On Episode 877 of The Core Report, financial journalist Govindraj Ethiraj talks to Prashant Vashisht, Senior Vice President and Co-Group Head at ICRA as well as Shantanu Sahai, Executive Director & Head - Private Credit at ASK Asset & Wealth Management Group.

SHOW NOTES

(00:00) Stories of the Day

(00:50) Markets steady as rupee falls again

(05:05) The GCC flow continues as big brands expand in India

(05:55) Where could petrol and diesel prices in India go and what are the driving factors?

(13:26) Large private credit funds are being launched and what that says about market demand for alternatives

(27:06) You will never guess what Ajinomoto is being used for

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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 Tuesday, the 19th of May, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

The stock markets are steady as the rupee falls again

The GCC flow continues as big brands from Starbucks to Brooks Brothers owner expand in India.

Where could petrol and diesel prices go, and what are the driving factors?

Large private credit funds are being launched. What that says about market demand for alternative investments.

And you will never guess what Ajinomoto is now being used for.

The Market, Alkylates, The Rupee and GCCs

Is there a link between the austerity measures that are being spoken about and advertised by many political leaders and the still depreciating rupee against the dollar, which is causing much anxiety? Well, if you consume less fuel, you potentially reduce the amount of crude oil India imports and perhaps the combined effect of all these demonstrations will be that. Though the better way to achieve the same objective and more will be to raise prices of petrol and diesel further as we've argued in the past, till it is close to what global crude oil prices are, just near $110 on screens. But there are other links that are now becoming evident.

The shortage of cooking gas in India and the attempt to bridge it by boosting LPG or liquefied petroleum gas production in refineries has directly affected the supply and price of gasoline in California, says a Reuters report. As India has leaned on refiners to maximise LPG output to comply, they have in turn cut production of alkylates, motor fuel additives made using LPG as feedstock. Now, alkylates are highly sought in California because they burn cleaner than other additives and the state requires a unique gasoline blend to reduce smog.

That is why California's motorists now face a double whammy from the war, a slump in Asian fuel exports that's hit its motor fuel supply chain and additives needed for California's unique gasoline blend, which are harder to procure because of India's conservation of cooking fuel, according to that Reuters report. Motorists in California are already paying the highest gasoline prices since 2022 as compared to the rest of the United States and lower alkylate supply will most likely push up prices even as summer driving boosts demand. Back home, India's commerce minister in a now somewhat familiar refrain has exhorted industries to identify goods that can be manufactured in India to help reduce import dependence on those products.

He also suggested that we should increase exports and buy goods manufactured in India instead of importing them. India's exports rose about 5% to about $863 billion in 2526. In financial markets, government bonds from Tokyo to New York extended losses on Monday thanks to rising prices of oil linked to the Iran war, which in turn fanned inflation fears and stoked investor wages on rate hikes from central banks around the world, according to a Reuters report.

Benchmark 10-year US Treasury yields, which move inversely to prices, were up about 3.6 basis points to their highest since February 25 at 4.63% in early morning trade on Monday. Yields on the 30-year Japanese government bond, or JGB, jumped more than 10 basis points to their highest on record at 4.2%, while the 10-year yield touched its highest since October 96 at 2.8%. Back home, the markets opened weak at start of trade but recovered smartly as the day progressed, a welcome sign given that usually it's tended to go in the opposite direction. The Sensex closed up 77 points at 75,315 and the Nifty 50 closed up six points at 23,649, so largely a flat market.

The rupee, however, was not flat, hitting a record low on Monday and falling for the seventh consecutive trading session as a rise in global bond yields converged with elevated energy prices, according to Reuters. The rupee fell to about 96.38 per dollar, eclipsing its previous all-time low of 96.13 and ended the session at 96.34, down 0.4% from its closing level on Friday, according to Reuters. The Indian rupee was not the only currency in Asia to hit a record low.

The Indonesian rupiah also hit a fresh record low on Monday after stocks fell and global oil prices, of course, hit two-week highs. On Saturday, Indonesian President Prabowo spoke about the rupiah's weakness at two events during a visit to East Java province and said on both occasions that villagers were not affected by depreciation because they do not make transaction in US dollars, according to news reports. And by the way, we're quite happy to share that we are ranking in the top 10 business news chart in Indonesia on Apple Podcasts in the last few days.

Indonesia joins Hong Kong and Singapore among major Asian markets where we consistently hit the top 10. Elsewhere, as the core report has pointed out, on-ground foreign direct investment has slowed but investment in India's talent continues. Starbucks has announced it is setting up its first corporate office in India, which is a global capability centre or captive arm.

Starbucks will hire for technology-focused roles as part of a wider global restructuring and cost-cutting push and start operations later this year and focus on technology operations and engineering-related work. Starbucks may also move some work from existing service providers in India to its own setup. Meanwhile, Catalyst Brands, which also owns leading clothing fashion names like Aeropostale, Brooks Brothers, and Nautica, has said it will increase headcount at its Bangalore GCC from around 650 to about 1,000 by the end of the year.

The firm is also moving more work from South America to Bangalore, its managing director in India told Reuters on Monday.

What is the trajectory of Oil Prices?

Oil prices dropped on Monday after an Iranian news report said that the United States had accepted waiving sanctions on Iranian crude oil temporarily. Crude futures fell to about $107.70, so just under $108 on Monday afternoon after having risen more than 7% last week.

Meanwhile, I spoke to Prashant Vasisht, senior vice president and co-group head of corporate ratings at ICRA Limited, and asked him about India's recent increases or last week's increases in petrol and diesel prices by three rupees each, and more importantly, where we could expect it to go, given that there is a fair degree of consensus that prices will rise further or will have to rise further.

INTERVIEW TRANSCRIPT

Prashant Vashisht: From the point of view of elevated prices of crude oil, this is a very modest increase in prices. If we look at the range of $120 to $125 per barrel of crude oil, the OMCs were making losses of about 1000 crores per day on sale of MS, petrol, diesel and domestic NPG. Now after this price hike, the situation is not very much better.

But considering the slight decline in prices, if I look at the 105 to 110 bracket of crude oil prices, which has been the price levels for the last one, one and a half weeks, even after these price hikes are still incurring losses about 500 crores per day, which clearly is not sustainable. At some point, if this geopolitical issue drags on, the OMCs would have to re-look at the prices.

Govindraj Ethiraj: So in order to achieve some kind of parity between what they are spending buying the crude versus what they are getting for selling the refined product, what would the prices have to be then?

Prashant Vashisht: See, currently the marketing losses on diesel are about 7.5 rupees after the price hike as per litre. And for petrol, it is about 3.2 rupees per litre as per our calculations. And the losses on the sale of domestic LPG also are quite high at about 400 rupees per cylinder.

So unless prices come down for crude and this geopolitical issue gets resolved, these are the losses on the OMCs are incurring as of now.

Govindraj Ethiraj: Right. The figure that the government has been putting out all these days is that there is under-recovery of 200 rupees per litre of diesel and 20 per litre of petrol. So what's the difference between under-recovery and a marketing loss?

So basically, it's about the same.

Prashant Vashisht: But see, the crack spreads for diesel have been very, very elevated. We have seen 100 plus. We've seen 80.

We've seen 60 and so on. These are very high. Can you explain crack spreads for a second?

So the crack spread is the price of diesel above the price of crude oil. And that is usually the crack spread is defined for all products. So it's the differential in price of diesel and crude or petrol and crude and so on.

When I'm talking about 3.2 rupees marketing loss for petrol and 7.5 rupees for diesel, I have considered the long-term 10-year average of the crack spreads. For the standalone refiners also, there is talk about capping their spreads that would be given to them. So it cannot be that oil marketing companies are paying 100 rupees or $100 per barrel of crack spreads for diesel and then selling again at a huge loss.

So that's where the difference in the calculation is. Because there is already a formula under discussion, which is not yet finalised. What I have considered is the long-term 10-year average crack spreads for this calculation.

Just another data point at 120 to 125, for which the crude price was, you know, which was a prevailing crude price about a couple of weeks back, the long-term averages, the under-recoveries or the marketing losses on diesel was about 18 rupees and on petrol about 14 rupees. Again, considering a higher crude price, but the long-term crack spreads of a past 10-year average.

Govindraj Ethiraj: Right. And you have this figure at hand, but we are obviously now importing crude from everywhere because we do not have access that much to West Asian crude or Persian Gulf, the cost of which should be much higher, assuming it's travelling maybe 40 days by sea and also from, let's say, the Americas. What does it mean to the cost of or the landed cost or the final cost that we are bearing now, particularly in the last few months?

Prashant Vashisht: The cost per barrel of crude from the Middle East is about 40 cents to 70 cents, where the range is because of the huge variation that tanker rates can have. And from America, say Gulf Coast, it can range from two and a half dollars to up to four dollars, four and a half dollars. So clearly there is almost two dollars to something like three dollars, three and a half dollars higher price of getting the crude from America or say a distant location like, say, South America or say North America.

So that would also be used in the calculation for the landed cost of crude, which would ultimately be the cost to the refinery.

Govindraj Ethiraj: So that would be the difference. Right. If I were to come back to my first question in some ways, as you look ahead now, we've done one price hike.

It appears that we have to do more, just going by the economics of it. So what could that number be eventually?

Prashant Vashisht: This was a modest increase. Probably the strategy here is to pass this on slowly so there is no shock to the economy. So what could be the next price increase and when would be a little, would be difficult for me to really call out here.

But probably the strategy I see is that this is going to be a graded increase rather than a one shot increase is where I see this.

Govindraj Ethiraj: Right. And you've given the breakup in terms of oil, in terms of gas, we are now, let's say we've reduced the subsidy on commercial LPG. And while there is a subsidy on cooking gas for homes, it's not clear to me what the gap that we are still seeing on the gas side is both for LPG and LNG versus what the international prices are.

Prashant Vashisht: Gas, commercial LPG is not typically subsidised. So there we are paying close to what the market rate is. Yes, it is not subsidised.

Domestic LPG till a short time ago, they were under recoveries and couple of quarters in between, they were almost market priced. But now obviously, again, as I mentioned about 400 rupees per cylinder of under-recoveries on domestic LPG. Now with regard to LNG, see that is mostly, there are a couple of mechanisms that the government has worked out, which is one of pooling of LNG for say, to provide to the fertiliser sector, etc.

If you want the spot LNG, that is much higher, I think 40% higher or so. So from that angle, LNG is mostly not subsidised much, but LPG availability has also been increasing for the industry as well. Because we've been able to source LPG from US and Australia and Canada.

US, as you would know, is a very large producer, given that LPG is also produced along with natural gas. Because of the shale boom, there is a lot of natural gas production as well. Great.

Govindraj Ethiraj: Prashant, thank you so much for joining me.

Prashant Vashisht: Thank you for having me.

Why are Large private credit funds being launched?

ASK Alternates, part of the Blackstone-backed ASK Asset and Wealth Management Group, which manages around 77,000 crore rupees worth of assets, has launched its second private credit fund with a target corpus of about 2,500 crore rupees, including a 1,500 crore green shoe option. This follows the closure and full deployment of its maiden private credit fund earlier this year, which ASK says delivered about 15% gross internal rate of return.

ASK says the Series B fund will continue its performing credit strategy, targeting about 14 to 16% gross IRR by investing in high-quality market-leading businesses. Several private credit funds have been launched in India in the last two years, even as the outlook towards private credit has dimmed in markets like the United States, prompting questions on whether Indian funds could also face similar pressures. In the last 12 to 18 months, several firms like DMI Alternatives, Assertis Credit, Motilal Oswal Alternates, Edelweiss, Multiples, Alternate Asset Management, True North, Prabhu Das, Leeladhar, and 361 Asset have launched private credit funds.

I reached out to Shantanu Sahai, Executive Director and Head Private Credit of ASK Alternates, and I began by asking him what was the reason for launching this fund now and the outcomes they expected to achieve from this fund.

INTERVIEW TRANSCRIPT

Shantanu Sahai: So the short answer is, of course, we are done with our previous fund. And now the team needs something to do. So yes, we are launching the new one.

But I think apart from that, more from a historical and from a current environment perspective, I think this is probably the best time to launch a new private credit opportunity for investors. And this is for several reasons. So in general, what we've seen is that private credit tends to be somewhat counter-cyclical in terms of how people look at it in the context of the overall market.

So if you think about it from an investor standpoint, equity market returns have been subdued now for the better part of the last three years. This year itself, if you take a point to point, Nifty 50 has been down about 6.5% over the last 12 months. It's barely given 2% or 3% over the last 24 months and single digit returns even in the last three years.

In such markets, it is generally considered that investors will look for opportunities to diversify away from equity, which allows them a degree of certainty in the returns that they are getting on their portfolios with also less volatility. And private credit in that sense tends to fill in that gap very, very well, because there is a high degree of visibility on what we are going to achieve and what we are getting. In general, investors are getting access to good quality names, which they would otherwise not get access to, at least from the debt perspective, if they were to go out and sort opportunities on their own.

And at the same time, there is a fair amount of visibility on returns while also promising them periodic income. So for example, funds like us pay out on a quarterly or a monthly basis, a certain portion of the IRR, which also gives them regularity of income as well. So that is from an investor standpoint.

From a practitioner standpoint, what this does is that it's a great time for us to be in this market because a lot of high quality businesses, which would ordinarily borrow at levels which would be lower than our thresholds will actually be available to borrow at our thresholds. And the reason very simply is that because the equity market valuations are subdued, a lot of companies or promoters who were trying to raise money earlier, if they were to go down the equity path, in that case, they would end up raising money at subdued valuations and therefore end up with higher dilution. So they typically try and push that can down the road by saying, let us raise money from the debt markets right now.

And then we can refinance that debt with equity as and when these valuations improve. So good quality companies come to the private credit market at these times to substitute funding, which they would have ordinarily raised through the equity markets via the debt markets. So it allows us to get good companies at these times.

Govindraj Ethiraj: Right. And, you know, there are some concerns and apprehensions about private credit in general, globally, as well as maybe flowing to or through to India in some ways. How are you or rather how would you respond to that?

Shantanu Sahai: Personally, my answer is that India private credit is very, very well insulated from the problems that you are seeing in the US market. This is for many structural reasons as such. The first and the most important of these is the sheer level of leverage in the US system versus the India system.

If you look at the average mid-cap company in the US, it is leveraged between five and a half to seven times. In India, that number is closer to two and a half to three and a half times. If you look at leverage finance transaction multiples themselves, and that's the level at which most private credit funds are offering debt to these companies, those leverage multiples are between six and a half to eight times in the US.

In India, it's between three and a half and four and a half times. So as a result of a significantly higher amount of leverage, the margin for error in India is a lot higher than it would be in the US. So that's one.

The second is the use of this money. In the US, if you see 70 to 80% of all the money has essentially been paid out to technology and tech assisted verticals. And a lot of that is going through a very significant amount of disruption on account of AI and everything else that follows with it.

And therefore, there is a very significant markdown of portfolio quality in the US across funds. You would have seen a number of funds being marked down by various rating agencies. In India, on the other hand, most of us end up investing money into growth assets.

So these are large second as India grows, they tend to be the focus areas for the government, and therefore, they enjoy favourable policy regulation as well. And at the same time, money tends to be put into growth assets rather than leveraged assets. So that's the second important reason.

And the third and a very important reason is the asset liability mismatch. So by definition, as you would imagine, private credit assets are illiquid. So if you've got a fund on the other side, which is an open ended fund, then you will always be running an asset liability mismatch.

If you remember, India had that asset liability mismatch moment back in 2020, when a number of our funds were essentially told by SEBI that if you guys are going to be doing illiquid assets, you need to have closed ended funds. So in India, it is a lot better matched, you've got illiquid assets supported by closed ended funds as against the US where we've got open ended funds, which are essentially seeing a run on their capital, but they don't have the ability to meet it because the assets that they hold are illiquid.

Govindraj Ethiraj: So three key reasons why. And from the example of your first fund, and maybe going into the second, who would you say are your top three borrowers thematically?

Shantanu Sahai: So as I said, our preference is to go for sectors which grow when the country grows. So would that mean construction? Can you define that?

I would say infrastructure, healthcare, and industrials, i.e. manufacturing, those would be our top three sectors. Within manufacturing, there would be a number of subsectors which are more favoured than the others. So for example, renewables, speciality chemicals, auto components, they would be the kind of sectors that we would like.

Govindraj Ethiraj: Right. And I understand that you're avoiding real estate and distressed debt and so on. That's correct.

But I would assume that the returns are good in those kind of areas. So and you're therefore saying that there's enough opportunity without taking these kind of relative risks. That's right.

Shantanu Sahai: So we follow within ASK a philosophy which is very akin to the philosophy of the credit fund of our sponsor, i.e. Blackstone, and which is a pure performing credit strategy. Performing credit strategy, by definition, does not invest into either distressed debt or venture debt. We've stayed away from real estate for the simple reason that real estate tends to be a very separate and specialised asset class in that sense.

And most funds who want to do real estate tend to do only real estate. So our preference is to have homogeneity of portfolio companies in terms of what we are looking at. If you start adding a few of these flavorful companies or out of sync companies in the portfolio, then the risk profile of the entire portfolio becomes somewhat harder to define.

So the intention is to keep it as homogeneous as possible.

Govindraj Ethiraj: So let me ask a slightly macro question. So viewed from the top, Indian industry is not investing as much in CapEx as it could or should right now or has not been for some time. Banks are also not lending as much as they could because there are not enough takers, including at this time when interest rates are low.

So in that environment, what is the role that private credit plays and to whom? Good question.

Shantanu Sahai: The way I think about this is that when input conditions start to get constrained, right, you've got crude, you've got LNG, you've got in general, FBIs pulling out money and so on and so forth, there is invariably a divergence between the industry participants. The larger guys tend to become larger and the smaller guys tend to become smaller. Either larger guys take away market share from the smaller guys.

Now this happens in one of two ways. Either the larger guys end up acquiring the smaller players and therefore there is consolidation that you see or they end up taking away market share by doing CapEx when the smaller guys are not doing CapEx. Both of those essentially present opportunities for people like us because corporate M&A as well as Greenfield CapEx are big areas where private credit deploys money.

So that's one. The second is in a lot of situations, you will see companies doing things or requiring money for things which they would have ordinarily raised equity for. Now, because of the fact that the equity markets are not exactly conducive from the perspective of being able to raise money at acceptable valuations, private credit again becomes a substitution for such fundraisings.

So the idea is that anybody, and this is the same point which I was making right earlier, the same companies who would have ordinarily gone to the equity market and raised money essentially come to Forkster. So those would be the two largest use cases in my view for companies in the current input constrained environment.

Govindraj Ethiraj: Right. I know that you have a gift city structure. So explain to us how you would use that.

And secondly, there are many players in private credit right now. And the question really is on the supply side in terms of investors. Are you seeing any shift in their preferences?

Have there been any shifts in the kind of investors who were, let's say, there in your first fund or investing elsewhere, but now coming to you? Or are these one kind of investors who stay with this type of asset class? Let me address the first question on the gift city first.

Shantanu Sahai: Gift city is essentially a investment vehicle or a pooling vehicle, which is intended to consolidate interest from offshore investors. Now, this could be NRIs, this could be institutional investors, what have you. The intention behind the pooling vehicle is to essentially have a passive feeder of sorts, which essentially percolates money from all of these sources and puts money into the funds.

The feeder really does not have too much of a independent existence of its own apart from being a passive investor into the MIG fund. But the idea behind setting up a vehicle like this is to ease out the tax and all the other formalities for foreign investors, because the gift city construct allows for a very significant and streamlining of documentation, especially you don't need TRCs, you don't need PAN cards, the TDS is better, and so on and so forth. So it's a preferred vehicle for a lot of the NRIs.

So that's one. In terms of the second question that you asked, in general, what we are starting to see now is family offices who were a lot more adventurous in terms of the quality of risk that they were taking in maybe the last three years are starting to get more conservative. The logic behind this was that earlier they were making enough returns on their equity portfolio, so they were happy to take risk on the credit portfolio to say, I am okay to take 19% risk, because tomorrow if a few things default as a result of taking 19-20% risk, I am okay with that because I'm making enough money on the other side.

However, now that they are not making money on the equity portfolio as much as they were, let's say, three years ago, the profile has shifted towards capital preservation. And that capital preservation, in fact, works very well for folks like us who tend to be very, very curated in our choice of businesses and in terms of the kind of companies that we deal with. So pure performing credit, in my view, will be a lot more favoured within the family office universe going forward as compared to what it was, let's say, two to three years ago when we raised our first fund.

The same, to a lesser extent, will probably apply to institutions as much. I would say domestic institutions like insurance companies and pension funds will probably also see a very, very similar thought process because they want to conserve capital over everything else. And therefore, they will continue to do it.

However, I would think that in the current environment where rupee has depreciated quite dramatically, in the last one year, I was doing some numbers about 12.5% down just within this year. Given the kind of rupee movement, I would say that foreign investors putting money into credit will be a little more circumspect as compared to what they were. It follows the same ethos as what the FBIs are looking at.

So I would think that there will be some amount of shift in the overall profile of our investor universe towards domestic investors as compared to what it was maybe three years ago.

Govindraj Ethiraj: Shantanu, thank you so much for joining me.

Shantanu Sahai: Thank you very much for your time.

What is the connection between Ajinomoto and AI?

A few months ago, we chronicled the rise of Toto, best known as the world's largest toilet maker, as a hot AI company. The reason for those who came in late was that it is a leading producer of electrostatic chucks, ceramic plates that hold silicon wafers firmly in place while memory chips are etched.

Toto's operating profit from advanced ceramics now accounts for more than half its total. Another Japanese company has joined the select club, and this time it's Ajinomoto, which has for a century supplied monosodium glutamate, or MSG, a chemical that gives food an umami kick. Now, another of the Japanese seasoning giant's products is wetting investor appetites, according to The Economist.

Ajinomoto Build-Up Film, or ABF, is a material used to insulate artificial intelligence processors from circuit boards. It was originally made from byproducts of MSG manufacturing, and Ajinomoto controls more than 95% of this market. Booming demands for AI chips has made the film scarce, pushing Ajinomoto's share price up by 65% since the start of the year, around three times the gain in Japan's benchmark Nikkei Index, according to The Economist.