Weekend Reflections – Week ending 2nd Nov 2024

Week ending 2nd Nov 2024

# 1 Markets

Concerns over slowing earnings growth, elevated valuations, rising geopolitical tensions, and recent developments in China have prompted foreign portfolio investors (FPIs) to pull out record Rs. 1.14 lakh cr. funds from Indian equities in October, causing the Nifty 50 and S&P BSE Sensex to decline by 6.22% and 5.83%, respectively, last month, marking their worst monthly performance since March 2020. But Samvat 2081 marking 150th year for BSE and 30th year for NSE helped Sensex reclaim the 80K level during Friday’s hour-long 7th straight Muhurat trading session. 

Overseas buying into Indian bonds through the fully accessible route (FAR) reversed in October, caused by strong dollar index, higher bond yields and stronger economic data in US, with outflows worth $333.7 million for the first time in October since the inclusion of the debt category in the JP Morgan bond index. Yields on the 10-year benchmark government security hardened and closed at 6.84% on Thursday

All the three broad indices in US – Dow Jones, S&P and Nadaq – weakened last week ahead of outcome of US Presidential Elections. Stronger economic data – higher non-farm payroll data – caused markets to factor in a smaller quantum of rate cuts by the Federal Reserve. US bonds therefore edged higher after ending October with their worst monthly performance in two years closing at 4.36% on Friday with expectations of crossing 4.5% over next few weeks. 

# 2 RBI

2.1 RBI asks lenders to MFIs to halt the practice of ‘netting off’ loans. After clamping down on high interest rates charged by lenders to microfinance borrowers, RBI has shifted its focus to one of the long-standing practices followed by the industry known as ‘netting-off’ of loans.

• It is a common practice especially for a lender in MFI to rollover or sanction new loan ahead of a borrower fully repaying the existing credit facility. Invariably, loans are rolled over when 1–3 instalments are due by the borrower and the fresh loan is netted off against the existing dues of the borrowers. By doing so, the earlier loan is settled by the lender and replaced with a new credit facility. This practice is commonly called as ‘netting off’ of loans.

The intent behind clamping down on this industry practice, probably, is to ascertain how many borrowers remain standard should a loan not be rolled over by the lender or what is known in common parlance as evergreening.

2.2 Insolvency and Bankruptcy Board of India [IBBI] vide its circular dated October 29 has stated that 

• Stressed assets that are going through liquidation under the insolvency law will now be listed and auctioned through a centralised electronic platform – eBKray platform – owned by a consortium of a dozen state-run banks to maximise recovery for creditors.
• eBKray platform though has been active for the past 5 years was used voluntarily sometimes, by banks, as assets are presently auctioned via multiple platforms by lenders.

Auctioning through multiple platforms leads to information asymmetry, as potential buyers have limited time to assess the value of the assets, often resulting in lower recovery rates. A Centralised platform will enable bidders to accurately evaluate the assets based on the information and representations available on the platform and would further help in maximising the value of assets

By enhancing transparency and efficiency through advanced technology, eBKray aims to increase bidder participation, streamline operations, and maximise returns for creditors while improving outcomes for bidders and therefore a welcome step

2.3 As per RBI report published on Thursday, 

• Banks’ credit grew at 14.4% y0y last month, slower than the 15.3% increase in September 2023, 
• Banks’ personal loan growth halved to 12.1% in September from a year ago, while growth in credit card outstanding dropped to 18% from 31.4% a year ago.
• Credit growth to the services sector decelerated to 15.2% in September from 21.6% a year ago, primarily due to lower growth in credit to NBFCs.
• On the flip side, loans to industry grew by 9.1% year-on-year in September, quicker than the 6% growth last year 

Indian banks’ loan growth appeared to have moderated this September, compared with the same month a year ago, as the impact of the Reserve Bank of India’s clampdown on “exuberance” in retail lending continued through various measures.

# 3 SEBI

3.1 SEBI, as per draft consultation paper released last week suggested some changes for Real estate investment trusts [REITs], and infrastructure trusts 

• permitting to use interest rate derivatives to hedge their interest rate risks on underlying exposures. 
• locked-in units may be transferred within sponsor groups subject to the condition that lock in on such units to continue for the remaining period with the transferee.
• Permitting fixed deposits to be included for cash balances while computing leverage
• Permitting REITs to invest in liquid mutual funds
• Permitting to invest in assets that fall under the ‘infrastructure’ category, provided the aim of holding such an asset was to earn fixed rental income from leasing it out and not assuming risk related to its operation

The draft proposals on REITs and InvITs would facilitate business and protect investors. Permitting transfer of locked in units within the sponsor group puts them on par with listed companies and thus a welcome initiative.

3.2 SEBI in its consultation paper published last week has proposed 

• raising the threshold for identifying High Value Debt Listed Entities (HVDLEs) to Rs 1,000 crore from Rs 500 crore at present to reduce compliance burdens. Currently, an entity having outstanding value of listed non-convertible debt securities of Rs 500 crore and above are referred to as ‘High Value Debt Listed Entities’.
• a dedicated chapter within LODR (Listing Obligations and Disclosure Requirements) Regulations focused solely on corporate governance norms for HVDLEs distinguishing them from equity-listed entities.
  • Proposed relaxation for HVDLEs which are not companies as per the Companies Act 2013 with regard to NRC, RMC and Stakeholders Relationship Committee.

The increased threshold would help reduce compliance burden and provide flexibility to corporates while accessing bond markets.

3.3 SEBI in its consultation paper released on Wednesday has proposed introduction of new product “Restricted InvIT”. 

• These are InvITs in which the returns to investors are restricted or managed in exchange for an assurance of a minimum return. That is, the investor cannot make unlimited returns but can get the assurance that he/she will get some returns, independent of the InvIT’s performance.
  • Even if the SPV does not generate any returns, this clause allows these unitholders to get a minimum income/return.
  • Thus, these arrangements allow for a cap and/or floor to the returns generated from each SPV.
  • If there is any deficit in the returns generated, then the sponsor or sponsor group entity or pre-disclosed counterparties are required to bring in funds to ensure minimum returns to the unitholders.

Under the current InvIT structure, all unitholders are meant to benefit equally from the underlying asset.  There are products in other global markets such as Defined Outcome ETFs or Buffer ETFs, which have gained popularity among rise-averse investors and those nearing retirement. Recognising the demand for such an arrangement, the regulator has proposed a framework to govern it. The proposed product would thus offer downside protection and appeal to investors looking for long term table returns. 

# 4  Economy

As per provisional data release by Govt on Wednesday,

• India’s core sector output, which accounts for about two-fifths of industrial production, rose by 2% during September. 
• Five of the eight core sectors – coal, steel, cement, fertilisers and refinery products – reported positive growth during September.

The easing of the disruption related to rainfall on sectors like mining and electricity perhaps could have contributed to improvement in core sectors performance.

4.2 As per ADB report published last week,

• Climate change under a high-end emissions scenario could lead to a 16.9 per cent loss in GDP by 2070 across the Asia and Pacific region, with India projected to suffer a 24.7 per cent GDP loss
• Rising sea levels and decreasing labour productivity would drive the most significant losses, with lower-income and fragile economies being hit the hardest.
• If the climate crisis continues to accelerate, up to 300 million people in the region could be at risk from coastal inundation, and trillions of dollars’ worth of coastal assets could face annual damage by 2070.
  • Intensified rainfall, extreme storm leading to frequent landslide and floods causing annual capital damage of up to $ 1.3 trillion affecting over 110 million people by 2070. 
  • the significant rise in emissions from developing Asia, are primarily driven by China, which accounted for 30% of global emissions in 2021. 

Going by the estimated loss, it is time, nations work seriously on climate change and reduce the effect of global warming.

4.3 As per Goldman Sachs report titled “What is driving job growth? – Navigating through sectoral shifts in Indian labour markets,’ released last week – 

• Around 10 million jobs need to be added annually between 2024-25 and 2029-30 for India to maintain an average gross value added (GVA) growth of 6.5% year-on-year,
  • In comparison, an average of 8.5 million jobs were generated each year from 1999-00 to 2022-23.
• Over the past 23 years, around 196 million jobs were created, with nearly two-thirds of these generated between 2012-13 and 2022-23

It suggests three policies for job creation in the country: 

• incentivising affordable social housing development,” as the real estate sector employs over 80% of the construction workforce. 
• expanding IT hubs and global capability centres (GCCs) into tier 2 and tier 3 cities
• re-allocating fiscal incentives to support labour-intensive manufacturing sectors.

The report’s analysis is based on the KLEMS database by the Reserve Bank of India (RBI) and the Periodic Labour Force Survey (PLFS) and thus guiding force for Govt to frame its policies like PLIs. 

4.4 Strange but True!!

Last week, the stock price of Elcid Investments, an NBFC listed on the BSE, skyrocketed by nearly 67,00,000%! From ₹3.53 to ₹2,36,250. Just a few months ago, on June 21, it was trading at just Rs 3.53 per share. Now that’s a meteoric rise.  Thanks to SEBI for introducing Special Call Auction a few months ago, to Investment Companies [ICs] for discovering the right price as most of them don’t get traded for true value.

• Elcid satisfied all conditions by SEBI – listed for > a year, has > 50% of investments in other listed companies, trading at less than 50% of its book value during past 6 months
• During Special Call Auction, investors can place buy or sell orders without any price limits, meaning there’s no upper or lower circuit, so prices can move as high or as low as investors are willing to pay.
• In fact, the company’s book value is Rs. 5.8 lakhs per share

Is more in store for the stock?

• There are no sellers. Only 328 shareholders or an exclusive club owning shares who are not prepared to sell and therefore no liquidity – artificial scarcity
• Using dividend discount model – does not work as Elcid only distributes dividend of Rs 25 per share, though it is possible to distribute Rs. 5500 through dividend from Asian Paints alone.
• Buyers may not be able to sell the stock unless the stock is delisted which is unlikely as holders may not be keen to do.

Though SEBI’s move is well intentioned, we need to see how more ICs are discovering price to see whether a pattern emerges.

# 5 PE/VC 

As per EY/IVCA report released last fortnight,

• PE/VC investments in 3Q2024 (US$8.8 billion) saw a 40% decline year-on-year compared to US$14.6 billion in 3Q2023 and was 45% lower than in 2Q2024 (US$16 billion). 
• In terms of volume, 3Q2024 recorded 26% year-on-year growth compared to 3Q2023 and a 12% decline compared to 2Q2024 (283 deals in 3Q2024 vs. 225 deals in 3Q2023 and 321 deals in 2Q2024).
• Like 2Q2024, 
  • the financial services sector received US$1.5 billion across 52 deals, growing by 27% y0y compared to 3Q2023 -US$1.2 billion across 40 deals. 
  • Infrastructure was the second in terms of value (US$1.5 billion across 20 deals), compared to 3Q2023 (US$3.9 billion across 14 deals). 
  • Technology ranked third, recording US$1.3 billion across 32 deals, compared to 3Q2023 (US$1.1 billion across 35 deals). 
  • Buyouts: Largest segment at US$2.7 billion across 13 deals, down 25% year-on-year from US$3.6 billion across 18 deals in 3Q2023.
  • Growth investments: Second largest, totalling US$2.6 billion across 49 deals, a 40% decline from US$4.4 billion across 39 deals in 3Q2023.
  • Start-up investments: Only segment to grow year-on-year, recording US$2.3 billion across 157 deals, up 21% from US$1.9 billion across 108 deals in 3Q2023. 

While the deal momentum showed a slight uptick in September compared to July and August, overall private equity and venture capital activity in 3Q2024 declined in both value and volume compared to the previous quarter. A key reason is the drop in large deals (deals of value greater than US$100 million), often driven by the widening gap between buyer and seller expectations and uncertainty created by geopolitical tensions.