Markets On Hold As External Pressures Build Up
Indian markets are now grappling between a shift in interest from foreign investors who are now re-looking at China
On Episode 401 of The Core Report, financial journalist Govindraj Ethiraj talks to Raghav Manohar Narsalay, partner at PwC and Lead for Research and Insights Hub, India.
SHOW NOTES
(00:00) The Take
(04:31) Markets on hold as external pressures build up
(08:11) Is $50 a barrel oil on the horizon?
(09:51) Two wheeler sales are up, will the festive season surprise?
(10:58) Why is India Inc holding back from investing in expansion?
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 3rd of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
Good rains are always good for India’s economy. A bad spell of rain does not mean the opposite either because India’s growth is much more insulated from bad monsoons than ever before.
But good rains provide the tailwind, both in terms of real impact and sentiment.
And if you are trying to divine how consumer facing industries will do, particularly in rural markets, these are useful and positive indicators.
So let's run through some monsoon stats that are now out, since September 30 broadly marked the end of the monsoon season.
First, the big number.
India has received 934.8 mm rainfall, which was much higher than the 820mm recorded last year during the same period.
It is even higher than the normal level of rainfall of 868.6mm, which translates into the fact that the South-west monsoon was 8% above LPA or long period average.
How dispersed was the rainfall, another important question ?
Very. Between 1 Jun and 30 Sep 2024, of 36 sub-divisions in India, 33 or close to 90% of the country received normal or above normal rainfall so far.
Five states were in the deficient zone and region wise, except east and north east, all other parts of India received higher than normal rainfall.
How good were reservoir levels ? Another important point.
Well, comfortable as of last week, at 87%, compared to 71% last year, according to BOB Research.
There are some variations within, with the northern region being lower compared to the rest of the country, at 68% compared to 86% last year.
For agriculture, this means that kharif crops like rice and maize which are grown between July to October have benefited from the strong monsoons.
Remember, the Government has just lifted all the bans on rice exports because we are now staring at surpluses.
As a follow on effect, rabi crops which include wheat and grow from October to April will benefit from the higher water levels.
So agriculture and the rural economy should be on better footing in the coming months.
This is of course the good news.
And then there is the bad news which is near term and external.
Tensions in the middle east which never eased as such have now ratcheted up after Israel dropped bombs and then launched a ground invasion into Lebanon last week.
Remember, in a few days we will mark the first anniversary of the Hamas attack on Israel on October 7, 2023.
And now Iran has fired missiles.
This affects many things, from the likelihood that oil prices might rise further to potentially longer flying times for airlines flying westwards, and higher fares which are already getting priced in for the winter season.
Even if oil prices don’t rise as such because of supply increases and demand slowdowns, movement of cargo, already facing constraints, could be hit further.
Which means India’s merchandise exports could continue to be under pressure.
China, which was on the decline for the last few years, seems to be turning around, thanks to a massive dose of stimulus measures. Whether these will lift the Chinese economy from the lows to which it had fallen in relative terms is early to say but there is a change in mood.
Which also means that investments could flow back to China, particularly portfolio investments, if last week’s surge is anything to go by.
And if China’s domestic market picks up further, many global companies who have reduced their China manufacturing exposure for instance or had focussed their energies elsewhere may have second thoughts. For instance, the luxury goods industry.
All this means that India may lose some of the major tailwinds that could have carried the economy and business confidence further, at least for the rest of the financial year.
It does appear that the next few months will see companies gaining from the domestic market but moving into a state of heightened alert in the international markets.
India’s key economic drivers now seem to lie somewhere between good monsoons and strained geopolitics.
And that brings us the top stories and themes for the day:
Markets on hold as external pressures build up.
Is $50 a barrel oil on the horizon, yes, going by Saudi Arabia’s threats.
Two wheeler sales are up, will the festive season surprise?
Why is India Inc holding back from investing in expansion?
Markets & Oil
The markets are still holding steady, broadly put.
On Tuesday, the BSE Sensex closed at 84,266.29, down 33.49 points while the NSE Nifty50 settled at 25,796.90, down 13.95 points.
Remember, Indian markets are now grappling between a shift in interest from foreign investors who are now re-looking at China and more on that shortly versus of course strong domestic flows which continue.
Good monsoons will obviously drive parts of the economy higher, including consumer products but of course valuations are pretty high already.
The mid and small cap indices are rising now, diverging once again in front of the large caps, with both the Nifty MidCap and Nifty Small Cap rising slightly on Tuesday.
At this point, the BSE Sensex has gained over 16 per cent this year, while the Nifty 50 has gained around 18 per cent.
Sebi Moves On Speculation
The Sebi is finally moving on curtailing speculation in derivatives after its own data revealed that its mostly young trigger happy traders who are losing the most money in this highly volatile and dangerous segment of the market.
On Tuesday, it announced six key changes to the index derivatives trading framework, aimed at curbing excessive speculation amid growing concerns about the mounting losses incurred by individual traders, the Business Standard reported.
They include increasing the contract size from Rs 5 lakh to Rs 15 lakh, raising margin requirements, and mandating the upfront collection of option premiums from buyers.
The new rules will also limit weekly expiries to one benchmark per exchange, bring intraday monitoring of position limits, and remove the calendar spread treatment on expiry days.
Will all this work ? Yes it should to some extent but how much is something we have to see.
Oil Prices Inch Up
A missile attack by Iran, also an oil producer, on Israel has pushed up war premiums on oil markets.
Brent crude jumped more than 5% following the attack on Tuesday and rose again on Wednesday to trade above $75 a barrel, meaning it’s added about $5 in two days, Bloomberg reported.
Israel has vowed to retaliate though analysts and traders told Bloomberg the market hasn’t fully priced in the risk of further attacks on Iranian oil facilities, or the idea that Tehran might try to block the Strait of Hormuz, something it’s threatened many times down the years without actually doing so.
The Strait of Hormuz is a narrow waterway at the mouth of the Persian Gulf through which almost all the region’s oil must flow through to reach global markets.
Its shallow depth makes ships vulnerable to mines, and its close proximity to Iran leaves tankers open to attack from missiles or interception by patrol boats, Bloomberg said, adding Iran-backed Houthi militants have been carrying out similar measures against commercial ships sailing through the Red Sea.
On the other hand, OPEC is likely to ramp up more output from December, while drillers outside the alliance are also ramping up production.
Bloomberg quoted Clearview Energy Partners saying that oil could climb as much as $7 a barrel if the US and its allies placed economic sanctions on Iran, or by $13 should Israel strike Iranian energy infrastructure.
Is $50 A Barrel Oil On The Horizon
Saudi’s oil minister has said that prices could drop to as low as $50 per barrel if so-called cheaters within OPEC+ don’t stick to agreed-upon production limits, according to delegates in the cartel quoted by the WSJ.
The statements were seen as a threat that Saudi is willing to launch a price war to keep its market share if other countries don’t abide by the group’s agreements, they said.
Key members of an alliance made of the Organization of the Petroleum Exporting Countries and its allies, together known as OPEC, are set to discuss whether to ease production curbs in December at a scheduled online gathering Wednesday.
Though geopolitical tensions have been around for months without any real impact on oil prices, the declines have apparently been frustrating for Saudi officials.
Early Signs Of A Stronger Festival Season
Everyone is focussed on the festive season and whether it can lift spirits for manufacturers, including in the automotive sector.
Two two-wheeler (2W) manufacturers are reporting double-digit increases in domestic sales in September as they prepared for the festive season.
Bajaj Auto, Hero MotoCorp, Honda Motorcycle & Scooter India (HMSI), and TVS Motor Company, all recorded an increase in sales ranging between 9 per cent and 28 per cent, due to strong domestic demand and upbeat market sentiment, the Business Standard reported.
The first half overall of this financial year - we are halfway through - has seen a 16 per cent rise in two-wheeler sales compared to the same period in 2023.
Most players saw high single-digit to double-digit growth, riding on positive sentiments in rural markets due to good monsoons.
How will four wheelers do ? Stay tuned.
Why Is India Inc Holding Back?
Data just out from the Centre for Monitoring Indian Economy or CMIE says India’s private sector has announced the setting up of factories and other new projects worth Rs 4.1 trillion or Rs 410,000 crore in the three months ended September, a 42 per cent rise from the year-ago period.
If you were to add this to Government announcements of roads, railways and similar projects worth around Rs 1.4 trillion or 140,000 crore rupees, the total value of project announcements for the quarter goes upto Rs 549,000 crore, says CMIE, quoted by Business Standard.
On the other hand, project completions, however, were slightly lower than in the previous quarter. The private sector and the government together completed Rs 0.8 trillion worth of projects in the September quarter, compared to Rs 1.9 trillion in the same period last year.
Sectoral data shows manufacturing as the biggest contributor, with new project announcements worth Rs 3.39 trillion in the September quarter, double of last year.
There has been an increase in the value of services, excluding financial services, as well as construction and real estate projects taken up in the latest quarter. However, electricity projects have seen a decline.
There are several sources and reasons for the bump up, including equity capital raised in recent months and also Government schemes like the PLI.
At the aggregate level, capacity utilisation (CU) in the manufacturing sector increased to 76.8 percent in Q4FY24 from 74.7 percent in the previous quarter. Seasonally Adjusted CU, however, remained stable at 74.6 per cent in Q4FY24,” said the Reserve Bank of India quarterly order books, inventories and capacity utilisation survey for March 2024 was released last month.
Meanwhile, a study by consulting firm PWC of balance sheets of 2,341 listed manufacturing entities in India for the period FY17-FY23 showed that the revenue generated by non-financial companies in the private sector during FY20-22 was largely used to deleverage and clean up balance sheets.
Which of course is a good thing.
The problem of course is that companies are not spending now as they should.
Private sector investment, especially in machinery, equipment, and intellectual property, has lagged in recent years, this recovery is incomplete, says PWC, pointing to the latest Economic Survey which highlights how private sector gross fixed capital formation (GFCF) in machinery, equipment, and intellectual property products grew cumulatively by only 35 per cent during FY20-23.
Meanwhile, its GFCF in “dwellings, other buildings, and structures” increased by 105 percent during the same period.
I spoke to Raghav Manohar Narsalay, a partner at PWC and Lead for Research and Insights Hub at the consulting firm and began by asking him why India Inc was holding back ?
INTERVIEW TRANSCRIPT
Raghav Manohar Narsalay: If we were to really look at India's, you know, balance sheets for the last five years, the focus has been on financial improvements, on achieving financial improvements. What we did was we analyzed balance sheets of 2,341, you know, listed manufacturing entities in India for a period of about, say, FY19 to FY23. And our analysis showed that the revenues generated by these non-financial private sectors, companies during FY20 to 22, were largely used to deleverage and clean balance sheets, you know, during those years, as well as during FY23.
What's really interesting, right, so this was certainly a bit, in the sense that in FY22, there was a massive revenue, although about 26% for this cohort over FY20. Somebody would have expected this to be financed by debt, but it wasn't. In fact, the debt numbers in FY22 were lowered by about 2.46 trillion in comparison to, I would say, about FY20. And this is a design facing, you know, kind of, so if I were to look at the horizon of FY19 to FY23, essentially, you know, kind of what's happening is that despite rising costs, even in FY23, it is very interesting to see, you know, companies really leaning in their bed deals. So, the balance sheet strategies were essentially focused on achieving more financial prudence. And I think it was absolutely great of the beginning to, you know, have done that.
Govindraj Ethiraj: Right. And is there any industry bias here? Are there some industries or sectors which are tilting the scales, so to speak?
Raghav Manohar Narsalay: That's a very interesting question. That's absolutely interesting. And, you know, so we did this debt-to-ebitda analysis, right, the debt-to-ebitda ratio analysis for these companies.
And while it kind of showed that the leverage had improved across all sectors, major sectors, notable improvements are, you know, largely in fertilizers, steam, pesticides, etc. Just let me give you one number that will kind of whet your appetite, which is the debt-to-ebitda ratio for, say, a sector like fertilizer came down from 6.33 in FY19 to as low as 1.72 at the end of FY23. And to your question as to, you know, who defied this trend.
So, auto-ancillary was the only industry in our analysis where the debt-to-ebitda ratio has gone a little bit upwards. It is still in a very comfortable zone. So, for auto-ancillary, it went from, say, 1.84 in FY19 to about 2.17 in FY23. But that's still very manageable as compared to what you would see otherwise. So, those were some of the sector-based insights in terms of management.
Govindraj Ethiraj: And would that mean that by inference that auto-ancillary has been raising more debt to invest in expansion and rather, which is CapEx, and therefore, by further extension, growth, as opposed to some of these other industries which are not?
Raghav Manohar Narsalay: I don't think that would be a correct way to interpret it. Because if you look at the ratio, it hasn't gone in a proportion where they would, you know, kind of really go in for expansion in massive ways. But I think they, my, you know, kind of understanding of this industry and certain discussions, surely tell me that a lot of this in the case of auto-ancillary would have largely, you know, to finance growth in the sense that if you are looking at this particular time period, this was also when the EVs were, you know, gearing up in a very big way to be launched.
So, you know, changes within those auto-ancillary industries to finance, you know, new products, to finance new IT would have possibly resulted in this, you know, ratio going upwards.
Govindraj Ethiraj: Right. And I'm assuming that's a somewhat positive trend. So, on the other hand, of course, your study suggests that the broader takeaway is that Indian industry is not investing sufficiently.
And then you also warn of the dangers of that.
Raghav Manohar Narsalay: So, Indian industry, you know, kind of has to really now use its balance sheet. So, as I said, we clearly showed, you know, kind of that, and this was shown using the analysis of the national account statistics data on capital formation, which kind of shows that, you know, the non-financial capital formations to nation's GDP as, you know, at constant prices, of course, was to the tune of 0.05% during FY23 as compared to 12.11 in FY22. In fact, the share of private non-financial corporations, you know, the gross capital formation in FY23 was lower, in fact, during the period of FY22-23.
So, these numbers kind of indicated that there is a lot to be done. And I think the reticence, right, which is coming in within companies to not really go around and invest largely comes from, you know, the consumer sentiment, especially in the rural markets, which is now, of course, you know, kind of going to look positive with good rains or, you know, a fair bit of good rain monsoon and some employment schemes, you know, kicking off there. In FY23, et cetera, I mean, there were issues of consumers not really going all out and buying in the market.
The growth was slowing down. There were also, you know, very moderate, I would say, increases that were happening in capacity utilization. Put these two things together, if no one is buying or if there is less buying, and on the other hand, if what I'm, you know, kind of manufacturing is the same in my own, you know, yards, then naturally, I will be reticent to invest capital to expand capacities.
So, I think that is what was really hitting companies. Let's hope that, you know, that this actually goes to a better cycle as we move ahead in this fiscal.
Govindraj Ethiraj: Sadanand Finally, you say that a sustained delay in infusing capital could stoke disenchantment. I'm assuming, do you mean that because there is no fresh capacity creation, let's say in some of the big industries, include, you mentioned steel, for example, earlier, though steel is adding capacity, but there are so many industries. Is that because if they don't increase capacity, then the prospect of job creation is not as good and the overall economic growth may not be as strong as one hoped?
Raghav Manohar Narsalay: Yes, absolutely. I think, given that the state has really set your green balance sheets, I think it's very important for the private sector now to invest in growth. Well, the biggest challenge is if they don't do that, right, is that they are going to, you know, kind of eat into their own competitiveness.
So, if I'm not going to finance, you know, or if I'm not going to invest in assets that create new IP, that create new products, new innovations, then my competitiveness is at stake. And more importantly, if you really look at this from a perspective of inflation, which is, you know, kind of softening to a large extent, you know, if the private sector does not really start investing and moving the wheels of the economy, then the government continues to not, or needs to continue to do that. And if the government needs to continue to do that, then it continues to borrow.
And as we all know in economics, you basically, when we start borrowing, even with this fight of, you know, softening inflation, the degrees of freedom for the central bank to reduce the interest rates reduce. So, therefore, it's very, very important, you know, for private sector to really lift its expenses or really start investing, stepping up its standbacks. So, I think that is very, very critical.
And this state chart is a real thing. Imagine that, you know, if you're reducing your capex expenditure, then the remunerative jobs that you would be creating with that increased capex expenditure are not going to fructify or materialize on ground. And when this demographic dividend that we all talk about, with so many youth coming into the job market, if those capex expenses or those capex doesn't kick off, then unnaturally, there's just a judgment which is going to split because people will look out for jobs and there won't be many.
So, I do, that is something that we really need to be cognizant about. You know, the private sector needs to step up its stance.
Govindraj Ethiraj: Right, Raghav. Thank you so much for joining me.
Raghav Manohar Narsalay: Thank you once again, Govind, for inviting me. Thank you.
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