Weekend Reflections – Week ending 14th Dec 2024

Week ending 14th Dec 2024

# 1 Markets

Nifty and Sensex managed to sustain positive momentum for the fourth consecutive week by recording a weekly gain of 0.5% amid consolidation, principally aided by FII net buying in December worth Rs.14450 cr. Sensex staged a stellar recovery of over 2,000 points to end 843 points higher buoyed by IT stocks and consumer stocks and closed at 82133 while Nifty 50 closed at 24768 on Friday.

Foreign portfolio investors have turned net sellers in the Indian G-Sec market this week, after the interest rate differential between India and US narrowed from 300 bps. to 240 bps. and their holdings in FAR securities came down to Rs 2.47 lakh cr. Since RBI kept repo rate unchanged, yields hardened and 10Y closed at 6.73% on Friday.

Rally in tech stocks, on hopes of looser regulation under Trump, pushed Nasdaq to close around 20000 on Friday. Dow Jones continue to drag on fading rate cut hopes and ended around 1% lower while S&P was flat last week.  The yield on the 10-year US Treasury benchmark has risen to 4.39% – the biggest weekly gain in a year as Fed is unlikely to cut rates in the meeting next week.

# 2 Banking

2.1 As per Finance Ministry release last week

• Gross NPAs of public sector banks (PSBs) have declined to a decade low of 3.125 at the end of September 2024 from a peak of 14.98% in March 2018. 
• Capital adequacy ratio of PSBs improved to reach 15.43% in September 2024 from 11.45% in March 2015
• During FY24, PSBs recorded the highest-ever aggregate net profit of Rs 1.41 lakh crore against Rs 1.05 lakh crore in FY23.  The figure was Rs 0.86 lakh crore in the first half of 2024-25.
• In the last three years, PSBs have paid total dividend of Rs 61,964 crore.

Measures like the 4Rs — recognition, recapitalisation, resolution, and reform — taken by the government appeared to have paid. Their capital base has strengthened, and their asset quality has improved. Now PSBs are able to go to market and access capital instead of depending on the government for recapitalisation

2.2 As per data released by RBI, 

• Banks’ deposit mobilisation increased 10.6% between November 2023 and November 2024, in tandem with credit growth. 
• Deposits with banks in the country stood at Rs. 224.7 lakh crore at the end of November 29, against R. 203.2 lakh crore a year ago: Banks’ credit also increased 10.6%, to Rs.179.6 lakh crore, up from Rs. 162.4 lakh crore a year ago.
• Term deposits and demand deposits also clocked double-digit growth in the same period.

This is a result of banks’ relentless effort to mobilise deposits and a fall in credit expansion, especially in the retail side, following the concerns raised by the regulator on the possible overheating

# 3 SEBI

3.1 SEBI vide its circular dated Dec 13, 2024, introduced exemptions to the requirement of maintaining pro-rata rights in investments and distribution of proceeds under the alternative investment funds (AIF) rules. Pro-rata rights ensure that investors receive rights proportional to their commitment in the scheme, for both investments and distribution of proceeds.

• Pro-rata rights apply to both investments made by the scheme and distribution of proceeds unless:
  • An investor is excused or excluded from participation.
  • An investor defaults on their contribution.
  • Exemptions also apply when returns or profits are shared with the manager/sponsor in terms of carried interest or similar agreements.
• Flexibility for Specific Entities:
  • Managers/sponsors, development financial institutions, state corporations, and sovereign funds can opt for returns lesser or losses greater than their pro-rata share by subscribing to subordinate classes of units.
    • If managers/sponsors subscribe to subordinate units, their investments must not be used to repay their liabilities.

• Pari-passu rights ensure all investors in the same scheme have equal treatment unless differential rights are explicitly offered.

• Differential rights can be offered if they:
  • Do not impose liability on other investors.
  • Do not provide undue control to select investors over fund decisions, except through investment committee participation.
  • Do not alter existing rights of other investors.

 

SEBI mandates the Standard Setting Forum (SFA) to develop implementation standards for permissible differential rights by January 15, 2025. AIFs must disclose criteria and eligibility for availing differential rights in the PPM.

Differential rights and priority distribution would enable AIFs to raise money from different kinds of institutions and would also help flow of funds to sectors requiring long gestation where commercial investors may hesitate to support. Clarity on excuse units was also long awaited and would help to accommodate to specific investors who wish to be exempted from select investments like insurance companies in overseas investments. Priority distribution was earlier suspended by SEBI on misuse by some debt funds to favour investors in AIFs over lenders. SEBI has now restored this flexibility with a clear condition prohibiting indirect benefit to investors as was done by some debt funds earlier. 

3.2 SEBI on Friday proposed to allow retail investors to participate in algorithmic trading. Algo trading provided advantages such as faster order execution, reduced transaction costs, greater transparency, better audit trails and improved liquidity.

• In 2012, SEBI introduced algo trading through the direct market access facility but restricted its access to institutional investors.
• Algos developed by tech-savvy retail investors themselves, using programming knowledge, would also have to be registered with the exchange through their brokers. The same registered algo could be used by retail investors for their family members.
• the specified threshold for categorisation as an algo would be evolved by the broker’s industry standards forum

 

Democratisation of algorithmic trading will attract more tech-savvy retail investors seeking automated and data-driven strategies.

3.3 SEBI vide another circular on Friday clarified on classification of Corporate Debt Market Development Fund (CDMDF) as Category I AIF, aligning with its broad objective of corporate bond market development and improving market stability. The CDMDF has been set up to serve as a Backstop Facility to purchase investment-grade corporate debt securities, particularly during market stress, to:

1. Instil confidence among market participants.
2. Enhance liquidity in the secondary corporate debt market.
3. Create a permanent institutional framework for activation during financial stress.

The classification provides clarity for market participants and institutions. Institutional frameworks like CDMDF can attract greater participation from investors and improve confidence in the corporate debt market.

3.4 SEBI last Tuesday has expanded the list of stocks for the same day settlement in the equity cash market to the top 500 scrips by market capitalisation. 

• In March, the regulator had introduced the beta version of T+0 (same day) settlement cycle on optional basis in addition to the existing T+1 settlement cycle in equity cash market, for a limited set of 25 scrips and with a limited number of brokers.
• The new rule on expanded scrips would be applicable from January 31,2025.
• All stockbrokers would be allowed to participate in the optional T+0 settlement cycle. And permitted to charge differential brokerage.

3.5 SEBI has notified the expansion of the definition of “connected persons”, who have access to price-sensitive information, with effect from December 5.

• Relatives, related firms or partners and people living in the same household or residence as the person involved, to be a part of ‘deemed connected persons’.
• This is also changed from “immediate relative” to relative which now includes spouse, parents (including in-laws), brothers and sisters (and their spouses), and children (and their spouses) of the person involved.
• If found these deemed connected persons would need to prove that they did not possess any unpublished price sensitive information (UPSI).

However, it is felt that shifting the burden of proof to the accused could lead to widespread misconceptions and wrongful suspicions, potentially implicating innocent individuals and distant relatives, while actual insider trading offenders could still avoid detection. 

This shift not only heightens the risk of unjust accusations, but also allows individuals to be unfairly branded as ‘connected person’ without cogent evidence while facing the serious charge of insider trading. 

# 4 Economy

4.2 Following lower Q2 GDP nos. GDP growth is being revised downwards by international agencies.

• Fitch – for FY25 lowered from 7% to 6.4%; revised to 6.4% and 6.5% for FY 25 and FY26. 
• S&P – Retained for FY25 at 6.8% (higher than RBI’s projection of 6.6%) and 6.9% for FY26.
• ADB – for FY 25 lowered to 6.5% from 7%; and for FY 26 to 7% from 7.2% earlier.

Reasons: 

• lower-than-expected industrial growth amid sluggish government spending.

• subpar increase in private investment and impact of tight monetary policy on housing demand.
• Other challenges include post-pandemic weakness in the public sector and household balance sheets, a highly competitive global manufacturing environment and weak agriculture sector growth

 

1. As per data released by Govt. last week,

• Retail inflation based on the CPI fell to a 3-month low of 5.48% in November from the 14-month high of 6.21% in October, primarily due to falling vegetable prices aided by rising supplies.
• Factory output growth (Index of Industrial Production-IIP] touched 3 months high in October at 3.5% up from 3.1% in September thanks to higher production of consumer durables and garments.
  • manufacturing output grew by 4.1% year-on-year, up from 3.9% in September, while mining and electricity output reported annual growth of 0.9% and 2%, compared to 0.2% and 0.5%, respectively, in September. 
  • capital goods output increased 3.1% year-on-year in October, compared to 3.6% in September.
  • Consumer durables output, including household appliances and vehicles, grew 5.9% in October, down from 6.5% in the previous month

IIP data underscores a fragile industrial landscape. While the breadth of growth across 18 of 23 manufacturing sub-sectors is encouraging, the subdued performance in core sectors like mining and electricity points to inefficiencies. The sluggish momentum in capital goods raises concerns over investment appetite, critical for sustaining long-term industrial growth. 

4.4 As per Govt release last week,

• India has reached a milestone of $1 trillion in cumulative foreign direct investment (FDI) inflows since April 2000, led by improved global competitiveness, a dynamic innovation ecosystem and a business-friendly environment, 
• Taiwanese companies are increasingly shifting their supply chains to India due to global trade tensions, with FDI from Taiwan surpassing $665 million between 2018 and 2024.
• Nearly 26% rise in FDI to $42.1 billion during the first half of the current fiscal, reflecting India’s growing appeal as a global investment destination,

Over the last decade (April 2014 to September 2024), total FDI inflows amounted to $709.84 billion, accounting for 68.69% of the overall FDI inflow in the past 24 years.

4.5 Interesting judgement!

In a significant ruling, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) last upheld a taxpayer’s right to engage in legitimate tax planning, allowing the set-off of short-term capital losses incurred from the sale of shares against long-term capital gains (LTCGs), drawing a clear distinction between legitimate tax planning and tax evasion.

• Tax dept’s argument described taxpayer’s methodology as “colourable device” -exploiting a drop in Mindtree’s share price after the announcement of a bonus issue, strategically selling the shares to generate short-term capital loss to offset the LTCG.
• Tax laws allow a short-term capital loss (from shares held for less than 12 months) to be set off against any capital gain, whether short-term or long-term. The officer claimed the taxpayer timed the sale of Mindtree shares deliberately after the bonus issue announcement to generate short-term capital loss, thereby lowering her tax liability.

A good judgement enabling investors to make appropriate legal tax planning.

4.6 Key Insights from analysis of 10-year GDP data published by Govt (2012-2023) last week

• Contrary to Engel’s Law, the share of household budgets spent on food in India has remained constant (28-32%) over the last decade, unlike developed nations where this share declines with income growth.
• Possible reasons: uneven income distribution, slow household income growth (5.7% annually from 2017-2023), and rising costs of living.
• Spending on meat, fish, and seafood has risen, while traditional staples like cereals and pulses have declined. Subsidized cereals via the Public Distribution System may have freed up budgets for diverse nutritional choices.
• Share of household expenses on sugar and sweets has dropped from 4.95% to 3.05%, reflecting health-conscious behaviour, though India remains a diabetes hotspot due to external consumption trends.
• Growth in alcohol spending (7% annually) surpassed tobacco post-COVID, reflecting social acceptance of alcohol during lockdowns and health concerns reducing tobacco consumption.
• Increased spending on healthcare, education, transport, and recreation reflects changing priorities toward investments in experiences and essentials over manufactured goods like clothing and home products.
• Insurance spending doubled post-pandemic as households began viewing it as a necessity rather than a tax-saving tool.
• LPG adoption surged due to initiatives like the Pradhan Mantri Ujjwala Yojana, replacing traditional fuels like kerosene and firewood.

India’s evolving consumption patterns highlight both challenges (income inequality) and progress (healthier diets, cleaner energy, increased focus on services). These trends underscore a shift in priorities toward health, security, and quality of life improvements.

# 5 PE/VC

5.1 As per whitepaper unveiled by KPMG at TiE Global Summit last week,

• • Startups contributed 10 to 15 per cent to India’s GDP growth from FY16 to FY 23.

• In FY23, startups contributed about $140 billion to the economy

• Contribution to GDP projected to reach $1 trillion by 2030, 

5.2 Takeaways from the 80-page Annual Wealth Creation Study (2019-2024) published by Motilal Oswal illustrate the resilience of certain companies and the strategic approaches investors can adopt to capitalize on market fluctuations and identify high-potential investment opportunities.

• Compound Annual Growth Rate (CAGR) of wealth created at 26% from 2019 to 2024, despite market benchmarks delivering muted returns of 5% to 15% during the same period.
• Reliance Industries emerged as the top wealth creator, followed by companies like Tata Consultancy Services (TCS) and HDFC Bank. 
• The report advocates for a strategy of investing in “Bruised Blue Chips,” which are fundamentally strong companies that have faced temporary setbacks. The key to maximizing returns is to buy these stocks close to their turnaround points, leveraging technical analysis patterns such as double-bottoms and reverse head and shoulders.
• Companies like Cummins India have successfully implemented cost control programs (e.g., Six Sigma approaches) that improved their EBITDA margins and profitability post-COVID-19. Additionally, debt reduction and restructuring have been crucial for many firms to ease interest burdens and revive profits.
• During market downturns, attractive valuations emerge. For instance, Cummins India saw its Price-to-Earnings (P/E) ratio drop from 26x to 13x, and its Price/Book ratio fell from 6.1x to 2.1x, presenting significant upside potential for investors.

5.3 As per Inc42 report,

• While just two startups achieved the coveted status last year six new-age tech companies entered the billion-dollar valuation club in 2024. 
• India is now home to 118 unicorns which have collectively raised more than $100 Bn in funding to date. 
• The number of new entrants to the unicorn club in 2024 was far below 2022 and 2021, when India minted 21 and 42 unicorns, respectively.
• As per Inc42 data, Indian new-age tech companies bagged $8.7 Bn in the first nine months of the calendar year 2024, up more than 20% from $7.2 Bn raised during the same period last year.