The Markets Take Breather, Could Rise Again
The stock markets took a breather once again on Friday as they now so often do after running up and away
On Episode 399 of The Core Report, financial journalist Govindraj Ethiraj talks to Aniket Dani, Director at CRISIL.
SHOW NOTES
(00:00) The Take
(05:27) The markets take breather, could rise again
(07:03) India leads global IPO mania.
(09:01) NRIs can rejoice, Indian rice is headed back to global markets.
(10:10) Why India needs more container ships
(19:59) India’s China conundrum and how import duties could affecting Government owned companies as well
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 30th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
Well this is the end of the second quarter of the financial year, the third quarter of the calendar year and here we are, half way or three quarters of the way, depending on which part of the world you are.
The Take
JRD Tata was known for his blue notes, summaries and observations of Air India flights he took, the airline he founded in 1932.
In 1951, he pointed out in one such blue note that on one aircraft, VT-DAR en route to Europe and back, some of the seats reclined much more than the others.
As a result he suggested that all our seats be adjusted for a maximum reclining angle, except of course the rear most seats limited by bulkheads.
In another note he said, the tea served on board from Geneva is, without exaggeration, indistinguishable in colour from coffee . . . I do not know whether the black colour of the tea is due to the quality (of tea leaves) used or due to excessive brewing. I suggest that the Station Manager at Geneva be asked to look into the matter.’
The next few decades saw a deterioration that is history book worthy, in the section on the spectacular decline and fall of businesses.
And to put a price on it, Air India ran accumulated losses of over Rs 70,000 crore and debt of over Rs 60,000 crore at the time the airline was going back into the Tata’s hands in January 2022 who were forced to sell it to the Government in 1953.
A spate of viral videos and several social media outpourings about the cringe-worthy condition of Air-India’s long haul flights reminded me that it is quite possible that JRD Tata’s advice has still not been heeded, in general and specific.
To be fair, Air India is furiously overhauling its aircraft and people though it evidently has challenges on both.
For instance, accounts of counter encounters by passengers suggest that staff remain unhelpful or barely helpful and would rather wish away a problem and the person than attack it.
But this could be happening with other airlines too and there is no fair way to launch comparisons.
But things become a little clearer and sharper when it comes to the quality of interiors and inflight service.
And here is where I think JRD Tata would have surely stepped in.
I watched as some of you did, the plight of a passenger who paid over $6,000 for a one way Delhi - Chicago first class ticket and then posted a video of the obviously abysmal condition of the seats and aircraft.
Add to it the inflight entertainment did not work on the 15-hour flight nor was there Wifi.
The passenger was apparently given a full refund.
He was lucky. Many other other passengers who have complained or borne their misery with silent grace have not sought for or got refunds.
Another passenger said she had to bear with a broken tray, reading lights continuously blinking and of course no entertainment system on a 16-hour flight from Mumbai to New York.
“All this while Air India is charging the highest fare for this sector and charging for seats,” she said.
I had a similar experience though not first class on a JFK-Delhi flight on Air India two years ago where almost nothing worked and the seats groaned and protested and the cabin crew seemed to be mostly focussing their energies and smiles on some VIP or such in the front.
It is clear that some of these aircraft, particularly long haul, have been problematic for at least two years for the Tatas.
Am assuming the previous management really did not care.
Now, it would take a staggering amount of indifference and corporate blindness for the top brass to not have noted the state of the aircraft on their prime routes in their reviews or travels, if they indeed chose to fly in their own airline as JRD Tata did.
So the question is why did they not do anything about it ?
The answers could be many.
The most obvious is that demand in these sectors is so high that the airline would rather sell the seat at the highest price they are able to command.
Of course a few passengers will turn out to trigger happy instagrammers. But that is the price you can decide to absorb I reckon.
Worse case, you refund, rest, you send a most apologetic Twitter message, perhaps even with a sad and regretful emojis thrown in.
This is where Air India has been quite evidently dishonest. I don’t have to scour social media because I have experienced it first hand.
The airline could be clearly warning passengers on these sectors that their seats are a disaster and there is no inflight entertainment system worthy of speaking about or listening and service is a hit and miss.
Of course no airline will willingly do this.
But what it can do is to offer at lower price points, particularly the aircraft that are old, creaking and provide a seating comfort similar to a cramped bullock cart on an unpaved road.
Many airlines including Emirates are offering unbundled business class fares where you pay less and get less, for instance, no lounge access, no chauffeur pickups and adjusted miles.
Air India could do that too for these aircraft. This is a software fix, not a hardware fix.
Perhaps if Air India’s top brass took a leaf out of JRD Tata and travelled in their own aircraft for 15 hours incognito, they may change their minds.
And that brings us to the top stories and themes for the day
The markets take breather, could rise again
India leads global IPO mania.
NRIs can rejoice, Indian rice is headed back to global markets.
Why India needs more container ships
India’s China conundrum and how import duties could affecting Government owned companies as well
Markets & More
The stock markets took a breather once again on Friday as they now so often do after running up and away, setting record highs every day of the week last week.
On Friday, the BSE Sensex was down 264 points at 85,571.85 after hitting a record high of 85,978.25 during intra-day trade.
The Nifty50 hit an all-time high too, of 26,277.35 before ending Friday's session down 37.13 points at 26,178.95.
For the week as a whole, the indices were up, between 1.5% and 1.2%, marking their third straight week of gains.
The markets have been rising every day since the Wednesday week before last when the US Federal Reserve cut interest rates by 50 basis points which in turn is seemingly and predictably pushing up foreign investor flows into markets like India.
IT companies fortunes are looking up.
We spoke last week about Accenture’s numbers surprising Wall Street for the latest quarter and the AI bump up.
Will the Indian IT majors come up with similar surprises ? Let's see.
Reuters reported that metal stocks gained more than 7% in their biggest weekly rise since December 2022, outperforming other major indexes.
All this is thanks to strong metal prices on hopes the new Chinese stimulus measures will boost its economy and global demand and lead to a decline in the dumping of steel products in countries like India.
Though as per latest reports, Indian steel makers still want duty on Chinese steel imports hiked. More on Chinese imports shortly.
The IPO Mania Continues
India is leading the globe in number of IPOs raising funds, a phenomenon which is frankly and mildly worrying since it does suggest some overheating.
Remembering, more mega IPOs including from some of the tech companies are expected as is Hyundai’s India arm, possibly with the largest IPO ever after Life Insurance Corporation in May 2022.
A BS report quoting GlobalData, a London based data analytics firm says that 822 Initial Public Offers (IPO) aimed to raise $65 billion in the first eight months of calendar year 2024 (CY24) till August.
Of this, Asia-Pacific (APAC) region recorded the largest number of transactions, totaling 575, amounting to $23.7 billion in value while India led with 227 transactions totaling $12.2 billion in the first eight months of 2024, the report said, primarily due to a higher number of small & medium enterprises' (SME) IPOs.
The US came in second with 133 deals of $23.1 billion, while China ranked third with 69 transactions worth $5.3 billion, the report suggests.
There is a global wave of fundraising and investing obviously, with many markets including the US hitting all time highs.
But that does not make it any less fragile as it usually does at new peaks.
The sectors leading the way in IPO activity globally thus far in 2024 according to the GlobalData report were technology and communications, followed by financial services, construction and pharmaceuticals and healthcare.
Non Basmati Rice Too Allowed
The Indian Government has allowed exports of non-basmati white rice to resume as inventories as farmers stare at a bumper crop harvest in a few weeks.
Earlier this month, the government also removed a floor price for basmati rice exports who were complaining, including on The Core Report, about their inability to take on competition from countries like Pakistan in the global basmati market.
These moves will likely improve farm incomes as well.
The export bans were in force since last year.
The other plus of India’s removal of export bans is that international prices would be lower.
And of course India’s thriving non resident Indian community or NRIs would be most grateful going by their reactions when the bans were imposed.
The Government did set a floor price for non-basmati white rice exports of $490 per metric ton and cut the export tax on white rice to zero.
On Friday, India also reduced the export duty on parboiled rice to 10% from 20% previously, Reuters reported.
India’s Container Shipping Challenges
Two weeks ago, the Government said the state-owned Shipping Corporation of India would start operating a large container ship and buy five additional second hand container vessels to counter the logistical challenges caused by the Red Sea crisis and overall prices shooting up.
Ports, Shipping and Waterways Secretary TK Ramachandran told mediapersons that one major concern raised was the refusal of foreign shipping lines to allocate slots for Indian goods amid a surge in freight rates and global demand and the negative impact on trade due to the absence of an Indian shipping line.
The solution appears to be to own more Indian owned shipping lines for carrying containers.
The Indian Express quoted exporters saying Asia-to-North Europe rates had more than doubled to over $4,000 per 40-foot container.
A TEU is a twenty foot container and more on that shortly.
The Global Trade Research Initiative (GTRI) whose founder Ajay Srivastava appears frequently on The Core Report has recommended that India boost domestic container production, enhance the role of local shipping companies, promote use of domestic containers, and strengthen local shipping firms.
India produces between 10,000 and 30,000 containers annually, while China, the global leader, produces around 2.5 to 3 million containers per year.
This leaves India with less than 1 percent of the global market share, making it vulnerable to disruptions in container availability.
Moreover, about 90-95 per cent of India's total cargo is carried by foreign lines, such as Maersk, MSC, and COSCO.
Indian shipping companies, led by Shipping Corporation of India (SCI), handle only about 5-10 per cent of trade by volume, it said.
I reached out to Aniket Dani, Director at Crisil Ltd and began by asking him to define the scope of the larger problem.
INTERVIEW TRANSCRIPT
Aniket Dani: Sure, so if you look at the overall container shipping capacity globally, the fleet size is about 5,800 ships, and it can carry about 2.58 million TEUs. But if you look at India, India has just 1,500 ships, out of which only 5% is containers, which means about 70 to 75 ships, container vessels is what we have. So what this translates into is about 90, 95% of India's cargo is transported on foreign shipping lines.
And what we have seen in terms of demand supply is that before the Red Sea crisis, there was a oversupply of containers and container ships. But suddenly after the Red Sea crisis, it has converted into a shortage, which has led to increase in freight rates. So this is the scenario that we are in currently.
Govindraj Ethiraj: Okay, and so why has there been a sudden crisis? I mean, of course, I mean, we all know that ships are taking longer to go around the Cape of Good Hope and so on, but why is this, I mean, why is there a supply shortage?
Aniket Dani: It is actually not supply shortage, but the capacity has remained constant. So number of vessels and the TEUs that they can carry. But if you look at the route that is being used, so if we transport ship, any merchandise exports are done from East to the West, which is to Europe or US, earlier through Suez Canal, it was taking about 20 to 22 days.
Now it is taking about 35 to 37 days, which means an increase in number of days, about 10 to 12 days. This, I think, has brought down the overall capacity within the system. So now we have a shortage of about five to 6%.
Govindraj Ethiraj: That's the global shortage or?
Aniket Dani: The global shortage, yeah.
Govindraj Ethiraj: Okay, so just to come back to India, so you said that 98% of India's cargo is really going on foreign shipping lines. So when you say cargo, you mean the kind that would go into a container unit, right? Or what we call TEU.
Aniket Dani: Yes, yes.
Govindraj Ethiraj: And do you have a sense on what the overall composition of India's cargo is that's outbound or inbound?
Aniket Dani: I think overall container would be a big chunk, about I think 25, 30% would be containers. Others would be your dry bulk or your even PUL, which is your petroleum products and other things.
Govindraj Ethiraj: Right. So, and how could this be solved? This problem could be solved by India owning more containers or leasing more container space, or how are you seeing that?
Aniket Dani: Two things that have created a problem, specifically if you look at India. First is, like you said, owning more vessels. Because foreign shipping lines have more vessels, they have control over freight lates and the time or scheduling of these ships, which for India increases the cost as well as the time taken for transporting merchandise exports.
Also adding to that, what happens is that almost 25% of India's cargo is transhipped from either Colombo or Singapore, which increases the transit time as well as the freight cost for us. So, if we own more vessels, and if we have now some ports, transshipment ports coming up in India, I think that will definitely reduce the time taken, reduce the freight cost, and we'll also be able to manage the schedules better.
Govindraj Ethiraj: Right. But the reason there is such a high proportion of transshipment is because smaller ships from India, reflecting also the amount of cargo we are carrying or can carry, need to go to bigger ships that are docking at some of these ports, like Colombo. Is that right?
Aniket Dani: Yes, exactly.
Govindraj Ethiraj: Right, so just to come back, so you're saying that for that 98% of India's cargo that can go in the form of merchandise trade, but this I am assuming you mean both imports and exports. Is that right?
Aniket Dani: Yes.
Govindraj Ethiraj: Right, so for that, I mean, that size of, let's say, market that there is, what is the sort of realistic possibility of investments coming in and what would it take? And equally, I'm saying, why wouldn't it have come already?
Aniket Dani: No, I think the thought process was not there, but if you look at the Adani port that is coming up in the south, which is a large transshipment port, right, then we have a port that is being planned in Andaman, Nicobar also, right? So there is now the government thought process that we also, as India, can have transshipment ports. And this is now starting to materialize.
We will see this change happening.
Govindraj Ethiraj: Right.
Aniket Dani: That large ships will start coming into India.
Govindraj Ethiraj: Right, and I mean, not to take you into a ports discussion, so let me come back. So if, for example, let's say we were to see an easing off in the Middle Eastern tensions, which means, hypothetically, ships start going through the Suez Canal again.
Aniket Dani: Correct.
Govindraj Ethiraj: Would that change the economics once again?
Aniket Dani: We feel that would change the economics drastically, because like I said earlier, you know, before the Red Sea crisis, we had kind of an overcapacity in terms of containers and the charter rates were falling down. And it had, I think, bottomed out somewhere in November or December 23. And then post this Red Sea crisis have sharply gone up.
So if this Suez Canal opens up again, we will again have that, you know, overcapacity and prices should start coming up.
Govindraj Ethiraj: Right. So you're saying that, okay, the economic growth argument is well taken. And you're also saying that regardless of whether the container markets open up, prices crash or not, it does make sense for India to invest in, let's say, more ships and more container carrying ships as a long-term strategy.
Aniket Dani: Yes, definitely. And to add to that, what also needs to be done is that if you currently see, right, on the West Coast, we have two ports, Mundra and Navasheva, and we are facing severe blockages and congestions in these ports because of either, you know, equipment shortages or inefficiencies in birthing space, delay in custom clearance, documentation. So all these things also have to be cleared.
So the port authority, ports, and the government will have to work together to make that system more efficient, which will help, you know, bring down that logistics cost.
Govindraj Ethiraj: Right. Right, Aniket, thank you so much for joining me.
Aniket Dani: Yeah, thanks. Thank you so much.
The China Conundrum
India’s economic dependence on China is of course worrying.
So much so that even as the Indian Government is bracing to handle dumping of Chinese goods because other countries like the United States are also stepping up duties on a range of products from solar panels to steel starting last week , the Government’s own firms are pointing out that they are dependent on China.
NTPC Green Energy, the renewable energy arm of state owned energy major NTPC has said in an IPO filing that the Government restrictions on trade ties with China will adversely impact its business given that China is a leader in wind equipment manufacturing.
Last year, NTPC Green Energy, imported Rs 1,271 crore worth of solar and wind equipment from Chinese suppliers, the Business Standard reported adding that it purchased equipment worth Rs 5,472 crore from Indian suppliers.
If import duties rise, as they could, then the cost for NTPC will increase.
Some 60% of the smartphone market is also controlled by Chinese firms and imports from China, including in steel, have been rising, despite all efforts otherwise.
