On Episode 897 of The Core Report, financial journalist Govindraj Ethiraj talks to Neil Shah, Vice President Research & Co- Founder at Counterpoint Research.

SHOW NOTES

(00:00) Stories of the Day

(01:29) Indian stocks no longer feature in the Top 10 of the MSCI EM index

(05:17) Bank stocks Take Up Indices on RBI Forex Moves

(06:19) TCS says will hire less as AI agents and employees will work jointly

(09:55) Fitch lowers growth projections for India to 6.4%

(13:58) How hunger for storage memory is upending the smartphone market in more ways than one

(25:17) Heatwaves have cut productivity of India’s leading garment industry factories

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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 feedback@thecore.in.

Good morning, it's Wednesday, the 10th of June and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

Bank stocks take up indices on reserve banks, Forex moves

Indian stocks no longer feature in the top 10 of the MSCI Emerging Market Index

TCS says it'll hire less as AI agents and employees will work jointly

Fitch lowers growth projections for India to 6.4%

How hunger for storage memory is upending the smartphone market in more ways than one

And heat waves have cut productivity of India's leading garment industry factories, according to a report.

Markets, The MSCI, Banks and TCS

There are two tangible data points or sets of them, which is driving sentiment, both amongst businesses and individual investors and savers. No prizes for guessing, but one of them is the current standing of the rupee against the dollar, and for that matter, against many other currencies. And the second is the relative static position of stock prices and thus investor wealth in the last two years.

Now, this is even without getting into the big factors like the war raging in West Asia, which has delivered solid shocks to economies across the world, including India. So if you had invested, as most wise people would have told you, in the top stocks in these benchmark indices, you would have been right, but also wrong. Right, because eventually these stocks could deliver.

Wrong, because you've already waited for a few years with little movement. I bring this up because I heard a union cabinet minister yesterday bemoan that there was too much negativity and we were shortchanging ourselves, in effect. Well, he's not wrong either, but it's tough to maintain a cheery attitude when these two data points look so grim, because both reflect other problems or challenges depending on how you choose to look at them as well.

It might thus be useful to note that India is not the only victim of heavy foreign institutional investor selling, which is keeping down the markets and taking the rupee up, that is depreciating it. South Korea is facing a similar situation as India with domestic investors buying and foreign portfolio investors exiting en masse, having sold about $62 billion net till May this year, according to Goldman Sachs. Korean investors have bought about $70 billion of stock this year, accompanied by a rise in new brokerage accounts.

As prices have risen, Korean stock weightage in global and emerging market benchmarks have increased too, forcing many active fund managers to trim positions to stay within portfolio and risk limits, according to CNBC. The KOSPI, that's the Korean index, had crashed 8% on Monday. Now, there have been a few reports and comments already on this theme, but it is our enthusiasm to buy stocks, particularly at the scale in the post-Covid era, which has provided the exits foreign institutional investors have looked for.

The exits have also been driven by the mad chase for AI stocks globally. It's also pushed out the top 10 constituents of the widely tracked MSCI Emerging Markets Index for the first time in more than two decades. Analysts tracking the benchmark told Business Standard, no Indian company featuring amongst the top 10 stocks in the MSCI EM Index, and that was a first since at least 2000.

Moreover, India's overall weight in the MSCI EM Index has dropped to a fresh six-year low of 10.8%, nearly half the record touched in 2024 or two years ago. September 2024 was the big peak. The index serves as a benchmark, that's the MSCI EM, for passive funds managing more than $700 billion globally and is also tracked closely by actively managed emerging market funds.

So the biggest constituents in benchmark, HDFC and Reliance, have fallen to the 11th and 12th positions from their earlier 7th and 8th positions in March. So this also goes back to the earlier point on how these stocks have barely moved in the last few years. HDFC and Reliance share prices are down about 26% and 20% from their peaks.

In contrast, AI-linked heavyweights like Taiwan Semiconductor Manufacturing Company, Samsung Electronics and SK Hynix have gone up 48%, 147% and 194% in the same period. And that's 194 is Samsung. Reduced weights have implications for both passive and active investment strategies as portfolio managers benchmark allocations to index weights and list old business standards.

So currently, the MSCI EM Index has more than 1,200 stocks with domestic companies, that's Indian making up for about a fifth. In late 2024, when the markets were peaking, India had briefly emerged as a competitor to China with almost the same weightage, but then China rested back its position. So all of this means that a recovery will take some time.

But on Tuesday, there was a recovery thanks to bank stocks and a fresh pause in the war following two downward trading sessions in the indices earlier, that's on Monday and Friday. Banks and financial stocks were up both in the private and public sector space. The Nifty 50 was up 119 points to 23,242.

The Sensex was up 394 points to 73,918. The Nifty Mid Cap and Nifty Small Cap were up 1.3 and 1.6% each. So what took up the bank stocks? Well, the Reserve Bank of India will offer state-run firms a concessional foreign exchange swap facility which could allow them to hedge overseas borrowings at roughly half the prevailing market costs.

The swap will be undertaken at a fixed rate of 1.5% a year for an average maturity of three years and above, the Reserve Bank said in a statement on Monday, according to a report in Bloomberg. Now, these specifics came after the Reserve Bank announced that facility on Friday as part of efforts to boost capital inflows into the country. The INR also closed stronger on Tuesday on a fall in oil prices at Rs 95.35 against the dollar up 0.4% from its previous close.

Asian currencies were also strong, according to a Reuters report. Meanwhile, India's largest software company, Tata Consultancy Services or TCS, expects IT companies like itself to slow down hiring as the company moves towards having an equal number of employees and AI agents in its workforce, according to Chairman N. Chandrasekaran, who spoke at the company's AGM or Annual General Meeting, as quoted by Reuters. India's $315 billion IT sector has been facing investor concerns that AI could disrupt its traditional labour-intensive business model.

According to that report, quoting TCS, it does not plan to downsize staff but will hire less. The company's headcount had fallen by more than 23,000 on a net basis for the year ended March 26. According to Chandrasekaran, if the company has half a million employees, the day is not far when the company will also have half a million AI agents.

So, the employees and the agents will work together, and that will be the future. But staying with the fate of Indian IT, a US federal court has struck down the controversial $100,000 fee imposed by President Donald Trump on H-1B visa applications. This could, depending on how it plays out, prove a major relief to thousands of Indian professionals and American companies that depend on skilled foreign talent.

The ruling, according to a Reuters report, was delivered by U.S. District Judge Leo Sorokin in Massachusetts, and he found that the fee amounted to a tax that had not been authorised by Congress. Among other news from that part of the world, and Wall Street in specific, that may have an impact on flows to India in future, a Bloomberg report says that the $31 trillion Treasury market has an unequivocal message for the new Federal Reserve Chairman Kevin Walsh, which is that interest rates aren't high enough. Yields on policy-sensitive two-year notes have jumped to their highest level in more than a year after latest economic data led traders to price in at least one quarter-point rate hike as soon as October, according to a Bloomberg report, which added that at around 4.15%, the two-year yield trades well above the Fed's current policy band of 3.5% or 3.75%, a divergence that began in March.

What's happened is that the latest read on job growth has topped all forecasts, reinforcing a growing conviction that rates need to rise in order to rein in inflation pressures and temper the risk of an AI-induced boom overheating the economy. Back home, there is rising concern about an increase in gold smuggling, thanks to import duties that were increased to 15% after the West Asia War started, aimed at deterring precisely higher consumption and thus reducing pressure on the rupee and thus also cut trade deficit. But this approach, of course, has never worked in India, except to send signals, and in all likelihood will never work either, which is to deter people from buying more gold.

According to the Reuters report, smuggling levels could cross 100 metric tonnes this year, thanks to rising grey market margins, which allows smugglers to undercut banks and refiners of the precious metal. A Mumbai-based bullion division head at a private gold-importing bank told Reuters that the grey market discount has gone beyond $200 per ounce or more than 4%, adding that banks were unable to offer even a $10 discount, let alone one of three digits. So, doing some computation, Reuters has calculated that 100 tonnes of gold would be worth about $14.3 billion, which is implying about $2.6 billion in lost tariffs and sales tax.

But gold smuggling in general has been falling whenever duties have been reduced. We may have just welcomed high GDP growth numbers for the last quarter, but the road ahead is less buoyant.

Why Has Fitch Lowered their GDP Projections for India?

Fitch Ratings on Tuesday lowered its GDP growth projections for the current fiscal to 6.4%, from its earlier estimate of 6.7%, saying the US-Iran war will slow down the economy in the September and December quarters.

It said that domestic demand will be the main driver of growth, but lower imports in real terms imply positive contributions to growth from net external demand. Last week, the Reserve Bank cut its growth forecast for the current fiscal to 6.6%, even as it increased its inflation projections to 5.1%. Fitch, according to a Business Standard report, said the slowdown will be most apparent in the second and third quarters as rising prices because of the war erode real incomes and dampen consumer spending. Elsewhere, India's current account deficit rebounded to a surplus of $7.1 billion or 0.7% of GDP in the fourth quarter of fiscal compared to a $15.5 billion deficit in the third quarter.

Typically, fourth quarters do tend to throw up a surplus, according to a Crystal Ratings note, which says that the surplus this time was around half the $13.7 billion recorded in the same period last fiscal because of goods trade deficit increase to $83 billion versus about $59 billion in the corresponding period last year as imports jumped and exports slipped. However, a higher surplus in services trade at $60 billion in the same quarter lent some support. On a cumulative basis, the note says the current account deficit stood at $25.2 billion last fiscal as compared to $22.9 billion in the previous year, but as a percentage of GDP, it was stable at 0.6%. Sticking to macro and from the region, Indonesia's central bank has hiked its policy rate by 25 basis points as it seeks to strengthen the local currency that has plummeted to record lows, according to a CNBC report.

The surprise increase brought the 7-day reverse repo rate to 5.5% from 5.25%. An economist polled by Reuters had estimated that the central bank there in Indonesia would hold rates. India, as we know, which is facing somewhat similar mix of challenges, did not increase rates at the last credit policy that's last week. Indonesian central bank said that besides mitigating the impact of the conflict in West Asia, the move was also a preemptive measure to maintain inflation within the government's target range of 1.5% to 3.5% in 2026 and 2027.

It also aims to enhance yields to attract foreign portfolio investment flows to Indonesia. Bank Indonesia highlighted that the depreciation of the rupiah 8% this year was also driven by foreign portfolio investment outflows. Investors have sold from Jakarta's equity market since the start of the year and the Jakarta composite has fallen about 35% to date.

That of course makes it another country with a similar situation as India. Remember we talked about foreign portfolio investors selling in Korea, then India, and now here's Indonesia. Earlier, the Indonesian central bank had increased interest rates by 50 basis points in May and also intervened in forex markets.

How much has SBI committed for the acquisition of Sun Pharmaceuticals?

The State Bank of India is to join a group of global lenders in funding Sun Pharmaceutical Industries' $12 billion overseas acquisition, according to Bloomberg. State Bank is set to commit as much as a billion dollars, according to sources who spoke to Bloomberg. Now businesses exporting particularly to Europe and North America have pointed out, including to the core report, the lack of big banks for Indian enterprises to ride on and into those countries for big deals, whereas competitors from within those regions do not have this problem.

It's less of an issue when doing business with regions like Africa and Latin America, but North America and Europe is a challenge, according to people who've spoken to us. So the point is that India does need big banks and also more global big banks truly support a high export target, particularly for higher value products.

How has AI affected Smartphone Manufacturing?

Apple on Monday rolled out a long-delayed overhaul of Siri, betting the upgraded assistant can help close the gap with big tech rivals and new-age startups in the crucial AI race, according to a Reuters report which reported on the revamp unveiled at the annual Worldwide Developers Conference in Cupertino, California, which introduced Siri AI, a more conversational assistant with a standalone app and the ability to analyse what's on a user's screen and pull in information from the web.

Now this comes about two years after Apple promised major upgrades that were evidently delayed. But there are other shifts apart from Apple's significant attempts to revive Siri that are happening within the smartphone market as high prices are beginning to bite even as the smartphone themselves become more sophisticated and a hunger for AI infrastructure that's affecting supplies and prices of everything along the supply chain and that of course affects consumers in a country like India which is a high smartphone purchasing market. I spoke with Neil Shah, Vice President of Telecom Consulting and Research from Counterpoint Research and I began by asking him how he was seeing trends in the smartphone market in the last few months.

INTERVIEW TRANSCRIPT

Neil Shah: We are seeing the share of wallet is actually shifting. So what is happening? Because of the memory crisis globally, the memory supply crisis and the memory pricing being pretty high now, the overall contribution of the memory cost to the overall bill of materials of the phone has increased significantly.

If you look at a premium phone, it used to be 7 to 8% or 10% rather if you add memory cost of the block materials, it has gone up to like almost 35%. So as a result, now what is happening is many of the OEMs are passing on that increase to the consumers. For the older models in inventory, they are increasing the prices.

And for the newer models, they are masking the pricing within the overall price of the phone, which would have cost you a little bit less if it was launched with the old cost structure, right? But what is happening because of that, there's a shrinkage happening within the demand for smartphones across the tiers, but more so it's pronounced in $300 and below, or I would say like 30,000 rupees and below phones, right? It is shrinking even faster.

What consumers are doing is they're holding onto the devices, the replacement cycles are elongating for those who don't want to spend that much on a low spec phone. But the premium market ideally would have grown double digit this year, but because of the price increase and the memory cost and all the other stuff and the inflationary environment which we talked about, we are seeing the premium market will still grow against the tide of the overall market, but the growth will be slower. It will be a single digit growth compared to a double digit growth, which would have forecasted if there was no memory crisis.

So that is what is happening right now.

Govindraj Ethiraj: So let's say if you look at the popular models across Samsung, Apple, Vivo and so on, what is the rough price increase that you've seen in the last few months?

Neil Shah: If you see below $300 phones, it's roughly 10 to 12% increase in terms of pricing on the list price basically. And on the bill of material cost, it is a massive increase. But when you mask it overall with the margins and pricing and everything, it comes down to 10 to 12% on the older inventory.

But the newer phones, it is difficult to say how much the price increased because what they're doing is they're being creative with the supply chain and selecting maybe slightly lesser expensive components in lieu of memory. The big question is, will Apple, Samsung increase the price for the new phones which are upcoming in the fall, like the Folds, the Fold 8th generation or Apple iPhone 18? Will it be a $50, $100 price increase for new iPhones?

Ideally, they have to because they have to pass on the cost to the consumers because the memory is super expensive. So overall to your question, I would say the premium market for the existing models, Apple, we are not seeing the price increase much at this point. But for Samsung and others, we are seeing at least 7 to 8% price increase for 45,000 rupees and above.

Govindraj Ethiraj: Tell me a little bit about the memory part. So the memory is the fixed memory inside the phone, right? And you're saying that they may reduce the and balance that out with what they play around with other components in the supply chain?

Neil Shah: That's a good question. What is happening is there are two types of memory which are on the board integrated into the PC, which works with the system on chip or the CPU or GPU within the smartphone. So that is DRAM, which is dynamic RAM, which is a RAM.

And there is NAND flash, which is the storage, which is like 256 GB, 512 GB. And the DRAM is basically the 8 GB RAM, 12 GB RAM, 16 GB RAM, which we see. What has happened, it's a conundrum for OEM because of AI coming in, generative AI, Agentic AI, all the phones require more DRAM because they have to store those models temporarily to run the Agentic AI.

So most of the phones which are being specced above 30,000 rupees, minimum there is a requirement you should have a 12 GB RAM to have quantised models. But now with the memory price increasing, everyone is scratching their head. We can't go back because everyone wants AI in their phone now.

Especially for 30,000 above, it has to have AI. So what they're being creative with is, as you said, the bill of materials. So they might cut down on instead of 4K display, 2K display.

Or instead of Samsung display, they'll go for a Chinese branded BOE display, which is where they save $5-$10. Like for example, one of the vendors, they didn't go for Sony sensors, which are more expensive in a flagship phone, but they went for a Chinese sensor manufacturer, then save like $20-$30 of bill of materials. They're becoming more creative with it and trying to see where they can increase but at the same time, reduce the cost to fit the memory cost within the calculations.

Govindraj Ethiraj: And the memory prices are up because of global supply shortages?

Neil Shah: No, the memory prices are increasing. Yes, there is shortage, but the shortage is because of the data centres. Everyone is building an AI.

You're seeing like hundreds of billions of dollars committed in terms of data centre rollout. And these data centres earlier were doing for training, so we are limited. But now we want inferencing, right?

We are running this cloud code, we are running chatGPT, agents, like everyone, all the advanced developers are now having hundreds of agents which are doing tasks for them. For that inferencing, you need a lot of, for decode, you need a lot of HDM, which is high-bandwidth memory. And the CPUs also now require a lot of DRAM.

So for example, NVIDIA launched a Vera-Rubin chip. That Vera CPU, where Rubin is a GPU, Rubin GPU requires a lot of high-bandwidth memory, HVM, whereas the CPU requires almost 1.5 terabyte of DRAM. So that alone, if NVIDIA ships millions of these chips this year, that Vera CPU alone would require 5 to 6% of the global output for DRAM, which puts pressure on the smaller smartphones manufacturers.

Because that is not prioritised, because the DRAM for data centres are more profitable for Samsung, Micron, and SK Hynix.

Govindraj Ethiraj: Interesting. And you're saying that basically, back to the smartphone users, the expectation that it will have a certain degree of AI compute capability is now given. As you said, they're in a bit of a bind here because smartphone users now want to use more and more AI. But there's also the cost of AI, isn't it?

I mean, do people think about that?

Neil Shah: Again, that is a double-edged sword as well. Because if you look at the cost of AI, people are paying for the tokens now more and more. So that is becoming expensive.

Then there is an onus on Google, of the world, Apple, and the world that do maximum computation on the device. So you need more RAM, you run the model locally, you generate the tokens locally, so you don't have to pay for the tokens which are generated in the cloud. So that is the whole concept of on-device or edge AI, where the industry is moving towards.

That's why for future proofing, for the next three years, when the models will run and you generate tokens on the device itself, for PC or a smartphone, you need more memory and you need better compute. That is where the hybrid AI comes in, where you can save on tokens, where you use on-device as well as cloud.

Govindraj Ethiraj: Right. Last question. So how is smartphone sales, given all of this, looking for the next quarter?

Neil Shah: So for next quarter, it's a constant struggle because every quarter the DRAM prices are increasing by like 50 to 80 percent. So at some point it is unsustainable for smartphone manufacturers to even launch a new phone. A lot of VR, AR headsets, they are actually cancelled or pushed back for the next two years.

So we'll have to wait and see. Right now our expectation or estimation for the full year is the market will decline. In the market, smartphones will decline double digit, at least 10 to 15 percent in that range, because we don't know what is going to happen in the next two quarters.

For premium, we are still seeing that the market will increase at least single digit, as I said, above 45,000 rupees. It will increase. It is against the tide because what is happening, if you look at the classical human mentality that I am not going to buy a low spec, cheap device, which is becoming costlier.

A device which would have cost 15,000 rupees, I am not going to pay 30,000 for it. Rather, I would buy an iPhone and I would spend 50,000 on a better device with a better spec device. Even if it's slightly expensive, I get more value for my money.

And it's all about in India, right? Value for money. Money spent less or money spent more, you need more value.

So that will drive premium sales a bit more and even the financing schemes and stuff which will alleviate some concerns. So to your original point about where the consumers are cutting down on less essential stuff, but mobile is very essential. AI is becoming very essential.

So the share of wallet, which I talked about in the start of the call, is shifting towards mobile phones more and you're cutting down on other stuff.

Govindraj Ethiraj: Neil, it's been a pleasure as always. Thank you so much.

Neil Shah: Thank you.

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Speaking of memory, semiconductors and smartphones, Malaysia's electrical and electronics exports which include semiconductors could cross $197 billion this year according to the country's chip industry chief who spoke to Bloomberg. The head of the Malaysia Semiconductor Industry Association told Bloomberg TV that semiconductors account for nearly 65% of Malaysia's electrical and electronics exports and they do not see that slowing down and actually expect exports to be higher.

How has Heatwaves affected Garment Industries?

Garment factories in India supplying customers like fast retailing companies Uniqlo, Marks and Spencers and Tesco are suffering productivity losses as much as 10% because of India's extreme heat according to a new report quoted by Bloomberg.

Research at 10 facilities in four regions found high temperatures are impacting product quality, delivery, reliability and contributing to higher employee absenteeism during peak summer months. The study that was published on Tuesday by the NYU Stern Centre for Business and Human Rights has found. Now obviously if this is happening for garments it must be happening in many many more industries or has happened in the last few months.

But back to report they also identified gaps in the monitoring of conditions at suppliers facilities by global retailers and fashion brands. Nearly all customers surveyed acknowledged the risks of extreme heat to production but only 35% required suppliers to track factory temperatures. Meanwhile heat wave conditions with temperatures between 43 and 44 degrees Celsius prevailed over parts of India on Tuesday including in Delhi even as the southwest monsoon has advanced into much of south India and parts of the northeast with conditions looking favourable for further movement into more parts of central India according to the Indian meteorological department.