On Episode 1020 of The Core Report, financial journalist Govindraj Ethiraj talks to Madhavi Arora, Chief Economist at Emkay Global. We also feature an excerpt from our recent Special Edition featuring Amit Agarwal, CEO at EAAA India Alternatives, part of the Edelweiss Group.

SHOW NOTES

(00:00) Stories of the Day

(00:41) Oil Markets Worry About The Longer Term

(02:03) Indian Markets Have A Good Run

(06:12) IHCL And AAHL Announce A Multi-Hotel Operating Agreement

(07:45) The Perils Of Trying To Fight The Dollar

(15:19) How Boring Investments In Roads And Solar Power Could Pay Off

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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 Friday the 30th of October and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

Oil markets are now worrying about the longer term.

Indian markets have a good run on Thursday.

The perils of trying to fight the dollar

How boring investments in rose and solar power could pay off.

Markets, Oil, The Rupee and Tech

A longer term concern in oil markets is the gap between physical supply of oil, of which there is plenty and the price that is being quoted for it right now. While we've pointed out that prices have detached in many ways from supply of crude, the question for which there is no clear answer is what could swing prices back, which is down.

On Thursday, prices were down on thresholds of peace talks in West Asia. The Wall Street Journal report said that US Vice President JD Vance has sought to revive peace negotiations by sending a letter to Iranian Security Council Chief Mohsen Rezaei. So could more political overtures lead to prices softening? It is of course possible, but then most people don't trust the political overtures right now.

So even if a neatly packed solution is around the corner, we have no way of knowing it is there nor can we anticipate. Six months ago, in anticipation, most analysts were predicting an end of the war in a few months at the outside and a few more months for prices to stabilise. Most economists have of course revised their crude price outlook since then because it affects so many other things, including inflation.

And at this point of time, it's really looking at the entire financial year now gone. The war itself is still on and the fires once started have spread much further out and so far out that it's tough to put all of them out, including the Houthi attacks on Saudi Arabia, which is causing serious damage to the oil economy. On Thursday, Brent crude futures were down slightly to $114, a barrel not much of a relief of course, but then it was down.

Back home, the stock markets are on a stronger footing with fresh rumours of a reduction in long-term capital gains on foreign investors, following of course a fresh clamour for some relief. In anticipation of something happening someday or possibly because of a general portfolio rotation, foreign investors have been net buyers of Indian stock in five of the last eight trading sessions till Wednesday, a Reuters report said. On Thursday, stock prices rose as the U.S. Federal Reserve held interest rates as expected and quarterly earnings back home were generally seen as positive and of course as projected.

The indices had lost about 2% each in previous seven sessions, dropping in six of them thanks to higher crude oil prices, according to a Reuters report. On Thursday, the benchmark indices Sensex and Nifty actually opened lower but then turned positive and rose swiftly, with both indices closing over 1% higher. The Sensex closed 905 points higher at 74,151.

The Nifty 50 was up 238 points to close at 22,937. The broader markets were also positive, with the Nifty mid-cap, 100, and small-cap indices gaining about 0.98 and 0.93% each. Amongst results we are watching, also because there is a direct linkage between oil prices, tensions in West Asia, which has affected flights and routes, Indigo, India's largest airline on Thursday said it had narrowed its loss to about 1,800 crores in the three months it ended September.

It had a loss of about 2,500 crores in the same period last year. Total income was higher, almost 24,000 crores, from about 19,000 crores a year ago. Total expenses were also higher, at about 26,000 crores, with aircraft fuel expenses rising to almost 10,000 crores.

The rupee rebounded after hitting its weakest level in two weeks and ended nearly unchanged on Thursday, thanks to possible intervention by the Reserve Bank of India and slightly lower oil prices, which offset dollar demand. Traders told Reuters the rupee ended at Rs. 95.26, almost the same as Rs.

95.22 in the previous session. On Wall Street, there is action once again. Stock futures were under pressure, pulled on by the latest batch of corporate earnings.

Alphabet, which owns Google, lost about 10% in pre-market trading after it missed expectations on adjusted earnings per share and revenue in the third quarter, CNBC reported, adding that the Google parent posted negative free cash flow of about $9 billion. The company has kept its full-year capital expenditure forecast at $195-200 billion. Interestingly, Microsoft was up 2.6% in pre-market trade on Thursday after its Azure cloud infrastructure business grew and helped it post beats on the top and bottom lines in the fiscal quarter, according to that CNBC report.

Microsoft last week offered voluntary separation to some 60,000 employees or more than 25% of its workforce. Meanwhile, investors in India are looking hard and high and low for investment options that come with less friction, particularly when it comes to cross-border, which in itself is more and more diversifying. Banking assets in India's international financial hub, that's Gift City, have gone up by about 60% since June thanks to a growth in the nation's credit markets, and the Gift City competes with Singapore and Hong Kong in attracting foreign capital, a Bloomberg report said.

Assets held by banks in the hub have reached about $193 billion, according to K. Raja Raman, chairman of the International Financial Services Centre Authority, who spoke to Bloomberg Television on Thursday. He was referring to the number as of the end of September. Now, this compares to about $120 billion as of June, according to IFSC8 data.

Raja Raman said that sustained growth has come through credit markets, especially offered by banks, and also added that the increase in banking assets, as we all know, was primarily due to foreign currency deposits and external commercial borrowings. Another Bloomberg report said that a record cash surplus at Indian banks is fading quickly as the central bank, that's the Reserve Bank, keeps liquidity tight to curb bets against the currency. More on that in a bit.

Excess funds with lenders have shrunk from a high of Rs 11 trillion or $116 billion in early September to about Rs 462 billion as of October 26, according to a Bloomberg Economics Index.

IHCL And AAHL Announce A Multi-Hotel Operating Agreement

And some interesting corporate news. The Taj Group of Hotels, owned by Indian Hotels Company and Adani Airport Holdings, on Thursday announced a multi-hotel operating agreement for eight hotels, representing more than 2,000 rooms across Mumbai, Ahmedabad, Lucknow, and Guwahati.

This is linked mostly to airport-linked properties, an area where many hotel chains are seeing a lot of expansion and growth opportunities. These hotels will operate under the Taj, Vivanta, Gateway, and Ginger brands, and will include three Taj hotels, two Vivanta, one Gateway, and two Ginger hotels catering to different segments, reports said. Reuters reports said that construction had begun for the Mumbai, Lucknow, and Ahmedabad hotels, while other properties are expected to become operational in three to four years.

Elsewhere, also within the Tata Group, Trent reported a second-quarter profit rise on Thursday thanks to strong sales at its fashion and lifestyle businesses and continued store expansion which boosted earnings. Consolidated net profit was up about 23%. Trent runs the Zudio and Westside chains had earlier reported a 23% rise in standalone revenue, with growth accelerating from the previous quarter, a Reuters report said, adding that Trent added about 17 Zudio stores and 10 Westside outlets during the quarter, taking total store count across brands to 1,342 as of September 30, compared to about 1,101 a year earlier.

Analysts at ICICI Securities told Reuters that value fashion retailers continue to report healthy revenue growth, although much of the increase was driven by new store openings rather than stronger sales at existing outlets.

The Perils Of Trying To Fight The Dollar

The Reserve Bank's Forex measures have somewhat steadied spot INR, but the stability is policy-engineered, not organic flows-driven and has come at the cost of a sharp dislocation in the forward market, a new report from MK Securities' Chief Economist Madhavi Arora has said. To the question on whether this and other steps will deliver a durable defence of the rupee, the report says, only temporarily, because restricting spot dollar access creates an illusion of stability.

It shifts and defers Forex demand rather than eliminating it, leaving pressure to resurface through derivative markets and or renewed spot buying. I spoke with Madhavi Arora and I began by asking her what were the structural solutions then at this point.

INTERVIEW TRANSCRIPT

Madhavi Arora: You know, as long as the underlying balance of payment pressure persists, any kind of regulatory curve that they're doing will just buy them time. You know, in terms of what we're looking at as far as the reforms are concerned, I think it's a more long-run story. If you look at the way currency rupee is getting impacted, it's not getting impacted as much by the current account, but more by the capital account.

Unfortunately, when the capital account is the one which leads to the currency movement, what you generally see is that there could be massive deviation from the fair value because they're largely, you know, hot money flows which are more panic-driven, and there's a panic premium that is attached to that. And it's very difficult to get the fair value of the rupee looking at, you know, how the balance of payment is largely driven by the current account. The reason why the capital account also is sort of getting muddled is, again, a more long-run story.

If you look at the last two years, India has not been the best performing market in terms of returns. Also, I think the lack of growth premium that we are offering to the world now, that has been one of the major reasons why FPIs are, you know, fleeing India. And at any point in time, when they're looking at rupee getting controlled or getting a support, they're actually finding it as a reason to exit India instead of waiting for currency to probably fall again.

And that's a very unfortunate situation for the central bank because while we talk of structural solution and obviously a very, you know, boring stuff which basically talks about factor market reforms, talks about making it easier to operate businesses in India, finding a growth premium back, but they are necessarily going to only play a role in the long run. In the near term, there could be massive deviation from the fair value and there's only as much policymakers can do. Unfortunately, when you are in a panic state and the policymakers tend to sort of take panic steps, it actually feeds into further panic.

Govindraj Ethiraj: And you've also said that the measures so far have steadied the rupee, but the stability is policy engineered and not organic flows driven. So, would you also say therefore that we should let the rupee be or let it float?

Madhavi Arora: Not necessarily. I mean, it's a very, very difficult answer to be very honest. What I'm saying is that do not create panic and random capital controls and even current account controls to some extent because it's easy to say that let the rupee be.

But as I said, currently, the balance of payment is driven by capital account or current account. Even with a Brent at 110 plus, we are looking at capital GDP sub 2%, assuming that the year Brent would be close to $100 billion per barrel. And as I said, the moment you look at effects being driven largely by capital account flows, the variance from the equilibrium is too high.

So, any kind of policy action that you take also may not necessarily lead to any durable solution. But at the same time, if you give a sense to the market that I'm letting the currency be at a time when there is a massive negative positioning against the currency, you know, the market speculators can take the currency to any level. So, then it'll be even more difficult for them to defend that random level that we may end up reaching.

So, it's a very close and difficult call for the Reserve Bank. But the trades of incrementally are getting expensive because the more they're trying to do any policy control, the more it is feeding into fear mongering and the kind of, you know, premium that the markets are now asking. If you look at the forward market, where they have actually made the hedging cost way too expensive, the aim was to essentially make hedging expensive, thus the volume would actually come down.

Instead, what happened was that there was so much of a panic in the market that the one-year forward premium went as high as 8% in a matter of 10 days. It has come down now. Obviously, markets have adjusted to the new realities.

But the inversion of forward market curves and the fact that when you're restricting the spot access, the whole, you know, bundled up pressure is visible in derivative market. And there also, you know, you're putting controls. I think it's just a matter of time.

The moment they release some of these measures or loosen them up, you will see currency pressure coming back materially. Unless, of course, you know, the global situation improves. Now, there are talks about the interest rate defence also being one of the ways to manage it.

They had done that in 2013. Unfortunately, if you recall, they had done interest rate defence before doing FCNR. This time around, we have done FCNR.

We celebrated FCNR flows of $145 billion plus. And today, we're still sitting at a situation where the second half of the balance of payment would be materially negative to the tune of $50 to $60 billion. So, we are looking at a natural pressure on the rupee.

So, yes, there is this argument that rupee has to probably weaken. But it's also a very difficult call to say that the Reserve Bank could just let the rupee be because these are not normal times. These are not times where currency would reflect your fundamentals.

It is a time where currency start reflecting random walks and leads to very, very unfair and unstable equilibriums.

Govindraj Ethiraj: So, your report is titled Mounting Costs of INR Defence Amidst a False Calm. So, you're therefore saying that this is a false calm right now. So, what then lies ahead beyond the calm?

Madhavi Arora: So, as I said, to a large extent, whatever is happening with the global front is also driving the rupee. So, it's not fair to say that our fundamentals are weak. We have worked in terms of managing our balance sheets very well, whether it is external balance sheet or internal balance sheet.

There has been some policy moves. Unfortunately, the growth story is not played out as well. AI trade is not very favourable for India.

We were not part of the China plus one camp post-2018 and thus the export story also hasn't played out for us. And if AI trade tends to hamper services exports, there is nothing India could actually offer in terms of balancing its current account properly or even balance the premium properly. So, I think there's no definite answers to that.

The only way I can think of is that just go the old-fashioned way where you keep working at improving your factor of productivities, keep improving your judicial reforms, making the ease of doing business easier, all those factors which could at least lead to businesses coming back to India to some extent in terms of more stable flows. FPI flows is not the right barometer to judge India. Obviously, there could be a tactical position, but last two years, they have continuously sold India.

That's not a healthy sign as well because somewhere it sort of perpetuates in the fact that India is no longer a growth premium story. And if you want to invest in India, they would want much higher returns, at least to the extent of 15% to 20% in equity markets, especially given the way Rupee is behaving. So, I think very difficult times for the Reserve Bank.

But as I said, old-fashioned ways, continue doing the so-called old-fashioned reforms will have a long way to go on that front as well. Unfortunately, the federal system is such that, you know, they may not be very effective implementation of those reforms, but at least there's intent on land labour, judicial reform that has to continue. And eventually, the growth premium will show up.

But as of now, the times are looking difficult. The West Asia crisis hasn't helped us much. And India is lacking a durable growth story in terms of what is going to move us next and, you know, sort of keep us afloat beyond 8% afloat.

Govindraj Ethiraj: Got it. Madhavi, thank you so much for joining me.

Madhavi Arora: Thank you.

How Boring Investments In Roads And Solar Power Could Pay Off

From highway tools to solar power to of course real estate, more opportunities are opening up for investors looking for long-term investments in assets that are, to put it mildly, boring.

EAAA India Alternatives, part of the Edelweiss Group, manages funds that invests and lends to businesses and went public recently, having closed its IPO earlier this week. So how does such investing work and what are the skills that funds like EAAA bring in when it comes to managing hard assets on ground like under construction projects or highways? I spoke with Amit Agarwal, CEO of EAAA India Alternatives, which manages assets of about 95,000 crore rupees as of June this year and I asked him to walk us through the company's portfolio and how they were developing the specialised skills needed for these investments and asset classes.

INTERVIEW TRANSCRIPT

Amit Agarwal: See, I think almost everywhere there is an investing opportunity. So I'm not sure how much I can state in terms of the growth and estimates, but I would thematically tell you, if you look at the government's national monetization plan itself, where the government wants to sell off the roads itself is close to 17 lakh crores itself. Now that gives an opportunity to everybody to buy the assets.

Any developer who is building a road asset, his main returns are from the work that he does while developing the asset. Once the asset is ready, it becomes asset heavy, but with a very scheduled yield, which he can sell off at a very low sort of ROA. So the asset availability is not an issue.

Actually finding the right set of teams to diligence those assets, understand how you can enhance and improve the yield on those assets, and then concluding those transactions is important.

Govindraj Ethiraj: And it's a very different skill set from buying equities on the secondary market. Yeah.

Amit Agarwal: Yeah. It needs people who are operating partners. Like for example, we have a hundred percent subsidiary inside EAAA called Secura that has got 55 plus people from the industry.

These are the people who are domain experts who have built roads, highways, and offices. They've leased out offices. Basically the skill set, which is core, which is not a financial underwriting skill set.

So when they a solar plant, they can say, okay, on this, maybe we can add one megawatt here. Maybe we can improve the panel efficiency. So you know, what are the value adds you can do in that asset?

Plus you have patient capital, a capital that is mapped to the tenor of this assets. All of these funds are typically six to eight year closed ended funds. You don't have redemptions, early redemptions.

People are looking at generating alpha by channelling their patient capital.

Govindraj Ethiraj: And in the case of let's say a solar power plant, you are working closely with the promoter of that plant, or are you actually running it yourself?

Amit Agarwal: So we only do a hundred percent buyout in our real asset strategy. So we've just buy out these assets. So what do you end up doing is being in control of those assets.

These are assets which are fully completed. So we don't do under construction that we have dependent on promoter to complete the assets. What we are only focused on how we will get the yield, how we will improve the yield.

The yield could be improved by expanding the revenue or by reducing the costs or by increasing the efficiency. These are the three parameters that we work on, but we do not work with promoters as such. They are our counterparty when we are buying these assets.

Govindraj Ethiraj: They sell these assets to us. Why would you want to own a hundred percent? I mean, what's the thinking behind that?

I'm assuming that's been the thinking since beginning, but why is that?

Amit Agarwal: So that is just to own long-term stream of cash flows because you're doing asset ownership. It's like owning a building for 30 years and giving out rent to the clients and also giving out the capital appreciation to the clients as and when that happens. Because ultimately the yields are only a combination of what rent you get and what capital appreciation you get in the asset.

And on the course, can I improve the yield, change of tenant mix, increase in area or you are able to add FSI to the place. So you can do multiple value add strategies. So owning gives you perpetuity of cash flows and that is what the clients are looking from you.

They are not looking at construction risk or undertaking huge construction risk.

Govindraj Ethiraj: So between solar power plant and private road, there could be some similarities in as much as both are public infrastructure or they're meant for public infrastructure. Commercial real estate is a cup of tea. So what are the similarities between the kinds of investments that you make and what are the dissimilarities and then therefore what brings it together?

Amit Agarwal: See, I think the teams are obviously very domain specialist teams. So we have people, the gentleman who runs our commercial office strategy has joined us from GIC. He was managing a large commercial real estate portfolio of GIC and a person who is looking at the operations has joined us from Brookfield.

So we have a very strong team, the leasing guys from JLL and all. So basically this is the team which has actually done the hard work. So you develop capability before you raise money.

Once you have built the capability, it just becomes easier. Whether it is 3 million, 5 million, 10 million, 15 million, it's about building that capability. So that I think is a very singular objective.

Every asset class will have its nuance. Road will have its nuance. Solar will have its nuance.

Even in solar, we use AI based technology and all of that to predict power generation in some sense. So some of these things are actually very deep in the operating side. So to that extent, I think our mindset, be a very high quality operator of these assets.

Bring the best practises in the world, in the globe to the asset operations and management. And that itself is alpha enough because people are just not sometimes focused on the smallest or the minutest details.

Govindraj Ethiraj: So let's say if you take an area like commercial real estate, which everyone talks about today, or more people are talking about today, would you say that valuations are good, rich, low? Because finally the money that you are raising from your investor is being applied or deployed into these assets.

Amit Agarwal: If you see there are REITs which are obviously available and they are giving their DPUs and yields and there is enough money flowing in those REITs as well. Our job is to find the opportunities of let's say a million square feet. You're not going for a 5 million or a 10 million place.

So we find these bespoke opportunities, which could be buildings with a million square feet where there is ability to add value. You can improve their layout. You can change their tenant mix.

Basically what all you can do into those assets. So your buying value is more dependent on what value creation you can do into those assets than what value you are paying for that asset. So that is the advantage of having an operating team because they are from the diligence stage identifying what more can we do with that asset than actually saying what is the current price of the asset.

If you are buying a fully 100% grade A, nothing to be done, no value addition, zero possible, a 10 million park and all that, then you are paying a price which is the market price. Here you are paying the price assuming what all you can do. It could include multiple things that we have done a lot of things, improving the access, improving the road, giving the client a very different feel.

So that when the tenant change mix changes, you get a higher rental. That will ultimately, because it's a stream of cash flows. And if you can improve the stream of cash flows, valuations will start making sense.

Govindraj Ethiraj: And is this a sort of overall alternatives approach where you're saying that really I'm going in at early build stage and therefore creating the value rather than saying that, okay, you know, because people tend to compare with secondary markets saying, okay, the valuation is good because prices have come down. Whereas here you're saying that I'm going to build the entity, which is right now, there's only vacant land there. And therefore the value will come much later.

Amit Agarwal: See, this is non equity correlated strategy. So nobody correlates us with equity and secondary markets. In fact, our strategies continue to do whatever they have to do in a very non volatile manner.

And they are not linked to the equity or the listed equities market. We do not go at early build stage. I am talking about a completed building only, but completed buildings also could be two varieties.

If you enter an Altimus, you will have a different feeling. While if you enter the, let's say INS Bhawan, you'll have a different feeling, right? Both are prime properties.

Both are completed buildings, but the feeling of the two buildings will be different. This might be old building, might be needing more rejuvenation, might need a new layout, might need a high quality cafeteria area to attract clients. So I'm just saying that it's not about early stage.

It is about how you can get into an asset and improve that assets.