Markets Fall Again As Global Cues Take Hold
Weakness on Wall Street gripped Dalal Street once again on Wednesday as markets sold off
On Episode 385 of The Core Report, financial journalist Govindraj Ethiraj talks to Sehul Bhatt, Director at CRISIL as well as Jignesh Shial, Director - Research; Head of BFSI Sector at InCred Capital.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take
(05:29) Markets fall again as global cues take hold
(06:13) Oil price fall is now worrying markets across.
(07:20) How rising temperatures and heavy rains are changing power demand patterns
(14:48) Bajaj Housing Finance IPO gets subscribed, what is the future for non bank housing finance companies though ?
(23:05) London Heathrow is the most internationally connected airport in the world
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 Thursday, the 12th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
Before we start, we are ranking 24 worldwide in the Best Business News Podcasts from millions of podcasts on Goodpods and ranked by listens, ratings, comments, subscriptions and shares.
So a big thank from all of us at The Core Report
The Take:
One swallow does not make a summer.
Nevertheless, could the return of one or potentially two multinationals that we know of reflect the relative resilience of the Indian market and a small turning point of sorts.
The $98 billion French retail giant Carrefour announced on Monday they were returning to India with a fresh partnership after a decade of exiting the country.
And yesterday, it was Ford Motors which shut shop in India in 2021, leaving car owners here panicking.
Ford is apparently discussing buying its old plant and coming back, of course for the third time.
India is not an easy market to do business as many companies have learnt the hard way.
It takes years to figure out where the real, addressable market lies for a product or service and then designing the right approach to India’s highly value conscious consumers can take longer.
There is no predicting of course that the markets will always grow.
Take electric vehicles, the most logical product for a price sensitive customer who has to shell out more than Rs 100 per litre of petrol.
So electric two wheelers and three wheelers are selling well in India but electric cars are slowing down.
Because hybrid cars now seem more attractive and also of course allow car owners to hedge against a full electric car which has some limitations in terms of charging infrastructure.
So Tesla, which seemed to be gung ho about entering India, clearly found that it would only make sense to export cars into India and not set up a greenfield plant for cars that would clearly be beyond the reach of the average customer.
But everything has a context.
After Donald Trump came to power in 2016, America started making it difficult for Chinese imports. And then companies started looking at moving manufacturing to countries like India.
And India has had its own problems with China, particularly at the border and flowing into trade matters too.
But global multinationals who were retreating into their primary markets are likely discovering their own markets are not growing much or in a limited way, particularly as the post pandemic surge in spending that we saw world over is now ebbing.
And China is a big factor too. Chinese demand is not recovering even as the country continues to reel from the fallout of the housing crisis.
Demand is weakening, also being one reason why global oil prices are sliding right now.
If countries can’t sell more to China, from within or from outside, that’s a major growth market off the table.
Other countries like Russia are also not in the reckoning, remember many American brands like McDonalds have departed after its invasion of Ukraine.
A Yale School of Management report originally dated January this year and since updated says some 1,000 companies publicly announced they were curtailing operations in Russia.
Back to India.
India as a broad market, including for premium customers continues to grow, though with some fits and starts.
Some 100 million customers with strong purchasing power cannot be ignored by any brand, anywhere in the world.
Moreover, India has evolved into a dependable manufacturing cum export base.
Remember companies like Maruti export around 14% of their production. At around 280,000 cars last year, that is a large number. Other global car majors are also exporting from India even as they sell to the domestic market.
Ford is apparently looking at both the domestic and global market with fresh eyes.
Many multinational pharma companies have pulled back from the domestic market in India but they have expanded their R&D presence to serve their parent firms. And many manufacture generic drugs here to export overseas
Carrefour, which has 14,000 stores in 40 countries, says it will launch in India next year.
Carrefour and Ford have another thing in common.
Both came in with joint venture partners that did not work out.
They must have realised that there have been fairly successful foreign ventures in India in recent decades in their own sectors, including joint ventures.
Remember, Walmart is in India, though not in the way people first thought they would, nor did Walmart itself. The company course corrected to focus on ecommerce for Indian consumers and the India manufacturing base for exports.
There is a fairly obvious reason why some companies evolve and adapt faster to India and its multi-layer opportunities.
And that is mostly to do with people.
The successful companies had the right ones driving it.
Our top stories and themes of the day:
Markets Fall Again as global cues take hold
Oil price fall is now worrying markets across.
How rising temperatures and heavy rains are changing power demand patterns
Bajaj Housing Finance IPO gets subscribed, what is the future for non bank housing finance companies though ?
London Heathrow is the most internationally connected airport in the world
Markets
Weakness on Wall Street gripped Dalal Street once again on Wednesday as markets sold off.
To take that occasional step back again, Indian markets are broadly in direction seeking mode as there are no clear upward signs visible, at least to me.
There are no downward signs visible either so which means it is a good market for stock picking.
On Wednesday, the benchmark equity indices, BSE Sensex, and NSE Nifty50 were both pulled down by global sentiments.
The BSE Sensex fell 398.13 points to settle at 81,523.16 while the NSE Nifty50 fell 122.65 points to end at 24,918.45.
We saw two consecutive days of gains in the market.
Oil Prices Are Falling
We are at a point where falling oil prices are now triggering concerns of a slowdown, the effects of which could even spread to Indian companies and thus stocks, as Morgan Stanley pointed out yesterday.
On Wednesday, oil prices steadied somewhat after falling below $70 a barrel for the first time in more than two years.
Oil prices have fallen almost 20% on concerns of slowing growth in US and China
The OPEC+ as already postponed an output hike.
Bloomberg quoted the International Energy Agency — which will issue a revised monthly outlook later this week — saying in August the market risked higher inventories next year even if the cartel cancelled the output increase.
Back home, stock prices of state-owned upstream oil companies Oil and Natural Gas Corporation (ONGC) and Oil India dipped up to 6 percent on the BSE.
Shares of Oil India have fallen 26 per cent from its record high level of Rs 767.30 that it touched on August 30, Business Standard reported.
How Heatwaves And Heavy Rains Are Changing Power Demand Patterns
Peak power demand in India is estimated to have fallen to 217 GW in August compared with 238 GW a year earlier, which was the second-highest level recorded in fiscal 2024, a report from Crisil Market Intelligence has said
Thanks to which the weighted average market clearing price in the real time market fell ~45% on-year to Rs 3.3 per unit in August 2024 from Rs 6.0 per unit a year earlier.
Demand has fallen across the country, with the western and northern regions experiencing on-year declines of ~10% and ~6%, respectively.
Other inputs are also being impacted.
Coal and renewable energy production have both fallen, by 3 and 13% in the month.
On the other hand, hydropower generation was up 7.6% on year after two consecutive months of decline as many states received ample rainfall.
But coal remains a key source of electricity generation in India. coal production declined 7.51% on-year in August 2024 as monsoon picked pace.
So what are the new trends and how does it influence the ability to predict demand and demand patterns in power.
I spoke with Sehul Bhatt, Director- Research at CRISIL Market Intelligence and Analytics and began by asking him why we were seeing a dip in power demand since we usually expect consumption to keep rising.
INTERVIEW TRANSCRIPT
Sehul Bhatt: So I think all temperature is the critical factor creating variation in power demand in recent times. To be specific, as per our observation, temperature in current area, 2023 was point 65 degrees Celsius higher compared to long period average. In fact, this year it has been even higher during summer months. What it means is, on account of increasing temperature, power demand obviously increases based on the geographical dispersion, specifically at an India level, April and May we have seen power in demand increasing by 12% however, in the recent months, thanks to early monsoon, power demand in India has been has seen a decline of almost 5.3% on year, which is close to 144 billion units as of as the country received 7% excess rainfall during the month. then was very similar. As far as peak power demand is also concerned, as per our estimates, peak power demand is also has declined to 217 gigawatt in August compared to the 238 gigawatt we have seen last year, which was the second highest level recorded in the fiscal 24.
Govindraj Ethiraj: Got it so you're saying that what we are seeing now is a reduction compared to the peak, which in turn, was caused by high temperatures
Sehul Bhatt: Right. And obviously the healthy monsoon has supported the overall demand scenario, where, because of lowering of temperature, the demand currently has also reduced.
Govindraj Ethiraj: In the last few years, we've also seen a rising trend in temperatures, right? So I'm just saying, what is the exact correlation between temperatures and demand, at least in the last four years? And if that's a one way street.
Sehul Bhatt: So typically, if you look at in general, the trend for power consumption, there are multiple factors, including the temperature, manufacturing pace, consumption pattern, and the obviously the penetration of consumer durables and so on and so forth. Obviously, there are correlation with regards to agriculture demand, also, typically, for the last two to three years. What has been changing is two patterns. One, we have seen that every year the temperature has been higher compared to the previous year, as long as your long term average or long period averages, which is indicating that, typically in the summer season, you end up having more consumption of power. Second, whenever the temperature has been higher, even during the monsoon season, because of lower monsoon period. And well, it was also supported by CMI related demand. You end up having peak season, which is not traditionally into the summer time. For example, previouly we used to have peak demand only during a summer time. But if you also seen the classic example is last year we have also seen peak demand actually occurring in the month of august. So we believe that, yes, temperature is a critical factor which determines the variation of power demand. But on top of that, the dynamics, with regards to how the other factors also play out. Will take care of peak demand variation
Govindraj Ethiraj: And what's the mix of power generation looking like, and how is that changing, Sehul?
Sehul Bhatt: So I think the generation has recently has mirrored demand trend, where we have seen 3% increase in August, closely the coal and renewable energy production has contracted by 3 to 13% respectively. And if you look at the hydropower, generation has surged by 7% on year, after two consecutive months of decline as many states receive sufficient rainfall, with southwest monsoon covering more part of countries, the August month water level also across 31 reservoirs and hydroelectric projects have improved. So thus, I think the share of hydropower, as has improved from 13% previously to almost 15%. We also believe that despite increasing focus of our sources, coal has remained a critical source of electricity generation in India. And in fact, monsoon, as it picked up, coal production declined by 7% in August this year on YOY pieces. And in order to ensure that we have uninterrupted generation amid surging temperature, the build up of whole stock was required. I think we estimate that to be around 14 days of inventory, which we believe is healthy and sufficient stock, thanks to steady dispatches that we have seen.
Govindraj Ethiraj: What's your outlook for the rest of the year? Given that, okay, we've had heat waves, which was the first part of the year, we've had very heavy monsoons, which are still not over in this part of the year, and what's the rest of the year looking like.
Sehul Bhatt: So we project power demand to grow at close to 6.5 to 7.5% and this fiscal owing to weather events, including severe and prolonged heat waves that were occurred in the first quarter, especially in the northern region, as well as insufficient rainfall that we saw in July, especially the northern region, again. Also supporting demand is a strong economic activity. On a long term basis. We think that power demand will rise at a CAGR of six to 7% over the next four to five years, driven by factors including temperature increase, manufacturing pace, increasing consumer durable penetration, changing consumer and regional patents. Now, keeping in mind the demand growth and the fact that non fossil fuels having PLF lower than the traditional coal PLF, we think that the capacity addition is going to be slightly at a higher pace. We estimate that to be around 10% CAGR over the next right.
Govindraj Ethiraj: And finally. How is this all or likely to impact prices going forward, Sehul?
Sehul Bhatt: So typically the demand volatility we have seen that impacting the prices, especially on the short term market. Let me take a reference of June 2024. When power demand increased by around 8-9% YOY, and in line with that increase in demand, we also saw volumes which are traded in short term market, especially of the RTM bass, which is the real time market volume. The volume surged by close to 20%. that impacted the prices, especially in some of the north region, where in couple of weeks for June, we saw prices going up to as high as 10 rupees per unit. However, last month, when we saw, obviously in sync with the demand decline that we have seen. Weighted average market pricing for RTM has also declined close to by 45% and they were hovering around 3.3 rupees per unit in August compared to six rupees they had. So we see that obviously, with the demand moderating decline that we have seen in case of this, prices have also fallen in terms of demand that comes up for short term market.
Govindraj Ethiraj: Sehul Thank you so much for joining me.
Sehul Bhatt: Thank you.
Bajaj Housing Finance, Space For Another Housing Finance Company?
Earlier this week, Bajaj Housing Finance saw its public offer being oversubscribed.
The company is a subsidiary of Bajaj Finance and the IPO was also triggered by regulatory requirements.
Bajaj Housing Finance is the second largest housing finance company (HFC) in India with an AUM of ₹97,071 crore as of the quarter ended June 2024.
The IPO was worth ₹6,560-crore and comprised a fresh issue of 50.86 crore equity shares worth ₹3,560 crore and an offer-for-sale (OFS) of 42.86 crore shares aggregating to ₹3,000 crore.
The question I had was what is the market like for housing finance companies that are not banks.
Remember, HDFC was a finance company which merged into a bank or HDFC Bank.
Non bank finance companies generally borrow at higher rates of interest and thus have to be more innovative about deployment so they can charge higher rates, obviously.
I spoke with Jignesh Shial, Director Research and head of BFSI Sector at InCred Capital and asked him how he was seeing Bajaj Housing Finance in the context of the larger market.
INTERVIEW TRANSCRIPT
Jignesh Shial: So if you understand housing mortgage business in general, in India, I mean mortgages as a product, though, you know, it has been quite popular for quite long period of time. Still, compared to most of the developed or even developing nations, we are quite underpenetrated. And obviously, being a such a large populated country, the housing remains the need of an hour, and even government has been consistently focused on it and all being an underpenetrated demand, specifically coming up from, not only from mattress and tier one, but obviously from tier two, tier three, tier four, cities and all. And definitely, there is enough scope left for, you know, couple of more or even lot of lenders, including banks as well as NBFCs, to stay around. Specifically, you know, banks versus NBFCs. I think you know, there are set of customers who needs more prone towards, you know, getting a service oriented model, or those who wants more handhold to do the lending transactions altogether. I guess in that particular case. And specifically, as you move more towards tier two cities and beyond, NBFCs are having a quite a comfortable way of managing such kind of customers, and, you know, dealing with it and charging them a little higher compared to banks, and still, you know, can do quite a lot of business into that particular geographies. So I think being under penetrated, and you know, more feet on the ground that NBFC has it, there is enough room for growth for, you know, banks as well as NBFCs, altogether,
Govindraj Ethiraj: Two questions so and that you're saying is, despite what should be gap in the rate, the interest rates that are being offered by either NBFCs or banks, including public sector banks. The second is that, what would be a number Jignesh, for example, suppose you say India has 100 customers. How much would be, let's say, in these kind of markets, which is the relatively underserved willing to pay higher interest rates versus those who are well served and are able to negotiate or hold a good rate.
Jignesh Shial: So basically, if you see the rate differential differs from, you know, the client to client, based on his financial data, is a credit. The score is overall, how he has been behaving a lot. The rate differential can be, you know, 25-50 whips. To know, even, even higher, as as big as or as a higher as 200-250 whips, also depending upon what kind of customer or what kind of markets are you serving in. But if I see, you know, still till date, if you see even existing data, if you will see it up, then I think major of the customer base, although there is no specific data or specific calculations that we have done, or even, I guess it's available in the public domain. But I think if you will see stating data or the existing data, major of the housing business or housing customers will be in the developed market, or basically the developed cities, or basically tier one cities and metros and all, which is, you know, little bit more cautious, little bit more concerned about the rates and all but incremental demand which is coming up. I think they are the portion of, you know, this underserved, or where, you know, you need a bit of a hand holding, and those want a bit of a more kind of a servicing, and still there, I mean that they're ready to pay higher rate of interest. Such kind of customer base, we will be, you know, higher. So incremental side, I think those are the customers which are more into, deeper into geographies, and who wants, you know, more of a specific servicing around and they're ready to pay higher rate of interest. Those customers are quite higher compared to the static base if you see it overall.
Govindraj Ethiraj: Right. If I were to put the question a little differently. Jignesh, so the Reserve Bank of India has been tightening lending norms across the board now for some time. So, and that obviously has affected, or I would think has is affecting non bank finance companies more than banks. Of course, in this case, a home loan is a secured asset. But at the same time, the environment is clearly not the same that it was maybe a year or two ago. How are you seeing this?
Jignesh Shial: Absolutely? Yeah, obviously rates have increased. But that, that, I guess, is applicable to everybody, including math long maximum, banks have seen a significant rise in the, you know, the lending rates. You know, the rates, which were close to seven, probably two years or two and a half three years ago, is almost inched up to eight and a half or 8.75 kind of a rate. And obviously for NBFC, it will be little, little will be even, even higher. But I think, you know, this is the rate hike is a phenomenon which is impacted banks as well as NBFCs in general, both kind of and us all together. And definitely the kind of customer profile they're serving up is also kind of little different. So in that particular case, you know, it's, it's been understood and it's been digested whatever customers you are servicing at this point of time, obviously, the lenders with among the NBFCs below, with the lenders with a more diversified borrowing profile, I mean those who are banks and cities deposits and all kind of banks, they are relatively better off compared to the ones who are mono borrowers or a single line borrowers and all. But even in that particular case, you know, considering that you know, the rates have been inched up for both the kind of lenders, banks as well as NBFCs that had been, you know, decent traction happening even for non lenders as well, though cost of funds being higher.
Govindraj Ethiraj: Picking up on cost of funds. So NBFCs typically borrow from banks, and obviously on lend and in the manner you just described, because they're able to create better products reach newer markets or lesser markets. How do you see that source of funding evolving? I mean, do you see NBFCs continuing to depend more on banks, or could they be able to raise funds from elsewhere.
Jignesh Shial: And yet, comparatively, couple of and including Bajaj and all, they have been raising money more diversified manner compared to banks. The dependence on banks have been relatively lesser compared to, you know, couple of smaller NBFCs. And also there is diversity, which is visible in the form of the raise money from capital markets, ECBs deposits and, you know, short term money, they're able to raise it so there are diversity which is visible, and that's the reason I'm saying, you know, those NBFCs, which has a relatively more diversified kind of a sourcing or kind of a borrowing, their rates are more competitive compared to, you know, a guy, I mean, a lender who has or a borrower who has a more of a banks, as the size of an NBFC grows up and balance, it becomes relatively stronger. The ability to raise money from more diversified sources always had seen rise. So all the NBFCs, as they grow up their sizes, the dependence on banks already, you know, starts reducing. And the ability to raise money through deposits or through capital markets and through ECBs and all has been rising. And even, I guess, RBI has been, you know, consistently had been, you know, instructing NBFCs to diversify their overall sub warrants and all. And I guess that has been visible since last couple of years.
Govindraj Ethiraj: Jignesh, thank you so much for joining me.
Jignesh Shial: Sure. Thanks a lot for inviting me.
Samsung To Downsize
Samsung Electronics is set to lay off over 200 executives across its Indian operations as the company faces slowing business growth and mounting competition, according to a report by The Economic Times (ET) citing senior industry executives.
The electronics giant’s decision to cut its managerial workforce by 9-10 per cent comes reportedly in response to declining consumer demand, particularly in its core smartphone business, as well as a broader effort to reduce costs and improve profitability.
Samsung India currently employs around 2,000 executives.
More on that shortly.
Mega Hubs Airports
London Heathrow Airport (LHR) remains the most internationally connected airport in the world this year and retains first place.
LHR is the 4th biggest airport in the world in terms of scheduled one way capacity in the year to August 2024. British Airways remains the dominant airline at London Heathrow operating 50% of all flights.
The data comes from OAG flight data and is pulled from the 100 largest airports and the 100 largest international airports in the world, based on total scheduled seats for an entire year (September 2023 to August 2024).
Data is extracted from the busiest day for global aviation in the past year (Sep 2023 to Aug 2024), Friday 2 August 2024.
The total number of all possible connections is calculated between inbound and outbound flights within a six-hour window, considering those where either the inbound, outbound, or both flights are international.
Also, Kuala Lumpur (KUL) moves up to 2nd this year and is the most connected airport in Asia Pacific.
Istanbul (IST) offers more destinations than any other Megahub, however Only FRA joins IST in offering over 300 destinations in their network.
In North America New York’s John F. Kennedy International Airport (JFK) leads U.S. airports ranking 6th in the Global Top 50 list.
Both Chicago O’Hare (ORD) and Atlanta (ATL), the world’s busiest airport, moved up the rankings this year, Chicago taking 9th position against Atlanta’s 11th spot.
