Markets Rock To Wall Street Beat
The tide has turned in the world markets once again and the number of bullish signals from Wall Street is once again at a high
On Episode 366 of The Core Report, financial journalist Govindraj Ethiraj talks to Manish Raj Singhania, President of the Federation Automobile Dealers Association (FADA).
Our Top Reports For Today
SHOW NOTES
(00:00) The Take
(06:43) Markets rock to Wall Street beat
(07:54) Oil prices ease off on demand worries and reduced war tensions
(08:50) Indian steel companies file anti dumping cases on Vietnam, even as Chinese steel giant announces harsh winter
(09:49) Are Indian IT companies poised for a turnaround?
(14:05) Why India’s auto dealers federation is asking banks to tighten scrutiny on their own members
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 Monday, the 19th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
1 of 3 smartphones, or close to 34% of smartphones bought in India are financed through loans and thus EMIs.
That’s a lot considering some 157 million smartphones will be sold in India this year.
Over 50 million smartphones will thus be financed this year.
Good news for the loan givers, including both banks and NBFCs, because phones are not becoming cheaper and people are buying more expensive phones because that is where the newest features lie, including the latest rage being AI, as Counterpoint Research’s Tarun Phatak told me some weeks ago.
Smartphones actually represent the extremities of desire and affordability in India, perhaps in most countries and maybe more among young people.
A viral video reported by the media last week speaks of how a temple flower seller’s son went on a hunger strike for 3 days till the poor mother relented and bought him an iPhone.
iPhones of course represent the most expensive of smartphones and are also a status symbol. If you are well to do, you will carry an iPhone and so will evidently, a child with no income.
A smartphone or iPHone in this case is not a phone, it is an entertainment device that you carry and immerse yourself in, whether it is streaming short form content, long form content or just doom scrolling as many of us end up doing on social platforms.
India’s young and aspirational are straining at finances, whether their own or their parents.
IT Services company Cognizant was quick to deny a report over the weekend saying they only paid their trainee engineers Rs 2.5 lakhs per annum or Rs 21,000 per month.
They paid more, they said, but to engineering graduates.
They said that was more than Rs 4 lakh which is more than Rs 33,000 per month and went upto Rs 12 lakh per annum, which is Rs 1 lakh per month.
So it was true that they paid non engineering graduates around Rs 21,000 a month starting salary which of course was no surprise, to me and anyone in the industry.
Cognizant’s response mirrors what the IT industry has been saying and doing for a while.
Which is that there is a fair bit of onboarding and training at the company’s cost before you become a fully productive employee able to bill clients sitting in the US, in dollars obviously.
Also, don’t forget that of the 1.5 million engineers that India produces annually, less than10% are employable directly, at least by the top IT firms.
Bottomline, starting more colleges is not the solution, though many education entrepreneurs and business people have realised already and converted their college campuses into other ventures.
Siddharth Pai, technology columnist, told me a few months ago on The Core Report, that starting salaries in IT Services had barely budged for more than 10 years.
And even if you were to assume the worst case of inflation, which it is not, you can only imagine how far these salaries can take today’s youngsters.
But what has changed in the last decade is that loans are easier to take, one swipe on the smartphone you took a loan on to buy will get you instant loans or buy now pay later loans.
Even as incomes only creep up.
Remember, inflation is eating away both the hopes of the youth and the sense of security of the old, causing both to move their funds into stock markets or even worse, speculative derivative trading and the like.
Nothing tells me that India can fix its jobs and thus aspirations problem easily, regardless of what politicians claim.
This is a scale problem presented in circumstances we are not in control of.
For example, we may want to step up in manufacturing but we are battling huge factories in China - more on that shortly - and the fact that we are uncompetitive for a variety of other reasons, including cost of land and finance.
Even Bangladesh is more competitive than India and bigger in garment exports.
That could also be because they enjoy favourable tariffs from importing countries compared to us but that is precisely the problem, few things are in our control today.
Maybe if we had opened up our small scale industry 30 years ago as I believe we should have, things may have been different but we don’t know that either.
India’s young need to align themselves for skilling vocations more than thinking they can train themselves for cutting edge jobs involving, lets say, AI. That is just not feasible.
Taking up vocational jobs, for which demand is far greater in India at this point, also requires a mind and thinking shift.
Vocational jobs involve the use of hands but could also typically pay more.
This is not to argue that there are millions of vocational jobs waiting but there is surely more demand for them then let's say IT Services and hopefully youngsters ought to choose and think of it proactively rather than after trying for years for a Government job.
A good vocational job for which demand will surely rise will also help you take less loans or pay out those loans with current incomes and also save for the future.
And you don't have to blackmail your hardworking mother into buying you an iPhone.
And that brings us to the top themes for the day:
Markets rock to Wall Street beat.
Oil prices ease off on demand worries and reduce war tensions.
Indian steel companies file anti dumping cases in Vietnam, even as the Chinese steel giant announces a harsh winter.
Are Indian IT companies poised for a turnaround ?
Why India’s auto dealers federation is asking banks to tighten scrutiny on their own members.
Markets & More
The tide has turned in the world markets, once again and the number of what I would call bullish signals from Wall Street is once again at a high. What happens on Wall Street obviously does not remain on Wall Street and spreads to Dalal Street soon, as it did last week.
So on Dalal Street, the BSE Sensex and NSE Nifty50, closed much stronger on Friday in a holiday shortened week.
The Sensex was up 1331 points to close at 80,437, while the Nifty50 was up 397 points to 24,541
According to a report in the Business Standard, 47 out of 50 constituents of the Nifty50 index ended higher, led by Wipro, Tech Mahindra, Grasim, Mahindra & Mahindra, and Tata Motors.
In the BSE space, 29 out of 30 constituents of the Sensex ended higher, with gains led by UltraTech Cement, and TCS.
In all cases, the gains were close to 4%.
The Action On On Wall Street
It’s rocking once again on Wall Street which means Indian markets will keep pace, give or take.
On Friday, stocks were up again as investors closed out the best week of 2024.
The big meltdown that happened just a few weeks ago seems to be totally forgotten, there and here.
All indices, the S&P 500, the Nasdaq Composite and Dow Jones Industrial Average are up sharply and are now within sniffing distance of their record highs which were hit, of course in July, not very long ago either.
Wall Street believes at least for now that recession fears were overblown.
“Data released over the past week has struck the right balance, being not too hot, nor too cold,” CNBC reported UBS head of investment for global wealth management Mark Haefele saying, adding that this should help allay the concerns of a looming recession or that sticky inflation will hamper the Federal Reserve if swift rate cuts are needed to defend growth.
AI is back in flavour, for now. Nvidia was among the biggest winners in technology stocks on the week, gaining more than 18%. Apple and Microsoft advanced roughly 4% and 3%, respectively, for the week, CNBC reported.
Oil Prices Recede Once More
Crude oil prices have eased on reports that Qatar told Iran to not attack Israel while Gaza cease-fire talks are ongoing.
Brent crude is now quoting around $79.68 per barrel or below $80 which it had edged over last week.
Daniel Ghali, senior commodity strategist at TD Securities told CNBC the risk premium appears to be “seeping out of energy markets once again, suggesting traders are curiously disregarding the risk of geopolitical aggressions ahead of the weekend.”
The other overhang is of course oil demand from China which continues to soften with the OPEC also lowering its forecast for 2024.
Steel Price Woes Continue
India has initiated an anti-dumping investigation on certain steel products imported from Vietnam, Reuters reported, quoting a notification from the Ministry of Commerce and Industry.
India’s steelmakers including Tata Steel have been publicly railing against Chinese steel coming from China and through Vietnam.
Tata Steel had gone on to say that the Chinese factories were running more to keep operations going rather than to make profit.
Amazingly, that was confirmed by China’s BaoWu Steel last week which produces about 7% of the world’s steel and said they were facing a harsh winter thanks in turn to the woes in the real estate business in China.
Reuters says Indian steel prices have hit their lowest levels in three years due to increased imports and reduced exports, according to data from commodities consultancy BigMint.
India, despite being the world's second-largest crude steel producer, became a net importer of steel in the fiscal year ending March 31, 2024.
Is The Mood For IT Companies Looking Up?
Lets begin with stock prices, usually a good signal to start a discussion.
One reason why the markets were up last week was information technology stocks which looked up thanks in turn to U.S. economic data which allayed fears of a recession.
The Nifty and Sensex were both up 1% for last week and the Nifty posted its best session since July 26, while Sensex logged the biggest single-day gain in over two months, Reuters reported.
IT was the top weekly gainer among the sub-sectoral indices, with Tata Consultancy Services, Wipro and Infosys being among the leading weekly gainers on the Nifty 50.
Indian IT companies earn a significant share of their revenue from the United States.
So that was the markets, what are we hearing from closer to the ground ?
Reuters is reporting that global banks have started reviving the technology projects they put on ice in 2023, raising hopes for the $254 billion Indian IT sector that makes about a third of its revenue from banking, financial services and insurance (BFSI) clients.
Latest quarterly reports from Tata Consultancy Services (TCS) , Infosys , Wipro and others showed a nascent recovery in BFSI client demand after six quarters of depressed spending since the Silicon Valley Bank collapse.
"BFSI should come out faster as they are the ones that went into the caution mode first," Reuters quoted a TCS senior official who also hoped that interest rate cuts by central banks and the end of U.S. election-related uncertainty will boost client confidence.
Moreover, there is an evident revival in demand for tech services from big banks such as JPMorgan Chase and Bank of America who in turn talked of this in their recent earnings calls.
JPMorgan said it was boosting its annual technology spending by $1.5 billion to $17 billion in 2024, while Bank of America has earmarked $4 billion this year for new technology initiatives such as developing generative artificial intelligence features.
The interesting thing is that BFSI recovery could lead the way for other industries and sectors as well.
The top five U.S. banks spent 6.8% more on tech investments year-on-year and 1.2% sequentially, their results for the quarter ended June showed, according to Reuters' analysis.
The renewed tech investments are aimed at boosting regulatory compliance, customer experience and cybersecurity, while also revamping infrastructure through cloud migration, according to their earning calls.
And of course lower interest rates which could happen next month will reduce cost pressures on big companies and clients of Indian IT companies.
Of course AI is the new investment and focus area.
Generative AI continues to be a focus as BFSI companies see a more direct benefit since there is considerable retail contact with which AI can create more efficiency.
Most firms convert 19% of their proof of concepts, or evidence showing the feasibility of an idea, into projects but BFSI companies convert 31%, Constellation Research CEO Ray Wang told Reuters.
"Most companies with a successful AI project will double down and invest in another one," Wang said.
Brokerage Motilal Oswal that it is too early to declare a full recovery.
Of course if you were buying IT stocks, the question is would you wait for brokerages to declare a full recovery or go in now !
Car Dealers Struggle With Record Inventories
Overall passenger car sales are on a good wicket, rising 11% in July against last year.
The problem is that car dealerships are sitting on massive inventory, so much so that the Federation of Automotive Dealerships Association feels that banks should lean on their own dealers to not over borrow to stock inventory which could take time to clear.
FADA has also asked the car companies to be vigilant about potential dealer failures due to these high inventory levels.
The challenges of inventory and the funding of it, a substantial part underwritten by banks, is as much about the challenges of the auto sales industry as it is about running any business in India.
The FADA says inventory is now at historic highs of 67-72 days amounting to Rs 73,000 Crores worth of stock, thus posing risks for dealer sustainability.
I reached out to Manish Raj Singhania, President of FADA India representing over 15,000 Automobile Dealerships having over 30,000 dealership outlets.
I began by asking him why FADA was asking banks to tighten their scrutiny over car dealerships.
INTERVIEW TRANSCRIPT
Manish Raj Singhania: After having a almost 14% in the month of July. And you know, lot of apprehension was already there in the industry that July got we got for PV industry. But finally we ended up well. And we should always recollect that last year, PV has created lot of records, and trespassing all those records is very, very difficult when we are doing it in double digit. So July went off well, and in the month of August also, kind of rains dropped in late, I should say, and walk ins have been good, especially with the dealers and with the brands when the new product launches are happening. All this is in preparation of, obviously, the festive season. And the only dampening effect, in terms of opinion, is the, you know, consistent rainfall that we are seeing, or somewhere, a lot of places, we are seeing flood like situations, and with extreme high rainfalls, obviously those places get affected by the climatic conditions. But a bit of marriage season, also, not much of oral but still, till date, in the month of August, also the walk ins have been good. And YoY growth is also there at the PV segment,
Govindraj Ethiraj: Right. And let me come to the overall dealer liquidity and inventory situation. So you're saying that inventory levels are now between 67 and 72 days, and worth about 73,000 crores. And as a institution, we are also saying that this is at an all time high. So why is that happening?
Manish Raj Singhania: I would only attribute this. If you look at the pinky industry, we are doing such a fantastic job in terms of retail. I mean, the numbers are still rolling in, in spite of lot of apprehensions from the industry. But customers are still coming forward. New launches is also driving the excitement in the industry. The only negative that we can see in the auto industry is the overestimation by the OEM with terms of their market share and their end numbers, and that is what is pushing them to build more vehicles to the dealers. They should understand that their billing should be in line with their retails, and unnecessary dumping of stocks with dealers will not bear fruit. So the liquidity challenges is in terms of the banking difficulty that a dealer might face when they are dealt with heavy numbers or paid off stock of almost 70 days plus we work on a trials period, trial cycle, actually, and Ideally somewhere between 30 to 60 days. And if a vehicle doesn't get rotated within this period, then obviously the dealer starts incurring loss. And for that particular vehicle. Ideally, we call for a 30 day top period. But anything above 60 days is like you're losing money like crazy. That's what is the sentiment of dealers, the rotation of that, you know, task period. If you don't rotate, then the penal interest comes in and you start losing more interest, more money in your business. So I think that is where the sentiment, as well as the liquidity situation, is reflecting.
Govindraj Ethiraj: Right. And that's the survey that I was going to ask you about so your survey that asks about liquidity and sentiment, the majority, almost 75% are between neutral and bad for liquidity as well as for sentiment. But you're also saying that you're asking the Reserve Bank to ask banks to be more stringent in terms of releasing loans to your own dealers. So why is that? Is it because something has already happened, and dealers are facing pressures.
Manish Raj Singhania: Few of the OEMs have started negotiating with the bank, compelling the bank in a way, to increase that trans period from 60 days to 120 days. Or what were the details? So if a dealer with a limited blockchain, if you have a 90 day speed up stock. If you hold a particular vehicle for 90 days, that means 3% of the dealer wires is bought to paying the back end to the back interest. So finally, what we have to run a setup. You have to develop a business, and you have to make some money out of it so that you can pay your interest, pay to your employees, or pay for the setup. So increasing the trial period will only extend extra burden in terms of stock numbers, in terms of interest that the dealer has to pay to the bank. So for OEM, it is very convenient so that they can, you know, further dump the stocks at the dealership. Rather than that, they should ensure that anything about 45 days, if a vehicle is available at the dealership, they should facilitate dealers in all possible way to liquidate that stock so that the rotation is continuous and fast moving.
Govindraj Ethiraj: So which are the models, which are, let's say, staying in dealerships longer than the others?
Manish Raj Singhania: So right now, believe me, everything has available in stock. very few models and variants are burning a waiting period. Also the new launches for those models, you definitely built up a booking kind of booking book, order book and all that. That's a different story. But otherwise, all vehicles are available.
Govindraj Ethiraj: So just to ask a more slightly finance question. In So, when you say that 73,000 crores is the value of stock that is sitting with dealerships, is that all and mostly funded by the banks?
Manish Raj Singhania: Yeah, 90% of the stock is funded by banks. It has to be funded by local marriage, such a huge inventory. That's what I keep on saying that. Finally, who is earning money the OEM who is selling this vehicle to the dealership. And secondly, for the answer, or the banker who's earning interest on these stock, and we have to pay all this from our margin.
Govindraj Ethiraj: Okay, so if you were to look at, let's say, the total number of cars sold in the year, and the fact that you're running now at a two month inventory. So what is then the ideal at this point of time, at least. What is the ideal production versus supply that you're I mean, what should be the ideal production figure versus the supply figure that we are seeing?
Manish Raj Singhania: So what is the up end actually? If this kind of stock level dealers were able to accumulate just before the festive season, or, you say, the month of September, it was a very comfortable kind of issue, because we have a tendency to accumulate stocks. Because during festival season, lot of issues in terms of, you know, logistics, order availability, all these issues come up. Teachers have a tendency to accumulate stock, so that if the festive season turns out to be good, that is what is the expectation, so you are able to address all the consumer requirements, and we have a model for or a variant or color or a sitting combination for every customer for us, because we don't want to lose on that sale. But what is sad is this level of accumulation has happened at the start of the most leanest month of the year. So that is the sad part. That is where OEM needs to correct their perspective. They need to understand. They need to recognize and accept this issue and take according correction and a comfortable you know, even if they are stressed out over ambitious, we don't advocate anything about 30 days paid up stock when you are working in such a perfect Supply Chain Management System, if you have, if you go to an OEM factory, they normally keep a three or seven days stock nothing above is there. And the supply chain, everything is now normalized. We did have some issues during covid times and all that, but now everything is normalized, and accordingly they should take corrections.
Govindraj Ethiraj: So given all of this, given the fact that you're, I'm assuming, sitting with almost six and a half lakhs of passenger vehicles, more than what your current run rate is. What's the outlook looking like? I mean, how much could the festival season absorb this year's festival season, at least for the next few months,
Manish Raj Singhania: end of October or mid November, whenever the festival season gets over, we do accept what is the present situation. We are already saddled with heavy stock, so they pay to Bill. Obviously they need to build everywhere one but they should only build vehicles which are required by the dealers and which are in shorted. Why produce vehicles which are already available at the dealership? Produce vehicle which is not available, which is shorted? They need to kind of recalibrate or reschedule or replan their production. Every OEM tends to produce a certain quantity of vehicles. There it is their estimation. Why they are going wrong. We have us two models which are in bouquet and which is not available at the dealership. You are not producing more of those models, but you are producing models which are adequately available at the dealership, and still, you continue to post those models every month to the dealership. They need to reinvent their production. I know customer requirement desires. Demand is changing very fast, and it's very flexible, and they need to reinvent how they can make their production line so flexible enough so they can address the right demand which is coming for the month.
Govindraj Ethiraj: Right, Manish, thank you so much for joining me.
Manish Raj Singhania: Thank you. Thank you. Thank you.
