US Exchange Traded Funds Are Investing 3 Times As Much In India Versus China

• <00:50> US exchange traded funds are investing 3 times as much in India versus China with Prakash Diwan
• <10:02> How 42% of Corporate India's Wage Bill Belongs To IT Companies with Vinod Karki
• <19:38> Action in the mattress space as Sleepwell buys Kurl-On
• <22:32> And news from Gandhinagar with Janet Yellen and Ajay Banga

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TRANSCRIPT

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Good morning, it's Tuesday the 18th of July and I'm Govindraj Ethiraj coming to you from a rainy Mumbai !

Our Top Reports For Today

• US exchange traded funds are investing 3 times as much in India versus China.
• How 42% of Corporate India's Wage Bill Belongs To IT Companies
• Action in the mattress space as Sleepwell buys Kurl-On
• And news from Gandhinagar With Janet Yellen and Ajay Banga

 

Markets At Record High

When it rains, it pours, goes the old cliche.

Domestic benchmark indices were at a fresh record high on Monday. The BSE Sensex notched a new high of 66,656 in intra-day trade, before settling at 66,590, soaring 529 points while the Nifty50, too, hit a new record high of 19,732. It, eventually, settled at 19,721, up 157 points.

A Bloomberg report today said investors in US exchange-traded funds favoured Indian stocks more than any other country last week as China's recovery turned sluggish.

Inflows into funds that invest in Mumbai-listed shares totalled about $638 million in the five days to July 14, while those buying Chinese equities received $223 million, Bloomberg said.

Elsewhere, HDFC Bank, the entity that now reflects the merger with mortgage major HDFC on Monday reported a 30 per cent jump in its net profit for the quarter that ended on June 30 to Rs 11,952 crore.

The bank's net revenue grew 27% per cent to Rs 32,829 crore in the quarter as compared to Rs 25,870 crore in the same quarter last year. The net interest income during the quarter jumped 21.1 per cent to Rs 23,599 crore from Rs 19,481 crore last year.

The bank's gross non-performing assets (GNPAs) rose slightly to 1.17 per cent in the quarter as compared to 1.12 per cent in the quarter that ended on March 31. As of June 30, the bank's total advances were up 15.8 per cent to Rs 16.5 trillion.

Significantly, the bank also crossed the $100 billion market cap figure to become the world's seventh-largest bank in value. With a market value of over $151 billion, HDFC Bank is now the world's seventh largest lender and bigger than Morgan Stanley, Goldman Sachs and Bank of China in market value.

Earlier, on July 13, shares of HDFC were delisted from the bourses following the merger with HDFC Bank. HDFC shareholders got 42 shares of HDFC Bank for every 25 shares of HDFC they held.

As we pointed out in The Core Report earlier, we seem to be hitting new highs every day. As we go higher, of course the quality gap between the headliners and the laggards becomes a little clearer. And which is where one should start worrying. As perhaps about valuations.

The overall bullishness of course continues. The Capital Group which had once partnered with the Aditya Birla group for financial services and then left has asked if India will be a breakout Emerging Market this decade. Note that it asks and does not say so in this note dated two weeks ago.

It then provides all the usual reasons that everyone else has and says that currently, the market is a little expensive by historical standards.

It then adds that India has historically traded at a premium on a relative price-to-earnings basis. The MSCI India Index trades at 20 times forward earnings versus its 10-year average of 18 times.

Capital analysts then say they believe the fundamental outlook for India is arguably better than ever. The market has a lot going for it: It's one of the world's fastest-growing economies, inflation is under control, the government has been fiscally responsible, and corruption is lower than it was a decade ago. If Indian companies can deliver on earnings and cash flows, we think it's possible the market can grow into these valuations. So a few more ifs and buts I would think than some of the other investment banks.

Meanwhile, Singapore's state investment firm Temasek is looking to invest as much as $9-10 billion in India over the next three years, executives told a clutch of newspapers yesterday.

Temasek, which invested over $1 billion in India in FY23, has already invested close to $2 billion so far this year led by its investment in Manipal Health. Typically, in the last few years, Temasek's investments in India have clocked around $1 billion per year. Temasek's overall India exposure stands at around $21 billion on a mark-to-market basis.

Yes, it can be tough to make sense of all this bullishness. So I reached out to Prakash Diwan, market veteran and director of Altamount Capital Management to get his take on how he was seeing the markets at this level, what he liked and equally what he was concerned about.

IT Sector Takes Home Lion's Share Of  Compensation

Did you know that more than 40% of all compensation in India Inc goes to the Indian information technology sector? Am sure that you would do some maths backwards and forwards and conclude that it was possible.

I must admit I was surprised by the figure, not by the fact that IT folks are paid well as they should be but by what this says about the rest of Indian industry and its ability or the lack of it to attract talent.
For listed companies, the exact figure is 42% which is the weightage of the IT services in the private corporate sector bill in India.

In terms of numbers, the IT/BPO industry share of the organised segment workforce is 12% while it is only 1% of the overall workforce. The compensation share looks quite large in this context.

The growth in private sector wages also represents the formalisation of the economy though, in overall terms, the formal workforce is still around 10% of the overall workforce, so 90% is in the unorganised sector.

The overall corporate sector wage bill has been rising over the years and is now 13% of GDP. On the other hand, did you know that it is only now that private corporate sector wages have overtaken public sector wage bills in India. The private bill stood at 30 trillion rupees compared to the public sector wage bill of Rs 28 trillion.

All this is from a just-out ICICI Securities report that looks at compensation in the economy with a larger and more important objective to try and understand what we could interpret in terms of potential spending and consumption.

A quick refresh on the overall distribution of jobs in India. Agriculture has 46% of all jobs followed by construction at 12.4% and hospitality and trade at 12.%. These are the top three employers.

Going ahead, IT could possibly shrink a little in terms of its contribution to the wage bill. And sectors like manufacturing, trade, hospitality and construction could take over, being the laggards of the previous decade.

To understand what triggered this report and also the macro view on these insights and findings, I reached out to Vinod Karki, equity strategist at ICICI Securities and one of the authors of this report.

Mattresses

Some years ago, I visited the shop of a leading mattress retailer in Mumbai who also happens to be a friend.
Looking at my prolonged indecision over a mattress in the context of course the price, he asked me why. I said why what? He said why would you spend so much time thinking about something you will spend anywhere between 1/3rd to ½ your life on?

That clinched it, for him obviously.

So it is with some regard that I looked at a major acquisition in the mattress space announced yesterday, by the country's largest manufacturer.

Sheela Foam, India's largest home mattress manufacturer, acquired rival Kurlon Enterprise, the maker of Kurl-on mattresses at a valuation of Rs 2,150 crore and a 95% stake.

It also purchased a controlling stake in the furniture rental company Furlenco, the company said in a release filed with stock exchanges for Rs 300 crore.

The acquisition of Kurl-on is expected to complete before November 2023 subject to regulatory clearance, while the Furlenco transaction is likely to complete by August 2023.

Kurlon Enterprise is a privately held company owned by the Pai family based in and around Bangalore. It had a revenue of Rs 808 crore in FY22. Furlenco is a flagship brand of House of Kieraya (HOK), a start-up based in Bengaluru founded by Ajith Mohan Karimpana, according to The Economic Times

The acquisition of Kurlon will help Sheela Foam to create a strong pan-India presence. The latter is strong in the North and West markets while Kurlon dominates the South and East zones. Noida-based Sheela Foam is strong in foams while Kurlon focuses on rubberised coir.

The Indian modern mattress market is valued at about Rs 18,000 crore in 2022 and is expected to grow at 10% annually in the next few years. The Indian market is fragmented and organised players accounted for nearly 40% in FY21 compared with 33% in FY12, the ET said.

Here is the part that is interesting.

The Sheela in Sheela Foam is Sheela Gautam who set up the company in 1971 and has been in and out of politics as a BJP member of parliament for four consecutive terms from 1991 to 2004 from Aligarh in Uttar Pradesh. She died in 2019.

The company's Sleepwell brand was launched in 1993 and has been going upstream with manufacturing via some 14 factories in India, Australia and Spain and downstream with partnerships and alliances since then in India and in other parts of the world.

Sheela Foam is run by her son Rahul Gautam who has a degree in chemical engineering from IIT Kanpur and a master's degree in science from the Polytechnic Institute of New York.
Kurlon, the company it is buying, started a few years before in 1962 and was established as Karnataka Coir Products. The first plant opened in Bangalore to produce rubberized coir mattresses.

 

News From Gandhinagar

Meanwhile, US Treasury Secretary Janet Yellen today said restrictions being crafted by the Biden administration on outbound investments to China would be "narrowly targeted" and would focus on "a few sectors, in particular semiconductors, quantum computing, and artificial intelligence," Yellen said this in Gandhinagar in Gujarat in an interview with Bloomberg Television. She is here, along with heads of finance ministers and central bank governors of G20 nations.

"These would not be broad controls that would affect US investment broadly in China, or in my opinion, have a fundamental impact on affecting the investment climate for China," Ms Yellen said.

Newly elected World Bank President, Ajay Banga, also in Gandhinagar for the G20 conference said he was more optimistic about India today as a whole than I have been for a long time.

He further said, "The world economy is in a difficult place… but it has outperformed what everybody has thought, but that won't mean there won't be more challenges."

The former Chairman of card giant Mastercard also said that countries should look beyond economic forecasts.

"The IMF forecast, the World Bank forecasts are that the world will get a little challenging over the next year or so… I said in a speech this morning that a forecast is not equal to destiny. We can change destiny; that's what we should think of right now," Banga told the media according to a report on the website BQ Prime.

"We need to bolster these lagging private sector flows. We have all been talking about private capital flows that should somehow flow miraculously into all these places. We haven't done a very good job," Banga said on Sunday at an event held in GIFT City, Gujarat.

He also drew attention to municipal financing at the city level, which he said is key to India's progress in urban areas.

"A lot of cities in India are very creditworthy... they may not have the data to present it in a form that enables private investors to comprehend the creditworthiness of the city," he said.

That's it from me for today. Have a great day ahead and send in your feedback and let us know if you want to be part of a Telegram broadcast list so you can get alerted to the podcast when it is uploaded.
Have a great day ahead!