Markets Recover On Political And China Cues
The stock markets recovered after the BJP’s win in local state elections in Haryana was received positively
On Episode 405 of The Core Report, financial journalist Govindraj Ethiraj talks to Siddhartha Rastogi, managing director of Ambit Investment Advisors as well as Ajay Rotti, founder and CEO of Tax Compaas.
SHOW NOTES
(00:00) The Take
(04:41) Markets recover on political and China cues, could stabilise now
(06:58) Oil slips after demand woes weigh again
(09:50) Decoding the Nifty50 as an investment strategy for the medium to long term
(19:42) India could see a new direct tax code coming? What should it not contain?
(26:43) Touch screen era may be ending
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 9th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
Last week, Mahindra & Mahindra announced that its just launched Thar ROXX, clocked 176,000 bookings within the first 60 minutes of the window opening.
The ROXX SUV starts around Rs 12 lakh and goes upto Rs 22 lakh
Mahindra had a similar run with its XUV 700 model which had a peak waiting period running into 18 months post Covid, helped also by a slowdown in production among most automakers at the time.
Right now, many hybrid car models, like Toyota’s Hycross hybrid have waiting periods running upto a year.
On the other hand India’s car dealerships are overflowing.
Latest figures from the Federation of Automotive Dealerships (FADA) say that there are close to 800,000 unsold cars worth Rs 80,000 crore lying with them. Inventory levels are now at a record 80-85 days.
So as much as Mahindra’s new Thar version is being sought after, other cars, including entry level ones are not doing well.
In October 2023, India’s largest car maker Maruti Suzuki’s chairman R C Bhargava said hoped that demand for smaller cars would make a comeback in the next 2-3 years stressing that this was important for the growth of India’s overall passenger vehicle industry.
Makes total sense.
Except that Mr Bhargava said roughly the same thing again a month ago or a whole year later at the company’s 43rd annual general meeting.
He reiterated Maruti remained committed to its small car lineup projecting a revival in the segment by 2025-26 or next financial year.
He also said he firmly believed that low cost and small cars were necessary for India’s economic and social conditions and that a temporary setback in demand would not change Maruti’s strategy.
And to put the numbers in context. Maruti’s small car sales have been falling, by more than 12% in the April to July 2024 period according to reports. Its utility vehicle segment however grew close to 16% in the same period.
You can’t fault Mr Bhargava’s logic which is that upwardly mobile consumers aspire for cars and as they do, often graduating from two wheelers, entry level cars make the most sense.
That is the theory but it's not yet working out in practice.
Car dealers have told me in recent months that potential buyers for entry level cars are not able to put together the loans to do so because they could not bring in the minimum amount.
On the other hand, car prices have jumped up in recent years.
Former Federation of Automobile Dealerships President Manish Raj Singhania told me last month that salaries incomes have not risen by the 70% or so car prices have.
“Average prices for passenger vehicles were around Rs 6.5 lakh four or five years ago, now the average price is almost Rs 11 lakh,” he told me.
The more premium cars including SUVs have of course done well or better in a phenomenon that is now well documented as the premiumisation of the consumer economy.
There are evidently two or three factors intersecting with each other.
First, consumers will always stretch themselves if they see something new they like and second, if they see good value.
Mahindra’s Thar is clearly a model consumers like though I personally found its Jeep like ride challenging for longer drives.
And then there is the classic value proposition, like in hybrid cars or for that matter even electric, though now hybrids have overtaken electrics in sales.
The question that follows is: are consumers not finding the current crop of car models interesting and exciting enough?
Nilesh Gupta, Director at Vijay Sales which now runs 143 electronics showrooms across India once told me in the context of a question on slowing sales that nothing turned around sales better than a new model.
He was referring to colour televisions but the same applies to cars to some extent as well.
The other more dreaded question of course is if there is a fundamental slowdown that is kicking in.
It is possible of course but we still have a month or two to go past the festival season before we attempt an answer.
Till that point, India’s auto industry will depend on hope and of course car dealerships to park their unsold cars.
And that brings us to the top stories and themes of the day:
Markets recover on political and China cues, could stabilise now.
Oil slips after demand woes weigh again.
Decoding the Nifty50 as an investment strategy for the medium to long term.
India could see a new direct tax code coming? What should it not contain?
Touch screen era may be ending.
Markets & More
The stock markets recovered today after the BJP’s win in local state elections in Haryana was received positively as a larger mandate for continuity of public investment led policies as was the fact that the China pull may be moderating for now as investors there held out for more stimulus packages.
Snapping a 5-day run, the Sensex gained 584.81 points to end at 81,634.8 levels.
The Nifty50, closed at 25,013.15, up 217.38 points.
The next thing to watch out for is the Reserve Bank’s monetary policy today and if there could be any interest rate cuts, though it seems unlikely for now.
FIIs Selling
The value of foreign institutional investor holding in Indian markets has crossed $1 trillion.
Cumulative assets of FIIS in India, including debt, equity held by different instruments, have crossed $1 trillion, a figure that is up around 27% since the beginning of 2024.
Most of this was equity, around $930 million.
On the other hand, FIIs are also pulling back right now.
FIIs pulled close to Rs 39,000 crore from Indian equity markets in just the last four sessions this month.
The BSE Sensex and NSE Nifty fell over 5 per cent from their records before of course recovering somewhat on Tuesday.
According to a report in Business Standard, foreign investors have invested Rs 1,50,266 crore so far in 2024, and withdrawn Rs 93,792.41 crore from the Indian markets, making them net buyers of Rs 56,473.59 crore.
Foreign investors are weighing several factors at the same time, from the recent exuberance in and for Chinese stocks to the tensions in the Middle East and of course the general uncertainty of who will become the next PResident of the United States.
The larger challenge is present valuations though all foreign brokerages swear by the longer term structural story of India.
'MSCI India currently trades at a forward P/E of 24.1x (vs the post-2015 average of 19.5x) after last week's pullback, and should some of these concerns materialise, we think valuation levels going back to 21x should become an attractive point for investors to start rebuilding positions in the market,' said Nomura in its report, quoted by Business Standard.
Oil Prices Fall Back
Demand indicators for oil continue to be weak and are offsetting the risks flowing from tensions in the middle east at least to some extent.
Brent oil dropped below $80 a barrel after China’s top economic planning body did not offer any new stimulus measures on Tuesday.
Oil lost as much as 2.2%, snapping a five-day rally.
The National Development and Reform Commission said it’s confident in reaching economic targets this year, but the lack of new spending disappointed investors, Bloomberg reported.
Traders continue to watch closely for Israel’s retaliation against Iran following a missile attack last week, which raised concerns over an all-out war.
Meanwhile, the global economy is entering a “dangerous time” like never before as Middle East tensions remain elevated, said S&P Global’s vice chairman Daniel Yergin to CNBC.
Yergin, a big voice in oil markets, told CNBC’s “Squawk Box Asia” that he expects Israeli retaliation will not just be a replay of last April, but something “much stronger.”
When asked if the global economy is on the precipice of another supply shock resulting from Middle East tensions, Yergin said it’s a precarious time for markets.
“I think it’s a very dangerous time, one that we haven’t seen,” he said.
“The betting is that the Israelis would not attack, try to attack, the nuclear facilities at this time. But a few months from now, a few weeks from now, whatever it is, Iran would have the capacity — it’s thought — to deliver a nuclear weapon, and that raises the stakes,” he said, likening the moment to the 1962 Cuban Missile Crisis.
Bottomline, things are not looking good for oil markets.
Hyundai IPO Is Giving Me Jitters
It's the largest IPO at around $3 billion or Rs 25,000 crore and is a cause for worry at least to me.
This is as much for the time at which it comes which is the somewhat middle of a current bull run as of course its size.
Yes, I don’t know whether this is the middle of the bull run or not actually but it sure feels like the moment or time when a few corrections can and perhaps should set in, as they already have to a smaller extent.
Reuters is reporting that Hyundai Motor India's IPO will open next week for subscriptions and will likely be priced in the range of Rs 1,865 to 1,960 ($22 to $23) per share, sources said on Tuesday, valuing the automaker at up to $19 billion in the country's biggest stock offering this year.
The India IPO will be Hyundai's first stock market listing outside South Korea and will also be the first carmaker to go public in two decades since Maruti Suzuki in 2003.
The IPO will open for subscriptions for big institutional investors on Oct 14, and invite bids from retail and other categories during Oct 15-17.
Markets & Strategy
The markets have recovered yesterday somewhat from a 5% fall in the previous week but going ahead, how could things pan out.
In the context of two factors, the external which is still unpredictable versus the internal, including the politics which is somewhat predictable.
The Core Report had pointed out earlier as well that the present market corrections have largely been driven by external factors so far.
So how should one look strategically at the stock markets in the medium to long term.
Second, the Nifty50 basket is an interesting study and illustration of how stock picking can be more scientific than you might think.
For more insights, I am now joined by Siddhartha Rastogi, COO of Ambit Asset Management, which manages close to half a billion dollars of funds right now.
INTERVIEW TRANSCRIPT
Siddhartha Rastogi: Govind, it's a very interesting question. And as you rightly said that there are contradictory domestic and global geopolitical situations which are building up. On one side, we saw that India is strengthening from the political perspective and on the global macro side, we are seeing that the Iran-Israel conflict is escalating.
And what we saw in last couple of days, the meltdown or the selling, that was predominantly the result of that global hiccup or the global challenge. Now, I would break the investment in Nifty into three parts. One is immediate term or the short term.
One is the medium term, which pans out for next 6 to 7, 8, 10 months. And then is a longer term when I talk about for next 18 months to 24 months. Now, interestingly, what is going to happen is, for understanding the future, you have to look at the past.
If I look at the Nifty returns for last one year, it has been closer to 26 odd percent absolute number. This I'm talking about as of yesterday. Or if I include that, it will be closer to 27, 27 half odd percent in a one year return basis.
Now, if at the same time, if I look at the earnings, Nifty earnings for last one year, it has been in the range of 14, 15 percent. If I look at the trailing P multiple of Nifty, it has been in the range of 23 half, 23, 23 half, which essentially means from a trailing perspective, little bit Nifty is expensive. But then you have to compare the market.
If I look at the same thing from the broader markets, which is mid cap and small cap, I include the entire factor. Last one year returns for the mid cap has been closer to 42 and a half percent and a similar number is there for the small cap for last one year. Whilst if I look at the earnings side, the earnings have been half of the number which has been delivered by both mid cap and the small cap.
So what are we implying here? We are saying that 50 percent of the growth in last one year has come in from the EPS growth, but balance has actually come in from the earnings, Earnings Expectation Expansion. Understand this, Earnings Expectation Expansion, which means P expansion.
Is it sustainable? May or may not be from here. If I look at the trailing mid cap multiple, it is relatively on an expensive side, which is closer to 46, 47 times.
If I look at the small cap, the number is quite similar, 48, 49 times the trailing small cap index. So Nifty from an immediate term, keeping in mind where we are, can see little bit of downside. How much downside?
Maybe we are at 25,000 after today's move. We can slip down by 1500 to at best 2000 points. So what are we talking about?
We are talking about closer to 8, 9 percent of maximum Nifty correction. And that's not a real correction. That's a great buying opportunity, keeping in mind that the earnings of Nifty in next two years are going to compound at 14, 14.5 percent. And if earnings only replicate without the multiple expansion, that's a great number to achieve. Imagine with little bit, little bit on the dividend side, if you are able to catch up, then Nifty TRI can comfortably give you a number which is closer to a 15 percent odd returns. So from a short term perspective, my suggestion would be if you have money, do not buy tomorrow.
Maybe what you should do is look for the global macros. Haryana News has already been factored in. JNK is out.
Maharashtra and Jharkhand, the elections are yet to happen. Things may turn either ways. Hence, at this juncture, be little cautiously positive.
But I would still wait for a little bit of correction in the Nifty before I put in that entire money. So that's from a medium term, six or seven months perspective, very, very distinctly, it's a buy call. Earnings season is going to start.
And my expectation is that the earnings season is going to be quite robust. Festive season, what is the indication we are seeing from the billion day sales, which has come in from the Flipkart and Amazon, which is going to come through, the numbers seem to be quite stamped up. And it is also the impact of the wealth effect.
You understand the concept of wealth effect because last 16, 17 months, people have made tons of money into the equities and they would have a to spend some bit during the festive season. So on the medium term, I'm bullish. In the longer term, very, very categoric.
Even broader markets make sense from a two year perspective. If I have to have a time horizon of two, two and a half years, I'm a buyer in the broader markets. But if I have a shorter time horizon, which is six, seven, eight, nine, 10 months, I would stick my neck out and only play with Nifty.
Govindraj Ethiraj: Got it. Can you now break up the Nifty for us and how you look at the constituent pieces of it, particularly groups and sectors and so on?
Siddhartha Rastogi: Absolutely. So Nifty, interestingly, after a long time has been bucketed into parts. So we see financial services, which is closer to 33, one third of the total Nifty is there.
You see oil and gas, which is closer to 12 watt percent. You see IT, which is 14, 14 quarter. You see FMCG, which is eight and a half percent.
You see metals, which is again three and a half. You see power, which is again three and a half. And you see auto components, which is eight and a half percent.
Now, these are some of the heavyweights into the Nifty. And then you have got a little bit of swing, which can come in from the PSUs, which can come in from some of the industrial houses, which have multiple holdings into the Nifty. Now, interestingly, we saw Nifty correction after a long time because of the macro reason.
Otherwise, for the Nifty to correct significantly, it's quite, quite challenging because most of the components are insulated from each other. They are uncorrelated. So imagine financial services has a large part on the private sector banking.
And we have seen that the private sector banking, despite of earnings being relatively robust and with a rate cut, which may not happen tomorrow in India, and which may not, and there will be status quo, which may happen. And eventually, RBI will budge and RBI may take a rate cut, maybe in December, maybe in January meeting. If that happens, then you have a positive mark to market on the securities, which are available for sale into the banking bucket.
So you would see that the private sector banks profitability is going to jump quite robustly. And that's one piece, that is one piece, which is still not moved when the Nifty has moved. So you have one positive effect there.
Now imagine, so which component has done brilliantly well? Power, metals. These sectors have done, oil and gas, they have done significantly well in Nifty.
Again, to counter this, you have a pack of IT and FMCG. Can IT and FMCG fall along with metals, mining, power? The answer is no.
So they are uncorrelated. And hence it creates a great, great mechanism. If you just blindly invest in Nifty, the chances of you making most money is most high.
Similarly, if I look at last one year, auto components, which formed closer to 88.5%, they have extraordinarily delivered closer to 60, 61, 62% returns. Now, this portion with the interest rate going a little slower, auto again is going to support. So imagine what are the triggers.
If macro markets go bad, if the interest rate cycle goes positive, which means there is a cut, you will have auto positivity, you will have positivity in the financial services. Now imagine if for some reason there is some catastrophe in the financial world, you have an uncorrelated market in the form of IT, you have an uncorrelated market in the form of FMCG. So these buckets make a classic case of what we call diversification.
And I think in this world where things are just falling apart by the day, Nifty makes a great case if you want to have sustainable, relatively risk-free kind of an investing, if you have a time horizon of two to three years timeframe.
Govindraj Ethiraj: Thank you so much for joining me.
Siddhartha Rastogi: Thank you.
India’s New Tax Code. The Core Report Weighs In
The Government has invited suggestions on the Income Tax Act, 1961, from the private sector and tax experts beginning October, as part of an exercise to simplify the direct tax law, the Business Standard reported last week.
The objective is to simplify the language and reduce litigation.
Finance Minister Nirmala Sitharaman in the 2024-25 Budget presented in July had proposed that the I-T law review would be completed in six months.
Considering that the six-month timeline ends in January, it is widely expected that the amended I-T Act could be brought in the Budget session of Parliament.
The Core Report is doing its bit to contribute to the discussion on India’s direct tax code by asking tax experts across the country for the three things they would like to see or not see in the new tax code.
I began by speaking to Ajay Rotti, Founder of Bangalore-based tax advisory firm Tax Compass and asked him for his three point take
INTERVIEW TRANSCRIPT
Ajay Rotti: Yes, they are rewriting, making the code simpler, etc. I think the most popular common things that are being asked is more on, you know, the main mechanisms or really the fundamental aspects of taxation on what is tax, at what rate, and how do you compute and things like that. But I think there are a few other things that need to be addressed.
And in my view, two very key aspects. One is our old tax code today is actually built on a huge trust deficit, that the taxpayers are there to arrange their affairs in such a manner that they will pay least taxes and things like that. And there are a lot of provisions around that.
And second is on, you know, administration, how do officers deal with their tax payers, and how do you litigate with the government and things like that. I think there's a good opportunity to clean up on these aspects, which is more on the administration of the tax statute rather than the, you know, the main statute itself, and the provisions relating to levy of taxes. And if I were to take, you know, a few examples, I think one key one on trust deficit that I can talk of is there is a very peculiar provision in our statute, which says that any income tax authority can give instructions to the authority junior, therefore, technically a CBDT can issue any kind of instructions to all officers who are performing below the CBDT or a Chief Commissioner can do it to officers below the Chief Commissioner and so on. However, they are precluded from issuing any instructions on giving directions to conduct a particular tax assessment in a particular manner. Therefore, if there's a taxpayer's case, individual case, they are prohibited from issuing any instructions.
Therefore, what that means is the officer sitting at the desk is supreme and he or she can take whatever decisions they want in that particular case. I think provisions like these, which are really in place because there was always a trust deficit need to go in. Therefore, today technically, if a large taxpayer is having a particular issue on one officer interpreting it in a particular manner, they should be able to reach out in the system to explain that this is what the officer is doing and therefore collective wisdom comes in and a senior officer takes a more pragmatic view, takes a more holistic approach to say, yes, we cannot be doing this, but that's not possible today. So some bit of that, those kinds of changes can definitely be done.
Govindraj Ethiraj: And the other point that I think you wanted to touch upon is litigation.
Ajay Rotti: Yes. So on litigation going, again, very peculiar to India as I deal with a lot of foreign investors, foreign companies, which are operating in India, it applies to Indian corporates, but it's more pronounced in a foreign corporate case because they are not used to this system of litigating. In India, you can't do, you can't litigate on taxes without paying money against the disputed taxes.
However, that's 20%, 50%. It depends and it can be anything, but it has to be at least 20% under Income Tax Act. It's a little lower under indirect taxes.
I think this again is an issue that definitely needs to be addressed because if you are litigating with the government and if you actually lose after a while, you have to pay it with interest so the money doesn't come free just because you are litigating and the government does get interest. If you litigate after paying, it becomes an expensive proposition. And also, there's an incentive for the tax officer because then you can make wild claims with some bit at least being collected.
And therefore, you have collected some money and then the taxpayer litigates. And when a refund is issued, the government actually pays with interest. And therefore, this again is a very complicated process.
And anybody who's actually dealt with litigation in India, tax litigation in India will tell you this is the biggest problem. You pay some money and then you litigate and you win after many years and you need to get a refund and that refund takes its own process. I think this is another classic area where the government can clean up, be a lot more taxpayer friendly, not that they're giving any largesse to them, they're not giving any benefit to them in terms of waiving away taxes or anything, but you actually litigate.
And then if you do lose after a while, you pay it with interest and penalty, but don't ask every taxpayer to pay money upfront before litigating.
Govindraj Ethiraj: Right. And last point, Ajay, so you talked about definition of income. Could you illustrate that with an example of either an inclusion or an exclusion?
Ajay Rotti: Yes. So, and here the issue again is I go back to the original point, which is the deficit or the trust deficit that's there between the taxpayers and the authorities. Over a period of time, what is income? Because you pay income tax on whatever is your income.
So, the definition of income becomes critical. It had a few clauses and every few years there's a subclause that's added and it's become a very lengthy definition, too many things that are coming. You know, share premium, the famous angel tax was added to definition of income to say, if you issue shares at a higher than fair market value, that becomes an income for the company.
If I transfer shares, and you'll be surprised, I transfer shares at a lower than fair market value to you and you buy it. So, a share which is worth 100, you buy it at 60, actually 40 is taxable in your hands because you got an asset which is worth 100 at lesser than, and there's a complex mechanism as to what that valuation has to be, et cetera. This statute is again in place because the government believes that people are arranging their affairs and moving assets and transferring at lower than fair market value.
So, you make life difficult for every transaction rather than go after those transactions where there is a possible issue. So, the definition of income itself, there's a lot of possibility and avenues to clean it up. To make it quite simple, take out some of these artificial extensions that are there.
You always have, you know, anti-abuse provisions which you have, which can be invoked. And today with the amount of data they are collecting, it's easier to catch. Some of these provisions made sense 15 years back when the government was not collecting as much information as they are collecting today.
So, that's another area where they can really clean up. And so, all these cleanups will actually show results on the taxpayer rather than it just being a lip service of, you know, our 300 page code has got reduced to 200 and so on.
Govindraj Ethiraj: Ajay, thank you so much for joining me.
Ajay Rotti: Thank you. Thank you, Govind. Pleasure always.
Touch Screen Era May Be Ending
The tyranny of touch screens may be coming to an end.
Companies have spent nearly two decades cramming ever more functions onto tappable, swipeable displays.
Now buttons, knobs, sliders and other physical controls are making a comeback in vehicles, appliances and personal electronics.
In cars, the widely emulated ultra-minimalism of Tesla’s touch-screen-centric control panels is giving way to actual buttons, knobs and toggles in new models from Kia, BMW’s Mini, and Volkswagen, among others.
Similar re-buttonization is occurring in everything from e-readers to induction stoves.
Perhaps the most prominent exponent of this button boom is the company that set us lurching toward touch screens in the first place. Apple added a third button it calls the “action button” to its full slate of new iPhone 16s unveiled this month, after introducing the feature on its upscale Apple Watch Ultra and Pro-model iPhones over the past couple of years. It also added a button-like “camera control” input on the iPhone’s side.
As Apple shows, companies aren’t just rediscovering buttons, they’re reconceiving them.
The switch back to physical interfaces is also, in many ways, a vibe shift. With touch screens ubiquitous, what was once viewed as luxurious is becoming tacky. Physical controls, done well, now signal the kind of thoughtfulness and exclusivity once attached to the original iPhone.
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