The Markets Reverse Three Day Losing Streak
There is a clear and big shift in India’s IT story
On Episode 642 of The Core Report, financial journalist Govindraj Ethiraj talks to Rahul Jain, Director at Dolat Capital.
SHOW NOTES
(00:00) Stories of the Day
(01:09) A Short Take
(04:20) The markets reverse three day losing streak
(06:02) Indian IT companies are downsizing, does that make them more attractive as investments?
(16:19) India is set to overtake the US in clean energy generation
(17:30) Dissenting voices have begun in the US-EU deal, what is the future of all such deals?
(18:37) A DeepSeek competitor emerges from China again
(19:44) Shailesh Jejurikar to take over as Procter & Gamble global CEO from January 1
(20:08) Tesla’s amazing financial engineering and the shocking revenue breakup
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 Wednesday the 30th of July and this is Govindraj Ethiraj, broadcasting and streaming weekdays from Mumbai, India's financial capital that's usually but in transit right now, so do forgive our shorter episodes.
Our top stories and themes
The stock markets reverse a three-day losing streak.
Indian IT companies are downsizing, does that make them more attractive as investments?
Dissenting voices have begun in the US-EU deal, what is the future of all such deals?
India is set to overtake the United States in clean energy generation.
Shailesh Jejudekar is to take over as Procter & Gamble global CEO from the 1st of January.
Tesla's amazing financial engineering and a shocking revenue breakup.
And a deep-seek competitor emerges from China.
A Quick Take
August 1 is upon us, on this day the United States is set to announce a series of unilateral trade deals essentially imposing tariffs of around 15% or higher on most goods coming into America. The current trade is about 10% as opposed to almost nothing in April and is likely to settle, at least that's the consensus view, around 15% for most countries. The stock markets, at least Wall Street, seem jubilant.
And while veteran fund managers are scratching their heads, retail investors who clearly control the fate and fortune of many stocks in the stock markets are being won over quite easily. The US-EU deal is a classic case when no one seems to be waiting for the critical fine print. Right now there is a 15% baseline tariff on EU goods, lowered from the recently threatened 30%, in return for an apparent smorgasbord of continental investments into the US and huge purchases of energy and military equipment, according to Bloomberg.
The same report says that Japan sealed a similar deal last week while pushing back on some extravagant Trumpian claims, referring to US President Donald Trump. Now, companies who have to eat the tariffs or customers will most likely pay higher prices in the coming days in the US. Maybe investors are aware of this, maybe not.
But the fact is that they seem to be celebrating what at one point was a much higher threatened rate of tariff and is now lower, though the net effect seems to be still negative. The United States is meanwhile pushing India to commit to an immediate elimination of customs duties on most products as soon as the bilateral trade deal being negotiated by the two countries takes effect, posing another hurdle in concluding an agreement before the 1st of August when the tariffs will kick in, according to a report in the Business Standard. It also quotes a government official saying that the US has sought from India an aggressive timeline for duty of elimination.
It wants zero duty on most of its products as soon as the deal comes into force, except for a few tariff lines that can be phased out in a year or two. Now, countries do reduce import duties on sensitive goods over a specified period of time while removing tariffs on non-sensitive items immediately when the agreement comes into force. Of course, countries define sensitive and non-sensitive differently.
For example, in the recently concluded free trade deal with the UK, India committed to phase out tariffs on 90% of goods, but that's over a period of 10 years, with 64% of goods to be tariff-free as soon as the FTA becomes operational, which is also why you should not be celebrating cheap Scotch whisky right away. Now, to return to the EU-US deal, it's by all accounts and reports light on specifics and vague on detail, and some voices are already questioning the big numbers touted. Ditto with Japan, with whom on paper it would appear like a win-win deal, but the mechanics of it are already being viewed with some scepticism.
So, while India and the US may have a deal in a few days or not is not the issue, it's whether any deal will hold out and for how long and what that really means. Remember, India has been threatened with two additional sets of tariffs, one for its membership in the BRICS union and the second for importing Russian oil. Will all this get ironed out in the bilateral trade deal that we are on the verge of signing? Again, maybe, maybe not.
And any or more such tariff slaps could be threatened or worse imposed on countries like India. It all depends on the geopolitics of the day and the mood of one person. So get ready for round two when the empire strikes back.
The Markets Pause
The stock markets took a breather to rebound on Tuesday after losing ground for three straight sessions. The Sensex rose 446 points to close at 81,337 and the Nifty was up 140 points to 24,821.
One of the significant moves in the market on Tuesday was TCS which fell about 1% to 3058 rupees during intraday trade. But the significant point being that it was the lowest level in 33 months. So there is a clear and big shift in India's IT services story and much more on that shortly.
Meanwhile, the rupee was also under pressure as dollar demand from importers and weaknesses and foreign portfolio investors continued to pull it to the 87 rupee mark, which is also its weakest level since March. The rupee hit a four month low of 86 rupees 91 paise against the dollar before closing at 86 rupees 81 paise. So that's 86 rupees 81 paise on Tuesday close according to Reuters.
So over the last 15 sessions, the rupee has apparently closed stronger only twice. The dollar index was also close to the 99 level as the euro fell to a one month low with investors now recognising that the terms of the trade deal between the US and EU favoured the United States according to Reuters.
Revenue Versus Headcount
For years, the Indian IT industry's revenue growth matched growth in head count.
For the first time now, that's changing as companies slow down hiring or even start downsizing as Tata Consultancy Services did when it announced a cut of about 2% of its workforce, about 12,000 jobs. Now remember, TCS employs over 600,000 people. So in percentage terms, the number is actually not that much.
But in absolute terms, it is. But more importantly, it's a trend reversal. Infosys has also slowed down pressure on boarding and Wipro is also trimming roles.
Because for all companies, revenue and net profit growth is still positive. In the latest Q1, that's April to June 2025, TCS saw a roughly 1.3% rise in revenue. Net profits were up close to 6%.
Infosys saw a 7.5% revenue increase. And HCL Tech saw an 8.1% increase. C. Vijay Kumar, CEO of HCL Tech, told analysts about two weeks ago that we've had a good amount of people released due to productivity improvements.
Not all of them are readily redeployable because the requirements for some entry-level or lower-end skills are being addressed through automation and other elements. The training and redeployment time is longer. Some of them will be redeployed, but for others, it may not be possible.
Now, other IT services companies are more careful in what they say. But HCL Tech, even going by my own interview with him a few months ago, can be a little more forthright. So from a purely business fundamental point of view, what does this mean for IT services companies? And could this mean that they're being more efficient and adaptive? I reached out to Rahul Jain, Director of Research at Dolat Capital, and I began by asking him how he was looking at these contrasting trends right now of rising revenue and falling headcount.
INTERVIEW TRANSCRIPT
Rahul Jain: If you see, there are 2-3 factors which are causing this. So first of all, of course, with COVID, what essentially happened is that people were available at different parts of the world at the same time and there was some mismatch related to various demand and various supply kind of getting aligned because clients were comfortable wherever the service is getting delivered, as long as they are getting the right uptime. So that essentially led to a significant amount of utilisation improvement across the board.
And we have seen 702,000 BIPs expansion in utilisation across the spectrum of service providers. So that was the first leg of optimisation on the headcount. Second, of course, we are seeing a troubled demand environment for the last couple of years, which is also forcing these companies to rather resort to just-in-time or more like subcontracting versus trying to keep a very high bench or workforce at their end.
And lastly, which is a more recent and nuanced thing is the AI thing where we are seeing some of the basic stuff, which is writing codes and all is now getting limited to a lot of automation. And different clients in their case studies are talking about up to 25% efficiency on that. So that could also be another factor that would lead to a growth outside of the headcount edition.
So these are the things that I think are the limit.
Govindraj Ethiraj: Right. So you're saying that people are subcontracting. So which means that their total headcount requirement is roughly the same or is growing like before.
It's just that it's not in their books.
Rahul Jain: So that is just one of them. And people have those challenges around various technologies. Also, if some of the technologies are relatively earlier and have not scaled.
So a lot of time, either the talent is not available, forcing them to go for subcontracting. And sometimes if they have an erratic demand for a particular kind of talent, they would rather prefer a flexi staff rather than having it and keeping them on the bench once the project gets over.
Govindraj Ethiraj: Right. And you also talked about the AI aspect. Now, some of it seems to be clear.
For example, the HCL CEO said recently that for them, at least there is, let's say, better utilisation of assets and they don't need as many people as before. So they've been fairly forthright. Others may not have been so forthright.
So how are you seeing it?
Rahul Jain: It is inevitable. The only thing is how fast or slow it could be, just like any other tech trend. We have seen right from news flow coming from the US where they are talking about a significant amount of investment going into the legacy system.
The advantage of this legacy system in the US market is that Indian companies having talent based in primitive languages like COBOL and all are still working at a very high cost in the application development maintenance pool. And these kinds of jobs would be possibly the first at risk because now customers are demanding better automation and efficiency on this thing. And these people are, from a skill set point of view, relatively outdated, I would call it, in case they are not getting trained into newer technology.
So genuine adoption would lead to this kind of job profile.
Govindraj Ethiraj: So it's interesting you mentioned COBOL because COBOL is such an old language in any case. And the fact that it's been around for so long, I'm told it used to be in ATMs, for example, or maybe some other embedded software. So one is that, is this the time now that all these older softwares will finally go away?
Or are we still sort of going to be working with, let's say, intermediate age softwares before we come to the kind of modern, more gen AI driven stuff?
Rahul Jain: Yeah, the beauty about technology is people find ways of not disturbing the old while adopting the new. And that is how we have been surviving with this older technology for so long. So a lot of companies are not very comfortable changing significantly on their old assets.
And that's why they have continued decades after decade despite new technology coming into place. Very difficult call to make whether it will happen over the next two, three, four, five years. But more importantly, is that people are acknowledging it more than any time in the past.
And there are better and efficient ways to solve it. And that is what people call technology debt. So the technology debt needs to be repaid over the coming years.
But let's see when it happens.
Govindraj Ethiraj: So the stock market question, I guess, is that if companies are downsizing as TCS has, the percentage is small in contrast to the overall size, but it is a significant number. Does that make them more attractive from a stock market perspective?
Rahul Jain: I mean, this is just one way to look at the business. But I think the bigger takeaway from it is that the companies have shown margin resilience over the last 10 years, despite seeing multiple challenges that they have come through. And that talks about the reason why these companies would stay relevant even in the next 10 years.
So I think taking cues from where the market is moving, taking action into that direction is definitely positive from a shareholder perspective. Of course, it also means that there is a lower demand in the market, which is definitely a near term pain. So I would say there's a mixed view coming out of that kind of news.
Govindraj Ethiraj: Now, within the universe that you look at, what are the companies or what kinds of companies are, let's say, better poised right now, either in terms of agility or in terms of greater AI enablement for the work that they're doing with their clients?
Rahul Jain: I would not be able to single it out purely on AI, because for most of these companies currently, this is, you know, one or two or three percent of their revenue, and they have not scaled up their revenue stream into AI at this point. So difficult to call it that way. But the important thing is how well you are aligned with the customer's thought process.
So if we take that into consideration, and of course, Gen AI is a point of concern for any IT spender today. So if I take it that way, I would still say Infosys, HCL, and LTIM were the bigger names that did well and continue to do well. So these are the names that I would like to highlight at this point.
Govindraj Ethiraj: Right. Last question, Rahul. So if you were to look at IT in the context of the whole market, I know that we've spoken before and you've expressed your reservations, let's say, on how much IT can grow or the challenges or the headwinds it's facing.
Has anything changed in that perspective, particularly with regard to the rest of the market? Or do you hold the same views?
Rahul Jain: Yeah, I think IT now has to be more seen as a technology play. And fortunately, within the technology pocket, we have a lot of new age businesses. We already have a lot of software companies listed into it.
So purely IT services point of view, there are mid caps, which are doing good versus large cap in terms of growth, given the agility they have, given the strong leadership they have, and given the size advantage they have. Within IT services, it's a mid cap, small cap, which could do well. And of course, there are good alternatives from the software as well as the internet side to play the overall technology space, which would still make the overall technology as a good bet versus the rest of the market.
Govindraj Ethiraj: So if I can add a question to that, when you say technology, would you even mean, let's say, a food delivery company being in the same bucket as Infosys or Wipro?
Rahul Jain: Yeah, technology is a much broader way to define the universe, IT services being a subset of that. And then, as you rightly said, one such example could be Eternal or Zomato.
Govindraj Ethiraj: Thank you so much for joining us.
Rahul Jain: Thank you.
Clean Power
Once upon a time, the United States was the sole clean energy superpower. Until 2011, it led the world in connecting wind and solar generators to the grid, a new report from Bloomberg says.
And then China took over, where its lead now looks way ahead. China added about eight times more renewables than the United States last year, and this year, India is likely to overtake too, says the Bloomberg report. India added about 22 gigawatts of wind and solar in the first half, which is much higher than 22, 23, and enough at full output to drive about one-tenth of the total grid.
Assuming this is maintained through December, says that report, they should put India ahead of the 40 gigawatt that the US government expects this year. Prime Minister Narendra Modi had set a target of 500 gigawatts of non-fossil generation by 2030, and the report says that going by the number of projects breaking ground in the past year, it means about 414 gigawatts of clean power is already operating or under construction, including nuclear and hydroelectric plants, which is obviously not far from the 500 gigawatt target, and there's still five years to go, according to that report.
Cracks in the EU-US Deal
France has denounced the trade agreement between the European Union and the United States as a submission on Monday, though other EU states largely backed a deal they acknowledged was lopsided but which averts an economically damaging trade war with the United States, according to a Reuters report. So, the deal, which was announced on Sunday between the US and EU, accounting for about a third of global trade, will see the US impose a 15 percent import tariff on most EU goods from next month, but offer some protection for critical industries like cars and pharmaceuticals. The French Minister for European Affairs said in a social media post reported by Reuters that, let's be clear, the current situation is not satisfactory and cannot be sustainable.
The free trade that has brought shared prosperity to both sides of the Atlantic since the end of the Second World War is now rejected by the United States, which is choosing economic coercion and complete disregard for WTO rules. The Dutch Minister for Foreign Trade said the deal was not ideal and called on the Commission to continue negotiations with the US.
Another Chinese DeepSeek
Startup Z.AI, formerly known as Zipu, said on Monday that its new GLM-4.5 AI model would cost less than DeepSeek to use, according to a CNBC report. Z.AI said its new GLM-4.5 is built on what is known as agentic AI, which means the model automatically breaks down a task into subtasks in order to complete it more accurately. It's also open-source, which is a new trend out of China, meaning it's free for developers to download and use.
And it's about half the size of DeepSeek's model and needs only eight NVIDIA H20 chips to operate. Z.AI CEO Zhang Peng told CNBC on Monday. Now, that's a chip NVIDIA customised for China in order to comply with US export controls, and NVIDIA said the US will allow it to resume those China sales after the three-month pause, but it's unclear when those shipments will begin.
He also said the company does not need to buy more of the chips as it has enough computing power for now, but he also did not share how much they spent on training the AI model and said details would come later.
P&G's New CEO
Procter & Gamble has promoted its chief operating officer to become chief executive officer on the 1st of January.
Shailesh Jejudikar, who joined the company in 1989, will replace Joe Moeller, according to a statement, and Moeller, who was named to the top job about four years ago, will become P&G's executive chairman, a report said.
Tesla's Financial Engineering
Scott Galloway, author, investor, commentator, academic, has put out an interesting set of statistics on Tesla, who, as we all know, has been having a tough time selling cars.
But then, to what extent do cars really help bolster its bottom line? So firstly, in 2020, Tesla's share of the US EV market was close to 80%, and now it's less than 50%, says the Galloway report. Tesla has also had a rough quarter. Revenue dropped 12%, its steepest decline in over a decade, and net income fell 16%.
Free cash flow was down to $146 million, which is about a 90% drop year over year, and way below Wall Street's $760 million estimate, which is, of course, unusual. The unusual part being Wall Street's estimates going so wrong. And here is where it gets interesting.
Tesla's profits are increasingly decoupled from its core business. The Galloway report says the company posted about $923 million in operating income this quarter, but only about a third came from selling cars. The rest came from selling regulatory credits, earning interest on cash, and gains from its stash of Bitcoin.
So far this year, Tesla has made more money from financial engineering than from its core business, cars and batteries, says that report. The only bright spot, the report says, is Tesla services and other revenue, which was up 17%, which came from its supercharging network, which added about 2,900 new stalls, which is an 18% annual increase.
