Hello. We’ll investigate why earnings for major Indian companies are falling, talk about how the nation liberalized its markets in the 90s, and then close with Gupshup, a round-up of the most important headlines.

BTW: Indian food is known for its spicy food — do you know what percent of global spice production India is responsible for? (Answer at bottom)

Markets

Read here for an appendix on the above.

Earnings Are Plummeting. Why?

Indian earnings for companies worth $600M or more dropped by 30%, with 40 of such companies reporting over 50% drop. This is largely a result of rising costs, as revenues have steadily climbed. 

One contributor is rising input costs. SPGlobal published in June that Indian manufacturing companies were seeing their margins squeezed by rising input and freight costs, with little ability to pass this on to consumers. Their August survey revealed manufacturing companies reporting further increased cost burdens from building maintenance, food, labor, raw materials, and transportation costs. Indian industries face tight price competition with Chinese steel, which has been flooding markets in recent months.

Indian companies also struggle with unfavorable base effects, as earnings grew by over 30 percent across Indian companies last year.

Still, August data showed that private sector output in India increased for the 37th consecutive month, with the growth rate still significantly strong compared to historical trends. Rate cuts, which are more likely now after Federal Reserve Chair Jerome Powell indicated they will cut rates as early as September, will provide relief to Indian companies that have been increasing their debt loads for critical projects.

Foreign investors are starting to turn away with flows reducing by $2B over the month. Although this is a small amount, the reduction in earnings has led to fundamental value being eroded away. Interestingly, some of the money is going towards IPOs with primary issuance inflow increasing by $1.4B. (Pricey stocks.) MSCI is rebalancing its Indian indices by adding 7 stocks and reducing restrictions on Adani stocks, which is expected to cause a $3 billion inflow.

India Used to be Socialist. What Happened?

At its founding, India’s architects designed a centrally-planned economy. For decades, the government operated most financial institutions, and manufacturing conglomerates, with heavy protectionism, a focus on import substitution industrialization, and micro-managing the private sector.

In 1969, J. R. D. Tata described doing business in India as “I cannot decide how much to borrow, what shares to issue, at what price, what wages and bonus to pay, and what dividend to give. I even need the government's permission for the salary I pay to a senior executive.”

India’s inward-obsessed domestic policy was driven by a desire for economic independence to solidify political independence. Many post-independence Indian thinkers thought free trade with the West would only restore the exploitation of Indian workers by the British that they had just fought so hard to end. “India's share of global trade fell steadily from 2.2 percent at independence to 0.45 percent in 1985, and that was hailed as a policy triumph by Indian socialists,” economist S. S. A. Aiyar writes.

However, by the 1980s it was obvious to the Indira Gandhi government that the country was far behind its peers; often treated as an economic equivalent of Pakistan despite having 8 times the population. The Gandhi administration eased regulations and investment controls, which caused an economic boon from 1988 to 1991. 

By 1991, the government was confronted with a near-empty currency reserve. Since India’s rupee was pegged to a basket of currencies of trading partners, the government often had to deploy reserves quickly to keep the peg stable. The 1991 global oil crisis, initiated by Saddam Hussein’s invasion of Kuwait, caused import bills to skyrocket, wiping the RBI’s reserves. Newly elected Prime Minister P. V. Narasimha Rao, and his finance minister (and future Prime Minister) Manmohan Singh, worked to quickly liberalize the economy to jumpstart growth.

Rao administration policies include ending the License Raj by removing licensing restrictions for all industries except 18 related to security, social, safety, or environmental concerns. To attract foreign investment, it allowed automatic approval for investments up to 51% foreign ownership, enabling foreign companies to bring in modern technology. It also eliminated the need for government approval of foreign technology agreements. Additionally, it aimed to break public sector monopolies by selling shares of public companies and limiting public sector growth to essential infrastructure, minerals, and defense. Finally, it abolished the MRTP rule, which automatically put large companies under government supervision.

After the 1991-1993 liberalization reforms, India experienced massive economic growth, lifting 139 million out of extreme poverty in two decades. From 1993 to 2005, GDP growth averaged 6 percent.

As a way to test if the economic improvements were due to liberalization or just the 90s global economic boon, we can compare India’s growth to a control group of “synthetic India” composed of countries nearby India (like Pakistan and Bangladesh) that did not implement the same liberalization measures. We find that India’s actual growth far surpassed neighbors after the ‘90s liberalization efforts.

Macro

Ambani touts clean energy as being a growth engine (BBG) 

• Ambani’s Reliance plans to grow with carbon-intensive branches to target petrochemicals

• Throughout India, there has been a shift from pure petroleum to other fuel sources including solar

Heavy rain soon to boost India’s cotton and peanut industries (BBG) 

• Western states are forecasting heavy rain which could destroy supply of both crops 

  • This could be a bullish indicator for cotton prices which have slumped 15% this year

• Rain could, ironically, add to food inflation since India also imports 60% of vegetable oils

Food inflation is reducing bank profits (Economic Times)

• Banks are unsure of how to strategize given the RBI’s lack of forward guidance due to high food inflation

Retailers see bigger opportunity in small cities (BBG) 

• Smaller cities are looking to more branded products which could cause the local retail sector to expand to 1,000+ cities

  • This could open a $600B market opportunity

Equities

Tata likely to postpone media unit IPO since buying out minority investors (BBG) 

• The conglomerate withdrew its IPO prospectus and is said to focus on Tata Play first

• Tata bought out minority investors like Temasek and PE venture Tata Opportunities

Paytm has been allowed to increase capex in online processing unit by $12M (BBG)

• The troubled fintech firm received government approval to beef up its online transaction processing unit

Alts

South African insurer Santam is looking to India and Asia to diversify returns (BBG) 

• Santam is looking to diversify its premiums to boost tepid growth at home

• Asia and the MIddle east are being looked at for reinsurance purposes, such as calamities

Telecom minister Scindia supports recent tariff hikes by private telco players (Mint)

• Scinida believes there should be higher return on capital considering investment of $50B

• Voice tariffs have inched up from 0.03 rupees per minute to 0.033 rupees, a miniscule change

Politics

Danish court rules that an arms struggler cannot be extradited back to India (Mint)

• The court rejected India’s claim connected to a 1995 case, citing his rights could be violated

India adds a second nuclear-powered ballistic submarine to fleet (BBG) 

• The sub adds to India’s ability to launch nuclear weapons from sea, air, and land

• It features more advanced technology including the ability to stay submerged for longer times

The Supreme Court will hear a case from Airtel and Vodafone on reducing penalty charges relating to adjusted gross revenues (Mint)

• Both companies are arguing that the government miscalculated AGRs and levied high fees

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Oh, and India is responsible for 50 to 75 percent of the world’s spice production.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 83.85 Indian Rupee