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Brokerages Bullish On India But Downgrades On Banking Sector Have Started

Downgrades from Goldman Sachs for India’s banking sector provide an insight into the overall state of the financial system in the context of retail savers and spenders as well as of course the banks ability to make money from them.

By Govindraj Ethiraj
New Update
Brokerages Downgrades Banking
On today’s episode, financial journalist Govindraj Ethiraj talks to Ashok K Bhattacharya, Editorial Director of Business Standard.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (03:29) Brokerages are bullish on India but downgrades on leading sectors like banking have started.
  • (09:17) Indian oil refiners are facing dwindling margins as the cost of crude goes up.
  • (10:58) Government releases household consumption data after more than a decade, spending on food is down.
  • (17:51) Is the Government going to be in the business of doing business?

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.


The Downgrades Are Coming

Well, the last week was, in some ways, unexpectedly, another record setting one. Unexpected because there are no specific bullish signs, or at least specific to India in recent weeks apart from a few bullish investment banking reports and of course continued earnings growth.

Last week, the Nifty50 ended at 22,212, a record, after hitting fresh records on 5 consecutive trading sessions during the week. 

The BSE Sensex closed down 15 points at 73,142.8

On Wall Street, it was Nvidia the chip maker all the way, after it rose 16% on Thursday and briefly crossed the $2 trillion market capitalization mark. That day it added about $277 billion in market capitalization which was higher than the $197 billion gain from Facebook-parent Meta earlier in the month.

The gains are no double spectacular but the level and value of swings is worrying, remember it can happen both ways.

The S&P 500 touched a record too of 5,100 on Tuesday but then held, as did the rest of the markets. 

Federal Reserve Bank of New York President John Williams said the economy is headed in the right direction, and it will likely be appropriate to cut rates later this year, Bloomberg reported.

If you take a step back, most world markets are rising steadily, including Japan’s Nikkei 225 which hit a 34-year high last week. Think about how old you were or where you were in 1989, particularly if you were in financial markets, just to get a sense on how markets can or cannot move.

Things are changing for Japan or perceived to be at least, as the feeling is that the country’s deflation era has now ended and companies are showing strong profit growth.

This has an interesting India connection because many global funds are now moving money out of China and investing in Japan and India. This would not have happened in the past because Japan was in the developed country baskets of global funds while India was and continues to be in the emerging markets basket.

India is now increasingly attracting funds from the non emerging basket as well.

Meanwhile, while all investment banks and brokerages have been steadily putting out bullish India reports, they are getting, as their job presumably demands them to be, selective about industries where they feel prices have run up. I will come to the total FII portfolio numbers in a minute.

Brokerage CLSA for example has put a sell on oil marketing companies like HPCL, BPCL and IOC, says the Business Standard.

CLSA analysts feel the oil refiners are pricing-in much higher than historical marketing margins, and a notable premium to the global peer average EV (earnings value)/Ebitda multiple.

A lack of retail fuel price changes in the last two years has clearly exposed the vulnerability of profits for the OMCs. 

While it does not appear that there could be cuts in pump prices of petrol and diesel despite elections on the horizon, CLSA warns that given the government's focus on fiscal consolidation it may look at avenues to raise fuel taxes post elections.

Those apart, large global refining capacity additions may soon raise doubts over the continuation of current high margins.

Another report by CareEdge has pointed out (as we have been doing so in the The Core Report as well) that  state-run refiners will face a shift in fortunes once cheap Russian oil becomes more expensive and less accessible, squeezing profits for OMCs that had been benefiting from Moscow's war in Ukraine. 

This is already happening, including for some kinds of crude where prices have been going up. More on crude shortly.

The more interesting and in some ways lesser expected downgrades have come from Goldman Sachs for India’s banking sector.

The reasons provide an insight into the overall state of the financial system in the context of retail savers and spenders as well as of course the banks ability to make money from them.

Last week, I replayed a part of Goldmans’ interaction with HDFC Bank’s CEO Sashidar Jagadishan where he spoke essentially about now his bank would not go for high risk lending which could potentially deliver higher returns and more importantly, about expanding their branch network so as to help raise more deposits.

Goldman has downgraded ICICI and SBI to Neutral from Buy while it has retained a Buy on HDFC Bank. It has upgraded Bajaj Finance from a neutral to a buy through Bajaj Finance is a NBFC and not a bank.

Clearly, the interaction with the HDFC folks has convinced Goldman about the merits of branch expansion and its more fundamental strategy of business growth.

Goldman says the "Goldilocks period" for the banking sector may be coming to an end, referring to a phase of strong growth and strong profitability. 

The larger problem that Goldman highlights is of course the fact that the share of bank deposits as a percentage of household financial assets is falling, it was 45% last year. Incrementally only 35% is going towards deposits.

And then bank deposits face competition from Government small savings schemes which are now 20% of total deposit pool and give interest rates more than bank term deposits.

We spoke of India and Japan being in a somewhat similar club. To put things in a little context now.

Foreign investors have invested over Rs 18,500 crore in debt markets this month 's debt markets, all thanks to the  upcoming inclusion of Indian government bonds in a JP Morgan Index. This is over the Rs 19,836 crore in January, making it the highest monthly inflow in more than six years. 

However, on the other hand,  foreign investors are net sellers in equity, at Rs 424 crore from equities so far this month, over Rs 25,743 crore in January.

Billions are expected to flow into debt this year from overseas though while the broader equity outlook is positive, the specifics are not clear.

So who is buying then ? Well, you and me, via mutual funds and directly. All of which makes the market direction a little difficult to predict on a micro basis. 

Which should also make you more of a long term investor if you really want to play it carefully.

And speaking of long term investing, a word on Berkshire Hathaway, the biggest of them all.

Berkshire reported a big rise in operating earnings in the fourth quarter, thanks to huge gains in its insurance business, while its cash pile grew to record levels.

Berkshire now has $167 billion in cash as of the fourth quarter, a record level that surpasses the $157.2 billion the conglomerate held in the prior quarter.

India’s Crude Oil Imports New Record

Oil prices are now down over the weekend, under $82 a barrel at around $81.62.

We spoke of the pressures oil refining companies are facing on the margin front because they can only make more money if the cost of crude they import is cheaper or remains cheap.

India's crude oil imports rose to a monthly record in January after the Red Sea shipping crisis delayed the December arrival of cargoes from the Americas, Bloomberg reported.

India's oil imports hit 5.24 million barrels per day (bpd) in January, up 17% from December and 3.5% higher than in the corresponding month a year earlier, according to the data.

An official with one Indian refiner confirmed that some cargoes it was scheduled to receive in December had been delayed until January and in some cases they had to pay more because freight and insurance costs have shot up because of tensions around the Red Sea and the Suez Canal route.

India’s refiners are buying more from the Middle East, including Iraq, to avoid disruption from the delays and make up for the diversion of Russian light sweet Sokol oil, supplies of which were hit by payment woes and tougher Western sanctions, Bloomberg reported.

Indians Are Spending Less on Food, Latest Consumption Data

Indians are spending less on food, particularly staples like rice and wheat, and more on discretionary items such as processed food, as well as durables like televisions and fridges, according to the latest Household Consumption Expenditure Survey, released late on Saturday 

The survey says average rural consumer spending rose to 3,773 rupees ($45.54) a month per person for the 12 months through July from 1,430 rupees in the previous survey in 2011-2012, which is of course ten years ago.

Urban spending rose to 6,459 rupees from 2,630 rupees.

The first bit of context is that the Government last released the numbers in 2017 on the ground that they were data quality issues. 

The Government was accused of suppressing the data because it apparently showed weak consumption trends.

The larger issue was of course data availability and data integrity for India which of course does not look very good in the eyes of investors, anywhere.

So now the data is out so hopefully this and other data cuts will be released on schedule including the Census which was last held in 2011 February and should have been held in February 2021 but was not because of Covid but has not found a date later, so far.

The survey also says that spending on  food fell to 46% of monthly consumption for rural consumers from nearly 53% in 2011-12, while in urban areas it fell to 39% from 43%.

The figures are at this point not fully square with other data we are seeing and could be also distorted somewhat by the free foodgrain programmes by the Government.

The survey says Indians are spending less on cereals, including wheat and rice, and pulses, but more on beverages, refreshments and processed food.

This could be true but could also suggest a shift away from expensive cereals and pulses which have seen very high rates of inflation for more than a year now which may be cooling in the last month but are still high. Plus inflation is close to 20% by the way.

Consumers are spending more on conveyance, consumer services and durable goods, like televisions and fridges.

Compared to 13 years ago average monthly per capita consumption expenditure (MPCE) in Indian households rose by 33.5% since 2011-12 in urban households to ₹3,510, with rural India’s MPCE seeing a 40.42% increase over the same period to hit ₹2,008.

The estimates of the MPCE are based on data collected from 2,61,746 households, of which 1,55,014 were in rural areas, spread over all States and Union Territories, the Government said, adding that a detailed report would be out shortly.

I reached out to Ashok K Bhattacharya , Editorial Director of Business Standard and began by asking him how he was reading the results of the survey.


Ashok Bhattacharya is going to stay with us on another story. Coming up.

The Private Sector Has Slowed Down On Investments And The Government Has Edged In

Almost since time immemorial (since that how long it seems) financial journalists like yours truly have asked the question about how long and even whether the Government should be in the business of doing business and more so in a developing country like India where the Government’s time and effort is better spent on allocating resources from a well tuned private sector which generates those resources.

Successive Governments have however demonstrated that India likes to do both.

A recent column by Ashok K Bhattacharya in Business Standard points out that this month’s Interim Budget shows that capital investments to be made by as many as 169 PSUs (including the Indian Railways) in the current year are up 15 per cent over such expenditure in 2022-23. 

Ten years ago, there were 147 such entities, whose capital outlays in 2013-14 were estimated at Rs 3.32 trillion.

The broader point being that the Modi government has contributed significantly higher amounts for equity infusion into PSUs compared to the Manmohan Singh government in a similar period of 10 years. 

This is contrary to the general perception of how the two governments dealt with the public sector. 

In contrast, the National Democratic Alliance (NDA) was seen to be focused more on disinvestment and privatisation, while refraining from providing any special financial support to PSUs.

The reality, says AKB, is quite different. The share of government equity for PSUs in the total public sector capital outlay was 15.8 percent during the Manmohan Singh years, but it almost doubled to 30.33 per cent during the 10 years of Narendra Modi. 

I reached out to AKB and began by asking him why this was happening and how investors, including those sitting outside India, should view the Government's increasing role in running businesses.