Markets Fall On Weak Signals
Indian shares lost traction on Tuesday, led by HDFC Bank's decline on likely lower-than-expected inflows
On Episode 363 of The Core Report, financial journalist Govindraj Ethiraj talks to Manish Gupta, senior director and deputy chief ratings officer at CRISIL Ratings.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take: Borrowing to Invest
(05:09) Markets fall on weak signals
(07:32) Red Sea crisis leads to 64% jump in global cargo ships fuelling in India.
(10:07) Fitch Ratings says lower attrition, slow wage growth is helping Indian IT companies maintain profitability
(11:57) Thermal power production has fallen for the first time in India.
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].
---
Good morning, it's Wednesday, the 14th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: Borrowing to Invest
Journalist Tamal Bandyopadya in an insightful column in January this year recounted how he asked a group of youngsters in a bar in Kolkata how they could afford to pay for the somewhat pricey drinks.
The answer was first that none of them had jobs and second, they were borrowing money on loan apps, as low as Rs 1,500.
They also usually repaid the loans with earnings from tuition or giveaways from their parents. And they repaid quickly and thus kept the credit scores high.
A host of crackdowns by the Reserve Bank of India across the financial sector this year has revealed borrowings at all levels.
The big one is what is known as unsecured loans, small loans for which there is no collateral. That includes credit cards, all of which have been rising.
And then, in March, the RBI asked IIFL to stop sanctioning or disbursing new gold loans because it had concerns in the company’s gold loan portfolio.
More specifically, in the quality of gold that was deposited with IIFL to take the gold loans. Which is quite shocking actually as it means that people were depositing substandard gold to take loans. It also means that the gold was not being checked properly by the lender.
There are many more examples, particularly of small loans taken by individuals.
Granted the reasons for these loans could be several but it does appear that investing in the markets in general or in some or many cases, dangerous derivatives products like futures and options could be another reason.
India has the world’s largest derivatives market now.
Bloomberg says India’s futures and options turnover hit a record $6 trillion in February, from less than $150 billion five years ago.
A large part of this growth followed the introduction of weekly-expiring contracts in 2019, replacing the traditional month-end expirations.The RBI is on record to express concern in general terms about savings going into derivatives, an area where 9 out of 10 traders as per official data lose or lost money.
It is my experience that RBI’s general comments usually have very specific data behind them.
The WSJ carried an article yesterday saying investors borrowed like crazy during the rally and now they are paying the price.
The headline might make you feel there are like minded folks youngsters sitting in the US as well.
Well, yes and no.
This article speaks of large, institutional investors and how the market meltdown in recent weeks has been driven by the rapid unwind of several popular trades and the heavy use of leverage.
Translated, whether it was the boys in the Kolkata bar or the smart and savvy suited booted Wall Street investors, they were doing roughly the same thing.
Of course, the interest rates vary.
Investors were borrowing in Japanese Yen at close to 0% interest and investing elsewhere in stocks and bonds and got shocked out of their wits when the Bank of Japan raised interest rates to 0.25% and ran for the door to start selling.
Triggering a shockwave last week that enveloped Indian markets as well.
In the case of the small borrowers, the rates could be between 30 and hold your breath, 60% an annum.
Elsewhere, India’s credit deposit ratio is a concern, as deposits into savings accounts are not growing as fast as banks are giving out loans.
A healthy gap between the two should be there but it isn’t and the RBI once again has been consistently referring to this, including last week.
The RBI is exhorting banks to step up deposit mobilisation, which of course will work only upto a point.
Savings are coming down because people are buying homes but also putting money into stock markets through mutual funds if not directly.
And a key reason for all this is that incomes are clearly not growing enough to keep pace with aspirations.
Or in many cases, there may be no income at all.
And where there are incomes, even if growing steadily, inflation is eating away at an unprecedented pace.
That is where things are, but the solution to high inflation and low incomes and high aspirations cannot be borrowing to invest.
Borrowing to invest is a dangerous phenomenon for any investor, large and small.
Usually it ends badly, or only the smartest are able to get out in time.
Most will not.
--
Our top stories and themes
Markets fall on weak signals
Thermal power production has fallen for the first time in India.
The Red Sea crisis leads to a 64% jump in global cargo ships fueling in India.
Fitch Ratings says lower attrition, slow wage growth is helping Indian IT companies maintain profitability
Markets And More
Indian shares lost traction on Tuesday, led by HDFC Bank's decline on likely lower-than-expected inflows due to a staggered weight adjustment on the MSC Index, Reuters reported.
The NSE Nifty 50 index fell 208 points to close at 24,139, while the S&P BSE Sensex fell 692 points to close at 78,956.
In both cases the fall was around 0.8%
HDFC Bank fell 3.4% and led the indices down.
MSCI said the changes will come into effect in two stages, in August and in November, contrary to market expectations of one move in this month.
So the earlier expectation was that some $3 to 4 billion would flow into HDFC Bank after the revision, but that estimate is now $1.8 billion for now, Reuters reported a brokerage saying.
A backgrounder on MSCI.
India’s weight in the MSCI EM Index has moved up from around 8 per cent in 2020 to an exact 20 per cent today and could cross 22% by the year end, analysts quoted by Business Standard said.
Consumer products company Marico gained 2.1% after restarting manufacturing operations in Bangladesh, a larger sign that business operations in that country in which many Indian companies have a presence, are restarting in the light of the political turmoil.
Interestingly, global markets and notably Japan where the meltdown began last week is almost back to normal.
Reuters called it Wall Street's rapid healing on Friday and said how Japanese stocks completed their week-long, hair-raising round trip on Tuesday as Tokyo markets returned from holiday and then wiped out the remainder of last week's losses.
Bottomline, life is returning to normal quite quickly after the meltdown last week triggered in turn by the Yen Carry Forward trades.
On the other hand, several reports say it is too early to give the all-clear to the rapid unravelling of “carry trades,” warning investors that the unwind may still have further room to run.
CNBC quoted a TD Securities analyst saying he’d be “very hesitant” to declare the end of the carry trade unwind, despite suggestions from some economists that the roll back may be largely complete.
“I’d push back on a lot of those narratives. You don’t have any real data to price your carry trades that we know,” Kelly told CNBC’s “Squawk Box Europe” on Monday.
Action In Oil
Brent crude futures are now above $80 for the last few days, quoting at $81.88 a barrel, having jumped on Monday.
Lots of developments in oil in general also reflect, among other things, the varying conditions of the global economy.
Some top US oil refiners are throttling back operations at their facilities this quarter, adding to concerns that a global glut of crude is forming, Bloomberg is reporting.
Marathon Petroleum Corp. — owner of the largest US refinery — plans to operate its 13 plants at an average of 90% of capacity this quarter, the lowest for the period since 2020.
Similarly, PBF Energy Inc. announced it’s preparing to process the least crude in three years, Phillips 66 will run its refineries near a two-year low and Valero Energy Corp. expects to trim oil processing.
Together, those four refiners account for about 40% of America’s capacity to churn out gasoline and diesel.
And here is the interesting oil news.
Indian ports reported a 64 per cent year-on-year (YoY) increase in the total number of bunkering and ship-to-ship (STS) calls during the first seven months of 2024, according to the S&P Global Commodity Insights and reported by Business Standard.
Bunkering refers to the process of supplying fuel to ships.
The new fuel supply route follows attacks on ships in the Red Sea region.
S&P says the Red Sea crisis has prompted ship owners to choose longer routes around Africa resulting in a substantial increase in monsoon bunker demand at Indian ports.
The crisis emerged in October 2023, and has managed to persist since then.
The total number of bunkering and STS calls to Indian ports was more than 6,765, compared with 4,113 during the same period in 2023, according to the report.
Interestingly, this figure, not surprisingly, slows down due to weather disruptions at this time, being monsoons.
However, it was further fuelled by favourable pricing and consistent supply from domestic refineries since the second quarter of 2024, as stated in the commentary by S&P Global Commodity Insights.
According to the CAS data, Mumbai, one of the major bunkering hubs in the country, saw a 53 per cent rise in total bunkering and STS calls. Market participants stated that the monsoon has had a little effect in Mumbai this time, the report said.
Fitch Projects Modest Rise In It Profits
Indian IT services companies could only see a modest rise in their profitability as their clients will continue to hold off on discretionary IT spending amidst economic uncertainties, according to a latest Fitch Ratings report, quoted by Business Standard.
However, the clients will continue to spend on projects that focus on cost efficiencies, the report said..
The recently-released report added, “Fitch’s global economic outlook forecasts US real GDP growth to slow to 2.1 per cent in 2024 (2023: 2.5 per cent) and Eurozone real GDP to pick up to 0.8 per cent (2023: 0.5 per cent).
Fitch says this economic backdrop will support revenue growth in the mid to high single digits, on a constant currency basis, for most Indian IT services companies in FY25.
This is in line with their performance in FY24, but weaker than the historical average.”
The credit rating agency has said that the IT services sector’s long-term growth will be supported by client spending on digital transformation, cloud migration, and artificial intelligence (AI).
Interestingly, it points out that Indian IT services companies have benefited from declining staff attrition rates in FY24, which has also reduced wage pressure.
Or put differently, people are not quitting jobs often and sticking on despite modest pay increases, if at all.
“The staff attrition rate for most Indian IT services companies peaked in FY22 at 22-24 per cent when the shortage of skilled IT staff led to increased competition for talent,” it said.
This is good news for the companies who are evidently breaking free of the stranglehold of job hopping engineers.
Fitch says lower wage pressures, an increase in utilisation rates, and employing a higher proportion of fresh graduates will benefit profitability.
Thermal Power Generation Contribution To Total Is Falling For The First Time
A big jump in renewable energy capacity will reduce the share of coal based thermal power plants by over 500 basis points to 67% in the coming year, after rising continuously in the last five years, a new report from rating agency Crisil has said.
The share of thermal power in overall power generation had increased to 73% in fiscal 2024 from ~69% in fiscal 2020.
This was mainly because the growth in demand (at ~7% during fiscals 2021-2024) was being met largely by thermal generation.
RE and other sources (nuclear, hydel, biomass) clocked just ~3% compound annual growth rate during this period.
This is now shifting and changing.
So now, incremental RE generation growth (at 20%) will be higher than the overall power demand growth of 5-6% over fiscal 2025 and 2026.
The macro reason is obviously the strong policy push and capacity addition of more than 50 GW in the next two years by fiscal 2026.
Thermal power of course is critical and necessary because renewable energy in the form of solar runs during the day and cannot be depended on to provide what is known as baseload power.
I reached out to Manish Gupta, Senior Director and Deputy Chief Ratings Officer at CRISIL Ratings Limited and began by asking him if this was the first time we were seeing a decline in thermal power generation in the overall power mix ?
INTERVIEW TRANSCRIPT
Manish Gupta: So your question, I think, is like, is it happening for the first time? Yes? The answer is yes. Essentially, what happened was in power sector. Let me just begin by giving you a perspective. Like in power sector, there are three types of major capacities, like, firstly, the thermal capacities, where, permanently, coal is a major fuel that is used. So out of the total capacity in India, somewhere close to 435, gigawatt, around 243, gigawatt is thermal, and predominantly 80, 90% of this will be coal based capacities renewable energy, which is solar and wind. They form the second chunk, which is around 120, plus gigawatt at the moment. And thirdly, will be all other sources, which include hydro, your nuclear and other biomass, etc, so which will be around 70 or gigawatt. So what was happening so far was that given the face of growth in demand that was their demand for power, bulk of this incremental demand was being met through thermal generation work, while not much of a thermal capacity ad was happening. But thermal PLFs, which is the unit for measuring the utilization level of thermal plants that was rising. Part of this incremental demand was also being taken care by renewables. But for the first time now, we are seeing that renewables is taking the lead in meeting the incremental demand. And that is a big shift that we are really talking about as part of our study,
Govindraj Ethiraj: Right. And this, I'm assuming, is mostly daytime
Manish Gupta: No. So when, when we talk about the power demand, that's power demand for a full day basis, not about the peak demand that we are talking about. So it's about total power consumption that we are seeing,
Govindraj Ethiraj: You know, So there was a lot of power generation capacity that was also projected in terms of fresh capacity and so on. So where are we in that broad sense, in terms of total projected how much renewable has pitched in and how much it could pitch in in coming years?
Manish Gupta: Yeah. So see, renewables has been the forefront in terms of the new capacity at in the power sector. So as I said, I think they have already reached a level of 120 gigawatt previous year, we added somewhere close to 19 gigawatt of renewable energy capacity in India, which includes post solar and wind. This year we are going to see a step up from 19 to around 25-26 gigawatt and something similar we are expecting for the next year as well. So this is one of the major reason why we are seeing that. You know, renewable energy capacity is going to lead in terms of meeting the incremental power demand, which may eventually result in reduction in the share of thermal in overall power generation.
Govindraj Ethiraj: So then, would it be correct to say that overall, let's say fossil fuel investments for power generation or energy is going to now start coming down in India, at least.
Manish Gupta: See this is not the first time that is happening. I mean, if you look at the fossil fuel power generation in India over last four years through fiscal 24 overall, somewhere close to 12 and a half gigawatt of capacity has had come in in last four years. What we are seeing now is a slight tapering from there. So if 12 and a half has come in in last four years, we are going to see 10 gigawatt coming in in the next two years. So while we are seeing thermal was any which way slow, some bit of an uptick that has happened as of now, but the pace of growth in renewable is far higher. Because of which we are seeing renewble taking the lead in the overall power generation mix.
Govindraj Ethiraj: Right. And what's the capacity versus utilization in thermal and how is that looking for the next couple of years?
Manish Gupta: If I look at, firstly, the thermal utilization level, as I said, I think utilization in power sector is measured from plant load factors, or which is commonly termed as PLFs. We have been seeing some bit of an uptick in the PLFs of thermal power plants, which has reached to a level of somewhere close to 69% as on fiscal 24 from here on, we are expecting that there could be some bit of a tapering, but it will still remain upwards of 65% in the foreseeable future. While this is the level for thermal but in renewables, the PLF levels are much lower. They are at around 19-20% so why in gigawatt terms, we are seeing a huge capacity at but the proportion of renewable energy in the generation mix that still remains at around 12-13% as the top. As we go forward, we are seeing this proportion of renewable energy mix increasing because of increased capacity at over here.
Govindraj Ethiraj: Are there any trends that you're seeing in these numbers that are also allowing you to project or giving you an insight about how investments are going and how, also, more importantly, consumption is happening at this point of time, or are likely to happen of energy?
Manish Gupta: Okay, let me just first talk about the consumption. I think consumption has been pretty strong in the previous years as well, something to the tune of six 7% and our expectation is somewhere close to five and a half to 6% will continue over the medium term. In terms of investments why private sector, has been very, very active in terms of adding new capacities in renewable energy side. On the thermal our side, it has been very tepid. And very limited capacities from private sector has come in. Most of the capacity, at out of the 10 gigawatt that I was talking of is likely to come in from Central Sector PSUs, and some state PSUs as well. So that's the the trend we are seeing in terms of investment in the car sector from a generation point of view.
Govindraj Ethiraj: So you're saying private sector participation in thermal power, or fossil fuel based energy, is reducing much more than public sector in the thermal side.
Manish Gupta: Yes, actually, it has reduced quite a lot in the past itself and today also, it remains at a low level, and most of the investment in the thermal side is going to be coming from the public sector companies or the government linked companies.
Govindraj Ethiraj: Right, Manish. Thank you so much for joining me.
Manish Gupta: Sure. Thanks a lot.
Starbucks CEO out
Starbucks has somewhat abruptly parted ways with Indian origin CEO Lakshman Narasimhan, who came via Pepsi and Reckitt where he was CEO and appointed current Chipotle Mexican Grill chief Brian Niccol as its next leader, an abrupt management change for the coffee chain as it works to turn around its business and contend with activist investors.
The Seattle-based company said Tuesday that Niccol will start as CEO and executive chairman of its board Sept. 9. Current Starbucks chief Laxman Narasimhan will step down as CEO and board director immediately.
Mellody Hobson, Starbucks’s executive chairwoman since 2021, will become the lead independent director.
Niccol will become the sixth person to serve as Starbucks’s CEO in the company’s history, and the second to come from outside the company. Narasimhan, who became CEO in March 2023, was the first to come from outside.
Starbucks operates close to 400 stores in India and came to India in 2012 and has said it is targeting 1,000 stores by 2028.
The Wall Street Journal said Starbucks has spent weeks negotiating with activist investor Elliott Investment Management on ways it can address slowing sales and operating problems.
Last week The Wall Street Journal reported that another activist, Starboard Value, had taken a stake in Starbucks.
