Markets Continue Their Upward Rise
The markets appear to be driven primarily by factors like lower oil prices and in some sectors
On Episode 525 of The Core Report, financial journalist Govindraj Ethiraj talks to G Chokkalingam, Founder, Equinomics Research & Advisory Pvt Ltd as well as C S Vigneshwar, President, Federation of Automobile Dealers Associations (FADA).
(00:00) The Take
(03:43) Markets continue their upward rise on lower oil prices
(15:01) The RBI could tighten norms for lending against gold in sign of overheated market.
(15:57) Auto sales are falling as customers postpone decisions and financiers tighten their purses
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].
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Good morning, it's Friday the 7th of March and this is Govindraj Ethiraj Headquarter and broadcasting and streaming as always from Mumbai, India's financial capital,
The Take
For all the breathless reporting on Tesla's imminent entry, which is expected to send Musk fans into raptures and global auto giants begging for mercy, the total investment from Tesla at this point is 35 lakh rupees a month at Delhi and maybe it'll be 70 lakh rupees a month and that's of course rent. Because that's the cost of renting two showrooms of about 4,000 square feet each, that being the size of the Mumbai showroom which we know, it's unlikely Delhi will spring any major surprises.
Even two-wheeler showrooms are bigger in many cases and most car dealerships are 5,000 square feet and upwards including in big cities. A 4,000 square feet showroom is not unusual, there could be even smaller ones but this is not the giant killer that Tesla is being made out to be. Not just that, it's surprisingly low-intent TeslaWater's entry strategy is only revealing that Tesla can be a great engineering product but it's not a company that wants to get its hands or feet dirty as other auto giants have done in their experiments with India.
Not surprisingly, people are speaking up. JSW Group Chairman Sajan Jindal said on Thursday that Tesla's entry into India's electric vehicle market will not be easy as the company is set to face stiff competition from domestic players like Tata Motors and Mahindra and Mahindra. Speaking at an Ernst & Young Entrepreneur of the Year award, he said Elon Musk is not here.
He is in the US. He can't be successful in India. We Indians are here.
He cannot produce what Mahindra can do and what Tata can do. Presumably, too much applause. Jindal did acknowledge Musk's genius.
He's super smart, no question about it. He's a maverick doing spacecraft and all of that. He's done amazing work and I don't want to take anything away from him but to be successful in India is not an easy job.
Jindal only sums up what every business, domestic or international, in India knows fully well and has done so for years. You can build cool electric cars and reusable rockets but it takes that and much more to succeed in India or you get the President of the United States to bat for you because even that may not be enough because a close to zero import duty demand going by reports is tough to offer. The Indian consumer can be idiosyncratic across product categories.
In cars and two-wheelers, again, customers want to be sure, for example, that there is after-sales service and a visible one and that the product in question does well on Indian roads. For example, it may not help that some of Tesla's models' ground clearance might be a little low for Indian roads. Now that, of course, can be engineered and then adding a loud horn which also is an imperative for Indian vehicles and roads but all of that means more customisation and thus cost.
So it will take more than just picking vehicles off an assembly line in Berlin or wherever and putting it on a ship bound for Mumbai port. Multinationals who have invested in India in the long term have spent time and effort in understanding the market and succeeded. But they've failed too.
Like Ford and General Motors have come and gone, Ford is now returning. But other car manufacturers who've had the patience have done well though within their own cycles like the Europeans, Japanese, and Koreans. Perhaps Musk's genius has allowed him to see what others have taken longer to understand.
India is a great consumer market but only for the patient. And that brings us to the top stories and themes.
The markets continue their upward rise on lower oil prices.
The Reserve Bank of India could tighten norms for lending against gold in sign of an overheated market.
Why is the stock market turning at this point and what might lie beneath the numbers?
Auto sales are falling as customers postpone decisions and financiers tighten their purses.
Markets Stay Up
It was interesting to see the bulls dominate, keeping the indices up despite the selling that kicked in after an early and positive start on Thursday. The markets appear to be primarily driven by factors like lower oil prices and in some sectors like air conditioners and energy riding on projections of higher temperatures and a hotter summer. Low oil prices means the economy benefits broadly because we import almost 80% of our requirements and also a lot of oil linked companies benefit which could include the refining companies and companies who use intermediates like paint companies.
The Sensex and Nifty were up for the second consecutive session and the 30 share Sensex closed up 609 points at 74,340. The NSE Nifty 50 was up 207 points to 22,544. The Nifty 50 is down at this point about 14.2% from its record high hit in late September. The broader markets did well too with small cap shares staying ahead with the Nifty small cap 100 index going up about 1.3%. The Nifty mid cap 100 index was up slightly less at about 0.4%. Makers of air conditioners and cool beverages and power companies saw an uptick in their stock prices on March 6th as investors expect stronger sales in the upcoming summer season according to money control. Now while tariff shares are keeping world markets on an edge the flip-flop is also evidently tiring traders out. For example the U.S. is in post tariffs on Mexico and Canada at 25% but is carving out or away energy and then cars and then now apparently agriculture. Despite all these trade tensions the Asian currencies have remained relatively resilient in light of a broader dollar decline and worries that U.S. growth is slowing according to Reuters. Meanwhile on Wall Street stock futures were under pressure on Thursday as investors sought out more clarity on the latest U.S. tariff measures CNBC reported adding that futures tied to the Dow Jones Industrial Average fell about 378 points, S&P futures and Nasdaq were all down more than a percentage. So how do we view the current uptrend in the market that's the domestic market from a fundamental or technical perspective?
I reached out to G Chokhalingam, veteran market analyst and founder of Economics Research and I began by asking him what had changed even if for only two sessions.
INTERVIEW TRANSCRIPT
G Chokkalingam: Oil plays a crucial role because if you look back to 2016 when the global depressionary conditions emerged again COVID time oil price crashed unbelievably and that alone I could say that gave a very predominant relief to the Indian economy and therefore largely contributed to the market recovery. As of yesterday, the oil price is down 27 percent from its 52 week high. You know we roughly put in about 140-143 billion dollars worth of oil so just imagine 25 percent fall can save you around 30 to 33 billion dollars which is more than our Indian pharmaceutical industry exports.
So the kind of impact will have on foreign exchange reserves, rupee exchange rate, inflation and also the corporate earning particularly the segment which uses oil or oil derivatives as input. So it plays a major role that is one of the reasons this time and apart from that you know the Q3 GDP also gave a little confidence of course number came a little early but then market was terrified by Mr Trump's statements on or his moves on tariff wars. But again I believe the market unnecessarily feared too much I believe because India 's trade surplus with the US is around 45-40 billion dollars which is nowhere comparable to the 361 billion dollar trade surplus China generated in the 2024 calendar year.
You know US can you know affect India because this doesn't include IT exports. I am talking about the goods exports. If the US makes any adverse move then yes we will have a problem but then there is theoretically or logically no fear of that because the tariffs are more or less similar. You take a GST or you take income tax in both countries in treating IT services. So therefore I believe the market is slowly getting some confidence that that is a third.
Fourth as I have been discussing with you repeatedly despite such a crash the investor inflow is continuing. Over five and a half lakh new investors have entered so five to eight lakh new investors are still coming to the market prior to that which prior to that it was even eight lakh per week seven to eight lakh. So obviously when new investors come they would come with the fresh resources to invest.
The fifth reason you know is that as of day 's closing we lost about 102 lakh crore of market cap from 484 lakh crore peak level in September 2024 the equity wealth evaporated to the extent of 102 lakh crore which was entirely you know which was more than the entire market cap in 2014 May. That time the entire market cap was 84 lakh crore only. Now such a huge fall which was almost 31 percent of India's nominal GDP for FY25.
So very rare but of course just because it has fallen you know that doesn't become an argument for buying a stock. But then what happened on the one hand when you know perception driven stock which does not have a justification for valuation comfort and they fell very badly the quality stocks also fell very badly. Close to this you know 31 percent of GDP level in the market getting wiped out made many smaller pockets of the small and mid-cap segment very very attractive.
I could see the pulse of investors in my limited circle so they all got attracted. So these are the four five reasons for market recovery and also as you go close to March you know a lot of people have a tendency to book losses and reduce a you know overall tax liability at the second of the year particularly when the first half was too good and second half was too bad. That also should taper off because now we are already into advanced tax payments.
So therefore I believe the day for yesterday probably the market has bottomed out. Yes there can be volatility one or two days we may fall but I think the underlying trend has bottomed out and it is for a recovery. I am not saying it is set for a massive rally but definitely looks like we are set for a sustained recovery from the middle of this month.
Govindraj Ethiraj: So which means you're saying that foreign portfolio investors also should slow down or are slowing down already because that is what is triggering most of it isn't it?
G Chokkalingam: That we cannot derive automatically is a relative call and they may wait for April first week for Mr Trump to clearly state what he intends to do in terms of tax policies towards India but you know the small and mid-cap stocks are the main domain of the retail investors. That is where still a lot of growth opportunities value unlocking opportunities are available but to be fair in the NICTA sensex majority of the sector, what I call a single digit growth syndrome, still exists. Unfortunately even in Q4 you may not see strong double digit growth in sectors like cement, automobile, FMCG volume, IT service exports in dollar terms.
So there are so many sectors where you still may have a single digit growth syndrome. So it is too early to expect the FIs to turn buyers. It might take a month or it might take even a quarter.
That is why I believe small and mid-cap segments should perform the large caps in the very near term.
Govindraj Ethiraj: If I can ask you an interest rate question. So the crystal ratings has just put out an outlook saying that they are expecting 50 to 75 basis point reduction in 2025-26. The European Central Bank has on Thursday cut rates by another quarter percentage point.
So it is now I mean rates are down further in the euro zone. Now all of this could I mean if there is a clear move towards lower interest rates I mean do you feel that transmitting to better corporate performance, better balance sheets and so on in this round?
G Chokkalingam: Yes definitely yes. As we discussed oil price, that plays a crucial role in bringing down the interest rate also. Mr Trump would contribute to worldwide interest rate cuts because he would cause little global pain and that would translate into further crash in the oil price.
Today you know a few days back there was a report that small businesses in the US which are known for half of their employment are feeling the pain of the trade war. They say that their margins have come down and profitability is hit and today there is news that the employment cut will be a record level from 2020 Covid time in the US. That would mean deflationary conditions spreading first to farming in a significant way in the US and then spreading across Europe as well and therefore the oil price should fall further down.
Last week Saudi Arabia and Russia announced a further increase in the oil output and then Mr Trump also for increasing the or maximising the oil output in the US. All this would mean further significant fall in the oil prices and secondly the monsoon forecast the South Korean agency says there could be a normal monsoon for India. So if IMD also forecasts and with the record level of output expected in the current crop year I think the result statement would be an understatement.
I would say that confidently if the monsoon doesn't fail in a big way I think the rate cut would be beyond the 50 basis point and that would lift the market once again significantly.
Govindraj Ethiraj: Chokka, thank you so much for joining me.
Crude Oil Prices Stay Soft
In all the trade wars so far the best news of course has been that crude oil and crude oil prices are staying low. Prices are staying soft now below 70 dollars a barrel on signals from the organisation of petroleum exporting countries plus that they will ramp up production. Brent crude had fallen to as low as 68 dollars 30 cents on Wednesday which is its weakest since December 2021.
Analysts had been predicting right through including on the core report that the prospect of more oil flowing from the United States post Trump would lead to lower prices and now OPEC countries or OPEC plus countries are also saying that they're increasing supplies. The OPEC plus producer group which includes the OPEC countries and allies including Russia decided on Monday to increase output for the first time since 2022. Meanwhile Reuters is reporting that U.S. exports of crude oil to India last month climbed to its highest in over two years ship tracking data showed as refiners in India sought alternative supplies following tighter U.S. sanctions on Russian producers and tankers. The U.S. exported about 357,000 barrels a day of crude to India which is the world's third largest oil importer and consumer in February. Reuters said quoting ship tracking data from Kepler last year exports from the U.S. stood at about 221,000 barrels per day.
Gold Loans Could Get Tighter
The Reserve Bank of India may ask lenders to follow stricter underwriting processes for gold loans and monitor the end use of funds according to Reuters. The Reserve Bank of India wants banks and non-banks to also increase background checks on borrowers and ascertain the ownership of the gold that's being mortgaged according to sources who spoke to Reuters. Since September 2024 bank gold loans have been rising by 50% sharply outpacing the growth in overall loans thanks also to tighter norms for unsecured lending.
Interestingly September 2024 is also the point at which the stock markets have turned and fallen since then. India is the world's second biggest consumer of gold and prices are of course near record highs. The Reserve Bank last year had hauled up several non-bank finance companies for lapses in their practices including the way they were appraising and valuing the gold that was being deposited with them for the loans that they were giving out.
Auto Sales Are Down
Customers are coming to dealerships but not converting or buying like before. Vehicle prices in relation to aspirations and incomes are rising and financing has become tougher also because the Reserve Bank of India had raised risk weightages which it has now loosened once again. The net result is slowing demand with February seeing passenger vehicle sales drop almost 10% year on year.
Even two wheelers which had been doing well last year have dropped about 7% all of this is for February 2024. The Federation of Automotive Dealership Associations FADA has said that even in the two-wheeler segment despite a close to 8.6% year-to-date growth retail sales have fallen by about 6.3% year on year. Urban areas saw a sharper decline at about 7.4% compared to a 5.5% drop in rural markets. So urban markets are doing better but only comparatively but both are dropping. FADA says inventory levels at around 52 days or so though down from a record peak of about 80 days last year is still high and more on that shortly. I reached out to C.S. Vigneshwar, President of FADA and I began by asking him why sales were dropping in this manner in the month of February.
INTERVIEW TRANSCRIPT
C S Vigneshwar: Right there has been a bunch of things happening to start off with. There have been headwinds which have been there for the last year at least in the industry for quite a few reasons. Last month there were a bunch of reasons.
I mean when Ellucian is in general that there's been a lot of stock which is being again accumulated at dealerships so therefore we are to start out with overstock. We're also looking at the markets in the last five months. I think there have been issues at our market and we feel that customers are probably putting the money in the stock market and they don't want to withdraw it right now at its low and they probably wanted to recover and do that. So the discretionary spending again has become a bit of a question, that's one.
Also looking at it from the point of view that the general thing regarding probably when he spoke yesterday the whole concept of tariffs or a come up and tariffs again go on to affect a large portion of the industry so that probably also weighing down on people's minds. We are also looking at a lot of NBFCs tightening their pockets in terms of giving loans. Delinquencies also have crept up according to them so therefore all these factors also make NBFCs a little bit more circumspect in terms of lending that's also there.
We are also finding that at some places we are let's say even the PV industry customers are taking a longer time to make a decision between enquiry to booking. This also is the conversion rates are taking longer more customers are coming in the walk-ins are quite decent enquiries are quite decent but customers are trying to find better ways to spend their money on vehicles themselves so they're trying to shop for better interest rates try to shop for better deals in finance but as I told you before financing is becoming a little bit difficult. So all these factors have probably played into the numbers in February.
Govindraj Ethiraj: Both passenger vehicles and two-wheelers have fallen. That's usually not the case because two-wheelers at least in recent years have maintained a somewhat steady trend. So why has that happened?
C S Vigneshwar: And the last year has been great for two-wheelers compared to two years previous. We have seen that a lot of headwinds also exist in the two-wheeler segments as I quoted before the NBFC challenge and the backing challenge also exists there. We also seen there's a fall in sales both in rural and urban but the rural sales have been a little bit more healthier the fall has been lesser so which means that decent agriculture produce and agriculture economy is relatively doing better than urban and even I look at urban customers the prices of vehicles are fast outpacing their salary increases so this might be two and multiple reasons for technology reasons for whatever it is but it hasn't been an even growth it has been an extraordinarily fast growth in terms of costs of vehicles and also aspiring customers want larger engine two-wheelers these things have actually been a bit of a damper.
Govindraj Ethiraj: You said that when people come to dealerships which means they've already decided that they want to buy a car I mean sticking to cars and yet they are not converting which was I'm assuming not the case earlier. So what exactly is causing them to pause at that point?
C S Vigneshwar: The market situation as I told you the discretionary spendings have become a little bit more difficult for them to make a decision on and today the quality of cars also have gone up so even the second hand market has become a good option for them to choose a car from instead of a brand new car. So a lot of companies are very good used car programmes where they also refresh the used cars so that's also become kind of a competition within an industry but most dealerships have a used car win so there again customers are not totally going away as such but there's another option for the customer.
Govindraj Ethiraj: Right now within models are you seeing any trends you know? For example, we saw this massive response for Mahindra's electric cars, the launch which is going to come into the market soon, so that was quite substantial, so are there any other such trends that you're seeing?
C S Vigneshwar: Question of not only EV is exactly a question of alternate fuels so we not only had EV displaying into it we have CNG which has been doing recently well all these years along we also have hybrids which have already taken off the future would be probably hydrogen fuel cell vehicles which also are in people's conservation but I mean it's not there as yet but definitely hybrids EVs and CNGs also play a very important role to augment the existing petrol and diesel technologies so I think we'll have a host of things happening we really don't want to from FADA say one particular horse would do well because I would really think this horse and we are quite agnostic regarding which one is going to go really succeed in the future but all these technologies are competing for space and all of them have a car required.
Govindraj Ethiraj: Right you said in your formal release that inventory levels are still a concern now it still seems to be lower than what it was compared to last year when you had peaked at almost 80 days and you're now seemingly at around 55 days.
C S Vigneshwar: So we were at crazy unbelievable highs last year which shouldn't have happened and currently we have about 50 days which hasn't reduced at all from last month the healthy inventory would be 21 days anything about 30 days doesn't start making sense because discounts are going up for the margins we get we also have other expenses like salaries rentals etc moment we cross 30 days because of inventory discounts also start going up so I don't think it's free at all for anyone concerned and OEMs have a large role to play and responsibility in helping us reduce these numbers quite a few OEMs have actually taken cognisance of this some of them have not when certain large I don't want to mention names here but certain large volume manufacturers start dumping vehicles without the consent of dealers I think that's not the right thing to do at all it's great for stock market saying that we have sold so many vehicles but the question is who do you sell it to it's not it's jumping on dealers doesn't mean it is sales so here again it is very important that everyone start talking about retails rather than talking about whole sales and the whole sales are great for stock markets even for the stock market is not great for the long run because the dealers the network starts suffering and the customer starts losing in the long run right what's your outlook for the next few months March would be better than February that's for sure but the challenge is whether March would be better than the previous March there are of course good tailwinds there festive season in terms of Navratri, Odi Padwa and Holi would help traditionally March has been a depreciation month so there would be companies and customers who would want to probably pick up vehicles because of the depreciation benefits but there apart there are enough headwinds for us to contend with and we can't do it alone we need to work with OEMs and with the banking and finance sector to help customers to get their dream vehicles.
Govindraj Ethiraj: Vigneshwar, thank you so much for joining me.
