World GDP most critical components : Energy , and land requirement.

Material things doesnt matter much , what matters is Energy and Intelligence that takes you to the matter that matters most. More about this "saying" by me in my later posts.

As of 2012 , the top two components of World GDP in terms of percentage are Healh care constituting 15-16% and energy  - constituting about 8-9%.  Together these two consists of near about 1/4th of world GDP.

Oil equivalent of energy consumed is - perhaps about 2000 kg of oil - or about 2500 liters of oil in  2014. considering about 10 to 10.5 Kwh per liter of oil,  the consumption is about 25,000 KWH units of Electicity per annum,  or aboout 2100 units per month , or about 70 units per day. This is perhaps all inclusive, Includes travel, your public transport, the consumption of power for production by the industry which produces them, The energy for the construction of your home, your appliances, all inclusive.

Average solar insolation is about 5kwh per day, even at 40% conversion efficiency, that comes to about 2 Kwh per day require atleast 35 sq.m of land per person . for 7 billion people , about 0.245 million sq km is required.  Compared to India's area - about 3.3 million sq KM, it is roughly 7.5%.

Indian population being 20% of global population, India would need 1.5% of its land to meet the country's present energy needs from purely solar @40% efficiency. @ 20% efficiency it willl be 3%. Wow.

Compare this to the percentage forest cover in India at 23%.  Looks meagre,  But this doesn't look scalable, if we need to increase the present energy consumption by 100 times, Just as we had increased the consumption of bandwidth over the last 10-20 years. Then 150% of India's land  is needed for our consumption @ 40% efficency. Not possible . So is nuclear fuel the only answer. Or am I simply dreaming of a 100 fold increase in energy consumption per capita!!!!

INDIAN INFRASTRUCTURE SECTOR - PURE INTEREST RATE PLAY !!! Case study of GMR Infrastructure

This article explains how Interest rates affect share price of High leverage stocks in a profound way. This also applys to your Home loan.

Suppose I has Rs. 100, & I started business taking a loan of Rs. 1000 (D/E =10:1). Interest rate is 10% PA, If my profit is Rs. 100/- per annum on my total Investment,  my Net profit is Rs. 0 /- . (Earnings- Rs.100/-, Interest- Rs.100/- ; Net profit (PBT) = 0) 

If  the interest rate comes down to  Rs. 9.5%, the Net profit will be Rs. 5 as per the above calculations. 

This Net present value of This Rs.5 profit over a 25 year period is @ 9.5% interest rate over a 20 year period is Rs.45. So My Rs. 100 equity value becomes Rs. 145 with a 0.5% reduction in interest rates.

This , analogy apply best for your home loan too. People buys a home with about 90% of debt. Not that , as it seems Indian Interest rates have peaked, it may be time to take high leverage.

This may well mean that stocks with real D/E of about 1:10 , Like Indian Infrasturcture stocks, will appreciate typically by 40-45% for every 0.5% reduction in Interest rates. 

Let us take a major infrastructure player  in the market - GMR INFRASTRUCTURE .   The stock has actual D/E of 5:1, real D/E of more than 10:1 . This is because, the invesments are mostly made in the SPV route. The parent company will have an Debt and equity component. It will again invest in Individual projects , which are treated as separate business, which will further have D/E of about 70:30. 

Let us look at the share price of  typical infrastructure stock GMR INFRASTRUCTURE  over the last 3 years, 

Change Date	RBI REPO RATE	GMR INFRA STOCK PRICE
March 19 2013	7.500 %	22
January 29 2013	7.750 %	19.8
April 17 2012	8.000 %	21
October 25 2011	8.500 %	18.75
September 16 2011	8.250 %	25.9
July 26 2011	8.000 %	26.5
June 16 2011	7.500 %	29.8
May 03 2011	7.250 %	34.25
March 17 2011	6.750 %	37.45
January 25 2011	6.500 %	39.4
December 1 2010	6.250 %	43.7
October 1 2010	6.000 %	53.6
October 1 2010	6.000 %	53.6
August  1 2010	5.500 %	63
July 1 2010	5.000 %	55

This leaves us , with strong proof that the stock has correlation with Interest rates.  Every 0.5 to 1% increase in interest rate - is reflected as about 50% increase in the stock price, Every  0.5 to1% decrease in Interest rate gave about -33% decrease  in Stock price. 

So in the current macro economic trend, where interest rates are slated to come down , The typical Infrastructure stocks are bound to increase. D/E ratio of 5:1 - The rate of increase will be atleast 50% for every 1% decrease in interest rates. So , come on now and buy the infra names. Its right time to buy.

In the next blog , we will analyze when to invest in the real estate with debt, It is another leverage play that depends on Interest rates purely.

Blog Intro

This blog is started to share my original thoughts/research on Investment. Majority of the thoughts will be on invetment in Stocks, real estate, Gold, Startups, on own Job.  These thoughts are honed through the years of presence in the Indian stock market, backed by a Business management education from an Elite Institute .  

This is my genuine attempt to BRING PROSPERITY AND HAPPINESS TO ALL.