FIIs $10 Billion Stock Sale in October: The Untold Story
Market watchers heaved collective sighs of relief after the market fall seemed to slow down on Thursday
On Episode 419 of The Core Report, financial journalist Govindraj Ethiraj talks to Vinod Karki, Equity Strategist with ICICI Securities as well as Heena Vazirani, Partner at PwC india.
Markets are flat, could they stay here?
The surprising story behind the record $10 billion worth of stock sold by FIIs in October.
Manufacturing PMI picks up.
Indian companies are not doing enough on data privacy awareness
The Government approves a Rs 1,000 crore fund for space startups
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 Friday, the 25th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
Sunil Nanda, a BITS Pilani graduate, founded the India Design Center for Nvidia Graphics in Bangalore in 2004, just 11 years after the company itself was founded in 1993 in the US.
A job description I found from that period said NVIDIA was looking for talented people who are passionate about the visual computing industry.
“We want individuals who are highly motivated and strive for perfection in their work. If you want to be part of a company that is shaping every pixel on millions of screens across the world, come join us,” the advertisement said.
While NVidia’s design and engineering centre came up in India 20 years ago, it came after chip giant Intel who had already set up in Bangalore, some 5-6 years earlier.
And Intel was the big brand and draw, including for journalists like me who chased visiting Intel brass for interviews.
NVidia was there but except for the tech and gaming media, no one cared that much. After all, it was just a gaming chip.
Intel’s largest engineering site outside the United States today is in India and it has over 13,000 employees here of which 90% are engineers.
NVidia is large in India too but smaller in absolute numbers, being a smaller organisation as well.
Nvidia founder Jensen Huang is presently visiting India and being feted across events and appearances, as he is elsewhere in the world.
Thousands turned up to see him and thus delayed an event featuring him in Mumbai on Thursday.
Until quite literally a couple of years ago, Jensen Huang’s visits to India would have been largely unnoticed except by tech media.
A $3.4 trillion dollar market capitalization number, in breathing distance of Apple, obviously has changed many things.
It is also a reminder of how rapidly things change in the technology world.
Intel, the ruler in the chip space for decades, has lost its preeminent leadership position, thanks to the shift to high performance AI chips and NVidia’s rapid dominance in that space.
Reports in August suggested Intel would lay off some 15,000 people even as talk of Intel being acquired surfaced, an unthinkable proposition a year ago.
India has a role in these companies' global rise as well.
Intel and NVidia arrived in Bangalore more than two decades ago because they saw potential in India’s engineers as much as the market where they both sold their products.
On both counts India has served the global technology industry well.
But tomorrow’s winners will typically arrive quietly today and only if they see raw potential, as these chip companies did once.
When NVidia’s first key India hire Nanda started off with a little over hundred colleagues, Nvidia was looking for talented people passionate about the visual computing industry.
Today, it is a force in artificial intelligence, reflecting how the company itself has pivoted over the years.
"We know from experience that India is home to some of the world's brightest engineers, as many of our top employees today are originally from there. India is strategic to NVIDIA and we are delighted to become a member of the Bangalore community," Huang had said in 2005.
He could well be making the statement today.
That is a reminder of India’s strengths and in some ways challenges ahead if it has to stay relevant in the global technology race.
And that brings us to the top stories of the day.
Markets are flat, could they stay here ?
The surprising story behind the record $10 billion worth of stock sold by FIIs in October.
Manufacturing PMI picks up.
Indian companies are not doing enough on data privacy awareness
The Government approves a Rs 1,000 crore fund for space startups
Markets Steady
Market watchers heaved collective sighs of relief after the market fall seemed to slow down on Thursday.
The BSE Sensex and NSE Nifty50 ended Thursday's trading session somewhat flat, though down.
The BSE Sensex was down around 17 points at 80,065.16 while
The NSE Nifty50 ended at 36.10 points at 24,399.40 levels.
The Nifty Midcap100 and Nifty Smallcap100 indices ended down by around a quarter per cent each.
The domestic cues are still somewhat negative though the global cues are somewhere positive to mixed.
Oil prices are edging higher and tensions in the middle east continue but corporate performance in the US is strong.
On Thursday, the S&P 500 was up after three straight losing sessions. One surprise was Tesla whose stronger than expected earnings pushed up markets.
Tesla surged more than 14% after the electric vehicle manufacturer posted third-quarter results that beat analyst expectations, CNBC reported.
More than 32% of the S&P 500 has reported third-quarter numbers thus far. Of those companies, 76% have beaten analyst expectations, according to FactSet.
I don’t have the India figure for this but it is evident that results here are trailing expectations in the latest quarter.
Oil Prices Rise
Oil prices rose on Thursday, reversing some of the previous session's losses, as the Middle East conflict and reports of North Korean troops ready to help Russia in Ukraine kept traders on edge, Reuters reported.
Brent crude futures were up $1.26, or 1.7 per cent, to $76.22 a barrel as of 0905 GMT.
Oil prices have gained about 4 per cent this week after falling more than 7 per cent last week on concerns of oversupply and weak demand and a perceived calming of Middle East tensions which of course has not happened.
"The opposing forces of economic anxiety, loose oil balance and potential war-related supply disruptions will ensure that no clear oil price direction emerges in the immediate future whilst the risk remains skewed to the downside in the medium term," an analyst at oil broker PVM told Reuters.
FII Selling, The Untold Story
FIIs have hit a record $10 billion. Heavy selling by FIIs in October has caused the markets to fall and weakened the rupee, taking it to a record low, among other things.
Why are they selling so heavily ?
Well the reasons are somewhat known and are mostly to do with them moving funds to China to ride on the post stimulus upside there.
Also valuations in China were lower and in India have been higher, broadly speaking.
But what were they selling ?
The intuitive answer would be everything they owned.
Not true, says an insightful study by Vinod Karki at ICICI Securities.
According to him, most of the selling has happened in what he calls consumer centric stocks, contributing more than 66% of the mix.
More specifically, the selling has included financials (likely led by retail consumer finance focussed lenders given their high holding and stock reaction) to manufacturers of consumer products (FMCG, auto, other discretionary).
Some 19% of the selling was linked to energy which in turn was linked to Reliance Industries.
But Reliance is also a consumption play with its heavy presence in retail and telecom.
Meanwhile, there was moderated selling in areas like IT and healthcare or what are known as defensive sectors.
While industrials were a mixed bag with moderate selling across most sectors while buying was observed in chemicals, metals and others.
Another interesting factoid here is that despite all this selling, FII holding in Indian equities is still around 16.3%, actually higher than the 16.1% in July.
So there is a lot of coming and going happening here.
So if FIIS are selling more sector specific rather than the whole market that also suggests that there is in some ways a specific problem rather than a general problem, at least through the FII lens.
I reached out to Vinod Karki, Equity Strategist with ICICI Securities and began by asking him what he was taking away and his outlook on overall equities.
INTERVIEW TRANSCRIPT
Vinod Karki: The trigger was the China, big rally in China from where we started seeing this and big outflows in India. Coming to where the selling is, we tried to triangulate the trend by looking at several factors. So one is basically the Fortnightly data which tells us which sectors buying and selling is happening from FII side.
What it is telling us that biggest selling is in financials. Now when I triangulate it with the stocks where these guys have the largest holdings and the stock reaction, it tells us that consumer lending, unsecured lending kind of stocks like NBFC and even the large banks which are retail-oriented, they seem to have fallen during this period. So obviously, it must have been selling in this area.
So it's consumer lending centric stocks then followed by the consumer product companies themselves. I mean, FMCG, consumer discretionary, these are sectors where this maximum selling has happened and in between there's energy. Within energy, one of the largest holdings is basically Reliance which is a large conglomerate but the rising share of consumption.
It's no longer just oil and gas play. So I think contrary to a typical risk of environment selling by FIIs which typically is in cyclicals, it seems to be more pronounced toward consumption like lenders as well as products companies basically. Whereas the rest of the industrials, if you see, it's a mixed bag, moderate selling in some sectors, some by other defensive like IT and healthcare also seeing some moderate selling.
That's how this has spanned out.
Govindraj Ethiraj: So that's interesting. So why do you think this is happening and specifically why NBFCs or FMCG and so on and why now?
Vinod Karki: Yeah, I think some of these stocks, we have put out that list which have been kind of the favorites for the FIIs in general in India. From the large holding perspective, it was these large banks and NBFCs which used to do a lot of retail credit. That seemed to be the case.
But what has happened over the last five years post-COVID rally, the rally has largely been these the CAPEX driven sectors, the capital intensive sectors, the corporate lenders, PSUs, defense, manufacturing, and these sectors have never been their favorites the last cycle. I think that is a rebalancing recap calibration that's happening that the supposedly very safe liquid names in consumer finance and consumption where they are disproportionately high level of holding is getting transformed into, I mean, they're even buying small and mid-cap despite all their riskiness. So which is the kind of, I think it's more of a recalibration than a signal of a risk of selling in India.
That's how I read it. Correct.
Govindraj Ethiraj: Right. Okay. So if I were to ask you to dive into that a little more, so how would this relate with, let's say, the kind of Q2 performance we're seeing, particularly in consumer products and consumer facing industries?
Vinod Karki: In fact, it is actually not on the portfolio recalibration, the whole economy is moving in such a way that we are having the performance of retail credit as such. If you see the credit growth numbers, the retail credit has been unsecured lending both from the regulator's perspective and the stress in the economy is decelerating. While industry credit seems to be picking up from single digit to 10% now, and especially in the mid and small companies, it's in the teens, the growth in industry credit growth.
So I think the economy itself is giving you a sense that the investment side of the economy is outperforming the consumption. And consumption has another big issue which we are seeing over the last year or so. If you look at the aggregate GDP, it is just barely growing 1% growth versus the aggregate GDP is growing at over 7% plus.
So when you do the aggregate versus non-aggregate GDP, it's very clear that the aggregate GDP is 1% on a 12-month basis, while the rest of the ex-aggregate economy is growing at around 8%. And the latest numbers for rural CPI, not just this overall CPI, but rural CPI indicates that number is close to 6%, while the income growth is trending lower to around 5% to 6%. So on a real income basis, rural India is getting the stress, I guess.
And there are some indications that you'll have a severe winter, and there have been extended rains in October, where it's the Kharif harvest season. So I think some of these things are creating problem on the income productivity and real income for the large consumption package. So I think it's getting reflected in stock reactions.
You can see it today also, you know, results muted and things like that.
Govindraj Ethiraj: And you're also saying that after all of this, the proportionate foreign portfolio investor holding in Indian equities has actually gone up to 16.3%. It did go up.
Vinod Karki: I mean, it bottomed out at 16.1% around July, it went up in August, September till about 16.3%. It is slightly higher than that. So the point we're seeing is that over the last six months, this number of FPI holding of Indian equities seems to be, you know, just jumping around the bottom. There have been a batch of selling and then buying and selling and that type of thing.
So currently, it hasn't broken down below that 16% range, which it already in July.
Govindraj Ethiraj: You've also touched upon domestic institutional investors. So as you see things today, and maybe in the next quarter or so, how do you see the investing strategy between domestic institutional investors and foreign institutional investors? So foreign you've already talked about, what's the sort of convergence or divergence with domestic?
Vinod Karki: One thing that's come out very clearly is that while the FIIs have been selling these large retail banks and all, it seems that that's being absorbed by the domestic guys, because the valuations are no longer quite demanding. I mean, that's the only space I would say in the whole market where valuations are cheaper than they were before COVID hit us. I mean, that's the only sector apart from commodities, basically.
Financials and commodities are the only two sectors in the market right now, which are relatively less expensive than they were pre-COVID. All other sectors are way above, basically. So I think domestic guys in general are buying, of course, across sectors, but more of a, you know, that the supply when it comes from, whatever large supply comes from FI, they tend to absorb that if valuations are not quite expensive.
I like it's happening in financials.
Govindraj Ethiraj: Right. Vinod, thank you so much for joining me.
Vinod Karki: Thanks, Govind.
PMI Figures
Growth in India's business activity picked up slightly in October after softening last month, led by stronger demand in the manufacturing sector, according to a survey that also showed job creation rose at the fastest pace since February 2006.
HSBC's flash India Composite Purchasing Managers' Index (INPLCF=ECI), compiled by S&P Global, rose to 58.6 this month from September's final reading of 58.3, which was a 10-month low.
The headline index has been above the 50-level separating growth from contraction for 39 consecutive months - the longest expansionary streak since June 2013.
"India's flash manufacturing PMI indicated that the manufacturing industry regained growth momentum in October. Several components accelerated after a modest slow down over the past two to three months," noted Pranjul Bhandari, chief India economist at HSBC.
Germany Agriculture
This is interesting because of the figures shared and the contrasts they represent.
Agriculture is the "most problematic" area in talks to secure a free trade deal between India and the European Union, Reuters reported German Economy Minister Robert Habeck saying on Thursday, suggesting that it would be better to focus on the industrial sector first.
Habeck, who is in India, said agriculture is a problematic area as there is a huge variation in the number of people working in the farm sector in India and Germany, he told reporters, adding that it was 2% of the population in Germany compared to about 60% in India.
"So you can't compare the two agricultural systems. If you were to open the markets completely ... the disruption to the Indian market will be tremendous," Habeck said.
It would be faster, smoother and practical to focus on the industrial sector instead, he said.
Although this is "not in line" with what the EU normally does, a "shortcut" may be the way forward as clubbing agriculture, services and industry was making it difficult, Habeck added.
India and the EU agreed in 2022 to relaunch talks on a free trade agreement, initially aiming to complete talks by the end of 2023, but have failed to make significant progress on a deal, with India blaming "irrational" standards set by the EU as one of the reasons.
Why Companies Have to Invest More in Awareness on Data Privacy
Last year saw the introduction of the Digital Personal Data Protection (DPDP) Act, 2023, legislation which broadly aims to empower individuals or data principals, by strengthening their rights to control personal data while simultaneously enhancing accountability for businesses and institutions handling such data.
The US and EU have rolled out similar legislation earlier.
While this is an important piece of legislation in this digital age, awareness of it is low.
Moreover, companies are not doing enough to ensure that their own consumers are more aware.
Given that our behaviour and interactions including for commerce are increasingly technology and data driven, understanding of and embracing the tenets of privacy becomes critical.
The findings are the outcome of a study run by consulting firm PWC to gauge where India stands in relation to privacy literacy, the obstacles that lie in the way of building a culture of privacy first in the country, and how these gaps can be bridged.
PWC connected with some 3,000 consumers across the country, from different regions, age groups and educational profiles, and with around 200 corporates.
It found a gap in the understanding of the basic tenets of privacy among all and not much desire on the part of companies to invest in consumer rights education.
Think of a bank with whom you have a continuous relationship and ask whether you feel they inform you adequately on this issue.
PWC says from a consumer standpoint, while lack of awareness about certain privacy-related processes, protocols, rights or responsibilities may not come as a surprise, there is an overall lack of trust in business.
I spoke with Heena Vazirani, Partner at PWC who focuses on risk consulting and asked her why companies were not putting enough effort here.
INTERVIEW TRANSCRIPT
Heena Vazirani: The first aspect is what is data privacy? Frankly, privacy is a fundamental right that was passed in our constitution in 2017. And the fact that, you know, culture as a culture, we usually in India just really give away our personally identifiable information or personal information, whoever is asking without any, you know, questions.
It was important that there is a regulation also that controls it. So in August 2017, the government published a particular act that's called the DPDC Act. What it is doing is it is telling organizations who are dealing with personal information to build security-related controls, ensure that, you know, the data is securely maintained.
And there are certain rights that have been given to individuals like us to ensure that, you know, we are able to have that fundamental right over privacy as well.
Govindraj Ethiraj: So one of the findings of your survey is that one is, of course, that people are not conscious enough, but equally companies are not investing enough in building that consciousness. So I think there are two parts to this question. One is, to what extent are the companies responsible for doing so?
And secondly, why are they not doing so?
Heena Vazirani: Business as usual is going on. There are very limited options that people have. If you see that when I want to engage with a particular organization on a digital platform, there will be only X number of organizations who are giving that option.
Frankly, business is going on and people do not have an option. So they will continue to do so and they will continue to give their personal details if they are asked so that we can get that service. Organizations are not really focusing on this aspect because, again, you know, the business continues.
But having DPDP into place, it's a business opportunity as well because companies can go back to their consumers, take it as an opportunistic aspect and say that, look, now we've implemented certain controls that are expected. We've implemented security-related aspects. We are covering all the aspects of data privacy, data breaches.
We are giving you all the rights. You will see that companies will give that trust back to the consumers. There will be rise in number of consumers and with the limited choice also there will be a preference that will be given and that eventually will raise the number of consumers for a particular platform if that trust is shown, the trust and transparency.
Govindraj Ethiraj: In your survey, did you find certain types of companies who were, let's say, one is complying or leading the way in setting good standards and some types of companies who are not?
Heena Vazirani: One aspect that we have to remember is that there are only certain sectors where we've regulated in nature, right, BFSI being the topmost. To a certain extent, there are a lot of regulations that are prevalent in the pharma sector also. And other sectors do not have so many, you know, governing bodies or laws that are embedded around personal information per se.
So, in our survey, we observed and got a similar outcome to say that companies who are way ahead in terms of implementation are at a broad level, BFSI firms as well as pharma companies because of the nature of the operations and the governance around you know other regulatory authorities on those sectors. Other companies are, I would say, comparatively going towards that journey now and it's because of the mandate of compliance and they are approaching and looking at this aspect because now this will become a law and obviously there are certain financial implications that are linked to it. So, they have to eventually do it and implement those aspects.
Govindraj Ethiraj: Right. So, as you look ahead, what else do you feel needs to be done to ensure that this act that was passed last year, you know, it's truly implemented. For example, let me give you a context.
For example, we hear a lot about internet scams nowadays, you know, phishing and or even direct WhatsApp messages, people getting phone calls. So, there is a culture, I mean, there is an ecosystem where clearly people are falling prey to things which is linked to the fact that they are either not guarded enough or could be better guarded. So, what's the broader challenge or way forward in your understanding?
Heena Vazirani: So, Govind, what I look at when I look at this act for me and frankly I've been in the space of privacy since 2013. So, I've been doing this work and this sort of work for almost a decade now. A lot of times we go back and say that an organization alone is responsible for it.
But at the same time when we look at the other regulations globally, it is also the individual who has all the rights to question organization and ask them that what are you doing about my data. I want the question to say that do you really need so much of information? Can it be done with only limited information?
So, the consciousness of an individual to not give out information so easily or give it only for the purpose that is required is a big change that would also help us reduce these kind of frauds. Today, I go to a restaurant and the restaurant will, you know, give me a form to fill and say that give me your feedback and then they will have all those freebies listed down. Because you are a privileged customer, can you give me your birth date, can you give me our anniversary, give me our spouse's name, give me our, you know, all the details will be asked under the pretext of saying that we will give you freebies.
And Indian mindset, I would not say everyone 100% is like that, but a lot of them will say that okay I'm getting a freebie, why not give the information. Now, someone who's tech savvy, you swipe your credit card there and you step out of the restaurant. Someone who's tech savvy can easily go change the code, use these details.
You remember if you looked at certain platforms, they will ask you what is your wife's name, what is your anniversary, what is all those questions are very easy to guess sometimes when you, you know, give out this information. So obviously you will fall prey to a lot of digital related frauds. Now, what is important for DPDB to be a success or privacy as a culture in the whole e-code system to be a success is one, when the information is being given out, definitely organization has to take care of the controls, security related aspects, prevent breaches to happen, keep the users aware, ensure the rights are given.
That is understood and now, you know, well spoken about. The second aspect is also upon us as individuals, as our duties to say that am I giving information which is really not needed? Is it that I am giving someone else's information to safeguard myself?
A lot happens here, right? I would not want someone to call me continuously. So I would give someone else's number, my friend's number, my husband's number, my cousin's number, just to say, okay, call this person and don't call me, right?
So I think that consciousness is really needed now for it to be successful because both are an equal part of this ecosystem.
Govindraj Ethiraj: Thank you so much for joining me.
Heena Vazirani: Thank you so much, Govind. It was a pleasure. Thanks for inviting me.
Funds For Space
And finally, The Indian government on Thursday approved a Rs 1,000 crore fund for the space sector, with 40 startups expected to benefit as the country strives to win a significant share of the commercial space market by 2033.
With funding ranging from 100 million to 600 million rupees depending on how mature each startup is, the fund will help generate employment, boost space technology development, fortify supply chains and support research and development, the government said in a statement.
"Capital infusion (will) create a multiplier effect by attracting additional funding for later-stage developments," it added.
The fund, first proposed in July, will be managed by the country's space regulator, the Indian National Space Promotion and Authorisation Centre.
India is among the top five space-faring nations in the world but only holds about a 2% market share of the commercial space market.
India has nearly 250 space startups, many of which are in the business of providing cost-effective services and hardware to sectors such as communications, agriculture and commodities, where high-quality data is a precious resource, REuters reported.
