The Core Report

Good morning, it's the 5th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.

The Take: Investors everywhere in the world are getting more concerned about market valuations except India
Friday’s trade and we will come to some details may have seen some correction but in general the Indian markets have been riding high, along with several markets worldwide, including of course the United States, Europe and Japan.

The only difference I can see is that scepticism and concern about the US markets, among institutional investors, is seemingly more visible than it is in India. In India, except for a handful of analysts, most feel confident about the current position of our indices and the valuations that drive them .

There is no formula to this nor a predictable reality that something will happen and markets will go crashing.

What usually happens is periodic corrections which we have not really seen except a jolt on June 4, the day election results were declared and the BJP Government could not command an absolute majority.

The Sensex crashed around 4,000 points to 72,079 on that day which is exactly two months ago.

And of course the markets have more than recovered since and continued their march to around 81,000 today.

But it is good to be a little more discerning and remember that a massive supply of savings seeking higher returns than bank deposits is also lifting Indian markets. Apart from a younger and hyperactive trading community buying up small and mid cap stocks. These are not the only drivers but strong ones.

Elsewhere on Wall Street, several analysts are sounding worried.

The Chief Economist at Apollo Global told Economist that the bubble was getting bigger and bigger and what’s when you need to worry that everyone will run for the exits at the same time.

JP Morgan Chase analysts said that large numbers of investors have aggressively crowded into positions based on improbable expectations of earnings growth. Goldman Sachs has said share prices have risen relative to bonds even as the risk of shocks has grown.

Morgan Stanley’s CIO told Bloomberg TV that a 10% correction is highly likely between now and the US elections, which happen in November.

Bloomberg is reporting that after a jam-packed week of earnings reports from mega cap technology companies one thing is clear: as profits slow, investors aren’t impressed by artificial-intelligence promises anymore. They want to see results.

Results from Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Apple Inc. this week signalled that the biggest companies in the world are still heavily investing in artificial intelligence.

However, shares of Microsoft and Amazon slid after their reports because of fears that those AI investments aren’t paying off for them — at least not yet — echoing the slip in Alphabet Inc.’s stock a week earlier.

“Investors are entering a ‘show me’ phase, seeking concrete evidence of AI’s impact on revenue and productivity,” said Adam Sarhan, founder and chief executive officer at 50 Park Investments. “This is causing some scepticism and volatility.”

And things move suddenly.

A weaker -than-anticipated jobs report for July ignited worries that the economy could be falling into a recession, CNBC reported.

The Nasdaq Composite lost 2.43% to close at 16,776.16, bringing the decline for the tech-heavy index from its recent all-time high to more than 10%.

The Dow Jones Industrial Average fell 610.71 points, or 1.51%, to finish at 39,737.26. At its session low, the 30-stock index was down 989 points.

Stocks sank after July job growth in the U.S. slowed more than expected, while the unemployment rate rose to the highest since October 2021.

Intel stock price fell 26% in a shock drop, plunging the most in 50 years after it missed earnings and announced a massive restructuring.

The Nasdaq is the first of the three major benchmarks to enter correction territory, down more than 10% from its record high. The S&P 500 and Dow were 5.7% and 3.9% below their all-time highs, respectively, said CNBC.

And all this is largely investors questioning the tech bubble.

And then, Warren Buffett appears to have soured on stocks, allowing cash levels at Berkshire Hathaway touch nearly $277 billion and selling about half its stake in Apple, even as the conglomerate posted a record quarterly operating profit, reported Reuters.

Berkshire's results released on Saturday suggest the 93-year-old Buffett, one of the world's most revered investors, is growing wary about the broader U.S. economy, or stock market valuations that have gotten too high, said Reuters.

Meanwhile, the Middle East is once again on the boil with Iran threatening to attack Israel, an action that is now being projected to happen as soon as today, if it does happen.

Geopolitical risks have been high but are higher now than they have been in a while.

Which brings us back to Dalal Street.

While the markets seem stable and seem that way, all analysts, though in some cases with some prodding, admit there are parts of the market which are severely overvalued.\

Valuations and the perception of them are subjective.

The way I would liken it is that the ship of investors is entering a sea with icebergs floating around, you could avoid them of course but only by staying alert.

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Markets Wrap
Weak global cues triggered a sharp fall in the Sensex on Friday, with the BSE Sensex falling 885 points to 80,982 and the Nifty50 falling 293 points to 24,717.

As is evident the Sensex is below 81,000 and the Nifty below 25,000 now.

For the week, since the markets were rising earlier, the Sensex fell around 351 points while the Nifty fell around 117 points.

The RBI’s monetary policy committee will meet this week to take a call on interest rates, which it mostly will not, that is take a call, and hold the Repo rate at 6.5%, also a sign that all is well, at least in the RBI’s view.

This week is also seeing several large IPOs coming up.

I have no view on these or earlier ones since the price discovery mechanism is highly driven by speculation and thus tough to assess the business on fundamentals. Equally, many of these, as has been the case in the past, have large components of offers for sale which is essentially investors recent and old getting out so once again making it tough to assess.

I can generally point out, as you well know, that investors have burnt their fingers with tech company IPOs, at least the large ones in recent years.

Perhaps one question worth asking is what is the company’s present profit after tax position and whether it is carrying accumulated losses.

I find several companies not revealing the fact that they are carrying accumulated losses, particularly the so-called new age ones and finding quite funny ways to hide it.

Meanwhile, the rupee slipped to a record low on Friday, after stock prices fell in line with a global equity sell-off.

The rupee closed down 0.04% at 83.75 against the U.S. dollar on Friday, its weakest closing level, after hitting an all-time low of 83.7525 earlier in the session, Reuters said

Oil Prices Hit By Low Demand
Crude oil prices have fallen to a 7-month low as concerns around demand in the US and China overtook fear of geopolitical risk.

Brent crude is now quoting below $77 a barrel, the lowest settlement price since early January, Bloomberg said.

The reason is that both the US and Chinese economies are looking weak and of course the latest news that US jobs data is not looking as good as the market expected.

Bloomberg said oil’s decline was the fourth straight weekly one — the longest run since December — driven by the concerns about demand in China, the world’s biggest crude importer, and the US, the commodity’s top consumer.

State Bank is Riding High
Elsewhere, first quarter results are still being released and more on that shortly.

Strong loan demand helped the largest lender State Bank of India beat estimates with $2 billion or around Rs 17,000 crore in April-June profits though provisions for loan losses also rose sharply.

Reuters says the figure was up around 1% and this was above analysts forecasts who were pegging profits around Rs 16,717 crore, not far from where it landed.

SBI's loans grew 15.39%, led by strong demand for retail loans, while deposits grew 8.18%.

But loan loss provisions, or funds set aside for potential bad loans, jumped 70% on-year to 45.18 billion rupees, said Reuters.

Indian banks have reported strong loan growth over the past few quarters, boosted by consumer spending amid firm economic growth.

What Are Q1 Numbers Telling Us?
Corporate earnings numbers are a good indicator of how the economy is doing and there is sufficient granularity to try and assess what the numbers portend as well for coming months.

Note I did not say they are a complete indicator but a good indicator.

At the top level, GDP growth is being driven by a consistent capital expenditure of the public spending cycle, says ICICI Securities in a report released last week.

According to ICICI Sec, banks and financial services, excluding banks and NBFCs saw stronger performances while pharmaceuticals, cement and metal sectors saw misses.

The big question is of course what are all these numbers telling us about the coming few months or rest of the year.

I spoke with Vinod Karki, Equity Strategist at ICICI Securities who looks at factors like electricity demand which has hit an all time high and credit growth which is around 15-16% he says.

I began by asking him what stood out for him in the last quarter and of course his outlook ahead.

INTERVIEW TRANSCRIPT

Vinod Karki: If you observe the GDP trajectory for India, currently Q1, would have expanded our 11% nominal GDP. So any asset class which is expanding demand more than that in terms of profit growth or even the revenue growth, I would bucket them under growth assets. So if you look at from that perspective, what we've seen so far is that sectors which are more on the, you know, capital intensive side, the industrials, capital goods, defense, utilities, real estate, even auto, to some extent, the whole bank pack, basically, largely, you know, there we have seen the profit growth to be north of this 11% which is the GDP line. We think that that's where their demand is outperforming broadly. And the commentary itself means just to the only profit growth in terms of order book and the overall situation is looking good now where it is below but still expanding. That you can see in FMCG, for example, I think these profit growth is around 19% same with it and pharma, so the defenses are growing, but below the GDP line. But there's a bunch of sectors and stocks where there's contraction in profit, largely using commodity pack, the oil and gas, metals, there's a contraction there. And a bunch of consumption means, like apparel, usrs, paints, movie, exhibition, these kind of sectors, we see the contraction in earnings. However, despite the contraction, if you see from commentary perspective and demand perspective, the commodities, be it the cement or cement, also contractors, so cement and the energy metals, yeah, so the demand is robust, but because of realization issues, there's been a contraction. And so that's the whole picture right now, the aggregate profit being pulled down by largely by commodities, the cyclical balance sheet driven companies showing better profit growth. Relatively, consumption is mixed between some consumption areas doing well, but others contracting it, and pharma in between, kind of so that's how it's looking, right now.

Govindraj Ethiraj: So let me put a slightly different question. Vinod, so even your report, you've said that strong demand from the capital expenditure cycle is obviously driving the whole thing, as in, it's such a powerful force that it's there is a downstream effect of that. So what if it were not there, and how would this have panned out, let's say, in previous years or other periods.

Vinod Karki: So there's a distinct change in the color of the economy. Post covid 2021 post FY21 the bulk of the demand surprises we have seen is coming from the investment side of the economy for pre 2021 and starting as bad as 2012, 2013, 2014, where the investment cycle peaked out. This was the opposite all these companies which I just talked about, industrials, defense, utilities, engineering, real estate. There were a bunch of companies which year by year, quarter by quarter, you saw already disappointed. So it's kind of a switch in the economy where the investment side of the economy has started to pick up. We saw similar switch between 2003-2004 to almost to 2018-2012. In between. There's a blip of the global financial crisis, but the investment cycle peak turned well, and the NPA cycle started dripping in. I think that's how the thing is. Over the last couple of years, we are seeing these sectors to be doing relatively better.

Govindraj Ethiraj: Okay, so if you were to now look at the earnings of this sample that you've studied or looked at or and are updating, I'm sure, how is earnings looking overall? How is the earnings trend looking like? Do you see it continuing for coming quarters? And then of the big question, of course, is, how does that relate to valuations?

Vinod Karki: Yeah. So see like, for example, commodities showing contraction, but from overall demand perspective, you have to remember that if the GDP is on nominal basis, going to expand by around 11% then there will be sectors which should be above it, and there'll be sectors which will be below it, right? So I think on an average, and given some leverage effects in the economy, if that starts taking in, I will be disappointed if the top 50 companies in this country don't expand their earnings by 13%,14%,15% at least, if the nominal GDP and the productivity of capital also improving. In general, roes are improving. Balance sheets are improving. So and that's kind of the issue that macro view that I'm taking when I do a bottom up, I realized that when I add up all these nifty companies, for example, the consensus, consensus forecast growth is actually coming around that point, 15% growth. So I think that's the thing. But what. Have a positivity is there in terms of the GDP revision upwards for India and things like that, I think this clearly, more than getting reflected in stock prices or market cap, GDP is approaching 150% it was just north of that, around 155 I guess the peak we have seen earlier. Nothing saying that earlier peaks cannot be breached, but from a benchmark kind of a thing, it appears to be very close to peak valuation. So I think the eating for the market is simple that we may enter a phase where stock prices may not rise much, and there could be churn between sectors, some sectors going down, while some sectors rising in terms of stock price and the index at the index level, nothing much happens for a few quarters, maybe. And that gives an opportunity, because the earnings expansion is happening at the rate of 14, 15% so for six months, if the index doesn't go anywhere, the earnings would have expanded by 6-7% so that would give you a cushion of valuation

Govindraj Ethiraj: Last question. So as you look at the earnings for the last quarter, and we are also obviously begun the subsequent quarter, what are the kind of stocks then you would pick, or rather stack sectors that you would pick, which you feel would, let's say, allow for good earnings expansion and also have some free room in terms of valuation growth?

Vinod Karki: Yeah, so that's the question to be asked, because, as I said, stocks are reflecting whatever optimism is there. And you're seeing all these sectors which are talked about, the industrials, the utilities, the defense you know, their valuations. I don't think much is left over there. But if you look at banks, for example, I don't think bank, given that the investors have already taken a leap of faith that the big investment cycle is up, that's why the investors are at such valuations. Somehow they feel that the releveraging of the economy will not happen and banks will not grow at a significant rate going forward, and the valuations are reasonably cheap, in my view, given that the fundamentals of the banks, which is the NPA cycle, being at the bottom, and given that the investment cycle is just about picking up, there is no question that at some point, re leveraging cycle will start in the economy. So they are best placed for the cyclical recovery in the economy, in my view, with less fear of NPA build up immediately. So that's one spot where I think the growth outlook is great with less chances of balance sheet issues and the valuations. The key thing is that valuations are not yet too demanding in that space, and it's a large part of the contribution to the profit. So I think that is one space, and maybe some few industrials, maybe in the energy sector, maybe even in metals, maybe where things are a little cheaper, I would say. And the whole cycle has not yet picked up in terms of the industrial pickup completely. So this will be solved of pockets where growth is looking good and valuations are not extremely high.

Govindraj Ethiraj: Okay, so on the flip side, what are the kind of sectors you feel where there's a considerable mismatch between earnings and valuations, at least in your perspective,

Vinod Karki: yeah, so I think consumer names come to mind immediately, because there was one expectation from this budget that there will be lot of populism spending at the cost of development spending, which didn't happen. And if you look at their valuations, they are still in the north of 50s on a forward basis. So I don't think the valuations, kind of, you know, do justice to the growth and the fundamentals. Currently, long term fundamentals are good for consumer companies in general, but from a medium term perspective, given that the overall, especially the rural side, the consumption, is a little worrisome, I think there's a mismatch over there. Some moderation valuation will help that to make it better. That's one space and lot of these industrials where the growth trajectory is improving, but the valuations have gone really. You know, high, I mean, 4050, 6070, times is, I think there you could see some issues over there.

Govindraj Ethiraj: Vinod, thank you so much for joining me.

Vinod Karki: Thanks Govind, Thanks.

How Apps Are Fooling You
A study led by the Advertising Standards Council of India says that 52 of 53 top apps in India which have been downloaded some 21 billion times collectively use deceptive patterns.

The report looked at some 12,000 screens from 53 apps across nine industries and it is safe to say that you would know most of them, spanning as they food, travel and so on.

Interestingly, health tech apps were found to have the highest usage of dark patterns, followed by travel booking and fintech.

So what are dark patterns ?

Well, they are deceptive UI/UX practices that can mislead or trick users into doing something they originally did not intend or want to do.

For example, apps created a sense of false urgency, like health-tech apps, ecommerce ones made it difficult for users to delete their accounts and basket sneaking, what an interesting term, was seen in delivery and logistics apps.

The three big culprits were health tech, travel booking and ecommerce, says the report, authored by Parallel, a Bangalore based design studio.

I spoke with Manisha Kapoor, CEO of ASCI and began by asking her what she was taking away.

INTERVIEW TRANSCRIPT

Manisha Kapoor: This is an area that we have been kind of working on for the last couple of years. We released a discussion paper, we brought out guidelines. The Department of Consumer Affairs also brought out guidelines, subsequently, in terms of dark patterns. So it's obviously on the regulator's radar. You know, this issue, and even globally, it is, I think what we really did not know was the extent of dark patterns. I mean, I think anecdotally, all of us have encountered it. You know, we all know that they exist. Some of them are more apparent than others. And I think the exercise really was to try and map the extent of dark patterns that exist in some of the most popular apps that we use. That was number one. The second thing I think we wanted to do, along with that, was to also provide alternatives which could be more ethical and did not, in a sense, impair the consumer's ability to make an informed choice. And thirdly, we said, Let's also do a score calculator for someone who at least intends to make an app that does not use these dark patterns. Then what could be a way in which we also support people who wish to get it right. So I think these were the kind of triggers more as a follow up to the guidelines that we had released earlier, and we felt this was a next logical step in that seat.

Govindraj Ethiraj: So you're saying that there was no specific trigger. For example, the areas that you studied in the report, like travel and logistics or E commerce in general.

Manisha Kapoor: As I said, I think we all have encountered these dark patterns, and we know that they exist, right? I think what we really wanted to do was to map how prevalent they were, what were the most prevalent dark patterns? Because everything, you know, earlier than that is really anecdotal, that we've all we know that they exist, but there was really no study to map the extent of it. And we felt that that was really a starting point to even assess, you know, what is the consumer harm, or what is the need for consumer protection, and how large is that need? And therefore, it informs and guides as to what the you know, action should be, how much of a priorities should something like this be? So it helps us to take some of those calls in terms of, you know, our action, of course, inform the industry also about its prevalence and what they could do about

Govindraj Ethiraj: So if you look at the kinds of deceptive or patterns or dark patterns, now, some are to do with, let's say, influencing your purchase decision, either very overtly or covertly. The second could be to do with collecting data without telling you or asking for more data than perhaps required, or making it mandatory in some way. The third could be, let's say, where you are trying to delete an account and you can't. And maybe the fourth could be where, in the case of health tech apps, as shown in your study, you're forcing someone to take a decision base, because obviously there is a certain inbuilt fear, in the very nature of this interaction around health. So how are you seeing the hierarchy of, let's say, I mean, I guess it's a reverse hierarchy of the kinds of patterns and their impact on consumers. So

Manisha Kapoor: I think, you know, obviously patterns that have an immediate impact in terms of, you know, a monetary purchase that you're making definitely rang high because you are making a decision immediately, and you're kind of putting out some money immediately. You are not very sure whether you made the right decision, or you're not completely confident that the decision you've made is the right one. So that, to me, is certainly high on hierarchy. I think the second one, which perhaps most of us don't realize what we are doing is privacy, right? I mean, privacy seems to be a small price to pay for an immediate benefit, but we do not necessarily understand or appreciate the longer term implications of something like that. So to me, that then becomes, in a sense, the, you know, the secondary kind of issue, the others are also, I would say, come in the way of an enjoyable experience online, right? So, for example, the fact that you cannot delete an account, or it takes you one step to sign in, but nine steps to log out or to delete an account, or that you are constantly being bombarded, you know, through in app messages that you may not necessarily wish to see. So that impacts your experience of, you know, browsing and understanding. So some are more directly impacting your purchase decisions. The others could be impacting your privacy and a longer term kind of harm. And the third are just coming in the way of your being able to get on with what you intend to do on the app. So, I mean, that's one way in which we could look at these aspects, right?

Govindraj Ethiraj: And you've looked at all the big names. I mean, you looked at the Uber and Olas and, you know, in travel, makemytrip, the E-Commerce Guys. And you're also concluding that purchasing, subscribing and booking flows are where most deceptive pattern instances were observed. So any examples here?

Manisha Kapoor: Yeah, so I think a purchasing things like, you know, when you're sneaking something into the basket, which you, let's say, did not sign up for. So that's an example of when you are trying to purchase something, what's happening. Pricing could be another aspect within that that you saw a headline price that you got attracted to, and eventually, when you check out that pricing is much higher. Onboarding, again, you know the data collection that's happening. So those are some of the examples, you know, in this area, which. It was the area where we saw the most kind of dark patterns being used.

Govindraj Ethiraj: And you also pointed out, for example, the drip pricing, which I thought was an interesting term, you know, that you keep adding, you say, the original price, packaging charges, platform fees, tips, taxes, and finally, which we of course, see in some of the delivery apps, where the final price is almost no relation to what the price of the product is.

Manisha Kapoor: Yeah, absolutely. So I think, you know, again, pricing is a very core aspect on which people take decisions, you know, to buy or not. And you know, therefore pricing needs to be clear. And there could be some, you know, interfaces or options where the some of the services could be optional. And then one could understand that if the price increases as you choose more specific services, or, you know, things like that, but if you are actually choosing something which is a mandatory part of the payment, let's assume taxes, you know. So either you upfront, say taxes extra, but then if you keep adding taxes as you go along, you know, which is, which is not a discretionary, you know, payment from my end, whereas, let's say delivery, etc, could be, you know, there is a need to maybe calculate distance from where it's being delivered, etc, or, let's say in food delivery apps. I mean, I find things like packing charges. And how will you deliver the food without packing it? So, you know, those then become charges that you end up paying, but you have no choice on not paying those charges. I mean, they are pretty much a part of the offering in the, you know, they're a very fine part of the offering. So I think those become some of the issues to look at. And what that also does, sometimes it makes price comparison very difficult, right? I'm comparing, you know, price of a certain, let's say, product that I'm buying on site A, where certain costs are included, and then I see a lower price on you know, app B, but maybe when I check out, in the end, you know, I may be actually ending up paying a much higher price. So as a consumer, you are not able to compare prices. I think that's one. I think the third thing interesting about something like pricing is also that, I think a lot of Consumer Studies show that once you actually commit to a purchase, then even as you go along, if you see that it's becoming less and less attractive to you, you have, in a sense, invested some of your time and effort in coming to that conclusion, and you don't want to start all over again. So I think these are some of the ways in which, you know, we feel that consumers could be harmed, or, you know, there is potential for consumer harm in some of these apps.

Govindraj Ethiraj: So what's the remedial action or move forward? What happens with this? How could consumers potentially either use this or when, as you showcase this, do you feel the businesses who are involved in, let's say, putting out these apps with these kind of patterns, are they likely to change? Because they'll say that, you know, finally, how do we get customers, unless we perhaps hook them somewhere?

Manisha Kapoor: I mean, I would say it is a tricky issue, because it's not easy to detect dark patterns. That's number one. So, you know, from a remedial action, it may not be that smooth, from a regulatory point of view, or even from a technology point of view, to actually detect some of these dark patterns. So that definitely becomes a challenge. I think the other challenges are these patterns themselves will evolve over time, right? So even a remedial action that you imagine today will need to catch up with technology as it evolves. So that is, then again, an effort which is then costly, you know, it needs a certain building of expertise, etc. So if you ask me, Is it possible? Of course, it is, but it's not easy, and it's going to be expensive. And again, therefore I feel that, you know, with all complex things, it's a mixture of consumer education awareness, it's a question of deploying technology itself to track some of these patterns. But importantly, I think it's also for the industry to realize that in the long term, you know, there will be a pushback against such tactics, and eventually it destroys consumers confidence and trust in the online experience, which is where all brands are today. And you know, no one wants that. So I think even in its own self interest, the industry would need to come along, you know, these journeys, and to say that, yes, we believe that, you know, the online experience needs to be something which consumers can confidently come to and feel that it's a space that is safe. So I would say that these are all the different pressures and pulls, you know, which need to come together and work, move to more conscious patterns, to move to designs, which are, you know, puts the consumer at the center of, you know, the thinking on that.

Govindraj Ethiraj: Manisha, thank you so much for joining me.

Manisha Kapoor: Thank you. Thanks Govind.