Markets Rise for the 5th Day on Easing Tariff Fears
Lower GST rates will help consumer product companies for sure and those stocks will benefit as will car companies if taxes on cars come down
On Episode 659 of The Core Report, financial journalist Govindraj Ethiraj talks to Anand Kulkarni, Director at Crisil Ratings as well as Ananay Jain, Partner at Grant Thornton Bharat.
SHOW NOTES
(00:00) The Take
(04:31) Markets rise for the 5th day on easing tariff fears.
(07:29) Government initiates laws to ban real money gaming
(16:07) Why are telecom companies raising prices?
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 21st of August, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital. We've had a day of respite from the rains, that is, at least the high-intensity rains, but it still continues to drizzle and looks cloudy most of the time. Speaking about cloudy…
The Take: Ambanis Caught In Crossfire As U.S. Continues To Pressure India On Oil
So, U.S. Treasury Secretary Scott Besant on Tuesday accused India of profiteering from its increased purchases of Russian oil during the war in Ukraine, saying the U.S. viewed it as unacceptable. Speaking to CNBC's Squawk Box on Tuesday, Besant said that Russian oil now makes up 42% of India's total oil purchases, which is a sharp jump from under 1% before the war, and he contrasted that with longtime buyer China, whose purchases went up from 13% to 16%. He said that India was just profiteering, India was reselling, and what he would call Indian arbitrage, buying cheap Russian oil, reselling it as a product, and that has sprung up during the war, which is unacceptable.
He said that, or rather added that some of the richest families in India have made as much as $16 billion in excess profits. Now, this follows U.S. Trade Advisor Peter Navarro's comment that India is a global clearinghouse for Russian crude and that the proceeds flow to India's politically connected energy titans and into Putin's war chest. Now, these statements are concerning for a variety of reasons.
First, while the global oil trade might be somewhat murky given how, for example, sanctioned oil tends to move around the world, oil to chemicals major reliance industries is one of the most visible and publicly traded companies in India. Second, exporting diesel or jet fuel from imported crude has been its strategy since the first refinery was set up in Jamnagar on the western coast of India 25 years ago. The reason why the refinery was set up on the coast, unlike refineries owned by public sector giants like Indian Oil Corporation, which are largely inland, was precisely to import crude and export product.
Overtime reliance, which controls roughly 25% of India's refining capacity, has obviously helped cut India's dependence on petroleum product imports like petrol or diesel. Now, India continues to import over 80% of its crude requirements, but the refining and value addition for domestic consumption and exports by all Indian refineries happens on Indian soil. Now, Reliance's profits for all its businesses over the last three years, including oil to chemicals, telecom, and retail, roughly add up to about $25 billion.
So, the $16 billion figure that Besant mentioned either might be an accurate depiction of reliance or might refer to the profits of other refining companies and the difference in profits because of the lower crude oil prices. Now, the details do not matter as much because Besant has clearly taken aim at the Ambani's and thus a business person seen as close to the government. In doing so, maybe he is equating them to the Russian oligarchs, typically very rich businessmen close to the Kremlin whose initial riches came from the privatisation of state-owned enterprises in Russia in the early to mid-1990s under then-President Boris Yeltsin.
Whatever Besant's intent, the specific attack does signal a further deterioration in US-India relations, at least at this point. It is unusual that Besant, who has managed money for over 40 years and has worked with the Soros Fund Management as Chief Investment Officer until about 10 years ago, would highlight profits made by Reliance, a private limited company, and its owners as unacceptable. Now, attempting to squeeze logic from the battery of statements we've seen in recent days might be futile, but it is evident that there is a continuing problem, which is the friction between India's Prime Minister Narendra Modi and US President Donald Trump, the reasons for which may go back to the period just before President Donald Trump got elected, as various foreign affairs experts have pointed out to us.
And therefore, I've also suggested that the continuing problem has to be resolved at the top. Now, while we await that, the Ambani's obviously have a new problem to grapple with. As many in business and politics are realizing, you can get many things done in India, but facing the might of the United States and dealing with a problem that's cross-border is a different ballgame altogether.
And that brings us to the top stories and themes.
The stock markets rise for the fifth day on easing tariff fears.
The government initiates laws to ban real money gaming. So what does it mean? And look at the background.
And why are telecom companies raising prices? Hint, the answer is you.
The Markets Gain Again
It was the fifth day of gains and this is where it gets interesting. Lower goods and services tax rates, which could come by Diwali, will help consumer product companies for sure, and those stocks will benefit as will auto stocks if taxes on cars, particularly the entry-level cars, come down and thus the price consumers pay for them. There is no real benefit beyond this from a market fundamentals point of view, at least right now.
But the macro factors are still strong and the tailwinds provided by low inflation, low interest rates, and an improved standard and poor rating. And if you want to add good monsoons to the mix, we'll hold the bottom for a few sessions at least. The nifty 50 managed to reclaim the 25,000 mark after about a month.
The index last closed above the 25,000 mark around the 24th of July. The nifty finally closed on Wednesday with a 70 point gain at 25,050. And the nifty has now rallied about 563 points in the last five straight trading sessions according to business standard.
The BSE Sensex was up 213 points to 81,858. And the BSE mid cap index and the small cap index were also up at 0.4 and 0.3 percent each. The rupee was down though on Wednesday as corporate hedging and short-term speculators increased demand, which was met by dollar sales by foreign banks.
The rupee closed at Rs. 87.06 to the US dollar against its previous close of Rs. 86.95. So it's back above 87 according to Reuters.
Meanwhile, Russia expects to continue supplying oil to India despite all the warnings from the United States that we've been hearing. Russian embassy officials in Delhi said on Wednesday adding that Moscow hopes trilateral talks will soon take place with India and China. So these trilateral talks obviously mean more than what you're just hearing.
So let's see how that develops. Now this also means obviously that India is not buckling to threats on buying Russian oil, at least as evidenced from the statements made by US Treasury Secretary Scott Besant. If something has changed after that or something that the Treasury Secretary did not know, I guess we will find out very soon.
Just to recap where things are, US President Donald Trump had announced additional tariff of 25 percent on Indian goods exported to the US from 27th of August, which is exactly a week away, as punishment for buying Russian oil, which constitutes 35 percent of India's total imports compared to a negligible 0.2 percent before the Ukraine war. These are figures from Reuters. Either way, the total tariff then would be 25 percent as it is today, which is higher than the 15 percent that we were expecting.
So it's 25 percent, potentially 25 percent, so 50 percent in all. And there are other tariffs and countervailing duties as well.
Real Money Gaming Takes A Hit
The Lok Sabha on Wednesday, that's the lower house of parliament in India, passed the Promotion and Regulation of Online Gaming Bill 2025, which aims to prohibit all forms of online real money games.
The bill was passed by a voice vote after brief remarks by the Ministry of Electronics and Information Technology, Ashwini Vaishnav, amidst protests from opposition members. Following its passage, the house was adjourned for a day. The legislation defines an online money game as any game in which an entry fee or monetary deposit is required, irrespective of whether it's based on skill or chance.
And more on that shortly. The bill prohibits any person or company from offering, aiding, or promoting such games and bars. Advertisements for these platforms, remember all the cricket matches, and prevent banks and other institutions from processing related payments.
The gaming sector pays about 28% goods and services tax imposed on October 23, and the sector has been fighting that. Several unlisted companies who are involved in this space would obviously be affected and quite likely have to shut down as things stand. The government has estimated that about 450 million people lose close to 20,000 crore rupees every year in online real money gaming, according to a government official who spoke to the Economic Times on Wednesday.
The government also treats online real money gaming as a major societal problem and has chosen to forego the loss in revenue in preference to people's welfare, according to that official. That official also said that online gaming involving money is a major problem for society and every parliamentarian has raised concerns about its ill effects. And between revenue and one third of the industry segment and society welfare, the government has chosen society welfare according to that source again.
I reached out to Ananay Jain, partner at consulting firm Grant Thornton Bharat, who's been working with some of these industry bodies in this space, and I began by asking him to give us a background on the gaming industry before asking him about where it stood today.
INTERVIEW TRANSCRIPT
Ananay Jain: It's a landmark legislation that you know has just been passed in Lok Sabha. So the basic premise of the bill is to actually remove the distinction that currently exists between game of chance and game of skill and that's what the minister Mr. Ashnavi Vaishnav has also mentioned in his speech in Lok Sabha. So what he's mentioned is that there are three different segments that India will be viewing now.
So there will be one which is eSports which has a separate federation in the world which has your streaming influencers working and then this next segment is the casual gaming which has your chess, sudoku and the likes and the third is the real money gaming which is all the fantasy, poker, ludo, rummy all of these apps combined together. So they've clearly made a distinction between the three segments. They've said that the bill is set to promote and there'll be investments from the government side to promote the first and the second which is your eSports and your casual gaming but there's a blanket ban on the third one which is the RMG.
Now RMG in this sector is the biggest contributor in terms of revenue, jobs around 30,000 crores revenue which bear in mind is expected to double or triple by 2028. So we're speaking about a huge industry that's actually being shut down if the bill goes through in the period that it's been drafted. Having said that there is still a lot of focus on innovation especially with the PM's vision that was there which he laid out in you know waves wherein he categorically calls out that he doesn't want India to just play games.
He wants India to develop games now. So I think there's a clear focus and shift that the government wants to promote the industry but at the non-RMG side and not at the real money side.
Govindraj Ethiraj: Right, okay so again just to state your definitions and this is useful because you've given the three clear definitions between eSports, casual gaming and real money gaming. Now real money gaming is not really gaming in the sense that I think of an xbox or a playstation and then play something right. It's really I mean it's more looking at an app and trying to take a bet on something and make money or lose money isn't it.
Ananay Jain: No it's not that simple and the word betting might not be correct here because in RMG also there are two segments to it right. One is the game of skill which worldwide if you look at it there are multiple reports which are there that you know poker let's say for example is a game of skill right. It's classified, it's it while there is an element of luck to it but that's there for all of the cases.
I mean if you look at it the best example of a game of skill is chess. The world would agree that there is no game like chess which involves your mind and everything but even there if you ask an expert there is an element of chance because it depends on if you toss there's a toss that happens whether you select white or black there is an element of it affecting the outcome. So I mean I'm just saying that you know it's not traditional gaming as we were used to in the 1990s but a lot of fantasy gaming and poker and rummy was a game of skill.
At least it was classified as a game of skill till now.
Govindraj Ethiraj: But I mean I guess the distinction is when you talk about chess I mean I don't want to go too much into the merit of this case but when you talk about chess but what we are saying really is there's money riding on it which is what makes the distinction.
Ananay Jain: Right and that's a distinctive point that governments that's what the bill is talking about now.
Govindraj Ethiraj: Right and as things stand will the industry which works on the real money gaming part will have to downsize or shut down as things stand today?
Ananay Jain: It certainly looks like that they will need to pivot so all of these big players if you look at it they have a segment of casual gaming and they have a huge database now so I mean they will have to pivot to casual gamings and games which do not involve money as things stand right now.
Govindraj Ethiraj: Yeah but if it's casual gaming and you said Sudoku for example is a casual game if there's no money riding on it so where is the revenue then going to come from is it advertising and so on?
Ananay Jain: It's going to be advertisement it's going to be in-play purchases that these games have so you can buy extra lives you can buy let's say for you might be able to get two or three squares filled which makes it easier for you to solve the entire puzzle it will be dependent on advertisement largely and then your small element will be the in-play app purchases.
Govindraj Ethiraj: And you feel that these in-play app purchases will not be a circumvention of what the government is intended to do because it's just really trying to stop people from putting money into apps like these isn't it?
Ananay Jain: No I think the focus of government is to stop wagering as of now so if you're completing a round of Sudoku and you winning an amount a monetary amount then it will be stopped but if you're actually just completing a level and moving on to next level then I don't think the government has problem with an app because what they are citing right now is that there's been a lot of suicides and there is some debt trap so that's where wagering aspect comes into the picture.
Govindraj Ethiraj: Right okay understood so let's talk about esports for a second I mean we see a lot of esports competitions happening around the country and it's a sort of more definitely a more accepted legitimate and desired version of digital gaming so what's the kind of opportunity that you see there including for maybe some of your clients to switch to or pivot to?
Ananay Jain: Esports is going to gain massive boost from this so there's going to be innovation in there's going to be innovation in terms of development of games there's going to be a huge content creation or you know these influencers that create content that's going to get a lot of recognition now government's going to focus on setting up advanced technologies like AR VR metaverse all of that will be the focus now so there's going to be a lot of innovation and development in terms of both games and the number of players will increase massively and federations being set up and you know you'll see them participating in tournaments not just in India but at world level as well and the focus and the shift of the world has been to you know move towards esports if you look at it there are esports world cups that are coming in there's been a lot of promotion of esports even on the in the gulf the middle east side europe and us have already taken a lead in in esports so i think china is playing an active role so so there is going to be a lot of esports promotion coming our way in the coming future.
Govindraj Ethiraj: Right Ananay thank you so much for joining me.
Ananay Jain: No problem, thank you so much Govind.
Why Telecom Prices Are Rising
Reliance Jio and Airtel have discontinued some of their entry-level data plans for mobile phones.
They've also hiked the cost of some of their prepaid plans, some more than the others, the details of which I'm sure you can find. The larger story is that there is a move up the value chain, so to speak, and the reason telecom companies are hiking rates is thus more fundamental. It's to do with two things.
One is consumer aspirations, which is the way you and I are consuming data, including perhaps the way you're listening to this podcast, and their own balance sheets, which are the company's balance sheets, which are changing and improving. Now consumers across the country are consuming more data and maybe at faster speeds and telecom companies balance sheets, as I referred to, are becoming stronger as they're now near the end of their major capital expenditure investments in telecom infrastructure, thanks to which operating profits of telecom majors will grow by about 12 to 14 percent. A report from Crisil Ratings, which looked at three companies with a 93 percent subscriber market share, has said, thanks to all of this, again, average revenue per user per month is expected to go to about 220 rupees from about 205 rupees last year.
I reached out to Anand Kulkarni, director at Crisil Ratings and the author of a recent report on the subject, and I began by asking him to tell us how and why consumption levels were rising and what that meant in terms of overall telecom spread and connectivity.
INTERVIEW TRANSCRIPT
Anand Kulkarni: So, Govind, let me start with the ARPU landscape. ARPU is the average revenue per user. And let me highlight what is happening there.
This typically would have two factors, the ARPU growth. One would be typical tariff hikes taken by these telcos. And second would be the intrinsic demand drivers for this ARPU.
Firstly, talking about the tariff hikes, over the past few years we've seen the telcos taking a couple of tariff hikes, which has supported their ARPU growth over a period. Like what happened last year as well. There was a growth last year.
Now, last year's tariff hike is already largely reflected in their ARPU performance of Fiscal 25. So the ARPU was around Rs. 205 for the last fiscal.
So on that base, despite we not building any incremental tariff hikes, we expect the ARPU to reach around Rs. 220 to Rs. 225 this fiscal.
Now to give a context, in Fiscal 24, when there was no impact of any such tariff hike, the ARPU growth was around Rs. 10. Going forward, we expect the growth to be much higher than the past such trends.
Govindraj Ethiraj: And what's the period for this when you say Rs. 200 or Rs. 220?
What's the period?
Anand Kulkarni: So from one year, let's say from year after year, in Fiscal 24, the growth was Rs. 10 as compared to Fiscal 23. So without any tariff hike, the growth was Rs.
10. Now we expect that to be Rs. 15 to Rs.
20. That is the delta that I'm talking about. This would be on account of gradual strengthening of the intrinsic demand drivers of the sector.
So there are around three such drivers that I would like to highlight. The primary driver all of us know is the surging data usage. Now for example, average monthly data consumption per user is expected to move from around 27 GB in Fiscal 25 to around 31-32 GB in this fiscal.
Now if you give a context to this, over the last six years, the data consumption has grown at a CAGR of more than 25%. So that is a very, very strong growth in data sales that we're talking about. One of the key factors for this data consumption growth is also wider availability of 5G networks now.
So we expect the 5G penetration to increase, which was around 35% as of March 25, is expected to reach around 45-47% by March 26. So effectively, we're talking about half of India's active users could be on 5G by next fiscal year. And now what 5G does is that it accelerates your data consumption.
So with 5G networks, consumers tend to spend more time on applications, they tend to look at more video streaming platforms, gaming, gen AI, social media. So all this leads to higher data consumption. So this was one key large driver of the growing ARPU.
Now the second driver would be the premiumization and that happens through bundling of plans. Now if you see, the telcos are now offering more plans which are bundling OTT subscriptions along with the basic plans. And there are some other value-added services also that can come in.
Now this pushes users to uptrade their existing plans. There has been some rebalancing of plans that has also happened, which results in phasing out of low data limit plans. So earlier, let's say there were many 1GB per day plans available.
Largely, you will see very, very less number of such plans. That happens because people would automatically get pushed to overall ARPU because of such changes or rebalancing. And third driver here would be the rural internet adoption.
We spoke about it last time when I was on this podcast. So internet penetration in rural as well as semi-urban is also expected to rise gradually. It has been rising in the past as well.
This will translate into users graduating from voice-only plans to at least entry-level data packs, which are typically around Rs.100 costlier for a 28-day validity that we generally talk about. So these three drivers are shifting the industry's ARPU's intrinsic driver and that is how the growth is happening for the sector.
Govindraj Ethiraj: Interesting. And the companies today are spending less from what you've said in your recent report as well, that the capital expenditure, that is companies spending on setting up infrastructure networks or telecom towers and making them capable of handling more speeds, all of that is now slowed down.
Anand Kulkarni: Largely, if you look at the capital intensity or CAPEX that we call, it is a function of two things. Obviously, your numerator would be actual CAPEX money that is going out and denominator is the revenue that they are generating. Now, what we are seeing is the CAPEX intensity, which was around 31% for last two fiscals, is expected to moderate to around 24-26% this fiscal.
Obviously, revenue growth is a contributor to my denominator growing, but major contribution will come from lower CAPEX that they are incurring. The first key reason, and it is the context that is important, first key reason is the 5G network rollout that was completed by the leading telcos in the past. That was a significant part of their past CAPEX.
Now, what we are seeing is 5G coverage is largely done the leading telcos have reached to a level where the incremental expansion would be less about increasing coverage, but more about optimisation or densification of the existing network that they have created. Hence, overall money required, because the build-out is largely done on 5G, that would be lower for the CAPEX. Second key reason is also on the spectrum.
So if you look at spectrum is another important money that they have to spend on. What we've seen is a significant amount of spectrum purchases were completed in fiscal 23. Last year also we've not seen, this year also we've not seen too much of incremental purchases.
So largely spectrum demand is met. What we are expecting is next renewal of the spectrum, the significant renewal will come only in 2030. So till that time, outlay towards spectrum also will be lower.
So what we are seeing is, as I was expecting, improving quality and capacity will be more important for these players rather than spending more on 5G coverage. So because of all this, we are seeing capital intensity coming down for the sector. This will also help in better cash flow generation for these players.
Govindraj Ethiraj: Right, so there are some players who are doing fine and there are some who are not. In the context of all of this, do you see the median health levels improving and some of the bigger players being able to hold out?
Anand Kulkarni: So right, overall what we are seeing is, if you look at consolidated numbers, overall health today seems stronger than the past. So when we looked at in the past, the competition was intense, which impacted your ARPUs, your profits. But today we are seeing profits are growing at a healthy rate.
We are expecting 12 to 14% growth in consolidated EBITDA for the sector. And more importantly, as I was expecting, this was a demand-led growth and it is not only driven by Terrify. Second more important from health perspective is the balance sheet.
Now there will obviously be difference between top players versus some others. But overall also what we are seeing is, the leverage for the sector is coming down. And what we are seeing net leverage, that is your net debt to EBITDA, is expected to come down to 2.7 times, which was 3.4 times last fiscal and even higher in the past. So overall also it is coming down. Obviously the leading players will be better placed as compared to some others to take the benefit of all this.
Govindraj Ethiraj: Right, so it appears to me that as people consume more, their appetite only increases. So it doesn't look like All of us as consumers are moderating or likely to moderate our demand for mobile data. Or any data for that matter
Anand Kulkarni: No, absolutely you're right. So as I was explaining earlier, there are 2-3 factors. One, obviously the network is giving you good quality or good data speed.
Second, look at the 5G handsets, those are available. Few years back, those were very, very costly. Today you are getting it around 10,000 rupees very easily.
All these supply factors are there. On the demand side, every day you are getting more and more apps, data streaming services, social media applications, which are also video streaming, which consumes much more data. So the entire ecosystem is being built in a manner where the data consumption is expected to grow only going forward.
Govindraj Ethiraj: Great. And pleasure speaking with you as always. Thank you so much for joining me.
