Markets Piggyback On Wall Street Rise
Banks in the US are all gearing to spend more this year on IT, including newer disciplines like AI
On Episode 368 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajit Velonie, senior director at CRISIL Ratings.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take
(05:00) Markets piggyback on Wall Street rise. IT stocks could keep momentum high
(06:33) Oil prices slide on reports of peace talks in the middle east
(08:07) Are more Indians switching to loans against gold because regular loans are becoming tougher to get
(17:50) The Chip War Continues
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 Wednesday, the 21st of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
There is the disease and there is the symptom.
The disease is that auto sales are most likely slowing down and the symptom is rising inventories with car dealers.
The question is, is the disease spreading beyond car sales ?
There is another symptom of the problem of slow sales, which is that more discounts and schemes are being offered particularly on older models while new models and hybrids are doing well, including with waiting periods.
This is not the first time this is happening, which is that older models are selling less and customers are itching for newer ones.
But what is happening for the first time is that car inventories with dealerships have hit a record high at over 2 months and stock worth over Rs 73,000 crore.
It has also brought out disagreements between dealers and manufacturers wide into the open, not a common occurrence which also reflects that things are definitely worse than what they appear.
Auto sales are obviously a leading indicator of how consumption is playing out, as it is on the health of the economy as a whole.
The Federation of Automobile Dealers Associations (FADA) whose president Manish Raj Singhania I spoke to earlier this week says their members are carrying stock equivalent to over two months of sales, that is, 730,000 units.
An ET article quotes car companies saying it is half that or around 400,000-410,000 units.
This is actually a very big gap and obviously means each faction is accusing the other of some pretty big lies.
FADA says it has written to the Society of Indian Automobile Manufacturers (SIAM) twice in less than two months, protesting at stock being dumped on dealers.
And to be fair to FADA, they have been pointing out high inventories on The Core Report for several months now.
So it's not a surprise by any stretch.
The Economic Times article also says car sales in India, also the world’s third largest market, fell for the first time in more than two years in July, as sluggish demand led to an inventory glut at dealerships, forcing carmakers to curtail dispatches (counted as sales) to their channels.
Sales declined 2.5% year-on-year to 341,000 units during the month.
That decline number might appear small but it's a trend reversal in a seemingly strong market. Which is obviously worrying.
The ET also quotes rating agency Crisil saying it has revised its growth forecast for the domestic passenger vehicle market to lower single digits, from 4-6% growth predicted earlier.
Earlier, FADA also put out an appeal to banks saying they should be careful about lending to auto dealerships, in a way asking that banks check its own members from overleveraging.
A considerable part of the stock held by dealers is financed by banks.
Car makers, including the big ones, are acknowledging inventories are high but claim it is lower than what the dealers are saying. Most of them seem to be saying their inventories with dealers are a little over a month while dealers are saying it is over 2 months.
Car makers also are questioning the total outstanding finance, saying it is closer to Rs Rs 45,000 crore and not Rs 73,000 crore as the dealerships say.
Perhaps the answer lies in between but FADA is saying its counting is accurate and not relenting.
There is a larger, again not new problem.
Which is that it is in the interest of auto companies to show high sales because many of them, like Maruti, Tata Motors and Mahindra and Mahindra are listed companies.
A sign of weakness here will hit stock prices.
Actually that is already happening.
A Bloomberg report says a sizzling rally in India’s auto shares is reversing as a build up of unsold vehicles and growing discounts by carmakers pressure profit margins.
India’s NSE Nifty Auto Index is down 4.1% in August, more than double the decline in the Nifty 50 Index.
Bellwether Maruti Suzuki India Ltd. has slid 6% so far in the month, on track for its worst monthly performance since December 2022.
The larger question is this.
Are the post pandemic sales euphoria now disappearing or going away.
This is a larger question because sectors like travel and hospitality are already seeing the first signs of the post pandemic euphoria fading, particularly in the western markets.
Could this be happening in India too ?
India is at the cusp of the festival season which will last for over a month, into Diwali, a period that usually sees higher sales of all products, particularly discretionary items, including in luxury.
Maybe car sales will rebound to higher levels, thanks to newer models but the question is definitely hovering over us. Whether cars or other products and services, will the growth momentum continue ?
And onto the top themes and stories for the day:
Markets PiggyBack on Wall Street rise. IT stocks could keep momentum high
Oil prices slide on reports of peace talks in the middle east.
Are more Indians switching to loans against gold because regular loans are becoming tougher to get.
India’s GIFT City or international finance centre takes a step back on allowing family offices to set up shop.
Stocks
Yesterday, we spoke of a revival in the fortunes of information technology stocks, riding on increased spends by their key customers in the western markets, particularly the banking and finance space in countries like the United States.
Banks in the US are all gearing to spend more this year on IT, including newer disciplines like AI.
If spending goes up, then that is good news for Indian IT services companies.
Moreover, if banks and insurance companies start spending, others could follow, kicking off a longer virtuous cycle of IT spend.
The benchmark indices ended on a two week high and the highest closing since August 2, thanks to the perception that fortunes for IT stocks are changing for the better. And separately, finance stocks as well.
The BSE Sensex index ended at 80,803 levels, up 378 points while the NSE Nifty50 closed at 24,698.85, up 126 points.
The broader markets which include the BSE MidCap and Small Cap indices also did well, closing between 1 and 0.5% higher.
The rupee has regained some energy.
The rupee has strengthened against the US Dollar after several weeks of staying under pressure, to close at Rs 83.79 to a dollar.
Global stocks have resumed their big march of course, gaining steam after the recovery following the lows hit earlier this month.
All on the expectation of course that the Federal Reserve will start cutting interest rates.
CNBC said that all major groups in the S&P 500 rose on Monday, with the gauge up for an eighth straight day — the longest winning streak since November.
The general feeling and bet is that the gains will extend beyond the tech space.
And some good news on crude following reports that cease fire talks between Hamas and Israel are gaining steam.
Brent crude is now under $78 a barrel, at $77.74.
If there is a cease fire, prices may slip a little more but the larger question is really demand and supply forces that are playing out, including with manufacturers who are constantly trying to manage production and output to keep prices high.
Gold Prices
For the first time ever, a bar of gold is worth a cool one million dollars, a milestone that was reached last week when Gold’s spot price crossed $2,500 per troy ounce, an all time high, reports Bloomberg.
The calculation works like this.
With gold bars typically weighing about 400 ounces, that would make each one worth more than $1 million.
There are some nuances to the figure, says Bloomberg because the amount of pure gold could be less in the bar.
Be that as it may, in the first half of this year, central bank net purchases of gold stood at 483.3 tons, equivalent to almost 40,000 bars, according to a Bloomberg calculation using figures from consultancy Metals Focus.
Just to remind you.
Gold is rising in this manner because of expectations that the Federal Reserve will cut interest rates.
And it has risen 21% from year to date, making it among the best performing major commodities in 2024, says Bloomberg.
Of course, it is not without reason we talk about it on The Core Report.
And the outlook continues to be bright, at least in the words of leading commodities strategists who are talking about $2,700 per ounce.
More on gold coming up shortly.
Gold Loans Are Dropping
Many Indians might be switching to taking loans against gold because they are unable to get unsecured loans thanks to the Reserve Bank of India and banks tightening the screws here, including by raising risk weightages.
This seems very likely because gold loans disbursals have shot up despite a tighter lending regime.
Gold loans are often taken by small businesses and more likely sole proprietorships to bridge short term cash requirements.
Other reasons include, of course , education and festive occasions.
Most loans are returned within the year.
Another stipulation in May saying gold loan NBFCs could not disburse cash in excess of Rs 20,000 - which by the way- was the mode most borrowers preferred, also does not seem to have had much impact.
Some 95% of disbursals were in cash, says a note from Crisil Ratings.
I reached out to Ajit Velonie, Senior Director, Crisil Ratings and began by asking him what was the impact of the new regime on gold loans.
INTERVIEW TRANSCRIPT
Ajit Velonie: May this year was really an important moment for the industry. Largely the gold loan industry works where borrowers able to come to the branch and able to get the gold at a very short notice, quick turnaround time. And the industry has worked where you have disbursed the money in terms of cash, because most of these borrowers need the money for an immediate requirement. The way the gold loans are structured too. You typically find there is a full flexibility in terms of the repayment. So mostly it's a bullet repayment. Tenure of the gold loan can be anywhere from, say, three months, so your players follow, going all the way up to 12 months. But typically you'll find that the repayments happen within, say, five to six months, and the cash disbursement is a very important part, because the borrower wants the money quickly. Now, in May of this year. What happened is that the regulator sent an advisory. This is based on an interpretation of the Income Tax Act, and the provisions of the act effectively do not allow an individual to receive money beyond 20,000 rupees in cash. So that had an impact for the players, and we had, in fact, put out an advisory saying this could potentially impact the business of all gold loan NBFCs. And what we did as part of this analysis is we quickly looked at what was the actual business done in the month of June, that's a month after the advisory. And what we noted is that the industry actually adapted to the regulation very well, very quickly. And the disbursements done in the June were about 12% higher than what was done on an average, say, for Jan, Feb, and March, for for this year. So overall, to say that the industry had adapted to regulatory development very quickly, and it was business as usual,
Govindraj Ethiraj: Right. And what is that figure per month? And I understand that you're now rating NBFCs, which represent more than 90% of the industry, so therefore we would represent most of the industry.
Ajit Velonie: So on an average for the month of Jan, Feb, in March, it was about 29,000 crores. Was the average disbursements. And the month of June, that is a month after it was nearly about 32,500 so that represents about 12% of course, one part caveat to say is one of the leading NBFCs is currently undergoing RB embargo. That entity could not disburse any amount, you know, in the month of June. So if you actually exclude that entity on a like to like basis, the growth is even higher. It's about 23 odd percent as a group. Might add that, you know, gold prices have also played an important role here, because ultimately, this business works on a loan to value, and we have seen gold price, you know, hit new highs in the month of June. And what we saw is commensurate. We did see some increase in the ticket sizes too, and that allowed the industry to show this through,
Govindraj Ethiraj: Right. And you're saying that most loans are paid back within five to six months,
Ajit Velonie: yeah. So if you analyze it from a cohort of disbursements, what you typically see is that if an entity disburses 100 rupees, say, in the month of January, within six months, by the end of January, about 65% of the money is actually fully paid off. The industry also works in the system that the amount to be paid, the interest is typically accrued, and the principal is meant to be a bullet payment. So let's say you have a 12 month loan, you will only need to pay it on the 12th month, but if you do pay earlier, the industry also looks to incentivize the borrower with some element of rebate on the interest. And the borrowers here typically need money for a short notice. So the way the industry works is, you typically have a borrower coming in, he may use the money for about, say, two months, three months, and probably comes back after two weeks for, you know, taking another round of money, but it's just more of a very fast, quick turnaround money that the industry is able to provide.
Govindraj Ethiraj: And would you have a number on how this stacks up against all consumer loans, secured and unsecured. This, I'm assuming, is secured.
Ajit Velonie: So when you look at the industry, the two biggest segments for the industry are housing loans and vehicle finance. So they will cost you more than 50% of the industries. If I take, say, the non banking, financial sector, NBFC, our estimate is the sector em is about 28 odd lakh crore. In that background, the gold loan industry is about 1.65 lakh per row,
Govindraj Ethiraj: okay, so it's a very small percentage of the overall
Ajit Velonie: That's right, yeah,
Govindraj Ethiraj: Right, okay. And we've also seen gold prices come down after the government reduced customs duties in July from 15 to 6% so is that having any impact on the value of gold?
Ajit Velonie: Yeah, I think what we have seen with gold loan, NBFCs, at least, is they're typically very much focused on risk management practices, and there are two, three key areas which they focus on. One, as I was mentioning to you, the product is bullet repayment product. Now the interest is also not really due, is typically accrued. But what the industry does is they encourage the borrowers to keep paying interest on a periodic basis, so that the loan to value is typically kept under control. The second element is that they do track the gold prices very, very closely. And what you will find is that the LTV, or the loan to value, is actually fixed, literally, on a daily basis. So when you do see a sharp increase in the prices, you may find that the NBFC prices the LTV differently, and when there's a sharp fall, they may build an additional cushion. So the ultimate reflection of this is in the portfolio loan to value. And what we have seen is that the portfolio loan to value has remained between 60-65% now against this, the regulatory upper limit is 75%. So there is a enough cushion, even assuming that there is a sharp fall in price to be able to manage in terms of risk on the portfolio. The second, the other element, I would say, is auctions. So the way the industry also works is they monitor the loan to value very, very closely, and in case there is a breach of this margin, they typically send a notice for the auction. Historically, we have seen that when it comes to the principal value, the losses have range annualized between point two to point 5% only. So the industry has seen very negligible losses, largely because of very high emphasis and focus on these risk management practices.
Govindraj Ethiraj: If I can come back to the question that we started with, what explains the jump that you've seen in the last month, because you said that one player is not active now. And despite that, there's there's a more than 12% increase. But if you take away that PR is actually a much larger increase.
Ajit Velonie: So there are two elements we have seen historically for the gold loan business. There is clearly a correlation of growth with gold price, because if that value of the gold has gone up, the borrower is able to come in and he realizes he's able to get more from a loan to value perspective, we also think that this period of April to June, there was other developments from the industry point of view, as you would be aware Govindraj, there was an increase in the risk weights on consumer credit. And I think we have seen that play out in the in the sector, overall vote for NBFCs and banks that there is an element of risk campaign built in when it comes to lending on the unsecured loan side. So we do think some element of the increase that we are seeing in the gold loans could also be because of fact that unsecured loans are maybe not as easily available as they were earlier. So combination of gold price improvement as well as some risk offs that you see on the unsecured as - help the industry show good growth. So our estimate for the growth in the Aum, what we gave you earlier was disbursement is about 10% that is non annualized. So an absolute growth of about 10% is what we have seen for the industry between March and June. So that's compares to, let's say last year, the whole year, the growth was about 20% and if you go to the previous year, it was about, say, 10 to 11%
Govindraj Ethiraj: So you're saying that the increase in risk weights is actually having an impact, and which is why people, one is people need the money. So they're therefore saying, Okay, now I'm not getting the loan, like a consumer loan, just like that. So now let me go and put my goal down and then take a loan instead.
Ajit Velonie: At overall, systemic level, yes, we do believe that from an access to funding if you're not able to access the unsecured loans. A gold loans is a very, very fast, quick mean of being able to get the money at a shorter notice. And that is clearly will have been.
Govindraj Ethiraj: Gold loans are a more regional phenomenon. As I understand, it's more in the south of India. And secondly, do you have a sense on what people mostly take these loans for? I got the fact that it's mostly short duration, and people are returning. But do you have any idea why they take it, or what could be the driving factors
Ajit Velonie: The industry is largely built itself in the South. In South people are well aware about but we have seen for the larger players that they have managed to expand very well, even in the north region. So I would say both regions are showing good growth in terms of the end use, mostly the customers here coming in for supporting from the business. So you do have a short term working capital requirement for purchase. We've also seen end use being typically for, say, a medical treatment or for education related purpose. I think these would be the top three, four reasons that we see from an end use point.
Govindraj Ethiraj: But you're saying it's for business, which means that people are putting personal, let's say, savings or assets down to fund their business. And I presume those businesses are also small.
Ajit Velonie: Yeah, these are typically smaller, you will say Kirana shops or vendors, etc, who will need the money to be done, to need the money at a very, very from a shorter tenure point,
Govindraj Ethiraj: Right. Ajit, thank you so much for joining me.
Ajit Velonie: Thanks. Thanks so much having me here.
The Chip War Continues
We have been pointing out in The Core Report that there is a global chip war on, fuelled by subsidies from the richest countries in the world, making it tougher for less rich countries like India to match subsidies.
The latest country to jump into chip manufacturing is Germany and Taiwan’s Taiwan Semiconductor Manufacturing Co. has reportedly broken ground in eastern Germany on its first European plant.
Chips are now viewed as strategic assets which countries, including India, want to control the manufacturing of.
“We are dependent on semiconductors for our sustainable future technologies, but we must not be dependent on other regions of the world for the supply of semiconductors,” said German Chancellor Olaf Scholz, who attended a ceremony on Tuesday to mark the start of construction of the €10 billion ($11 billion) fab in the city of Dresden.
Significantly, about half the funding will be covered by state subsidies.
Germany is leading the European Union push to produce one-fifth of the world’s semiconductors by 2030.
Germany says it will spend €20 billion to bolster domestic chip production. That includes the TSMC plant and €10 billion in aid for a planned Intel Corp. plant in Magdeburg.
The new site will help Europe reduce its reliance on Asia for importing vital technology and comes after German carmakers including Volkswagen AG and Porsche AG expressed interest in boosting domestic chip production.
Production is slated to begin by the end of 2027.
India has three chip making and assembling plants in various stages of construction and readiness of which at least one should start producing in 2026.
India will be making the older, higher nanometer chips used for basic electronics including automobiles and electronic goods, as opposed to the more latest ones that go into the latest iPhones for example.
