Markets Rise For The 6th Day
There is renewed optimism on resolution on India-US trade talks with several hints and suggestions of some form of compromise on the 50% tariff imposed on India
On Episode 709 of The Core Report, financial journalist Govindraj Ethiraj talks to Shalini Pillay, India Leader for the Global Capability Centres segment at KPMG in India.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Markets rise for the 6th day as optimism takes over.
(02:49) US sanctions on Russian oil majors will affect India.
(06:18) India’s vast talent pool is a magnet for more GCC business verticials, latest being energy.
(15:14) Tesla posts losses again though its CEO wants a $1 trillion salary.
(16:51) Feedback
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 Friday, the 24th of October, and this is Govindraj Ethiraj, broadcasting and streaming weekdays from Mumbai, India's financial capital, and we have rains again.
The top stories and themes.
The stock markets rise for the sixth day now as optimism takes over.
US sanctions on Russian oil majors will affect India.
India's vast talent pool is a magnet for more GCC business verticals, and the latest is energy.
Tesla posts losses again, though its CEO wants a $1 trillion salary.
A Good Diwali Week
Well, it's been a good Diwali week, at least so far, with India's equity benchmarks rising for the sixth consecutive trading session. There is renewed optimism on resolution on the India-US trade talks, with several hints and suggestions of some form of compromise on the 50% tariffs imposed on India by the United States.
Now, it must be noted that India is facing a 25% tariff only for importing Russian oil, which could come down, and more on that shortly. The other 25% duty may well continue and is still amongst the highest in the world and is also pretty much the figure first unveiled as part of sweeping tariffs across the world in April by US President Donald Trump, which means that there has been no negotiation impact before or since then. So if we are to see a lower tariff than even 25%, as some are speculating, that would mean that there has been a fairly successful round of negotiations or is going on.
But that is something yet to see anything firm on and nothing is firm till President Trump announces it. And of course, it can change even after that, as we've seen with China. Meanwhile, Indian stocks are powering ahead.
Trading on Thursday started on a very strong note, though it moderated from highs, thanks in large part to IT stocks, which drove the rally. The Sensex hit a fresh 52-week high of 85,290 and was up 864 points at the highest point of the day and then closed down 130 points up to 84,556. The NSE Nifty 50 was up 23 points to 25,891.
The last six trading days have seen the Sensex rising about 1,526 points and the Nifty about 745 points. On Thursday, Infosys was the big gainer in the BSE 30 stock Sensex, which was up 4% after the company's promoters opted out from a ₹18,000 crore share buyback. Other IT stocks were also up once again on U.S.-India trade optimism.
In the broader market, the BSE mid-cap index was down 0.2%. The small-cap index was down 0.5%.
Oil Drama
Now, there is a fair bit of renewed drama in the oil markets, with the U.S. now imposing sanctions on two top Russian oil producers, which of course affects everyone importing from them. Reuters report says Indian refiners are poised to sharply curtail imports of Russian oil to comply with these new U.S. sanctions on these producers.
Multiple trade sources also told Reuters that Chinese state oil majors have suspended purchases of seaborne Russian oil from these two companies. India has been the biggest buyer of discounted seaborne Russian crude after the 2022 invasion of Ukraine by Russia, and India imports about 1.7 million barrels per day, or at least it did in the first nine months of this year. Now, the U.S. has sanctioned Lukoil and Rosneft, which are Russia's two biggest oil producers.
This means that refineries in China and India will need to seek alternative suppliers to avoid exclusion from the Western banking system, according to analysts who spoke to Reuters. The U.S. also said it was prepared to take further action, as it called on Moscow to agree to a ceasefire in Ukraine. There is, of course, continued scepticism in the market about whether these sanctions would result in a fundamental shift in supply and demand.
Another analyst told Reuters that so far almost all the sanctions against Russia in the past three and a half years have mostly failed to dent either the volumes produced by the country or the oil revenues. Now, back home, Reuters reports that Reliance Industries, which is India's biggest buyer of Russian crude, is planning to reduce or cease imports of Russian oil, including halting purchases under its large long-term deal with Rosneft. A Reliance spokesperson told Reuters that recalibration of Russian oil imports is ongoing and Reliance will be fully aligned to the Government of India guidelines on a question on whether it plans to cut its crude imports from Russia.
Now, it's not clear what the GOI guidelines are here because the sanctions are on Russian exporters and GOI guidelines on the matter, if so, are yet to be revealed, and once again at least to us. Meanwhile, Bloomberg reported that the latest restrictions announced by the U.S. blacklisting Russia's largest producers would make it all but impossible for flows to continue. So far this year, India has taken over 36 percent of its imports from Russia.
Bloomberg said, quoting analytics firm Kepler, and historically, however, as we've been discussing here, India has actually not been a significant importer of Russian crude and has depended more heavily on the Middle East. Now, after 2022 and that invasion of Ukraine and a $60 per barrel price cap imposed by the G7 nations, which aimed to limit Kremlin's oil revenues, that of course prodded India to start importing Russian crude. Bloomberg also says that in the short term, the latest sanctions will mean that orders due to be placed in the coming week for crude that will load in November and deliver in December will now be overwhelmingly from other destinations.
Vandana Hari, founder of Singapore-based Vanda Insights and a frequent guest on The Core Report as well, told Bloomberg that with this sanctions move, Indian refiners may have to pull back way faster, though she says that it'll be probably relatively easier for India, which was not buying any Russian crude until three years ago, compared to China. And then oil prices rose nearly five percent on Thursday after the U.S. imposed those sanctions. Brent crude futures were up about close to $3 to about $65.50 a barrel, while U.S. West Intermediate crude futures were up about $2.9 to $61.43 a barrel.
Another Breed of GCCs
There are always newer business verticals where multinationals are setting up captive centres in India. One interesting one was McDonald's a few months ago with large captive centres coming up in Hyderabad.
Now, there are a few factors that have driven the growth and mushrooming of global capability centres, as they're called in India. The first is most likely trust and confidence that the Indian arm, which will be tethered to a global process or value chain, will deliver consistently and in a manner that data and other IP can be moved back and forth securely. The second, of course, is capability and talent.
In all respects, more companies ranging from pharmaceuticals and engineering research and development to other forms of back-office management are setting up shop in India in recent years. One such area which could see increased opportunity is energy, according to a new report from consulting firm KPMG. And perhaps an interesting time to discuss this, given today's episode's focus on energy issues, particularly oil.
While energy majors like Chevron are already in India with GCCs, the potential is large, according to a new report from KPMG titled From Cost Centre to Nerve Centre of the Energy Enterprise Global Capability Centres. I reached out to KPMG partner Shalini Pillay, an author of this report, and I began by asking her what was different about the opportunity for energy GCCs.
INTERVIEW TRANSCRIPT
Shalini Pillay: Like you rightly said, today the GCC model is spread across every industry sector you can think of. And part of what makes the model actually feasible is the fact that it's leveraging the digitalisation that's happening across global organisations. And this model saw a flip through COVID, which really means that it enabled anything that could be done leveraging technology that could be processed remotely could actually be enabled by the GCC model.
So in some sense, to your question, it's not really dependent on where the organisation is physically sitting, but one is taking advantage of what technology is doing, how you're digitizing the entire business value chain, and that is what is coming together really effectively. So to give you an example, as you rightly pointed out, a lot of energy majors have local assets and they tend to be very localised, but there are two dimensions to this. One is the GCCs are actually working to create digital twins of these global organisations.
So if you imagine that, and you imagine a digital twin sitting remotely here in India, you suddenly have an opportunity to monitor your assets, to influence those assets, to track how they're doing, to optimize it remotely. So it's a combination of the typical technologies, industrialisation. If you look at IoT and the operating technologies that are coming together, all of that creates a beautiful digital web, which allows you as the GCC to then be in that cockpit, steering, monitoring, influencing global operations.
And that's why it becomes very relevant and as relevant to a global energy major on their hardcore operations on the downstream side of it. If you look at energy customers who are changing, there's also significant impact from a customer experience perspective, who are now increasingly demanding, just like you would see it in some of the consumer industries.
Govindraj Ethiraj: So if you were to illustrate that, so let's say you talked about operations and driving operations, apart from the digital twin aspect, where you're really recreating the whole, let's say architecture or system in another place, but digitally, what would be a good way to understand what's going on, the complexity of what could be done or is being done?
Shalini Pillay: Like I said, if you imagine the digital twin of a plant or an oil rig, where you're actually monitoring the assets sitting over there, your ability to actually track the lifecycle, track the asset lifecycle, the maintenance requirements is one example. For oil and gas majors that have vast gas pipelines, for example, today they use drones to actually track these pipelines. A lot of those drones, the architecture that drives the software there, are being run, designed, and monitored from India.
Of course, equally scary is the cyber element, which is why the security architecture is really important. So GCCs are not only becoming this digital nerve centre, they are creating a super resilient layer around it, where the cyber technologies, everything that's required to make sure you have the strong digital trust environment built around it is also happening here. So you're monitoring your assets, monitoring these gas pipelines, you're looking at the lifecycle, where is it that you need to actually do your repairs, maintenance, asset management, all of that's possible from here.
And they need robust security architectures that actually ensure this is super secure.
Govindraj Ethiraj: Right. When you wrote this report, so one is, of course, I guess you're looking at people who are already in India doing all of the stuff that you talked about, but I'm guessing you're also suggesting that there is opportunity for others to come and do this as well. Yes.
Is it doing more stuff here or is it others or new people to come here and do the same stuff plus?
Shalini Pillay: Actually, it's both and this again applies across every industry. A, there's an opportunity for the uninitiated to kind of understand the model and take advantage of it.
Govindraj Ethiraj: Is that more in energy, you feel?
Shalini Pillay: No, the energy, it's a little less. You have a handful of large players, there are a bunch of mid-sized players, but compared to some of the other sectors, I would say you don't see as many in the energy space, but there certainly are players who are not here yet who will look to come in and set up shop for sure. But the opportunity is equally large, Govind, for the existing players.
So traditionally, they did a lot of the corporate function support, which was now being done and dusted with all of the IT, finance, HR, and some of the supply chain. But now the opportunity to go up that value chain because you are embedding technology increasingly in core processes. So the more your core gets tech enabled, the higher the opportunity for the GCC to actually support.
So there are new avenues opening up as you kind of move up that value curve, so to speak. If you look at retail outlets for a lot of the energy players at their gas stations, some of that is now getting more and more digitalised. Imagine when you then track that consumer experience and connect all the dots to actually open new revenue channels.
A lot of that can be done through data analytics, data mining that's now getting done out of the GCCs.
Govindraj Ethiraj: Interesting. So you're saying, for example, if it were a BP or a Shell gas station in Great Britain or somewhere in Europe, then the data that's flowing from those stores in the gas stations could be or is being monitored and worked upon in India.
Shalini Pillay: Could be analysed from here. You look at mining that data to see what more you can then do.
Govindraj Ethiraj: Right. That's not an energy operation. I mean, it's an off energy.
Shalini Pillay: That's an off energy. But that's an example to say that there are newer dimensions to energy. The energy consumer is getting more conscious and that opens up another set of opportunities.
But to your earlier question, the more you see technology embedded in core operations, the more opportunities for the GCC to play a big role.
Govindraj Ethiraj: Right. And how are you seeing the talent stroke skill flow for serving all of this in India?
Shalini Pillay: It's the talent that's attracting players here, right? The challenge, of course, is for us to ensure we sustain that talent and keep a very healthy, growing pipeline if you want to keep increasing the number of GCCs coming in. But that, like you're aware, is today very much a national agenda.
It's a state agenda. And there's some good work happening there, Govind, in terms of upskilling talent. And I think increasingly wave two is going to be techno-functional talent.
So which means you take your engineers who work in the energy space and look at upskilling them with the right tech skills. It's not just taking the IT software engineers. So what's going to be more and more relevant as you penetrate the value chain is to actually look at players who understand the domain in depth and then can apply operational technology, look at gen AI and some of those newer technologies, combine it in a very meaningful way.
So the future is going to be more techno-functional.
Govindraj Ethiraj: And that's an interesting term. So if I were to ask you to put a number on it, so let's say an energy GCC hires 100 people, how many of them would be energy stroke petroleum engineers, percentage-wise, roughly?
Shalini Pillay: My guess is not very high at this point. I think it would probably be more like, and I'm just throwing a wild guess here, probably 25-30% because a large part of that skill today is pure tech, the software engineers, because of the nature of work that was done so far. But as that moves up, I think the opportunity to pivot to more core domain skills coupled with tech skills is only going to grow.
Govindraj Ethiraj: Right. Shalini, it was a pleasure speaking with you. Thank you so much for joining me.
Shalini Pillay: Thank you so much.
Musk Wants A Trillion-Dollar Pay Package From Tesla Now
The news is that Tesla has reported record third-quarter revenue, which has also been driven by high quarterly sales thanks to expiring electric vehicle tax credits in the United States.
But profit also dropped 37 percent, partly due to costs. And it's quite clear that Tesla is not immune to the cost pressures affecting the auto industry, as a report in Reuters points out. Analysts also said that the margin compression is the real concern, and higher operating expenses, increased tariffs and lower regulatory credit revenue have hit all at once.
Musk, of course, wants to position Tesla as a company focused on robotics and self-driving technology, and that has helped or maybe kept investor optimism going. The stock has been trading at more than 200 times the company's profit expectations, which, by the way, is way higher than any other tech company or mega cap stocks, as they're called. So just on that price-to-earnings, Tesla's forward price-to-earnings is 200.
Now, can you guess what Apple is, the company whose phones you perhaps own or would like to, as many would say? Apple is at 33. I repeat, Tesla is at 200. Apple is at 33.
Microsoft is 32. Nvidia, whose stock has been setting the bosses on fire, is at 30. Amazon is also at 30.
The alphabet is 24. And then if you just want to contrast with old economy companies, Ford Motor is 9, and General Motors is 7. We're talking about forward price-to-earnings ratio.
