Markets Slide Again As Cues Vanish
A rocking Wall Street over the weekend could not lift spirits on Dalal Street which drifted lower
On Episode 454 of The Core Report, financial journalist Govindraj Ethiraj talks to Garima Kapoor, Economist at Executive Vice President and Elara Securities as well as C S Vigneshwar, president of the Federation of Automobile Dealers Associations (FADA).
(00:00) Stories Of The Day
(00:50) Markets slide again as cues vanish
(02:41) RBI new governor is a IIT engineer
(05:25) The investment case for PSU stocks
(17:49) Car sales fall despite unprecedented discounts at dealerships
(27:12) Why 2024 will go down as the warmest year ever
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 regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Tuesday, the 10th of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The top stories and themes.
Markets slide again as cues vanish.
The new RBI governor is an IIT engineer.
Car sales fall despite unprecedented discounts at dealerships.
The investment case for PSU stocks
Why 2024 will go down as the warmest year ever
Markets
A rocking Wall Street over the weekend could not lift spirits on Dalal Street which drifted lower after struggling somewhat to stay in the green.
While foreign portfolio investors are now more active in the markets, including putting out bullish equity reports, it does not look like there is a surge of buying yet and may not be till next month.
The second half of December usually sees activity levels reduce as traders go off on holidays.
On Monday, the BSE Sensex and NSE Nifty50, ended the week's first trading session lower with the Sensex falling 200.66 points, or 0.25 per cent, to settle at 81,508.46. While the NSE, Nifty50 settled at 24,619, down 58.80 points, or 0.24 per cent, from its previous close on Monday.
On the other hand, the Nifty Midcap100 and Nifty Smallcap100 indices ended higher by 0.50 per cent and 0.19 per cent, respectively.
Meanwhile, shares of Godrej Consumer Products fell 9% on Monday, set for their worst day since March 2020 also dragging down other FMCG stocks after it warned of stress on demand and profit margins in the third quarter.
The stock fell to its lowest since Jan. 18, its biggest one-day percentage drop since the onset of the pandemic, Reuters reported.
If there was hope that the second quarter slowdown was an aberration, then Godrej’s commentary suggests it was not and will take some more time to turn.
This is the first specific pointer from a large FMCG company for the third quarter as I could see and does not portend well for the rest of the sector as well as overall consumer demand trends particularly in the urban segment that has visibly slowed down.
Saudi To Cut Oil Prices
Saudi Arabia is cutting oil prices for buyers in Asia by more than expected after OPEC+ further delayed an output revival, underlining the weak market outlook, Bloomberg is reporting.
State oil producer Saudi Aramco will sell its main Arab Light crude grade at a premium of 90 cents a barrel to the regional benchmark in January, according to a price list seen by Bloomberg. That compares with $1.70 for this month.
Aramco also cut prices for north-west Europe and the Mediterranean. It made no change for North America.
Brent crude is hovering around $72 a barrel right now as there is rising belief that demand side softness will lead to a surplus in the global market.
Earlier, OPEC+ — led by Saudi Arabia and Russia — agreed to push back production increases planned for the start of January by another three months, following two previous delays, Bloomberg reported.
RBI’s New Governor
While the Government of India, in its inimitable style, kept the suspense running till the end, it was quite likely that Shaktikanta Das was unlikely to get a fresh extension as the Reserve Bank of India Governor.
The 67-year-old Das has already served six years at this point and had retired from Government earlier.
So it was logical in some ways to expect a younger face to take over which appears to be the case with the incoming Governor Sanjay Malhotra, who is currently serving as the Secretary in the Department of Revenue.
His tenure starts on 11 December, that is tomorrow and will last for three years, as is the case with RBI governors.
Das was already the second longest serving Governor.
Malhotra, an Indian Administrative Service (IAS) officer of the 1990 batch from the Rajasthan cadre, holds a degree in electrical engineering from the Indian Institute of Technology (IIT) Kanpur and a master's in public policy from Princeton University, Business Standard reported.
What can change with the new governor ?
Well it's too early to tell.
While there have been murmurs about Das digging in his heels on lowering interest rates, it also seems unlikely that he had that much institutional freedom to start with, at least in comparison to previous governors.
Das has definitely been a steady face of the RBI, both within as employees point out, and externally, conservative without being ancient.
Under his tenure, the rupee has held steady making it one of the most steady currencies in the world in recent years.
More significantly, he has been quick to recognise the froth in the borrowing and lending markets and tightened risk weightages for banks and non bank finance companies particularly for unsecured loans.
He has also come down heavily on erring finance companies including some fintech companies who thought they could get away with a lot thanks to their advertising spends and perceived self clout.
While India could surely benefit from lower interest rates, I can say with some history and some intuition that interest rates are as defining an issue as in more developed markets.
The RBI could surely beef up some of its early warning system and data capture, given the problems with data elsewhere in the economy.
Remember, the RBI was talking of a 7% growth rate in the last quarter and that turned out to be 5.4%.
This is not to lay the blame on Das’s door as he closes it behind him but to present a challenge to the incoming governor. Among others that will follow.
State Owned Story
In the last couple of years, one category of stocks that has done quite well and beyond expectations is public sector units or PSUs or state owned companies.
The run up in the market overall and these stocks has also led to concerns of stretched valuations, particularly in defence stocks among others.
But the larger bet on PSU stocks has been the Government’s hard thrust on public spending which of course has been quite visible in recent years, including in areas like infrastructure and of course defence.
A new report from brokerage Elara Securities makes a strong case for continued investment in PSU stocks.
The case of course is dependent on premises which are worth debating. Principal among them is the Government’s ability and propensity to maintain a high rate of public spending, particularly since for various reasons, including elections earlier this year, spending had slowed down.
Also, the economy itself is not looking as robust as it was two quarters ago.
Finally, within PSUs, is it purely a monopoly situation like in the oil, gas and refining companies that make a good investment thesis or do these companies have more intrinsic value, in management capability as well as business prospects.
I put all these questions to Garima Kapoor, Senior VP and Chief Economist at Elara and began by asking her why a slice like PSU stocks as opposed to other vertical stacks like energy or defence?
INTERVIEW TRANSCRIPT
Garima Kapoor: I think over the last 3-4 years, particularly post-COVID, this government has worked towards policies that have actually driven the top line, that is revenue, and driven the profitability of PSUs. Because CAPEX spending has been the forefront or the core policy of this government, the biggest beneficiaries of either Atman Narbhar policy or the aggressive CAPEX spending have been PSUs.
However, lately, especially since last 7-8 months, there has been a significant slowdown in government's capital expenditure. It's degrowing by 14% till November this year, raising doubts whether it is still worthy to own certain PSUs in the thematic space or the thematic fund space, or is it still worthy to have a view on the positive PSU asset cycle. And those questions actually drove me to deep dive into the PSU asset cycles and the history for last 24-25 years.
Govindraj Ethiraj: And what you're seeing now, as you say, is that there is clearly very high public expenditure and public spending, which is going into areas which are typically dominated by PSUs. So, in a way, that brings me to my second question, which is that, is there a bias here towards monopolies, businesses or companies which are typically state-owned and areas which are more state-controlled, for example, defence and energy, oil and gas?
Garima Kapoor: So, effectively, COVID can define the simple public sector enterprises. The growth drivers can broadly be defined into two simple segments. One, that is driven by policy, by policy continuity of the government.
That is, let's say, if the policy of the government is intergenerational, then defence PSUs will do well because they will get bulk of the orders. Other is the spending. Now, spending is basically a function of how much you are allocating as your capital expenditure on the budget day, in the central government budget.
And that drives certain sectors like, let's say, railways, because railways is completely owned by a government dividend. And then there are certain, those who enjoy the benefit of policy continuity or stability as well as spending and probably the vision that probably drives India's growth metrics over the next 10-15 years, and that is power. Because India's peak power growth is going to be rising by 6-7% CAGR, because we are investing so much into renewable energy, government drives the policy and it has set its target.
So, the PSUs in and around that ambit also become another aspect to look at. So, you can broadly divide as pure policy, policy plus spending, or simply pure spending like railways.
Govindraj Ethiraj: Got it. One of the things about obviously public sector units or state-owned enterprises is that they are run by the government and therefore decisions have to go back and forth, particularly maybe larger decisions and decisions involving larger capital expenditure and so on. Do you factor that in when you look at, let's say, what kind of growth a company could see or decisions a company could take for its own betterment?
Garima Kapoor: Yes, obviously. One of the reasons some funds do not like to own public sector enterprises is because they do not like to own the space that has anything got to do with too much dependence on the government, because they fear government instability or they fear lack of continuity of policy approach. However, one hallmark of this government under Narendra Modi has been that they have made PSUs the drivers of growth by basically also undertaking measures that have made them operationally efficient.
For instance, in 2022 financial year, the government included in their MOU structure. Now, MOU is something that every central public sector enterprise signs with its respective department or ministry in the government of India and certain goals or benchmarks are set of what you need to achieve. Now, basis those benchmarks, the PC, CPSCs are performing and then end of the year they evaluated basis whatever benchmarks were set out for them.
If they over achieve whatever was set out to them, they're rated as excellent or if they underachieve, they're rated as very poor. So, you have CPSCs rating, this is MOU parameters like very poor, poor, excellent, very good, so on and so forth. What we see is since 2020, that was the year even before the government spending started, that is financial year 2020, the poor rated CPSCs dropped out and they started to fall.
And the good rated CPSCs which were falling start chuffed out and they started to improve. So, we are seeing some bit the operational efficiencies of CPSCs also get better. Simple statistics like output per employee, which basically defines the productivity of CPSCs, that has seen a staggering 50% growth in three years and the last data point that evaluated was FI24.
So, policies like volunteer retirement, hiring more contractual labour, all of that and consolidation of course in the public sector enterprises space has really worked. And then if I look at something like other efficiency parameters like asset utilisation ratio, the asset turnover of CPSCs which used to be about 0.9 to 1 anywhere between FI15 and FI16, that has steadily improved to 1.5. So, that means you are improving your ability to utilise your asset, number one. Your profitability is improving.
Number three, your operational efficiency is also kicking in and all those parameters that you normally define CPSCs as like to be inefficient, to be underproductive, etc. We're also seeing a turnaround.
Govindraj Ethiraj: But you're also saying in a way that because these companies are in businesses where let's say they either have a clear tailwind like State Bank of India is in banking and competing with others but it also has obviously a rich history of scale and size and so on. Or they're in businesses like oil and gas or there are companies which are linked to defence production or to railways where the competitive market is severely limited. So, you're saying one way or the other the prospects are good because either the competitive market is limited or there is tremendous let's say legacy strength.
Garima Kapoor: To put a little differently while I agree with this, I will just maybe put the same statement a little differently and probably I'll reword it. I'll say some of the CPSCs in some of the sectors are able to compete with their private peers despite it being expected that private peers will outperform. For example, today when the liability is one of the biggest questions, how does a liability franchise or how does a bank garner deposits when deposit growth has been lagging credit growth.
Something like SBI with a very strong deposit franchisee and with a very strong CASA will tend to outperform its peers whether public sector or private sector.
Govindraj Ethiraj: As you look ahead, what do you see as the fast growing sectors or stocks within that and what's the downside? I mean so because we started out by saying that public expenditure is a big driver and we've already looked at growth coming down in the economy to 5.4% which we've discussed already. So in that context, do you see public's expenditure staying where it is and if it goes up or down, down more likely, then will all of this or a lot of this argument still hold?
Garima Kapoor: My core argument of the strategy report that I've worked is to prove as to why the government capital expenditure cycle has not yet peaked out. As a simple rule, the asset growth cycle of public sector enterprises drives its earnings and the asset growth of public sector enterprises lags the government spending on capital expenditure by two years. So if the capital expenditure of the government remains form or rather continues to grow, there is a continued visibility as to why PSUs will do better.
Now one big reason notwithstanding the sluggish spending for so far this year because it was an election year, as the government moves away from fiscal deficit as a fiscal anchor to something like debt GDP, what will happen is that so long as the rate at which it adds debt every year remains below the rate at which its GDP grows, the debt GDP ratio will continue to consolidate leaving it a room to be able to maintain fiscal deficit in the broad range of 3.5% to 4.5%. So according to my estimates, even at a very, I should say, conservative 10% nominal GDP growth, taking revenue receipts lower than what they are currently in terms of growth and maintaining a consistently 8% revenue expenditure, government of India can reduce its GDP ratio comfortably from 56% by 10 percentage point by the end of FY40, yet spend on its CAPEX something like 3.3% currently in FY25, that is as per budget estimates, to 3.7% end of 30 and all the way to 4% in FY33. So what happens is that moment you move away from targeting a specific fiscal deficit as a target and start targeting debt to GDP ratio as a consolidation anchor, it automatically starts to open up space for you to be able to spend.
So my estimates for now till 2040, you can stay in fiscal deficit anywhere between 3.5% to somewhere about little over 4% by that matter.
Govindraj Ethiraj: Right, and you're assuming some sort of linear growth in tax collections and overall government income.
Garima Kapoor: So I am assuming the current tax, the revenue receipts of the government, x of borrowing are growing at somewhere about 12-13%. I'm assuming a very modest growth of about 8%. So I'm being very conservative.
Govindraj Ethiraj: Okay, before we go, we spoke last week and you had projected that the Reserve Bank of India will not cut interest rates and instead cut cash reserve ratio for banks. So now that's happened and what's going to happen next?
Garima Kapoor: That's happened partly also because that was the only route where you could address growth and still manage your external sector risks and manage the rupee. Next is that you will see a rape cut in FY25 basis point.
Govindraj Ethiraj: Okay, that's pretty precise. Garima, thank you so much for joining me.
Garima Kapoor: Thank you so much, Govind.
Car Sales Swing Down
India’s automotive sector continues to face growth challenges. The good news in some ways is that inventory levels are finally falling, to around 60-65 days after crossing 80-85 days.
The ideal inventory level as you will hear shortly is around 21 days.
Passenger vehicle sales by 13.72% for November while commercial vehicle sales also were down 6.08%, data from the Federation of Automobile Dealership Associations which represents over 30,000 dealerships has said.
Two wheelers did well, growing 26.67% MoM and 15.8% YoY, achieving record-high November registrations that even surpassed November’23 levels.
The industry was expecting more though, including from the wedding season.
The industry is also grappling with a fundamental problem.
Honda Cars India's President & CEO, Takuya Tsumura, highlighted weak consumer sentiment and increasing discounts driving "artificial demand" in the market.
Or essentially saying that cars would not sell if the discounts were not there and the discounts as we will hear are never seen before.
Mr Tsumura also noted in a report in The Economic Times that the industry has excess stock which was contributing to the lower actual demand compared to last year.
According to him, demand was a whole month behind.
There is another aspect, which is finance and what appears to be the tightening of it which we have seen elsewhere as well.
I reached out to Coimbatore based FADA President, Mr. C S Vigneshwar and began by asking him how he was reading the Honda statement about sales largely being propped up by discounts.
INTERVIEW TRANSCRIPT
CS Vigneshwar: Today, a lot of consumption is happening because of loans, because availability of finance, so that today people are looking at EMIs rather than anything large. So, I think that sentiment holds good in anything which is financeable, if I can call it that way. I'm sure it's similar in cars too, so I would look at it as an area where the stocks are high, and stocks are a direct relation to the discounts available.
And today, we are having never ever seen before discounts available in the auto sector, especially in the PV segment, for a single reason being our stocks are high and we want to offload stocks. But the good thing about it, if I can see a light at the end of the tunnel, it will be that the last two months, stocks have been coming down. Even last month, the stocks have dropped about 10 days compared to the previous.
So, I think manufacturers are taking cognisant of the situation, but still we had about 65 stock, which is crazy. Because for us, in the industry, we think 21-day stock, it would be the perfect stocking levels given the kind of inventory we have, and the kind of margins we have. So, 21-day stock would be a healthy stock.
We are still far away from it. I agree with what MD San had said from Honda, discounts are driving the market at this point.
Govindraj Ethiraj: When you say never ever seen discounts, I mean, can you give us some proportion or percentage, I mean, what are you comparing it with? I don't know, cars out there. So, on a value, for example, what is the, when you say never, I'm assuming you mean value.
So, let's say 1 lakh off on a 20 lakh car, for example. So, that would be? That would be good enough.
CS Vigneshwar: Yes, that would be something which is available in the market, right.
Govindraj Ethiraj: On inventories, you said that basically you're at about 65 days, if I've got that right, which is still about three times what you should be holding.
Last point from the Honda Managing Director, he said that we are running a whole month ahead, which is almost 330,000 cars for the industry.
CS Vigneshwar: Our whole life is running a few quarters there. We end up buying a phone on AMIs, we end up buying the car on AMIs. So, I mean, it's, this has been a factor of the last couple of decades.
So, and it's becoming only stronger in the last couple of years. More and more people want finance, the accessibility of finance is higher. So, finance is really helping us actually drive the market.
Govindraj Ethiraj: Is there a positive side to this, which is that inventories are coming down, which means manufacturers are reducing their production and therefore, what they send you next, which is maybe a quarter or so down the line, I don't know if there are new models, but newer cars, or at least in the new year, could that change things?
CS Vigneshwar: It could, but this correction has to happen faster. One of the reasons also would be that November was a little bit tepid and it was disappointing is quite a few of the customers actually have shifted their requirements to December, anticipating higher discounts. So, now the higher discounts are available.
So, we're expecting these customers to come and pick these cars off our lots. So, that has to be combined along with the reduction in stock by a reduction in wholesales. So, when this happens, when both of these two happens, probably is going to be a better place where we'll be sitting first of January.
Govindraj Ethiraj: Now, to come to November, there has been some confusion, at least for people like me, who are looking at it from outside, because we were pegging a lot of demand trends around the festival season, which itself was not strictly comparable because the dates differed from the previous year, which is 2023. So, where are we today? As we speak in the first week of December, are we able to see a normalised sales number?
CS Vigneshwar: This one will look good, according to me, because October was great. Even the 42-day period, which we took, we also released numbers last month, in the middle of the last month, we can get. And that was also looking strong.
But November was again a little bit weak because in passenger vehicles, we recorded a minus 13.72% degrowth. So, that was a degrowth. So, a lot of it is because people are waiting for the December offers.
And it's become traditionally people used to actually jump to January saying that I don't want the older model. But now, last 5-6 years, people have actually seen value in actually picking up the car in December at a good deal.
Govindraj Ethiraj: What's your sense of the overall festive plus spending? I mean, I think your official position is that it's not been so good. So, what was the expectation then?
CS Vigneshwar: November was below expectations. So, below expectations is going to be, we're expecting it to spill over into December in terms of retail.
Govindraj Ethiraj: At which point it could pick up. Okay. So, however, two-wheelers have done well.
How does that contrast or does that make up in any way for the industry as a whole?
CS Vigneshwar: Two-wheelers have been doing really good for the last year. And they've only been building up momentum. And what we saw last, in terms of month on month, it was a 26% increase.
And year on year, it was a 15% increase. 15.80% to be exact. And a lot of it is actually coming from the rural areas.
The rural area right now, last month, it was crazy. Usually, the rural areas contribute about, I mean, 55-56% around. But last month, they jumped to nearly 64% of contribution compared to urban-rural split.
So, I think that was a huge revelation. And that was actually coupled with the fact that there was a nearly 29.88% increase in tractor sales year on year. So, which means that the Bharat of India is doing really well.
And it's actually becoming a locomotive to drive the economy. Having said that, the harvests have been good. So, there's a lot of positivity in the rural segment.
Apart from that, we also have seen that a lot of the minimum support price for a lot of crops have also got up. So, this also helped. Whilst Bharat is great and we're quite happy for it, we've also seen that urban India lose a little bit of steam.
One example I would give you is that in 2020, the average cost of a car was 6.5 lakhs. The average cost today is about 10.5 lakhs. So, for a 70% increase in price, and this has happened for various reasons, including, you know, if fees are coming in and road taxes being increased in certain places.
But has salary gone up to the same extent? It hasn't. I mean, it won't.
So, there is some kind of a pressure in the discretionary spending in urban areas, as well as inflation pressures. So, it'll be great if the government actually can take cognisance of this and actually start reconsidering the GST for entry-level two-wheelers, entry-level four-wheelers, passenger cars. Because these entry-level products are not anymore luxury products.
They've all become really utility products where people want to use. It's a need. It is not a luxury anymore.
Govindraj Ethiraj: Any broad trends that you're seeing? I mean, when I say you, I mean, you as a dealer yourself and as you visit your showrooms, people, anything that you've been picking up in terms of what people are looking for? What's exciting them?
CS Vigneshwar: Elements are still decent. The finance availability is good. Offers are high.
But these offers may not last for long. So, these discounts won't last forever. This is the last hurrah, if you ask me, because this sales, high stock is going to be a last hurrah for discounts and be a great time to go and pick up these vehicles by customers.
But after that, believe me, in January, Feb, March, things are going to start tapering down.
Govindraj Ethiraj: And some manufacturers are already saying they're going to increase prices.
CS Vigneshwar: Quite a few of them are increasing prices. So, which means that there's a good time to go and pick the vehicle up right now. Because price hike is something which is inevitable.
Inflation will lead to input costs raise and they'll have to factor with it.
Govindraj Ethiraj: Vignesh, thank you so much for joining me.
CS Vigneshwar: Thanks. Govind. Take care.
Warmest Year Ever
This year will be the world's warmest since records began, with extraordinarily high temperatures expected to persist into at least the first few months of 2025, European Union scientists said on Monday.
The data from the EU's Copernicus Climate Change Service (C3S)from January to November had confirmed 2024 is now certain to be the hottest year on record, and the first in which average global temperatures exceed 1.5 degrees Celsius (2.7 degrees Fahrenheit) above the 1850-1900 pre-industrial period.
The previous hottest year on record was 2023.
Extreme weather has swept around the world in 2024, with severe drought hitting Italy and South America, fatal floods in Nepal, Sudan and Europe, heatwaves in Mexico, Mali and Saudi Arabia that killed thousands, and disastrous cyclones in the US and the Philippines.
Last month ranked as the second-warmest November on record after November 2023.
"We're still in near-record-high territory for global temperatures, and that's likely to stay at least for the next few months," Copernicus climate researcher Julien Nicolas told Reuters.
Carbon dioxide emissions from burning fossil fuels are the main cause of climate change.
Scientists are also monitoring whether the La Nina weather pattern - which involves the cooling of ocean surface temperatures - could form in 2025.
That could briefly cool global temperatures, though it would not halt the long-term underlying trend of warming caused by emissions. The world is currently in neutral conditions, after El Nino - La Nina's hotter counterpart - ended earlier this year.
