The Core Report

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

The Take: India’s affluent class has choices to make.

In many ways it was inevitable. Both Canada and Australia have started tightening inflows, particularly for students.

Australia has said it will cap the number of new international students at 2.7 lakh for calendar 2025, the lowest in 5 years, down from the 5.6 Lakh in 2023.

Canada is tightening across the board, for both students and foreign workers. The details are several to get into here.

There are many reasons. One clearly is the pressure external students are putting on infrastructure including housing which is limited.

Second is the evident misuse and abuse of the system, leading to distortions in the labour market as well.

Fourth and most important, in my view, the not so soft issues of rising immigration, an increasingly sensitive voter issue in many countries, including in the United States.

So whether Donald Trump or Kamala Harris become President, moving to the US will be tougher than what it is.

These reversals will cause a blowback down the line, particularly for India’s affluent class.

The study overseas industry has boomed like never before. Just one segment, which is NBFCs, have seen the education loan business growing 80% and 70% each year in the last two years.

This year, education loans with NBFCs alone will grow another 40% to cross Rs 60,000 crore, most of it is for overseas education.

Amazingly despite all the growth, Crisil Ratings says formal loans are only a small part of the funds mobilised, so families are obviously mobilising elsewhere.

Interestingly, loan givers are themselves pulling back right now, for example for loans on Canada-bound university applications.

But the attraction to go overseas is not slowing despite increased friction, including paying presumptive taxes to the Indian Government on money remitted overseas.

Families continue to scrounge around to send their children for undergraduate study, where the chances of staying on are actually quite low from all the anecdotal evidence I have seen.

Many parents, both well earning professionals as well as self employed or those who run small or smaller businesses would like their children to leave the country and ideally return only for family reunions.

So what happens as options overseas shrink and opportunities in India stay roughly the same, particularly for India’s affluent class which has bet on mobility for the next generation and the promise of a better first world life, different from what they have lived.

We are on the way to that..tens of thousands of potential students will not make it to universities in Canada, Australia, England or the United States in coming years.

Even if they do, return is imminent for most, so it's back to the workforce here.

Stomaching this disappointment will be tough for all, even though a lot of money will be saved !

India’s economy continues to grow and can surely absorb talent, whether in humanities or technology.

But the domestic job market is facing its own stresses. Latest placement data from the top universities and colleges like IIT Bombay and IIM Ahmedabad suggests that median salaries are falling quite sharply. For IIM Ahmedabad’s one year MBA programme, maximum earning potential (MEP) has dropped to a 6-year low after having risen in previous years.

Some IIT Bombay students are settling for offers around Rs 4 Lakh a year, same as a media job or less sought after industries.

If this is the condition of the top colleges, it will be tougher down the line, or compromises will be higher.

And on the demand side, IT companies are shrinking at this point and while corporate India is hiring, the rate is slow.

And while the lure of entrepreneurship will stay, it is not the same as it was a few years ago when Silicon Valley venture funds had opened the sluice gates.And the most brainless ideas were supposed to reflect hidden genius.

And finally, the horror stories. Some 46,000 post graduates and post graduates applied for contractual sanitation worker roles in Haryana, the state has revealed, for a job that will pay around Rs 15,000 a month.

The 395,000 applicants in all who have applied apparently know precisely what they would be getting into.

The Hindustan Times quotes one applicant, a 29-year-old applicant, Rachana Devi from Sirsa, saying in the report the scarcity of jobs led her to apply for the position.

Despite holding a degree in nursery teacher training and currently pursuing a master’s degree in history, she has been unemployed for four years.

Several applicants hold BEd degrees and are studying for their masters in different disciplines.

India’s incoming, educated workforce has to make some tough choices.

First is to accept that going overseas will get tougher and they may have to make their way around the Indian job market.

Second, work harder to align with the job market, maybe sacrifice a little on perception and bury ego to get good experience, maybe settle for even free internships to do so.

Many smart young girls and boys are already doing that and they don’t need us to tell them.

Hopefully, their staying back will lead to a better quality of life for all of us.

And that brings us to the top stories and themes of the day.

Indices fall as markets digest Wall Street moves

Oil prices hit 9-month low, why it's good news for India.

Car dealerships say inventories have risen further to 75 days

Rupee hits fresh lifetime low.

How IPO prices perform after a year.

Are Indian IT companies and stocks set to break out of the holding pattern of recent years ?

Markets & More

Wall Street weighed heavily on Indian markets as they opened on Wednesday morning, falling and then recovering somewhat towards the end of trade.

Global sentiments are now weak again and it would be interesting to see if Indian markets can run on their own steam, notwithstanding the fact that domestic fund flow continues to be strong, though possibly not as much as in earlier months.

The Nifty50 finally gave up its 14-day winning streak and dropped 81 points to close at 25,198 while the Sensex closed 202 points down to close at 82,352.

Meanwhile, the rupee hit a record low on Wednesday, hitting a lifetime low of 83.98 to the U.S. dollar in the last minute of trade.

It closed at 83.9650, versus its previous close of 83.9675, having stayed in a narrow three-paisa range throughout the session, Reuters reported.

Car Inventories Rise Further
In a worrying sign, car dealerships are now saying that their inventory has now touched 75 days, remember they were ringing alarm bells at 70 days or so.

Moneycontrol has quoted the Federation of Automobile Dealers Associations (FADA) as saying they are holding some 750,000 cars which will take two and a half months to clear.

There is some disagreement between the car makers and the dealers on what the numbers really are and we will get to the bottom of it in a day or two but there is no doubt that the inventories are at very high levels and hurting the channels.

The larger question of course is what it reflects, a lack of pickup in older models, which is true, slowdown in demand because of weather linked issues, like heat waves followed by rains, or a consumption slowdown, or a mix of all.

Oil Prices
Oil prices rose slightly overnight after falling to a nine-month low as OPEC+ discussed delaying its plans to increase supplies.

Brent futures rose above $74 a barrel following a 5% drop on Tuesday.

Things have turned quite a bit in the oil market.

Bloomberg for example quoted oil forecasters from JPMorgan Chase & Co. to Standard Chartered Plc who had predicted a rally to $90 a barrel or beyond this quarter based in turn on summer driving demand and OPEC supply restraints.

Instead, oil has wiped out all of this year’s gains.

Other factors are downbeat economic data from China and the US has stirred fears over demand in the top two consumers, while a Libyan official predicted a resolution to the crisis that has shuttered half the country’s output, Bloomberg reported.

Some of these things could change faster but others, including the China slowdown will take time to unravel.

Back in India, paint stocks jumped, because of the fall in crude oil prices.

Stock Prices of Indigo Paints, Asian Paints, Berger, Kansai and Akzo Nobel all rose, reported the Mint, including Asian Paints which hit a 8-month high.

The outlook for paint stocks was relatively weak until now.

US Markets
The big news in global markets was the fall on Wall Street on Tuesday.

Following which Europe and Asia also saw sell offs.

Asian chip stocks fell thanks to fresh concerns over the AI frenzy.

But the big fall was Nvidia which plunged 9.5% on Tuesday, wiping nearly $300 billion off the chipmaker’s market cap and pulling chip stocks down with it, CNBC reported.

Intel fell almost 8%, Marvell slid 8.2%, and Broadcom lost about 6%. AMD

dropped 7.8%, and Qualcomm fell nearly 7%.

Chip stocks have been rising in the past year on optimism that the artificial intelligence boom will require companies to buy more semiconductors and memory to keep up with rising computational requirements for AI applications.

The sector has been led by Nvidia, which dominates the market for AI data centre chips. The stock is still up 118% in 2024, said CNBC, adding that other chip majors are also trying to get a foot in.

Intel and AMD sell AI chips, though with limited market penetration so far. Broadcom works on Google’s TPU chips, and Qualcomm is promoting its chips as the best for running AI on Android phones.

Last week, Nvidia reported $30 billion in revenue for the quarter ending in July, higher than Wall Street’s already elevated expectations.

But all that is not evidently making the Street happy.

IPO Blues
We have been talking of the IPO boom here and also the Sebi report which talked of how some 54% of IPO shares were flipped within a week of listing in a study that tracked IPO listings for around 18 months until December last year.

And maybe investors know something or their action precipitates the fall that comes.

On one hand, Of the 166 SME IPOs listed in 2024, two-thirds have given at least 50% return and 67 have delighted investors by doubling their money.

Many of them doubled on Day 1 itself till NSE imposed a 90% price cap a couple of months ago.

However, after the listing day boom, comes the real hurdle as most investors resort to flipping.

Shares of about half of SME stocks, 72 to be precise, that got listed in 2024 are now trading below the listing day's closing price, according to data from Prime Database. Such losses go as high as 69%, says MoneyControl quoting that data.

Bajaj Housing Finance IPO
More mega IPOs are on the way. Bajaj Housing Finance is targeting a valuation of 582.97 billion rupees ($6.94 billion) in one of India's biggest initial public offerings this year, a term sheet showed on Tuesday, according to Reuters.

Bajaj Housing Finance, the country's second biggest home loan financier by assets under management, has set a price band of 66-70 rupees per share for its $782 million IPO, which will run from Sept. 9 to Sept. 11.

IT Stocks See A Resurgence
Indian IT stocks have been on a reasonably strong wicket in recent months after falling out of favour and flavour with institutional investors for the last two years or so.

That is changing, at least broadly though it is not clear whether the latest upheavals on Wall Street including a fresh reading on the economy which is less positive will change things.

Broadly, many banks in the US have said they are stepping up spending on technology. If they do that as they do that, other sectors will follow and that would flow directly into and additionally so into the coffers of companies like TCS, Infosys, Wipro and others.

I reached out to Ajit Mishra, Sr VP, Research at Religare Broking and IT industry analyst and began by asking him what has led to the change in tone in IT stocks and also how India’s IT companies are internally geared for the shits.

INTERVIEW TRANSCRIPT

Ajit Mishra: Multiple factors, basically, which has led to this change in tone, in the IT counters in last six months. The first and foremost is that there was almost like two and a half years of under performance that we were seeing. So there was valuation comfort in certain pockets, which led to this recovery and but the major factor which we feed has led to this rebound, which is pushing the index and stocks to the record highs, is the possibility of rate cut in the US markets. So that too would positively impact the demand scenario and the fear that we have around this recessionary fee and US markets and other factors, so that might result in quicker than anticipated rate cuts. So that would help you know, largely the It counters. Another important aspect is that the sector will really demand, especially from the bsfi space that has started showing green shoots. So that is also another positive factor which is positively impacting stock prices.

Govindraj Ethiraj: If you were to go down to, let's say BFSI. Now I have been reading, for example, that some of the big banks in the United States are stepping up their IT spend, and have said that they will increase their IT spend. Now, would that mean that Indian IT companies could benefit directly? And are you seeing anything in the deal flows themselves that suggests that things are changing.

Ajit Mishra: So at present, we are not seeing any change in the deal flows. But yes, as you have rightly mentioned, that in fact, you know, in the BSFI segment, banking might take some time because we have the CEO selection also scheduled. So they might take some time to, like, you know, adjust to the newer political environment, and then they might take the call. But other pockets are definitely showing some sign of recovery and revival. So from insurance and the other verticals, we might see some order flow first, and then eventually the big banks will also follow the suit. So as of now, I feel that largely they are also in the weight and what situation. But as the management have shared, especially from the major IT companies, that they are positively biased towards the second half of this current fiscal. So maybe around the like, you know, next one or two quarters, we'll start seeing the deal flows also accordingly,

Govindraj Ethiraj: Right. And I'm assuming the stock prices are also running up in anticipation of that. So if we were to look from within now, so let's say in the top three or four companies, that's TCS, Infosys, Wipro, HCL tech, what's your sense? I mean, in a very broad, if you were to take a broad view of how they're coping with this current phase, I mean, there is, costs are obviously high. They've all slowed down on hiring, if not actually gone on the reverse in the last year where, obviously, margins are under pressure, the top line is not really growing. So this is from an internal point of view. Do you see that changing? And what could drive that?

Ajit Mishra: In fact, in the recent quarter, we saw a mixed trend, in fact, within the major players, also at some places, we saw some uptick in revenue, and in some places there was marginal improvement in the margins as well. But as of now, there is no clear trend. And yes, there were challenges related to cost and other factors, but the bigger factor was the attrition rate, which was like, you know, dampening and, you know, causing major challenges to the IT companies and plus the talent pool, especially for the new technologies like generative AI and others. So now they are focusing largely on that aspect. So internally, they are preparing for, let's say, this next demand revival. So the challenges that we were seeing, at least on the domestic front related internally to the companies they are working on it, and this is what you know, they have shared during their management commentary as well. So hopefully this scenario would change, and plus the internal demand that we are all seeing for the cloud migration, automation, domestically also that is all somehow helping them to cope up until we see the global demand you know re emerging.

Govindraj Ethiraj: If you go to look at last couple of years overall, top line has been slow, and that's what the stock markets have also, in a way, recognized that if the growth is going to be slow, and now we're saying that's changing. But how much of that change can actually make, Let's say it stocks more attractive? or are they running up too much in anticipation of what appears like relatively slower, or rather only marginal increase in growth and profitability.

Ajit Mishra: Govind, as we largely like, you know, discount at least, like, you know, six months or one year down the line, what the expectation so that is what we are seeing in it also. So yes, in certain pockets, we saw that the stock recovered, especially in the mid cap, id space sharply, and then the post numbers, the reaction was equally sharp. So I think that barring the it majors. In fact, if you exclude that Wipro in that list, other names are largely, you know, trading with modest optimism. It's not very high optimism, because they have not done much in last if you'll see in the last almost two and a half, three years, they have not gained much in terms of the price appreciation. So this recovery is just like, you know, a catch up move in line with what we are seeing in the other sectors. So the actual action I feel is, you know, impending, and maybe by the next half we'll see, start seeing the outperformance, maybe from the IT pack, which we have been seeing like struggling last couple of years.

Govindraj Ethiraj: Right, Ajit, Thank you so much for joining me.

Ajit Mishra: Thank you. Thank you so much. Govind.