The Stock Markets Fail To Track Global Market Recoveries
Indian markets started with a strong rebound with the rest of Asia and then started sliding
On Episode 357 of The Core Report, financial journalist Govindraj Ethiraj talks to Karan Taurani, senior vice president and consumer industry analyst at Elara Capital.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take: The Power of Doing Nothing
(06:36) The stock markets fail to track global market recoveries, poised to stabilise
(08:39) The rupee hits a fresh low
(09:53) If you had invested in Sovereign Gold Bonds in
(11:14) The latest GST tax target; foreign airlines
(12:35) How pizzas are now India’s favourite fast food though competition is rising
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 the 7th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital. And in transit today.
The Take: The Power of Doing Nothing
A day or two after the markets started cratering in March 2020, I got a call from a well known industrialist.
He said he was selling into the market in sheer panic. From the sound of his voice, I was guessing this was a very large amount he was talking about.
I am guessing he must have lost a fair bit, I don’t know whether he reinvested if he did.
The point is that a market fall like on Monday or on Jun 4, 2024 can make the most seasoned investors shudder.
After all the stock markets have been running steadily up, since Covid as it happens.
Right here on The Core Report, we have been arguing that valuations are increasingly stretched and more for some segments of the market than the others. Which is not to say that the markets will crash through the floor but it is prudent to be prepared for corrections and stiff ones at times.
The usual counter argument is of course that the earnings driven by company performances are strong and steady.
And second, there is a near avalanche of funds flowing from investors who are pumping savings - mostly by pulling out of bank deposits- into mutual funds, every month. Braver ones are borrowing and investing directly in the market including in derivatives.
Monday’s 2,222 point fall was the first sign in recent years that we are not immune to global cues which we to some extent thought we were. The reversal this time was because the Bank of Japan raised interest rates and institutional investors who were borrowing cheap Yen earlier and investing in attractive stock markets including India suddenly found it less lucrative to do so.
There is the AI factor as well. The markets have been riding on the euphoria of AI stocks in the last year or so.
Analysts are now questioning what AI will really deliver to its many users, including large corporations and whether all this investment is of course worth it.
All of this makes the underlying proposition of a continuous bull market a little weak, at least for the moment.
Actually analysts are questioning everything.
Bloomberg says whether Monday’s wild gyrations mark the final bang of a global selloff that started to build last week or signal the beginning of a protracted slump is impossible to know.
On Tuesday, many markets rebounded quite sharply including Japan and more of that in a moment, except India which fell further, although less. More on that shortly.
Bloomberg said one thing is clear, the pillars that had underpinned financial-market gains for years — a series of key assumptions that investors across the world were banking on — have been shaken, including that the US economy is unstoppable and AI will quickly revolutionise businesses everywhere and Japan will never hike interest rates, or not enough.
All of this and more applies to India too, in different ways of course.
So what should you be doing ?
Well, whether it is in India or Wall Street, it goes back to how you have made your original investment decisions and for what kind of horizon.
It also depends on what your outlook was, did you think the stock markets would keep rising forever ? Well, clearly you were and will be wrong in future too.
There are of course good reasons to be worried about how things could go.
And there is nothing that you can do about much of it, whether geopolitical tensions or slowing corporate performance thanks to demand cycles.
There are some golden rules to investing, the key of course is to have a balanced portfolio between stocks, bonds or debt and other asset classes.
If you were a steady investor, the last month or so would have looked bad, because a sudden cut in import duties has made gold cheaper in India.
Internationally, gold is still ruling strong though down in the last few days. More on gold and what you might have missed shortly.
The lessons of the last few days should be as follows:
The stock markets cannot be willed to keep going up.
They won’t because, among other things, the nature of money is that people also need it at various points of time.
Just watching it grow passively and for eternity cannot be a lifelong pastime and that is not what institutional investors and fund managers are paid for.
By the way, I feel sudden falls are actually less worrying than the longer duration flat or steady declines in volumes and index levels.
Sudden falls, mostly driven by speculative bets, also tend to recover and we are seeing some signs of that.
Of course if this sets off something longer term, then it's tough to say but at this point, there is no major change fundamentally, including in the performance of companies in India.
Which is the reason a balanced portfolio becomes important and is what you should build whenever you start investing. Strong portfolios tend to weather even longer term dips, unless you have a dramatic event like Covid or the global financial crisis of 2008.
I can see the temptation to invest in red hot derivatives or tips with smaller amounts of money because the perception is that losses will be small and gains will be high. It does not necessarily happen that way.
The biggest lesson is that the jolt can come from anywhere. Who could even spell yen carry trades until Monday.
I am kidding but only slightly.
We must finally remember we are living in an easy or cheap money world.
The WSJ says this may also be the start of a reckoning for a decade and a half of excessive spending and easy money that is going to arrive eventually.
Because cheap money is never free, and it can’t last forever, the WSJ emphasises and points out that it builds distortions and excesses that are unsustainable and must eventually be addressed.
Couldn’t agree more.
So that’s what the Fed had to do by raising rates to arrest inflation, and part of that bill is now coming due.
Moreover, low-income consumers have spent down their pandemic savings. The current economic slowdown is one result.
How soon and rough the reckoning will be is the great unknown, says the WSJ.
Back home, this is a good reminder also that the vast pools of capital that were pouring into ventures is less because of the genius whizkids behind them and more because capital was willing to take random and wild bets.
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Markets And More
Indian markets started with a strong rebound with the rest of Asia and then started sliding.
The BSE Sensex ended at 78,593, down 166 points while the NSE Nifty50, on the other hand, ended 63 points down at 23,992.
Both indices had climbed almost 1.5% each before they took a U turn later in the day.
There are some big questions still hanging.
First of course, whether the yen carry trade impact is over or there are still positions that are unwinding.
Depends on who you ask.
After all, Japanese stocks rebounded sharply on Tuesday The Nikkei 225
— which saw its largest loss in the previous session since the 1987 Black Monday crash — as well as the broad-based Topix gained over 9%.
The Nikkei ended the day up 10.23% at 34,675.46, hitting its largest daily gain since October 2008 and highest ever spike in terms of index points, reported CNBC.
Wall Street was also strong on Tuesday morning, quoting at least 1%up.
The larger question in some way is what the US Federal Reserve will do now and if so, will it do so soon ?
It was supposed to have reduced interest rates earlier but it did not and now there is speculation that it might do reactively rather than proactively.
US data is suggesting a slow down in the world’s biggest economy and speculation that the rate cut when it comes might be too late.
A continuing sign of how traders jump into opportunities they perceive is the rise of textile and garment-related stocks which surged up to 19 per cent on the National Stock Exchange (NSE) on Tuesday because of the crisis in Bangladesh, which exports more garments than India
Business Standard quoted analysts saying the crisis may provide only a "temporary window" for gains and that investors should wait for the rally to cool off before adding fundamentally sound companies.
"The ongoing crisis in Bangladesh means fresh order flow may get diverted to India till the situation stabilises. This, however, is a temporary window as Bangladesh remains advantageous on the cost front,” a HDFC Securities analyst advised caution in the newspaper
Rupee Falls Again
The Indian rupee fell on Tuesday and closed at its weakest level on record, pressured by a decline in its Asian peers and strong dollar demand in the non-deliverable forwards market, Reuters quoted traders saying.
The rupee hit an all-time low of 83.96 per U.S. dollar before closing at 83.9525, down 0.1% from its close of 83.8450 in the previous session.
Concerns about a U.S. economic slowdown and the unwinding of carry trades that used the Chinese yuan to fund long bets on the rupee have pressured the local currency this week.
Major Commodities Are Slipping
We have been speaking largely of stocks and that is where the attention is.
Major commodities like gold, oil and copper have all fallen in recent days as, among other things, investors start to focus on the demand side.
For economies like the US, higher unemployment also means weaker economic demand.
Bloomberg reports that on Monday, Copper was down around 2% on the London Metal Exchange after slumping as much as 3.8%, with aluminium also falling.
Benchmark oil futures dropped about 0.5%, after trading down 2.3% at the lowest level in seven months.
Crude continues to quote below $77, or around $76.50 a barrel.
A Look Back At Gold
Gold prices were rising steadily globally and in India till a reduction in import duties on gold from 15% to 6% or so made it more attractive.
Remember, import duties used to be around 2% around 12 years ago and rightfully so.
We should be reducing import duties further because high duties only spurs more smuggling and the loss of the little revenue that we could earn.
So here is the news.
The Reserve Bank of India (RBI) has announced that August 5, 2024 shall be the final redemption date for SGB 2016-17 Series I tranche, having completed eight years from its date of issuance and is accordingly redeemed.
The redemption price was set at Rs 6,938 per unit of SGB or one gram of gold, also being the closing price as of last week as published by the India Bullion and Jewellers Association, says The Economic Times.
So how much would you have earned ?
Well, had you invested in 2016-17 in the SGB, you would have earned around 122% in over 8 years.
The issue price then was Rs 3,119 or you would have earned Rs 3,819 per gram of gold.
And this is a gold bond which means it is as safe as it gets.
And before we forget, the SGB bears a fixed interest of 2.75% per annum, payable semi-annually which is taxable for all investors.
More GST Notices
The Directorate General of Goods and Services Tax Intelligence (DGGI) has issued show cause notices to ten foreign airlines operating in India for allegedly evading taxes amounting to Rs 10,000 crore, according to a report by Economic Times.
The report quoted officials as saying that among the airlines are British Airways, Lufthansa, Oman Air, Emirates, and Singapore Airlines.
The methodology followed here appears to be similar to what Infosys was hit with.
The notices, sent over the last three days, pertain to unpaid taxes on services imported by India branches from their respective head offices, the officials stated.
There are some details to this but the larger issue seems to be obviously serving of tax notices which do not seem to have much prospect of reaching any real fruition.
Except of course to rattle the companies concerned and send them scurrying to lawyers and chartered accountants.
The notices cover the timeframe from July 2017, when GST was implemented, to March 2024.
According to a senior official, the overseas headquarters of these airlines have been handling services like aircraft maintenance, crew payments, and rentals. The DGGI asserts that since these services are provided from one legal entity to another, they are subject to GST, which the airlines have not remitted.
An investigation into the matter began in August 2023. The DGGI summoned key executives from the Indian offices of these airlines in December last year and January this year, requesting explanations and a list of tax-exempt services.
Foreign airlines contended that GST should only be applied to taxable services within India, given that the place of service included both the head office and branch office, said the ET.
They also reached out to their respective embassies, which brought the issue to the attention of the finance ministry, the report said.
As a result, the matter was referred to the GST Council's fitment committee. The council subsequently approved a circular on June 26, which clarified the valuation of the "supply of import of services" by a related person.
Pizzas
Pizzas which represent some 25% of fast food in India are driving sales of fast food but there is rising competition too.
If you thought the big chains are firms like McDonalds, KFC and Pizza Hut, there are others as well, with over 75 stores each, as Karan Taurani, Senior VP and consumer industry analyst at Elara Capital tells me
There are close to 10 large chains with more than 75 stores just selling pizzas which in turn represent roughly 25% of the fast food market.
I began by asking him how he was seeing overall trends in the fast food industry and particularly in the last 6 months, both from a consumer preference and behaviour point of view and of course the corporate fundamentals.
INTERVIEW TRANSCRIPT
Karan Taurani: So in terms of broad demands last six months, I would specifically say that it's been quite challenging. You know, post the onset of festive [season] most of these QSR names, of fast food names have seen a decline in terms of SSG, which is in a wide range of 2% to 7% which means that it's a very troubled time. I don't think we've seen this kind of a sharp decline since the last, I think, about five years now. So whatever it is, the situation of the industry is quite challenging. Whether you call it, you know, it's because of the delivery off take or whether it is because of, you know, sumato doing well, whether it is because of higher competitive intensity, there could be multiple reasons for the same but definitely the industry is challenging. One broad trend that we have noticed is that, what is dragging this kind of a performance, what is leading to this decline is the Dine-in revenue. So I think dine-in revenues are still seeing a decline of, anyway, close to about 7 to 9% for all these players. And that is primarily, you know, because of lower mall footfalls. That's also because of, you know, cinema content not doing well, because eventually cinemas are also like a, you know, lever, you know, for better growth in terms of dining within the food court area. And third, of course, you know too much of, you know, casual dining, too much of competitive intensity in the dining and, of course, lastly, you know more off take on delivery. I mean, customers are getting more used to convenience, like ordering kind of things, and that's where they're kind of dining out, you know, lesser as compared to what it was. So definitely, there are, there's a troubled time in terms of growth rates, and dine in is a very big reason for the same.
Govindraj Ethiraj: So you're saying that dine in has been going down by seven to 9% every year for the last few years.
Karan Taurani: So on a YOY basis, if you see, yes, dine in. SSG, a dining same social growth is in the range of about, you know, six to 8% kind of a decline. And this is specifically for players which have a higher exposure to dine in. If you look at the likes of, you know, KFC, if you look like the likes of Burger King, McDonald's, all of them would have a dinie-in exposure of anywhere close to about 45 to 50% so I think that is, you know, seeing the pressure, otherwise, delivery growth rate for all these players is somewhere, you know, doing much better. You are seeing growth in that segment. But dining is a struggle, clearly.
Govindraj Ethiraj: So as things even out between dine in and ordering out or ordering in is what's the cumulative outcome of this on the way these companies are doing? Again, for the major brands in fast food.
Karan Taurani: So even our evening out, the outcome, as I said, you know, the SSC decline is in a wide range of about, you know, 2% to about 6% and dine-in decline would be in the range of eight to 12% also for some of the players, where they are placed now, in terms of, you know, going ahead, we obviously have the lever of festive and last year, if you remember, the festive season also was not very great in terms of potential growth rate. So I think this year, on that kind of a base, O&D quarter, could see a growth of anywhere close to about three to 4% but I think that is nothing 'Wow' for the industry, because generally, during the festive times, the industry has also grown 5% 7% on SSC. So purely, we are going to see an improved trajectory as far as demand environment is concerned. But you know, don't expect a V shaped recovery. It's going to be more of a steady state recovery. So let's say in the Q1 of FY25, players are reported a decline. I think Q2 will be largely flattish or a small decline. Don't expect like a positive in Q2 itself. So it's going to be very slow and a painful recovery.
Govindraj Ethiraj: So on a cumulative sense, if most of the major fast food companies or brands are seeing declines, even if small as cumulative, both dine in as well as our ordering out. Now what is driving this? And is it something because, I mean, is it because of other competitive pressures? Is it because consumer behavior is changing or preferences are changing?
Karan Taurani: I think one is, of course, the environment itself has been tough, as I told you, the points you know, in terms of why dine-in as a category or dine-in as a channel is struggling. Second thing is that, you know, adoption of delivery. So I think delivery frequency increasing massively. We've seen Zomato Gold seeing very strong offtake. In fact, 50% of Zomato food GOV (gross order value) is coming from the Gold program, which means that the frequency is increasing immensely as far as ordering is concerned. So clearly, I think these are things you know, which are kind of keeping the growth rates under the check, you know, for the FnB companies, and that will sustain going ahead, because people want convenience. And lastly, I think there's also this problem of competition. I mean, the customer clearly is willing to try out new brands, which was not the case about five years ago. The customer was loyal to brands like, you know, McDonald's, Burger King or a KFC. Now, the thing is not there anymore. The customer is going to try new brands, and if at all the experience of these brands are good in terms of, you know, the dine-in store, in terms of the you know, the nature of the store, or in terms of menu innovation, or in terms of the quality of food, there is a significant shift that we are seeing from global QSR chains to local QSR chains. And I think this is also one factor which is kind of putting the growth trajectory of the global QSR chains.
Govindraj Ethiraj: So let me ask you a slightly more top down question. So let's say Indian consumers were spending 100 rupees last year on everything, whether it's again, the the big brands that we spoke of, their competitors, cloud kitchens, what have you. Are they spending more this year as we stand here today, or are they not?
Karan Taurani: So if you look at it from that standpoint, yes, the answer would be that yes, they might be spending around 10 to 15% more. But yes, in terms of shares, let's say global QSR chains of their food wallet share, you know, was around 60 to 70 rupees, that would have come down to a below 50 rupees. So I think incrementally, you know, the global QSR companies are somewhere kind of losing or not able to hold on market share, because even the basis phenomenally high for those companies, whereas the new companies which are started, for example, Good Flippin Burgers, there is Burger Singh, there are so many of these smaller chains which are started in pizza, you know, which is lapinos. So somewhere on that small base, because of significant expansion, because of being able to piggyback on the aggregators, because of delivery, these fears are kind of growing faster.
Govindraj Ethiraj: Got it. We've also seen in the last year or so, food prices go up quite sharply. And within food vegetable prices, we are holding at about 27% or 26% inflation just in vegetables. Now that obviously directly impacts all these companies or businesses. How is that showing up on numbers or balance sheets?
Karan Taurani: So I think if you look at the vegetable prices, vegetables that way is like a very small portion of their overall, you know, cogs, or rather raw materials. So to say, I think they are majorly more dependent on the price of bread, milk, cheese, dairy products. And I think thankfully, over the last, you know, couple of quarters, we have not seen very sharp inflationary pressures over there. So as far as gross margin is concerned, you know, all these companies have been at a stable level versus last year. And they are, some of them also reported increase in gross margin. That's because of operating efficiencies and many innovation and other things put together. So I think clearly inflationary pressure is not the issue now. The issue now is in the in terms of, you know, EBITDA margins, because clearly, despite gross margin seeing an improvement on a YOY basis, EBITDA margins have come down significantly because of higher discounting and higher competitive intensity and the value add products to push demand and to drive, you know, more customers in the dine-in facility.
Govindraj Ethiraj: Currently, in the last, let's say, three to six months, what's the one thing that's really caught your attention, where you felt that, oh, here is a new kind of product, which could, let's say, to use your terms, wow consumers, or something that you're looking out for.
Karan Taurani: So I think, you know, firstly, product innovation is very, very important for any QSR company, if they were able to, you know, kind of execute well and drive more footfalls in terms of dining. So there have been multiple products which have been launched. I think one very good product, which I feel is the fried chicken roll. I think this is, you know, something completely different. And you know, in terms of propositions, most of these companies generally piggyback, you know, most of them have got different type of most is a very good product. And I think that is something which could be exciting in coming times.
Govindraj Ethiraj: At this point of time in the fast food universe, what's the single biggest selling product in by revenue and volume?
Karan Taurani: So in terms of revenue and volume in the fast food industry, you know, pizza is a significant large market share. You know, over here, if you look at the industry as such, pizza market share would be almost about 25 to 30% that's also because, you know, pizza as a product, has seen wide acceptance across non Metro markets, scaled aggressively, and pizza has got some, at least some 15 players or other 12 who have, you know, more than 100 outlets. So pizza is the most favorite in terms of the fast food category today.
Govindraj Ethiraj: Got it. Karan, thank you so much for joining me.
Karan Taurani: Thank you Govind
