Sunday, August 27, 2023
Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.
Last week India imposed a 40% export tax on onions, and plans to sell them locally at a subsidised rate.
Now that the price for tomatoes is declining, there has been a steady rise in the price of onions.
India is particularly sensitive towards the price of onions, potatoes and tomatoes, since they are crucial to the Indian palette.
The government’s onion tax looks preemptive since the rise of prices is in line with seasonal trends.
However, the recent 8x rise in tomato prices seems to have brought criticism for the government, along with contributing to retail inflation, which reached a 15 month high in July 2023.
High inflation has also added to anxiety around sustenance of the current status quo on interest rates that the RBI has stuck to.
Any rate increase would have us going back to the same cycle of slower growth, lower valuations, and pressured markets; which at least India seemed to have sustainably contained until the recent price increases popped up.
Similar anxiety has been popping up in the US too, with treasury yields soaring.
The fact that the US economy is strong with buoyant growth, unemployment at its historic lows, and high wage growth has resulted in investors worrying that the Feds work of cooling the economy down is far from over.
Other than that, there are supply pressures which are also adding to inflation worries. Over 200 cargo ships are stuck at the Panama Canal (the place that connects the Atlantic and Pacific oceans), nearly a third of the Pacific’s containers pass through.
A drought made local authorities restrict the number of ships that can pass through per day since the movement of ships requires freshwater.
The delay is already causing a rise in shipping prices, and can also contribute to inflation in the US, which has been a worry since months now. And higher inflation would lead us back to the same place that is already pressuring the markets - rate hikes!
But unlike in India where government intervention can lead to contained onion prices, there’s little the US can do to free up the Panama Canal.
Again, India seems to be better placed with ammunition available to tackle potential pain.
In 2016, a 110 year old heritage building at Flora Fountain in South Mumbai was restored to house the one place where rich college students go to flex at - it being one of the world’s largest fashion brands - Zara.
Keep in mind, its neighbours include Hermes, Sabyasachi and Christian Louboutin.
The 50,000+ square feet property made for one of the biggest transactions of this kind, with an estimated monthly rent of Rs. 2.5 crore - that’s Rs. 30 crore annually (isme tera poora ghar jayenga)
Around the same time, a new private label picked up an 8,000 square feet property at Commercial Street in Bangalore, which is a supremely commercial (obviously) space with hundreds of local shops, sans luxury.
It targeted the aspirational Indian mass market, providing good quality fashion at affordable prices; and quickly gained immense popularity.
And within just 7 years, with more than 350 stores, it is now the largest apparel retailer in India - Zudio.
The link between the luxurious Zara and the affordable Zudio is that they are both owned and operated by the same entity - Tata Group’s Trent, under which also comes another uber-successful retail chain that falls right between the two price points - Westside, creating a fashion trifecta.
With brand chains that strongly appeal to consumers across segments, Trent has emerged as the undisputed leader in apparel retail.
Across all three brands, Trent has been doubling its store count every 2.5 years. And, not surprisingly, 80% of the store addition over the last 5 years has been of Zudio, which went from its first store in 2016 to more than 350 now.
Over the same time, Trent’s share price has gone from Rs. 200 at the end of 2016 to Rs. 2,000 now! Naturally, the success of Zudio has contributed meaningfully to the market cap for Trent so far.