On Episode 825 of The Core Report, financial journalist Govindraj Ethiraj talks to Sourav Mitra, Partner–Oil & Gas at Grant Thornton Bharat as well as Ambareesh Baliga, Market Expert.

SHOW NOTES

(00:00) Stories of the day

(01:00) The US wants to militarily control the Strait of Hormuz, even as ships of countries friendly to Iran are passing through

(03:56) How Indian institutional investors are providing a floor in the markets

(11:48) Indonesia starts regulating dollar outflows in a move that could be replicated elsewhere

(13:32) Where do India’s oil and gas supplies stand right now?

(21:20) Wall Street moves one step closer to doing away with mandatory quarterly results reporting

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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.

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Good morning, it's Wednesday the 18th of March and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, on a day where we've seen fairly good air quality and therefore clear skies.

Our top stories and themes…

How Indian institutional investors are providing a floor in the markets

The U.S. wants to militarily control the state of Hormuz, even as ships of countries friendly to Iran are passing through.

Indonesia starts regulating dollar outflows in a move that could be worryingly replicated elsewhere.

Wall Street moves one step closer to doing away with mandatory quarterly results reporting.

And where do India's oil and gas supply stand right now?

Markets

The problems always start with cash flow and at least one set of very visible companies are tightening theirs. India's state-owned fuel retailers are asking for advance payments for petrol and diesel supply to fuel pumps nationwide, according to dealers who spoke to Reuters, as the companies are apparently suffering significant revenue losses from retail sales.

Earlier, the public sector refineries were giving a five-day credit period to the dealers. About 90% of the country's 101,400 retail fuel stations are supplied by state-owned refiners like Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum. Retail prices of petrol and diesel are still holding at pre-war levels, despite global oil prices over $101 per barrel, which is what the oil companies have to pay.

Actually, they have to pay even more right now because the Indian basket of crude imports is higher. And remember, the rupee has also been depreciating steadily. The president of the All India Petroleum Dealers Association, which represents about 92,000 fuel stations in India, told Reuters that they are upset because they also run their business on credit and some dealers sell fuel to clients like government departments and transporters also on credit.

So this is where the squeeze could come. More on oil later in the show. In terms of latest updates, there is nothing to indicate that the end of the war is near, given that the United States is continuing to attack and all the war hawks, including in media like the Wall Street Journal, are openly advocating for complete military control of the state of Hormuz to ensure that oil passes through.

So a fresh reminder that Asia's problem, since most of Asia has and will suffer for a prolonged period because of America's war, are Asia's alone. And that, of course, includes India. Meanwhile, West Asia continues to pay the price for its proximity to the United States.

From here, it does appear that West Asia and its oil fields are a small price to pay for the ultimate prize for the U.S., which is, of course, the extinction of Iran's leadership, assuming that is the objective. On Tuesday morning, the UAE announced a full airspace closure for around two hours as it intercepted attacks from Iran. The General Civil Aviation Authority said the decision was to ensure the safety of flights and aircrew and safeguarding the country's territory, according to a Bloomberg report, which added that on Monday, Emirates had suspended operations for more than seven hours following a fuel tank fire at Dubai International Airport caused by a drone incident, after which flights resumed on a limited schedule.

On Tuesday, a large gas field in the UAE was set ablaze after a drone strike and a vital oil port was halted again. Bloomberg reported, adding that latest incidents in the UAE add to a fast-growing list of attacks on energy assets in the Middle East. Some of the largest refineries and a massive LNG export plant have been halted following drone strikes, while ports around the region have been hit, while oil fields in Saudi Arabia have been targeted.

Bloomberg also reported that many of Emirates' flights into Dubai are almost empty, while flights out are full. Meanwhile, the Indian stock markets are showing some signs of maybe resilience or value buying, and possibly tracking oil prices, which are now hovering around the $101 mark or just above $100. There are two camps in the market, and those who feel the war will end in a few weeks and those who don't, those who are not sure, would mostly fall into the latter group.

All this is accentuating the volatility in the markets, which slipped between negative and positive territories once again on Tuesday, but closed in the positive and thus continuing the recovery for a second day. The Nifty 50 was up 172 points to 23,581, and the Sensex was up 568 points at 76,070. The broader markets were also higher.

The Nifty mid-cap and small-cap indices were up 1% and 0.8% each. So what are the overall demand and supply trends looking like in the market right now for flows of capital, and how could investors be looking at this? I reached out to veteran market analyst Ambareesh Baliga, and I began by asking him how he was seeing or has seen the last few days, and how he was looking ahead.

INTERVIEW TRANSCRIPT

Ambareesh Baliga: Now see, when the war started, the Iran-US-Israel war started, there was an expectation that the war may be short-lived and the markets will bounce back decently soon. And because of which we saw some amount of buying coming in at the market when it had fallen initially. But then the war kept on extending and the markets kept on falling.

In the last couple of days, in fact the last one week, we have seen a decent amount of panic from the retail investors as well as HNIs. I mean, I know quite a few HNIs who have actually sold off the complete portfolio saying that this war is going to extend for a couple of months, I think we are doomed, and people have sold off. So typically when that happens, you have markets correcting sharply because there are hardly any buyers, whereas there's a lot of selling coming in from these investors.

So I think that's exactly what we saw in the last few days. The last two days, yes, I think the markets have fallen quite a lot, so it's never straight fall. I mean, you always have some sort of bounce backs.

So I think we are seeing that bounce back as of now. I mean, I don't know whether it's, I mean, we have seen a bottom or we could see further downfall from here. Because like I said, in case this war continues much longer, yes, it will have an effect.

Govindraj Ethiraj: Okay. And I'll come to that effect. Tell us about what's happening, you know, beyond the Sensex stocks.

And where do you see the action? Or rather, where is the action mostly confined to or not confined to?

Ambareesh Baliga: In the last four or five years, post-COVID, one clear phenomenon which I've noticed is that, forget the Sensex or the Nifty stocks, I mean, you have mutual fund stocks and the non-mutual fund stocks. And the mutual fund stocks, because they are the major buyers in the Indian market since the last four or five years. Now, the mutual fund stocks are those top 400, maximum the top 500 stocks.

Because generally, mutual funds do not invest when the market cap is less than, say, 7,000-8,000 crores. I think, max, they come down to about 5,000 crores of market cap. Below that, you generally don't have mutual fund investing.

That's because like the AUM is so large in every fund that even if you put a small amount in a market cap company, which is less than 5,000 crores, you end up owning, say, 5% or 8% or 10%, which doesn't make sense. So typically, you have those mutual fund stocks and the non-mutual fund stocks. And the non-mutual fund stocks are the ones which are generally bought by the retail and the HLIs.

And that's the one which actually gave you that huge alpha till September 2024. And post that, we have seen that major correction in that part of the market. Because it's not being bought by mutual funds, and they're the ones which are sitting on cash, there was hardly any buying support coming for those stocks.

So because of which, if you see in the last one and a half years, the individual portfolios have performed much worse than the mutual fund portfolios. If you look at those mutual fund funds, they have performed much, much better than the individual portfolio because they are more of these small caps which are there.

Govindraj Ethiraj: Right. And if you look at what's affecting the markets, one, of course, I mean, it's the war in general, but it's also oil prices in specific, which transmit to the economy. What's your sense?

I mean, what's the one or two things that could maybe give us some hope and what will not?

Ambareesh Baliga: Normally, whenever there is a geopolitical issue, whether there's a war, it affects the stock markets. But unlike the Russia-Ukraine war, I mean, that's been continuing for a very long time, but that had an initial effect. But after that, it did not because end of the day, it was not in our backyard, nor was it really affecting the oil prices.

In fact, the Russia-Ukraine conflict brought down the oil prices for India, because we were buying from Russia since then at a discount. But with this war, what has happened is it has affected the oil prices, they've gone through the roof, it's affecting the supply chain across, and it's also affecting the international trade. But again, I think time is very important out here.

Because if this whole issue gets over, possibly in the next one week or max in the next 10 days, I think India can still take that brunt. But in case it carries on, say for the next two months or three months, yes, I think the Indian economy will get affected. And that's what people are afraid of.

So, in case by some chance, in the next four or five days, they come to an agreement, there's a truce, I think you could see the Indian markets really bouncing back. Overall, the world markets should bounce back, but Indian markets will bounce back extremely well, because we would be the least affected.

Govindraj Ethiraj: Right. And how are valuations right now, given that we've fallen so far at least 10% in this calendar year itself?

Ambareesh Baliga: Valuations, I think have come down to very decent levels. I mean, typically, we were at about 20, 21 earlier, as I speak, has come down to about 17, 18, 25, 27, which I think is extremely attractive. But then when we're in a situation like this, I mean, an attractive market today could become more attractive tomorrow.

So it depends on what sort of risk taking capacity one has. Because if one does not have much of a risk taking capacity, I would say, possibly stay out, don't panic and sell, but at least stay out of the market for the time being. But then if you have a risk taking capacity, if you have enough cash in bank, which is your own, not borrowed, then I think times like these really give you one of the best opportunities which comes once in many years.

So if you have cash in hand, go ahead and buy good stocks, fundamentally good stocks, I don't think you'll regret it.

Govindraj Ethiraj: Right. Last question, you talked about a time like this, what would you compare this period with, let's say, in the last two decades or so or three decades?

Ambareesh Baliga: No, I mean, you can't compare, it's not an apple to apple comparison.

Govindraj Ethiraj: It's similar. I mean, like, for example, there are some comparisons to 2008 crisis.

Ambareesh Baliga: Absolutely. At that point of time, we thought the whole global financial system that collapsed and is going to take ages before things come back to normal. But then those who invested at that point of time had to wait for a couple of years.

But then the sort of returns you got, I mean, recently, if you're talking of COVID, COVID was something where, I mean, people were not sure whether they would live to see the next year. I mean, that was a fear which was there. I mean, at the end of early April 2020.

But then, I mean, those who invested at that part of time, I mean, have made multi baggers. I think there's a huge amount of wealth created in India, post COVID, because of the markets.

Govindraj Ethiraj: Right. Good note to end on Ambareesh, thank you so much for joining me.

Rupee and Indonesia’s New Forex Rules

The rupee moved in a small band on Tuesday as corporate dollar demand and worries over the hit from higher energy prices were cushioned by state-run bank dollar sales, possibly inspired by the Reserve Bank of India, according to Reuters. The rupee closed at ₹92.37 per dollar, barely changed, and is still close to its all-time low of ₹92.47 hit last week. Speaking of currency, it's a worrying sign and it goes back to cash flows, though of hard currency and at a cross-border level.

Indonesia's central bank has tightened foreign exchange regulations as it tries to soften the impact of the Middle East war on inflation and the rupiah. Cash purchases of foreign currency against the rupiah will be to $50,000 per buyer per month, down from $100,000 starting April, Indonesia's central bank said in a statement, according to a Bloomberg report. Thresholds for forwards and swaps were increased and supporting documents will be required for outgoing foreign exchange fund transfers of $50,000 and up from $100,000 previously.

No, India has not signalled any such move right now, but it is definitely within the realm of possibility, given that we've constantly played with the outbound remittance programme, much to the irritation of many Indians wanting to take more money out of the country. Elsewhere, gold prices continue to hold steady as demand for it rose on geopolitical concerns flowing from the Iran war, while investor caution ahead of the U.S. Federal Reserve's monetary policy decision kept gold prices in control. Spot gold was at about $5,001, that's about $5,000 per ounce, on Tuesday morning, according to Reuters.

India’s Oil and Gas Supplies

It's back to oil. A Pakistani tanker earlier this week became the latest vessel to sail out to the state of Hormuz by moving closely to the Iranian coast, suggesting an approved route that points to Iran's tightening grip on the narrow waterway, even as America seeks or tries to assert control, according to Bloomberg. Two bulk carriers, which had called at Iranian ports, took the same route on Monday morning, broadcasting their whereabouts, even as other ships preferred to switch off transponders for safety.

And on Saturday morning, two India-flagged liquefied petroleum gas tankers have also exited the strait, while a Gambia-flagged general cargo ship has left Hormuz on Tuesday. So where does India stand presently in terms of oil and gas supplies? I reached out to Sourav Mitra, partner Energy, Grant Thornton Bharat, and I began by asking him to talk about what the status was as he saw it.

INTERVIEW TRANSCRIPT

Sourav Mitra: I think on a supply side, as I said that government has put really significant efforts to ensure that the availability of both LPG and good is something that could be addressed upon. I think they have navigated two ships from the state of Hormuz which will at least address the LPG concern. I think two ships have already been in the Indian waters.

There are another six ships what we understand are standard on the state of Hormuz for which discussions are ongoing. In terms of crude, as I said that crude is something where it is a diversified supply chain. While dependence is not as bad as LPG, there are sources, I think crude could be taken from Venezuela, from the American and the West African part which again should not be a matter of concern.

And also there are high levels of at least 60 days of supply storage of crude and petroleum products the OMCs and the government have. So I think from a point of petrol and diesel, it is not such a matter of concern. But yes, LPG is something which government is focussing on and trying different ways to mitigate the challenge.

Govindraj Ethiraj: One of the things that the government has said that it's doing is ramping up production of LPG amidst or rather with the oil marketing companies or the refineries. And that was expected to have taken it up by at least 25%. Do you have a sense on where we are right now?

Sourav Mitra: I think it is picking up slowly. So as of now, I think the latest report that we could hear is 38% is the domestic production, 38 to 40% is the domestic production which is happening primarily from the refineries. Refineries including Reliance have also, I think, committed to the fact that they have fully put up their all resources into expanding the LPG, the propane and butane cuts.

So I think as of now, it looks around 38 to 40% is the domestic LPG production and still the dependence is around close to 60% is from the import dependence.

Govindraj Ethiraj: And we've obviously seen a drop in commercial use because of the diversion. So has that helped even out things a little bit for the domestic side? Definitely.

Sourav Mitra: I think it has held a lot of settling of the nerves given that there was panic among the household given 90% of your LPG usage is the domestic ones. The 10% is the one of which is the commercial, some industrial and some of the auto LPG stations. Auto LPG stations, what we understand has been completely zero.

They have been not getting gas. A lot of commercial establishments which are not so essential have been also, I think, there have been gas rationing which is happening. And that has at least helped to, I think, address the domestic use of the domestic LPG cylinder that is required.

Govindraj Ethiraj: Right. And we've, of course, been falling back to some extent if we could call it that on pipe natural gas, as in those who have pipe natural gas or already had it, obviously have not had a problem so far. But that also is dependent on imports.

So while we've had a larger domestic or other smaller domestic consumption to divert from industrial, where do we stand?

Sourav Mitra: See, I think compared to LPG, natural gas is in a far better position. 50% of the demand of the entire India is made by domestic production and another 50% is done by the energy imports. When we talk about the pipe natural gas, particularly off late since last one, two years, the city gas distributions have been doing very well into penetrating the connections, the domestic connections.

And people who have been connected are not feeling that pinch of LPG shortage. However, one needs to address that. I think the allocation of domestic gas also ensures that as per the essential priority, the first priority will be the domestic gas followed by the CNG and then the other industries.

But the shortage of imported LNG is having a pinch, particularly on the fertiliser sector. A lot of fertiliser plants are effectively operating at 50%, 60% of utilisation, thereby having a direct impact on the urea production. Similarly, I think the major industries who were dependent on LNG, I think the ceramics one, the steel manufacturers, who are the core of the manufacturing hub, they are feeling a lot of heat given that there have been a curtailment of gas which has happened.

LPG to these customers is not available and they do not have any alternate source to run these plants. And given that this is March and a lot of financial end happens, a lot of production targets are there, the overall impact is more seen on the industrial, the small scale and the industry which is dependent on natural gas. But yes, answering the question, people who are on domestic pipe, natural gas, urban and semi-urban areas where the city gas distribution are able to connect it, they are always better footed compared to the LPG connections.

Govindraj Ethiraj: Sourav, as you look outside the country, how are you seeing the overall supply situation? While we know about the problems of the state of hormones, how is oil supply looking like elsewhere? And are there any other trends that you're seeing?

Sourav Mitra: See, I think there are trends, there are signals what will happen is if this conflict continues and the state of hormones is not, the diplomatic channels fails and there are less passage of ships happening. I think then government will explore other routes. I think LPG could be brought from the US markets which will take another three weeks or four weeks as a sailing time.

There could be LPG is expected to come from Argentinian market also. I think so that is something which is a second option for the government. When we see the other countries, how they are mitigating, I think South Asian countries are I think much more exposed to this critical thing.

Bangladesh, Pakistan, Nepal, these are some of our neighbouring countries, they are facing a lot of heat. And given that what we hear from the official channels of the Iran foreign ministry, who has committed that I think non-Israeli and non-US ships will be permitted to go and your diplomacy, I think that could definitely see that the LPG and your, at least the crude which is the UA crude, one of a ship from UA crude is also expected to land in Kandla. So I think these are positive signs if government is able to navigate the situation as his basis on a one-to-one individual basis.

I think that could be a mitigation step towards arriving at the problem.

Govindraj Ethiraj: Sourav, thank you so much for joining me.

Sourav Mitra: Pleasure speaking to you. Thank you.

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While there are tankers that are heading towards India, it also depends on the size of the tanker.

As we discussed earlier, two tankers could provide potentially one day's supply of liquefied petroleum gas. But if it's a large tanker or a VLCG, then it's quite likely that we could meet four to five days of LPG consumption, in which case, of course, we could hope that some of the larger tankers also make it out and through the Strait of Hormuz to India. Most of those tankers are coming from Saudi Arabia.

The End of Quarterly Reports?

India follows a quarterly reporting system, which is considered more of a bane than a boon for corporate India, at least the listed universe. The United States Securities and Exchange Commission or SEC is preparing a proposal to eliminate the requirement to report earnings quarterly and instead give companies the option to share results twice a year, according to a Wall Street Journal report, adding that the SEC could publish that proposal as soon as next month. Once the proposal is published, it would be subject to a public comment period after the period, which lasts about 30 days, the SEC will vote on it.

We don't know, of course, whether it will happen. But given the fact that US President Donald Trump is pushing it, the chances are obviously high. The rule is expected to make quarterly reporting optional, not eliminate them completely.

And it was first floated in Trump's first administration, then surfaced last year, as we reported on the core report as well, and now seems to be moving in a more concrete way, according to the Wall Street Journal. Publicly traded companies in the US have reported results every three months for the past 50 plus years, says the Wall Street Journal, adding that any change is also likely to face opposition from investors who rely on the transparency of regular disclosures. So what will India do if the United States makes quarterly reporting optional? Or rather, what should India do? Well, you could leave your comments in the comment section, and I promise to pick them up.