Markets Fall 930 Points
The indices saw their biggest single-day drop in about three weeks on Tuesday
On Episode 417 of The Core Report, financial journalist Govindraj Ethiraj talks to Divyam Mour, research analyst at Samco Securities as well as Sagar Shetty, research analyst at StoxBox.
SHOW NOTES
(00:00) The Take: That Sinking Feeling
(03:33) Markets are falling. The Mega IPO effect
(07:59) A Look at the Cement and IT
(16:22) How China Plus One has fallen short
(18:02) HSBC Restructures, Gets First Woman CFO
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 Wednesday, the 23nd of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: That Sinking Feeling
The stock price of L&T Finance fell to a four month low after HSBC Global Research cut its target price on the stock.
The reason given, a likely disruption in assets under management and earnings per share growth in the near term due to sectoral headwinds in microfinance.
Which of course is a sub segment of finance.
But L&T Finance is not alone.
India's Bajaj Finance reported lower than expected second-quarter profit on Tuesday as it set aside more funds for potential bad loans.
The company reported a consolidated profit after tax of Rs 4,014 crore in the three months to Sept. 30. Analysts, on average, had expected Rs 4,343 crore, as per estimates compiled by LSEG and reported by Reuters.
The NBFC has been grappling with elevated losses in the last few quarters, especially in the personal loan segment in rural regions, Reuters reported as well, adding that it had reported lower-than-expected profit in the first quarter as well, hurt by higher funds set aside to cover potential bad loans.
Several NBFCs have already been asked to stop lending, including in the most RBI crackdown on a few app-based ones for, among other things, usurious lending or unlawful interest rates, coupled with of course poor due diligence
It is no secret that RBI has been consistently warning about excessive lending in unsecured loans and small loans.
The more aggregate data in terms of impact on banks and non bank finance companies will emerge in coming days.
But it is clear that there was froth at the top when it comes to consumption and demand, whether for products or for services or driving speculative activity in the stock markets.
And this froth has been driven by borrowing and not real income.
The extent of this may be limited and might not cause systemic damage because the controls at the top are fairly strong and the RBI has been steadily tightening norms, including asking for more risk weights on the lenders balance sheets as it did in November last year.
But the unwinding can be painful, mostly for those who borrowed and recklessly consumed.
Markets could slip further and more small loans could go bad.
This would raise some questions on the nature and quality of the increased consumption in the first place.
A good part of the post-Covid spike in spending was partly driven by borrowings. That is not so much the problem as the resultant interpretations of the quality of spending and the resultant consumer spend data.
It would appear that companies have overinterpreted consumer spending behaviour here and are sounding somewhat surprised now as it is moderating.
There is that sinking feeling which will stay till we are able to see the full picture on what really happened in the last three years, particularly on the balance sheets of non bank finance companies.
And worse, the individual balance sheets, which we may never see.
The top stories and themes of the day
Markets are falling. The Mega IPO effect
How does IT look
Cement and onwards
HSBC Restructures, Gets First Woman CFO
Markets Fall 930 points
I can’t say my worst fears have come true but some fears clearly have. The stock markets fell as India’s largest IPO till date listed on the bourses today.
Before we get to that, the indices saw their biggest single-day drop in about three weeks on Tuesday, thanks to slowing corporate earnings and continued foreign selling which appears to have crossed $11 billion for the month of October now.
Interestingly, the markets opened in the positive and stayed so for the first hour of trade before slamming the reverse gear, logging their worst session since Oct. 3.
All the 13 major sectoral indices declined. Forty-seven of the Nifty 50 stocks logged losses, said Reuters.
Hyundai’s Mega Rs 27,000 crore + IPO listed today at a discount and generally took the rest of the market down, as some of us were wishing it would not.
This is not to say that there is a direct correlation between mega IPO listings and market falls but it does happen and it has happened again.
Hyundai Motor shares fell 7.2% on their market debut on Tuesday and the stock listed at 1,934 rupees on the National Stock Exchange, below its offer price of 1,960 rupees, and fell as much as 7.6% before closing at 1,819.60 rupees. That valued the company at 1.48 trillion rupees ($17.6 billion).
The Sensex fell 930 points to settle at 80,220.72 while the NSE Nifty 50 ended at 24,472.10, down 309 points.
Stocks that lost were Bharat Electronics, Mahindra & Mahindra, Adani Enterprises, Coal India, and State Bank of India, whose losses extended up to 3.79 per cent the Business Standard said, adding only ICICI Bank, Nestle India, and Infosys managed to eke out some gains
The Nifty SmallCap 100 Index was down close to 4% while the Nifty Midcap 100 was down around 2.5%.
Notably, the fear index, India VIX, which gauges the volatility in the Indian stock markets, ended higher by 4.21 per cent at 14.34 points.
The Nifty PSU Bank index was the worst hit among sectors, ending down by 4.18 per cent. This was followed by realty and metal indices, which settled lower by 3.08 per cent and 3 per cent, respectively.
F&O A National Past time
Although India leads the world in F&O trading volumes, it is a crown that SEBI does not aspire to hold, especially given that 93% of retail investors experience losses in this market segment, said Whole Time Member Ashwani Bhatia, quoted by NDTV Profit.
He was speaking at the Morningstar Investors Conference and stressed the importance of protecting retail savings and discouraged the perception of F&O trading as a "national pastime".
To this end, the Securities and Exchange Board of India has also put forth a series of new regulations aimed at safeguarding investors.
These include stricter margin requirements, larger contract sizes, and enhanced upfront premium collections, as well as clearer risk disclosures for retail investors.
Like we discussed earlier, the issue is not just the fact that 93% of investors are losing money, it is about where they are sourcing the funds that they are eventually losing.
Meanwhile,
The Indian rupee slipped to an all-time low on Tuesday, pressured by weakness in its regional peers and likely outflows from local equities, although the Reserve Bank of India's intervention helped curb sharp declines, Reuters quoted traders saying.
The rupee closed marginally weaker at 84.0775 against the U.S. dollar, its weakest closing level on record, after touching its all-time low of 84.0825 earlier in the session.
Asian currencies fell between 0.1% and 0.4%, while the dollar index was at 103.9, hovering close to its highest level in two months.
The rising odds of a second presidential term for Donald Trump have boosted the dollar and U.S. bond yields in recent sessions.
Meanwhile, back home or rather at home, the International Monetary Fund (IMF) on Tuesday kept its growth forecasts for India unchanged at 7 per cent for FY25 and 6.5 per cent for FY26, holding that pent-up demand accumulated during the pandemic has been exhausted as the economy “reconnects” with its potential growth.
“In India, the outlook is for gross domestic product (GDP) growth to moderate from 8.2 per cent in 2023 to 7 per cent in 2024 and 6.5 per cent in 2025, because pent-up demand accumulated during the pandemic has been exhausted as the economy reconnects with its potential,” it said in its latest World Economic Outlook report.
Non bank finance companies are already facing sectoral headwinds.
Where do sectors like cement and information technology stand?
To pick on cement first, despite the general bullishness on infrastructure and housing demand, the last few months have been bad enough to send cement prices down to a five year low.
While demand might pick up in the second half of the year and thus make up to some extent, there is a problem with over capacity as well.
So over capacity and low prices, not something that has been highlighted very clearly in the last few months, at least in my conversations.
And there it is.
The Mint says that pent-up cement demand is expected to drive volumes, but supply is also set to rise.
In FY25 and FY26 each, industry-wide capacity addition of 30 million tonnes per annum (mtpa) is expected, of which about 50% in each year would be done by UltraTech, the Birla Group company who saw a 36% drop in net profits in the latest quarter.
Elsewhere, Adani Group company Ambuja Cements Ltd announced the acquisition of 47% stake in Orient Cement Ltd on Tuesday.
The move gives Ambuja access to markets of south and west India. Ultratech bought out south-based India Cements Ltd recently and is awaiting regulatory approvals.
I spoke with Divyam Mour, Research Analyst, SAMCO Securities and cement analyst and asked him why prices had hit such lows.
INTERVIEW TRANSCRIPT
Divyam Mour: If you see the cement sector, it is facing a muted demand. It has grown about 2-3% in the first quarter. And historically, if you see, construction activities slowed down due to monsoon.
So it has an effect on the cement demand. And if you see on the supply side, the top 4 cement producing companies, they are increasing their capacity. They are expected to increase around 42-43 million capacity in this year.
So this additional capacity is creating the disparity between the demand and supply. It is putting extra downward pressure on the prices. And if you see coal, pet coal, and diesel, in the 7 months of FY25, it has lowered down.
So coal has reduced by 34%, pet coal by 15%, and diesel by 2%. And the companies are passing on this reducing cost to their customers. So this is also additionally leading to the reduction in the cement price.
So it has lowered down to the level of 2019.
Govindraj Ethiraj: Got it. So at this level, do you feel that the next couple of quarters are going to be very tight for all cement companies?
Divyam Mour: As I said, quarter 1 was primarily down due to the general elections. It faced muted demand. And quarter 2 is slightly down.
But if you see quarter 3 and quarter 4 will come back on its track. The infrastructure theme, it is still in focus. It is still in line.
And the housing structure demand, it is going to boost the cement sector demand. So the demand will be there. And on the supply side, the cement producing companies are in line to meet the demand.
They plan to extend their capacity. So if you see on the demand and supply side, the cement sector will grow. Some irregular events might happen in the short term.
But the overall sector is good. Overall demand outlook is good.
Govindraj Ethiraj: So you're not seeing an oversupply overhang?
Divyam Mour: In terms of quarter 1 and quarter 2, there was oversupply. That led to the downward pressure. But if you're asking for the outlook of quarter 3 and quarter 4, the demand will increase.
Govindraj Ethiraj: And you're saying overall demand is more or less on track? I mean, though it was lower for the last two quarters? Yeah.
Divyam Mour: The quarter 3 and quarter 4 demand will get a rise. How would that be compared to last year? Same time?
So if you see in the financial year, 25 is expected to grow at a rate of 7 to 8 percent. Altertech 2 is expecting it to grow at a rate of 8 percent, the demand. So in the first quarter, it was about 2 to 3 percent.
But in the remaining half year, it is going to grow by 10 to 12 percent. To be on the track of the 7 and 8 percent expected for the year.
Govindraj Ethiraj: So you're saying very broadly, the cement industry is doing well then? I mean, doing well in the sense, at least, our second half will make up for the first half. And you're not really seeing any demand slowdown as such beyond what happened in the first half?
Divyam Mour: If you see the Pradhan Mantri Awad Yojana, 10 lakh crore was allotted to 1 crore housing for the middle class and the urban. So that will help the demand. Because the government is still doing its bit to increase the infrastructure.
All the plans are in there. It has not been substituted yet. So the demand will be there.
Govindraj Ethiraj: Is there anything else that you're taking away from the fact that prices are so low?
Divyam Mour: No, sir. The primary factor I told you was that the extreme supply, oversupply led to the prices and the reduction in the input cost. Because the competition is such that they are passing on input cost to their customers so that they keep with the customers.
Govindraj Ethiraj: Divyam, thank you so much for joining me.
Divyam Mour: Thank you, sir.
And then there is IT services.
Results have been a mixed bag with some IT majors like HCL Tech reporting better numbers.
What are the trends telling us though, remember both TCS and Infosys have stepped up hiring which in itself could be a positive sign.
I spoke with Sagar Shetty, Research Analyst, StoxBox for some quick takes.
INTERVIEW TRANSCRIPT
Sagar Shetty: If we consider the US election which is going to happen in November, so that is one of the factors which could be needed during the third quarter as well, like because of the deportation rules or anything like that. But other than that, after the calendar year comes in and after the budgets are posted in by the company, we feel like the company are really going to do well and especially the tier 1 companies, because of the wide variety of services which they can provide. So companies like TCS, Infosys and HCL go through the quarters and going ahead with it. And one more factor also to consider is the deferment in the ramp-up days which are happening in the previous quarters, which could not be followed in the, which are not going to be happening in the coming quarter as well, because the discrepancy spending are expected to pick up. So yeah, so the pipelines are expected to be strobust, the days are expected to be coming in as fast as they can and the admission rate is also expected to be lower in the coming quarters as well.
Govindraj Ethiraj: Sagar, thank you so much for joining me.
Sagar Shetty: Yeah, thank you. Bye.
China Plus One Has Fallen Short
India’s attempts at boosting its manufacturing sector by capitalising on the US-China trade war have fallen short, according to a new study, with other Asian rivals benefiting to a much greater extent from escalating tensions between the world’s biggest economies, the Business Standard reported.
Between 2017 and 2023, India’s total share in US imports rose by 0.6 per cent points to 2.7 per cent while mainland China’s portion dropped by around 8 per cent points to under 14 per cent, according to Oxford Economics.
The biggest beneficiary from the trade diversion in the region has been Vietnam, whose total share in US imports grew by 1.7 per cent points to 3.7 per cent in the period.
Taiwan and South Korea have also made greater strides than India, increasing their share of US imports by 1 per cent point and 0.7 per cent points, respectively, according to Oxford.
India’s share of gross domestic product has remained broadly stagnant at 17 per cent for over a decade.
The research also implies that India may struggle to make significant gains if Donald Trump returns as US president and follows through with a threat to impose a 60 per cent tariff on Chinese goods.
“The US-China trade war so far has improved India’s export prospects only to a limited extent, dashing hopes that an escalation of the conflict could boost the lagging manufacturing sector,” Alexandra Hermann, an economist at Oxford Economics wrote in a note. “India’s export strengths largely lie in sectors of the ‘old economy’, where growth potential is limited and competition is fierce.”
Overall, in areas like electronics India’s imports from China have risen dramatically contrary to perception that it was going down.
HSBC Restructures
HSBC has named Pam Kaur as chief financial officer and announced plans to revamp its regional operations around the world.
Taken together, the changes mean HSBC, which has a large India presence, is embarking on its biggest restructuring in at least a decade, Bloomberg reported.
The changes will cut the number of executives who sit on the newly named key operating committee to 12 from 18.
With Kaur as chief financial officer, she’s the first female finance director in its 159-year history. She joined in 2013 as audit head before overseeing risk and compliance.
“She is highly respected and well known to the board and was the unanimous choice,” Chairman Mark Tucker said in a statement.
As part of the new geographic set up, HSBC will have an Eastern regional unit including Asia Pacific and the Middle East, and a Western market that includes its non-ring-fenced bank in the UK, Europe and the Americas. It also made Hong Kong and UK standalone units.
Last year, the New York-based company eliminated the roles held by three regional chiefs who oversaw operations in about 160 countries around the world along with legions of managers with that same geographic focus. Those changes are part of what’s allowing the firm to cut more than 20,000 jobs across the company.
