Markets Are Sliding Away
Both indices were swinging to and fro though not as much as we saw on Wednesday
On Episode 477 of The Core Report, financial journalist Govindraj Ethiraj talks to Tarun Pathak, Telecom Analyst and Research Director at Counterpoint Research.
(00:00) Stories Of The Day
(01:09) Markets are sliding away
(06:50) The Indian mobile phone market has stagnated, thanks to which half the manufacturing capacity of 500 million phones is lying idle
(18:02) RBI wants to improve its data forecasts.
(20:55) 52 of 59 ultra luxury properties worth Rs 4,750 crore bought in India last year were in Mumbai as sales values keep rising
(21:48) Mercedes has a record sales year in India.
(22:49) Electric car maker BYD sells more hybrid cars than electric, did you know?
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 regarding any feedback, you can drop us a message on [email protected].
—
Good morning, it's Friday, the 10th of January and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
Top stories and themes
Markets are sliding away
RBI wants to improve its data forecasts.
The Indian mobile phone market has stagnated, thanks to which half the manufacturing capacity of 500 million phones is lying idle.
52 of 59 ultra luxury properties worth Rs 4,750 crore bought in India last year were in Mumbai as sales values keep rising
Mercedes has a record sales year in India.
Electric car maker BYD sells more hybrid cars than electric, did you know?
Markets Away
Nothing, it appears, can stop the markets sliding and the bears continue to win the day at the end of the trading day despite a strong fight back by the bulls at least on some days.
Thursday was clearly not one of those days.
The benchmark equity indices, BSE Sensex and NSE Nifty50, closed down again with the 30-share Sensex falling 528.28 points to close at 77,620.21.
The NSE Nifty50 also ended lower by 162.45 points at 23,526.50.
Both indices were swinging to and fro though not as much as we saw on Wednesday.
Broader markets also mirrored the benchmarks as the Nifty Smallcap100 and Nifty Midcap100 indices ended down by 0.93 per cent, and 1.35 per cent, respectively.
Here is one reason the markets are weak.
An increasing number of foreign investors and brokerages are still bearish on India at this point.
HSBC has cut its rating on Indian equities to "neutral" on Thursday and cut its end-2025 target for the BSE Sensex by 5% to 85,990.
This obviously means a 10% upside for the Sensex, which was trading at 77,700 levels on Thursday.
This is also roughly what most fund managers and analysts have been predicting in recent months. The term that is often used is muted as is the case here as well.
"The cyclical growth slowdown and elevated valuations have capped the upside in the near term... (and) we see muted market returns in 2025," HSBC said in a note reported by Reuters which added that last year, Goldman Sachs and Bernstein Quants had already downgraded Indian stocks, citing a slowdown in economic and corporate activity.
Some brokerages like Citi and Morgan Stanley have forecast double-digit returns from Indian stocks, while Motilal Oswal said it sees healthy corporate earnings growth in FY26.
Interestingly, the benchmarks are still back to 10% below their record highs which they had temporarily lifted themselves up from after hitting
India, in January, forecast an annual growth of 6.4% in the financial year ending in March, the slowest in four years, dragged by a weaker manufacturing sector and slower corporate investments.
After hitting multiple record highs until September last year, the Sensex and the Nifty 50 index retreated, then pulled back and have now begun a fresh retreat, down almost 3,000 points the last week alone.
The benchmarks, which posted their ninth straight annual gain in 2024
A quick flashback. More than 50% of the 44 firms in the blue-chip Nifty 50 index
that have reported earnings so far have either missed analysts' estimates or reported results in line with expectations, according to data compiled by LSEG.
Banks, which have the largest weightage in India's listed universe, are struggling as strict policy measures from the central bank have slowed demand for credit, HSBC said.
Growth in the technology sector is also weak because of a slow recovery in overseas demand and though rural demand shows signs of a recovery, consumption in urban areas is muted, HSBC said and more on technology with TCS results coming up.
The only good news if so is that Indian equities are relatively insulated against an uncertain global backdrop and could benefit from any change in trade policy by the incoming Donald Trump administration, HSBC said.
Rupee Falls Too
The Indian rupee continued to wilt under a strong dollar and of course dollar outflows.
The Indian rupee hit a lifetime low on Thursday, pressured by a rise in U.S. bond yields and strong dollar bids in the non-deliverable forwards (NDF) market while the central bank likely stepped in to cap losses, traders told Reuters.
The rupee declined to 85.93 per U.S. dollar, weakening past its previous record low of 85.8575 hit in the last session.
TCS Results
Tata Consultancy Services , India's largest software company and the first major company to declare 3Q results posted a smaller-than-expected third-quarter revenue on Thursday after its key North America market underperformed for the fifth consecutive quarter, Reuters reported.
The company's consolidated revenue increased 5.6% to 63,973 crore rupees ($7.45 billion) in the October-December quarter, falling short of analysts' expectation of 64,452 crore, as per data compiled by LSEG.
Mumbai-based TCS' quarterly net profit rose 12% to 12,380 crore rupees while analysts expected 12,399 crore rupees profit.
"Revenue growth was below expectations but the third quarter is a seasonally weak one as most clients ramp down operations due to the holiday season," said Piyush Pandey, analyst at Centrum Broking.
Pandey, however, termed the deal wins and operating margin improvement as "positives" that may aid a turnaround in the United States in the coming quarters following the regime change.
India's $254-billion IT services industry has been slowing somewhat in recent years as major clients in the US and Europe have cut spending.
The industry is also in the centre of several protests against H1B visas in the USA, though the use of H1B visas by Indian IT services companies like TCS and Infosys or Wipro has been slowing down sharply in recent years.
The USA accounts for over 40% of the sector's overall revenue.
TCS’s total order book stood at $10.2 billion during the quarter, compared with $8.6 billion in the previous quarter and $8.1 billion in the year-ago period.
Smartphone Demand
Nearly half of India’s mobile phone manufacturing capacity, established under the government’s production-linked incentive (PLI) scheme, is currently underutilised or repurposed due to declining global and domestic demand.
Capacity is high because there is far more capacity being created than there was demand for, including the fact that the domestic market for smartphones has remained the same around 150 million for more than four years now.
Data from research firm Counterpoint Research shows that India’s mobile phone production capacity reached over 500 million units by the end of 2024.
Of this, some 250 million phone making capacity is lying idle for various reasons.
This of course has strategic implications and insights for mobile phones in specific but manufacturing in general when it comes to tuning for and anticipating both domestic and global market demand.
Most manufacturers have shifted to produce telecom equipment or wearables or even shutting production.
It reached out to Tarun Pathak, Research Director at telecom and technology consulting firm Counterpoint Research and began by asking him to walk us through what the total capacity versus demand was for mobile phone manufacturing and why there was such a gap ?
INTERVIEW TRANSCRIPT
Tarun Pathak: It's an interesting topic. So, we started tracking this manufacturing in India almost like in 2014 when this all started. And there was basically what we look at is divided into three phases.
One is when 2014, 15, 16 when everyone started basically started assembling in India. So, that was the time right from 2OEN, Samsung and Nokia, they used to manufacture assembly in India. But then everyone raised to assemble in India.
So, that was the phase one. And suddenly we have seen a lot of OEMs started partnering with the EMS players, opening up the lines because the cost to assemble a phone was not huge. And then obviously there was some duty deficit as well.
And then there was this phase two, which was phase manufacturing programme that was launched by Government of India, which essentially states that you need to also now just not do local assembling of mobile phones, which is basically you build, you import parts from other countries and merely assembling it here. So, you need to basically localise as well. And there were different phases where the components were divided and the duties were levied on that, so that the local sourcing starts happening.
So, that was the phase two. And essentially, we are now in the phase three, which is being driven by PLI, Production Linked Incentive, which essentially states that, okay, now you are doing assembling, you're also locally sourcing something, but now your incentives and everything will be linked to the production of the devices you are doing. So, that has basically consolidated operation of a lot of OEMs, because to get this incentive, OEMs normally went in favour of a couple of EMS players that have the potential to do that or potential to hit the targets.
So, what we have seen that right from the phase one, when everyone started on their own or smaller players, moving towards more towards the larger players like the Dixons or the Foxconn of the world that have an incentive to produce more to qualify for the PLIs. And that transition has led to a lot of these smaller EMS players exiting from the business. So, they traded in multiple ways, either they sold these capacities to the bigger players or those are like just idle and being converted into different.
So, as a result of it, we have seen that we have technically a production capacity, which is as big as like 500 million to produce 500 million units across feature phones, smartphones and tablets. Currently, the production output is only 250 million, which is necessarily the half of which is being utilised. Technically, we can scale our manufacturing assembling to that level.
But the point here is that right now it is largely being driven by domestic consumption. Like, for example, whatever India is producing, it is meant for domestic consumption and export is only 20 percent of it and being done only by two major players, Samsung and Apple. So, I think the export part is a miss here and that obviously with certain capacity and the domestic demand, you can only produce that much.
You can sit on a sulphurus.
Govindraj Ethiraj: Right. So, let me pick up on two or three points you made. So, one is you said that a lot of small players were absorbed by larger players.
So, the gross or the aggregate capacity is still the same, right?
Tarun Pathak: Yes. So, either it largely remains the same or they're still looking at what to do with these smaller factories. So, for example, there are even smaller players like no one even like very few people have heard.
Like, for example, you have companies like Cohort, Concert Digital, Creators Corporation, Excellence Mobile Tech, KBR. So, that list goes on to almost like 62 to 65 players. But then as the rule of industry is like top five is almost like top six is almost like 90, 95 percent of the market.
Govindraj Ethiraj: So, these factories were like subcontracted earlier or were they OEMs? Subcontractors.
Tarun Pathak: OEMs were very few like Vivo had their own, used to have their own and then Oppo, Samsung has their own. They were not doing for others. Mainly, although the Oppo is doing for their sub-brands as well like Realme and not sub-brand but technically, yeah, they're doing for OnePlus.
Govindraj Ethiraj: Right. So, therefore, there are two different things. So, one is you're saying a lot of smaller factories which came up as subcontractors to larger ones have got absorbed because they couldn't survive as standalone entities.
And the second is aggregate capacity of the larger ones now, which includes the smaller ones, is only working at about 50 percent.
Tarun Pathak: So, what also happened what this PLA did? So, let's say I'm a factory X and I started with a certain OEM, let's say OEM A and that OEM A was giving entire capacity to me earlier, let's say 4 million per unit. So, I have that capacity working for that OEM.
So, I build a factory which has a capacity to produce at least five because I always want to keep it a buffer. But now that OEM, what it did, it started to diversify. Instead of going with that EMS X, it says like, hey, let me go to EMS Y and Z as well because these are the two EMS that also qualify for the PLA and maybe I'll get some.
So, now what happened now that EMS X can't basically shut down its own capacity because it thinks that maybe I'll win over some of the business from other EMS. So, it is still idle. But again, the point is, we are utilising 100 percent of local demand through this assembling but only 20 percent of the export is being met.
Govindraj Ethiraj: And which is mostly Apple and Samsung as you said. So, what's the likely outcome of this? The fact that we have so much spare capacity at this point and with the market only growing very slowly even if it is.
Tarun Pathak: Right. So, there could be two alternatives to it. One is like you increase your export because export technically if you look at China is exporting almost like a billion phones from their manufacturing and manufacturing powerhouse of the world.
Let's say if Trump government comes into power and there is some kind of tariff barriers. So, India stands advantage. So, you still have those geopolitical China plus one strategy that everyone is looking at maybe comes in favour of India.
And India's export India still has a huge export potential. I believe we are still scratching at the top of the surface because none of this think of it is like Chinese brands have 75 percent market share in India but only two percent in terms of export contribution which is like they can technically export from India because in PLI they were not being given the benefits. Let's say Oppo's own factory but now things are changing.
Vivo has partnered with like it's a JV with Dixon in that and then we have seen Transient going to a similar route where Dixon has bought the taken over the iSmart which is again their factory. So, these things are happening but if let's say India that is currently doing almost like 50 million of export right now. Imagine that number becomes four times in a couple of years then we are somewhere 250 million internal demand 200 million exports will be somewhere closer to 450.
Govindraj Ethiraj: Assuming what you're saying is that the technical capacity to produce those phones capable of exports or to meet export requirements in the case of let's say an Apple or a Samsung which is higher end is already there. But my other question is what was the expectation when all of this capacity was being created at such speed? I mean was there an expectation that we'll hit 500 million phones in terms of manufacture?
Tarun Pathak: I think everyone saw it in a silo basis. So, everyone like all these factories players they didn't see this because the duties were 20 percent it all started 20 percent duty is huge and then everyone thought okay we'll get some mix of like smaller models. Feature phone market was big at that time and then feature phone also declined.
So, everyone thought like okay maybe we'll cater to some and it's an easy model in a sense like you start a factory I think margins are still in 1 2 2 2 3 percent in that but and number of like investment is like 5 to 6 crores to start a line basically. So, barriers to entry was low and then they all started but then market also went into consolidation. India market is still at very similar level as we were during the COVID level.
So, if you look at 2020 market was at 150 million smartphones and it is still at like four years down the line at 153 million. So, even the smartphone market didn't increase at the level everyone expected. China in a sense is close to like 270 million with the same population.
So, we still have some room to now for growth in this segment but at the same time that's something which everyone missed and I believe we are sitting at the excess capacity because of that and then maybe partly due to the PLI.
Govindraj Ethiraj: Tarun, it was a pleasure speaking with you as always. Thank you so much for joining.
Tarun Pathak: Thank you so much.
RBI Forecasts
India's new central bank governor Sanjay Malhotra has initiated a review of the Reserve Bank of India's inflation and growth forecasting tools to minimise projection errors, Reuters is reporting quoting sources.
Malhotra, who took charge last month, is asking the RBI's internal teams to include new datasets, analysis and projections in their inflation and growth forecasts.
The review comes amid increased scrutiny on the central bank's growth and inflation estimates, which have been off the mark for much of the current fiscal year, with growth on track to be much weaker than expected and inflation higher.
At the December policy meeting, the RBI cut its growth forecast to 6.6% from 7.2% for 2024-25, while retail inflation projections were raised upwards to 4.8% versus 4.5% earlier.
This was after India's gross domestic product growth fell unexpectedly to 5.4% in the July-September quarter, its slowest in seven quarters, while inflation quickened again in November.
On Tuesday, the government forecast annual growth of 6.4% in the fiscal year ending in March, the slowest in four years and below the RBI's projections of 6.6%, weighed by weaker investment and manufacturing.
The RBI may increase datasets required to gauge trends in income and expenditure better and include for example trends in small-ticket digital payments as well as data from food delivery apps and online taxi aggregators
"The RBI's forecasts on inflation typically go wrong because food prices are pretty volatile," Reuters reported a source saying, adding that "The RBI typically relies on (wholesale market) data for the same and that's what makes it prone to errors."
PLI
Apple Inc. supplier Foxconn Technology Group and Dixon Technologies India Ltd. are asking India to pay them billions of rupees in subsidies they think they are entitled to under the government’s production incentives program, Bloomberg is reporting.
The government pledged a total of Rs 41,000 crore ($4.8 billion) in subsidies to manufacturers, and part of that remains unallocated because some companies didn’t meet estimated production targets. Foxconn and Dixon argue that, according to the program rules, they are eligible for some of the unallocated funds, people familiar with the matter said.
Industry experts The Core has spoken to in the past have pointed out some of the administrative challenges in getting PLI benefits deposited in companies accounts and suggested it was holding back the true potential of PLI for industry growth.
Foxconn could get as much as Rs 600 crore and Dixon Rs 100 crore if the government releases the funds, the people said, asking not to be identified as the matter isn’t public. The government is reviewing the two requests, the people said.
Bloomberg said companies want to see the administration follow through on regulations that have led to significant investments, including Apple partners assembling $14 billion of iPhones locally last fiscal year as they diversify beyond China. South Korea’s Samsung Electronics Co. has also levered the plan to step up exports.
In contract manufacturer Dixon’s case, the government is also reviewing whether the supplier made new investments for producing Xiaomi Corp.’s smartphones or whether machines were merely shifted out of another factory which previously assembled the Chinese brand’s devices, one of the people said.
59 Flats Ultra High Value Flats Worth 4,7754 Crore In 2024
The last year saw at least 17 property purchase deals worth over Rs 100 each - 16 in Mumbai and one in Delhi-NCR (Gurugram).
Of the 16 in Mumbai, 14 were apartments (Worli, Malabar Hill, and Pali Hill) and two bungalows at Cuffe Parade and JVPD.
Moreover, of the 59 ultra-luxury homes sold in 2024, at least 52 were in Mumbai city or 88% of total deals.
Delhi-NCR was next with 3 deals for 2 ultra-luxury homes in Gurugram & 1 in Delhi; Hyderabad & Bengaluru each saw 2 deals worth >INR 40 crore each.
Property research firm Anarock which compiled these figures says that the number of sales as well as the sales value of such assets hit new peaks.
Mercedes Sales
India of course continues to see a luxury buying frenzy even if the rest of the economy is slowing.
Luxury carmaker Mercedes-Benz India plans to roll out 8 new models, including battery electric vehicles, this year as it looks to build over its record sales in 2024.
The company sold 19,565 units last year, growing 12 per cent as compared to 17,408 units in 2023.
Mercedes said sales of battery electric vehicles almost doubled in 2024 as compared to 2023.
The company said one out of the four vehicles it sold last year was a top end vehicle (TEV) with a price tag exceeding Rs 1.5 crore.
Mercedes-Benz India told wire agency PTI that the new launches would be a mix of new models as well as fresh versions of the existing line up.
The company introduced 14 new models last year in India.
Iyer noted that the company remains optimistic as sales growth continues in 2025 as well despite witnessing some headwinds in the second half of last year.
"We start the new year with a strong 2,000 odd car order bank. I think that gives us a lot of confidence to move into 2025," he added.
Hybrid Wins
Hybrid-powered vehicles are proving more popular than battery-only ones in China, even as consumers shift away from gas-only cars, full-year data reported by CNBC shows.
India too is exhibiting a similar trend with hybrid car sales growth overtaking electric car sales.
BYD, by far the market leader, said in a filing Wednesday it sold around 4.3 million passenger cars in 2024.
However, nearly 2.5 million of those vehicles were hybrid-powered, a reversal from 2023 when BYD sold slightly fewer hybrid cars than battery-only vehicles.
“We still see growth in the Chinese market in terms of battery electric, but we see it sort of capping,” said Joe McCabe, president and CEO of AutoForecast Solutions. He forecasts that by 2031, there will still be demand for internal combustion engine-based vehicles, including from hybrid-powered cars.
