Quarterly Newsletter #3
January to March 2025 | Notes from the Solar Industry
Roots, not just Branches
The Indian equity markets have seen a rough ride in the past few weeks. Specifically, some sectoral scrips that had been of concern from the outset. When I meet market participants from the West, I notice a deep emphasis on quantative analysis. While they hold their place, one must also focus on the intangibles while deciding whether to omit or commit to an investment decision.
The risk of corporate governance or ‘quality of promoter’ is a critical element, which investors in the developed markets should consider while evaluating India. Perhaps, those markets have so much data, that their approach to investing is largely rational but behaviours change across cultures and there is nuance that cannot be ignored.
I am reading a book on principles of economics from the Austrian school and Ludwig von Mises, an economist and philosopher from that school of thought very aptly said the following:
Economics is not about things and tangible material objects; it is about men, their meanings, and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.
In group-based cultures such as India, where businesses are family-owned, there is an enormous amount of information one can collect through insightful questioning and on-ground observations. I want to share a few observations that I have seen play out repeatedly. These can result in suboptimal decisions and lead to an erosion of value. Many commentaries on the stock market talk about the errors of omission vs the errors of commission. Some of the warning signs are not new – studying history, then, is perhaps a better subject than finance to learn about the equity markets. If one notices these red flags and decides not to act – one can avoid the error of commission.
The solar business is hard enough
When the going gets good, some promoters feel that they can get into adjacent businesses. One can easily rationalize the adjacency and therefore becomes a big blind spot. The solar business is a hard enough business with very tight margins – looking at expanding across the entire energy transition universe, means too high of a capital ask and too much decision fatigue. Call me boring or conservative but the long-distance running mindset teaches one that sticking to your lane and staying the course, helps in compounding.
A personal experience that explains the perils of success:
One of my friends was a CFO of a very well-known start-up. The last time I met him; his startup raised a few hundred million and was sitting on cash. Before this stint, he had been a banker as well as a VC. So, he has been on the side of taking money, giving money, and arranging money – A good all-round understanding of finance. When asked how the founder feels about the fundraise, my friend said, the problem with success is that it brings new friends. These friends come in the form of new advisors or new buddies at a members’ only club. He said, if not new friends, one starts to see more “yes” men grow within the firm - it feeds the hubris and often results in making some suboptimal financial decisions. Success, then, is a lousy teacher.
While asset diversification is key, spreading too thin results in loss of focus and starts a cascade of problems.
Bring on the Bling
This one is easy and visible. Success leads to a significant change in promoter lifestyle – There is nothing wrong with enjoying the wealth one has worked hard for but not at the cost of shareholders. I have seen generational wealth (70 – 80 years of pole position in the industry) being destroyed in a few years by suboptimal behaviour. At its core, India remains a culture where humility and simplicity are valued, therefore a sudden shift in behaviour, gets noticed and amplified, often, from the closest quarters.
Too much in the news
Traditional investing wisdom states that one should be careful of companies that are too much in the news. Early stage and/or private markets investing may be susceptible to FOMO and PR, but the public markets only care about consistent delivery of EPS. Promoters might feel doing an IPO may be a good way to raise capital, but the management & promoter bandwidth may dilute focus from value accretive work.
In conclusion, understanding corporate governance and promoter fabric are critical for investing in India. In one of the many beautiful gardens of Delhi, stands this pillar with an insightful saying from Rumi. This may provide some insight into where to look while building a thesis.
Raisina Dialogue
Of the many travels and conferences in the last quarter, I was most excited to attend the Raisina Dialogue in New Delhi. It’s India’s flagship conference on geopolitics that brings heads of states, members of the government, business executives and thought leaders from various domains to discuss and debate a myriad of subjects. There were 120 countries represented this year.
As mentioned in the last two newsletters, the solar industry is significantly affected by geopolitics. Energy policy is now becoming a matter of international interest hence I attended this event hoping to join some dots between the big picture view and the daily last mile execution.
Compute needs Energy
I noticed a common theme across sessions that tech would trump (pun-intended) everything in geopolitics and that India, through its STEM talent and inherent demand, was well positioned to benefit immensely from the AI revolution.
International diplomacy has many groups of friends, NATO, QUAD, BRICS, Global South vs Global North and across these groups, it was evident that be it climate change or be it defence and warfare – the role of technology in understanding human behaviour would take precedence in the coming decade.
Minister Ashwini Vaishnav spoke about AI roadmap for India and mentioned that the sectors for disruption include healthcare, agriculture, weather forecasting, and education. Ronnie Chatterji, Chief Economist at OpenAI, cited an interesting use case for areas with little or no medical facilities. A picture taken of an infant at the time of birth, when run through an AI model, could immediately tell the birthweight and recommend remedies. Mr. Amitabh Kant mentioned that in Baramati, Maharashtra sugar cane yield had tripled because of the use of AI.
Be it AI, semiconductors or datacentres, the underlying need for all the technology growth is energy. Dare I say, if I read the room right, I felt that the narrative of technology and national security seemed to have created far more urgency with the speakers than the narrative of climate change.
In my experience, conversation about climate in international settings end up in a blame game of who should take moral/actual responsibility for emissions and that debate has no end. However, technology and national security tend to induce rush due to their inherent nature of short-term reward and/or destruction.
Therefore, looking at synergies between solar and some of the national priorities – AI, data centers, space and defence, could help startups generate ideas that are scalable and fundable.
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Disclaimer: Views expressed are personal and not those of any organization that I am associated with.