Morning Scan: All the big stories to get you started for the day

The gap between equity valuation of top IT firms and their actual financial performance is rising rapidly. The nifty IT index has surged 7.1 percent in the past two trading sessions at a time when India’s four largest IT companies reported their worst quarterly performance in over five years. The top four IT firms are now trading at a trailing price to earnings multiple of 29.1 times, the highest in the past seven quarters.

Why it’s important: There seems to be no fundamental basis for the rally in IT stocks other than expectations that earnings growth will improve. Speculative exuberance seems to be the order of the day.

#3. Investors rush to buy sovereign gold bonds as high returns impart extra shine

Sovereign gold bonds have regained the interest of investors, posting a near record response in the current financial year in a replay seen in the pandemic scarred 2020-21. Although only one tranche per quarter has been announced so far since April last year, 31.6 tons of gold bonds have been sold. After the next tranche in March, the total for 2023-24 is expected to cross the record subscription level of 32.4 tons seen in 2020-21. The total subscription of the first three quarters was 157 percent higher on year.

Why it’s important: The market for sovereign gold bonds is maturing, driven by handsome compounded annual return of nearly 11 percent in eight years, excluding interest paid for half years during this period.

#4. Vodafone Idea makes no progress in securing funds from Development Finance Corporation

The telecom department has noted Vodafone Idea’s failure to close a funding from the US International Development Finance Corporation for deployment of new technologies despite assurances by the telco that it would do so four months ago. The government is the biggest shareholder in the cash-strapped carrier with a 33.1 percent stake.

Why it’s important: Loss-making Vodafone Idea has been struggling to raise funds. It needs capital to pay the government and large vendors, expand its 4G coverage and roll out 5G to compete with stronger rivals.

#5. B2B firm Udaan suffers from near halving of valuation, marking a precipitous fall

B2B ecommerce company Udaan’s valuation has fallen by nearly half to around $1.8 billion in a down round, marking one of the most precipitous drops for a startup that has raised over $1 billion. The Bengaluru-based Udaan was last valued at $3.2 billion following a funding round in January 2021.

Why it’s important: Udaan has been one of the highest-funded start-ups but it has been scaling down operations over the past 12-18 months to reduce cash burn and find a path to profitability.

#6. State-owned lenders to ramp up scrutiny of securities of high-value borrowers

Public sector banks are set to revamp their processes to create a risk-based profitability measurement framework to include more frequent scrutiny of securities pledged by high-value borrowers. They will also widen the coverage of early warning signals to help identify and reach out to distressed borrowers.

Why it’s important: This is part of efforts by state-run banks to transition to lending based on transaction and cashflow using new technology instead of traditional asset-based lending.

#7. Reserve Bank may offer relief to lenders on loans linked to alternative investment funds

The Reserve Bank could consider giving some relief to mainstream banks and development financiers on downstream loan-linked alternative investment fund exposures, which they were required to either liquidate by later this week or provide for in compliance with its prudential directive. NBFCs are unlikely to be provided any relief in this regard.

Why it’s important: The main goal of the original stricture is to de-risk such risky exposures and prevent potential evergreening of doubtful lending to struggling corporates. That should not be compromised.

#8. India’s share in venture capital funding falls to lowest in five years

India’s share of total global venture capital funding declined to 2.9 percent in 2023, the lowest since 2019, reaching just $7.3 billion as most startups struggled to raise money without marking down earlier valuations. Funding to Indian startups slumped by nearly a third compared to 2022, when it hit $20.6 billion and accounted for 4.8 percent of the global figure, according to global data by CB Insights.

Why it’s important: The era of easy money for the Indian start-up ecosystem is over. New enterprises have to show robust paths to profitability to be able to regain their funding mojo.

#9. Government to consider incentive scheme for critical minerals to forestall China

The government is likely to come up with a policy framework for critical mineral refining with an eye towards China. Under the policy, the government may come up with an incentive scheme on the lines of the production-linked incentive scheme. The mines ministry has prepared a policy draft in June after finalizing a list of 30 critical minerals required in a number of key sectors, including battery storage, telecom, and defense, among others.

Why it’s important: The experience of previous such incentive schemes shows that they are not necessarily attractive to businesses. A well-crafted policy will have legs to run.

#10. Pay packages of private bankers under scanner to prevent excessive risk-taking

Boardrooms and corner offices of private banks are under the scanner of the Reserve Bank of India as the regulator keeps top-level compensation under its thumb to prevent excessive risk-taking. In multiple instances, the banking overseer has refused to approve pay hikes, delayed approving higher remuneration or even directed an outright pay cut.

Why it’s important: Private banks have often seen salary increases of top brass run ahead of rises in revenue and profit, leading to a pushback on executive compensation by the central bank.