Markets Flat As Traders Calculate Tariff Impact
Indian markets have been responding cautiously so far, neither celebrating nor panicking
On Episode 626 of The Core Report, financial journalist Govindraj Ethiraj talks to Kunal Khattar, Founder at AdvantEdge as well as Prashant Vashisht, SVP and Co-Group Head, ICRA Ltd.
SHOW NOTES
(00:00) Stories of the Day
(01:00) Markets flat as traders calculate tariff impact
(05:30) French consulting giant CapGemini to acquire Indian BPO firm WNS in $3.3 bn all cash deal
(07:27) Adani enters Ambani territory with a PVC plant, how big is the market?
(15:01) The rare earth crisis gets real as EV plants stare at shut downs. Are there alternatives?
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 Tuesday, the 8th of July, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
Our top stories and themes,
The stock market's flat as traders calculate the impact of potential tariffs.
French consulting giant Capgemini acquired Indian BPO firm WNS in a $3.3 billion all-cash deal.
The Adanis entered the Ambani territory with a PVC plant. How big is the market?
The rare earth crisis gets real as electric vehicle plants stare at shutdowns.
Are there alternatives? And Donald Trump threatens an additional 10% tariff on BRICS countries.
A Cautious Start
This will be a week of uncertainty and we already told you so, and Indian markets have been responding cautiously so far, neither celebrating nor panicking. The tariff-in-force date, as per US Treasury Secretary Scott Besant, is now August 1st for countries that haven't finalized an agreement with the Trump administration.
But then, of course, like before, there are googlers and bouncers when there are no straight yorkers and spinballs to go to. President Donald Trump said on Sunday, the US will impose an additional 10% tariff on countries aligning themselves with the anti-American policies of the BRICS group of developing nations, whose countries kicked off a summit in Brazil on Sunday. BRICS stands for Brazil, Russia, India, China, and South Africa.
Prime Minister Modi is also there, and the term BRICS, if you have forgotten, was coined by American investment bank Goldman Sachs. Not that there is any direct connection, but the genesis of BRICS is more to do with the bundling of promising emerging markets. In a joint statement from the opening of the BRICS summit in Rio de Janeiro, released on Sunday afternoon, the group warned the rise in tariffs threatened global trade, continuing its veiled criticism of Trump's tariff policies, according to Reuters.
Trump's warning came hours later, adding that there would be no exceptions to his policy. Thank you for your attention to this matter, he said in a post on Truth Social. He did not clarify or expand on the anti-American policies referenced in his post.
Meanwhile, India has made its best offer to the United States, a Bloomberg report says, quoting unnamed officials and added, now India's trade deal was in the hands of President Donald Trump. New Delhi has conveyed to the Trump administration the red lines it's unwilling to breach in finalising an agreement, as we've been discussing here, which include allowing the United States to export genetically modified crops to India and opening up India's dairy and automobile sectors to the US. Given all of this, the markets were flat.
The Sensex closed at 83,442, up only about nine points, and the Nifty was at 25,461. The NSE mid cap 100 index was down about 0.2% and the NSE small cap 100 was down about 0.4%. Within the indices, the Nifty fast moving consumer goods index went up about 1.7%, and the oil and gas and energy indices were also up according to Business Standard. Meanwhile, on the heels of the Jane Street capital controversy, which we spoke about yesterday, the Securities and Exchange Board of India said it is enhancing its surveillance to scrutinise manipulation in derivatives trading.
Jane Street has been charged with manipulating stock indices, and there may not be many more cases, the chairman of SEBI, Tuhin Kanta Pandey, said without elaborating, according to a Reuters report. India is the world's largest derivatives market accounting for nearly 60% of the 7.3 billion equity derivatives traded globally in April, according to the Futures Industry Association. Most people who trade in derivatives in India lose money and figures put it at more than 90%.
The surge in derivatives trading, which has been driven by retail investors, has prompted SEBI to limit the number of contract expiries and increase lot sizes to make it more expensive to do such trades. Jane Street Capital was barred on Friday from buying and selling securities in the Indian market and was also asked to deposit $567 million. SEBI said the trading firm had bought large quantities of bank nifty constituents in the cash and futures market to artificially support the index and morning trade while simultaneously building large short positions in index options.
And later in the day, Jane Street would reverse the trades to profit from options positions, according to SEBI in its 105-page order. What traders perhaps did not realise or perhaps even dream of was the fact that the person on the other side of the trade was an ultra-bright, smart algo trader sitting in New York porting over data and combining brain and computing power to levels that I guess most people don't know to find and capitalise on these market gaps. Add to it the ease of access to stock markets thanks to ever-slicker trading apps where it all begins and presumably ends with a swipe.
Meanwhile, on Wall Street, confusion reigns supreme, which of course does not matter to Wall Street itself because it seems to be ignoring all Trump's tariff tantrums. Stock futures fell on Monday after the U.S. said that tariffs are now set to go into effect from 1 August and not July 9. In an interview with reporters on Sunday, President Donald Trump, along with Commerce Secretary Howard Lutnick, were asked to clarify when the tariffs would go into effect. In response, Lutnick said 1 August.
He also said that the President was setting the rates and the deals right now. Earlier in the day, Treasury Secretary Scott Besen said in an interview on CNN's State of the Union that tariffs will return to April 2 levels on August 1 if there is no progress on signing a deal with the U.S.
The Big Consulting Acquisition
French IT services giant Capgemini announced on Monday it will acquire India-based business process outsourcing firm WNS in an all-cash deal worth about $3.3 billion, according to Reuters. Capgemini will pay about $76.50 per WNS share, which is about 17% higher than the closing price on July 3, excluding WNS' existing debt, according to the report.
With this acquisition, Capgemini plans to develop a specialised consulting business that will help companies transform their operations using advanced AI technologies. It also expects significant investments in this space, particularly in agentic AI, which focusses on AI systems capable of and developing them to take decisions or make decisions autonomously. Capgemini CEO Ayman Ezzat said WNS brings its high-growth, margin-accretive, and resilient digital business process services, while further increasing their exposure to the U.S. market.
Capgemini is a French company. WNS is seen to have about 600 clients across 13 countries and also works with big brands like Coca-Cola, T-Mobile, and the United Airlines. Capgemini shares, however, fell 5% on Monday after it announced that deal.
The decline reflects investor concerns about the potential impact of generative AI on the BPO market that Capgemini is targeting. The Economic Times quoted analyst Morgan Stanley saying that AI could make the BPO sector highly automated, shifting it away from its traditional people-intensive model, which could lead to lower revenues and intensify competition from new entrants.
Another Giant Enters Petrochemicals
The Adani Group is on the way to commission a 1 million tonne a year PVC or polyvinyl chloride plant at Mundra in Gujarat, which will also market its entry into petrochemicals, where Reliance Industries, also mostly Gujarat-based, is the player, according to sources who spoke to the Press Trust of India.
PVC is a synthetic plastic polymer used to make everything from pipes and fittings to window and door frames, cable insulation, wall coverings, vinyl flooring, credit cards, and toys. PVC pipes typically replace metal pipes, which tend to corrode and rot. The PTI report also quotes India's annual polyvinyl chloride or PVC demand at about 4 million tonnes, while domestic production capacity stands at about 1.6 million tonnes, half of which is with Reliance, and we'll come to more on that.
PVC demand is expected to grow at over 6 to 7 percent a year, driven by sectors like agriculture, as there are more irrigation systems, or there are more irrigation systems, apart, of course, from housing and pharmaceuticals and packaging. Adani is setting up this plant as part of its cluster, or rather a cluster, in Mundra, and the facility is expected to commission in fiscal 28, that's between April 27 and March 28, which is three years from now. The report also said that the Adani group is looking to implement the acetylene and carbide-based PVC production process, with environmental clearances and consent to establish the project already having been received.
Reliance has a capacity of about 750,000 tonnes per annum and has plants at Hazira, Dhej, and Vadodara, or Baroda, in Gujarat, and is also apparently looking to double its capacity by 2027. The Adani plant, too, could expand its capacity to maybe 2 million tonnes. So, the larger question, of course, is how big is the market for PVC products and the rationale behind setting up a PVC plant at this point, given the fact that we are meeting a fair bit of our needs through imports.
So, I reached out to Prashant Vashisht, Senior Vice President and Co-Group Head of Corporate Ratings for rating agency ICRA, and I began by asking him to take us through the metrics as things stand today.
INTERVIEW TRANSCRIPT
Prashant Vashisht: In terms of plastics, our per capita consumption is just about 10-11 as compared to 30 kgs per capita globally. So there is a lot of scope for growth and that is what we are witnessing. We are seeing growth rates of 6-8% in most of the plastics in the domestic market.
Now coming to PVC specifically, we have been heavily reliant on imports for meeting the domestic demand for PVC. Currently there is a gap of about 2.5 million tonnes. About 1.6 million tonnes is the current production of PVC in the country whereas the demand is about 4.1 and this is again as I mentioned growing at 6-8%. So there is a huge import dependence for PVC in particular.
Govindraj Ethiraj: Right, so if I can ask a sort of contra question here. So how is it that we have not seen so much capacity creation in PVC? Like many industries we are very close to demand or maybe even ahead of demand.
Prashant Vashisht: So see actually PVC is made from ethylene, the predominant route that is used globally is ethylene. Now what happens is when you make ethylene, you can go to either polyethylene or you could also go to PVC. Most of the manufacturers have found polyethylene to be a more lucrative molecule to make, plastic to make rather than PVC and accordingly there has been a shift towards polyethylene rather than polyvinyl chloride leaving this huge gap in demand and production.
Govindraj Ethiraj: So you're saying that from a market point of view, let's say whatever plastic product I was going to buy like a chair or a pen or whatever, it could either be made from polyethylene that's PE or it could be made from PVC?
Prashant Vashisht: No, I'm not saying that. A product may be best suited to be made by a particular polymer. Now in case you find that the margins that you are getting as a manufacturer are higher for polyethylene rather than PVC, I would use my ethylene molecule to make polyethylene.
Govindraj Ethiraj: That's what I mean. Got it. So PVC for example we speak of in the context of pipes which I'm assuming is not something that PE or polyethylene is used for.
Prashant Vashisht: So yeah PVC is used a lot in pipes but a certain kind of pipes also use HDPE. For certain kinds of applications HDPE is also used.
Govindraj Ethiraj: Right and we are importing about 2.5 million tonnes of PVC every year and is that because it's produced more cheaply in other parts of the world?
Prashant Vashisht: So for countries like China which had put up huge capacities that are based on coal, we don't have that much good quality coal for production of PVC and for the ethylene route we have mostly our manufacturers have mostly gone towards polyethylene rather than taking the PVC route. So possibly cheaper as well as you know more lucrative products being produced in India rather than the lower IRR product.
Govindraj Ethiraj: So in which case would it be then really let's say remunerative for companies to set up PVC capacity at this point of time?
Prashant Vashisht: Yes, see currently there is a huge import substitution potential that's been there for years and overall margins also for polyethylene are down because right now what has happened is China for the past few years has been having huge capacities in its petrochemical production and predominantly most of these other products. So the margins comparatively look better for PVC also right now.
Govindraj Ethiraj: Right and slightly broader plastics question, so if you were to look at let's say the other components of the plastic chain or the plastic product portfolio where else do you feel are the gaps in terms of either production or demand?
Prashant Vashisht: So there is a huge demand potential for the commodity polymers like polyethylene, polypropylene. Some of our companies are putting up those capacities besides that for some of the engineering plastics like polycarbonate that is not produced in the country then there is PMMA which is not produced. Some projects have been announced in these spaces also accordingly there is a huge potential for import substitution in all of these products.
Govindraj Ethiraj: Right last question, so I mean given your understanding of the cost of production do you feel that India is competitive in the broader arena of plastics and within plastics areas like polyethylene or polyvinyl fluoride at this time and if duties were to come down for various reasons would India or Indian producers be as competitive?
Prashant Vashisht: So I think we are among the most competitive producers globally. We don't really suffer from cost inefficiencies that would hinder you know scaling up or ramping up production of these plastics. Most of these are produced in millions of tonnes and Indian plants are also of global scale and can compete with anybody anywhere else in the world.
However where gas is used as a feedstock there are probably some of the gas rich countries or countries which like say middle east like say US where ethane is available at very cheap rates these would be more advantaged but otherwise we are good in terms of cost structure.
Govindraj Ethiraj: Right Prashant, thank you so much for joining me.
Prashant Vashisht: Thank you for having me, thanks.
The Rare Earth Crisis
With the month of July having begun, major electric vehicle automakers are staring at production slowdowns, if not halts now. Bajaj Auto, the largest two-wheeler EV maker in the country right now, and Maruti Suzuki, the four-wheeler giant, though not in EVs, have both said that they have to curtail production this month if they don't get fresh supply of rare earths, particularly magnets and the like, used for electric motors.
Production disruptions in early August will also hit sales leading up to the festive season, which starts in October, and normally sees between 30 and 35 percent of annual sales. Bajaj Auto's Executive Director, Rakesh Sharma, said in a fourth-quarter results conference call at the end of May that they did see dark clouds on the horizon in terms of continued supply of rare earth magnets from China, which are an essential component of high-performance electric vehicle motors. China has not stopped exports but slowed down the process through what seems to be paperwork, particularly at the customs end, for rare earths heading out of China.
Back here, Maruti also said something similar last month, which is that they could see production constraints, particularly for its main EV model that's under production. So given the dependence on China both for production and processing of minerals to produce the magnets and the like, what are the solutions, if any, in the medium to long term? I reached out to Kunal Katter of venture firm Advantage, which works mostly in the mobility space and is watching this space, that is, of rare earths closely and is also invested in a potential solution, or one of many potential solutions. I also asked him how he was reading the situation right now and how realistic were the options to the magnets for motors that are in short supply.
INTERVIEW TRANSCRIPT
Kunal Khattar: I think it's basically an outcome of the entire tariff differences and wars that are going on. China is recognising that they control 90% of the supply chain. It's using this to showcase their might and how they can have an entire industry come to a standstill.
So I think fundamentally it's important for us to recognise that this is a small example of where we need to make sure that our over-dependence on one particular country, whether it's magnets or whether it's cells, etc. etc. From an EV industry's perspective, we need to recognise this challenge and start looking for various solutions to make sure that we don't have such situations happening again.
But I think it's probably going to be a near-term issue or problem and I'm happy to discuss why I feel that this is not going to last long.
Govindraj Ethiraj: Okay, and as things stand, what really are the options for industry given the fact that we only mine a little but even what we mine we are not able to process because a lot of the processing capacity is also sitting in China?
Kunal Khattar: I think there's going to be some near-term, mid-term and long-term solutions. I think near-term of course we're going to have to leverage our political relationship with China to ensure that we get an exemption or we continue to source these materials from China. So that's probably in the immediate terms.
My guess is that as soon as these things settle down, they will resume supply. What gives me confidence in the fact is that China has invested billions of dollars in creating this capacity. So it's not really in their best long-term interest to continue with this ban.
So they will also be under pressure from the people who have made investments to resume supplying to overseas customers. In the mid-term, I think it's a wake-up call for us to recognise and identify alternate sources. So there are other countries that are also getting into the business of manufacturing these magnets.
That's probably a mid-term solution. As a fund, we are looking at alternatives such as manufacturing motors which don't require these magnets. In fact, one of our portfolio companies did exactly that.
So if our dependence on the magnets themselves go away and we have alternate motors using different technologies, then the dependency on China has reduced significantly and it's more permanent. Long term, of course, you have companies that are in the business of recycling batteries. I'm guessing that the same companies can also get into the process of recycling the rare earth materials that go into these magnets.
But that's an extremely long-term solution.
Govindraj Ethiraj: Right. And you're saying that technologically speaking, because each company, I'm assuming whether it's now a two-wheeler company or a four-wheeler company, the size and scope of the motors are quite different. And so will their performance depending on what the category is placed in.
So wouldn't each company have to find its own solution?
Kunal Khattar: When you look at the technology itself, the underlying technology is similar irrespective of the size of the motor. So if you're looking at building a technology that doesn't require or has an alternative to the magnets that go into these motors, fundamentally that same technology can be used to build motors of different capacities that can be of a different size for a two-wheeler versus a three-wheeler or a four-wheeler. So of course, it depends on what the business model is.
Are you in the business of making just the design or the technology aspects and licence it to other manufacturers who are already building motors for these different vehicles and therefore already have the manufacturing capabilities and the customers which are the OEM signed up? Or do you want to get into the business of actually manufacturing the motors, in which case you're going to have to build that capability for different capacities? Or you want to get into and become an OEM yourself?
So it really depends. I think in the short term, creating IP-led technology that fundamentally can build motors that don't require these magnets is probably the way to go.
Govindraj Ethiraj: And you're saying if you were to explain to someone who doesn't know this, you can actually build a motor without magnets because one would assume that motor and magnet go together and which is what makes it turn or go round. That's right.
Kunal Khattar: I mean ultimately magnet, think of it as one of the components or raw materials that go into these magnets. So building alternate motors that don't require these technologies is basically what we call magnet-free motors. And this technology is basically synchronous motors, EESMs, that are being designed and built, which removes the need for permanent magnets altogether.
In fact, there is an IDTech study that predicts that almost 30% of EVs in the medium to long term will be driven by magnet-free motors by as early as 2035. So that's a pretty exciting opportunity for us and which is why we backed Conifer, which is the startup that I'm referring to.
Govindraj Ethiraj: Right, but you're saying that people were investing in magnet-free motors not because they were trying to address the shortage of magnets.
Kunal Khattar: I think ultimately where, you know, it's been many years, many countries are looking for alternate technologies, alternate sources. The whole term of China plus one. So I think this is one of the things that the founders were able to pick up and both the founders are actually based in the US and have worked with Tesla and Vivian, where they've all recognised that in the long term it's important to de-risk 100% of their sourcing from China, which means alternately either you look for alternate sources for motors or you sit down and design it themselves.
I mean they were not expecting this to happen and this has given companies like Conifer a lot of tailwinds and a momentum to grow. But even without this ban, we were pretty confident that globally EV manufacturers are going to continuously look for alternate sources and alternate technologies which reduce their dependency on China.
Govindraj Ethiraj: So to come back to India now, if you were to look at the value chain, so to speak, from the mining of rare earths to the processing of them to making them ready for manufacturers, whether it's in automotive or related industries, what else do we need to do? I mean the government is pretty seized of this now and is moving quickly. It wants to give let's say PLI benefits and so on and so forth.
So what else do we need to do to address the core problem?
Kunal Khattar: The government is well aware of what it requires. I think policy and support are the only two things that's there. We are in fact in touch with both the Ministry of Industries as well as Ministry of Road Transport and have sort of presented to them this as an opportunity for India to actually become global leaders in developing motors which don't require rare earth magnets.
So I think apart from PLI of course there are different government schemes. I'll give credit to the government that they have already introduced various schemes whether it's PLI, whether it's the recent announcement of investing in research and development or technology innovation, whether it's the fund-to-fund schemes or whether it's PME drive. There are enough policies that's available.
I think it's about just getting the underlying support and allowing companies that are building these technologies that are helping us reduce our dependencies to come in in an accelerated fashion. And also I think it is for domestic manufacturers also to help support such companies and not come back with the usual thing that oh you're a startup, you have 12 months of runway, why don't you prove yourself and things like that. So it's not just the government, we are hoping that we get support from the manufacturers as well which I think will allow us to build and become market leaders in motors that don't require these rare earth magnets.
Right Kunal, we've run out of time. Thank you so much for joining me.
Govindraj Ethiraj: Thank you so much for having me. Bye-bye.
