Current Chronicle Brews #4
INR, Private Equity, Index inclusion for Bonds, Nike's dismal show and much more...
Index
Indian Rupee: Volatility to Stability.
Private Equity heads back to India: India's hefty returns lures back global PE giants
India's Financial Pivot Point: What the JPMorgan EM index inclusion means for India's Sovereign Debt market
How an ugly time for consumer stocks ended in dismay for Nike: Shares of the shoemaker suffered record one day drop.
IREDA's FPO: From Zero to Hero and Financial Gymnastics at their best
The Bird that never took off: Koo's Wings Clipped and India's Twitter Alternative Flies Away.
National Stock Exchange's New Rule: Capping the Fun at 90% for SME IPOs
These are the articles covering the upcoming trends we’re likely to see. I hope you like them.
Indian Rupee: Volatility to Stability
In the previous decade, in the aftermath of the Global Financial Crisis (GFC) in 2008, India was sieged by various political scandals and a policy paralysis (due to lack of stability in the policymaking decisions). Add to that the Federal Reserve's decision of stopping bond purchases to inject more liquidity into the system, leading to skyrocketing Treasury yields, and you get a weaker INR and declining Forex reserves.
All this was what India faced in the later years of the 2000s decade and the earlier years of the 2010s decade. India was included in the Fragile Five nations at that time. Since then, the Indian Rupee has continued to weaken against the US Dollar but has done so at a declining rate. So, what tamed the wild swings of the Indian Rupee and what are its current implications?
After Mr. Narendra Modi won his first Prime ministerial elections in 2014, and his third consecutive election in early June 2024, India has shown many signs of being the most resilient economy amongst those of the other emerging markets in Latin America and Africa.
Political stability, policy continuity, some major decisions like giving an Inflation target mandate to the RBI, promoting manufacturing and capital flows into India, promoting global capability centers for the export of services in India, commendable management of the Covid 19 pandemic, etc. have led to the rupee stabilizing more in the last 10 years.
Although there is a valid argument that the RBI does have a cap of the appreciation and depreciation of the INR by buying the USD and selling it respectively. This leads to the fact that economic fundamentals aren't fully factored in the INR value.
Investors tapping the Indian markets should rejoice at the sight of a less volatile currency, especially when Indian Treasuries are on the cusp of being included in the JP Morgan flagship emerging market index. This event has policymakers on their toes, but will help significantly to reduce the fiscal deficit which is bound to increase due to the NDA government not securing a majority.
India is also striving to promote greater international use of its currency, particularly for trade. Investors will be watching for a pivot in monetary policy, as a softening of interest rates would add to downward pressure on the rupee. A narrower interest-rate gap with the US tends to weigh on emerging-market currencies, as investors find the relative value proposition less appealing.
Private Equity heads back to India: India's hefty returns lures back global PE giants.
India recently has arrived at the limelight when it comes to private equity giants investing in the country.
In the past decade, international firms have boosted their investment in India fivefold, according to consultants Bain & Co. Funds that once settled for a minority share in established family-owned companies are now buying majority stakes of the hottest startups. And a growing stock market has enabled fund managers to sell their holdings quickly, helping return cash to their investors.
One who is aware of India's history prior to the 1991 reforms piled upon India by the IMF, courtesy of the Gulf war and soaring oil prices, must be wowed by this progress India has achieved in the past 2-3 decades.
Until the 1990s, India was almost completely closed to foreign capital, and few private equity funds were involved in marquee deals. A relaxation of rules around the turn of the century unleashed a rush into the country, with most of the biggest global funds firmly established there by 2006. Blackstone established itself in India in 2005, initially wrote off its India investments, and now India stands to be Blackstone's third largest investment market after the US and UK.
This journey wasn't all smooth though, with PE firms having to cross multiple hurdles such as strict government regulations over selling of stakes in Indian firms, heavy and complicated taxation environment (which has reduced, but is also prevalent today to some extent).
In recent years, PE firms have been adding staff in Mumbai, funding sectors across the entire economy. KKR has invested in eyewear maker Lenskart and school operator Lighthouse Learning Group, and it’s plowed about $3 billion into roads, renewable energy and traditional power generation. Carlyle Group Inc. (CG) has a stake in VLCC, which develops weight-loss solutions. Sweden’s EQT AB works with Indira IVF, a chain of fertility clinics. Blackstone holds stakes in more than 80 companies and has become the country’s largest commercial landlord.
A couple of years ago, when Prime Minister Narendra Modi met Blackstone Chief Executive Officer Stephen Schwarzman, they spoke about India’s tough laws on taking listed companies private, according to people familiar with the matter. And several funds have asked regulators to ease requirements calling for disclosure of the identity of any foreigners participating in an investment, which they say impede capital flow into the country, say the people, who asked not to be identified discussing sensitive conversations. The Indian Venture and Alternate Capital Association (IVCA), an industry body for alternative assets, held pre-budget consultations with Union finance minister Nirmala Sitharaman on 20 June.
“When PE funds invest in companies, they have some rights to protect themselves that can be viewed as a control position. So, the question was if there can be an exemption for PE funds," said Srini Sriniwasan, managing director of Kotak Alternate Asset Managers Ltd, who is also the vice-chairperson of IVCA.
The Indian government wants to encourage more people to put money into these AIFs because they can help support important things like building roads, giving loans to people who need them, and helping new companies grow.
India's Financial Pivot Point: What the JPMorgan EM index inclusion means for India's Sovereign Debt market
Starting on Friday, June 28, foreign investors will gain access to India’s tightly regulated $1.3 trillion government bond market, by way of India's inclusion in the JPMorgan Emerging Market Index.
India has a peak weightage of 10%, similar to that of China.
Global investment in the country’s debt could amount to as much as $40 billion in total due to the index inclusion, according to Goldman Sachs.
Background Story
Talks of India's inclusion in the index started in the previous decade when Mr. Raghuram Rajan was the Governer of the RBI. But those talks stalled as India was reluctant to let it's debt market sway at the whims and fancies of the Interest rates in the US, and the international investors with deep pockets.
Fast forward to 2020, the Covid 19 pandemic had hit, and the RBI opened a wide swath of its sovereign bond market to foreign investors, when the Modi Government needed a $22.6 billion stimulus package after the country had been locked down. The overseas cap in corporate debt will now be 15% of what’s outstanding, the RBI said back then. The plan to provide wider access to Indian bonds was first announced in the budget unveiled on Feb. 1, 2020, whereas the government had set a 6% limit on overseas ownership previously.
Even Bloomberg LP, the parent of Bloomberg Index Services had offered to work with the authorities for potential tax breaks to international investors investing in India. JPMorgan added India to its watchlist in 2021. India hasn’t yielded to requests by foreign investors for tax breaks.
What likely revived the matter was investors wanting diversification to compensate for China’s economic woes and sanctions on Russia.
Current Situation
JPMorgan announced India's inclusion in September 2023 and even Bloomberg LP is looking to include India in its index in the coming years, with a potential S&P Ratings upgrade too on the cards.
Global funds such as BlackRock (BLK), KKR and Abrdn investing in India ahead of the actual inclusion.
Advantages
Necessary funding for Infrastructure development and providing more liquidity to the banks for reducing credit cost and further enhancing the development of India. It is also expected to boost India’s private credit as well as corporate bonds markets.
INR Internationalization and enhanced use of the INR in World Trade.
For global investors, Indian bonds offer access to a high-growth, high-yield market.
Risks
Concerns over political stability and policy continuity.
Increase in volatility from sudden outflows during global risk-off periods.
To conclude, this has been a major success for India as in 2013, when it was lumped together as part of Morgan Stanley’s “Fragile Five” — economies that are heavily reliant on foreign inflows and vulnerable to rising US interest rates.
Eventually India could get added into even bigger bond indexes such as FTSE Russell’s World Government Bond Index or Bloomberg’s Global Aggregate Index.
How an ugly time for consumer stocks ended in dismay for Nike: Shares of the shoemaker suffered record one day drop.
Taking a hit due to weaker than expected quarterly revenue and dropping consumer spending in the US and also across the globe, Nike Inc. (NKE) shares suffered a record one-day drop on Friday.
Even similar consumer discretionary stocks like Walgreens Boots Alliance Inc. (WBA), Levi Strauss & Co. (LEVI), and in Europe, Hennes & Mauritz AB (H&M) and L’Oreal, also flashed warning signals about the resiliency of shoppers. Reports from Pool Corp (POOL, swimming pool supplies distributor). and General Mills Inc. (GIS) earlier this week similarly depicted households under pressure. British sportswear retailer JD Sports lost 5.4% at Friday's close, while Germany's Puma fell 1%. Adidas' shares were up marginally.
Strong consumer spending was the reason which powered the S&P 500 to records after records, but there might be some cracks developing in that very spending, which was strong despite persistent Inflation and higher borrowing costs.
Nike's U.S. market share in the sports footwear category fell to 34.97% in 2023 from 35.37% in 2022, and 35.40% in 2021, according to GlobalData.
The sportswear giant is changing its product lineup to roll out new $100-and-under sneakers in countries around the world to appeal to price-conscious consumers. It will also roll out this year an Air Max version and Pegasus 41 with full-length foam midsole made from ReactX to boost sustainability.
IREDA's FPO: From Zero to Hero and Financial Gymnastics at their best
The Indian Renewable Energy Development Agency (IREDA) is planning a Follow-on Public Offer (FPO) to raise equity capital, pending government approval. IREDA IPO was launched in November 2023 at ₹32 apiece. The stock is currently trading at ₹197.48, a significant 520% above the IPO issue price.
The proposed FPO could range from ₹4,000 crore to ₹5,000 crore.
IREDA is a systemically important non-deposit taking non-banking financial (NBFC-ND-SI) company. It facilitates promotion, development and commercialization of new and renewable sources of energy and provides financial assistance to energy efficiency and conservation projects.
IREDA sanctioned loans worth ₹9,136 crore during the first quarter of financial year 2025, a growth of nearly 5x from last year's figure of ₹1,893 crore. Disbursement of loans during the quarter stood at ₹5,320 crore, which is a 67.6% growth compared to the ₹3,174 crore it had disbursed during the corresponding quarter last year. At the end of the June quarter, IREDA's loan book stood at ₹63,150 crore, up 33.77% from the same period last year, when it stood at ₹47,207 crore.
The FPO is stated to be for the purpose of boosting up the equity capital of the company to maintain a AAA rating, to boost renewable energy project funding for the purpose of the Net-Zero ambitions and plans to become a Maharatna company by 2030. Currently there is a mini-ratna status conferred upon it by the Government of India in 2015.
The Bird that never took off: Koo's Wings Clipped and India's Twitter Alternative Flies Away.
Koo, India's Twitter-like social media app is shutting down after it failed to secure deals with multiple larger internet companies, conglomerates and media houses. Koo's co-founders Aprameya Radhakrishna and Mayank Bidawatka conveyed this development in a heartfelt note on Wednesday.
"We explored partnerships with multiple larger internet companies, conglomerates, and media houses but these talks didn't yield the outcome we wanted," stated the note.
But why exactly did India's twitter alternative fail to take off in a country aiming to be aatmanirbhar and having the double dhamaka of gradually rising internet penetration and a whole lot of people willing to sign up on the platform to talk to each other?
Let's get to know here:
Koo, the Indian microblogging platform was created to rival X/Twitter.
The social media network gained popularity in 2021 when the Indian government was in a scuffle with X/Twitter over the non-removal of some content, with several ministers and departments of the Union government flocking to Koo. Several prominent Indian politicians like Piyush Goyal, Ravi Shankar Prasad, author Amish Tripathi, cricketer Anil Kumble and Javagal Srinath were some of the first personalities to sign up on Koo.
Koo also had 1 million downloads within 48 hours of its launch. But the recent funding winter got too heavy for the little bird to handle, unsuccessful partnership discussions with major internet companies, conglomerates, and media houses and combined with failed merger and acquisition talks, its co-founders finally decided to let go and said a final goodbye on behalf of the little yellow bird.
National Stock Exchange's New Rule: Capping the Fun at 90% for SME IPOs
Move over, unicorns - India's National Stock Exchange (NSE) just capped the magic at 90%, that too with immediate effect from today.
In the frenzy of SME IPOs, where stocks soared up to 2x to 3x of their listing prices in a single day, The National Stock Exchange (NSE) decided that it was enough of minting money for SME investors and decided to put a circuit on the listing day gains of SME Stocks.
Now, NSE isn't doing this for its own benefit, but for the benefits of retail investors who get butchered like pigs, when they invest at the lure of 2x, 3x or even sometimes 10x to 15x times returns. An analysis of SME IPOs in the first six months of 2024 (Source: ET Markets) shows that 43 out of 110 issues have at least doubled investor wealth from their offer price with returns going up to 1,500%.
During the first half, 37 companies—from diverse sectors like co-working space, furniture retailing, and online ticket booking—have been able to tap the primary market to raise almost Rs 32,000 crore, according to data provided by PRIME Database. In 2007 — the peak of the bull market — 54 companies had raised Rs 20,833 crore. Thus far in 2024, around 120 SME companies have launched their IPOs. Of these, 98 SME IPOs listed at premium, while 18 listed at discount over issue price.
This can be put into perspective by the fact that BSE SME IPO index will hit the 1 lakh mark, even before the original BSE Sensex which has just crossed the 80000 mark.
"To standardize the opening price discovery/ equilibrium price across exchanges during special pre-open session for initial public offer (IPO) for the SME platform (and not for Mainboard IPOs/Relisted Securities/Public Debt), it has been decided to put an overall capping up to 90% over the Issue price for SME IPOs.
What do we, as retail investors need to know:
While Sebi approves mainboard IPOs, SME IPOs are approved by stock exchanges - BSE and NSE, so we as retail investors need to exercise a certain level of due diligence while investing in SME companies and not be swayed by "seemingly attractive returns that may quickly come their way."
So, whether you're looking to make a quick buck or a slow-and-steady fortune, just remember that in the world of SME IPOs, the limit does exist, and it's 90%.
That’s it for this article. There’s nothing more that I can add to it as of now, but surely I’ll keep writing more and more.
Thanks for your support.
Love you all.