Weekend Reflections – Week ending 23rd Nov 2024

Week ending 23rd Nov 2024

# 1 Markets

The Indian stock market snapped its two-week losing streak on a high note on Friday, offering relief after weeks of correction possibly due to short covering.  The rebound saw the benchmark equity indices ending up about 2.5 percent, with Sensex jumping nearly 2,000 points to close at 78963 and Nifty reclaiming 23,900. Saturday Assembly result is expected to provide political stability and positively impact investor sentiment and could trigger rally in stock market due to continuity of pro-business policies. 

10-year G.Sec  was trading flat last week and closed at 6.85% tracking UST yields as the investors focused on the MPC meeting to provide valuable cues to the market.

Falling unemployment and other sound economic data aided market rally with all the 3 broad indices increasing by 2% last week.  But Fed Chair statement that economy is no hurry to lower rates unsettled the bond markets and hardened yields. US10Y yield closed at 4.41% on Friday. 

In this confused global market scenario, it was interesting to see that Karachi 100 index surging 66% in the last one year eclipsing every other market – despite the country having GDP growth at 3%, lowest forex reserves, high inflation and debt doubling every 5 years.

# 2 RBI

2.1 Key takeaways from RBI Bulletin published last Wednesday,

• • The slackness in economic activities in the September quarter is behind and the medium-term outlook remains bullish. Inflation can undermine the prospects of real economy, especially industry and exports if allowed to run unchecked.
    • India’s Q2 growth at 6.7%, lower from MPC estimate at 7% and 7.6% for Q3  
    • Unemployment rate in urban areas declined to 6.4% in September 2024 (v/s 6.6% in June).
    • Labour force participation rate in urban areas increased to 50.4% in September 2024 (v/s 50.1% in June).

• Gross Foreign Direct Investment (FDI) in India during H1FY25 grew by 25.7 per cent Y-o-Y to $42.1 billion, up from $33.5 billion.

• • Repatriation or disinvestment by investors rose to $27.8 billion in H1FY25, up from $23.1 billion during April–August 2023
  • The net inflows through ECBs rose to $ 7.9 billion in H1Fy25 from $ 6.8 billion in H1Fy24
• As imports from FTA partners have gone up by 37.9% India needs a “panoply” of bilateral trade agreements with better market access to capitalise on the China plus one trend in global manufacturing.

2.2 As part of initiative to improve credit access for MSMEs in India

• Govt has begun discussions with stakeholders, including RBI and Exim Bank, to develop a ‘Creditworthiness Index’ 
• The proposed index will rate companies across industries using common parameters, helping lenders evaluate borrowers with weak financials, limited documentation, or minimal transaction history, multiple people aware of the development.
• The initiative is part of the broader plans to form a National Trade Finance Committee and create a framework for expanding export credit.

2.3 RBI plans to launch an affordable, local cloud data storage pilot programme in 2025, for financial firms, which would be first-of-its-kind initiative by a major central bank.

• RBI’s research department, known as the Indian Financial Technology and Allied Services (IFTAS), will steer the initial work. It will later be developed in partnership with one or more private tech companies.
• the pilot will be expanded in phases over the next few years and will cater to the budgets of smaller banks and financial services companies.

India’s cloud services market was estimated to be at $8.3 billion in 2023 and is expected to grow up to $24.2 billion by 2028. But it is largely dominated by foreign players. The RBI’s new initiative will use local IT companies and compete with global providers like Amazon Web Services, Google Cloud, IBM Cloud, and Microsoft Azure. 

The move is being viewed as a push for localisation of payments and financial data, and is consistent with its long time need for storage and access of the data inside India. But just like the launch of Unified Lending Interface by RBI, it is not clear why regulator itself should be a main player instead of a facilitator for innovative solutions.

# 3 SEBI

3.1 SEBI, as per notification issued on Nov 18,

• Has amended alternative investment funds (AIF) rules directing AIFs to grant investors’ rights in investment and distribution of proceeds in proportion to their commitments in a scheme.
• The investors of a scheme of an AIF shall therefore have rights, pro-rata to their commitment to the scheme, in each investment of the scheme and in the distribution of proceeds of such investment.

This is a major change from current practice where proportion of each investment is made basis net investible funds – which tend to vary across different investors basis applicable commercials like lower fee or opex or set up fee etc. Variable fee depending on amount of commitments is not uncommon as is in Mutual Funds.  By making this notification applicable for AIFs, SEBI has made it operationally challenging for Fund Managers to attract different set of investors.  We will await detailed circular for more clarity. 

3.2 SEBI, through a circular last Thursday abolished the requirement of a mandatory security deposit to be placed with the exchanges before a public issue.

• As per current regulations, any company that is looking to launch a public issue of equity shares has to deposit with the stock exchanges an amount equal to 1 per cent of the issue size. The deposit was returned to the company after the public issue.
• That the requirement of 1 per cent security deposit was put in place for public/rights issues so that an issuer resolves investor complaints relating to the transaction such as for refund of application money, allotment of securities and dispatch of certificates.

The requirement of security deposit has become redundant considering various reforms and present framework for public or rights issues such as application through ASBA (Application Supported by Blocked Amount) UPI mode of payment, mandatory allotment in demat, among others. 

Thus, this move is another bid to facilitate ease of doing business for issuer companies

3.3 SEBI in its consultation paper released last week has proposed to make dozen changes in connection with SME IPOs including the following:

• raise the application size of IPOs of SMEs from present minimum size of Rs. 1 lakh to Rs. 2 lakhs and in some cases up to Rs. 4 lakhs.

• increase the requirement of minimum 50 allottees in public issue to 200 to ensure that there are sizeable number of investors to enable liquidity in the market.
• Compulsory appointment of monitoring agency irrespective of issue size. 

Recent SME issuances have witnessed heightened retail participation with applicant-to-allotted investor ratio going up from 4x in FY22 to 245x in FY24. In terms of the amount, it was observed that 50 per cent of SME listed entities have undertaken related party transactions [RPTs] of more than 10 per cent of their consolidated turnover, and 1 out of 7 more than 50 per cent of turnover.  

The need for better corporate governance standards and more stringent oversight of related party transactions, which have been areas of concern in the SME sector prompted for these changes. In fact, the limit of Rs 1 lakh was prescribed in SEBI regulations over 14 years ago and in last 14 years Nifty and Sensex have grown by around 4.5 times, and therefore it would be fit to increase the threshold in same ratio as the markets have grown. 

3.4 SEBI last Monday has issued additional guidelines to Credit Rating Agencies [CRA] 

• CRAs to verify issuer’s fund availability and ascertain the reasons for payment failure in cases where nonpayment of debt arises due to factors beyond the issuer’s control – like incorrect investor account details, outdated payment information etc.
• CRAs have to ensure that the required payments are deposited into an escrow account on the due date in these cases.
• CRAs for such cases must provide details – security name, ISIN, amount, due date, reasons for failure to stock exchanges, depositories and debenture trustees.

This is a welcome move as under present rule, any delay of even one day or R. 1 in debt payment is considered default unless the debt term is rescheduled before the due date. The proposed guidelines are therefore aimed at ensuring uniform treatment of non-payment scenarios across CRAs. 

3.5 SEBI as per discussion paper released last week, is proposing more diversified ownership of equity clearing corporations, which are currently fully owned by the country’s exchanges. A clearing corporation is responsible for the confirmation, settlement and delivery of trades. 

• The first option is to allow existing shareholders of exchanges to own 49% of the clearing corporation directly, leaving the parent exchange to hold 51% initially. The exchange can then be required to bring down its holding to 15% over time, the SEBI proposed. 
• Alternately, shareholders of exchanges can directly hold the entire equity of the clearing corporation subject to a change in existing regulations. Present regulations require stock exchanges to own at least 51% of clearing corporations

Broad-basing and diversifying the ownership of clearing corporations would help strengthen their financial and operational independence and ensure they can operate primarily in the public interest and therefore a welcome move.

# 4 Economy

4.1 As per Goldman Sachs report released last week,

• Though India’s strong long-term structural growth story remains intact, GDP growth likely to decelerate to 6.3% YoY in CY25, on continued fiscal consolidation and slower credit growth on macro-prudential tightening by the RBI.
• The economy will likely be insulated from global shocks emanating out of a potential trade war between US and China.

4.2 As per HSBC Flash India PMI compiled by S& P Global, released last week,

• Composite Purchasing Managers Index (PMI) was up at 3 months high of 59.5 in November from October’s reading of 59.1 and against 57.4 in November 2023.
• Manufacturing PMI was marginally down from to 57.3 in Nov vs 57. 5 in October
• Services PMI climbed to a 3-month high of 59.2.

Higher than the long-term average index was led by

• rising business gains and export sales, despite increasing cost pressures 
• Expansion in new orders and output was higher in manufacturing firms than services
• Growth in international sales much higher in manufacturing firms than services.

4.3 As per World Intellectual Property Organisations [WIPO] 2024 report on IP trends released last Tuesday

• India now ranks sixth among the top 10 countries globally in patents, trademarks and industrial design applications.
• Fastest growth recorded by India among the top 20 origins with 64480 patent applications a 15.7% increase from 2023 and 149% surge in granted patents from last year
• Industrial design applications have also risen by a remarkable 36.4%, attributed to a heightened focus on the manufacturing and creative sectors.
• Trademark filings, another indicator of the nation’s burgeoning IP ecosystem, saw a 6.1% increase in 2023, positioning India fourth globally.

Resident filings climbing to 55.2% highlights the increasing prominence of domestic innovation and intellectual property activities, fuelled by various government initiatives such as the ‘Make in India’ programme, which has encouraged local manufacturing and innovation. This signifies the strengthening of India’s R & D capabilities and growing recognition of value of IP protection.

# 5 PE VC

5.1 Key Points from Inc42 report on India’s SaaS Ecosystem released last week

• Indian SaaS market expected to grow from $14 Bn (2024) to $70 Bn by 2030 at a 31% CAGR.
• Majority of funding (72.9% of $20 Bn between 2014-H1 2024) and unicorns (20 of 27) are horizontal SaaS – (caters to multiple industries)
• Vertical SaaS (industry specific solutions) funding grew at 18% CAGR (2018-2023) compared to 10% for horizontal SaaS. 
• Projected revenue: $26 Bn (vertical SaaS) vs. $44 Bn (horizontal SaaS) by 2030.
• 85% of Indian SaaS startups (around 1.5K firms) are leveraging AI for automation, personalisation, and analytics.
• AI-driven SaaS is creating new categories like software testing automation and predictive analytics.
• SaaS funding in H1 2024 stood at $915 Mn across 91 deals, continuing the downward trend. 

5.2 Takeaways from McKinsey Report – “Perspectives and Research for the investing industry” – released last week which includes insights on how institutional investors like PE Firms can gain performance and uncover opportunities across the investing universe. 

a.: Five Alphas are listed as capabilities required by PE Firms to succeed in the next era of private capital.

1. Sales Alpha: 
   • This refers to the ability of firms to raise more capital on better terms than their “fair share” based on their performance and market conditions – expand their geographical reach, tap into new sources of capital, and innovate with new product vehicles. They build strong brands and deliver consistent performance.
2. Sourcing Alpha: 
   • Sourcing alpha is the ability to create new bespoke investment exposures. Firms need creativity and a sophisticated capital allocation process to craft attractive transactions. More proactive origination than laid back investment banker led originations. 
3. Operational Alpha: 
   • This involves post-acquisition value creation – to deliver transformational change, such as creating new business models, reducing working capital drag, and delivering technology improvements. 
4. Exit Alpha: 
   • Firms producing exit alpha develop a range of exit routes, such as GP-led continuation vehicles and long-hold institutional structures. These firms perform systematic re-underwriting of each investment and focus on who the next owner of their assets could be.
5. Organizational Alpha: 
   • Organizational alpha involves designing the firm’s structure and operating model around client-centricity, repeatability, and scalability. Successful firms engineer and industrialize their flagship processes end to end and invest in data and technology to strengthen the firm’s spine.

Firms that develop capabilities across these five alphas are positioned to outperform their peers and adapt to the challenges of the next decade. They may consistently deliver 900 basis points of outperformance relative to public markets at scale over extended periods

1. The report also includes sectoral research in 13 areas including Aerospace, Defence, Agri, Chemicals, Electric power &Natural gas etc besides highlighting opportunities in the next decade like potential of Gen AI to transform business through M&A, data centres, real estates through tech enabled brand and agriculture technology.
2. Key data points:

• Global assets under management – $ 132 trillion as at June 2024 (8% up from 2023)
• Decline in venture capital funding – 60% from 2021 to 2023
• Annual investment required in climate, healthcare, and education solutions to meet UN Sustainable Development Goals by 2030 would be $4.1 trillion.
• Estimated size of the global space economy by 2035, up from $630 billion in 2023 is $1.8 trillion.