Markets Hammered Once Again
The stockmarkets were hammered again even as fresh buy calls are coming from several quarters.
On Episode 517 of The Core Report, financial journalist Govindraj Ethiraj talks to Kinjal Shah, Senior Vice President & Co-Group Head, Corporate Ratings, ICRA. We also feature an excerpt from our interview with C Vijayakumar, CEO at HCL Tech from yesterday’s Nasscom Technology Leadership Forum in Mumbai.
(00:00) Stories of the Day
(01:19) Markets hammered once again even as institutional brokerage buy calls rise
(05:13) We need to transition from an input centric model to an outcome centric model, HCL Tech CEO C Vijayakumar to The Core
(11:06) Indian IT to grow faster this year, expand workforce
(12:30) Rating agency ICRA projects improved revenues on rural revival and increased Govt spend
(20:47) Apple to hire 20,000 workers in US in definite hit to global sourcing
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 Tuesday, the 25th of February, and this is Govind Raj Hetiraj, headquartered in Broadcasting and Streaming, as always, from Mumbai, India's financial capital. And before I proceed, I would like to inform you that a study based on Instagram hashtags, reported in travel magazine, Travel Plus Leisure, has found Mumbai to have the most iconic skyline in Asia. The three global cities ahead of Mumbai are New York, Dubai, and Chicago.
Now back home, the top stories and themes,
the stock markets are hammered once again, even as institutional brokerage buy calls rise.
We need to transition from an input-centric model to an outcome-centric model, HCL Tech CEO C. Vijay Kumar tells The Core.
Rating agency ICRA projects improved revenues on rural revival and increased government spend.
NASSCOM says Indian IT will grow faster this year and expand its workforce.
And Apple to hire 20,000 workers in the United States in what could be a definite hit to global sourcing.
Markets Get Beaten Down
The stock markets were beaten down once again for the fifth consecutive day as fresh buy calls were coming in from several quarters, or rather started coming in. ICICI Securities put out a note over the weekend saying it was calling the SENZX in a year's time at 90,000 as we discussed yesterday, and now Citibank has followed with upgrade calls. Before we come to that, on Monday, the 30-share SENZX fell about 856 points or 1.14%, close at 74,454, and the NSE Nifty 50 was down 242 points or 1.06% at 22,553. Now, the broader markets were weak too, with the Nifty Small Cap 100 and Nifty Mid Cap 100 indices going down 1% and 0.9%. So the question in many people's minds, as we've also been pondering here, is whether we're close to that bottom. Mathematically going by past projections, that seems feasible because the 2024 predictions were that the markets would need to correct by about 10% so as to make valuations a little more palatable. Now, that's obviously happened, and much more.
Of course, there are still diverging points of view on current valuations, but then the firm buy calls have begun. The first notable one was ICICI Securities, as we said. The second to join the list was Citigroup Inc., which has upgraded Indian stocks to overweight from neutral while turning underweight on equities in Southeast Asia. Citigroup said in a note reported by Bloomberg that there is a meaningful upside in Indian equities thanks to or rather amidst less demanding valuations. The benchmark NSE Nifty 50 index could rise to 26,000 by the end of December, according to a Citibank strategist, who suggests a 15% gain from Monday's trading level. The benchmark NSE Nifty 50 index could rise to 26,000 by the end of December, according to a Citibank strategist, which of course suggests a 15% gain from yesterday's trading levels.
Citibank had flagged a limited upside in August last year thanks to earnings risks for the stocks in India. Now, the benchmark index has fallen about 14% from its September peak, with foreign portfolio investors now having net sold about $23 billion of stocks over concerns over slowing economic growth and weak earnings. Now, all of this selling has obviously eased the high valuations to some extent with the benchmark index now trading at about 19 times its one-year forward earnings estimates compared to 21 times in September.
So, that's the level at which people are obviously still feeling it's expensive. Bloomberg reported Citi saying that financials and healthcare are amongst key sectoral overweights in the country while remaining underweight on pains and consumer discretionary stocks. So, all of this of course links to earnings and how companies are expected to perform in coming quarters and more on that coming up shortly.
Meanwhile, the economy may have rebounded last quarter, growing 6.3% thanks to increased government spending that helped offset weak household demand, according to a Reuters poll of economists who forecasted a relatively modest growth ahead. GDP is predicted to have touched an annual 6.3% in the October to December quarter, up from a near two-year low of 5.4% in the previous quarter, according to that Reuters poll of 53 economists that was conducted between yesterday and the 17th of February. So, forecasts for data that's going to be out on the 28th of February ranged from 5.8% to 7.4% while economic activity as measured by gross value added was estimated to have expanded 6.2%. Elsewhere, gold prices have come back to trade near their record peak thanks to a weaker US dollar while investors looked ahead to a key inflation report later this week to gaze at the Federal Reserve's interest rate trajectory, according to Reuters. Spot gold rose to about $2,947 an ounce on Monday afternoon after hitting an all-time high of $2,954 last week.
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There is a clear shift away from the way India's IT services industry has grown over the last 30 years with people and associated revenue growth according to Vijay Kumar, CEO of the roughly $14 billion HCL Tech, India's third-largest IT services company by revenue, while speaking to me at the sidelines of the NASSCOM Technology Leadership Forum happening in Mumbai yesterday. Vijay Kumar's statements are also a somewhat formal and increasingly open acknowledgement by the IT services industry of the impact of AI on jobs and the nature of jobs in the global IT services industry. According to him, the industry needs to transition from an input-centric to a more output-centric one where you get paid based on how successful the product is in the market, he said, and that kind of mindset, according to him, will change the current services model.
And I asked him in an exclusive interview why this was happening and what were the circumstances surrounding this change.
INTERVIEW TRANSCRIPT
C Vijayakumar: And now is the moment the decoupling should happen. We're already seeing the decoupling and that means more outcome-centric, more people-based services, more platform-based services. From just services, it's more IP and services.
So, I think these are some of the shifts that we need to make. It's not that it's completely new. Already a lot of industries have some segment of their business in this model, but we need to really amplify that.
Govindraj Ethiraj: And what is propelling it right now? As in, if you're saying there is a linear shift towards.
C Vijayakumar: It's the productivity unlock that generative AI is able to do. Whether it is software development, we think there is 20 to 30 percent productivity improvement possible in the entire end-to-end lifecycle of software development. So, we built a platform called AI Force, which uses some of the traditional available language models, but it really covers the end-to-end lifecycle of software development.
It's just not coding, it's design, it's deployment, it's support, all of that. And if you want to make a change to an existing software, to make a change impact analysis, depending on what the change is, sometimes it might take three, four weeks for an engineer to come up with or a team to come up with these other changes. But with generative AI, you can get that output in less than half an hour.
So, that is the kind of change which is unlocked.
Govindraj Ethiraj: So, if I can ask you to illustrate once again. So, let's say you were working for a big bank or a retail chain. What's the kind of problem that they would have given you 10 years ago and how would that get solved right through the stream?
And how would you do it differently? Or rather, how would it be done today, which reflects the productivity savings and everything that you're talking about?
C Vijayakumar: A good example would be a financial services firm, where we are part of a very large transformation programme. The client is spending almost a billion dollars a year, and it's a five-year transformation programme. It'll probably be in the second year.
Now, with generative AI, we have showcased in certain segments, how can the entire programme be done in 30% less time? So, the five-year programme can be done in four years, which is, of course, a billion dollar plus saving. But more important is the time to market.
If you're able to get those features, capabilities, if you can launch the modernised platform one year ahead of time, then it's a huge business value that gets created. So, I think these are the conversations which we are having, and it's fundamentally different. And how can you lead these conversations with clients to showcase that you can do something much faster that will create faster time to market?
And those are the types.
Govindraj Ethiraj: And a lot of this is still rolling out. So, are you able to predict sort of substantively that this is the cost-saving I will be able to bring in time, for example?
C Vijayakumar: Yeah. So, it's an iterative process. So, we constantly engage with our customers by what we call is part of the possible, right?
So, a study that is done in a limited way demonstrates that you can do things faster. It does not mean that the entire thing can be done. So, you will have to onboard the client.
Clients also should be willing to walk the path with you, right? You kind of define an art of the possible, walk the path with the client. There will be some changes in the way.
And as long as you have a good understanding with the client, I mean, it's a new technology. Change management is very significant in this. So, you need client's cooperation and full involvement to make this happen.
So, you really have to onboard the client in this journey. And then the outcomes that you get out of this journey can be shared. The value can be shared.
Govindraj Ethiraj: So, when you talk about the art of the possible, what is possible today in a way that you could define it for people who will be watching this and what is not possible today?
C Vijayakumar: All productivity unlocking is still happening with humans in the loop. I do not foresee that a lot of this can be done completely independent of humans. I think that's probably a little bit of misconception, which we need to kind of deal with.
But the involvement of humans could be much lesser, right? Like somebody who is used to developing code now needs to validate code. But that does not mean that programming concepts, the basics that are not required.
I mean, that's a misconception, right? You can do everything through generative AI, but you still need very strong programming concepts to be a good developer, to deliver a good quality code. You still need to understand the architecture, right?
Now, how do you kind of break that work into smaller pieces, which you can do much faster? Just developing the code through right prompting, you can do much faster. So, I think it's not that everything is getting replaced.
A lot of fundamentals remain the same.
India's It Sector To Grow Faster This Year
India's IT services industry is expected to grow at a higher pace this fiscal year, thanks to engineering research and development and the rising number of global capability centres or GCCs, or the offshore hubs for international or multinational companies, according to industry body NASSCOM on Monday. NASSCOM expects the industry revenue will grow 5% to about $282 billion in fiscal 25 compared to 4% last year, with revenue crossing about $300 billion in fiscal 26, according to Reuters, who put together that report. Software exports comprising service and sale of products to clients are expected to grow about 4.6% to $224 billion in fiscal 25. And the industry is expected to add about 126,000 jobs on a net basis, taking the total workforce to 5.8 million in fiscal 25. The industry's total headcount rose to 5.67 million or 5.7 million in fiscal 24 from about 5.58 million a year earlier. NASSCOM Chairperson Sindhu Gangadharan said that enhanced artificial intelligence implementation, the rise of agentic AI and the growing maturity of GCCs as value hubs are reshaping industry dynamics, according to that Reuters report.
More on agentic AI tomorrow.
ICRA Projects Higher Revenue Growth
Rating agency ICRA on Monday said Indian companies could post about 7% to 8% revenue growth in the March quarter of the current fiscal year, thanks to a revival in rural demand and an increase in government spending. It does expect private capital expenditure, however, to remain measured, thanks to uncertainties around geopolitical developments and a relatively subdued outlook on merchandise exports. It also points out, quite correctly, that sunrise sectors such as electronics, semiconductors, and niche segments within the automotive space like electric vehicles will continue to see a scale-up in investments, which it also attributes to many production-linked incentive programmes announced by the Government of India.
Moreover, it says that recovery in the operating profit margins for India Inc. witnessed over the past quarter is likely to be sustained at about 18.2% to 18.4%, thanks to an increase in demand. ICRA's analysis is based on the performance of 602 listed companies, including financial sector entities, and that shows that 6.8% year-on-year revenue growth, supported by improved demand across consumption-orientated sectors like consumer durables, fast-moving consumer goods, retail, hotels, and airlines, while commodity sectors like iron and steel witnessed some decline following lower realisations thanks to weak global demand and cheaper imports from China, said ICRA. I reached out to Kinjal Shah, Senior Vice President and Co-Group Head, Corporate Ratings at ICRA, and I began by asking her how she was seeing corporate results for the quarter ahead.
INTERVIEW TRANSCRIPT
Kinjal Shah: Just to give you a perspective of Q3 FY 2025, ICRA analysed around 602 listed entities, excluding the financial sector entities, and the sample set of the 602 companies, they witnessed a y growth of around 6.8% in revenues during Q3 FY 2025. So we're seeing that the demand momentum that we've seen in Q3 would likely continue in Q4 as well, with a certain more uptick because of the improvement in the urban demand which is expected. So Q3 did see the benefit of improved rural demand and a slight uptick in government spending.
Q4 expectation of the 7-8% yy growth is stemming more from the fact that we'll continue to see benefits of this improved rural demand and an uptick in government spending. Further, after remaining sluggish for over the last few quarters, the urban demand is also expected to improve aided by the sizable income tax relief which has been provided in the budget 2025, which typically improves the consumer sentiments. Then there is monetary easing by the RBI through the 25 bps repo rate cut.
And also there are expectations of a moderation in food inflation, which would further augment discretionary consumption. So all these together would result in the 7-8% revenue growth which has been expected by ICRA.
Govindraj Ethiraj: What is the comparison? I mean, if I were to try and draw a conclusion on whether demand is picking up again, revenue growth has resumed to the levels that we saw, let's say, last year. Is there anything to compare to?
Kinjal Shah: So like you said, the RBI, we're anyway seeing growth. So overall, there is an uptick in demand is what we can conclude.
Govindraj Ethiraj: Right. And if you were to look ahead, you also said that sectors like semiconductors and electronics are seeing investments, which is true. How much of that is contributing to bottom lines or top lines of companies that you're analysing?
Kinjal Shah: As of now, we're seeing investments going into these sectors like electronics, semiconductors, or even within the automotive space, like electric vehicles, where there are these production linked incentives, PLI schemes, which have been announced by the government of India. For the current year, obviously, there has not been any major benefit arising out of these because these are still in the investment phase. The overall commercialisation of operations of these investments will take at least two to three years.
And that's where we will see the benefits to corporate India from, say, the domestic value addition or, say, the lowering of costs vis-a-vis the imports that they're currently doing. So as of now, we wouldn't attribute much benefit to the revenues or profit margins because of these investments that are ongoing.
Govindraj Ethiraj: Between rural and urban, you're saying rural has revived and urban is also likely to see a revival because of the factors that you just mentioned. What is the stronger driver at this point? And how could that be for the next quarter?
Kinjal Shah: Right. So again, just stepping back, I mean, earlier last year, we'd seen that there was a lot of pressure on the rural demand because of the variant monsoons at various times of the year. Obviously, the government spending was also not that great.
Now, I mean, in the current year, what we've seen is that the rural demand has improved. For the current calendar year, if I were to talk about H1C by 2025, we expect it to remain upbeat aided by the robust output for most Kharif crops and the favourable outlook for the ongoing Rabi season. Beyond that, obviously, our normal and well-distributed monsoon season in 2025 will also be very crucial to support the agricultural outcomes and food prices.
So while this will remain the key driver and the impact on the overall economic growth, what we've also seen is the slowdown in the urban demand over the last few quarters because of the curtailment on discretionary spending. So typically, this urban demand is more driven by consumer sentiments. So when sentiments are weak, the demand also reduces.
So like I mentioned that because of certain positives that we've heard about recently in terms of the income tax benefits, repo rate cut, etc., that will help boost the consumer sentiments and also help fuel the urban demand.
Govindraj Ethiraj: Have you seen or are you able to compare this with any time in the past where, let's say, I don't think we've seen such a large income tax relief, but let's say, you have a hundred thousand crores worth of tax relief and what that could potentially do. Is there some way of calculating that? Is there any historical precedent?
Kinjal Shah: Difficult to directly attribute it as in how much that savings could result in a growth in demand or uptake in the revenue growth. But there is the qualitative element associated with it. So like I said, I mean, the demand is actually driven by consumer sentiment.
The fact that the middle class is going to get those kinds of savings that helps boost the consumer sentiments and then that will trigger a lot of discretionary spending as well, which has been curtailed to a large extent at this moment because of the bleak macroeconomic outcome.
Govindraj Ethiraj: If let's say the monsoon is good, how could this change? And if it's not, then what would happen?
Kinjal Shah: As of now, I mean, it's too early to comment about how the monsoons would be, but typically what we expect during the start of the year is that there will be a normal monsoon. That's going to be the expectation. So betting on that, the monsoon will be normal.
We are seeing that the uptake in the rural demand, which we've seen, will continue because that will aid the rural cash flows and the farm cash flows. But obviously, I mean, if the monsoon were not to be normal, I mean, say if the monsoons were going to be lower than the long term average or if the monsoons were going to be disparate across states or in terms of the timeline, etc., it does cause a lot of disruptions to the crop output and ultimately it affects the rural farm cash flows. It results in an increase in food inflation when there is a scarcity of the crop output as well.
So all these elements will in turn again present in higher inflationary scenarios, which again leads to curtailment of spending and so on.
Govindraj Ethiraj: Last question. So you've also said that consumer products, retail, hotel, and airlines, and also iron and steel, for example, are under pressure because of both global and domestic reasons. Are there sectors which you feel have bucked the trend, so to speak, at least in this period?
Kinjal Shah: In the last quarter that we analysed, Q3 FY25, we did see a recovery in operating profit margins for several sectors like pharmaceuticals, fertilisers, telecoms, telecom metals and mining, power and hotels. This was due to a mix of factors. I mean, for some of the sectors, it was because of improvement in demand.
For some, it was because of the better product mix. And overall, for some, it was the benefits of operating leverage which played out. While for some sectors like iron, steel, shipping, textiles, and tyres, the YY expansion in the operating profit margin was curtailed because of higher input costs and also because of lower realisations for some of these sectors.
So it's a mix that we've seen across sectors and which happens every quarter. I mean, not all sectors will follow the same positive or negative trajectory. Some will tend to gain and some will tend to lose.
Govindraj Ethiraj: Kinjal, thank you so much for joining me.
Kinjal Shah: Thank you so much.
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Thanks to sheer costs and unviable economics. Of course, with all countries, including India and China in the crosshairs when it comes to tariffs, companies like Apple may have no choice. This disclosure comes a few days after Trump and Apple CEO Tim Cook met in the Oval Office, according to Bloomberg.
He's investing hundreds of billions of dollars, Trump said after that meeting last week, implying Apple is investing locally because it does not want to pay tariffs, said Bloomberg. Trump has threatened, as we know, an additional 10% tax on items imported from China, where Apple builds the majority of its phones and other products. But he has apparently, that's Tim Cook, has traded investment in the U.S. for relief in the past.
