Markets On Longest Winning Streak in 17 years
The Nifty 50 has risen for 11 consecutive sessions, adding about 4% to post its longest winning streak since October 2007
On Episode 375 of The Core Report, financial journalist Govindraj Ethiraj talks to Deven Choksey, veteran market and Reliance watcher and founder of DRChoksey Finserv.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take: The Importance of Friction in Payments
(05:38) Markets On Longest Winning Streak in 17 years
(06:36) Defence stocks, once a darling, are still falling
(09:12) Reliance says it will double earnings in retail and telecom business in 3 years and considers bonus issue
(19:02) Corporate growth is moderating, says Crisil ratings, slowest in 15 quarters
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 Friday, the 30th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take The importance of friction in payments
For the last few years, the financial system, led by financial technology companies or fintechs have strived to reduce the friction of the system.
Which means, combined with unified payment interfaces (UPIs) and the like, payments, whether peer to peer or with banks has speeded up to levels not seen before.
Similarly, we are now mesmerised by the simplicity with which, thanks to a swipe on the smartphone, we can take instant loans, buy now, pay later and invest in stocks and shares of all kinds.
This is one reason why the financial system is now overheated, from personal loans to investments in stocks or worse, derivatives.
The Core Report has argued in the past that we need to introduce more friction now, particularly in some segments of the financial system, to slow down transactions.
Christopher J Waller, A governor on the board of the Federal Reserve, America’s equivalent of the Reserve Bank has made a powerful case for reducing friction, I repeat reducing friction.
And he said this at the Global Fintech Festival this week in Mumbai, quite likely to the embarrassment of many present there.
“Not all frictions that slow payments down are bad. Certain frictions are purposely built into the global payment system for compliance and risk-management reasons. Slowing down the speed at which payments are cleared and settled helps banks prevent money laundering and counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments,” he said.
He was speaking in the context of interlinking fast payment systems and responding to the proposition that we should be able to make payment to a cousin in, let's say, in the US, with the same speed and efficiency, I can make a mobile phone linked payment on GPay.
According to him, while the practice today of sending payments through an often complex chain of correspondent banks contributes to slower payments that could benefit from efficiency enhancements, there was no silver bullet that increases speed and efficiency without tradeoffs.
Unless new solutions are found, interlinking fast payment systems might increase the risk-management burden for banks that participate in them.
He then asks if we can necessarily assume that all parties to a cross-border transaction want faster payments?
The fundamental friction in any transaction is that the seller of an object—a can of soup, an hour of labour, or a good manufactured for export—wants to receive their money as fast as possible.
However, the buyer of the object, or the buyer's intermediary, typically has an incentive to wait as long as they can to pay for something they have purchased.
Under this logic, senders need to be properly incentivized to speed up cross-border payments. The one exception may be person-to-person remittances, where workers from other countries want to send money home, and recipients want access, as fast as possible.
But remittances are only a small percentage of the value of cross-border payments, so we'd need to weigh the benefits against the costs of a potential public-sector intervention to shift incentives. So, I am still left with the larger question of whether we should be incentivizing faster cross-border payments.
Mr Waller then goes on to the costs of faster payments and of course who will eventually bear it ?
He provides the example of the low cost international ACH payment network between US, Europe and Canada which he says has not worked.
And a point that many here forget.
The infatuation of finding a technology solution cannot override the social, legal and other constructs that drive financial systems and payments in a country.
Because technology, as Mr Waller also points out, is the easier part.
The legal, compliance, settlement and governance challenges are more substantial, he says.
So let’s come back to India and look at another angle.
Scores of people daily are scammed by fraudsters who send SMSs, whatsapp messages and mails to you and me.
Sometimes it is about investing your money somewhere, sometimes sextortion and often a simple con, like a message that sounds like it came from a colleague who desperately needs money.
Between reported and unreported, it is safe to say that millions of dollars of people’s hard earned money is being lost every month.
Enabling all of this is, among other means, frictionless transfers via UPI to bank accounts, where it turns out that despite all the mind numbing levels of bank KYC that normal people have to go through, there are evidently KYC less mule accounts which are collecting the money and transferring them elsewhere.
Of course, UPI is not the only device, there are many more.
But nothing connects all of them well as the basic proposition of speed, efficiency and of course anonymity.
Which brings us to the compliance and legal part that Mr Waller spoke about.
We need for sure more frictionless transactions, for instance, can we bring it down by 20% in the case of buying homes or for buying a car. And taking loans to do that.
What we do not need is so much ease of transactions that the financial system could collapse on small savers and investors one day.
Top STories Of The Day
Markets On Longest Losing Streak in 17 years
Reliance says it will double earnings in retail and telecom business in 3 years and considers bonus issues.
Defence stocks, once a darling, are still falling
Corporate growth is moderating, says Crisil ratings, slowest in 15 quarters
Markets & More
TO use an old cliche, the markets seem to be on a slow and steady climb up the hill, except that we can’t see the summit.
The Nifty 50 has risen for 11 consecutive sessions, adding about 4% to post its longest winning streak since October 2007.
Indian markets are among the top performers globally this year, helped by hefty domestic inflows amid a robust economic and earnings outlook, Reuters reported.
And of course the BSE Sensex and Nifty50 hit record highs, thanks also to Reliance Industries and more on that shortly.
Both the Sensex and Nifty 50 closed near their record highs on Thursday, with the Nifty 50 closing higher for the 12th straight session.
The BSE Sensex hit a fresh all-time high of 82,285.83, to close at 82,134.61, up 349 points. Similarly, the Nifty 50, which had touched a new all-time high of 25,192.90 intraday, closed 99.6 points higher at 25,151.95.
Defence Stocks
While the markets are at an high, defence stocks have been on a downward journey since the presentation of the Union Budget for 2024-25 (FY25), the Business Standard reports.
The reason I bring them up of course is the fact that they are a good representation of the highly stretched valuations we are seeing in the market in general and in some sectors specifically.
Shares of Garden Reach Shipbuilders, for instance, have lost 26.9 per cent, while Cochin Shipyard is down 20.8 per cent since Budget presentation (July 23), BEML 15.3 per cent, Mishra Dhatu Nigam 13.2 per cent, and DCX Systems 13.4 per cent, Business Standard said.
Many other defence or linked stocks have lost too, maybe a little less.
In this period, the Nifty50 index has gained 2.2 per cent.
The reason attributed is that defence allocation at Rs 6.21 trillion did not really increase from the previous year in the Union Budget and that seems to have turned sentiment around.
Monsoons May Be Prolonged Into Late September
India's monsoon rains are likely to be prolonged into late September this year due to the development of a low-pressure system in the middle of the month, two weather department officials told Reuters.
Above-normal rainfall due to the delayed withdrawal of the monsoon could damage India's summer-sown crops like rice, cotton, soybean, corn, and pulses, which are typically harvested from mid-September.
The crop damage could lead to food inflation, but the rains may also result in higher soil moisture, benefiting the planting of winter-sown crops such as wheat, rapeseed, and chickpea.
"There is an increased probability of a low-pressure system developing in the third week of September, which could delay the withdrawal of the monsoon," said a senior official of the India Meteorological Department, who sought anonymity as the matter is sensitive.
Interestingly, a research report from HSBC says more than rains and reservoirs, temperatures matter more when it comes to food output and inflation.
HSBC’s economists say that the correlation between average temperatures and food inflation has risen sharply over the last decade.
According to them, reservoir levels matter less now because the impact of low rains can be better managed thanks to improving irrigation facilities.
So with all of this, HSBC predicts that food inflation could fall over the next few months by 2 percentage points are
Reliance AGM and AI
It's interesting that while businesses world over are now moderating their stance somewhat on AI investments, Reliance Industries made it a centre point in their interaction with shareholders yesterday at the 47th Annual General Meeting of the company
Chairman Mukesh Ambani said Reliance would double in size in 6 years time and would double sales and operating profit in its telecom and retail businesses over the next three to four years.
Reliance spoke of an all encompassing AI strategy which the oil to chemicals major proposed to inject into all its operations, both consumer facing and otherwise.
Reliance said it was developing a suite of AI tools and platforms called 'Jio Brain' and setting up data centres in Gujarat, which it plans to power with green energy.
"Our goal is to create the world's lowest AI inferencing cost, right here in India. This will make AI applications in India more affordable than anywhere else," Mr Ambani said.
To get a sense on how the markets and analysts were viewing Reliance’s AGM, I reached out to Deven R Choksey, veteran market and Reliance watcher and founder of DRChoksey Finserv and began by asking him what did he take away from the AGM Speech
INTERVIEW TRANSCRIPT
Deven Choksey: Well, I think at the outset, Govind, I find that so much of clarity has been provided by the chairman in the AGM. I think the cornerstone of this entire speech is that implementation of AI at every business level in the company. And so very beautifully they have thought about the entire subject. They are talking about bringing up the efficiency. They are talking about bringing up the accuracy. They are talking about the bringing up of complete sustainability in the business, and at the same time talking about increasing the profit margins in the particular businesses where they are saying that, I think with the use of AI, probably, I think they are going to remain fully charged up with this particular businesses. They are talking about industry four, even in the new segment of business, which is renewables. And I think that's where probably you get a complete sense that the company is heading for a good amount of, I think, growth going forward as well, whatever the past growth that the company has had now onwards, I think you going to be seeing the efficiency land growth due to implementation of AI cost in their own setup, and then offering the entire AI platform to their customers in different different verticals that they talked about, be it agriculture vertical, be it education vertical, be it retail and the commerce vertical and healthcare vertical. The four priorities I think they talked about that is also equally important. So overall, I think the speech conveys that, I think they are basically modernising the business in a one line effect across, second most important aspect, I think, and this is very important from the perspective of looking at the consumer facing business, both the consumer facing business, I think categorically, a statement has been made that in three to four years, times from now, these sides of these businesses, both in terms of revenue as well as in terms of EBIDTA, is going to gain double which means we are talking about growing the business at the rate of 25 to 30% rate of growth under the variety of assumptions, which they have basically spelled out. So again, to me, this is a very DEA sharing plus retail as well as geo platform put together today are working on annualized EBITDA of around 90,000 to one lakh crore. And we are talking about growing the size to 1,80,000 to two lakh crores in a span of next three and four years time. So that means, I think this is a going to be a solid group that is coming. And one last point, I think, on the renewable side of the activity wherein TV, comic or the narrative has been made, then the business will be positive from the day one. Cash flow positive also from the day one. Now this is a very big statement, because you are putting in 75,000 crores in a complex, integrated facility, and you are talking about generating cash flows and profitable business from the day one. And again, I think the narrative that I think current O to C business will be surprised five to seven surplus in the five to seven year period from now on. So these are some of the key takeaways from the AGM, as I see it, right.
Govindraj Ethiraj: Okay, so let me ask you a quick first question. You talked about the modernization and the efficiency part is that somehow also suggesting that growth is slowing down, particularly for traditional businesses.
Deven Choksey: No, I don't think that the growth is slowing down. Growth will continue at a pace at which I think this businesses have matured. It will continue to further grow. In fact, in each and every business areas, I think there will be a demand for plant, I think which will continue to grow. I think that is given Absolutely. If economy at a nominal rate of growth of non 11 and half 12% is growing, then all these businesses are expected to grow at around 16 to 17% minimum. So that part is understood, but to remain profitable,
Govindraj Ethiraj: You mean refining, petrochemicals and so on,
Deven Choksey: because to remain profitable is extremely important. They have combined defining the petrochemical business or integrated business now. So I think to remain profitable is very important. That's where I like the underlying narrative. Then they want to remain efficiency driven in this business,
Govindraj Ethiraj: okay. And if you were to look ahead, you talked about the fact that retail and consumer, that's I mean when you say retail, retail and consumer is the same thing, and digital, or digital and telecom could each be about 90,000-200,000 crores of earnings before depreciation, interest and tax. So, and you're also saying that this could double in the next Did you say five years or three years,
Deven Choksey: three years, three to four years. Because geo platform currently 60,000 crore EBIDTA on a yearly basis, surrounded on yearly basis. And the retail is currently somewhere, that is the 34,000 crores, I think, on a yearly basis. That means, I think both these businesses put together around 90,000-1 lakh crore, kind of a beta making businesses which are getting double in three to four years time. So that is showing the growth rate of more than 25% business.
Govindraj Ethiraj: Are you expecting IPOs in this? Because that was one thing that was expected in the AGM, or from the AGM.
Deven Choksey: So they believe in giving surprise Govind, I think they said AGM. I think was not expected to announce one issue, one bonus they announced. I think one is to one bonus. And I believe that I think retail and the Jio platform would be hived off at one part of time, for sure, I think, but I think they would probably, I think, use the time. I guess. I think whenever they work, good
Govindraj Ethiraj: and your takeaway on the bonus, which is coming after seven years or.
Deven Choksey: Brilliant. because I think you already got the shareholder funds of around seven lakh crores in the booths, and you have about 6700 crore worth of equity. So frankly speaking, you are even talking about 8-9% of your fund, I think, to get capitalised. And at the same time, I think one lakh, 60,000 per worth of EBITDA is being produced even last year, almost so current year. I think even if you assume that 15 to 20% kind of a book coming in citing approach to 171-180 plus. I guess I think that is the kind of EBITDA that companies talking about tourism. So 6778, crore capitalization is easily survival. I guess I think this is the, this is also include given the opportunity or thinking underlying statement, as I read it, in between the lines that they are getting ready for, separating out these two units, the Jio platform and the retail because when you capitalise your reserve at such point of time you are ready for, I think monetising your existing business is there. That's where I think you want to give the money back to your existing shareholders. That's what they are doing currently. That is what I take in between the lines.
Govindraj Ethiraj: any area of concern or disappointment. Deven?
Deven Choksey:I don't think that. I think with such a size of company, I think will remain concerned if they stop producing growth. Yes, I would. But I think here the assurances that I think growth is, I think more than that, trying three. I think the renewable business, they're talking about five to seven years time, overtaking 62,000, per hour worth of O to C business. That means you are getting a sign that every year, around 50,000 to 20,000 per hour of additional profit is going to get added into the books in coming years. I think, I think there is no disappointment on the party happy if such a large size company is talking about modernizing the entire manufacturing with the industry four standards, and giving the opportunity, I think, to the business is to use AI in a significant manner.
Govindraj Ethiraj: So this is the, or rather was the 47th AGM, which means only three more to go for the 50 years old in Jubilee. I mean, when it's 50, I'm sure there'll be a lot of discussion. But as it heads towards 50, and you look back any thoughts.
Deven Choksey: Brilliant way of, I think executions of business, I think that is one single mind, single thought, I think coming in my mind that each and every vertical which they have grown, be it oil and gas exploration, vertical with refining, vertical with petrochemical, vertical even the consumer facing. Vertical. The way in which they have been exhibiting the business is mind boggling. Even in the renewables, I think they are talking about integrated facility, which is even for lithium, refinery onwards to battery packs. That is where I think a complete benefit is being talked about. Even same thing happening for green hydrogen that in the West land, I think you have creating the solar plants and using the solar energy to use, I think, with the existing businesses, and also, I think from the conversion of watery to the hydrogen they are basically going ahead with a good amount of clarity on this particular subject. So frankly speaking, their ability to scale up the business to a larger size, it is admiring and I guess I think that spirit is not lost. So I would think that I think we are still heading for, I think, much better times going forward as even though these companies become so huge, I think they are probably promising that I think will grow in the range of 15 to 20% year on year basis,
Govindraj Ethiraj: Right Deven. That's a good note to end on. Thank you so much for joining me.
Deven Choksey: Thank you Govind. Thank you all the best
Corporate Growth Is Moderating
Corporate revenue growth likely moderated to 5-7% in April-June, the slowest in 15 quarters, a report from CRISIL Market Intelligence and Analytics has said.
Corporate India is estimated to have logged yet another quarter of moderation in revenue growth at 5-7% in the three months through June, the slowest in the past 15 quarters and the third straight quarter of moderation, Crisil’s analysis of ~350 companies indicates.
That compares with 6.7% growth for these companies in the January-March 2024 quarter.
The decline in growth was largely due to a drop in agriculture-linked sectors such as fertilisers, seasonal factors and the impact of the general elections on the construction-linked sector, Crisil said.
In sectors like cement, Crisil said revenue growth remained moderate on a high base of the year-ago quarter, and large and midsized players reeled under pricing pressure.
In steel products, too, while domestic demand was healthy, prices moved south, capping further improvement in revenue.
Says Aniket Dani, Director - Research, CRISIL Market Intelligence and Analytics, “Consumer discretionary and staple products and services, which together make up ~35% of our sample’s revenue, clocked growth in the quarter.
Exports were strong, thanks to drug shortages and easing pricing pressure in the US, which propped up the pharma industry and a modest growth in the IT industry.
Investment-linked sectors such as power, capital goods, ports and shipping also clocked strong growth. The power sector, which accounts for nearly 70% of revenue of this vertical, is estimated to have grown 12%, driven by prolonged and intense heat waves across the nation during the quarter.
And finally, when it comes to margins, there was an estimated 50-70 basis points (bps) improvement in the quarter, Crisil said.
Crisil feels that corporate performance ought to improve in the next quarter thanks to improved demand during the festive season.
