ESG Investing To Gain Momentum In 2022!
ESG investing is gathering strength globally. With the advent of Covid, the socially and environmentally conscious investors are willing to happily reallocate their investment monies to help the cause of making this planet a more livable place. Yogesh Supekar delves on the concept of ESG investing and highlights various opportunities for the investors willing to benefit from the emerging ESG investing trend. The ESG investing is not new to the investment world. However, the emergence of ESG investing trend may be new for the equity markets. Indeed, the market size for ESG companies is growing rapidly in India and globally. Before we delve deep into ESG investing trend and preference by investors, it is important to understand ESG investing first.
What is ESG investing?
ESG stands for Environmental, Social and Governance. ESG Investing (also known as “socially responsible investing,” “impact investing,” and “sustainable investing”) refers to investing which prioritizes optimal environmental, social, and governance (ESG) factors or outcomes. ESG investing is widely seen as a way of investing “sustainably”—where investments are made with consideration for the environmental and human wellbeing, as well as the economy. It is based on the assumption that the financial performance of organizations is indirectly affected by environmental and social factors.
As ESG investing accelerates in demand, several key trends are emerging – from climate change to social unrest. The coronavirus pandemic, in particular, has intensified debate on the interconnectedness of sustainability and the financial system.
There is rising recognition of Environment Social and Governance (ESG) investing in developing economies, especially in times of increasing global uncertainties owing to the Covid-19 pandemic. Companies with strong ESG credentials are seen to be performing well financially as compared to their competitors.
Looking at global trends, the United Nations Principles for Responsible Investment (UNPRI) has reported an increase of 26% in ESG assets in 2021, as against 22% in 2019. By March 2021, 601 signatories (asset owners) of the UNPRI group managed more than $121 trillion. The global inflows in sustainable funds have increased by 88%, in which Europe has accounted for almost 80%, followed by the United States, Asia (excluding Japan), Australia/New Zealand, Japan, and Canada.
ESG investing in India has been steadily gaining popularity in the last five years, but the efforts made for this purpose are at an amateur stage. It has been estimated that inflows in ESG mutual fund schemes in India have increased by 76% in 2021, increasing from Rs 2,094 crore to Rs 3,686 crore in 2019-20. In addition to this, in 2020, India’s large asset management companies (AMCs) have launched schemes that have a clear focus on ESG aspects. In the stock indices too, the sustainability themed index NIFTY ESG 100 has outperformed the NIFTY 100 between 2020 and 2021. Further, anticipating stable, long-term risk-adjusted returns, pension funds too have started integrating the ESG factor.
Why ESG Investing?
The companies that rank high on ESG factor are the ones which are doing well by doing good. The question investors should ask is whether high ranking ESG companies actually make money and whether that translates into creating wealth for shareholders. In other words, any investor who is focusing on ESG investing strategy has to identify if the ESG investing strategy performs better than non-ESG strategies. If we look at performance on bourses for some of the companies such as EKI Energy, which is a pre-eminent brand in the realm of "climate change, carbon credit and sustainability solutions” across the globe aspiring to render strategic solutions for helping businesses and organizations to achieve their climate ambition, it is more than impressive. EKI Energy shares have risen by more than 8300 per cent in just one year and the stock continues to gain in every trading session. The company has a simple objective: To rehabilitate earth to a low carbon and climate resilient global economy. Kotyark Industries is yet another example of a company that tends to benefit from the ESG investing trend and is turning out to be a multibagger.
According to Gunvant Vaid, a Chartered Accountant and an HNI investor, “Huge winners come from three simple things: (a) identifying megatrends, (b) earnings explosion and (c) investor’s ability to hold for the long term. Once a megatrend is identified and a company that tends to benefit from the megatrend and able to deliver supernormal earning growth is selected, all one has to do is buy and hold for the long term. There is very good chance of creating huge amount of wealth in the process. There is no doubt in my mind that ESG investing is a megatrend. It is already making waves globally and I think the trend of ESG investing will continue to strengthen.”
As more and more global investors are willing to park excess funds in stocks that fit into the ESG criteria, it is safe to assume that the buying in EV-related stocks, renewable energy and companies that stand to gain from carbon credits will remain robust.
Says Mohit Jangir from Jaipur, an investor and founder of Investing Hut, “From my years of experience of equity investing, I have realized that investor should be focused on three things while identifying market beating companies – 1. Business, 2. Team and 3. Valuations. The trick is always to find a good business with right set of management team and the stocks should be available at reasonable valuations. Once you identify such a company, then it is only a matter of holding on to such stocks with patience and conviction. When it comes to ESG investing, my thoughts are clear. ESG -ve sectors such as oil & gas, metals & mining, and power generation (nonrenewable), which contribute significant GHG emissions and have social implications, are more sensitive to the ESG metrics. ESG +ve sectors, companies which are working in sectors such as IT, electric vehicles, clean energy, green chemicals, waste management, etc., can be considered while investing in the ESG framework. Investors should take an optimistic view in the long-term on consumer discretionary, clean energy/green hydrogen, APIs (selective). Manufacturing sector is expected to grow aggressively owing to the government support in the form of PLI and corporate tax rate cut. It is important to understand the triggers driving the growth and the investment rationale should be clear.”
Kanika Agarrwal, Co-founder of Upside AI
"Climate change as a theme is now front and centre (justifiably so), especially in the west which is the source for a lot of capital in emerging capitals like India. So, I think the E in ESG is going to receive disproportionate attention than it has in the past. As financial markets mature, social and governance standards tend to improve across the board. As we have seen in 2021, activist investors have now started to have some impact, even in traditional promoter-driven businesses. So, I think sustainability is an extremely sustainable theme."
Opportunities in Semiconductor Industry
Semiconductors are manufactured in a fabrication plant (also called a fab or foundry) of a factory. Fabs require machinery which are very expensive. Integrated circuits, transistors, solar cells and other computing materials would not exist without semiconductors. Because of this, semiconductor materials have a significant impact on the computing and electronic industry. Adoption of Artificial Intelligence (AI) and Internet of Things (IoT) will be the major factor to accelerate industrial adoption of semiconductors in use of new technologies.
The global foundry revenue is growing at 10.4 percent on an average, while semiconductor is a multi-billion-dollar industry. Out of the global capacity among fabs, a majority of leadingedge wafer capacities are located in Asia. The U.S. has 12 per cent, Europe 9 per cent, China 15 per cent, South Korea 22 per cent, Taiwan 21 per cent and Japan has 15 per cent. The upsurge witnessed in smartphones in the past few decades has propelled the growth of semiconductors. The rapidly advancing AI, IoT and other technologies using semiconductor chips are engendering change in R&D and manufacture of semiconductors.
Today, companies are transforming their own business models to adapt to 5G, AI, and IoT. AI, IoT and other technologies have specifically triggered a new wave of revolution in the semiconductor industry. Also, the application of 5G networks helps to grow with growing demand for faster highperformance computing devices. Semiconductor manufacturers have huge opportunity to tap into this new market, as long as innovation can keep up with consumer demand. Semiconductor technologies have helped the scientists to develop everything from bomb detectors to smart glasses. Looking into the future, AI will certainly change the way how our world works. The manufacturers who can address the needs of both AI and IoT for semiconductor chips will make it to the top in future markets.
As things stand today, AI researchers and developers have already begun to disrupt the markets for autonomous vehicles, financial services, healthcare and medical electronics, media, smart-home appliances, industrial automation, traffic control, construction and agriculture industry. The combination of IoT and AI will only increase demand and innovation in the semiconductor sector. Some of the companies such as Qualcomm and Nvidia are breaking new ground in the IoT market. Nvidia, which is acclaimed for high end computer graphics cards, is also seeing success with semiconductors chipsets for automated vehicles. The company’s Tegra processor can be found in some Tesla automobiles. Qualcomm sold over $1 billion in IoT chips and, like Nvidia, is making inroads into automotive electronics.
Governments and companies across the world are putting huge efforts to meet the global demand for semiconductors. The industry outlook for coming years has a created a lot of opportunities in fields such as data processing, energy transmission, storage and usage; applications such as 5G, AI, cloud computing, EVs (electric vehicles), ADAS (advanced driver assistance systems), IoT, metaverse, etc.
"Sustainability is no longer about doing less harm. It’s about doing more good"
- Jochen Zeitz
President and CEO of Harley-Davidson.
Opportunities @ Airbag manufacturers
The Government of India has made it compulsory for the automobile industry to increase the number of airbags in cars. This has given a push to the airbag manufactures as well as companies supplying raw materials used in production of airbags. The three main companies that manufacture airbags are Bosch, Minda Industries and Rane Madras. The materials used for manufacture of airbags are nylon and sodium azide. The major producers of nylon are Century Enka, Aym Sintex and SRF. The second material needed to produce airbag is sodium azide and the major player in this space is Alkali Metal.
Conclusion
Clearly, the investing themes that are emerging for 2022 and beyond are ESG, ethanol, digital AI, semiconductor and EV. For investors, zeroing on opportunities in these growth areas can be a daunting task as the valuations are already stretched for most of the stocks. Also, excessive optimism can play a spoilsport while investing in these new sector stocks. It is possible that poor quality stocks from these trending sectors have already gone up and that can lead to underperformance.
A bottom-up stock selection approach is required in these new growth sectors. Only quality stocks where earnings growth is visible and valuations are at least fair, if not attractive, should be included in the portfolio.
Market is showing signs of weakness ahead of the major upcoming event of the Union budget. The year 2022 started with huge optimism as frontline indices gained by ~4 per cent. However, the frontline indices have shed all of their gains made in 2022. The global markets are also displaying weakness, with some of the major indices such as Dow Jones Industrial Average and NASDAQ slipping below the 200-DMA for the first time since March 2020.
The budget may set the tone for the markets in the short term, after which the direction of the global markets and the earnings may dictate market mood in 2022.
Looking at the emerging investment themes, we have handpicked our top bets for 2022.
Borosil Renewables Ltd
CMP (₹): 610.30
BSE CODE: 502219
Face Value(₹) : 1
52Wk High/Low : 748.00 /215.80
Mcap Full ( ₹ Cr.) : 7,951.01
HERE IS WHY
✓Technological moat
✓Dominant domestic player
✓Healthy margin
Borosil Renewables Limited (BRL) is promoted by well-known Borosil Limited, pioneers in specialty glass products. BRL is the first and only solar glass manufacturer in India with an annual capacity of 2.5 GW (low iron textured solar glass). BRL was previously known as Borosil Glass Works Ltd into which Gujarat Borosil Ltd has been merged. The company grabbed the opportunity in this segment quite quickly and commissioned the solar glass manufacturing facility at Bharuch in Indian state of Gujarat in January 2010. BRL has a strong focus on modernization and known for its ground-breaking achievements like the development of the world’s first fully tempered 2 mm thick solar glass, solar glass with lowest iron content giving highest glass productivity and also being the first company in the world to successfully remove the most hazardous substance ‘antimony’ from its solar glass, etc.
The company gives tough competition to Chinese players and exports abundantly as well. The quarterly performance shows a net sale of ₹265.61 in Q2FY22 as compared to ₹222.67 crore in Q2FY21. The operating profit of ₹43.64 crore in Q2FY22 was reported as compared to ₹42.14 crore in Q2FY21. Also, the net profit rose by 2.26 per cent in Q2FY22 as compared to ₹17.36 crore from ₹16.98 crore in Q2FY21. The annual number for net sales shows increase of 19.8 per cent to ₹761.69 crore in FY21 from ₹635.83 crore in FY20. The operating profit also rose by 17 per cent in FY21 to ₹141.09 crore from ₹120.10 crore in FY20. Subsequently, the net profit also shot up by 21.52 per cent from ₹47.74 crore in FY20 to ₹58.01 crore in FY21.
BRL has a dominant domestic share of 40 per cent and the balances are largely met by imports and are the price makers, with imports cut out due to global shortage. Prime Minister Narendra Modi has set a massive target of achieving the target to 450 GW renewable energy capacities by 2030. The current solar capacity is at 37 GW, constituting 40 percent of renewable capacity. The solar capacity is targeted to reach 100 GW by 2022 (57 per cent share) and 300 GW by 2030 (67 per cent share). The government has also designed various programs like SECI scheme, Kusum 26 GW by 2022 with an incentive for farmers to install solar pumps and grid connected projects. This gives players like BRL to meet the demand by supplying glass which being a very important component and at the same time building strong relations with local panel manufacturers.
Normally the company exports 23 percent to 26 per cent of sales to European nations like Germany, Italy, France, Holland and the United States and Canada. As the major technological huddles have gone over the years, BRL has been able to compete against cheap imports in domestic market as well in export markets. The solar industry is heading towards increased use of glass modules (glass on both sides) due to increasing share of bifacial modules/floating solar plants. For glass-glass modules, solar glass is expected to make up to 20 per cent of the solar module cost, and 10-11 per cent of the total solar project cost. The company is likely to benefit from the transition of globally solar industry towards glass-glass modules. Hence, we recommend BUY.
Praj Industries Ltd.
CMP (₹): 395.35
BSE CODE: 522205
Face Value(₹) : 2
52 Wk High/Low : 448.25 / 110.25
Mcap Full ( ₹ Cr.) : 7,261.52
HERE IS WHY
✓Market leader
✓Strong financials
✓Robust order pipeline
Praj Industries is India's most accomplished industrial biotech company. Over the past four decades, they have focused on the environment, energy, and agri-process industry, with thousand plus customer references spanning hundred plus countries across all five continents. The company’s diverse portfolio comprises bioenergy solutions, critical process equipment and skids, breweries, zero liquid discharge systems and high purity water systems. Bio-Mobility™ and Bio-Prism™ are the mainstays of Praj's contribution to the global bio-economy. The company's Bio-Prism portfolio comprises technologies for the production of renewable chemicals and materials, promises sustainability while reimagining nature.
Their Bio-Mobility platform offers technology solutions globally to produce the renewable transportation fuel, thus ensuring sustainable decarbonization through a circular bio-economy. Praj Matrix is the state-of-the-art R&D facility with over 300 international patents filings and forms the backbone for the company's endeavours towards a clean energy-based bio-economy. The company’s quarterly consolidated financials reveal that net sales and other operating income for Q2FY22 stood at ₹532.41 crore, growing twice from ₹260.24 crore recorded in Q2FY21. Q2FY22 operating profit came in at ₹52.72 crore, jumping by 2.4 times relative to ₹21.97 crore in Q2FY21.
On similar lines, net profit tripled from ₹11.39 crore in Q2FY21 to ₹33.34 crore in Q2FY22. During the quarter, ethanol production capacity of plants using Praj’s technology solutions across the globe has crossed formidable 11 billion liters annually.
This translates to around 10 per cent of global ethanol production (excluding China). In terms of annual consolidated financials, net sales and other operating income grew by 18.35 per cent from ₹1,102.37 crore in FY20 to ₹1,304.67 crore in FY21. Operating profit climbed 27.77 per cent from ₹108.08 crore in FY20 to ₹138.09 crore in FY21. Net profit grew by 15.11 per cent from ₹70.43 crore in FY20 to ₹81.07 crore in FY21.
The company’s strength is its unique approach from R&D to design and deployment (D&D). This has helped them build time-tested mutually rewarding relationships with customers around the world. From October 2021 onwards, incentives to sugar industry have doubled and it has encouraged ethanol production from B-heavy molasses, sugarcane juice, and sugar syrup. Considering social, environmental and economic benefits of ethanol blending program (EBP), the Government of India has advanced 20 per cent ethanol blending target by 5 years from 2030 to 2025. This is expected to create opportunity of additional 10 billion liters per annum ethanol capacity.
Also, the government’s move to allow direct sale of ethanol as a fuel for compatible automobiles is further expected to support the higher ethanol demand. This is creating distinct visibility of growth in ethanol demand and helping build industry structure alongside robust ecosystem across the value chain. This bodes well for Praj, as the company is a market leader in developing and deploying innovative technology solutions for sugar as well as starch based ethanol plants. The company has robust financials, is almost debt free and has been maintaining a healthy dividend payout ratio. Hence, we recommend BUY.
Tata Motors Ltd.
CMP (₹): 478.55
BSE CODE: 500570
Face Value(₹) : 2
52Wk High/Low : 536.50 / 255.55
Mcap Full ( ₹ Cr.) : 1,58,907.64
HERE IS WHY
✓India PV business gaining share
✓Supplies expected to improve
✓Electric vehicles to gain traction
Tata Motors Limited (TML) is one of India’s largest original equipment manufacturers (OEMs) offering an extensive range of integrated, smart and e-mobility solutions. TML’s commercial vehicle (CV) offerings include sub-1 tonne to 55-tonne gross vehicle weight (GVW) trucks and small, medium and large buses and coaches. TML’s passenger vehicle (PV) offerings include the ‘NEW FOREVER’ range that exemplifies the IMPACT 2.0 design language across cars and utility vehicles and is developed using pioneering technologies that are sustainable. TML is also playing a leading role in proactively shaping the electric mobility landscape in the country.
TML has a JV with Fiat Group Automobiles to manufacture passenger cars, engines and transmissions for the domestic market, and a JV with Cummins Inc. USA for the design and manufacturing of diesel engines. Jaguar Land Rover (JLR) continues to shape the future of modern luxury vehicles globally built around its iconic brands: Jaguar and Land Rover. JLR, which became part of Tata Motors Group in 2008, exemplifies quality and sustainability. The other two subsidiaries of Tata Motors include Tata Motors Finance and Tata Daewoo and Tata Technologies Limited.
Analysing the quarterly performance, the net sales and operating income for Q2FY22 is reported at ₹61,378.82 crore as compared to ₹53,530 crore in Q2FY21, an increase of 14.66 per cent. The operating profit declined by 25.97 percent to ₹4,983.52 crore in Q2FY21 in comparison to ₹6,731.52 crore reported for Q2FY21.
The net loss stood at ₹4,476.61 crore in Q2FY22 as compared to ₹343.28 crore in Q2FY21. On the annual front, the net sales and operating income for FY22 reported was ₹2,49,794.75 crore, 4.32 per cent lower than ₹2,61,067.97 crore. The operating profit expanded by 66.65 percent to ₹34,930.62 crore in FY21 as compared to ₹20,960.22 crore in FY20. The company reported a net loss of ₹13,016 crore in FY21.
India operations showed significant improvement as compared to Q2 a year ago, however the supply chain issues, and commodity inflation impacted the margins. As a result, TML reported EBIT of (1.6) per cent and pre-tax loss for Q2 FY22. PV business continued its turnaround journey and strengthened its double-digit market share with decade high quarterly sales. EV business recorded nearly three-fold growth and recorded highest monthly and quarterly sales of 1,078 units and 2,704 units, respectively.
In the case of Jaguar Land Rover, for the quarter, revenue was £3.9 billion with a pre-tax loss of £302 million (EBIT margin -4.7 per cent). Free cash outflow stood at £664 million, after £484 million of investment spending and £501 million volumerelated working capital outflow. This was significantly better than prior guidance for a £1 billion free cash outflow, indicating priority given to higher margin products and cost controls to reduce the cash break-even point for the company. Looking ahead, the semiconductor shortage remains dynamic and a bit hard to forecast; however, JLR expects to see gradual recovery.
Also, JLR is taking measures to increase the future visibility and control over semiconductor supply for its vehicles, working closely with semiconductor and Tier I suppliers. Going forward, demand is expected to remain strong for JLR and India passenger vehicles while commercial vehicles’ demand is seen gradually gaining traction. Semiconductor issues and commodity inflation will continue to impact the near term and the company is doing its best to manage them. The performance is expected to improve gradually as both the supply chain and the pandemic situation improves. Hence, we recommend BUY.
( Prices as on Jan 24, 2022)