Markets Rise Again On Tariff Talks
The markets have been somewhat stable in the last few days
On Episode 680 of The Core Report, financial journalist Govindraj Ethiraj talks to Karan Taurani, Executive Vice President (Media, Retail, Consumer Discretionary & Internet) at Elara Capital.
SHOW NOTES
(00:00) Stories of the Day
(01:00) Markets rise again on tariff talks
(02:22) How it’s been a year and the markets have not gone anywhere
(05:02) Where are GST savings in households really likely to go?
(14:45) Rolls Royce expands in India, sets up largest GCC in India
(15:36) Chip wars break out again, with China at the centre
(16:53) Where US customers can learn from India
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 18th of September, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital. And finally, we did see a day without much rain and some sunshine.
Our top stories and themes,
The stock markets rise once again on tariff talks
How it's been a year and the markets have actually not gone anywhere.
Where are GST savings for households really likely to go?
Rolls Royce expands in India, sets up its largest global capability centre in the country.
Chip wars break out once again with China at the centre.
And what US customers can learn from Indian ones?
Stable Markets
Whatever the reason, the markets have been somewhat stable in the last few days. We are not seeing the usual swings and sometimes the wild swings that we often see. One reason is of course the trade discussions between visiting US officials and Indian trade officials in New Delhi, which kicked off the latest round between the two sets of officials on Tuesday were reported as positive and forward-looking.
Earlier, President Donald Trump and Indian Prime Minister Narendra Modi said they spoke by phone on Tuesday to mark Mr. Modi's 75th birthday, which was on Wednesday. President Trump said he thanked Prime Minister Modi for his help in ending the war between Russia and Ukraine, but gave no details. The markets moved higher on Wednesday, also in anticipation of a rate cut by the US Federal Reserve, which is keeping global markets on the boil for some time now, discounting pretty much all and every piece of bad news as we've been seeing.
Back home, the Nifty 50 was up 91 points to close at 25,330, and the Sensex was up 313 points to close at 82,693, a two-month high. Now, with Wednesday's gains, the Nifty has now risen in 10 of the last 11 sessions and is just 3.6% of its lifetime high of 26,277. Just to repeat, we are at 25,330, and that 26,000 figure was hit in September last year, and more on that in a moment.
A new report from Kodak Institutional Equities, ever the sober voice in Indian markets, points out that a $90 billion domestic inflow, retail investor euphoria, and fiscal and monetary support has not really lifted India's benchmark indices higher as you look at it over a year, and that's something that we've discussed on the core report two editions ago as well. So, over the previous 12 months, from September 2024, the benchmark Nifty and Sensex indices have given 0% returns, says this Kodak report. The small cap and mid cap indices, meanwhile, are below the September 2024 levels, which, of course, were the peaks for Sensex and Nifty.
Now, in this period, just to reiterate, the equity market has seen about $90 billion in inflows from domestic institutional investors, according to analysts at Kodak Institutional Equities led by Sanjeev Prasad. They also said that the market's performance could have been worse with a stronger rupee. The Indian market's performance has been understandably worse in US dollar terms.
So, while domestic investors or institutional investors have invested about $90 billion in the secondary market over the past 12 months, and the fact that the market has largely been flat should, the report says, disprove the market's belief in flows as a driver of markets. Second, dissuade institutional investors from focussing wholly or largely on retail flows into mutual funds as a driver of markets. And third, drive investors, institutional and retail, to focus more on fundamentals, that's earnings and valuations.
Kodak also says that, in turn, it attributes the weak market performance in the last 12 months or a year to expensive valuations for most sectors and stocks. Valuations have stayed at high levels despite several stocks being flat or down over this period due to constant earnings downgrades and earnings downgrades in sectors and stocks over the last 12 months, which have kept valuations high. On a hopeful note, Kodak Institutional says they expect a gradual earnings improvement over the next few quarters and strong earnings growth in fiscal year 2027.
Meanwhile, the rupee rose on Wednesday, supported by a weaker dollar, ahead of an expected rate cut by the US Federal Reserve and, of course, the trade talks that have now resumed in New Delhi. The rupee hit an intraday peak of Rs. 87.73 during the session before ending at Rs.
87.81, that's up 0.27%, its best one-day gain since August 19, according to Reuters. Just last week, the rupee had hit a record low of Rs. 88.45, so from Rs.
88.45, we're now at Rs. 87.81. Gold prices have also eased off after hitting record high levels in the previous session. Spot gold was around $3,668 per ounce on Wednesday after hitting a record high of $3,702 on Tuesday.
Where Are GST Savings Going?
There is no doubt Indian consumers are going to benefit from the consumption tax cuts or goods and services tax rate cuts to kick in next week, but the larger question is, how much money will go where, going by past trends and likely behaviour? For instance, if my household bill comes down by X, where will that X likely go? Or if I save on something larger, like a car or an air conditioner, that obviously is at a lower price now. Now, all of this also depends on how we spend, discretionary, which is not predictable as such, and non-discretionary, which is items of daily use almost. A report from Elara Securities authored by Karan Taurani says that with an estimated net revenue reduction of about 48,000 crores for the government, that's said to act as a fiscal stimulus.
He says that based on a 2X multiplier, this could release about 96,000 crore rupees of incremental demand into the economy with discretionary spending dominating the mix, that's 50% of incremental flows. Importantly, he says, fashion food services, quick service restaurants and online food delivery, lifestyle, and electronics may be the biggest beneficiaries. According to him, and that's something we've discussed here on the core report, necessities may see modest premiumization-led value growth, which means people will buy, let's say, stuff which is a little more expensive now that everything is a little cheaper.
He also says QSR chains may benefit the most with consumption boosts and positive impact because of lower input costs. I spoke with Karan Taurani, who covers the retail sector for Elara, and I began by asking him how he was seeing the shifts in spending.
INTERVIEW TRANSCRIPT
Karan Taurani: If you look at the GST, why is it a mild share? Because the numbers are not changing significantly, right? So, we've analysed two things here.
Whatever flows down in terms of GST benefit, it's going to flow in terms of various industries. It could go into fashion, it will go into other parts of history, wallet, alcohol, you know, apparel put together, footwear, some of the money could also go into food, online food delivery, dine-in, everything put together. So, in terms of the potential impact of this money which is flowing through as stimulus, I mean our assumption in terms of stimulus is about 48,000 crores.
And let's say there's a 2x multiplier of that stimulus being flowed in terms of the economy as a whole. About 50% of that incrementally will flow into decisionary wallets because a consumer is already spending on obligatory necessities. There might be some premigration play in terms of necessities, in terms of FMCG brands, but a larger chunk of this will go to decisionary.
Wallets like fashion, footwear, everything put together. So, I think that what we're trying to say is that the wallet share, once the money goes into these business segments, the kind of impact it will have is not more than 1%. It's about 0.2 to 1% which is like a very small impact. And the overall impact of this on the companies is in terms of their revenues, assuming that the market share is stable for these companies, there's no change in market share, is similar in 0.2 to about 100%. The bigger delta will come although in terms of EBITDA because some of these businesses like USR have got a very high operating leverage. So, even a 1% revenue upgrade could lead to a 4% to 5% kind of an EBITDA upgrade for some of these companies selectively.
Govindraj Ethiraj: Right. And just to break down that discretionary, so if you're saying if I'm in all in a month able to save 100 rupees, then 50 rupees of that is what I would use to buy things which I'm not sure or I'm going to buy discretionarily which means it's not something I may have bought last month, it may not be something I might buy next month.
Karan Taurani: So, you know, PWC came out with a report, the report clearly said 30% of your wallet is being used today. So, today as a consumer, 30 rupees is being spent on decisionary. But what we are seeing is that once a consumer gets more money into their hands, 50% will go to a decision.
So, fashion is a big share, food is a big share, what will people do? They will dine out, they will go and drink outside, they will probably spend in terms of, you know, online delivery, they will spend in terms of apparel, do more of shopping, ordering, everything put together. So, 50% of this money is being thrown into deciding things which are, you know, basically food, alcohol, going out, everything put together.
So, in terms of wallet share, if you look at the numbers, if I can just break the math here, fashion and food, food includes dine-in and the delivery part is 4% wallet share each, right, in terms of consumer wallet overall, in terms of 100 rupees is the number basically of the consumer is spending, 4 rupees is being spent on fashion and 4 rupees approximately is being spent on dine-in and in terms of delivery. This is on the assumption that the decisionary wallet is at 30%, now that's a 4% number there.
Assuming that incrementally, whatever number that is flowing into the economy as a stimulus, 50% of that comes into decisionary bucket. This 4% number can actually move up towards 7-8% in terms of wallet share or in terms of spending out of this stimulus that we've assumed. So, net-net, there's an incremental delta for all these industries in the range of 0.8 to 1% which will flow in terms of the industry growth rate and then assuming that the market share is stable, it will flow into the incumbents and the companies in these segments as well.
Govindraj Ethiraj: Right now we are in a slightly unusual situation because the rate cuts were announced on the 15th of August, it's kicking in on the 23rd of September and most consumers have held back bigger ticket purchases including cars relatively at least. Now, how is this likely to even out by let's say the end of October or when we look at the festival season as a whole?
Karan Taurani: So, we have not analysed auto companies here, automobiles inventory over here, we've largely analysed consumer discretionary companies which is QSR, alcohol, cinemas, fashion, then you have online food delivery, all these 4-5 segments put together. OTT spends, you know, TV spends, everything put together. So, I think what's going to happen here is that the impact of this number or these numbers will kick in after October.
So, you could ideally start with a better festive season in terms of overall demand growth environment, that's the first thing. The second benefit of GST is also on the raw material side. So, if you look at many of these companies, they are going to benefit from raw materials as well.
Firstly, let's go with QSR. So, in the case of QSR, what's happening is that many of the products which are ghee, milk, dairy, breads, wheat are seeing relaxation in terms of GST and some of the sauces and spices as well. So, because of this change in GST slab, you will see gross margin improvements for the QSR company which is a very big risk spike because these companies are currently chasing growth, they are trying to grow very aggressively in a market which is highly competitive. So, this gives them an edge to actually protect their growth rates and try to, you know, focus with better margins as well and not actually see a fall in terms of margins, that's the first thing.
The second thing is that there's also a positive impact on companies like NICA. So, if you look at healthcare as a segment, the GST then has come down from 18% to 5%. Now, this is a very big delta because 25% of NICA's GOV or GMB rather comes from the healthcare segment and that could see relaxation in terms of better volume of take and also, you know, potential margin improvement in that business.
So, there's a double positive impact specifically for stocks on the QSR side and for stocks like NICA which you see as a benefit because of GST. Right.
Govindraj Ethiraj: So, very broadly, you're saying that in the two categories, discretionary, fashion, lifestyle and electronics will benefit and in the non-discretionary, you're saying which ones? Yeah.
Karan Taurani: So, on the non-discretionary side, we will see premiumization in the FMCG business. So, in terms of what we're trying to say, the wallet share in terms of discretionary, obligatory and necessity is around one-third approximately each of that. Assuming that 50% of it flows incrementally, the new wallet goes to decisionary.
The necessity of wallet share can actually come down because people will spend on decisionary, people will spend on obligatory ones once they have extra savings in their hand but necessity will see the least positive impact because you will only see premiumization of trends with the necessities. People will not consume more or eat more because of this relaxation. They'll probably move to a higher price brand if at all.
So, that's the positive impact there.
Govindraj Ethiraj: Right. And if you were to just come back to that 100 rupees and look at, let's say, how consumers behave when they get more income in their hands or see price cuts. I mean, my question really is, is this following past trends or is this extrapolation of what we think may happen differently this time?
Karan Taurani: So, I think this is more of a past trend as well. Whenever you see some kind of relaxation coming in, consumers do spend on two things. As I said, one is obligated to pay education, medical, and health expenses or probably they kind of retire their loans in a pastoral manner as the first way through it.
And for people who may not want to do that or who may not have loans and too much of education expenses, then the decisionary bucket opens up. And within decisionary, I think people start to go out more. Whether you look at dining footfalls in the industry, in the QSR spade and the F&B services market has been struggling since quite some time so that definitely you will see despite because people will go out more often in terms of high frequency.
And of course, the fashion market as well, whether you call it online or everything put together, people will also try to purchase more clothes during the festive season and beyond that as well. So, there is ample proof here that this is the least case impact we are factoring in because this multiplier effect which I told you which is 2x of the stimulus which is there of 48,000 crores, this can even be three to four times. This is how things roll from here on.
So, on a base case scenario, we are assuming that there is at least a one to one and a half percent impact on various industries within decisionary bucket. And there is a four to seven percent kind of an EBITDA upgrade for various companies in the decisionary bucket.
Govindraj Ethiraj: Got it. Karan, it's been a pleasure speaking with you. Thank you so much for joining me.
Karan Taurani: Thank you. Thanks.
Rolls-Royce Expands
Rolls-Royce, on Wednesday, inaugurated a 700-seat global capability centre, the British aerospace and defence company's largest and most advanced facility in India, according to news reports. Rolls-Royce already employs over 2,000 engineers and can now host global and domestic players like Access Collins Aerospace, Wipro, Mahindra, Boeing, Airbus, and Pixel, which are active in areas ranging from propulsion and power systems to structural components and advanced technologies, according to business standard.
Chips In Focus
China's internet watchdog has asked companies like Alibaba, ByteDance to terminate orders for NVIDIA Corp's RTX Pro 6000D, according to the Financial Times quoted by Bloomberg.
The Cyberspace Administration of China told companies this week to stop testing that NVIDIA chip and cancel existing orders. And before that, several companies had indicated they would order tens of thousands of their product, which NVIDIA introduced to get around restrictions on the shipment of advanced AI chips to China, according to the Financial Times. Meanwhile, Alibaba shares rose on Wednesday after Chinese state media reported it had secured a major customer for its AI chips.
So there you are, Alibaba is making chips. China Unicom will deploy Alibaba's AI accelerators from its semiconductor unit called PingTog, or T-Head, according to a report from China's state broadcaster CCTV, quoted by CNBC. Now, Alibaba does not sell chips directly, but companies can effectively use the computing power based on those semiconductors by buying Alibaba cloud services, according to that report, which CNBC says has been verified.
Alibaba stock was quoting higher in Hong Kong, while its US-listed stock was also up more than 2% in pre-market trade.
Duty-Full Shopping
Now, Indian customers like me are used to this.
Order something from amazon.com in the US or any website overseas, and the courier service who brings it home in India also presents a nice little bill, along with the package beyond what you've already paid for. Now, that bill is the customs bill, which you may not have really expected, or at least the size of it usually is a surprise. Amazon now pre-charges for goods, so that it collects the customs duty upfront when you make that dollar payment or overseas payment, but many other sites don't.
So products that come, for example, through Speedpost in India can also take much longer because they get stuck at the post office because sometimes they want clarifications on whether this was really importable and is allowed. Now, American customers, here's the bottom line, are getting ready to experience all of this and more, something they've never seen before. The Wall Street Journal quotes the example of a customer who ordered a $77 shirt in August from a Swedish sports brand.
He paid $30 for shipping, and two weeks after the package was delivered, he received an unexpected bill from FedEx for $42.35. All of this is a result of a rule change by the Trump administration, making all e-commerce packages entering the US subject to tariffs. Earlier, packages worth $800 or less had been exempt from duties. Now, this change is catching shoppers unaware, says a report in the Wall Street Journal.
Another customer says he ordered the same item twice, one was tariffed and one wasn't. In May and June, the average number of packages worth $800 or less arriving into the US each day fell to 1 million, down from an average of 4 million last year. FedEx and UPS say that they are seeing an increase in packages that need customs clearance and have been directing confused customers to FAQs on their websites.
They also say that because of missing information on shipping labels, it's holding more parcels, pending calculation and payment of duties, and all carriers say, according to that Wall Street Journal report, that they facilitate tariff payments to the government on behalf of sellers or buyers, and of course, charge brokerage or processing fees for this service. The Wall Street Journal quotes another example of a pizza shop owner in the US who was expecting his annual shipment of oven replacement parts from Canada. This was worth about $640, and before delivery, he received an email from UPS saying that he owed government charges of $1,196 and brokerage charges of $128 without breaking down how the tariffs were calculated.
A lot of this, like I said, is very familiar territory in India, and maybe if you want to take a crash course, this is what you should do. That's to visit India.
Navi Mumbai Airport
Mumbai's new airport, Navi Mumbai International Airport, is getting ready to launch.
The date that we have now is September 30th. There are, of course, no real roads connecting western parts of the city, that's Mumbai city, to the airport directly, so it's a good hour and a half, maybe even two hours of driving, depending on where you're starting from. Nevertheless, flights will begin.
Air India yesterday said that it will start commercial flights in the first phase of operation, so I couldn't see an exact date. Maybe they're hedging to see when the exact start date will be. In the initial phase of the new airport's operations, Air India says it's Air India Express.
Arm will operate 20 daily departures to and from the Navi Mumbai Airport, connecting 15 cities, and will scale up to 90 daily departures by mid-2026, including up to five daily international flights. By mid-2027, it wants to expand to nearly 140 daily departures, seamlessly connecting passengers to key domestic and international destinations. I do hope there is seamless connectivity to the airport as well, which at this point there isn't, and it does not look like there will be, even by mid-2027, going by the track record of organisations like the Bombay Municipal Corporation.
