On Episode 898 of The Core Report, financial journalist Govindraj Ethiraj talks to Prabhakar Kudva, Co-Founder and Director at Samvitti Capital. We also feature an excerpt from our Special Edition interview with Vishal Mehta, India Leader for Energy Practice at Boston Consulting Group.

SHOW NOTES

(00:00) Stories of the Day

(01:00) Mutual fund Inflows are Slowing but is that a Bad Thing?

(03:23) Markets Hold Steady Despite Fresh Flare Up in West Asia

(05:21) Leading Banks Start Offering FCNR Deposits at New Rates to Attract NRI Money

(06:48) India Inc’s Q4 Performance Paints a Picture of Resilience, says Bank of Baroda

(08:17) India Inc is Talking of Stepping Up Capital Expenditure in Earnings Calls and Management Discussions

(19:05) A 270 GW peak load - How India’s Power System Is Trying To Cope

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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.

Good morning, it's Thursday the 11th of June and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital and of course waiting for the rains to come.

Our top stories and themes

The markets hold steady despite a fresh flare-up in West Asia.

Mutual fund inflows are slowing but is that a bad thing?

Leading banks start offering FCNR deposits at new rates to attract NRI funds.

India Inc's Q4 performance paints a picture of resilience, says Bank of Baroda.

India Inc is talking of stepping up capital expenditure in earnings calls and management discussions.

A 270 gigawatt peak load, how India's power system is trying to cope?

Markets, Mutual Funds, AI IPO and FCNR

There is some hand-wringing on right now on what a slowdown of flows into mutual funds in the country means.

India's equity mutual fund inflows fell to their lowest in a year in May while gold exchange-traded funds saw record outflows as investors booked profits following a call, among other things, to curb bullion purchases by the government. Flow into equity mutual funds fell 40% month-on-month to about Rs 22,900 crore in May, according to data from the Association of Mutual Funds. The lower inflows, according to the CEO of the Association of Mutual Funds of India, is because of extreme volatility in the markets as crude hovers around $100 a barrel, which has prompted near-term caution amongst investors.

So the data does suggest caution and not panic as May marks the 63rd consecutive month of positive flows into equity mutual funds, according to a Bloomberg computation, which also quoted the AMFI saying that the number of contributing SIP or systematic investment plan accounts has remained steady at 96.4 million in May. On the other hand, gold exchange-traded funds saw record outflows of Rs 725 crore last month after India raised import duties on gold and silver from 6% to 15% in an attempt to slow down gold purchases from overseas and save dollars. Now to come back to mutual funds, the question to pose is whether investors who are ditching their SIPs or pausing them are or were thinking longer term in the way one should usually think of long-term investment.

Now the data clearly shows they are in a minority and possibly belong to a newer generation of investors who also can't be blamed if the markets have not moved in almost two years, considering that they may have started just a year or two before that. Perhaps the churn is important because it takes a few cycles for investors to get a sense on how longer-term investing, particularly via the mutual fund route, works, where patience and a strong stomach can matter more than the funds in hand. On the flip side, it is the exuberance of the last few years that has led to higher valuations, which has led to, among other things, foreign portfolio investors and institutional investors in general exiting at higher levels.

So all in all, we could see more stable markets and reasonable expectations for the near future. But remember, we are also going to see some big initial public offers or IPO hit the market once again, which will see lead investors and promoters, including from overseas, take out their investments or profits from their investments. So a steady state, which would ideally be a prelude to a sustained run or even a bull run is or seems a while away.

On Wednesday, bank stocks were holding stronger and against a fall in the market following fresh escalations in West Asia with open threats, as is usually the case from the United States, of more attacks to come. Bank stocks were boosted by a concessional forex swap facility that would lower the cost of mobilising foreign currency deposits, according to Reuters. The Nifty 50 and the Sensex dropped a fair bit after having stayed steadily in the positive during the day but ended flat.

The Nifty 50 was down 27 points to 23,214, and the Sensex was up 64 points to 73,983. In the broader markets, the Nifty mid cap and small cap were down 1.49 and 1.3% each. And if you're tracking this, Elon Musk's SpaceX has apparently drawn more than $250 billion of investor demand for what is likely to be the largest ever initial public offer, according to Reuters.

SpaceX is targeting only $75 billion. Meanwhile, the Times of India report clarified, as have other brokerages who allow you to invest overseas, that Indians cannot take part in the direct IPO allotment. Instead, they can invest only after the listing through secondary markets using international brokers under the Reserve Bank's liberalised remittance scheme, or LRS.

The rupee was up marginally with the currency market seeing elevated dollar demand thanks to maturing non-deliverable forward contracts and likely central bank intervention, according to Reuters, which added that the rupee closed at Rs 95.26, up slightly from its previous lows of Rs 95.35 on Tuesday. Gold prices were down on Wednesday in India, falling now to below their pre-duty hike levels following a sharp decline in global bullion prices, according to a Reuters report. Meanwhile, several if not all eyes are still on the bond markets following the Reserve Bank's move to improve flows into government securities.

Short-term Indian government bond yields have fallen to their lowest in three months on Wednesday, steepening the yield curve to a one-year high on expectations that banks will invest funds raised under the Reserve Bank's dollar inflow measures in this segment, according to Reuters. And domestic banks, that's the major ones, have started raising interest rates on foreign currency non-resident bank deposits, that's the FCNRB, after the Reserve Bank operationalised a US dollar rupee swap facility for fresh FCNR deposits with maturities of three to five years. HDFC Bank, according to a Business Standard report, has already raised its FCNRB deposit rates by up to 260 basis points, and it's offering 6% in the three-to-five-year maturity bucket.

Other private sector banks like Yes Bank and AU Small Finance Bank have also hiked their FCNRB rates and are offering as much as 7.10% on deposits in the three-to-five-year ten-hour bucket. The Reserve Bank of India last week authorised dealer banks raising fresh FCNRB deposits with maturities of three to five years would be eligible for a facility under which the central bank will bear the full hedging cost until September 30th. Meanwhile, yields on two-to-five-year bonds have fallen by up to 30 basis points, led by the 6.36% 2031 bond, which accounted for about half a billion of the roughly $1 billion in foreign purchases in the last three days, according to a Reuters report.

Now, there are varying projections of how much funds could flow into India because of these measures, and they are all in the tens of billions of dollars. Meanwhile, oil prices did not respond much to fresh attacks in West Asia, with Brent futures rising about $1.7 to $92.88, so just under $93 a barrel.

Why Has india been resilient during Q4 this year?

India Inc.'s Q4 financial performance paints a picture of resilience, according to a note from Bank of Baroda Research.

Following a sample of 1,506 companies, BOB sales growth in sales improved to 9.8% this year compared to 4.5% in Q4 of 2024-25, or the previous year. Profitability growth also improved to about 12% compared to about 8.4% in the previous year. In terms of broad category, the BFSI segment, that's banking financial services and insurance, that's 224 companies, recorded an improvement of both net sales as well as profit growth, while non-BFSI, that's about 1,282 companies, saw a sharp improvement in net sales.

Profit after tax growth was largely stable at 10.5% compared to 11.5% roughly the year before. So what BOB is saying is that among other trends, consumer-based industries have done well in both sales and profit growth, and that's significant because it does suggest that demand has picked up. A large part of the increase in profit after tax can be traced back to FMCG, or fast-moving consumer goods companies, where calibrated price hikes have helped producers maintain healthy growth in margins.

There was a decline in PAT growth for consumer durables. On the other hand, export-orientated industries like textiles, chemicals, diamonds, and jewellery saw a growth in net sales, which also is because of a weaker rupee, which benefited exports.

Is India Inc. on the verge of stepping up capital expenditure?

Is India Inc. on the verge of stepping up capital expenditure, a sign of improved demand, and more importantly, business confidence? A BOB research report, once again, says that for a set of 2,383 companies that they looked at, cumulative gross fixed assets, including capital work in progress, increased by about 5.8% to about 46 lakh crore rupees. In 24-25, that figure was 7.4%. But there were differences in growth in assets across different sectors, with many growing above 10% in 25-26. For these 810 companies, growth was 13.5%. And also, and expectedly, infrastructure and capital goods have seen a good increase in gross fixed assets above 15%.

The BOB report says front-end spending of the government on CAPEX would be one of the major contributory factors to this expansion. Retail has of course been booming, and we've been referring to it here on the core report, with several companies expanding on their physical contact points by setting up multiple stores across the country. Remember, we spoke of jewellery being one category which is seeing significant expansion.

Looking at it from a credit point of view, according to BOB, growth in credit to these sectors is in this order. Trading saw 16%, infrastructure 9.5%, retailing 11.5%, capital goods 32%, alcohol 13%, diamonds and jewellery 41%, chemicals about 15%, and healthcare about 18%. So what are companies saying? I spoke with Prabhakar Kudva, co-founder and principal officer for Samvitti Capital based out of Mulki near Mangalore, who said they had been tracking several earnings calls and concluded that companies are indeed stepping up their investments. He also added it was raining there already. So rains in Mumbai, I believe, and I hope are only a few days away.

INTERVIEW TRANSCRIPT

Prabhakar Kudva: So I think one of the patterns, or one of the themes, that I have been observing, because we read, we do a lot of earnings analysis and we read a lot of con calls as fund managers, so basically you get a sense of what these managements are talking about, right?

So, across the board, right, across the board, I think the Indian corporate companies, right, they are looking at a huge demand coming through because of various reasons. Some of it is domestic-led, some of it is export-led, right?

So, if I can talk about the domestic side of it, mostly it is the whole energy security thing, right? The whole state of hot moles crisis has woken both the private sector as well as the government up to the fact that the only key missing piece in the India growth puzzle is energy, right? And it's completely out of our control. We have to fix this energy puzzle.

So I think there is a tailwind, both from the government policy side as well as the need for corporate India to ensure that the growth sustains and we reach that 2047 target that we have.

The biggest, obviously, is power, right? So power, both on the renewable side as well as on the transmission infra. We are all aware that a lot of renewable capacities are being set up, whether it is the Adanis, whether it is the Reliance, whether it is the Waris of the world. So a lot of renewable capacity is being set up, and this capacity is typically sitting in the deserts of Rajasthan, right?

So you're generating the power there. So how do you get it to where it is being consumed? And that is where a lot of this transmission and these HVDC players come into play. So there is humongous capex lined up. The demand is so much that these guys do not have the capacities and, the more and more capacities they put up, they are confident that all of these capacities are going to be utilised, right?

So power is, domestically, one big area where there seems to be capex happening.

Secondly, there's been a lot of noise around currency, right? The INR has depreciated quite a bit, but one of the silver linings has been the fact that we have depreciated, obviously, not just against the USD but also against the Chinese currency, right?

So what that has done is a lot of Chinese imports have become much more expensive now, right? So we've depreciated, I think, close to 10–15 percent to the Chinese currency. So a lot of import substitution capex also is happening. A lot of stuff which used to be imported earlier from China, even though there were capacities in India, right, because the Chinese guys were cheaper, because of this whole depreciation, suddenly the Indian capacities have become more competitive.

Govindraj Ethiraj: What's an example of that, Prabhakar?

Prabhakar Kudva: Oh, I would say a lot of these commodity chemicals have become very, very competitive, both for domestic use as well as for global exports, because of our depreciation. So there is a lot of capacity coming up on the chemical side also.

Number three is, again, a well-discussed thing, but the whole PCB and the electronics manufacturing piece. A lot of capacity is coming on stream over the next couple of years, whether it is the Tatas or the CG Powers or the KNEs of the world.

So, across the board, of course, in terms of nanometres, we are nowhere near where Taiwan is, but it's a start. So a lot of such, even if it is low-end, capacities are coming up. There's a lot of demand coming through for that.

If you move on to the export side of things, then again, the whole AI enablers in the value chain. We are probably in the third or fourth layer, but a lot of these US companies which make these stream turbines or are building the infra in the US or in the rest of the world, a lot of them are supplied to by Indian manufacturers, and they are setting up capacities to serve those guys.

Similarly, on the CDMO side. CDMO, it's a China-plus-one story, but again, the currency tailwind is there, as well as the whole US-China skirmish, right? It is pushing a lot of these guys towards the Indian CDMO players.

And not only that, to be fair to them, I think the Indian CDMO players have demonstrated capability over the last decade. They have scaled up meaningfully. They have ensured that the quality as well as the trust has been established. So a lot of business is coming, especially on the peptide side, to the Indian CDMO players.

So I think, across the spectrum, if you read the managements, if you hear the managements, I think they are more bullish than the investors are. The investors are really focused on the macro, but the managements, obviously, are focused on their businesses, and they see a lot of demand coming through.

Another one I would like to point out, which is not being spoken about possibly, is textiles, right? And textiles has gone through a very bad cycle.

Now, with the UK FTA, the EU FTA, and hopefully the US FTAs, the trade deals happening, Indian textile has always been a big export market as well as an employment generator here. So with all of these FTAs, and with us getting a better deal than Bangladesh and other competitors, right, to some extent, that is also opening up a big market for these textile guys. They are also looking at incremental capex and getting ready for that next shift.

So I think the next three or four years are going to be very, very interesting, purely from a company and business point of view, in terms of how a lot of companies will scale up, right?

Govindraj Ethiraj: Produce, prospectively, maybe more earnings or definitely more confidence in the companies and the economy.

So, how are you seeing things right now, Prabhakar? Particularly as where we are, with the war being on an on-off mode, what are investors telling you? What is your Outlook?

Prabhakar Kudva: I think investors have digested two very difficult years, right, that we have had, whereby the market has actually gone nowhere.

But I think what has happened since April, the first of April, right, is that we probably have entered a new cycle. I think the market has discounted a lot of these issues. It started with tariffs and then the Iran-Israel war. So a lot of these things seem to be discounted. Even the Trump statements, the market is not bothering much.

And if you see the behaviour of crude over the last one week, even though there were renewed news flows of skirmishes happening between Israel and Iran, and just yesterday between the US and Iran, crude is trending down. Crude is trending down, right?

Gold and silver are trending down. Part of it is because of the expectation of the Fed hike, but also they are not reacting to the war news anymore.

So I think a lot of bad news is in the price. But having said that, I think the new cycle, right, a new cycle always brings in new themes. The market is very selective, and only a few sets of themes that we spoke about in my earlier answer, whether it is the energy players or power, the CDMOs, some of these very specific themes are working over the last one quarter.

The broader market is still not out of the woods. That will take some time, till this whole thing settles down.

Govindraj Ethiraj: The whole war noise settles down, right?

And last question. So you said that there's a shift in the cycle, and therefore the mood and so on. So what makes you say that, or what are you reading that gives you that sense?

Prabhakar Kudva: It's primarily a lot of data, right? Because, see, markets run on cycles. If you go back and study the cycles, right, generally you will have a couple of good years followed by a couple of bad years. There'll be time correction, there'll be price correction, and then a new cycle begins. Number one.

Number two, sentimentally also, if you look at it, right, or if you look at the sentiment indicators, a lot of pessimism is being baked into the Indian markets, right? So all the news flow today, whether it is the FIIs exiting, whether it is the fact that we are out of the top 10 of the MSCI FII weightage in the Indian markets, all of those indicators also are at a cyclical low, at a time when we've probably had the best quarter.

Q4 was the best quarter in terms of median profit growth in the last maybe two or three years, I think since 2022–2023.

So I think good fundamentals, plus pessimism, plus businesses delivering in terms of earnings, right, tells me that the moment the headwinds of geopolitics and the macro go away, there will be demand into the Indian equity markets.

Govindraj Ethiraj: Okay, that's a good note to end on. Thank you so much for joining me.

Prabhakar Kudva: Thank you, Govind. Thank you so much.

Why is Meta going to Lease a Data Centre from Reliance?

Meta platforms will lease an AI-ready data centre to be built by Mukesh Ambani's Reliance Industries, according to a statement from Meta.

Meta is already a major investor in Reliance's Jio platforms and last year formed a joint venture to develop AI tools for companies using its Lama models. Reliance will build a 168 megawatt data centre in Jamnagar in Western India, where its main refining complexes are also located, and the project could be scaled up. The deal obviously comes at a time when India has seen a surge in hyperscale data centre bills led by companies like Amazon, Microsoft, and Google, all earning into tens of billions of dollars, according to a Reuters report.

Can India Cope with the current power demand?

A few weeks ago, India saw a peak power demand of 270 gigawatts. While the system seemed to have been prepared for that, coping has clearly been a struggle, as has been evident from the reports of power cuts from many parts of the country. Rising temperatures are not helping as consumers pull more electricity for cooling and nighttime cooling.

India's classic predicament is that there is surplus power because of solar and renewed solar generation during the day and deficit at night because solar plants back down. I spoke with Vishal Mehta, India's leader in energy practise and managing director and senior partner at consulting firm Boston Consulting, and I began by asking him how he was seeing the situation from the ground during his recent visits to power utilities and in this case, distribution company centres in northern India.

INTERVIEW TRANSCRIPT

Govindraj Ethiraj: If I were to take a step back, and you know, I mean, I'm starting from the same 270 gigawatt peak. So we've talked about distribution and some of the challenges, and I'll come back to distribution in some time. But tell me about what's been happening on the generation side.

I mean, I know that we have solar days and solar, non-solar days and so on. We are obviously producing a lot of electricity, but not all of it is effectively getting distributed or transmitted rather. So should we create more capacity or should we direct our energies elsewhere?

Vishal Mehta: If you see any good power system design, we'll have different capacity sources, because no one capacity source is perfect to solve. And what are the objectives you are trying to solve for? You are trying to solve for affordability, low cost of the electron, which today, solar is the lowest cost of electron.

Then you are trying to solve for reliability or predictability that when I want it, will I get it? Can I forecast accurately that this is the time I will get it? Third is called dispatchability, which means when I want it, can I send it?

So that's the third part. And fourth in the recent years, which has gotten added is basically the climate impact on the green part of the electron. So you are trying to solve at once for all these objectives.

And the hierarchy of objectives changes depending on what stage of the economy you are in. For many years, we were trying to first get power to everyone. It didn't matter what colour of the power it was.

Now we have ambitious targets on the colour of the power as well. Colour of the power has added the challenge on flexibility and dispatchability. So you need now new sources.

Now, India has some sources and some sources which are missing. So we have solar, we have wind, reasonably amount of solar, good amount of wind. We have thermal, which is through coal.

Coal is reliable. You know exactly if I want this much megawatt at this slot, I can say it, I can dispatch it. But it's a slow ramp up start and all of that.

And it is expensive now. We had very little nuclear, which is a good baseload, clean power. So you have the colour of the power is great.

Reliability is great. Dispatchability is great. Cost is higher.

We have hydro, very limited as compared to the size of the system that we need. And one important joker in the pack, which is missing in India, which is gas. So gas globally is predictable, reliable, relatively clean.

I'm not saying it's renewable, relatively clean and highly dispatchable. Whenever I want it, I can generate is a faster response time as compared to this thing. So we don't have gas.

We don't have any domestic gas. Imported gas is expensive. So we've not created a great amount of capacity on the gas side of things.

Govindraj Ethiraj: And even for what you've created, our plants are often shut down. This is even before the West Asian crisis.

Vishal Mehta: Yes. So the way majority of Indian gas based power plants operate on what is known as the domestic allocated gas, which is APM, which is a subsidised price. At that price, basically the power generation costs are still reasonable.

Now, in the hierarchy of allocation of APM gas, power is not the most important use case. I mean, some years back, we changed the allocation of gas. The first port of call was city gas distribution.

So that gas was going towards CNG, which is transportation. It was going towards home connections, which is PNG, piped gas. So these two applications were prioritised over other applications.

Power is not even the second application. After that, you got fertilisers, which is basically a gas guzzling industry because you make ammonia out of it. So that's the second application which is there.

And that has direct linkage to inflation, agriculture, etc. When you say that power plants don't operate, it's because either you don't have enough gas to allocate to those. And if it is not subsidised gas on market prices, that gas plant cannot exist.

Gas plants will go up and down for that particular reason. There are some gas plants who based on their outlook on what they will get from the market, if the prices are very high, like this summer, for example, if the anticipation of price was very high, they would have imported some LNG, which is expensive, but it is still giving them a spread between the fuel cost and the power cost, then they would have brought in that LNG and used it. But you can't take that decision overnight.

If I have to plan for an LNG cargo, it has to be done at least 45 days in advance. If I'm planning from the US, which a lot of people are now saying with the West Asian crisis, I will go to the US, then it is like one and a half, two months in advance, I have to plan.

Govindraj Ethiraj: You can get it?

Vishal Mehta: You can get it.

Govindraj Ethiraj: For some price, it's available?

Vishal Mehta: Yeah. As a molecule, as a commodity, it is very liquid.

Govindraj Ethiraj: For example, despite all the Qatari gas fields going out of commission and so on.

Vishal Mehta: So there's somewhere around the world it is there. A lot of it was getting transported to that corridor. Now, if it is not being bought in that corridor, and it is being bought somewhere else and get transported over a longer distance, your costs will obviously go up because of that reason.

But availability will not be the challenge. But I don't see that as the answer. Theoretically, as a power systems engineer, I would say that we should have had a lot of gas, but it's difficult to build any reasonable amount of gas based power plants.

So there are three sources where we need to solve this problem. I think first is, which is the obvious one is storage. I think we are all underestimating the amount of storage that will be required.

And I'm not going by what technology of storage, I mean, there are many technologies, there is pumped hydro, there is battery. Again, in that, any sane planner would say you need a mix of all technologies, you will not bank on just one of them. Everybody has some advantage or disadvantage.

That's the obvious answer. The second one is you look at what is the more evening aligned generation that you have. So you have wind, for example, where we are doing less than what we should ideally be doing.

So we are planned for 10 gigawatts of wind a year, we don't do as much wind, we are not able to construct as much wind. In my view, if you ask me, we should do be aiming for much higher wind than that, because it is more aligned to the load profile. So wind actually, if you see even on that day of 270 gigawatt, when it happened, the evening slots, when it peaked, a lot of the load was actually taken by wind generation.

Wind gets you in the evening, it's also again, relatively less predictable, but it is more aligned to the slots that is there, right? That's a good thing.

Govindraj Ethiraj: There is scope for more capacity.

Vishal Mehta: Yeah, because solar is very easy to construct, is more reliable to construct, right? For any developer who's putting in money, I'll give you an MNRE, MNRE tracks the projects for both solar and wind. On an average of all the commissioned projects, solar has gotten commissioned with a three-month delay.

On an average, wind has gotten commissioned with a nine-month delay. And wind is more expensive at a capital cost level. So you have delayed your capital being productive by nine months, so it adds to the cost.

So any investor would say, why are we trying to do, say everybody wants wind in the system, but I will not do it, let somebody else do it. It's like that old thing, you know, I want a Bhagat Singh, but not in my house, but in my neighbour's house, right? So wind is that story, but it's a very market aligned, load aligned source for India.

We would have to do our hydro and our thermal anyways. This thermal will be very expensive because the average utilisation factor of those thermal plants will be lower, but they are the ones who will kind of come in, in the evening night slots to relieve the load on the entire system.

Govindraj Ethiraj: And you're saying they'll be lower because?

Vishal Mehta: Because the daytime they cannot compete with solar.