads: BNPL outstanding
players are experimenting with different models (closed loop vs. open loop,  ~45% of personal loans
convenience vs. credit, offline vs. online, and partnerships vs. balance sheet disbursements in Q4CY20
lending) in their efforts to discover viability. While the jury is still out on the were done through FinTechs
“ideal” model, Zest and Slice emerge with early leads on our proprietary
BNPL Quotient, built on vectors such as platform scale, engagement levels,  Indian incumbents are better
revenue drivers, propensity to cross-sell, and risk management. placed compared to global
 Business viability gaps need addressing: With limited revenue drivers peers in confronting the BNPL
(such as MDR and low customer-driven fees) and low per user spends, our wave
analysis suggests limited economic viability, particularly of the convenience-  Credit card remains the by far
led model and a need for customer-led fees (EMI financing, personal loans, the most exhaustive form of
etc.). The BNPL model has a significantly high dependence on late fees (~3- BNPL product in terms of
10% of spends), which also mirrors itself in elevated credit costs (unsecured offerings to the consumer
nature of credit, high share of NTC customers, limited recourse with digital
collections), although digitisation drives lower opex.
 Regulatory convergence ahead: BNPL FinTechs disproportionately benefit
Krishnan ASV
from favourable regulatory arbitrage around the ease of onboarding, risk-
venkata.krishnan@hdfcsec.com
sharing, bureau-reporting, and customer disclosures, which we expect will
+91-22-6171-7314
converge on the back of the RBI’s impending regulatory approach.
 Tablestakes for incumbents but differentiated approaches: Incumbents are
Deepak Shinde
approaching “new-age” BNPL as tablestakes either through in-house deepak.shinde@hdfcsec.com
offerings or partnerships. We see two distinct approaches: private banks +91-22-6171-7323
with large carded base offer BNPL exclusively to ETB customers to raise
engagement, cross-sell and maintain profitability; on the other hand, those Neelam Bhatia
with a limited carded base have adopted the partnership route with FinTech neelam.bhatia@hdfcsec.com
BNPLs to tap into new-to-franchise customers.
+91-22-6171-7341
 BNPL to add significant addressable market to credit cards: Credit cards,
the most exhaustive form of BNPL, in our view, are expected to benefit from Sahej Mittal
BNPL, as the format acts as a feeder engine, adding credit-tested and more sahej.mittal@hdfcsec.com
potentially cardable customers to the addressable market. +91-22-6171-7325
HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters
FinTech Playbook: Buy Now Pay Later | De-mystifying the tablestakes
BNPL = Commerce + Payments + Credit

 Old wine, re-branded: The proliferation of Buy-Now-Pay-Later (BNPL) as a
mode of credit-based payment is gaining significant traction, particularly
amongst the millennials and Gen-Z population (~51% of India's population)
within a short span of time. Proliferation of ecommerce (28% CAGR during
FY18-FY21), rising digital payments (26% CAGR during FY18-FY21), and
digital infrastructure (e-KYC etc.) have enabled seamless customer
onboarding, credit assessment, and usage in payments.
However, BNPL as a concept in India has been in existence for years, in the
form of "No-cost-EMIs" through merchant subvention. Merchants have also
been increasingly willing to pay “swipe fees” for commerce-enablement and
business-enhancement, higher authorisation rates and better end-to-end
management of the point-of-purchase or point-of-sale financing journey.
Credit cards are also technically a form of BNPL. However, this new form of
BNPL benefits from the sheer pace of adoption and the proliferation of
ecommerce, with technology being leveraged to blitzscale across multiple
categories of individual consumption. The number of unique BNPL users
has zoomed to 10mn in a span of a couple of years, compared to ~35mn
unique credit card users during this time.
Exhibit 7: BNPL userbase at ~1/3rd of credit card users Exhibit 8: BNPL-high on volumes, low on loans
outstanding
Volume
BNPL
Consumer Personal
Durables loans
Business
loans Home
2 Wheelers
Auto loans
loans
Value
Source: Industry, Company, Transunion CIBIL, RedSeer, HSIE Source: RBI, CRIF High Mark, HSIE Research | Note: BNPL disbursals
Research exclude credit cards spends and cards-based EMI loans
Exhibit 9: BNPL contributed to ~37% of retail digital Exhibit 10: Increasing share of UPI in P2M payments
lending by banks by volume in FY20
% share in digital loans disbursed UPI P2M DC POS CC POS m-wallets
Net Banking Prepaid cards NETC

36% 37%
FY22* 38 20 25 6 8 21
21%
2% 3%
0%
FY21 27 29 27 7 8 21
Personal Auto Gold SME BNPL Others
loans loans loans loans
0% 25% 50% 75% 100%
Source: RBI, HSIE Research Source: RBI, NPCI, HSIE Research | Note: * 8MFY22
Page | 3
 What makes BNPL so unique? BNPL has proliferated at a furious pace in

the past couple of years, primarily due to two key reasons: relatively easy
availability of credit for NTC customers (albeit with lower credit limits) and
seamless user experience from onboarding to payments. BNPL players'
credit assessment relies on several parameters beyond bureau score and the
credit limits are fairly dynamic (based on spends and repayment history).
However, the biggest value proposition of BNPL over other payment modes
(including credit cards), is the seamless user experience. Most BNPL players
provide for onboarding of new customers during checkout (online as well as
offline) with turnaround time of a few minutes. Further, payments for online
purchases are made with a single click (choosing the BNPL option) with no
need for an OTP or any other authentication (regulatory arbitrage). Low fees
from the customer (0% interest products, low subscription fees etc.) and end-
to-end digitisation are some other features that are lucrative, particularly for
the younger generation and new-to-credit (NTC) cohorts.
Exhibit 11: BNPL’s customer value proposition in a nutshell
Easier access for

NTC customers
Low fees for Onboarding

customer during checkout
End-to-end TAT - few

digital product minutes
One-click
checkout (no
OTP etc.)
Source: Industry, HSIE Research
Page | 4
Exhibit 15: ecommerce penetration across segments-significant opportunity

(FY21E)
e-commerce penetration %
60%
45%
30%
15%
0%
Appliances
Pharmacy
Lifestyle
Personal care
Overall
Smartphones
Grocery
Online food
retail
delivery
Beauty &
Source: RedSeer, Zomato, Nykaa, Snapdeal API Holdings DRHP, GfK Research, HSIE Research
 Digital P2M payments surging like never before: Digital P2M payments
continue to witness strong growth momentum after registering 26% CAGR
between FY18 and FY21. The surge has been led by increasing smartphone
and internet penetration, further catalysed by the pandemic and investments
by FinTechs, incumbents, and policymakers in the payments ecosystem. As
highlighted in our thematic report, P2M Payments – Surging pool,
dwindling yields, Digital P2M payments are expected to exhibit 34% CAGR
to USD1trn by CY25, driven by increasing digital penetration (~50% of
ecommerce transactions payments are done through cash-on-delivery) and
more use cases, with a disproportionate contribution from mobile payments
(UPI), which have emerged as the single largest mode of P2M payments.
Exhibit 16: % CAGR across payment modes: FY18 - Exhibit 17: P2M payments expected to grow to USD
FY21 1trn by CY25E
280% FY18 - FY21 CAGR

234%
210%
140% 104%
90%
70%
70%
14% 13% 12% 11%
0%
FASTag
Total
CC POS
UPI
m-wallets
DC POS
AEPS
Prepaid
cards
Source: RBI, NPCI, HSIE Research Source: Industry, RBI, NPCI, HSIE Research
 Increasing shift towards digital payments augurs well for BNPL: The
increasing penetration of digital payments on merchants (~25% penetrated)
and consumers (22% penetration) augurs well for the BNPL industry.
Delayed fulfilment (ecommerce) or in-store purchases are typically the last
use cases in a customer’s digital journey, P2P transfers being among the first
followed by ticketing and bill payments. The increasing pool of digital
payments creates a sizeable addressable market for credit-based payments
such as credit cards, BNPL, and checkout financing.
Page | 6
Exhibit 18: Understanding the user’s digital journey
Delayed fulfilment
Instant fulfilment
Trusted government platforms (electricity, water

bills), instant/ fulfilment platforms (services) and
value convenience of digital transactions
UPI / Wallets & Small

transaction amounts
Utility Bills / Offline Stores / E-Commerce / Other

P2P / Offline Retail Ticketing
Mobile Recharge Malls usecase
Exhibit 19: ecom as a percentage of total spends–cards- Exhibit 20: Average ticket size across payment modes
based payments (by value)
Source: RBI, HSIE Research Source: RBI, NPCI, HSIE Research | UPI denotes UPI P2M
Page | 7
 Proliferation of short-term consumer credit: Short-term consumer credit

(STCC, ticket sizes below INR 0.1mn) has witnessed rapid growth since
FY18, now contributing to >50% of total disbursal volumes in FY21, as per
CRIF Highmark. While the personal loans outstanding have grown at 25%
CAGR from FY19 to FY21, the volume share of STCC has risen from 54% to
71% during this period.
 Deferred payment options driving high volumes: Rising penetration of e-

commerce and digital payments is now beginning to meaningfully reflect in
retail credit with increasing volumes of checkout financing (BNPL, EMI
financing, etc.). Beyond credit cards and traditional EMI financing options
by incumbents, challenger FinTechs and BigTechs, in partnership with
NBFCs and banks, are increasingly offering credit at the point of sale.
Exhibit 21: Retail credit outstanding in India (FY21) Exhibit 22: Personal loan originations by ticket size (by
volume)
Gold Others < 0.1mn 0.1mn - 0.2mn 0.2mn - 0.5mn 0.5mn - 1mn >1mn
Auto 5% 21%
6% 100%
LAP 75%
8%
Personal 50%
Home loans
loans 79%
31% 71%
9% 54%
25%
40% 35%
Business
loans Agri loans 0%
10% 10% FY17 FY18 FY19 FY20 FY21
Source: CRIF High Mark, HSIE Research Source: CRIF High Mark, HSIE Research
Exhibit 23: Share of personals loans < INR 10K in personal loans disbursals
Volume Value (RHS)
80% 4%
60% 3%
40% 2%
20% 1%
0% 0%
FY17 FY18 FY19 FY20 FY21
Source: CRIF High Mark, HSIE Research
 NBFCs at the forefront of STCC disbursals: NBFCs, driven by standalone

lending and FinTech partnerships, are capturing the lion’s share in STCC
disbursals at 49%/66% by value and volume as of Mar-21 respectively,
followed by private banks at 20%/19%. Private banks have a higher share in
larger ticket sizes, where the unit economics is far more favourable.
Consumer durables financing (up to INR 50K) has been dominated by
NBFCs (largely Bajaj Finance) in terms of value and volume with over >75%
market share in disbursements, while private banks have focused on EMI
financing through their credit card and debit card EMI offerings.
Page | 8
Exhibit 24: Value market share–personal loans and Exhibit 25: Volume market share–personal loans and
STCC (Mar-21) STCC(Mar-21)
PSBs Private Banks NBFCs Others PSBs Private Banks NBFCs Others
100% 4% 6% 100% 4% 3%
15%
75% 29% 75% 44%
37% 66%
50% 50%
40%
27%
25% 25%
43% 19%
25% 26%
12%
0% 0%
Personal loans STCC Personal loans STCC
Source: CRIF High Mark, HSIE Research Source: CRIF High Mark, HSIE Research
 CreditTech - a crowded space: The FinTech ecosystem is currently in a

sweet spot in terms of total addressable market opportunities, the problem
statements being redefined, migration and distribution of profit pools, and
availability of private (and increasingly public) equity capital that is chasing
exponential growth. ~30% of the FinTech funding has accrued to CreditTech.
Exhibit 26: ~25-30% of FinTech Funding towards digital Exhibit 27: Increasing pool of BNPL and personal
lending now loans FinTechs
Source: VCCEdge, HSIE Research Source: Industry, HSIE Research
Page | 9
Sizing the burgeoning BNPL market

 Low-stakes gateway to large addressable market: The BNPL market is
poised for explosive growth, led by improving penetration in customer base
as well as usage categories (merchant base). The surge in BNPL FinTechs,
along with rising focus by the incumbents and improving ecommerce
penetration, is likely to drive the customer as well as merchant base.
 Customer journey - cash to digital to deferred payments: The surge in

digital payments penetration is likely to provide a strong base for BNPL. A
typical user’s payments journey migrates from cash to P2P payments, utility
payments followed by merchant payments (offline followed on online). Our
conversations with industry participants suggest that deferred payments are
typically the last stage of evolution in a customer’s digital journey. With the
proliferation in digital payments, particularly mobile payments having low
ticket size (Average of INR 700) across tier 2/3 cities (~80% of PhonePe’s
monthly active users are from non-tier 1 cities), the digital payments
continues to expand, providing a larger potential customer base for BNPL.
Exhibit 28: ~35mn are credit carded compared to ~150mn Exhibit 29: India’s demographic distribution -
online shoppers and >500mn smartphone users ~700mn in the target segment of 20-54 years
People with age 20
694 0 - 19 487
- 54
Smartphone users 525 20 - 29 240 17%

Active Internet
425 30 - 54 454 33%
users
Online shoppers 150 55 - 64 108 8%
Credit card users 35 (mn) > 64 91 (mn)
0 150 300 450 600

0 150 300 450 600 750
Source: Transunion CIBIL, RedSeer Report, TRAI, World Bank, HSIE Source: World Bank, HSIE Research | Note: Numbers in blue
Research boxes denote % of total population
 Creditworthy yet un-tapped - unit economics evolving: Multiple reports

across the industry categorically demonstrate the creditworthy market in
India. As per a BCG publication on India’s spending patterns, one-third of
the households earned >INR41K per month, while ~78% households earned
>INR12.5K per month. With the average BNPL spends per month in the
range ~INR2-3K, the addressable market is disproportionately large.
Exhibit 30: Target segment at ~215mn households (CY2019)
Source: BCG report – How India spends, shops and saves in the new reality?, HSIE Research
Page | 10
 Increasing organised retail penetration provides large addressable TAM:

Organised retail (offline + ecommerce) is poised to grow to USD 380bn and
constitute ~28-30% of overall retail market by FY26 from ~15% in FY21,
driven by increasing digital penetration and consumer preference towards
better shopping experiences and pricing. Increasing penetration of
organised retail provides a larger addressable market for BNPL players and
provides relatively easy scalability as well (through tie-ups with payment
aggregators, card networks, stores franchises etc.) compared to general trade
segment.
 Merchant subvention–finding the sweet spot: Merchant categories with

high gross margins and high cost of customer acquisition are more likely to
provide higher subvention for POS financing, as per McKinsey Merchant
POS financing Survey. The cost of acquisition varies for merchants across
channels such as social media platforms, ecommerce marketplaces, etc., and
could be as high as in double digit percentage as well. While BNPL’s value
proposition in terms of increased sales velocity, higher average order value
etc. could be applicable to the entire merchant landscape, merchant
categories in the “high and medium willingness to pay” bracket are likely to
provide higher merchant subvention to the BNPL players.
Exhibit 31: Merchants with high margins and high CAC likely to provide high subvention for EMI financing
Source: McKinsey Merchant POS Financing Survey, HSIE Research| High willingness to pay Medium willingness to pay
Exhibit 32: BNPL disbursals poised to reach USD 56bn by FY26

Units FY21 FY26E CAGR Comments
India's population mn 1,380 1,577 3%
Smartphone users mn 550 800 8%
% of total population % 40% 51%
No of online shoppers mn 150 400 22% Rising penetration of e-commerce
% of smartphone users % 27% 50%
Improving penetration of deferred
No of unique BNPL users mn 10 100 58%
payments on online/offline space
% BNPL penetration in online shoppers % 7% 25%
Increase in use cases with widening
Disbursals per user per month INR' 000 2.2 3.5 10%
merchant base
BNPL disbursals INR bn 260 4,187 74%
BNPL disbursals USD bn 3.5 55.8
Source: World Bank, TRAI, RedSeer Report, Paytm DRHP, Industry, HSIE Research
Page | 11
BNPL–a global phenomenon

 Making inroads into well-carded countries: BNPL’s usage has surged in
well-penetrated credit card markets such as Australia, US, UK, Sweden, etc.
Similar to India, the adoption has been higher among the millennials and
Gen-Z with lower usage history with credit cards. Several firms have
achieved economies of scale and also tapped in the public equity markets
with a demonstrated business model.
Exhibit 34: Highly penetrated credit cards market- Exhibit 35: Surge in GMV (TPV) of leading global
with saturation in growth BNPL players
CIF CAGR Year
30% CY16-CY20 Company Units CY18* CY20* CAGR
ending
India Klarna Dec USD bn 29.0 53.0 35%

20%
France
Brazil* Affirm Jun USD bn 2.6 8.3 78%
10%
Russia
South Korea AfterPay Jun USD bn 3.7 15.8 107%
UK
0% Singapore
Indonesia Australia Zip Jun AUD bn 1.1 5.8 130%
CC per capita (x)
-10% Sweden
0.0 0.9 1.8 2.7 3.6 Sezzle Dec USD bn 0.0 0.9 426%
Source: BIS, HSIE Research | Note: * Data for CY19 Source: Company, HSIE Research | Note: * FY19 and FY21 for
AfterPay, Affirm and Sezzle
Exhibit 36: Surge in BNPL users in Australia, Exhibit 37: BNPL already constitutes >10% of ecom
compared to credit cards issuances payments in select countries (CY20)
(mn) BNPL users Credit and charge cards - CIF
Sweden
32
Germany
24 Finland
Australia
16
Netherlands
UK
8
India
0 USA
FY16 FY17 FY18 FY19 FY20 FY21
0% 6% 12% 18% 24%
Source: RBA, ASIC, HSIE Research | Note: * BNPL users for FY21 Source: WorldPay Global Payments Report 2020, HSIE Research
include only top 2 players
Exhibit 38: Users below 35 years contributed to ~60% Exhibit 39: ~60% of people in age group 18-34 had
of BNPL transactions in FY19 (Y/E June) used a BNPL product in US according to a Survey
35 - 44 45 - 54
Age (in years) Jul-20 Mar-21
22% 12%
55 - 64
18 - 24 38% 61%
4%
65+ 25 - 34 47% 60%
1%
25 - 34
38% 35 - 44 50% 61%
18 - 24
23% 45 - 54 42% 53%
Over 54 21% 41%
Source: ASIC, HSIE Research Source: The Ascent Survey – July-20 and Mar-21, HSIE Research
Page | 13
 Unit economics gradually evolving with economies of scale: Several

leading BNPL companies such as AfterPay, Affirm, Klarna, etc., on the back
of astronomical surge in GMV, have witnessed improving unit economics.
For AfterPay, high merchant service fees remains the most important
revenue driver, with small contribution from the late fees from the customer
(~10-15% of revenues). The company is now gradually diversifying into
other products such as bank accounts in partnership with banks (Westpac)
for higher customer engagement and driving profitability. However, the
profitability remains elusive as the marketing and promotion expenses,
along with higher tech and employee expenses are yet to normalise.
Exhibit 40: AfterPay unit economics (as % of GMV) – FY21 (Y/E June)
Source: Company, HSIE Research
 Affirm–diversifying revenue streams beyond merchant fees: Companies

such as Affirm have begun to diversify their revenue streams beyond
merchant fees in order to achieve profitability. Affirm is now issuing virtual
debit cards that generate interchange fee and buying out loan portfolio from
the banking partners. However, the profitability is elusive for Affirm as
well, with credit costs and tech expenses being the biggest cost drivers.
Exhibit 41: Affirm unit economics (as% of GMV) – FY21 (Y/E June)
Page | 14
Different BNPL models at play

 The proliferation of BNPL in India’s payments ecosystem has been fairly
diverse, with players following different models. These models could be
classified based on multiple parameters: purpose, target segment, merchant
ecosystem, distribution model, user type, and product categories. As the
ecosystem evolves, some of these models could integrate with one another
or the unviable ones are likely to get weeded out.
For the purpose of this report, BNPL is defined as the deferred payment
option available at checkout (online/offline) including interest-free credit
period (15d-45d), no-cost-EMI (Pay-in-3/4) and EMI financing. However, we
exclude personal loans/cash advances offered by a few BNPL players from
this definition.
Exhibit 46: Emerging BNPL business models
BNPL
Merchant Distribution
Purpose Type of user
ecosystem model
Convenience Closed-loop B2C

Incumbents
Credit Open-loop Payments B2B
e-commerce
Marketplace
Standalone
White label
Page | 16
Revenue streams–limited but growing

 The diverse BNPL models bring about multiple sources of revenue, from
customer as well as merchant side. The various revenue streams could be
categorized under: (a) subscription-based fees (zero for most BNPL players),
(b) spends-based fees (MDR, merchant subvention etc.), (c) instance-based
fees (late fees, processing charges for EMI loans etc.) and (d) interest income
on non-zero-cost-EMI products.
Exhibit 56: BNPL revenue streams
Revenues
Customer- Merchant-
driven driven
Interest Subscription/
Late fees MDR Merchant
income Convenience
(~INR 50 - 500) ~1.5% - 2% subvention
18% - 30% fees
1. Interest income: Being a checkout financing option, BNPL players provide a

short-term (15d to 30d) interest-free period to customers for their purchases.
However, they also provide higher-tenure credit over 3-12 months (as high
as 24 months as well) at zero interest cost (in case of merchant subvention)
or at an average APR of ~24%. The higher-tenure credit is typically available
for large-ticket size purchases such as smartphones, white goods etc.
(typically above INR 5K).
Interest income typically acts as a booster to the revenue and overall
profitability of the BNPL model. As the customer profile matures, interest
income should gradually start kicking in for the BNPL players to drive
overall profitability.
The interest rates on EMI loans offered by the BNPL players are typically
than that of credit card and debit card EMI due to higher risk profile of the
customer, higher cost of capital etc.
Exhibit 57: Interest rates on EMI loans offered by BNPL players
BNPL player EMI interest rates
ZestMoney 21% - 24%
LazyPay Up to 32%
Amazon PayLater Up to ~24%
Flipkart PayLater Up to ~24%
Paytm Postpaid Up to ~36%
Slice ~30%
HDFC Bank FlexiPay ~28%
ICICI Bank Cardless EMI 10% - 22%
Kotak Cardless EMI 0% - 30%
Page | 21
2. Late payment charges: Most BNPL players charge late fees based on the bill
amount and the overdue period. Although the charges are lower compared
to that of credit cards on absolute basis, late fees as percentage of spends is
on the higher side. With the absence of a revolve credit option, most BNPL
players temporarily freeze the accounts until the dues are cleared.
A high share of late fees in the revenue mix is an indicator of a sub-optimal
portfolio and not sustainable in the long run.
Exhibit 58: Late fees for BNPL players
Olamoney Paytm Amazon Flipkart
Simpl LazyPay Slice Credit cards
Postpaid Postpaid PayLater PayLater
INR 10 - INR 0 - 100 INR 100 -
Late fees INR 12 - 118 INR 59 - 590 IN 50 - 500 INR 60 - 600 INR 1,000
500 per day 590
Spends threshold for
500 25,000 5,000 5,000 20,000 20,000 5,000 50,000
highest late fees
% of spends 23.6% 2.4% 10.0% 10.0% 2.5% 3.0% 12.0% 2.0%
Source: Industry, HSIE Research | Note: AXSB credit cards late fees taken for reference
3. Subscription/convenience fees: A few select BNPL players charge their

customers a subscription or convenience fee as well. Mobikwik charges a
one-time activation fee of INR 99, while Dhani app charges INR 199 for
every month of usage. Paytm Postpaid charges a convenience fee of ~1-3%,
depending on the BNPL variant (Lite/Delite/Elite). With most of the peers
providing BNPL services without fee, charging subscription fees diminishes
the value proposition to the customer to some extent.
Select BNPL players charge convenience fees to consumers for EMI loans as
well, based on tenure and ticket size. However, substantial portion of EMI
loans through FinTech BNPL players levy no processing fees, unlike card-
based EMI loans (up to ~2%).
Exhibit 59: Subscription/convenience fee by a few BNPL players
Company Customer base Charges Description
Charges for monthly bill
Flipkart PayLater ~3 mn INR 10 per bill
above INR 1,000
1% – 3% of spends + Convenience fee based
Paytm Postpaid ~3 mn
GST on spends
Mobikwik ~1 mn INR 99 + GST One-time activation fee
INR 199 – 200 per
Dhani 1.3mn Monthly subscription fee
month + GST
Source: Company, Industry, HSIE Research | Note: Active customers base for Paytm Postpaid;
No. of OneFreedom Card paying subscribers for Dhani as on Sep-21
4. Merchant fees–the holy grail: Merchant fees, in the form of MDR and
merchant subvention, is perhaps the most important revenue driver for
BNPL players. Merchants’ propensity to pay higher service fees is typically a
function of their gross margins and opportunity cost in terms of customer
acquisition (Exhibit 31). Bulk of the merchant subvention is for the three to
nine months tenure EMI loans for higher ticket sizes.
Page | 22
Exhibit 60: Merchant service fees (% of spends) for various BNPL players
(FY21 – Y/E June)
8%
6%
4%
2%
0%
Sezzle Affirm AfterPay Splitit* Wallets Credit UPI
cards (on OD)
Source: Company, HSIE Research | Note: * Data for CY20; Interchange fees for Credit cards
issuers in India and UPI (on OD)
 Offline BNPL - incumbents dominate: Offline retail still constitutes >90% of

the ~USD 0.8trn Indian retail market and is poised to reach USD 1.1trn by
FY26. The traditional offline BNPL segment has been dominated by banks
through credit cards (~40% of total spends on POS, Credit card EMI), debit
card EMI and NBFCs such as Bajaj Finance (EMI card network).
However, except credit cards spends, bulk of the traditional offline BNPL
has been through EMI financing with higher ticket size (above INR 5K).
Exhibit 61: India’s offline retail market-large TAM
Source: Bain & Company report, HSIE Research
Exhibit 62: Credit card spends – going strong (except Exhibit 63: Bajaj Finance’s EMI card network and
FY21) volume of loans disbursed through EMI card
Source: RBI, HSIE Research Source: Company, HSIE Research
Page | 23
 FinTechs - Scratching the surface, multiple models at play: FinTech BNPLs

are gradually tapping into the large offline retail market as well. Although
the TAM in offline retail market is significantly high, the ease of penetration
is much lower compared to online commerce. Most FinTechs are tapping
into either the open-loop ecosystems such as cards network (Slice, UniCard)
or UPI (LazyPay) to scale up their acceptance network. A few payments-
based BNPL players such as Paytm and Mobikwik are tapping into their
captive merchant network for offline payments, although the merchant
penetration within their own ecosystem remains low (Paytm at ~3% and
Mobikwik at <1%).
Scalability in the offline segment is likely to remain a challenge, particularly
for closed-loop ecosystems with heavy investments required in establishing
and integrating with the merchant network, while the open-loop ecosystem
provides lower customer stickiness.
Exhibit 64: BNPL offerings in offline space
POS UPI QR - Wallets Payment Aggregators Standalone
•FinTechs issue •Credit on UPI •Based on wallet •Integration with POS •Closed loop -
prepaid cards (with through PPI/OD ecosystem for service providers establishing network
OD) accepted at all account payments such as PineLabs, with merchants
POS terminals •Provides access to •Higher MDR Ezetap, MSwipe etc. •BAF - Over 0.1mn
•Open-loop ecosystem large QR-code compared to other •E.g. ZestMoney touchpoints, INR 126
•E.g. Slice, Unicard, acceptance network modes of payments bn loans o/s (B2B
PostPe etc. •ICICI Pay Later, •E.g. Paytm, sales finance)
LazyPay Mobikwik
Source: Industry, Company, HSIE Research
Page | 24
What makes a robust BNPL franchise?

 BNPL models evolving; key ingredients likely to remain constant: We
have assessed the various FinTech BNPL models on our proprietary HSIE-
BNPL Quotient framework. The framework encapsulates six key
parameters: scale, customer value proposition, key revenue drivers,
customer engagement levels, cross-sell opportunities, and risk management.
A robust BNPL franchise, in our view, should have deep competitive moats
with a large merchant network (preferably closed-loop), with healthy
customer value proposition and an optimum mix of convenience and credit
products to drive overall profitability. The franchise should also have the
ability to onboard NTC customers enabling to target a large potential
customer base; however, its credit filtering algorithms and dynamic risk
management should keep the credit costs below the threshold level.
 Incumbents vs. FinTech BNPLs - different models, different objectives:

While incumbents have their own BNPL offerings as well, they are mostly
targeted at ETB customers with focus on improving customer stickiness and
provide further fillip to profitability. Hence, we benchmark these BNPL
players in two different categories.
 BNPL players scaling up: BNPL players in India are currently in the growth
phase, scaling up their customer and merchant base, along with driving up
their engagement levels. This is driving the higher burn-rates despite low
CAC for a BNPL customer and higher delinquencies, becoming a big drag
on profitability. As the BNPL players reach a critical mass, we expect the
operating losses to recede and unit economics to stabilise.
Exhibit 70: HSIE-BNPL Quotient framework – FinTechs
Amazon Flipkart Paytm Mobikwik Olamoney
Category Parameters Simpl ZestMoney LazyPay Slice
PayLater PayLater Postpaid Zip Postpaid
# Customers
Scale # Merchants
Breadth of merchants
Customer Interest-free credit period*

value Subscription fee x x x x x    x
proposition Credit limit**
MDR
Revenue
Interest income (EMI loans) x        x
drivers
Late fees (Max)
Engagement Spends/active user/month
levels # Transactions per month
EMI EIR % x x
Cross-sell
Other products*** x    x x   x
Risk Collection intensity
management ETB/NTB NTB NTB NTB NTB ETB ETB ETB ETB ETB
Source: Company, Industry, HSIE Research | Note: Full dark circle denotes highest, white circle denotes least; ETB denotes captive customer base; *
Interest-free credit period considered only for PayLater products; ** Credit limit for EMI loans; *** Other products include personal loans, cash
withdrawals, insurance etc.; Collection intensity includes different modes of collections for delinquent customers
 ZestMoney evolving faster than peers: As per our framework, ZestMoney
(Camden Town Technologies) seems to be scoring higher than peers in
becoming a robust BNPL franchise. The company has begun to gain scale,
while diversifying into interest-generating EMIs, personal loans, insurance
etc. Slice, a card-based BNPL, also seems to be making healthy inroads into
the segment, emerging as a direct competitor to credit cards, with the
advantages of a FinTech.
Page | 28
 E-commerce-led BNPLs scaling gradually: While the ecommerce platform-

led BNPLs such as Amazon PayLater, Flipkart PayLater etc. have significant
advantages in terms of a large captive customer base, customer traction on
the platform and agility similar to FinTechs, the scalability has been lower
than our expectations. For example, Flipkart PayLater customer base is still
at ~15% of the Flipkart Plus customer base and ~1% of Flipkart’s customer
base.
 FinTechs - payments to lending journey a reality check: Several FinTech

players had ventured into payments as a steppingstone to financial services,
with the objective of acquired customers and their transaction data acting as
the pool for cross-selling other financial products (with incremental near-
zero CAC). While a few have ventured into lending as well through BNPL
such as Mobikwik, BharatPe, Paytm etc., the journey has met with little
success so far in terms of scaling up the portfolio and achieving profitability
along expected lines.
Exhibit 71: Cross-sell for payments and ecommerce firms: Large TAM, low penetration so far
Flipkart Amazon India Paytm
Total customer base 350mn Total customer base >300m Registered users 330mn
Flipkart Plus 20mn Amazon Prime 18mn MTU 57mn
Pay Pay Postpaid

3mn Later 3mn 3mn
Later
Source: Company, HSIE Research | Paytm statistics as on 30-Sep-21 (Postpaid includes only active users); Flipkart statistics as on 30-Jun-21;
Amazon Prime subscribers statistics as on Jun-21
 Card-based BNPLs–confluence of cards and FinTech BNPL: Card-based

BNPL players such as Slice, UniCard etc. are leveraging the open-loop card
rails with a product that is a mix of a BNPL and credit card. While the open-
loop merchant ecosystem provides little competitive moats with merchants,
the familiarity of the card product has been able to drive healthy metrics for
players such as Slice in terms of spends per active card (~INR10K per
month), transaction frequency (>4 transactions per month), etc.
Page | 29
Incumbents and BNPL–threat vs. opportunity

 Incumbents gravitating gradually towards BNPL: Incumbent banks have
traditionally been providing BNPL offerings in the form of EMI financing
(including no-cost-EMI) through credit cards and debit cards EMI. A few
NBFCs such as Bajaj Finance (most formidable) and Home Credit Finance
have been very active in EMI financing.
With the advent and surge of BNPL, leading private banks are upping their
game with their own BNPL offerings, broadly similar to FinTech BNPL
offerings. HDFC Bank's FlexiPay, ICICI Bank's PayLater and Cardless EMI,
Axis Bank’s FreeCharge PayLater, Kotak Mahindra Bank's Smart EMI and
IDFC First Bank’s Easy EMI card are aimed to provide seamless payments
experience without a debit or credit card.
Exhibit 76: Incumbents’ credit-based payments
Credit Cards - EMI & Pay Later Debit cards EMI Cardless EMI/BNPL PayLater
•PayLater: Interest-free period up to 50 •No-cost-EMI and Interest rate EMI (~12- •Pay Later: Interest-free period up to 15 -
days 18%) 45 days
•EMI: No-cost EMI and Interest-rate EMI •Offline (POS enabled) and online •No-cost-EMI and at-cost-EMI at POS
(~12-24%) merchants (offline and online)
•Offline (POS enabled) and online •Pe-approved ETB customers •NTB and ETB customers
merchants •Offered by most banks •Offered by very few banks only
•ETB customers currently
•Receivables (FY21): INR 1.7trn
Source: RBI, Company, HSIE Research
 Focus remains on ETB customers, profitability: While the incumbents' non-

card-based BNPL offerings are similar to FinTech BNPL offerings, they are
kept limited mostly to ETB customers. While cross-sell to an ETB customer
improves the profitability with low CAC and low delinquencies (transaction
history, right-of-lien etc.) along with increasing customer stickiness, it
doesn't serve the purpose of widening the customer funnel for the bank
through new customer acquisitions on the asset side.
Exhibit 77: Incumbents’ BNPL offerings
Axis Bank FreeCharge
HDFC Bank FlexiPay ICICI Bank PayLater ICICI Cardless EMI Kotak Smart EMI
PayLater
Interest-free credit
15 45 30 NA NA
period (days)
Launched in 2018 Nov-18 Q4FY21 Nov-20 Aug-21
Payment Rails Payment aggregators UPI Wallet Payment aggregators Payment aggregators
Credit Limit
1 - 60 20 10 10 – 1,000 1,500
(INR’ 000)
EMI tenure
1-3 NA NA 3 - 15 6 - 24
(months)
Pre-approved CA and Pre-approved ETB
Eligibility ETB NTB, ETB NTB, ETB
SA customers customers
Interest rate – EMI
~28% NA NA 10% - 22% 0% - 30%
loans
Processing fees 0 0 0 0 INR 99 - 2,999
INR 250 + 3% per INR 750 + 3% per
Late fees 3% per month INR 10 per day INR 400 + 2% per month
month month
Source: Company, HSIE Research | Note: HDFC Securities is a subsidiary of HDFC Bank
Page | 34
 Partnerships with FinTechs for indirect lending: Incumbents have been

participating in the BNPL segment through direct offerings to customers as
well as indirectly through partnership with FinTechs. Most FinTech BNPL
players have entered into partnership with the incumbents, whereby the
disbursements, particularly EMI loans (no-cost-EMI and at-cost EMI), are
carried out by the incumbents, with the FinTech BNPL earning a sourcing
fee.
Exhibit 78: Lending partners for BNPL providers

BNPL Lending partners
Source: Company, HSIE Research | Note: The list of lending partners is not exhaustive
Exhibit 79: Implications for incumbents

Segment Threat/opportunity Incumbents Implications
Credit cards Direct competitor to Credit card All credit card issuers
Widening the customer funnel
AXSB, KMB acquiring NTB Increased digitisation to reduce friction and
Customer funnel through NTB customer
customers through BNPL offerings provide seamless experience to customers
acquisitions
HDFCB, ICICIBC, KMB, AXSB,
Improving customer stickiness Driving profitability with minimal CAC and
ETB customer stickiness IDFCFIRST have BNPL offerings as
(PPC) through BNPL high IRR
of now
Growth in disbursals and revenue, access to
Partnerships Portfolio/earnings growth IDFCFIRST, Leading private banks
NTB customers
Source: HSIE Research
Page | 35
13 January 2022
Hawkish pivots and China’s Covid dilemma

Verbier
The pro cyclical inflation story keeps building as market participants compete to up their 2022 Fed rate hike
forecasts. Expectations are now widespread that the Federal Reserve could raise rates four times this year
with the first “live” meeting in March. The money markets are now discounting three to four rate hikes in 2022
with the first rate hike in March.
The discussion of when balance sheet contraction begins has also commenced with Federal Reserve
Chairman Jerome Powell acknowledging in his Congressional testimony on Tuesday that it could be this
calendar year, stating that “at some point, perhaps later this year, we will start to allow the balance sheet to
run off”. He also commented that how many rate hikes there would be would depend on the data. This is
unremarkable in itself. But it is interesting that the concept of average inflation targeting seems to have
disappeared entirely from the language of Powell. It will also be interesting to see what Vice Chair-elect Lael
Brainard says in her Congressional testimony today.
What has become known as the Fed’s “hawkish pivot” naturally reflects the high inflation readings, with the
December CPI data again confirming the inflation overshoot. But it also reflects the political need, from the
standpoint of the Biden administration, to be seen to be doing something about inflation as previously
discussed here (see GREED & fear - Inflation and politics, 16 December 2021). US headline CPI inflation
accelerated from 6.8% YoY in November to 7.0% YoY in December, the highest inflation print since June 1982.
While core CPI inflation rose from 4.9% YoY to 5.5% YoY, the highest level since February 1991 (see Exhibit
1). As for the Cleveland Fed’s trimmed-mean CPI inflation, it increased from 4.55% YoY in November to 4.83%
YoY in December, the highest level since February 1991 (see Exhibit 2).
Exhibit 1: US CPI inflation
Source: Bureau of Labor Statistics

Exhibit 2: Cleveland Fed Trimmed-mean CPI inflation
5.5 (%YoY) Cleveland Fed Trimmed-mean CPI inflation
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Federal Reserve Bank of Cleveland
If the CPI report is, in GREED & fear’s view, now the most important US monthly data point, last Friday’s payroll
data has also kept the inflation story building. Indeed the sharp fall in the US unemployment rate in December,
down from 4.2% to 3.9%, and the larger than expected 0.6% MoM increase in average hourly earnings, caused
Jefferies’ US chief economist Aneta Markowska to proclaim the return of the Phillips Curve (see Jefferies
research The Phillips Curve Is Back, With A Vengeance, 7 January 2022). Aneta’s view is that a steeper Phillips
curve means that wages will be a sustained source of inflationary pressures, long after the supply chain issues
are resolved. She now expects the unemployment rate to decline to 3% by the end of this year and average
hourly earnings growth to accelerate toward the 5.5-6% range.
This is interesting to GREED & fear since the formal dismissal of the Phillips Curve as an analytical tool was
one of the practical consequences of the Fed’s so-called “Strategic Review” completed in August 2020, along
with the stated willingness to overshoot 2% and the related commitment to so-called average inflation
targeting. Meanwhile average hourly earnings growth grew at a healthy 4.7% YoY in December with the largest
wage gains being recorded in the lowest paying jobs (see Exhibit 3). Average hourly earnings in the leisure
and hospitality sector and the retail trade sector rose by 14.1% YoY and 5.4% YoY respectively in December.
Exhibit 3: US average hourly earnings growth
(%MoM) % MoM %YoY (RHS) (%YoY)

5 9
4 8
7
3
6
2 5
1 4
3
0
2
(1) 1
(2) 0
May-18
Sep-18
May-19
Sep-19
May-20
Sep-20
May-21
Sep-21
Nov-18
Nov-19
Nov-20
Nov-21
Jul-18
Jul-19
Jul-20
Jul-21
Mar-18
Mar-19
Mar-20
Mar-21
Jan-18
Jan-19
Jan-20
Jan-21
Source: Bureau of Labor Statistics

If the strength of the labour market is causing neo-Keynesian economists to take the inflation risk much more
seriously, GREED & fear remains of the view that the ultimate cause of the inflationary pressures being seen
in the US today is the explosion in broad money supply growth since the pandemic began, as discussed here
on numerous occasions previously.
This is also why it remains critical to keep an eye on loan growth in America to monitor any sign of a pickup
in the credit multiplier which could lead to a related pickup in velocity. In this respect, it remains crucial to
monitor lending to finance real economic activity, as opposed to loans to finance asset purchases which have
been the key driver of credit growth in the quantitative easing era which commenced back in late 2008. This
is in the context of banks continuing to ease lending standards, based on the latest Fed loan officers quarterly
survey. The Fed’s Senior Loan Officer Survey in October showed that a net 19.9% of US banks reported easing
lending standards on business loans and a net 33.2% reported easing lending standards on household loans,
though down from 31.9% and 45.8% respectively in July (see Exhibit 4).
Exhibit 4: US Senior Loan Officer Survey: Net percentage of US banks tightening lending standards
100 (%) Business loans Household loans
80
60
40
20
(20)
(40)
(60)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Federal Reserve – Senior Loan Officer Opinion Survey on Banking Lending Practices
GREED & fear continues to monitor two different US credit aggregates. The current state of play is as follows.
US banks’ commercial and industrial (C&I) loans and consumer loans, a measure for loans to the real
economy, rose by 1.0% YoY in the week ended 29 December, compared with a 10.2% YoY decline in May. This
compares with the 17.8% YoY growth in May 2020 when lending was boosted by corporates drawing down on
credit lines to deal with the emergency circumstances triggered by the pandemic. While US banks’ securities
holdings, real estate loans and other loans and leases, which could be broadly construed as lending to finance
asset purchases, rose by 12.5% YoY in the week ended 29 December, compared with 6.6% YoY in February
2020 prior to the pandemic (see Exhibit 5).
If that is the current state of play, it is also worth noting that bank loans to the real economy are now 5.5%
above the pre-pandemic level in February 2020 and are up 3.7% from the recent low reached in September.
While credit for asset purchases is up 24% since February 2020 (see Exhibit 6). As for overall bank loan growth
in the US, bank lending was growing in late December at the fastest three-month (13 weeks) annualised rate
since 2008 (save for the pandemic-triggered surge in 2020 when, as already noted, corporates drew down on
pre-existing credit lines). Thus, US commercial banks’ total loans rose by an annualised 11.8% in the 13 weeks
ended 29 December, the highest annualised growth rate since December 2008 if the surge in 2020 is excluded
(see Exhibit 7).
Exhibit 5: US banks' loans to the real economy and credit for asset purchases %YoY growth
20 (%YoY)
15
10
(5)
(10) Commercial & industrial loans and consumer loans
(15)
Securities in bank credit, real estate loans and other loans & leases
(20)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Note: Data up to the week ended 29 December 2021. Source: Federal Reserve, Jefferies
Exhibit 6: US banks' loans to the real economy and credit for asset purchases: US dollar levels
(US$bn) Commercial & industrial loans and consumer loans (US$bn)

4,700 Securities in bank credit, real estate loans and other loans & leases (RHS) 12,500
12,000
4,500
11,500
4,300 11,000
4,100 10,500
10,000
3,900
9,500
3,700 9,000
Aug-19
Aug-20
Aug-21
Oct-19
Oct-20
Oct-21
May-19
Sep-19
May-20
Sep-20
May-21
Sep-21
Nov-19
Nov-20
Nov-21
Jun-19
Jun-20
Jun-21
Apr-19
Jul-19
Apr-20
Jul-20
Apr-21
Jul-21
Mar-19
Mar-20
Mar-21
Jan-19
Feb-19
Jan-20
Feb-20
Jan-21
Feb-21
Dec-19
Dec-20
Dec-21
Exhibit 7: US commercial banks’ total loan growth: 13-week annualised rate
40 (% 13-wk saar)
US bank loan growth: 13-wk annualised rate

30
20
10
(10)
(20)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
It is further worth highlighting that US commercial bank credit growth is now running at US$186bn a month
over the past three months to 29 December, up from US$70bn in August, though down from a recent high of
US$193bn a month in the three months to 22 December (see Exhibit 8). This is the highest average monthly
increase since the data series began in 1973 if the surge in 2020 is excluded. It should be noted that this latter
data point includes commercial banks’ purchases of fixed income securities as well as loans extended. As
regards the breakdown between the two, the average monthly increase in banks’ securities holdings rose to
US$87bn in the three months to 29 December, up from US$56bn in August. While the average monthly
increase in bank loans rose from US$13bn in August to US$99bn in the three months to 29 December, the
biggest average monthly increase since December 2008 if the surge in 2020 is excluded (see Exhibit 9).
Exhibit 8: US commercial banks' average monthly credit growth (including loans and securities holdings)
350 (US$bn)
US commercial banks' monthly credit growth (13-week mov. avg.)
300
250
200
150
100
50
0
(50)
(100)
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Exhibit 9: US commercial banks' average monthly credit growth (13-week mov. avg.)
350 (US$bn) Securities in bank credit
300
Loans & leases
250
200
150
100
50
0
(50)
(100)
8-Jul-20
7-Apr-21
4-Mar-20
19-Aug-20
11-Aug-21
21-Oct-20
13-Oct-21
27-May-20
19-May-21
1-Jan-20
30-Sep-20
22-Sep-21
3-Feb-21
11-Nov-20
2-Dec-20
24-Nov-21
17-Jun-20
30-Jun-21
15-Apr-20
29-Jul-20
28-Apr-21
21-Jul-21
25-Mar-20
17-Mar-21
22-Jan-20
12-Feb-20
13-Jan-21
24-Feb-21
6-May-20
9-Sep-20
23-Dec-20
1-Sep-21
15-Dec-21
3-Nov-21
9-Jun-21
All of the above is a reason to maintain exposure to bank stocks in the US as well as to energy stocks (see
Exhibit 10). These remain GREED & fear’s two favourite cyclical sectors to own. Still in the very short term it is
also worth noting that a hawkish Fed is now, to a certain extent, priced in with the 10-year Treasury bond yield
not yet breaking above the 1.8% resistance level identified by Jefferies’ European Desk Strategist Mohit Kumar
(see Jefferies research European Interest Rate Strategy - Morning Views, 11 January 2022). The 10-year
Treasury bond yield reached an intraday high of 1.806% on Monday and is now 1.75% (see Exhibit 11).
Exhibit 10: S&P500 Energy Index and Banks Index relative to S&P500
Source: Bloomberg, Jefferies
Exhibit 11: US 10-year Treasury bond yield
Source: Bloomberg
As Wall Street correlated world stock markets remain focused, for understandable reasons, on the risks posed
by the Fed’s so-called hawkish pivot, and more talk of quanto tightening will certainly make equity markets
more nervous, it is worth stressing again that the Chinese equity asset class should prove defensive in any
future Wall Street-led global risk-off move triggered by escalating Fed tightening concerns. This is because
China spent most of last year tightening and has now begun to ease.
As discussed here previously (see GREED & fear - A contrast in cycles, 9 December 2021), policy towards the
all-important residential property market has begun to be relaxed since October with a more clear-cut signal
given for support for the sector at the Central Economic Work Conference held in December. The statement
following the meeting said China will support the property market better to cater to the reasonable demand of
home buyers and adopt city-specific policies to boost the virtuous cycle and healthy development of the
sector. The regulators also announced in December that mortgage availability has been expanded to
upgraders and not just first-time buyers while banks have been encouraged to offer so-called M&A loans to
developers to encourage consolidation in the sector.
The issue has therefore now become whether property related data will start to stabilise in response to such
signals as well as the resulting related greater availability of mortgage credit. Thus, new mortgage lending
was Rmb401bn in November, which was Rm53bn higher than in October (Rmb348bn) which in turn was
Rmb101bn higher than in September (see Exhibit 12 and Jefferies research Soft December Sales Concludes
the Frustrating 2021, 31 December 2021 by head of China/HK property research Stephen Cheung). It should
be noted that the PBOC has only reported monthly mortgage lending data for October and November via its
official WeChat account. The December number has not yet been released.
Exhibit 12: China monthly increase in outstanding personal mortgage loans
450 (Rmb bn) Monthly increase in outstanding personal mortgage loans

400
350
300
250
200
150
100
50
0
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 Sep21 Oct21 Nov21
Note: 1Q20-3Q21 data are monthly average increase for the quarter, based on official quarterly data reported by the PBOC. September-
October 2021 data are based on information released recently by the PBOC via its WeChat account. Source: PBOC
Meanwhile, it is encouraging that data for the end of December shows an encouraging pickup in sales.
According to the weekly sales data from Soufun monitoring 25 major cities, weekly property sales in floor
space terms in the last week of December were only 5% below the level in the same week in 2019, compared
with a 10% decline for the previous two weeks and a 32% decline in the last week of November (see Exhibit
13). While one week does not necessarily a trend make, this looks to GREED & fear like a potentially significant
inflection point. Certainly, the policy signal from the central government has become much more clear-cut
over the past month and more, and history shows that Chinese property buyers respond to such signals.
Exhibit 13: China weekly residential GFA sold in 25 cities
8 (m sqm) 2019 2020 2021 2022
0
wk1
wk3
wk5
wk7
wk9
wk11
wk13
wk15
wk17
wk19
wk21
wk23
wk25
wk27
wk29
wk31
wk33
wk35
wk37
wk39
wk41
wk43
wk45
wk47
wk49
wk51
Source: Soufun
Memo to: Oaktree Clients
From: Howard Marks
Re: Selling Out
As I’m now in my fourth decade of memo writing, I’m sometimes tempted to conclude I should quit,
because I’ve covered all the relevant topics. Then a new idea for a memo pops up, delivering a pleasant
surprise. My January 2021 memo Something of Value, which chronicled the time I spent in 2020 living
and discussing investing with my son Andrew, recounted a semi-real conversation in which we briefly
discussed whether and when to sell appreciated assets. It occurred to me that even though selling is an
inescapable part of the investment process, I’ve never devoted an entire memo to it.
The Basic Idea
Everyone is familiar with the old saw that’s supposed to capture investing’s basic proposition: “buy
low, sell high.” It’s a hackneyed caricature of the way most people view investing. But few things that
are important can be distilled into just four words; thus, “buy low, sell high” is nothing but a starting point
for discussion of a very complex process.
Will Rogers, an American film star and humorist of the 1920s and ’30s, provided what he may have
thought was a more comprehensive roadmap for success in the pursuit of wealth:
Don’t gamble; take all your savings and buy some good stock and hold it till it goes up,
then sell it. If it don’t go up, don’t buy it.
The illogicality of his advice makes clear how simplistic this adage – like many others – really is.
However, regardless of the details, people may unquestioningly accept that they should sell appreciated
investments. But how helpful is that basic concept?
Origins
Much of what I’ll write here got its start in a 2015 memo called Liquidity. The hot topic in the investment
world at that moment was the concern about a perceived decline in the liquidity provided by the market
(when I say “the market,” I’m talking specifically about the U.S. stock market, but the statement has
broad applicability). This was commonly attributed to a combination of (a) the licking investment banks
had taken in the Global Financial Crisis of 2008-09 and (b) the Volcker Rule, which prohibited risky
activities such as proprietary trading on the part of systemically important financial institutions. The
latter constrained banks’ ability to “position” securities, or buy them, when clients wanted to sell.
Maybe liquidity in 2015 was less than it had previously been, and maybe it wasn’t. However, looking
beyond the events of the day, I closed that memo by stating my conviction that (a) most investors trade
too much, to their own detriment, and (b) the best solution for illiquidity is to build portfolios for the long
term that don’t rely on liquidity for success. Long-term investors have an advantage over those with short
timeframes (and I think the latter describes the majority of market participants these days). Patient
investors are able to ignore short-term performance, hold for the long run, and avoid excessive trading
costs, while everyone else worries about what’s going to happen in the next month or quarter and
therefore trades excessively. In addition, long-term investors can take advantage if illiquid assets become
available for purchase at bargain prices.
Like so many things in investing, however, just holding is easier said than done. Too many people equate
activity with adding value. Here’s how I summed up this idea in Liquidity, inspired by something
Andrew had said:
When you find an investment with the potential to compound over a long period, one of
the hardest things is to be patient and maintain your position as long as doing so is
warranted based on the prospective return and risk. Investors can easily be moved to sell
by news, emotion, the fact that they’ve made a lot of money to date, or the excitement of
a new, seemingly more promising idea. When you look at the chart for something
that’s gone up and to the right for 20 years, think about all the times a holder would
have had to convince himself not to sell.
Everyone wishes they’d bought Amazon at $5 on the first day of 1998, since it’s now up 660x at $3,304.
• But who would have continued to hold when the stock hit $85 in 1999 – up 17x in less than two
years?
• Who among those who held on would have been able to avoid panicking in 2001, as the price fell
93%, to $6?
• And who wouldn’t have sold by late 2015 when it hit $600 – up 100x from the 2001 low? Yet
anyone who sold at $600 captured only the first 18% of the overall rise from that low.
This reminds me of the time I once visited Malibu with a friend and mentioned that the Rindge family is
said to have bought the entire area – all 13,330 acres – in 1892 for $300,000, or $22.50 per acre. (It’s
clearly worth many billions today.) My friend said, “I’d like to have bought all of Malibu for $300,000.”
My response was simple: “you would have sold it when it got to $600,000.”
The more I’ve thought about it since writing Liquidity, the more convinced I’ve become that there
are two main reasons why people sell investments: because they’re up and because they’re down.
You may say that sounds nutty, but what’s really nutty is many investors’ behavior.
Selling Because It’s Up
“Profit-taking” is the intelligent-sounding term in our business for selling things that have appreciated.
To understand why people engage in it, you need insight into human behavior, because a lot of investors’
selling is motivated by psychology.
In short, a good deal of selling takes place because people like the fact that their assets show gains,
and they’re afraid the profits will go away. Most people invest a lot of time and effort trying to avoid
unpleasant feelings like regret and embarrassment. What could cause an investor more self-recrimination
than watching a big gain evaporate? And what about the professional investor who reports a big winner
to clients one quarter and then has to explain why the holding is at or below cost the next? It’s only
human to want to realize profits to avoid these outcomes.
2
If you sell an appreciated asset, that puts the gain “in the books,” and it can never be reversed. Thus,
some people consider selling winners extremely desirable – they love realized gains. In fact, at a meeting
of a non-profit’s investment committee, a member suggested that they should be leery of increasing
endowment spending in response to gains because those gains were unrealized. I was quick to point out
that it’s usually a mistake to view realized gains as less transient than unrealized ones (assuming there’s
no reason to doubt the veracity of the unrealized carrying values). Yes, the former have been made
concrete. However, sales proceeds are generally reinvested, meaning the profits – and the principal – are
put back at risk. One might argue that appreciated securities are more vulnerable to declines than new
investments in assets currently deemed to be attractively priced, but that’s far from a certainty.
I’m not saying investors shouldn’t sell appreciated assets and realize profits. But it certainly doesn’t
make sense to sell things just because they’re up.
Selling Because It’s Down
As wrong as it is to sell appreciated assets solely to crystalize gains, it’s even worse to sell them just
because they’re down. Nevertheless, I’m sure many people do it.
While the rule is “buy low, sell high,” clearly many people become more motivated to sell assets the more
they decline. In fact, just as continued buying of appreciated assets can eventually turn a bull
market into a bubble, widespread selling of things that are down has the potential to turn market
declines into crashes. Bubbles and crashes do occur, proving that investors contribute to excesses
in both directions.
In a movie that plays in my head, the typical investor buys something at $100. If it goes to $120, he says,
“I think I’m onto something – I should add,” and if it reaches $150, he says, “Now I’m highly confident –
I’m going to double up.” On the other hand, if it falls to $90, he says, “I’m going to think about
increasing my position to reduce my average cost,” but at $75, he concludes he should reconfirm his
thesis before averaging down further. At $50, he says, “I’d better wait for the dust to settle before buying
more.” And at $20 he says, “It feels like it’s going to zero; get me out!”
Just like those who are afraid of surrendering gains, many investors worry about letting losses
compound. They might fear their clients will say (or they’ll say to themselves), “What kind of a lame-
brain continues to hold a security after it’s gone from $100 to $50? Everyone knows a decline like that
can foreshadow further declines. And look – it happened.”
Do investors really make behavioral errors such as those I’ve described? There’s plenty of anecdotal
evidence. For example, studies have shown that the average mutual fund investor performs worse than
the average mutual fund. How can that be? If she merely held her positions, or if her errors were
unsystematic, the average fund investor would, by definition, fare the same as the average fund. For the
studies’ findings to occur, investors have to on balance reduce the amount of capital they have in funds
that subsequently do better and increase their allocation to funds that go on to do worse. Let me put that
another way: on average, mutual fund investors tend to sell the funds with the worst recent performance
(missing out on their potential recoveries) in order to chase the funds that have done the best (and thus
likely participate in their return to earth).
We know that “retail investors” tend to be trend-followers, as described above, and their long-term
performance often suffers as a result. What about the pros? Here the evidence is even clearer: the
3
powerful shift in recent decades toward indexing and other forms of passive investing has taken place for
the simple reason that active investment decisions are so often wrong. Of course, many forms of error
contribute to this reality. Whatever the reason, however, we have to conclude that, on average, active
professional investors held more of the things that did less well and less of the things that outperformed,
and/or that they bought too much at elevated prices and sold too much at depressed prices. Passive
investing hasn’t grown to cover the majority of U.S. equity mutual fund capital because passive results
have been so good; I think it’s because active management has been so bad.
Back when I worked at First National City Bank 50 years ago, prospective clients used to ask, “What kind
of return do you think you can make in an equity portfolio?” The standard answer was 12%. Why?
“Well,” we said (so simplistically), “the stock market returns about 10% a year. A little effort should
enable us to improve on that by at least 20%.” Of course, as time has shown, there’s no truth in that. “A
little effort” didn’t add anything. In fact, in most cases, active investing detracted: most equity funds
failed to keep up with the indices, especially after fees.
What about the ultimate proof? The essential ingredient in Oaktree’s investments in distressed debt –
bargain purchases – has emanated from the great opportunities sellers gave us. Negativity reaches a
crescendo during economic and market crises, causing many investors to become depressed or fearful and
sell in panic. Results like those we target in distressed debt can only be achieved when holders sell to us
at irrationally low prices.
Superior investing consists largely of taking advantage of mistakes made by others. Clearly, selling
things because they’re down is a mistake that can give the buyers great opportunities.
When Should Investors Sell?
If you shouldn’t sell things because they’re up, and you shouldn’t sell because they’re down, is it ever
right to sell? As I previously mentioned, I described the discussions that took place while Andrew and his
family lived with Nancy and me in 2020 in Something of Value. That experience truly was of great value
– an unexpected silver lining to the pandemic. That memo evoked the strongest reaction from readers of
any of my memos to date. This response was probably attributable to (a) the content, which mostly
related to value investing; (b) the personal insights provided, and especially my confession regarding my
need to grow with the times; or (c) the recreated conversation that I included as an appendix. The last of
these went like this, in part:
Howard: Hey, I see XYZ is up xx% this year and selling at a p/e ratio of xx. Are you
tempted to take some profits?
Andrew: Dad, I’ve told you I’m not a seller. Why would I sell?
H: Well, you might sell some here because (a) you’re up so much; (b) you want to put
some of the gain “in the books” to make sure you don’t give it all back; and (c) at that
valuation, it might be overvalued and precarious. And, of course, (d) no one ever went
broke taking a profit.
A: Yeah, but on the other hand, (a) I’m a long-term investor, and I don’t think of shares
as pieces of paper to trade, but as part ownership in a business; (b) the company still has
enormous potential; and (c) I can live with a short-term downward fluctuation, the threat
4
of which is part of what creates opportunities in stocks to begin with. Ultimately, it’s
only the long term that matters. (There’s a lot of “a-b-c” in our house. I wonder where
Andrew got that.)
H: But if it’s potentially overvalued in the short term, shouldn’t you trim your holding
and pocket some of the gain? Then if it goes down, (a) you’ve limited your regret and (b)
you can buy in lower.
A: If I owned a stake in a private company with enormous potential, strong momentum

and great management, I would never sell part of it just because someone offered me a
full price. Great compounders are extremely hard to find, so it’s usually a mistake to let
them go. Also, I think it’s much more straightforward to predict the long-term outcome
for a company than short-term price movements, and it doesn’t make sense to trade off a
decision in an area of high conviction for one about which you’re limited to low
conviction. . . .
H: Isn’t there any point where you’d begin to sell?
A: In theory there is, but it largely depends on (a) whether the fundamentals are playing
out as I hope and (b) how this opportunity compares to the others that are available,
taking into account my high level of comfort with this one.
Aphorisms like “no one ever went broke taking a profit” may be relevant to people who invest part-time
for themselves, but they should have no place in professional investing. There certainly are good
reasons for selling, but they have nothing to do with the fear of making mistakes, experiencing
regret and looking bad. Rather, these reasons should be based on the outlook for the investment – not
the psyche of the investor – and they have to be identified through hardheaded financial analysis, rigor
and discipline.
Stanford University professor Sidney Cottle was the editor of the later versions of Benjamin Graham and
David L. Dodd’s Security Analysis, “the bible of value investing,” including the edition I read at Wharton
56 years ago. For that reason, I knew the book as “Graham, Dodd and Cottle.” Sid was a consultant to
the investment department at First National City Bank in the 1970s, and I’ve never forgotten his
description of investing: “the discipline of relative selection.” In other words, most of the portfolio
decisions investors make are relative choices.
It’s patently clear that relative considerations should play an enormous part in any decision to sell existing
holdings.
• If your investment thesis seems less valid than it did previously and/or the probability that it will
prove accurate has declined, selling some or all of the holding is probably appropriate.
• Likewise, if another investment comes along that appears to have more promise – to offer a
superior risk-adjusted prospective return – it’s reasonable to reduce or eliminate existing holdings
to make room for it.
Selling an asset is a decision that must not be considered in isolation. Cottle’s concept of “relative
selection” highlights the fact that every sale results in proceeds. What will you do with them? Do you
have something in mind that you think might produce a superior return? What might you miss by
switching to the new investment? And what will you give up if you continue to hold the asset in your
5
portfolio rather than making the change? Or perhaps you don’t plan to reinvest the proceeds. In that
case, what’s the likelihood that holding the proceeds in cash will make you better off than you would
have been if you had held onto the thing you sold? Questions like these relate to the concept of
“opportunity cost,” one of the most important ideas in financial decision-making.
Switching gears, what about the idea of selling because you think a temporary dip lies ahead that will
affect one of your holdings or the whole market? There are real problems with this approach:
• Why sell something you think has a positive long-term future to prepare for a dip you expect to
be temporary?
• Doing so introduces one more way to be wrong (of which there are so many), since the decline
might not occur.
• Charlie Munger, vice chairman of Berkshire Hathaway, points out that selling for market-timing
purposes actually gives an investor two ways to be wrong: the decline may or may not occur, and
if it does, you’ll have to figure out when the time is right to go back in.
• Or maybe it’s three ways, because once you sell, you also have to decide what to do with the
proceeds while you wait until the dip occurs and the time comes to get back in.
• People who avoid declines by selling too often may revel in their brilliance and fail to reinstate
their positions at the resulting lows. Thus, even sellers who were right can fail to accomplish
anything of lasting value.
• Lastly, what if you’re wrong and there is no dip? In that case, you’ll miss out on the ensuing
gains and either never get back in or do so at higher prices.
So it’s generally not a good idea to sell for purposes of market timing. There are very few occasions to
do so profitably and very few people who possess the skill needed to take advantage of these
opportunities.
Before I close on this subject, it’s important to note that decisions to sell aren’t always within an
investment manager’s control. Clients can withdraw capital from accounts and funds, necessitating sales,
and the limited lifespan of closed-end funds can require managers to liquidate holdings even though
they’re not ripe for selling. The choice of what to sell under these conditions can still be based on a
manager’s expectations regarding future returns, but deciding not to sell isn’t among the manager’s
choices.
How Much Is Too Much to Hold?
Certainly there are times when it’s right to sell one asset in favor of another based on the idea of relative
selection. But we mustn’t do this in a mechanical manner. If we did, at the logical extreme, we would
put all of our capital into the one investment we consider the best.
Virtually all investors – even the best – diversify their portfolios. We may have a sense for which holding
is the absolute best, but I’ve never heard of an investor with a one-asset portfolio. They may
overweight favorites to take advantage of what they think they know, but they still diversify to
protect against what they don’t know. That means they sub-optimize, potentially trading off some of
their chance at a maximal return to increase the likelihood of a merely excellent one.
6
Here’s a related question from my reconstructed conversation with Andrew:
H: You run a concentrated portfolio. XYZ was a big position when you invested, and it’s
even bigger today, given the appreciation. Intelligent investors concentrate portfolios and
hold on to take advantage of what they know, but they diversify holdings and sell as
things rise to limit the potential damage from what they don’t know. Hasn’t the growth
in this position put our portfolio out of whack in that regard?
A: Perhaps that’s true, depending on your goals. But trimming would mean selling
something I feel immense comfort with based on my bottom-up assessment and moving
into something I feel less good about or know less well (or cash). To me, it’s far better to
own a small number of things about which I feel strongly. I’ll only have a few good
insights over my lifetime, so I have to maximize the few I have.
All professional investors want good investment performance for their clients, but they also want
financial success for themselves. And amateurs have to invest within the limits of their risk tolerance.
For these reasons, most investors – and certainly most investment managers’ clients – aren’t immune to
apprehension regarding portfolio concentration and thus susceptibility to untoward developments. These
considerations introduce valid reasons for limiting the size of individual asset purchases and trimming
positions as they appreciate.
Investors sometimes delegate the decision on how to weight assets in portfolios to a process called
portfolio optimization. Inputs regarding asset classes’ return potential, risk and correlation are fed into a
computer model, and out comes the portfolio with the optimal expected risk-adjusted return. If an asset
appreciates relative to the others, the model can be rerun, and it will tell you what to buy and sell. The
main problem with these models lies in the fact that all the data we have regarding those three parameters
relates to the past, but to arrive at the ideal portfolio, the model needs data that accurately describes the
future. Further, the models need a numerical input for risk, and I absolutely insist that no single number
can fully describe an asset’s risk. Thus, optimization models can’t successfully dictate portfolio actions.
The bottom line:
• we should base our investment decisions on our estimates of each asset’s potential,
• we shouldn’t sell just because the price has risen and the position has swelled,
• there can be legitimate reasons to limit the size of the positions we hold,
• but there’s no way to scientifically calculate what those limits should be.
In other words, the decision to trim positions or to sell out entirely comes down to judgment . . . like
everything else that matters in investing.
The Final Word on Selling
Most investors try to add value by over- and underweighting specific assets and/or through well-timed
buying and selling. While few have demonstrated the ability to consistently do these things correctly (see
my comments on active management on page 4), everyone’s free to have a go at it. There is, however, a
big “but.”
7
What’s clear to me is that simply being invested is by far “the most important thing.” (Someone
should write a book with that title!) Most actively managed portfolios won’t outperform the market as a
result of manipulation of portfolio weightings or buying and selling for purposes of market timing. You
can try to add to returns by engaging in such machinations, but these actions are unlikely to work
at best and can get in the way at worst.
Most economies and corporations benefit from positive underlying secular trends, and thus most
securities markets rise in most years and certainly over long periods. One of the longest-running U.S.
equity indices, the S&P 500, has produced an estimated compound average return over the last 90 years
of 10.5% per year. That’s startling performance. It means $1 invested in the S&P 500 90 years ago
would have grown to roughly $8,000 today.
Many people have remarked on the wonders of compounding. For example, Albert Einstein reportedly
called compound interest “the eighth wonder of the world.” If $1 could be invested today at the historic
compound return of 10.5% per year, it would grow to $147 in 50 years. One might argue that economic
growth will be slower in the years ahead than it was in the past, or that bargain stocks were easier to find
in previous periods than they are today. Nevertheless, even if it compounds at just 7%, $1 invested today
will grow to over $29 in 50 years. Thus, someone entering adulthood today is practically guaranteed
to be well fixed by the time they retire if they merely start investing promptly and avoid tampering
with the process by trading.
I like the way Bill Miller, one of the great investors of our time, put it in his 3Q 2021 Market Letter:
In the post-war period the US stock market has gone up in around 70% of the years . . .
Odds much less favorable than that have made casino owners very rich, yet most
investors try to guess the 30% of the time stocks decline, or even worse spend time trying
to surf, to no avail, the quarterly up and down waves in the market. Most of the returns in
stocks are concentrated in sharp bursts beginning in periods of great pessimism or fear, as
we saw most recently in the 2020 pandemic decline. We believe time, not timing, is the
key to building wealth in the stock market. (October 18, 2021. Emphasis added)
What are the “sharp bursts” Miller talks about? On April 11, 2019, The Motley Fool cited data from JP
Morgan Asset Management’s 2019 Retirement Guide showing that in the 20-year period between 1999
and 2018, the annual return on the S&P 500 was 5.6%, but your return would only have been 2.0% if you
had sat out the 10 best days (or roughly 0.4% of the trading days), and you wouldn’t have made any
money at all if you had missed the 20 best days. In the past, returns have often been similarly
concentrated in a small number of days. Nevertheless, overactive investors continue to jump in and out of
the market, incurring transactions costs and capital gains taxes and running the risk of missing those
“sharp bursts.”
As mentioned earlier, investors often engage in selling because they believe a decline is imminent and
they have the ability to avoid it. The truth, however, is that buying or holding – even at elevated prices –
and experiencing a decline is in itself far from fatal. Usually, every market high is followed by a higher
one and, after all, only the long-term return matters. Reducing market exposure through ill-conceived
selling – and thus failing to participate fully in the markets’ positive long-term trend – is a cardinal
sin in investing. That’s even more true of selling without reason things that have fallen, turning
negative fluctuations into permanent losses and missing out on the miracle of long-term
compounding.
8
* * *
When I meet people for the first time and they find out I’m in the investment business, they often ask
(especially in Europe) “what do you trade?” That question makes me bristle. To me, “trading” means
jumping in and out of individual assets and whole markets on the basis of guesswork as to what prices
will do in the next hour, day, month or quarter. We don’t engage in such activity at Oaktree, and few
people have demonstrated the ability to do it well.
Rather than traders, we consider ourselves investors. In my view, investing means committing capital
to assets based on well-reasoned estimates of their potential and benefitting from the results over
the long term. Oaktree does employ people called traders, but their job consists of implementing long-
term investment decisions made by portfolio managers based on assets’ fundamentals. No one at Oaktree
believes they can make money or advance their career by selling now and buying back after an
intervening decline, as opposed to holding for years and letting value lift prices if fundamental
expectations prove out.
When Oaktree was formed in 1995, the five founders – who at that point had worked together for nine
years on average – established an investment philosophy based on what we’d successfully done in that
time. One of the six tenets expressed our view on trying to time markets when buying and selling:
Because we do not believe in the predictive ability required to correctly time markets, we
keep portfolios fully invested whenever attractively priced assets can be bought. Concern
about the market climate may cause us to tilt toward more defensive investments,
increase selectivity or act more deliberately, but we never move to raise cash. Clients
hire us to invest in specific market niches, and we must never fail to do our job. Holding
investments that decline in price is unpleasant, but missing out on returns because we
failed to buy what we were hired to buy is inexcusable.
We’ve never changed any of the six tenets of our investment philosophy – including this one – and we
have no plans to do so.
January 13, 2022
9
Does Not Compute
Jan 5, 2022 by Morgan Housel
Alot of things don’t make any sense. The numbers don’t add up, the
explanations are full of holes. And yet they keep happening – people
making crazy decisions, reacting in bizarre ways. Over and over.
Historian Will Durant once said, “logic is an invention of man and may be ignored by the
universe.” And it often is, which can drive you mad if you expect the world to work in
rational ways. A common cause of everything from divisive arguments to bad forecasting is
that it can be hard to distinguish what’s happening from what you think should be happening.
Two short war stories to show you what I mean.
The Battle of the Bulge was one of the deadliest American military battles in history.
Nineteen thousand American soldiers were killed, another 70,000 wounded, in just over a
month as Nazi Germany made an ill-fated last push against the Allies.
Part of the reason it was so bloody is that Americans were surprised. And part of the reason
they were surprised is that in the rational minds of American generals, it made no sense for
Germany to attack.
The Germans didn’t have enough troops to win a counterattack, and the few that were left
were often children under age 18 with no combat experience. They didn’t have enough fuel.
They were running out of food. The terrain of the Ardenne Forest in Belgium stacked the
odds against them. The weather was atrocious.
The Allies knew all of this. They reasoned that any rational German commander would not
launch a counterattack. So the American lines were left fairly thin and ill-supplied.
And then, boom. The Germans attacked anyway.
What the American generals overlooked was how unhinged Hitler had become. He wasn’t
rational. He was living in his own world, detached from reality and reason. When his generals
asked where they should get fuel to complete the attack, Hitler said they could just steal it
from the Americans. Reality didn’t matter.
Historian Stephen Ambrose notes that Eisenhower and General Omar Bradley got all the war-
planning reasoning and logic right in late 1944, except for one detail – how deranged Hitler
had become. But that mattered more than anything.
A generation later, something similar happened during the Vietnam war.

Secretary of Defense Robert McNamara viewed the world as a big math problem. He wanted
everything quantified, and based his career on the idea that any problem could be solved if
you obeyed the cold truth of statistics and logic.
One of the key measures of success during Vietnam was body count – how many Viet Cong
did American troops kill? Are more Viet Cong dying than Americans? It was easy to track,
easy to show on a chart, and became an obsession.
Then there was the logic: If enough Northern Vietnamese were killed, you could break the
spirit of the enemy who saw their chances of victory diminished. More enemy bodies was
equated with being closer to winning. William Westmoreland, who commanded U.S.
forces, explained in 1967:
We’ll just go on bleeding them until Hanoi wakes up to the fact that they have bled their
country to the point of national disaster for generations. Then they will have to reassess
their position.
The war was turned into a math equation. If enemy dead outnumbered American dead,
Americans would win. Ice-cold logic.
But the bodies piled up, and the war went on. And on. And on.
The “equation” would work only if the North Vietnamese leaders were calm, rational actors
who would “calculate costs and benefits to the extent that they can be related to different
courses of action, and make choices accordingly,” as one paper put it.
But they weren’t.
Edward Lansdale of the CIA once told McNamara that his statistics were missing something.
McNamara said, “What?”
Landsdale said, “The feelings of the Vietnamese people.”
You couldn’t capture that on a chart. But it meant everything. In 1966 New York
Times reporter Harrison Salisbury wrote:
I seldom talked to any North Vietnamese without some reference coming into the
conversation of the people’s preparedness to fight ten, fifteen, even twenty years in order
to achieve victory. At first I thought such expressions might reflect government
propaganda … but … I began to realize that this was a national psychology.
Ho Chi Minh put it more bluntly: “You will kill ten of us, and we will kill one of you, but it
is you who will tire first.”
That’s exactly how it played out in America, where statistics meant nothing against feelings.
Westmoreland once told Senator Fritz Hollings, “We’re killing these people at a rate of 10 to
one.” Hollings replied, “The American people don’t care about the 10. They care about the
one.”
That was hard to reconcile in the statistical mind of someone like McNamara. It was like
defying the laws of physics, or a typo in a math equation.
But that’s how the world works.
Some things just don’t compute.
Investor Jim Grant once said:
To suppose that the value of a common stock is determined purely by a corporation’s

earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is
to forget that people have burned witches, gone to war on a whim, risen to the defense of
Joseph Stalin and believed Orson Welles when he told them over the radio that the
Martians had landed.
That’s always been the case. And it will always be the case.
One way to think about this is that there are always two sides to every investment: The
number and the story. Every investment price, every market valuation, is just a number from
today multiplied by a story about tomorrow.
The numbers are easy to measure, easy to track, easy to formulate. They’re getting easier as
almost everyone has cheap access to information.
But the stories are often bizarre reflections of people’s hopes, dreams, fears, insecurities, and
tribal affiliations. And they’re getting more bizarre as social media amplifies the most
emotionally appealing views.
A few recent examples of how powerful this can be:
Lehman Brothers was in great shape on September 10th, 2008. Its Tier 1 capital ratio – a
measure of a bank’s ability to endure loss – was 11.7%. That was higher than the previous
quarter. Higher than Goldman Sachs. Higher than Bank of America. It was more capital than
Lehman had in 2007, when the banking industry was about as strong as it had ever been.
Seventy-two hours later it was bankrupt.
The only thing that changed during those three days was investors’ faith in the company. One
day they believed in the company. The next they didn’t and stopped buying the debt that
funded Lehman’s balance sheet.
That faith is the only thing that mattered. But it was the one thing that was hard to quantify,
hard to model, hard to predict, and didn’t compute in a traditional valuation model.
GameStop was the opposite. The statistics showed it was on the edge of bankruptcy in 2020.
Then it became a cultural obsession on reddit, the stock surged, the company raised a ton of
money, and now it’s worth $11 billion.
Same thing here: The most important variable was the stories people told and the emotions
they suddenly stumbled upon. And that was the only thing you couldn’t measure and couldn’t
predict with foresight. That’s why the results don’t compute.
Whenever something like this happens you see people shocked and angry about how the
market has become detached from fundamentals.
But Grant was right: It’s always been like this.
The 1920s were giddy. The ‘30s were pure panic. The world was coming to an end in the
‘40s. The fifties, ‘60s, ‘70s, were boom to bust, over and over. The ‘80s and ‘90s were
insane. The 2000s have been like a reality TV show.
If you’ve relied on data and logic alone to make sense of the economy you’ve been confused
for 100 years straight.
Japan is offering companies a 40% tax rebate to raise wages. But most companies aren’t, in
part because raises just aren’t part of the Japanese business culture.
Meanwhile, JPEGs of apes have risen in value several thousand percent in the last few
months, in part because that is part of the crypto culture.
Economist Per Bylund tweeted this recently:
The concept of economic value is easy: whatever someone wants has value, regardless of
the reason (if any), and its value is higher the more it’s wanted and the less there is of it.
Not utility, not discounted cash flow – just whether people want it or not, for any reason. So
much of what happens in the economy is rooted in emotions, which can, at times, be nearly
impossible to make sense of.
To me it’s obvious that the one thing you can’t measure, can’t predict, and can’t model in a
spreadsheet is the most powerful force in all of business and investing – just like it’s the most
powerful force in the military. Same in politics. Same in careers. Same in relationships.
A lot of things don’t compute.
The danger, and you see it often in investing, is when people become too McNamara-like –
so obsessed with data and so confident in their models that they leave no room for error or
surprise. No room for things to be crazy, dumb, unexplainable, and to remain that way for a
long time. Always asking, “Why is this happening?” and expecting there to be a rational
answer. Or worse, always mistaking what happened for what you think should have
happened.
The ones who thrive long term are those who understand the real world is a neverending
chain of absurdity, confusions, messy relationships, and imperfect people.
Making sense of that world requires admitting a few things.

John Nash is one of the smartest mathematicians to ever live, winning the Nobel Prize. He
was also schizophrenic, and spent most of his life convinced that aliens were sending him
coded messages.
In her book A Beautiful Mind, Silvia Nasar recounts a conversation between Nash and
Harvard professor George Mackey:
“How could you, a mathematician, a man devoted to reason and logical proof, how could
you believe that extraterrestrials are sending you messages? How could you believe that
you are being recruited by aliens from outer space to save the world?” Mackey asked.
“Because,” Nash said slowly in his soft, reasonable southern drawl, “the ideas I had about
supernatural beings came to me the same way that my mathematical ideas did. So I took
them seriously.”
The first step to accepting that some things don’t compute is realizing that the reason we have
innovation and advancement is because we are fortunate to have people in this world whose
minds work differently from yours. Beyond Nash are people like Elon Musk and Steve Jobs,
whose personalities are equal parts brilliant and absurd, and the absurd can’t be separated
from the brilliant – you have to accept the full package. We’d never get anywhere if everyone
viewed the world as a clean set of rational rules to follow.
The next is accepting that what’s rational to one person can be crazy to another. Everything
would compute if everyone had the same time horizon, goals, ambitions, and risk
tolerances. But they don’t. Panic selling stocks after they’ve declined 5% is a terrible idea if
you’re a long-term investor and a career imperative if you’re a professional trader. There is
no world in which every business or investing decision you see should align with your own
view of the world.
Third is understanding the power of incentives. Bubbles are technically irrational, but the
people who work in bubbles – mortgage brokers in 2004 or stockbrokers in 1999 – make so
much money from them that there’s a powerful incentive to keep the music playing. They
delude not only their customers, but themselves. Nothing gets people to look the other way
like easy money.
Last is the power of stories over statistics. “Housing prices in relation to median incomes are
now above their historic average and typically mean revert,” is a statistic. “Jim just made
$500,000 flipping homes and can now retire early and his wife thinks he’s amazing” is a
story. And it’s way more persuasive in the moment. If you look, I think you’ll find that
wherever information is exchanged – wherever there are products, companies, careers,
politics, knowledge, education, and culture – you will find that the best story wins. Great
ideas explained poorly can go nowhere while old or wrong ideas told compellingly can ignite
a revolution.
Novelist Richard Powers put it: “The best arguments in the world won’t change a single
person’s mind. The only thing that can do that is a good story.”
It’s hard to compute, but it’s how the world works.

Why Math Class Is Boring—and What to
Do About It
Shane Parish
There are two types of people in the world: those who enjoyed mathematics class in
school, and the other 98% of the population.
No other subject is associated with such widespread fear, confusion, and even outright hatred.
No other subject is so often declared by children and adults alike to be something they “can’t
do” because they lack an innate aptitude for it.
Math is portrayed as something you get or you don’t. Most of us sit in class feeling like we
don’t.
But what if this weren’t the fault of the subject itself, but of the manner in which we teach it?
What if the standard curriculum were a gross misrepresentation of the subject? What if it
were possible to teach mathematics in a manner naturally incorporating the kinds of activities
that appeal to children and learners of all ages?
All of those things are true, argues Paul Lockhart, a mathematician who chose to switch from
teaching at top universities to inspiring grade-schoolers. In 2002, he penned “A
Mathematician’s Lament,” a 25-page essay that was later expanded into a book.
In the essay, Lockhart declares that students who say their mathematics classes are
stupid and boring are correct—though the subject itself is not. The problem is that our
culture does not recognize that the true nature of math is art. So we teach it in a manner that
would just as easily ruin any other art.
***
To illustrate the harms of the typical mathematical curriculum, Lockhart envisions what it
would look like if we treated music or painting in the same dreary, arbitrary way.
What if music education was all about notation and theory, with listening or playing only
open to those who somehow persevered until college?
“Since musicians are known to set down their ideas in the form of sheet music, these curious
black dots and lines must constitute the “language of music.” It is imperative that students
become fluent in this language if they are to attain any degree of musical competence;
indeed, it would be ludicrous to expect a child to sing a song or play an instrument without
having a thorough grounding in music notation and theory.
Playing and listening to music, let alone composing an original piece, are considered very
advanced topics and are generally put off until college, and more often graduate school.”
And what if art students spent years studying paints and brushes, without ever getting to
unleash their imaginations on a blank canvas?
“After class I spoke with the teacher. ‘So your students don’t actually do any painting?’ I
asked.
‘Well, next year they take Pre-Paint-by-Numbers. That prepares them for the main Paint-by-
Numbers sequence in high school. So they’ll get to use what they’ve learned here and apply it
to real-life painting situations—dipping the brush into paint, wiping it off, stuff like that. Of
course we track our students by ability. The really excellent painters—the ones who know
their colors and brushes backwards and forwards—they get to the actual painting a little
sooner, and some of them even take the Advanced Placement classes for college credit. But
mostly we’re just trying to give these kids a good foundation in what painting is all about, so
when they get out there in the real world and paint their kitchen they don’t make a total mess
of it.'”
As laughable as we may find these vignettes, Lockhart considers them analogous to how we
teach mathematics as something devoid of expression, exploration, or discovery.
Few who have spent countless hours on the equivalent of paint-by-numbers in the typical
math class could understand that “there is nothing as dreamy and poetic, nothing as radical,
subversive, and psychedelic, as mathematics.” Like other arts, its objective is the creation of
patterns. The material mathematical patterns are made from is not paint or musical notes,
however, but ideas.
Though we may use components of mathematics in practical fields such as engineering, the
objective of the field itself isn’t anything practical. Above all, mathematicians strive to
present ideas in the simplest form possible, which means dwelling in the realm of the
imaginary.
In mathematics, Lockhart explains, there is no reality to get in your way. You can imagine a
geometric shape with perfect edges, even though such a thing could never exist in the
physical, three-dimensional world. Then you can ask questions of it and discover new things
through experimentation with the imaginary. That process—“asking simple and elegant
questions about our imaginary creations, and crafting satisfying and beautiful
explanations”—is mathematics itself. What we learn in school is merely the end product.
We don’t teach the process of creating math. We teach only the steps to repeat someone
else’s creation, without exploring how they got there—or why.
Lockhart compares what we teach in math class to “saying that Michelangelo created a
beautiful sculpture, without letting me see it.” It’s hard to imagine describing one of
Michelangelo’s sculptures solely in terms of the technical steps he took to produce it. And it
seems impossible that one could teach sculpture without revealing that there is an art to it.
Yet that is what we do with math all the time.
***
If school curriculums fundamentally misrepresent math, where does that misrepresentation

come from? Lockhart views it as a self-perpetuating cultural deficiency.
Unlike other arts, we generally don’t celebrate the great works of mathematics and put them
on display. Nor have they become all that integrated into our collective consciousness. It’s
hard to change the feedback loops at play in education because “students learn about math
from their teachers, and teachers learn about it from their teachers, so this lack of
understanding and appreciation for mathematics in our culture replicates itself indefinitely.”
In schools, mathematics is treated as something absolute that needs no context, a fixed

body of knowledge that ascends a defined ladder of complexity. There can be no criticism,
experimentation, or further developments because everything is already known. Its ideas are
presented without any indication that they might even be connected to a particular person or
particular time. Lockhart writes:
“What other subject is routinely taught without any mention of its history, philosophy,
thematic development, aesthetic criteria, and current status? What other subject shuns its
primary sources—beautiful works of art by some of the most creative minds in history—in
favor of third-rate textbook bastardizations?”
Efforts to engage students with mathematics often take the form of trying to make it relevant
to their everyday lives or presenting problems as saccharine narratives. Once again, Lockhart
doesn’t believe this would be a problem if students got to engage in the actual creative
process: “We don’t need to bend over backwards to give mathematics relevance. It has
relevance in the same way that any art does: that of being a meaningful human experience.”
An escape from daily life is generally more appealing than an emphasis on it. Children would
have as much fun playing with symbols as they have playing with paints.
Those whose mathematics teachers told them the subject was important because “you’re not
going to have a calculator in your pocket at all times as an adult” have a good reason to feel
like they wasted a lot of time learning arithmetic now that we all have smartphones. But we
can imagine those who learn math because it’s entertaining would go out into the world
seeing beautiful math patterns all over the place, and enjoying their lives more because of it.
***
If the existing form of mathematics education is all backward, what can we do to improve it?
How can we teach and learn it as an art?
Lockhart does acknowledge that the teaching methods he proposes are unrealistic within the
current educational system, where teachers get little control over their work and students need
to learn the same content at the same time to pass exams. However, his methods can give us
ideas for exploring the topic ourselves.
An education in the art of mathematics is above all a personal process of discovery. It

requires tackling the sort of problems that speak to us at that particular point in time, not
according to a preordained curriculum. If a new direction seems of interest, so be it. It
requires space to take our time with exploration and an openness to making judgments (why
should mathematics be immune to criticism?) All of this is far from ticking boxes:
“The trouble is that math, like painting or poetry, is hard creative work. That makes it very
difficult to teach. Mathematics is a slow, contemplative process. It takes time to produce a
work of art, and it takes a skilled teacher to recognize one. Of course it’s easier to post a set
of rules than to guide aspiring young artists, and it’s easier to write a VCR manual than to
write an actual book with a point of view.“
We should probably let go of the idea that doing math is about getting the right answer.
Being creative is never about getting to a destination.
Above all, mathematics should be something we engage with because we find it to be a fun,
challenging process capable of teaching us new ways to think or allowing us to express
ourselves. The less practical utility or relevance to the rest of our lives it has, the more we’re
truly engaging with it as an art.

What We Are Reading - Volume 2.096

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What We Are Reading - Volume 2.096

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14th Jan 2022

What We Are Reading - Volume 2.096

 Decade of India! Antique

 Th Eagle Eye Motilal Oswal

 Global Equity Strategy Credit Suisse

 Greed & Fear Jefferies

 Selling Out Howards Marks

 Does not Compute Morgan Housel

 Why Math Class is boring and what to do about it Shane Parish

Capex driven economic upcycle likely

Macro-economic outlook: Expecting a strong growth trajectory

Macro environment before the start of a multi-year capex cycle

Initial signs of capex revival visible

Business confidence at an all-time high driven by multiple

Engineering exports growth is at 30 year high; likely

Source: CMIE, Antique Source: CMIE, Antique

Strong central government expenditure continues in FY22

Why we believe in a strong capex revival?

Macro environment before the start of a multi-year capex cycle

2. Expectation of a strong global capex cycle driven by stimulus

3. Ample resources available to fund the upcoming capex cycle

Indian banking system well capitalized (Tier-1 capital %) to fund

Centre, 42.3 State, 45.1

State, 57.7 Centre, 54.9

Source: Antique Source: Antique

4. Low capacity utilization not a hindrance; driver of mid-late capex cycle

Fixed asset turnover (x) Capacity utilisation (%)

5. Normalization of real estate to drive higher GFCF growth

Household dw elling as % of GDP Household dw elling (INR bn)

Lower interest rate has helped reduce EMI by ~20%

6. PLI & Global supply chain diversification to drive Manufacturing

Expect real Manufacturing GFCF to increase from

Source: CMIE, Antique Source: Antique

Continuous intervention in indirect tax to help correct inverted

Production Linked Incentive may help restart private capex?

Total capex linked to PLI over next 5 years 7,731 Pharma

Source: Antique Source: PIB, Antique

7. Government Infrastructure push to act as another trigger

Commercial construction GFCF may inch up to

Source: CMIE, Antique Source: CMIE, Antique

Real commercial construction capex may grow by

20,000 16,656 15%

Any recovery on private side may drive upside risk

Valuation reasonable despite impending rate hike

Source: Antique, Bloomberg Source: Antique, Bloomberg

Nifty trading at mean levels on Bond-Equity earnings

Source: Antique, Bloomberg Source: Bloomberg, Antique

Policy normalization to help normalize yield curve;

10yr - 1 yr Average 1yr - Repo Average

Source: Bloomberg, Antique Source: Bloomberg, Antique

Nifty-50 FY22-24 EPS CAGR at healthy 16% on high base

Nifty EPS % grth (RSH)

Source: Bloomberg, Antique

Theme 1# Dream capex cycle finally unfolding

Expect GFCF share may reach ~35% of GDP by FY27

GFCF may reach by INR 73trn by FY27

GFCF (INR bn)

Expecting a conservative 8.8% GFCF CAGR over next 5 years

Pick-up in capex growth largely driven by normalization of real estate demand

PLI induced private capex expected to the tune of INR 7.7trn

Equivalent to ~9% of annual private capex may continue over

Relaxed fiscal glide path of 4.5% by FY26 vs earlier target of