Markets Edge Up Once Again, Tracking Asia
The stock markets were up again and held onto the small gains
On Episode 604 of The Core Report, financial journalist Govindraj Ethiraj talks to Gopal Jain, Co-Founder and Managing Partner at Gaja Capital.
SHOW NOTES
(00:00) The Take: Cable TV’s Digital Disruption
(06:17) Markets edge up once again, tracking Asia
(06:39) US says it has a trade deal with China, the latter yet to respond
(10:56) Dedollarisation is rising, differently from what was predicted earlier
(13:51) Should you buy stocks of companies that provide steady dividends…or not?
(24:31) Malls are converting retail stores to entertainment zones as ecommerce pressure builds
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 [email protected].
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Good morning, it's Thursday the 12th of June and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
The Take: Cable TV's digital disruption, a jugaad industry, is meeting its comeuppance
Like most cities and towns in India, Mumbai has its share of ugly black cables strung haphazardly across buildings connecting entire neighbourhoods to a central hub somewhere. These cables have formed the basis of India's ground-up local entrepreneur-cum-sometimes-muscle-man-led cable and satellite television industry revolution. They've also existed all these years in a time warp of their own.
The other less ugly but equally obtrusive sign of this revolution has been multitudes of mini-satellite dishes broadly facing the eastern skies because there's no choice but to aim in that direction, but affixed to balconies and rooftops once again in a fairly random fashion and destroying the little aesthetic that there was. Over the years, many apartment complexes have moved to more single and centralised dish antennas on the rooftop which would then connect to multiple houses. But dramatic changes are afoot.
An Ernst & Young report quoted by Business Standard says a sharp drop in pay TV subscribers from about 151 million around seven years ago to about 111 million last year has led to a sharp contraction in the once burgeoning industry. Significantly, the industry has reportedly lost over half a million jobs in the last seven years as consumers switched to OTT, smart televisions, and free satellite TV from state-owned Doordarshan. The combined revenue of the four major direct-to-home operators and ten leading multi-system operators who run these smaller cable operators fell to about Rs 21,500 crore in 2023-24 from about Rs 25,000 crore in 2018-19, which is about a 16% fall even as if we look ahead, pay TV subscribers are expected to almost half by 2030 or in about five years time.
So, from 2019 till about 2030, the total amount of pay TV subscribers could come down by half. Now, this decline in subscriber numbers and the resultant job losses is thus as much driven by changing consumer habits as by digital disruption. These insights were released by the State of Cable TV Distribution in India report on Monday published jointly by the All India Digital Cable Federation and Ernst & Young India.
Now, these developments also highlight a classic contrast between Jagat principles around which most of the cable industry operated versus the challenges India now faces of upskilling its workforce to an AI-ready world on the other extreme. And this should surely act as a warning to any legacy industry which has still not heeded it. My own experience dealing with cable television operators and their collection agents has been less than memorable and I found an undercurrent of menace in most interactions in most any city.
Of course, on the flip side, if you just moved into an apartment and needed a cable connection urgently, these were the people who would do it for you in hours. Most people would not really be sad or upset with the cable operators' disappearance. In most cases, they would not have even noticed.
The industry made up of companies like Zee, Geostar and Sony argues that linear television continues to be resilient. They cite the 85 to 90 million households still paying for TV services as a sign of untapped potential, especially amongst DDs or Doordarshan's free-dish users and homes in the media dark regions. The industry is still hoping that some 100 million homes in India which do not have cable or satellite TV could be customers for low-cost plans and affordable set-top boxes.
But the industry itself has been in the throes of major consolidation moves in recent years. Note that Geostar itself is a merger or buyout of Disney India, including Hotstar by Reliance, and Zee and Sony had a long and messy courtship meant to culminate in a merger which fell apart quite literally at the altar. Needless to add, the consolidation in the industry reflected precisely the problems highlighted by that report.
On the other hand, it's possible that the industry's growth has peaked, at least from a revenue standpoint or the desire or affordability of customers to pay, so things will only move slowly here on. And also, it could be more about shifts and which platform or piece of content grabs the maximum eyeballs, revenue, or subscription, like IPL cricket, which is already drawn in billions of dollars of forward investments. Back to the jobs question, since it is interlinked, while we could do with fewer cable guys or dish antenna installers, we will still need last-mile connectivity since most heavy users of the internet are switching to fibre links directly to homes.
But the difference is that you're dealing with fewer employees of larger companies like Tata, Airtel, or Jio who mostly deal with entire apartment complexes rather than individual homes as opposed to interacting with the local entrepreneur. Remember, many apartment complexes, new and old, themselves provide internal wirings and confined maintenance and repair to centralised boxes. And the telcos also are increasingly giving you more intuitive software and apps, thanks to which connections and routers can be set up in Jiffy or with some help from the call centre.
An increasing number of users will also and will rely solely on smartphones, thanks to ever-rising mobile data speeds, including with 5G spreading to most corners of India. In this shrinking market, the cable guy today has to be more qualified, digitally literate, and work with more systems, processes, and of course, the latest technologies. Looking back, you could assign blame to governments and policy makers for not helping out, but the onus also lies on businesses and workers to upscale and evolve.
It would also be good to reflect that an entire industry, in this case, cable to home, built on Jagat, would not last forever.
And that brings us to the top stories and themes of the day.
The stock markets edge up once again, track Asia.
The US says it has a trade deal with China, but the latter is yet to respond.
Should you buy stocks of companies that provide steady dividends or not?
Malls are converting retail stores to entertainment zones as e-commerce pressure builds
De-dollarization is rising, but differently from what was predicted earlier.
Markets
The stock markets were up again and held on to the small gains. Remember, the Nifty was up 1 point on Tuesday, even as the Sensex was down. Wednesday's drivers were information technology, oil and gas, even as consumer products and public sector banks were under pressure.
The Sensex closed up 123 points to 82,515, and the Nifty was up 37 points to 25,141. Meanwhile, US President Donald Trump on Wednesday announced on social media that a deal with China, that's a trade deal, had been struck following intense negotiations between the two countries and their teams in London. The trade deal is pending final approval from both him and Chinese President Xi Jinping.
In a post on Truth Social, Trump said that as part of the agreement, China will supply upfront full magnets and any necessary rare earth materials, and he also said that we will be imposing a total of 55% in tariffs, while China will impose 10%, and the relationship between our countries is excellent. In return, he says the United States will provide what was agreed upon, including allowing Chinese students to study in US colleges and universities, something that he's always supported. Now, Chinese media has so far been somewhat silent on this, presumably waiting for a clear sense and go-ahead on whether all terms have been agreed to by their side.
Now, a sense of normalcy in trade relations with China will obviously bring some calm to global markets, but there is expectedly concern. This deal is taped together by the two sides' leverage over each other, not common principles or shared interests. The chances for further stops and starts are quite high, according to Scott Kennedy, senior advisor and trustee chair in Chinese business and economics at the Centre for Strategic and International Studies in Washington, speaking to CNBC.
So, to reiterate, as I see it, even if there is a deal, there is no clear guarantee it will last and in what form. However, oil prices rose to a seven-week high following reports of that deal being struck. Markets are of course responding, as we've been seeing, to short-term moves despite noting and understanding on several occasions that the final outcome in these discussions may not be the same as the announcements that preceded.
So, nevertheless, fruit futures, that's Brent fruit futures, were up more than a dollar to about $68, a battle on Wednesday midday, which means now they've crossed $68, while U.S. West Texas Intermediate was up about $1.3 to about $66. At this level, West Texas Intermediate has touched its highest in more than two months, according to price quotes from Reuters. Meanwhile, gold prices also rose on Wednesday thanks to cooler-than-expected inflation data in the United States that strengthened investors' conviction that the Federal Reserve will start cutting interest rates by September.
Gold was up slightly to about $3,337 an ounce after rising even more a session earlier. Back home, the rupee was higher at Rs. 85.51 against the U.S. dollar from its previous close of Rs. 85.60 in the previous session, according to Reuters numbers. Again, Asian currencies were largely steady, while the dollar index is now hovering around 99. Among other news, Elon Musk appeared to walk back his war of words with President Trump a week after they traded insults in a dramatic and public falling-out we referred to.
Elon Musk wrote in a post on X or Twitter overnight that he regrets some of his posts about President Trump last week and they went too far. Tensions between the two burst into the open on the 5th of June, so it's exactly six days since the public walk-back has happened. The blow-up came days after Musk's departure as a close advisor to Trump.
Now, the core report has argued earlier this week that India should be guarded in its approach and treat Tesla or Musk like any other good potential investor into India, whichever way his relationship with the White House goes. Elsewhere, back home, while the overall macro signals have been good, one signal, which has obviously been the arrival of the monsoons, has now stalled. On the other hand, Delhi and parts of northwest India are now experiencing heatwaves, with temperatures crossing 40 degrees Celsius, with Delhi recording a season high of 43.8 degrees Celsius, or about 3.6 degrees Celsius above normal, according to the Indian Meteorological Department. And some agriculture news, India's rice stocks in government warehouses are up 18 percent from a year ago to a record high for the start of June, says Reuters, while wheat stocks have hit their highest level in four years on higher procurement from farmers. Record dry stocks would also help India increase shipments, while an improvement in wheat inventories could help in curtailing any price spikes later this year by increasing sales, Reuters reported.
The Path to De-Dollarisation
A fintech entrepreneur I met in Singapore recently told me that the US trade moves were the best opportunity that he had not expected to see when he started out in his new venture in payments.
A veteran of the payments industry in the region is creating payment networks for small and medium enterprises in Asia, with an emphasis now, or rather increasingly so, on non-dollar transactions. Asia is progressively moving away from the US as a mix of geopolitical uncertainties, monetary shifts and currency hedging prompts de-dollarization across the region, according to a report on Wednesday in the CNBC. The move away from the dollar is gaining momentum in ASEAN countries driven mainly by two forces, people and companies gradually converting their US dollar savings back into local currencies and large investors hedging foreign investments more actively, according to a Bank of America note quoted by CNBC.
De-dollarization in ASEAN is likely to pick up pace primarily via conversion of forex deposits accumulated since 2022, the banks Asia Fixed Income and Forex Strategist told CNBC. So beyond ASEAN, the BRICS nations, which includes India and China, have also actively developed and peddled their own payment systems to bypass traditional systems like SWIFT, which are US controlled, and reduce dependency on the dollar. China has also been actively promoting bilateral trade settlements in the Yuan.
A forex strategist at ING told CNBC that Trump's erratic trade policy decisions and the dollar's sharp depreciation are probably encouraging a more rapid shift towards other currencies. Though that shift has been happening over time, the dependence on the dollar has been steadily reducing with its share in global forex reserves declining from 70% in 2000 to about 58% in 2024. So that's a fairly long period, but the decline is pronounced and is likely to accelerate.
Since the start of the year, the dollar index has weakened by over 8%. So de-dollarization is not a new phenomenon, but the narrative has changed and investors and officials are also beginning to recognise, says CNBC, that the dollar can be or rather has been used as a leverage if not openly weaponised in trade negotiations. This has led to a revaluation of predominantly overweight US dollar portfolios, according to the Barclays Head of Forex and Emerging Markets Macro Strategy in Asia, who spoke to CNBC, adding that countries are looking at the fact that the dollar has been and can be used as a sort of weapon on trade, trade sanctions or other direct sanctions, and that's been the real change in recent months.
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Would you bet on dividend-paying companies?
Companies last year paid more as dividend to shareholders despite muted growth or less growth in revenue and earnings. The combined dividend payout by India's top-listed companies was up about 11% year-on-year, according to a report in the Business Standard. Now, in contrast, these companies' net profits adjusted for exceptional gains and losses were up only 5.2%, while combined net sales were up about 7.5%. Now, this analysis is based on a sample of 1,200 companies that are a part of BSE 500, BSE mid-cap, and BSE small-cap indices, according to Business Standard. Now, while the numbers may shift as that sample expands or contracts, the larger question is really this. Is it a good thing when companies increase their dividend payouts, and how does that stack from an investor's point of view? Remember, dividends also go to owners, promoters, and founders, so if money goes out of the company, potentially it's not being used for business expansion of some form or the other.
So, are higher-dividend companies good investment bets, and when are they not? I reached out to Gopal Jain, veteran investor, co-founder, and managing partner of Mumbai-based private equity firm Gaja Capital, and I began by asking him first his read on companies who pay higher dividends, despite, as we talked about, the slowing sales and profits.
INTERVIEW TRANSCRIPT
Gopal Jain: One year's data is not the right way to go about it. I think maybe one way to rationalise this is that there's a catch-up happening over a long term. If you go back 20 years, dividend payout ratios in India were extremely low and there was very poor fiscal discipline inside companies.
There was very poor management of estate between personal estate and a company's estate for promoters. All of these things are tightening and therefore there is an increase in the payout ratio. That's a long-term trend perhaps and maybe that's what it needs to be viewed against.
Govindraj Ethiraj: Got it. So, if you were to look at payouts, usually payouts go to both promoters and shareholders, and what you're saying is that people were not giving out much money because they were extracting it from the company itself?
Gopal Jain: Traditionally, most promoters did not make a distinction. Founders did not make a distinction between themselves and the company, and it's very important to make that distinction. There is a clear distinction between a founder and the company.
The company is a distinct entity. The company has a distinct purpose, business objective, and I think this clarity is emerging in Indian companies that, listen, if you have free cash flow, if you have surplus capital, if you don't have a high-quality idea for investing, then that money belongs in the pocket of your shareholders, and you're one of the shareholders. You see, 20, 30 years ago, the typical Indian founder had very low equity ownership inside the company, because there were two balance sheets, two P&Ls, and a lot of off-balance sheet transfers.
People did not see equity either as a way of control or as a way of wealth transfer from the company to shareholders. That has changed. We now have single balance sheets, single P&Ls, and off-balance sheet transfers have reduced.
If you want control, you need high equity ownership, and if you want the profits of the enterprise to be transferred equitably to you, you need high ownership. So a huge correction has happened over the last 30 years, which means that if you have free cash flow, if you have surplus capital, and there are easy metrics to determine this, if a company has a large amount of capital in non-operating assets, and if you hold the bar at a reasonable level in terms of what constitutes a high-quality idea, both in terms of alignment to your business objective and return on capital employed, based on these tests, companies should have greater and greater discipline around returning surplus capital to their shareholders. And if part of that equitably flows to founders, it's not a bad thing, because many good things come out of this.
Govindraj Ethiraj: So the counter view to that could be, particularly maybe longer-term institutional investors, that basically companies should really be deploying their capital all the time in good investment ideas, and the failure to find one should not be a reason to start returning capital.
Gopal Jain: See, good is not the enemy of great. It's a question of what percentage of your free cash flow are you returning. If you are allocating some part of your free cash flow to retention and some part of your free cash flow to dividends, that's a healthy practice.
I'm sure you'll agree. So yes, it's a red flag if there is no free cash flow. Yes, it's a red flag if you're borrowing.
Yes, it's a red flag if you are, maybe for some it's a red flag if you're dividing out 100% of your free cash flow, because the question is, don't you have ideas for future growth? But then let me ask you a counter question, which is worse? Having a poor quality investment idea for the future or returning capital to shareholders?
Govindraj Ethiraj: And how would you see this from your own vantage point as an investor? In any company, I mean, this is not about your firm specifically, but let's say you are putting in money, and your investors who give you money to invest onwards are typically looking at, let's say, a 10 year horizon or a 7 to 10 year horizon. How would you then approach some of these cases?
And have you had similar situations in the past?
Gopal Jain: See, we typically invest in high growth companies. And these are younger companies, smaller companies. They're not the average Sensex company, the average Nifty company, or even a typical, let's say, BSE 200 company.
There are 400 companies, over 400 companies, right? What's the latest count that are listed and have a market cap of more than a billion dollars? I think that number might be closer to 500 now.
The businesses that we invest in are smaller, young businesses, and they are high growth businesses. So they usually come up with pretty good use for the capital that they generate. In fact, in some cases, they want to raise more capital during our investment journey.
But yes, some of the companies that we invest in do reach a point where this becomes a question. It's a very healthy discussion, and we always promote this discussion. But listen, if you reach that point where there is free cash flow, there's surplus capital on the company's balance sheet, what is the best use for it?
Certainly not coming up with a harebrained expansion idea. Are you in a position to consider the healthy amount of debt rather than equity? And does part of this surplus capital belong in the pocket of shareholders, the founders being one of the eminent?
Govindraj Ethiraj: So if you were to take a slightly macro view now, let's say dividend payout has gone up as per this data set. And I take your point that we've not really looked at a longer time period. But even using this as a trigger, does this tell you that there are not enough investment opportunities?
Assuming most companies in the kind of data sets that we're looking at want to do good, are capable of coming up with reasonable ideas, but can't or are not. And therefore, the macroeconomic environment is not really the best right now for expansion for those kinds of new ideas, particularly for mature businesses.
Gopal Jain: We are correlating this fact of higher payouts with the wrong reason. Knowing the macroeconomic outlook right now, I am not correlating this to this particular explanation. I'm correlating this to better fiscal discipline.
I'm correlating this to the separation of founders and companies, to the emerging professionalisation of companies, to the availability of debt, and all of those positive factors. In some cases, of course, and this is company specific. We're talking about enterprises in a growing environment, where let's say the economy is growing normally at around 10%.
I mean, there are still going to be businesses that can't find high quality investment opportunities. If that's the case, and some shareholders see higher payouts as a precursor of the fact that the management is failing to find high growth opportunities in a high growth environment, I think it's understandable. But by and large, we should correlate this to very positive long term threats around how the character profile and the internal fiscal management of companies is by and large improving.
Govindraj Ethiraj: So let me flip that on to the other side more as a fundamental investing question. When you look at a set of companies, of course, there would be many reasons you would invest in a company. Would you look at dividend payouts over, let's say, a five year period as a reason to invest in them?
I mean, we are obviously talking about listed in mature businesses, or how much of a reason if you put a percentage on that, which I don't, but I would certainly look at fiscal discipline as a net.
Gopal Jain: If you're investing in a business, which has pre cash flow, founders are using that company as a platform to create a conglomerate, I would stay away from, which is what historically many founders did, which is you take a cement company, and then you invest in a telecom company, and from a telecom company, invest in a retail company. If you want to set up another business, you should be doing it from your personal balance sheet, not from the company's balance sheet. So I think if there is a business that has pre cash flow, and if there is proper fiscal discipline, and a healthy amount of capital is being paid out to shareholders, I would see that as a positive.
On the other hand, I would see a big negative. If surplus capital is being used for diversification, uncorrelated diversification, and expansion for the sake of expansion.
Govindraj Ethiraj: So you are saying that dividend payout is a good reason, at least one good reason, to invest in a company's stock, or the level of dividend payout consistently?
Gopal Jain: Dividend can be a good reason, absolutely a good reason to invest, because it signals fiscal discipline. It signals that the founders are seeing the company and themselves as two different things, that they're seeing the dividends and not the perks associated with the company as their primary financial benefit from the company. Again, just go back many years, why did we like multinational companies?
Because they had good dividend payouts, right? What did that signal? That signalled hygiene, discipline, so on and so forth.
And look at the multiples. Similarly, those Indian companies where there is a distinction that promoters create between their personal estates and the estate of a company, often show high dividend payouts. That doesn't mean that they don't grow.
And look at the multiples they enjoy. Some of the Indian companies who show these characteristics. On the other hand, those who have leveraged the businesses to create conglomerates, have a conglomerate discount.
Govindraj Ethiraj: Interesting. And conglomerate discount is something that has been discussed in the past, but I must return to it another day. Gopal, thank you so much for joining me.
Gopal Jain: Pleasure speaking with you, Govind.
Malls Switch To Experience Zones
Prestige Estate Projects, which is amongst India's top five real estate developers by market value, wants to sell more entertainment and dining spaces in malls while cutting back on apparel retailers, according to a report in Bloomberg. The company's CEO, Muhammad Ali, told Bloomberg that shopping could be done from anywhere once you know the brand, but entertainment cannot be bought online. Now, while it is not evident from this report whether other malls are actively pursuing the same strategy or to what extent, it definitely reflects some shifts and larger shifts in consumer behaviour and, of course, how institutional retail is trying to respond to these changes.
Prestige, whose investors include Blackrock and Vanguard, plans to allocate about 40% of space in malls to entertainment and restaurants, twice of what its older properties offer. At the same time, retail space will be cut from as much as 85% to 60%, he said. The pressure is obviously building from e-commerce, and malls are trying to reposition themselves as experience-driven destinations with shopping, leisure and lifestyle all thrown in.
Prestige operates about four malls right now but wants to grow its presence to 15 malls, spanning about 10 million square feet across leading Indian cities in five years. Prestige says, quite aptly I guess, that it wants to include physical activities that engage people of all ages and helps them burn a few hundred calories. The company is also focused on live performances, and that's something that we've seen in Mumbai as well, with companies like Phoenix Malls also running live performances small and large.
