The Bulls And Bears Fight It Out Once Again
It was a mighty battle between the bears and the bulls on Dalal Street once again on Wednesday
On Episode 507 of The Core Report, financial journalist Govindraj Ethiraj talks to Aditi Nayar, Chief Economist at rating agency ICRA. We also feature an excerpt from our interview with Akshay Kumar Singh, Managing Director and Chief Executive Officer of Petronet LNG Ltd (PLL).
(00:00) Stories of the Day
(00:50)The bulls and bears fight it out once again as markets slip for the 6th day
(06:30)Consumer price inflation is down to a five month low, will another round of rate cuts come?
(14:43)India is gearing up for a major gas sourcing and distribution push
(27:33)The new tax bill is almost here and early reactions suggest more was expected
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 Thursday, the 13th of February and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
The bulls and bears fight it out once again as markets slip for the 6th day
Consumer price inflation is down to a five month low, will another round of rate cuts come?
India is gearing up for a major gas sourcing and distribution push
The new tax bill is almost here and early reactions suggest more was expected
Markets
It was a mighty battle between the bears and the bulls on Dalal Street once again on Wednesday with the final hours resembling the last overs of a one day international rather than a stock market.
The bears finally won with the the BSE Sensex closing at 76,171.08, down 122.52 points, having traded in an almost 1,000 point range.
The NSE Nifty50 closed down 26.55 points at 23,045.25. The index recorded an intraday high of 23,144.70, while the day's low was seen at 22,798.35.
Some of the financials did well while Reliance Industries and Mahindra and Mahindra and Eicher Motors did not.
Among the broader markets, the Nifty Midcap100 and Nifty Smallcap100 indices settled with losses of 0.26 per cent each.
At this point, the Sensex and Nifty have fallen for the sixth day in a row.
The reasons have not changed, given the =persistent selling by Foreign Institutional Investors (FIIs), weak Q3 results and valuation concerns over smaller cap stocks, the new bogey so to speak.
Should tariffs on Indian exports to the US affect India ? To some extent it could affect the fortunes of companies who are exporting though the pharmaceutical industry going by the words of a Indian Drug Manufacturers Association official who was on our show yesterday, it is possible but unlikely that drug imports into the US will see tariffs, given how sensitive the prices are and its impact on health and lives.
India exports around $27 billion in all and of that, some 30% goes to the US.
Back to the markets, Equity-oriented mutual fund (MF) schemes attracted net inflows of Rs 39,688 crore in January, despite a sharp selloff in the market.
While the inflows were 3.6 per cent lower compared to December, they were 21 per cent above the average monthly inflows for calendar year 2024, Business standard reported.
The segment break up is interesting, given the focus on small cup mutual funds and their possible struggles.
Among the 11 equity sub-categories, thematic funds received the highest net inflows at Rs 9,017 crore, followed by smallcap funds at Rs 5,721 crore and flexicaps at Rs 5,698 crore.
Notably, inflows to smallcap funds increased by 22 per cent month-on-month, despite a significant decline in the sector.
What is however clear, at least to me, is that we cannot take the supply side as a positive for the market, meaning just because people are pouring in more funds does not mean the markets will keep going up.
And while the blame is generally dumped on FPIs for selling more than $10 billion this year, a lot of Indian funds have also been selling, as fund managers have told me in recent months.
Incidentally, in January, the Nifty Smallcap 100 Index fell by 9.9 per cent, marking its worst monthly performance since May 2022 and the third-worst since Covid-19.
The Nifty Midcap 100 fell 6.1 per cent, its steepest drop since October 2024.
The market rout continued in February, with the Nifty Smallcap 100 index and Nifty Midcap 100 each declining by another 5 per cent, according to the BS.
By the way, at their session low, the small-caps were 21.4% below the record high levels hit on December 12. However, they closed 18.7% below their all-time high.)
A close of more than 20% below a record-high indicates that the underlying stock or security has entered a bear market.
The mid-cap index is about 17% from its record high. Both the small- and mid-cap indexes remain in correction territory, which is 10% below the record high, says the BS.
All this is obviously to help you determine if we are circling the bottom of the market or still far away from it.
The data is obviously saying we are closer to the bottom.
But then there is the matter of sentiment.
Legendary emerging market investor Jim Rogers told Business Standard that the whole world, including the US, is overdue for problems. That’s because nearly all stock markets around the globe have done well recently.
Rogers says he has invested in India many times in my life which is of course true.
He also believes the central dispensation (government) in New Delhi understands the Indian economy, and what all needs to be done.
And is thus more optimistic about India than before. For the first time in my life, I am actually enthusiastic about India.
There is of course a but.
He says he does not like to buy markets that are making all-time highs. As a rule, if the markets are correcting and investors are not worried, I do not buy.
So, if the markets were to correct in India and investors are depressed, worried and despondent, I would probably buy Indian stocks.
So this is your non data answer to what is a good time to buy ?
Rogers says he has sold out from nearly every stock market in the world, except China and Uzbekistan.
I sold Japanese shares too soon, but that was my strategy. I own Chinese shares mainly because they have not seen a vibrant recovery post the Covid pandemic.
He also says Indian stock markets are overreacting to global developments, especially related to Donald Trump.
That said, if the Indian markets go down more from here on, I hope I can buy stocks there again. I need for the Indian stock markets to go down more before I start buying.
Retail Inflation
Moving on from markets. Some good news.
India's retail inflation has slowed to a five-month low in January as food price inflation cooled off, increasing the likelihood of another rate cut in April.
Annual retail inflation in January was at 4.31%, lower than economists' estimate of 4.6% and 5.22% in the previous month.
Retail inflation was at 3.65% in August 2024, as per data released by the Ministry of Statistics and Programme Implementation (MoSPI) on Wednesday.
Interestingly, the data shows higher inflation in rural areas at 4.64 per cent, compared to 3.87 per cent in urban regions.
Food inflation slowed in January, though it remained high at 6.02 per cent, driven largely by high prices of vegetables, fruits, oils, and fats.
It stood at 8.39% in December.
In January, vegetable prices rose 11.35% year-on-year, compared with a 26.60% increase in the previous month.
Prices of cereals rose 6.24% against a 6.50% gain in December, while those of pulses gained 2.59% against 3.80%. Prices of vegetables and pulses fell from the previous month.
Will this and imminent rate cuts help the economy pick up pace ?
I reached out to Aditi Nayar, Chief Economist at rating agency ICRA and began by asking her what other signals she was seeing
INTERVIEW TRANSCRIPT
Aditi Nayar: So basically, Let me start with the CPI inflation number. It came in lower than we expected and we're projecting to fall further to 4% in February. Which is going to be the last print altho the MPC has when it holds its next scheduled meeting in April. And this is quite significant because 4% is the elusive midpoint of the MPC's medium-term target range of 2-6%. So if that is the case that's going to be setting us up with a very high likelihood of another rate cut coming in the April policy itself. Now when we look at what caused our CPI inflation to fall between December and January, primarily it was food inflation, but it was not very broad-based. So a few items led to this correction in food inflation, particularly vegetables.
But that's been a big pain point over the last several quarters. So it's not bad news in a sense, I think any fall in food inflation is very welcome. When we look at the rubby output that is expected, the rubby sowing right now, and the reservoir levels, all of that gives us a good amount of comfort on the food inflation front going forward.
Now a couple of other things that could of course impact the inflation trajectory, one is what happens globally in terms of tariffs and other policy changes and the impact it has on both commodity prices as well as on the exchange rates. Now the CPI itself is not very sensitive to exchange rate movements. The transmission is typically lagged and incomplete.
Incomplete in a sense that services inflation tends to not be affected by what happens with exchange rates because services tend to be pretty much domestically produced and consumed. As opposed to the WPI which has a much higher weightage of traded commodities, tends to see a much quicker transmission of exchange rate movements. Other than that we've had the budget which has given an almost equal boost in terms of the capex increment which is about 1 trillion between this year and next year and the consumption boost in terms of the tax relief which is also about 1 trillion.
Now my sense is that when we look at the per month average amount of tax relief, it's not huge. We think most of it is going to be spent. Some of it may also go into younger adults acquiring their first home because there will be an improvement in the home loan eligibility after the tax cuts.
And my sense is that the tax relief is probably going to be largely spent on services where the inflation has not been a big concern of late.
Govindraj Ethiraj: But you're really saying that's six seven thousand rupees a month that's the additional income in the hands of additional or potentially additional income. So you talked about the tariff uncertainty. So the uncertainties for countries which are raising tariffs, it doesn't look like India is going to raise tariffs or the country we've already in anticipation reduced tariffs though the products on which we've reduced are very few at this point.
So why would that be a concern?
Aditi Nayar: The concern is what will happen to overall global trade flows if the US raises tariffs on additional countries going forward and does that happen to India as well. So firstly we've already seen tariffs being increased on some countries and on some products. Now going forward is it going to be uniform across countries on certain products or is it again going to be more country specific and where does India get bracketed.
So we heard some signals in the last couple of weeks that India might get clubbed with the bricks in terms of having a common tariff imposition. We don't know whether that is going to happen. So we don't know how much our exports are going to get affected on what items and therefore we are not quite clear on what will be the trend of the INR over the next few months.
Govindraj Ethiraj: The first trade cut has happened after five years. Another one is imminent as you're saying now. Both come through in the next one being in two months time.
How do you see the overall impact on economic activity or the economy as a whole?
Aditi Nayar: The interest rate cards pass through very quickly into things like EMIs. So there again the tax relief and the potential EMI relief will give a boost to consumption and where we've been most concerned over the last couple of quarters is parts of urban consumption. So rural now is expected to do better with overall trends for the agri-economy looking healthier.
We expect rural demand to be more sustained going forward. But urban demand was extremely uneven. High-end demand seemed to be very much intact.
Mid-level and lower income urban households seemed to be more impacted by the fact that food inflation in particular was quite high over a period of time. So if we do have food inflation coming down, we have tax relief for the salaried households and we have EMIs which can potentially come off over the next couple of quarters, then all of this will provide a sentiment boost and we do expect that consumption demand is going to be better. Now that is also something that is going to be important for private capex to come back.
In a global scenario where exports are quite uncertain, only when we have a lot more confidence on the domestic demand sustaining would we expect the capex cycle to significantly improve.
Govindraj Ethiraj: Right and in a broad sense you know in or rather in the past we've seen that food prices have moved quite erratically as in we've not really been able to predict and particularly potatoes, onions, tomatoes and so on and maybe more tomatoes and onions. So given that I mean could prices again start swinging, I mean is that a possibility and if so are we ready for it or geared for it?
Aditi Nayar: To be very honest as a forecaster I kind of assume we are going to have a vegetable price shock at some point in the year. I just don't know when and which item. Unfortunately that definitely remains a risk.
The other thing is that you know in general agroclimatic risks seem to be on the rise. So while I'm saying that you know in the immediate term the kharif output was good, the rabi sowing is higher than last year and very importantly reservoir levels in many regions are quite healthy which takes away the anxiety related to the onset of the next monsoon to an extent. So all of this sets us up for a better outlook for crop inflation but of course you can have like freak weather events which create short term or you know the pain as far as perishables are concerned and can also impact particular crops.
Govindraj Ethiraj: Great Aditi, thank you so much for joining us.
Aditi Nayar: Thank you.
Gas Wars
India’s liquefied natural gas purchases are set to more than double by 2030 as infrastructure expansion and modest growth in domestic production prompt a jump in consumption, the International Energy Agency has said.
Demand for the fuel will rise to an annual 64 billion cubic meters by 2030, up from 36 billion last year, according to the IEA’s latest report on the Indian gas market, published on Wednesday.
India is the world’s fourth-largest buyer and is aiming to sharply increase its use of gas in the overall energy mix.
At this rate, this would mean an annual growth rate of 11% until the end of the decade, twice the average rate seen in the last 10 years.
The increase, part of an overall rise in demand from transport, industrial consumers and refineries.
“India’s gas market is entering a new phase of growth, supported by significant infrastructure development and clear policy direction,” the IEA’s Director of Energy Markets and Security, Keisuke Sadamori said in a statement.
“The prospect of higher gas demand in India coincides with an expected wave of new global LNG supply. However, it will require careful planning and market coordination to ensure supply security and to help gas to compete in a price-sensitive market.”
India is targeting the share of gas in India’s energy mix to climb to 15% by 2030, up from around 6% today, a level that has stayed pretty much the same in the last 10 years.
I spoke with Akshay Kumar Singh, a veteran of the oil and gas industry and also Chairman and Managing Director of Petronet LNG, which owns right now two receiving stations for LNG in Cochin in Kerala and The Hague in Gujarat. Petronet LNG receives this gas in these two stations and then distributes it across the country through pipelines and occasionally through trucks.
Ands began by asking him to describe Petronet LNG’s and its current gas sourcing and distribution strategy.
TRANSCRIPT
Akshay Kumar Singh: Petronet LNG Ltd. is a joint venture company promoted by four Maharashtra companies, IOCL, ONGC, KEL and TTCL, each having 12.5% equity share. And the company was set up in year 1998 and it was first of all assigned the job of setting up first LNG terminal in Southeast Asia. And the first LNG terminal at Tejas was commissioned in year 2004 with a capacity of 5 mm TPA, meaning by 5 billion tonnes per annum, the conversion of LNG into the recast.
After that, the Tejas terminal has been expanded from 5 million tonnes to 17.5 million tonnes in the year 2019. And perhaps at present, it is considered to be the world DGS terminal handling almost 260 to 270 LNG cargo in a year. Even though the capacity wise, there are some terminals in South Korea and Japan which had got more capacity than the Tejas LNG terminal, capacity utilisation wise and handling of more number of LNG cargo, Tejas is number one.
We are in the process of expanding the Tejas LNG terminal capacity from 17.5 to 22.5 mm TPA and very soon the capacity expansion probably in coming 3 to 4 months will be completed and the Tejas terminal will have 22.5 billion tonnes per annum capacity. In year 2013, the Petronet set up a second LNG terminal at Uchi with a capacity of 5 mm TPA. Unfortunately, due to some evacuation pipeline issue, the capacity utilisation could not reach to bearable level despite efforts by various stakeholders to increase the capacity utilisation.
And as of now, we are able to utilise that terminal at 22-23% capacity. But the Tejas terminal is almost operating at 100% capacity. So, both terminals combined, capacity wise in India, it is 43% of total LNG re-gas capacity in India.
But, this two terminal handles more than two-third of total LNG import in the country. So, this is the unique feature of Petronet LNG which is supporting the gas-based economy in our country. Last year, almost 51% of total natural gas consumption in country was met by imported LNG and 49% was domestic gas.
And Petronet's share of handling those 51% was almost 70%. So, we are a key player in LNG supply chain of India and we intend to continue as a leader in this LNG business and as a part of the expansion plan. We are in the process of setting up a land-based 5 million tonne foreign capacity RLNG terminal in the east coast of India at Gopalpur in the state of Odisha.
In fact, the Pochi terminal which is of 5 million tonne capacity is being utilised at present 1 million tonne and Gale is in the process of completing the gas pipeline connectivity from Pochi to Banalore. And it is expected that during this year, probably in 6 to 8 months time, the pipeline will be completed and Pochi LNG terminal will be connected with the national gas street. Meaning thereby, the Pochi gas can flow to Nangal in Punjab, Guwahati in eastern part or Tiwet, Kolkata in West Bengal.
So, it will be the interior part of the national gas street. And we expect that once this pipeline connectivity to Banalore is completed, there will be substantial improvement in the capacity utilisation of Pochi terminal from present 22, 23 percent to probably going 60, 70, 80, 90 very soon. And going forward in coming 3 years time, when the Gopalpur terminal is made operational, the Petro Net LNG will be playing a major role in meeting the energy security of the country.
This is what I brief you about the LNG part. Apart from that, we are in the process of setting up a petrochemical complex adjoining to our LNG terminal in the Haze. The capacity of petrochemical complex is 750 ETA and per annum the EDH, propane dehydrogenation plant at 500 KTA of polypropylene product.
Apart from this two product propylene of 750 KTA and EP of 500 KTA, we will also be setting up ethane and propane handling capacity at the Haze terminal. We are in a process of constructing a third jetty, which will be unique in the country, which will have LNG, propane and ethane, three product handling facilities, which is nowhere in the country. Propane is required for feed stock of our petrochemical plant, we need around 1 PN tonne of propane.
And ethane is required for our associated and the promoters as subsidiary company, mainly the Popal, Guild and other who needs propane, ethane for their petrochemical plant. And going forward when in 2028, our existing LNG contract from Raas based Qatar, which is of 7.5 billion tonne per annum capacity is expiring and it has been renewed for further 20 years up to 2048. At the new terms of contract, they will be supplying lean gas and there won't be any ethane and propane.
So presently it is a rich gas, which is being extracted by ONGC and being supplied for running of Popal petrochemical plant. But from 2028 onwards, we ensure the availability of feed stock for the Popal plant. We are in a process of setting up the ethane and propane handling capacity at the Haze.
The project has already been approved by our board of directors and it is at quite advanced stage of implementation. The licensors have been positioned, they have done the basic designing event package, the PMC is in position, all the long lead items which is identified have been almost tendered. There are 13 packages for long lead items, 11 have already been sorted in the market, tendering process is on.
And we are right now on track. We have environment clearance, we have land, we have all the resources available and we target to complete this petrochemical project by end of 2020 setup. Right.
Govindraj Ethiraj: Okay, couple of quick questions. So if I were to ask, your current receiving stations are on the west coast and you have a new one coming up on the east coast in Gopalpur as you said. So would the sources for LNG on the east coast be different from the ones on the west coast?
Akshay Kumar Singh: Yes, see as on today we have a long term contract. Almost you can say 90% of our capacity at the Haze has been tied up of long term receiving. And we have still 10% which is untied and it is being used for the export.
Going forward, when a new capacity is being added, our promoters and other off takers are in the process of tying up the long term and mid term contract and we are in discussion with them to hire a mid term or long term contract for converting LNG into RECAP. So the source would be across the world. It is not a particular country.
It can come from anywhere in the world. And as we know that the major source of supply for the LNG is Qatar, Australia and USA. It is the major dominant supplier in the world.
Almost last year the USA became the number one supplier. Almost 87 million tonnes they supply. Earlier it used to be Qatar.
They are around 80 million tonnes and Australia also around 80 million tonnes. These are the three major dominant suppliers of LNG and the remaining is from different countries across the world. So when the prices are reasonable and less volatile, a lot of LNG comes as an export bond.
And the terminal which has a spare capacity only can convert it. And we have seen last year during the summer season, particularly May, June, July, the volume requirement for the power sector which normally corresponding to the ABI area it was around 23 NMS EMB went to almost 35 NMS EMB. So a huge requirement of base was there during the summer season.
And in fact we were operating our damaged terminal even at 150-120% capacity. So it is a chicken and egg theory. You have to create the infrastructure and also look for the opportunity whenever the prices are reasonable.
A lot of volume flows in our country as a spot volume and we look for such opportunity in the future.
New Tax Bill
It is almost there but not yet.
The copy is out and doing the rounds but it is yet to be presented in parliament so maybe some last minute changes are possible.
India will introduce a new condensed version of its income tax law in the lower house of the Parliament on Thursday, which aims to simplify the six decades old rules that have led to a slew of litigations.
In July 2024, Finance Minister Nirmala Sitharaman announced that the government would simplify its income tax law to make it easy to understand, and aimed to reduce disputes.
The new income tax bill will drop old and redundant sections of the law to shrink it to 622 pages from over 800 pages, according to the bill reviewed by Reuters.
"By replacing complex provisions with clearer provisions, it aims to reduce legal disputes and encourage voluntary tax compliance," said Rohinton Sidhwa, a partner at Deloitte India.
The bill includes tax rates in tabulated forms and removes conditions attached to legal clauses, making the law easier to understand. It also drops explanatory footnotes to legal sections and makes clauses self-explanatory.
Income tax disputes have surged to 13.4 trillion rupees ($154.25 billion) as of March 2024, of which disputes amounting to 3.8 trillion rupees were added in less than two years.
