FPIs In Full Blown Selling Mode, Unload $10 Billion Of Stock
The Indian markets tried hard to reach higher ground but could not
Title: FPIs In Full Blown Selling Mode, Unload $10 Billion Of Stock
Description: On Episode 416 of The Core Report, financial journalist Govindraj Ethiraj talks to entertainment industry journalist and author Vanita Kohli Khandekar as well as Dr Ajay Mathur, Director General of the International Solar Alliance.
(00:00) The Take
(05:09) FPIs in full blown selling mode, unload $10 billion of stock
(06:46) Rupee hits record close, gold prices are up 32% this year
(07:44) Chinese steel production drops, dumping could increase
(09:15) India is revving up solar power, but is also dependent on Chinese imports
(21:18) A serum company buys a film production house, why could that be?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, it's Tuesday, the 22nd of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
For several months it has been clear that auto sales in India have slowed down.
A key indication of that has been the rise in inventories at dealerships, now at a record 80 days.
Using that benchmark alone, we have argued that there was a good chance this reflected a larger slowdown in the economy and also the end of a post-Covid spike in spending.
A Kotak Securities report that puts out stock picks for Diwali day trades says the brokerage is cautiously optimistic on India.
The words sound strange and distant given that no brokerage has really used the word caution to describe the Indian markets even until a few weeks ago.
So what’s changed ?
Actually, it's the smart money.
The first to hit the reverse gear were the foreign portfolio investors who have now reportedly sold a record $10 billion worth of stock this month.
They were mostly heading to China in a desperate attempt to catch the market upside of the series of stimulus measures that the Government had unveiled in recent weeks.
It helped that Chinese valuations were low and Indian valuations were high.
All the fleeing investors and the brokerages like Jeffries by the way swore by India’s longer term story even as they were dumping stock. Other brokerages like Bank of America and Macquarie similarly reduced India weightages and increased China.
If Indian markets were indeed so full of promise, it is unlikely we would have seen the kind of exodus that we have.
Most institutional investors have always pointed to earnings as the driver of market prices and valuations. Markets are a slave to earnings, is the usual response when asked about valuations.
But the latest earnings season has been slow, in contrast to the past.
A report in the Financial Express says net profits of a sample of 164 companies (including banks and financials) were up 7% year-on-year on the back of an 8% rise in revenues.
But net profits would have fallen but for a 23% jump in other income.
Importantly, the FE article says the across-the-board miss in estimates suggests the Street has been unable to gauge the extent of sluggishness in demand, whether for IT services or for consumer goods.
Managements claim reasons range from muted consumer demand, elevated commodity prices and higher advertising and promotion spends amidst competitive intensity.
The cautiously optimistic Kotak report points not to the earnings but India’s strong macroeconomic position including an improving fiscal and inflation outlook.
The report also says that there is some modest improvement in laggard sectors of IT services and consumer staples.
Actually, it is more about what the report is not saying which is of course the usual bullish cross sectoral bullish tone which we have been seeing across brokerages.
There are several other data points like Goods & Services Tax or GST whose growth is down to 6.5%, lowest in 40 months, which is almost on par with inflation and could arguably mean very little or no growth in volumes.
Elsewhere, real estate purchases are slowing and sales of old homes have slowed further.
There are various positive data points as well as there should be.
But broadly this looks more like the end of a standard high growth phase which was more cyclical than a straight up line as people would have you believe.
And quite likely this is a good development for the economy and markets as they cool off and resume their upward journey in good time.
The bigger question to me is how come no one saw this coming until almost the last moment.
Like Bajaj Auto did when it suddenly almost out of the blue announced that two wheeler festival season sales were clocking below expectations.
Or UltraTech Cement who reported a bigger-than-expected 36% decline in consolidated second-quarter profits on Monday, thanks to cement prices which are now near five-year lows.
Many companies have pointed to the demand slowdown caused by heat waves followed by elections followed by heavy rains across the country.
Does that mean that demand would have been hunky dory were it not for these extraneous factors and thus would roar back after, which is now.
Well quite evidently not.
The question really is to what extent India Inc knew there was a more fundamental problem with consumer demand all these months.
Did it not know or knew but somehow chose to stay silent ?
Neither answer is actually very comforting.
And that brings us to the top stories and themes
FPIs in full blown selling mode, unload $10 billion of stock.
Rupee hits record close, gold prices are up 32% this year.
Chinese steel production drops, dumping could increase.
India is revving up solar power, but is also dependent on Chinese imports.
A serum company buys a film production house, why could that be?
Markets & More
The Indian markets tried hard to reach higher ground but could not. The BSE Sensex swung some 959 points even as investors continued to sell.
A sharp increase in HDFC Bank stock did not help either.
The BSE Sensex closed at 81,151.27, down 73.48 points or 0.09 per cent.
The Nifty50, too, was down at 24,781, down 73 points.
It’s a record October with the highest ever selling by foreign institutional investors (FIIs) with sales of nearly $10 billion worth of investments from the Indian stock market beating the $7.9 billion sale seen during the Covid-led market crash in March 2020, though the proportionate value this time is lower as total investment value for FIIs is much higher.
Gold Prices High
Gold, which is considered a hedge against political and geopolitical uncertainty, has risen 32% so far this year.
And they are up again for the 5th day now, obviously hitting fresh records thanks to ongoing middle east tensions and some uncertainty around the US election, Bloomberg reported.
Silver is now at a 12 year high.
Gold is at $2,733.50 per ounce and has returned as a safe haven asset with analysts predicting $2,900/oz over the next 12 months.
Traders are pricing in a 90% chance of the U.S. Federal Reserve lowering rates in November, according to the CME FedWatch tool, Bloomberg said.
Rupee Record Low
Gold might be up but the rupee was at its weakest closing level on record on Monday.
The rupee closed at 84.0725 against the U.S. dollar, a tad lower than its close at 84.0650 in the previous session.
Foreign investors have pulled out close to $10 billion from local stocks in October crossing the previous high of $8.35 billion in March 2020, around Covid.
The dollar index has risen nearly 3% in October, boosted by expectations of shallower rate cuts by the Federal Reserve alongside rising odds of a victory for Donald Trump in the upcoming U.S. presidential election, Reuters reported.
"FX markets seem to be positioning for a Trump victory in next month's U.S. presidential election," ING Bank said in a note.
Several analysts in both equity and forex markets appear to be pricing in a Trump victory in elections next month.
China Steel Demand Shrinks
China will account for less than half of global steel consumption in 2024 for the first time in six years, according to the World Steel Association, as the decline in the country’s real estate sector pummels demand for the metal, Bloomberg reported.
India’s market will grow by 8% this year — after rising 14% in 2023 — to 143 million tons, while other emerging and developing economies will see growth of around 7% for a second year running, according to Worldsteel.
“China’s at the structural peak in terms of steel demand,” Simon Trott, chief executive for iron ore at Rio Tinto Group, the world’s largest supplier of the steelmaking ingredient, said at an address in Melbourne on Friday.
“The world will need more steel in the next 20 years than it’s used in the last 30, despite the sort of growth we’ve seen in China.”
Worldsteel sees Chinese consumption racking up a fourth year of declines in 2024 to 869 million tons, while demand in the rest of the world rises 1.2% to reach 882 million tons.
China’s share will shrink further in 2025, according to the association.
This appears to mark the end of China’s decades-long infrastructure and property boom.
The rest of the world last surpassed China’s share of demand in 2018.
Solar Blazes Away
India’s ambitious goal of installing 500 GW of renewable energy capacity by 2030 may drive the country’s annual solar equipment imports to around $30 billion due to heavy reliance on Chinese goods, Global Trade Research Initiative (GTRI) has said.
In 2023-24, India imported USD 7 billion worth of solar equipment, with China supplying 62.6 per cent.
China now dominates over 80 per cent of global solar production and exports, controlling 97 per cent of the world's polysilicon supply.
I reached out to Ajay Mathur, Director General of the International Solar Alliance, a joint effort by India and France to step up deployment of solar energy solutions and to which 119 countries are signatories to the ISA Framework Agreement.
I began by asking him to walk us through the key challenges in ramping up capacity and the opportunities as well.
INTERVIEW TRANSCRIPT
Dr Ajay Mathur: These are amazingly interesting issues. For one thing, when we are looking at India, doing the 500 gigawatts is no longer a serious challenge. The question is how much more can be.
And this is largely because in the last few months, we have seen the price of electricity from down the clock renewables to match that of a new fossil fuel plant, new coal power plant at about 5 rupees. So all the solar plus wind plus battery is 5 rupees minus and all the new coal is 5 rupees plus. What it implies is that unless we, now we need to take care that we have enough land, we need to take care we have enough transmission lines, we need to take care we have enough cash to invest in the upfront cost of these plants.
If we do that, then it will be very, very likely that we reach somewhere near 750,000 gigawatts instead of just 500 gigawatts by 2030. That was one point. The second is where do we get modules from?
Today, approximately, well, something of the order of 80% of the modules used in India come from China. This has two problems. One is, of course, the supply chain problem because it takes time for these panels to come from there to there.
The second is one of the costs because for the cost you are dependent on what the Chinese manufacturers want. We have seen that as far as going from solar cells to solar modules is concerned, that makes economic sense today and therefore you're seeing a lot of solar cells going to solar modules, those plants coming up across the country. We've got something like 20 gigawatts worth of capacity going from solar cells to solar modules.
We added approximately 15 gigawatts in 2024, so that's more than enough. The problem is making solar cells. Solar cells, China has been selling at an amazingly low price and that's largely because the capacity that they have is approximately double of what the global demand is.
Therefore, for the sake of survival, there are various plants which provide very inexpensive solar capacity just so that they can remain in business. Now, what it also means is that we will need to provide incentives for people to remain in the solar cell business. We are providing them to the performance link scheme, the Performance linked Incentive Program, and what we hope is that something of the order of approximately 15 this year and 25 next year worth of gigawatts of solar capacity will come.
So, the solar cells to solar module guys don't need to buy from anybody else. They can buy from the made in India solar cell capacity itself. So, my view is that from solar cells to solar modules, I think we are already economically viable.
Making solar cells requires incentives. We have done that, so my feeling is we'll return to the corner sooner rather than later. The third question that you had asked was about capacity.
Now, very, very clearly, we need people who are trained in designing and managing solar plants, but also in the policies that are needed for the solar capacity to be made. We also need capacity to make sure that the grid works all the time. So, remember, we're talking of solar and wind and storage and hydro and nuclear.
All of this is carbon neutral, but what it means is that you've got electricity from one source coming in at one time, from something else coming up at another time, and therefore, we are looking at capabilities to manage the grid. This is amazingly important. The grid managers need to be trained to do this.
This capacity building has started. There's a Greenest Goods Council, but the number of people that are needed needs to enhance dramatically fast. We are now going ahead with the rooftop program, but we will need people who can manage those rooftop programs as well, those rooftop installations that are made.
We need those people. We are looking, therefore, at something like a doubling of the capacity that we are producing today to what we need.
Govindraj Ethiraj: Right. Okay. So, if I were to stay with India for a moment, can I ask you, between, let's say, rooftop and grid power, how is that equation evolving now, given that there's a lot of subsidies going into rooftop solar support as well?
Dr Ajay Mathur: So, we have got about 70,000 megawatts of solar power in the country. Approximately 15,000 to 55,000 is grid connected, and approximately 10,000 to 15,000 is rooftop. But remember, this 10,000 to 15,000, which is rooftop, was just 5,000 years ago.
With the rooftop program, we are seeing a dramatic change, and we are seeing something of the order of, I believe, one crore households being connected through solar rooftops. That implies that over the next three years, we've got something of the order of 7,000 to 8,000 megawatts a year added. So, what we can expect is that we would have about 20,000 megawatts added to solar rooftop by the end of 2027-28 or so.
Govindraj Ethiraj: In terms of rooftop solar, and I mean domestic or household rooftop solar, would you say that the pickup in India has been similar to, let's say, other parts of the world, or has the policy input of providing subsidies helped, and to what extent?
Dr Ajay Mathur: First of all, I think, as a consumer, I am now better off using solar electricity, if my roof can bear the weight of the solar, if I can connect it and connect it in a manner that I use solar electricity instead of grid electricity when I want. So, yes, the benefits are there. When I have excess solar, I can supply it to the grid using the networking program that is available.
How are we going? We are still in the very early stages, but I have no hesitation in saying that with this program and this program, policies only become better as we go along because we have always learned from our experience. My own feeling is that we will reach the 20,000 megawatt goal in three years.
Govindraj Ethiraj: Right. So, as we reach, as you said, parity in terms of cost of power, what else are the key policy challenges, or for that matter, even investment challenges, whether it's public or private sector ahead? Let me start with the financial challenges.
Dr Ajay Mathur: Even though the cost of electricity from grid-based renewable electricity, round-the-clock renewable electricity is now less, what it means is the capital cost is still much more. The capital cost is twice. A 100-megawatt coal unit will cost about 900 crore rupees.
Solar plus wind plus a storage of an equivalent capacity will cost about 1920 crores. By itself, doubling the amount of financial resources that are needed is not that great a challenge for a country like India. But what it means is that there are many other sectors which would be starved of money.
So, you can almost hear them sucking the money out. One way of handling it is to enhance the velocity of the money that is invested in the solar area. So, the same money, instead of being invested for seven years, could be invested for three years.
Then you could do it twice. Now, what will happen after three years? What we can do is build up the bond market.
Go in so that your pension money and my pension money can be invested in these solar projects and they get an annual return and pay me. And in the process, they also get funded. So, because the projects are ready in two years, take the money out after the third year, replace it with bond money, and then give the same money to the next project.
Govindraj Ethiraj: Right. Let me supplement that last question. Any unfinished agenda?
Dr Ajay Mathur: A big unfinished agenda. I think the key issue is land. Where do we find the land? Now, back of envelope calculation suggests that the Thar desert is large enough to meet all of India's needs in 2070.
However, we don't want that. We want solar to be much better diversified across all the states of the country. The issue is how do we get the land?
We have great examples from the wind energy area where, for example, in Tamil Nadu, the land was first bought, then it was leased, and then just the points on which the wind tower was placed, only that was leased. I think what state governments need to do is to purchase pieces of land, and then they can resell them or release them, depending on how well they've got it, to solar development. That would, I hope, make chunks of land available.
These chunks of land are also important because what it allows the transmission company to do is build transmission links between these chunks of land and the place where electricity is used. This availability of land will help me as a developer to go to these chunks of land closest to where I have my PPA. That will give me the certainty that I will get the project and I will build it as well.
Govindraj Ethiraj: Dr. Mathur, thank you so much for joining me.
Dr Ajay Mathur: Thank you. Thank you very much, Govind.
Injection Of Entertainment
In entertainment news, a vaccine company or its owners to be more specific are acquiring a film production company.
Adhar Poonawala of the Serum Group, known mostly as makers of vaccines are acquiring a 50% stake in Karan Johar run Dharma Production at a valuation of Rs 2,000 crore.
Elara Securities said the Rs 1,000 crore infusion will enhance capabilities of production houses to make large-budget films; an average budget of one large scale Hindi film is in the range of INR 2-3bn.
- Both parties formed a binding agreement and Serene Productions (Adar Poonawala’s investment vehicle) to invest INR 10bn in the company.
- Karan Johar will be spearheading the company as an executive chairman while Apoorva Mehta will be the Chief executive officer of the entity
Dharma was engaged in discussions with multiple parties including Saregama Music and Reliance Industries Ltd and according to Elara had reported losses in the last two years and lower revenues.
The production house was founded in 1976 by Yash Johar (Karan Johar’s father); Karan Johar with family would own 100% stake in Dharma Productions, before this deal.
I spoke with well known entertainment industry journalist Vanita Kohli Khandekar for her take on the deal and what either side stood to gain from it.
INTERVIEW TRANSCRIPT
Vanita Kohli Khandekar: I think the motivations of the buyer and the seller, Govind, are completely different. Just a week back, or maybe 10 days back, I did this piece when this news was about Dharma talking to various people. The list included Adani, Reliance, and Saregama. And I think the day I filed that story, Saregama, in that evening itself, Saregama said that there was no, nothing of material interest to be revealed yet to the stock market, it was a listed company.
But I think that, unfortunately, Karan or Apoorva both haven't spoken to me and neither has anybody from Saregama and nor has anybody from the Poonawala group. I've been following up with them. But from whatever I understand from speaking to people within the business.
One is a stage of life thing. So from the seller's perspective, it's a stage of life thing that Karan is over 50. I think at some point he does want to encash the equity he has.
Secondly, we must remember that this business is going through a transition phase. It's not a tough phase or a good phase or a happy phase. It's a transition phase.
And the production of films, the whole making of content in India is an extremely fragmented business. This is a hill which Hollywood climbed 70 years back, maybe a hundred years back. These are hills which we are just beginning to climb when OTT is taking off.
Television is on the decline, is in gentile decline. So the point is the buyers are extremely consolidated. Remember, you have a Reliance Disney, you have a Netflix, you have an Amazon, large, big giants who can dictate prices and dictate creative terms.
And the sellers, which are your, whether it's an XL, T-Series, Viacom. Now, Viacom, of course, is part of a far bigger group, which is Reliance Disney. I was just looking at the names, Dharma, all of them.
There is Applause, Balaji. They all, everybody will be within 100 to 1,000 crore. I mean, T-Series was about 1,000 crore, if I'm not mistaken, last year.
So in films, just in films, not overall. But my point is these are smaller companies compared to the people who are buying stuff from them. Theatrical business is challenged.
It's challenged not because people are not coming back to the theatres, but people are coming back less. And therefore, to get them there, you need to spend far more money. Getting people on OTT is not a problem.
And selling stuff on OTT is not a problem. So you need more scale. And this is one business.
I don't know if you noticed, Govind, there has been investment in distribution. There has been investment in technology. There has been investment in several other parts of the value chain.
But investment in making content has only come from two or three players, which is Netflix, Amazon, and a few others. You don't have investment in content at scale. And ultimately, whether it's a newspaper, whether it's a television channel, or whether it's an OTT, they are all aggregators.
So that business has got consolidated. These guys making films and TV shows are not consolidated. So from the seller's perspective, to go back to your question, this was an imperative.
That consolidation is bound to happen. We said this, I've been saying this for I think almost two years now. And the consolidation that we saw with Reliance Disney or we could have seen with Sony Z, it is but natural that it will happen at this end of the value chain.
The only problem is there isn't enough money chasing these guys. They need strategic investors, right? Without that, so that, and on the buyer's side, I don't know, I don't know what it means for the Poonamwala.
Is it a vanity buy? Is it that they genuinely want to diversify into films? And really, there could be a variety of motives here.
See, if it was a Saregamma, I could have given you a cogent set of thingies, but here I'm not, this is an unknown quantity for me.
Govindraj Ethiraj: Right, and how do things look from here on? Again, in the context of the fact that this quarter or last few quarters, things have been somewhat tough, but this is of course cyclical. I mean, we could see new hits and things could turn around for the theatrical side at least.
Vanita Kohli Khandekar: No, no, theatrical side, Sree has been a huge hit. It's doing better numbers than Jawan and Pathan did in the domestic market. If you take a global box office hit, of course, Pathan, Jawan are bigger, but She's done well.
Several other films have done well. So it's not, I don't think theatrically so challenged that people will start, but the fact is if these guys want to make more films at a scale where people come back to the theatres or where the OTC, also you must remember that the streaming boom is over. All the streamers have cut their budgets globally over the last one and a half, two years.
Disney is listed, so they have to cut back. Netflix is listed, they've cut back. Amazon has cut back.
Everybody's cut back the budget. So that party is over, that throwing money at shows and films, that is over, that was a phase. So ultimately, just like TV became a proportion of your film's revenues, or a film's P&Ls, streaming is becoming a proportion.
Eventually, whatever you do globally, theatrical brings in 60 to 70% of a film's revenue. If a film doesn't work in the theatre, it does not make money, period. You could say all you want, unless you know you're a two crore film and you've sold to the OTT for two and a half crore, then you're fine.
You get me? A film has to make money in the theatre. And if they have to revise it, so it's based, it is what Balaji did to television production, if you think of it, or what Ogilvy did to advertising films.
You have to bring scale and getting scale into the creative business is extremely tough.
