Greenvissage Explains – October 2024

Greenvissage explains, Can Swiggy dominate Zomato in Stock Markets?

As Swiggy prepares for its highly anticipated IPO, the question on everyone’s mind is whether it can rival the success of its main competitor, Zomato. With plans to raise over INR 10,000 crore, Swiggy aims to bolster its growth and expand its presence in the competitive food delivery and quick commerce landscape. But will this financial boost be enough to challenge Zomato’s established dominance? Swiggy’s IPO comes at a crucial time in India’s rapidly evolving food delivery and quick commerce sectors. While both companies share similar core offerings—food delivery and quick commerce—their paths to growth have diverged significantly. Swiggy, known for its innovative approach and an early foray into quick commerce with Instamart, has set aside INR 982 crore from its IPO proceeds to further expand this service. The aim is to scale operations, opening more dark stores to facilitate speedy grocery deliveries. In contrast, Zomato has made strategic moves, including its acquisition of Blinkit, which has quickly become a formidable player in quick commerce, capturing about 40% of the market share compared to Instamart’s 32%. This aggressive strategy has allowed Zomato to leverage Blinkit’s growth, positioning it as a strong competitor in both food delivery and quick commerce.

Swiggy and Zomato have different revenue models that reflect their strategies. For Swiggy, food delivery remains the primary revenue generator, with a gross order value (GOV) of INR 10,189 crore in Q1 FY25, marking a 23% growth. However, Zomato outperformed with a GOV of INR 15,455 crore, showcasing a remarkable 53% growth. Zomato also boasts a larger active user base—18 million compared to Swiggy’s 12 million—underscoring its market leadership. In the quick commerce arena, while Swiggy’s Instamart reported impressive revenue growth of 90% to INR 403 crore, Zomato’s Blinkit more than doubled that, achieving INR 942 crore with a staggering 145% growth. The differences in take rates also highlight Zomato’s efficiency; Blinkit’s take rate of 19.1% outpaces Instamart’s 14.8%. Swiggy’s B2B supply chain services have become its second-largest revenue source, bringing in INR 1,268 crore. This diversification offers Swiggy a buffer against fluctuations in its primary business areas. Zomato’s Hyperpure, while growing, still lags in comparison.

One of the most significant challenges for Swiggy is its current profitability status. In Q1 FY25, Zomato reported a net profit of INR 253 crore, while Swiggy faced a loss of INR 611 crore. This stark contrast raises concerns about Swiggy’s operational efficiency and its ability to manage costs effectively as it scales. Zomato’s tighter grip on profitability could bolster investor confidence as both companies navigate the IPO landscape. Both companies are eyeing growth in Tier 2 and Tier 3 cities, where the potential for expanding their customer base is substantial. Swiggy’s early entry into quick commerce and its acquisition of Scootsy in 2018 are strategic moves that laid the groundwork for its current offerings. However, the competition is fierce, and the race for market share in these emerging urban areas is heating up. As Swiggy gears up for its IPO, it must articulate a compelling growth story that highlights its potential to capture a larger market share, particularly in quick commerce. The funds raised will play a crucial role in scaling operations, enhancing marketing efforts, and ultimately bridging the gap with Zomato. The competition is set to intensify, and only time will tell who emerges victorious in this dynamic landscape.

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Greenvissage Explains, Will the Gold continue its rally?

Gold has been on a remarkable ascent over the past year, with prices soaring from INR 58,000 per 10 grams to nearly INR 77,000. This sharp increase is not merely a fleeting moment; it reflects deeper economic currents, raising the question: how long can this gold rally sustain itself? Gold is predominantly traded in US dollars, so its value is closely tied to the dollar’s strength. Recently, the dollar has weakened, making gold more affordable for investors using other currencies. This depreciation has sparked increased demand, contributing significantly to the rally. The US Federal Reserve’s monetary policy plays a crucial role in shaping gold prices. After a series of aggressive interest rate hikes in 2022, the Fed has shifted its stance, recently pausing rate increases and even cutting rates for the first time in four years. Lower interest rates decrease bond yields, prompting investors to seek alternatives like gold, which, while not yielding interest, is perceived as a stable store of value. Global inflation remains a persistent threat, eroding the purchasing power of currencies. Central banks have been printing money at unprecedented rates, further devaluing paper currencies. In this environment, gold acts as a hedge against inflation, appealing to investors looking for a safeguard for their wealth. Central banks around the world have been aggressively increasing their gold reserves, purchasing a record-breaking 1,136 tonnes in 2022 alone. This trend has continued into 2024, with an additional 483 tonnes bought in the first half of the year. Central banks are diversifying their reserves and hedging against potential currency crises and inflation, fueling demand for gold. The expansion of the money supply, particularly in the US, has been staggering. The M2 money supply has quadrupled since the early 2000s, indicating an abundance of currency in circulation. Historically, gold prices have tracked money supply growth, reinforcing the notion that as more money floods the market, confidence in paper currencies diminishes, pushing investors toward gold.

While several factors are currently propelling gold prices upward, questions remain about the sustainability of this rally. The health of the global economy will be a critical determinant. If inflation persists and economic instability continues, the demand for gold as a safe-haven asset is likely to remain strong. Conversely, if central banks successfully rein in inflation and stabilize currencies, the impetus for gold buying may diminish. The Federal Reserve’s future decisions regarding interest rates will also impact gold prices. A return to aggressive rate hikes could bolster the dollar and make bonds more attractive, reducing the allure of gold. Investors will need to monitor economic indicators closely to anticipate these shifts. Global tensions and geopolitical uncertainties often drive investors toward gold. As long as such uncertainties exist—be it from conflicts, trade wars, or economic instability—gold is likely to maintain its appeal. The M2 to Gold ratio, which compares the price of gold to the money supply, can provide insights into whether gold is undervalued or overvalued. A rising ratio may suggest that gold is becoming increasingly overvalued, signalling a potential correction. Keeping an eye on this metric can help investors gauge the market’s sentiment toward gold.

While the gold rally has been fueled by a combination of weakening currencies, inflation fears, central bank purchases, and an expanding money supply, its sustainability remains uncertain. Investors should remain vigilant about economic trends, interest rate movements, and geopolitical developments that could impact gold prices. In essence, the ongoing gold rally is more than just a reflection of price; it serves as a barometer for the broader economic landscape. As we navigate this precarious financial environment, the question is not only how long the rally will last but also what it signifies about the future of our financial systems. For now, gold continues to shine as a symbol of safety amid uncertainty.

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Greenvissage explains, What are the SEBI’s new rules for Futures and Options?

The Securities and Exchange Board of India (SEBI) has recently implemented significant changes to Futures and Options (F&O) trading in response to growing concerns over rampant speculation and financial losses among individual traders. With a staggering 93% of F&O traders reporting losses between FY22 and FY24, SEBI is stepping in to create a safer trading environment. One of the most notable changes is the restriction on weekly options trading. Currently, traders can engage in weekly options on multiple indices such as Nifty, Bank Nifty, and Sensex. Under the new regulations, SEBI plans to limit weekly options to just one major index per exchange. For instance, the National Stock Exchange (NSE) might allow weekly options exclusively on Bank Nifty or Nifty; the Bombay Stock Exchange (BSE) may offer them solely on Sensex or Bankex. This shift aims to curtail the high-frequency trading and speculative bets that come with multiple weekly options, which can lead to increased volatility and risk for individual traders.

Currently, traders holding calendar spreads—where they buy and sell options on the same underlying asset with different expiry dates—enjoy margin benefits even on expiry day. However, starting February 2025, SEBI will eliminate this benefit on expiry day, requiring traders to maintain full margins. For example, if a trader has a short option with a margin of INR 1 lakh and a hedged long option, they currently only need to hold INR 50,000. On expiry day, however, they will need to keep the entire INR 1 lakh in margin to cover potential volatility. To further manage risk, SEBI is introducing an additional 2% Extreme Loss Margin (ELM) on all short options positions on expiry day, effective November 2024. This applies to both pre-existing and newly created positions. For instance, a trader with a short position in a Nifty call option expiring on a specific day will need to add this 2% margin to their existing margin requirements. This move is intended to buffer against sudden market movements, which are often pronounced on expiry days.

The minimum contract size for index derivatives will be increased from the current range of INR 5 lakh to INR 10 lakh, to a new range of INR 15 lakh to INR 20 lakh starting in November 2024. This adjustment is designed to ensure that only experienced and well-capitalized traders participate in the derivatives market, reducing the likelihood of smaller retail investors overextending themselves. Currently, position limits—maximum exposure allowed in a contract—are checked only at the end of the trading day. Starting in April 2025, SEBI will implement intraday monitoring, taking multiple snapshots during the trading day to ensure traders do not exceed their limits at any point. This measure aims to provide real-time oversight and prevent excessive risk-taking. Finally, SEBI will now require traders to pay the full premium upfront when buying options, eliminating the previous practice of allowing payment at the end of the day. This change is aimed at preventing traders from relying on borrowed money or leveraging their positions further in an already high-risk environment.

SEBI’s new rules reflect a proactive approach to mitigating the risks associated with F&O trading in India. By implementing measures to limit speculative trading, increase margins, and ensure responsible trading practices, SEBI is taking significant steps to protect individual investors and promote a more stable trading environment. While these changes may impose additional challenges for traders, they are ultimately designed to foster a healthier market ecosystem and reduce the financial strain on individual traders. As the market adapts to these new regulations, it will be crucial for traders to stay informed and adjust their strategies accordingly.

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Greenvissage explains, Is the Chinese economy heading the Japanese way?

When analyzing the current state of China’s economy, one might be tempted to classify it in simple terms: is it booming or busting? The truth is far more nuanced, revealing a complex landscape that evokes memories of Japan’s economic trajectory in the 1990s. As we delve into the paradoxes defining China’s economic situation, we must consider whether the nation is on a path similar to Japan’s prolonged stagnation or if it can carve out a unique future. China is grappling with significant challenges that threaten its growth narrative. Consumer confidence has plummeted, the real estate sector is in turmoil, and youth unemployment has soared to nearly 20%. The government has stopped releasing unemployment data due to its alarming nature, indicating a deep crisis of confidence in China’s economic model. Yet, juxtaposed against these challenges is a burgeoning technological landscape. China is rapidly advancing in sectors like electric vehicles (EVs), where companies such as BYD have outpaced Tesla in exports. Moreover, China dominates the solar panel supply chain, controlling over 80% of global production. These contrasting dynamics lead to the question: how can such strong tech advancement coexist with a struggling economy?

To comprehend this duality, we can turn to the concept of a “balance sheet recession,” as coined by economist Richard Koo. This phenomenon occurs when an asset bubble bursts, leaving households and companies with more debt than assets. As a result, rather than borrowing and spending—typically seen in healthy economies—entities focus on debt repayment. China’s real estate bubble has left many in a precarious financial position, stifling consumer spending and investment. Even as the central bank lowers interest rates to stimulate the economy, the lack of demand for borrowing signifies a deeper issue: the desire to fix balance sheets rather than invest in growth. The similarities between China’s current situation and Japan’s economic downturn in the 1990s are striking. Japan, once considered an unstoppable economic force, saw its asset bubble burst, leading to a prolonged recession characterized by an ageing population. Japan’s working-age population peaked in 1995, and China’s has shown signs of decline since 2015. Both countries face demographic challenges that could limit economic growth. Japan experienced stagnant productivity growth; similarly, China is now grappling with diminishing returns on its investments. Just as Japanese banks propped up unprofitable companies, China’s state-owned enterprises continue to receive support, perpetuating inefficiencies. While these parallels are concerning, there are notable differences. China’s per capita GDP remains significantly lower than Japan’s during its downturn, suggesting more room for growth. Additionally, China has a broader range of policy tools at its disposal, which could potentially mitigate a similar fate.

In a balance sheet recession, Koo posits that the government must act as the “spender of last resort” to stabilize the economy. China has implemented fiscal stimulus, but much of this has been directed toward industrial policy rather than directly bolstering household incomes or consumption. The reliance on investment-led growth has created an imbalance, as household consumption only accounted for 38% of GDP in 2022, compared to 68% in the US. Despite these issues, some experts, like Vincent Gave from Gavekal Research, are cautiously optimistic. Gave argues that China’s rapid advancements in technology and innovation could help it avoid the fate of prolonged stagnation. With a focus on high-value industries, such as EVs and digital payments, China could generate new engines of growth. China’s economic trajectory is not occurring in isolation. Geopolitical tensions with the West, particularly the US, threaten to disrupt trade and collaboration in critical areas, including climate change. China’s dominance in green technologies makes it a vital partner in global efforts to tackle climate issues, but ongoing rivalries could complicate these collaborations.

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