Markets Withstand Hindenburg, Adani Stocks Don’t
The BSE Sensex and NSE Nifty pulled back from initial losses to end Monday's choppy session on a flat note
On Episode 362 of The Core Report, financial journalist Govindraj Ethiraj talks to Aditi Nayar, chief economist at ICRA as well as Shiv Putcha, founder & principal analyst at Mandala Insights.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take
(05:29) Markets withstand Hindenburg, Adani stocks don’t
(07:29) Inflation is down to 3.5%, why you shouldn’t celebrate yet
(14:13) Bharti buys a 25% stake in iconic UK brand, British Telecom
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].
---
Good morning, it's Tuesday, the 13th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
It is clear to most now that the major issue in the latest Hindenburg salvo is not the Sebi chairperson Madhabi Puri Buch but it’s Adani.
Whether or not the Sebi chairperson should have disclosed more details of her past investments is something that will soon be settled, one way or the other.
To reiterate what I said yesterday, she should invite an inquiry, disclose proactively all her and family assets on the Sebi website and there is a good chance everyone would have moved on.
The issue IS that the crossing of wires and paths, even if inadvertently, with Adani's investments in an offshore fund, brings the needle back to Adani.
The Adanis fully realise that there is a problem in the public perception of them and their stocks and have been one for more than a year, since January 2023 to be precise when the first Hindenburg barrage was fired.
While they have managed to get through a lot and the stocks have bounced back, the stigma still holds.
As is evident from the manner in which Adani stocks fell on Monday following Hindenberg’s second instalment, a day when the rest of the stock market was flat
Last week, Bloomberg did a fairly in depth video cum text report on the group, evidently with full access, including to all the next generation leaders and inheritors and a willingness to answer all the tough questions.
The tough questions were asked to be fair but the Adanis were not grilled and perhaps the interview would not have happened if it came to that.
The point is that the Adanis made a somewhat sincere attempt to open up to an independent news organisation, as opposed to let's say speaking to NDTV who they own.
This also tells you why it is important to be seen to be questioned by independent media and journalists, large or small and not, for example, to look at regurgitated content disseminated by blogs run by stockbroking houses.
Or media that is owned by parties whose interests may conflict or clash with the news in question.
Now, to come back to the Adanis.
One key problem has been, from day one, the unclear ownership of overseas companies that own shares in Adani companies in India leading to concentrated holdings here which among other things, creates artificial scarcity.
The other was to do with accounting issues which I feel is not the major one.
These companies or funds are sitting outside India and thus not subject to Indian jurisdiction as such.
Attempts to seek information, assuming they were made, have come to nought.
The good news is that post this episode, Sebi made it mandatory for these overseas funds with concentrated positions, among others, to share information on ultimate beneficial owners.
But there is no way to force an entity sitting outside to reveal something it does not want to or in any case, you have to believe what they tell you.
Sebi by the way has not spoken on the Adani issue per se, ever since. There is no way of knowing where the investigations have gone, what they have uncovered, if anything. Nothing in the public domain appears.
The Sebi problem clearly went away but the shadow has not.
This is something that Adanis must realise will come back to haunt them again and again.
And the only way to address it is to speak freely and openly and respond to questions on the mechanics of these investments and other charges in the original Hindenburg report.
The Adanis surely realise that a share price comeback is not success or victory in the integrity game if the shadow of their past looms so large.
Perhaps they thought the matter has been resolved and evidently it has not.
I argued before that they have to open up on their shareholding, including the mechanics of it and the overseas investors, and answer every possible question that could be asked of them.
By people who can be relied upon to ask questions. And then who will question further, till there is complete clarity on the past.
Coming open will help bring finality.
Even if the markets react, it can’t be worse than these continuing shocks.
Moreover, as all institutional investors who barely put any funds in them know and also would acknowledge, the Adani group assets are sound and solid in most cases, from ports and airports to consumer products and cement.
These are real assets and not a financial illusion.
And not in the league of venture funded tech companies that have imploded all the way.
The Adonis would do good to all, including investors present and future to close this episode, to the extent it can.
And that brings us to the top themes of the day.
Markets withstand Hindenburg, Adani stocks don’t.
Inflation is down to 3.5%, why you shouldn’t celebrate yet.
Bharti buys a 25% stake in iconic UK brand, British Telecom.
Markets & More
After starting on the backfoot on Monday amid the latest salvos in the Hindenburg-Sebi row, the BSE Sensex and NSE Nifty - pulled back from initial losses to end Monday's choppy session on a flat note.
Sensex lost 57 points to close at 79,648.92.
The Nifty50 fell 20 points to 24,345.55. In general the markets were see-sawing a bit.
The markets did not react to the Hindenburg as such though many of the 11 Adani Group stocks that are listed came under pressure. Some of the group stocks lost between 2 and 4%, more than the market which like we said was quite flat.
Elsewhere, the Rupee slipped again, to its weakest closing level on Monday, aligning with a decline in Asian currencies and a possible intervention from the Reserve Bank which ensured it did not fall further, Reuters said.
The rupee closed at 83.9725 against the US dollar, after closing at 83.9550 in the previous session. The RBI likely sold dollars to limit further depreciation in the currency, traders said.
Elsewhere, Bloomberg is reporting that foreign investors pulled a record amount of money from China last quarter, likely reflecting deep pessimism about the world’s second-largest economy.
China’s direct investment liabilities in its balance of payments dropped almost $15 billion in the April-June period, marking only the second time this figure has turned negative, according to data from the State Administration of Foreign Exchange released Friday.
Should the decline continue for the rest of the year, it would be the first annual net outflow since at least 1990, when comparable data begins.
Foreign investment into China has slumped in recent years after hitting a record $344 billion in 2021.
Interestingly, while the slowdown in the economy and rising geopolitical tensions has led some companies to reduce their exposure, the rapid shift to electric vehicles in China also caught foreign car firms off guard, prompting some to withdraw or scale back their investments, said Bloomberg.
Inflation Is Down
India’s inflation numbers dropped below the central bank’s target for the first time in nearly five years.
Inflation, as represented by the consumer price index, rose 3.54% in July from a year earlier, data from the Ministry of Statistics and Programme Implementation showed Monday.
That’s the slowest pace since August 2019 and below a median forecast of a 3.60% increase predicted by economists in a Bloomberg survey.
Inflation climbed 5.08% in June.
Lower food prices were a key driver of lower inflation numbers and of course the high base effect, which we will come to shortly.
Economists polled by Reuters had forecast inflation at 3.65%, based on a higher print in July last year when inflation hit a 15-month peak of 7.44%.
Prices of food, which account for nearly half of the retail inflation, rose 5.42% from last year in July, compared to a 9.36% rise in June.
Vegetable prices rose 6.83% year-on-year in July against 29.32% in the previous month.
I reached out to Aditi Nayar, Chief Economist of ICRA and began by asking her what one should take away from the latest CPI data and one should not take away.
INTERVIEW TRANSCRIPT
Aditi Nayar: So today's number is a little bit lower than we had expected, but the fact that it was going to fall substantially between last month's print and this one's print was sort of fairly well known, and so it's not a surprise that we bought inflation coming in significantly lower than the last month, although it has come in a little bit lower than what we were actually forecasting for this month. Now, a large part of the drop in the headline inflation number is really coming from a favorable base effect, which means that inflation was so high at this time last year that optically we're getting a lower inflation number. And that is something that may not necessarily sustain at the same pace going ahead. So we need to take this drop in the headline number with a pinch of salt, because it's going to be transient, and it's not indicative of the fact that inflation is going to remain sub 4% over an extended period of time. It could remain below 4% in the current month, but not really going into September and beyond.
Govindraj Ethiraj: Okay, so if I were to ask you to illustrate that, so let's say vegetable inflation was running at about 27% and right now it's showing at about 6.8% so if a year ago, I bought 100 rupees worth of vegetables, when it was running at 27% it would mean that a year later, I would be paying about 127 rupees. And if we are now saying that inflation has come down to 6.8% or, let's say 7% or thereabouts, what would that mean?
Aditi Nayar: So that means that last year, the vegetable prices went up so much between June and July that this year they're only 6% higher than what they were in July of 2023 possibly what we need to look at in the current context, is the month on month change. Vegetable prices went up by 14% between May and June, and they've gone up again by 14% between June and July.
Govindraj Ethiraj: Okay, so overall, I'm still paying about 7% more than what I was paying a month ago,
Aditi Nayar: 7% more than what you paid a year ago, and 14% more than what you paid last month.
Govindraj Ethiraj: Right. So in that sense, inflation is not really in control, at least when it comes to, let's say, the vegetables and food part of it.
Aditi Nayar: Yeah, the battle isn't won on that front at all for a lot of the other parts of food inflation. You know, we've had this pick up in the monsoon in the last month and a half, kharif sowing is about one and a half percent above last year. Generally, the trends are looking favorable, but the last six weeks of the monsoon are quite crucial. If we get extended periods of very heavy rainfall, then that is also something that can be damaging. So there's still quite a lot of water to really go under the bridge between now and the end of the monsoon season, before we can feel very comfortable on the outlook for food inflation.
Govindraj Ethiraj: Anything else that's standing out for you in the overall consumer price inflation basket, Aditi?
Aditi Nayar: So the Core inflation, which is the CPI basket, without food and fuel, and we also removed petrol and diesel for transport. That number has inched up a little bit because of the telecom price hikes that happened in the month of July. And again, this was expected. We knew that this was going to happen. But I think more broadly, we do think that core inflation will continue to inch up over the rest of this year, particularly, you know, if we do think that robust domestic demand is going to be the underpinning of our GDP growth, then it's very unlikely that services inflation will be muted. Because, you know, services are something that we really can't trade. So situation where global demand is in the doldrums and commodity prices are low, can benefit us as an importing nation, and it can help to bring our domestic output prices lower and boost demand further. If our domestic demand is already healthy, but when domestic demand is healthy, services is not something that you can import from the rest of the world. Services. Is something which you produce and consume largely domestically. And therefore that is a price bucket which starts to go up.
Govindraj Ethiraj: Right. And what's your outlook at this point? I mean, so one is you've clearly already highlighted, not the problem, but let's say the fact that there is a base effect, and therefore one should not pop the champagne too soon. What else are you looking out for in coming months?
Aditi Nayar: So this month will be quite interesting. You know, we are looking at a lot of essential commodities prices being on the higher side this month as well, but vegetable prices are relatively less badly behaved in the current month so far. So let's see how the rest of the month or turns out, and if you're able to kind of have a flattish print in August, my sense is that we may even get a slight dip. So I don't think that the July three and a half percent is the bottom. I suspect we're going to get a slightly softer print in August, unless perishable prices really spike between now and the end of the month, so August may be the bottom, and then we go back to being the range of four to 4.8% or so in terms of the monthly prints from September to March.
Govindraj Ethiraj: Right. That gives us a good sense. Aditi, thank you so much for joining me.
Aditi Nayar: Thank you.
Bharti Acquires British Telecom
Sunil Mittal owned Bharti Enterprises said it would acquire a 24.5% stake in BT, worth about 3.2 billion pounds ($4 billion), buying out the British company’s top investor, telecoms tycoon Patrick Drahi, as his Altice group struggles with high debts, CNBC reported.
Interestingly, BT owned a 21% stake in Bharti Airtel Ltd in the late 1990s.
Bharti said in a statement on Monday that it had no intention of making an offer to acquire the whole of BT, the former state monopoly which is Britain’s biggest broadband and mobile company.
Bharti said it would buy an initial 9.99% stake before seeking to add the remaining 14.51% following regulatory approvals. It is voluntarily applying for clearance under the UK National Security and Investment Act.
Bharti said it supported BT’s executive team and strategy as the group pushed forward with an “ambitious” transformation programme to deliver long-term sustainable growth.
BT’s shares have risen by 24% in the last six months as the fruits of its long-term investment plan to build the country’s fibre network start to materialise.
Mexican magnate Carlos Slim bought a 3.2% stake in June this year, a boost for Allison Kirkby who took over as BT’s CEO in February.
Bloomberg reported the move will bolster Bharti’s international expansion while giving the British carrier more investor stability.
“We are long-term telecom investors,” Mittal said in a call with reporters on Monday. “This is not a stock market operation.”
BT shares rose as much as 7.6% in London on Monday.
Bharti’s stake in BT is part of an international expansion effort that follows investments in Africa and UK-based satellite company OneWeb, which merged with Eutelsat in 2023.
BT is the UK’s largest telecoms operator and an iconic brand that has seen its share price drop for years.
“We welcome investors who recognise the long-term value of our business, and this scale of investment from Bharti Global is a great vote of confidence in the future of BT Group and our strategy,” BT CEO Allison Kirkby said in a statement on Monday.
European telecom operators including BT have been struggling to make a return on capital as they attempt to roll out expensive 5G mobile technology and connect homes to fibre lines.
One reason the British operator may have fallen behind, Mittal said, was a slow rollout of fibre that allowed so-called altnet rivals to get a foothold in areas BT Openreach had not covered.
INTERVIEW TRANSCRIPT
Shiv Putcha: Number one, it seems like there was an opportunity in the first place because of the circumstances around Altis in the UK. And as you're aware, they've also been selling off some other assets. So this was probably in the works for some time, and Bharti and BT do have some history, as you're aware of as well, including BT being a prior investor in Bharti Airtel and so on. So, you know, known each other for a long time. So I think an opportunity presented itself, and it's a good diversification, sort of, you know, or a strategic opportunity for, as they said, they're not interested in acquiring the entire company, which kind of makes sense. But I think this, you know, is the next set of opportunities for a group like Bharti, the India Business is stabilizing, even Airtel Africa is sort of seems to have come through the worst of it. And this is the not only was the opportunity available, I think it was also available because they've just gotten over that first round. You know, the heavy expenditure, the capex from the 5g build out. So all of these kind of combined, I think, has prompted them to pull the trigger on this.
Govindraj Ethiraj: British Telecom is obviously a BT, as it's now known as. It's a very iconic brand and name in Britain. And I guess there is that sort of optical bit about an Indian company again, I mean, after maybe Jaguar Land Rover and so on, buying into an iconic British brand so, and I'll come to that in a moment. But does this also suggest that the India opportunities for telecom players like Bharti are now limited.
Shiv Putcha: I wouldn't say limited, but it's not a high growth kind of, you know, the environment that it was, you know, even five years ago, perhaps because if you talk about 5g the consumer opportunity is it's significant, but it's not. It's more people transitioning from previous generations to this right on the consumer side, most of the opportunities will come from enterprise, from an enterprise play, but that's going to take some time to play out, so in the meantime, what you do? Okay, they've got fixed wireless access, which is a good, you know, monetization sort of opportunity for them, but they do need to do other things. So I wouldn't call it limited, but it's also a timing issue right now, they just digested all the CapEx spend. The network is out, so you can't sit still. And if an opportunity like this comes up for a prestige kind of play, as you just go, you know, refer to it as, I think, you know, certainly it's a big feather in their cap,
Govindraj Ethiraj: Right. And I was looking at the BT, you know, their, what their size and spread is. So they have about 25 million subscribers, and they're the largest provider of consumer mobile and fixed broadband communications in the UK. And, I mean, that's what they say. And of course, they also have a lot of debt that they're sitting on. And maybe those are some of the reasons why. Maybe they're existing investors who, for other reasons too, may be getting out. But the larger question is that, is there any synergy at all between, let's say, a group like Bharti and British Telecom
Shiv Putcha: In terms of immediate obviously, it's in a completely different country. It's not an adjacent market as such, but it is a mature market. BT has substantial assets and a sub cyber base and revenue stream and everything you just mentioned. So the, I think one opportunity where maybe at a party can step in and help them is there is more and more convergence, you know, in terms of the offerings in the UK, between mobile broadband and sort of in media play as well. So I think BT probably could use some help in that, you know, in those areas, and any may be able to this investment will certainly give them a shot in the arm at the right time, when the competition levels are heating up in the UK domestic market.
Govindraj Ethiraj: When you look back a little and maybe look ahead, what's the nature of the telecom industry, or the architecture of the telecom industry looking like. So, I mean, if I can supplement that, you know, for example, Bharti clearly started in India, but then acquired assets in Africa and a couple of other countries, smaller ones. Vodafone is in India, but it's a global player, and now is partnered with an Indian company. Jio at this point, is a purely domestic play, and may expand later, but we don't know. So, how is this? I mean, are you seeing any sort of architectural commonality, or any trends in that?
Shiv Putcha: Yes. So a few things at a very high level, sort of macro view, definitely, there is increasing consolidation going on in the industry. And, you know, we kind of it goes in ebbs and flows always, of course, but where I feel like we're seeing turn to some large operator groups, and there are people who are looking at opportunities in Europe. At the moment, it's not just Bharti, even there are some others, you know, some Middle Eastern sort of telcos and others who are looking at available opportunities. And there's also increasing convergence in the sense of, it's not just covid. Zoomer or wireless only, you know, you're seeing more diversified sort of set of assets across mobile, across broadband, across, you know, IoT, the nali, looking at satellites coming up also, and all of them will increasingly converge onto a common network architecture. And there will be, you know, on the enterprise side, people don't sort of realize that BT has a strong enterprise sort of focus as well, which will certainly help. You know Bharti, at a time when you know the UK and India talking about FDA and lots of other you know business convergence as well, right? So there are quite a few things that they can work on about. All of these are large operator groups on increasingly consolidated, common infrastructure, is the way things seem to be going, and this certainly plays into that story.
Govindraj Ethiraj: Right. Makes sense. Shiv, thank you so much for joining me.
Shiv Putcha: Thank you so much, Govind.
