Will we have our own global desi daaru?

Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.

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Today, we look at 6 stories:

• India might soon get a signature drink!
• The end of oil?
• NSE IPO finally?
• Port strike withdrawn by unions
• The Zee-Sony bailed merger
• Zomato Acquires PayTM’s ticketing business

India might soon get a signature drink!

The global alcoholic beverages industry is estimated to be worth about $1.7 trillion.

Despite the well-known harmful effects, alcohol remains very much a part of the culture in most countries. It's often referred to as a social lubricant for a reason. Signature alcoholic beverages are frequently woven into a nation's identity, often characterized by a unique ingredient that sets them apart. For example, Scotland and Ireland are popular for using barley in their whiskey, while Canada and the United States are known for using corn, rye, and wheat in many of their whiskies and bourbons.

However, unlike these nations, India has yet to establish a recognized primary ingredient or a signature spirit. While various alcoholic beverages are produced across different states—such as Feni in Goa, Mahua in Central India, and Arrack in the South—India as a whole has not yet developed a distinctive spirit that can be marketed globally.

Currently, the Indian alcohol market is dominated by locally produced versions of European spirits like whisky, rum, gin, and vodka. Indian manufacturers have created and adapted these foreign spirits using local ingredients, but none truly stand out as distinctly “Indian.”

This could soon change. Major distilleries like Diageo and Pernod Ricard, are now exploring the use of grains like millets in their whiskey production, aiming to create a signature “Indian” style and flavor.

Why millets, you might ask?

Millets are resilient crops, capable of withstanding extreme heat, drought, and even floods. This resilience makes them particularly suited to India’s climatic conditions, which range from dry to semi-dry regions. From a consumption perspective, millets are rich in nutrients like fiber, vitamins, and minerals, and they’re also gluten-free—a significant consideration given that over 8% of the global population is now gluten intolerant.

Recognizing these advantages, the Indian government has been actively promoting millets for several years. The push as been so significant that the United Nations declared 2023 as the International Year of Millets to help promote them globally. Today, India produces about 40% of the world’s millet, making us a global leader in its production—no other country comes close.

Source: Factly

Given this context, if India is to develop a signature spirit, millets seem to be the most fitting ingredient.

Traditionally, millet-based alcohol drinks have existed for quite some time, particularly in rural India and among tribal communities. For instance, Ragi is used to make drinks like "ragi beer" or "ragi wine" in southern India, while Bajra is used in Rajasthan to produce a traditional alcoholic beverage known as "Bajra Chhang." Some breweries across the country are also beginning to tap into this trend, offering millet-based beers.

Reflecting on this opportunity, the CMO of Diageo India stated, “India, on the path to becoming a more affluent nation, is looking more to its own roots to discover what's good, versus something that's just aping what's happening globally. So, there are innovations with ingredients such as millets, rice, or any other grain.”

She also compared this moment to similar developments in the Western alcohol beverage markets, noting, “The US had its moment with bourbon and Canada with rye. It’s about really looking at that unique blend of what is Indian, and we do a lot of innovation in our process because we have a very different temperature, different maturation, different climate zones across the country.”

Pernod Ricard, another major distillery that owns brands like Absolut Vodka, Chivas, and Jameson, is adopting a similar approach with an added focus on sustainability. Their goal is to create an authentic Indian spirit while also reducing water usage, lowering methane emissions, and creating new opportunities for local farmers.

This could mark a significant shift for India’s AlcoBev industry, particularly in terms of export potential. For context, in 2023, India’s alcoholic beverage exports were valued at approximately $300 million, a figure that has remained relatively flat for many years. Currently, India doesn’t even rank among the top 20 alcohol exporters globally.

Overall, the next few years will be crucial to watch in the AlcoBev space and for all related listed entities. If we can capitalize on the government’s push for millets, it could significantly elevate India’s global standing in an industry that is deeply embedded in worldwide social culture.

The end of oil?

The energy markets have been one of the most entertaining segments in the broader financial markets over the last five years. First, crude oil prices went negative during the COVID-19 pandemic. Then, after the reopening, we witnessed a massive rebound in crude prices. In 2022, Russia, the world’s second-largest producer of crude at that time, invaded Ukraine, causing oil prices to soar above $120 per barrel.

However, since then, crude prices have declined, and for the past year, they have been stuck in a range between $70 and $90 per barrel. As of the most recent data, Brent Crude was trading at $77 per barrel, despite the recent flare-up of violence in the Middle East between Israel and Hezbollah.

We’re discussing crude oil because it’s an essential input in numerous industries. If crude prices rise, everything from airlines, agriculture, textiles, construction, food manufacturing, to pharmaceuticals will be affected. The other reason is that there’s a lot happening in the crude oil market, making it a fascinating topic to explore.

At a high level, it’s interesting to note that despite all the geopolitical shocks and concerns this year, crude prices haven’t spiked dramatically. While they have been volatile, they’ve remained within a range, which is good news for all of us as consumers.

Demand and Supply

Let’s talk about demand and supply. There are three major organizations that publish widely followed forecasts:

• EIA: U.S. Energy Information Administration
• IEA: International Energy Agency
• OPEC: Organization of the Petroleum Exporting Countries

All three agencies recently released their latest forecasts, and we’re noticing something unusual. OPEC expects demand in 2024 to grow by 2.1 million barrels per day, while the EIA anticipates a growth of 1.1 million barrels per day, and the IEA projects an increase of just under 1 million barrels per day.

Source: EIA

For context, the world currently consumes over 100 million barrels of oil per day. These forecasts refer to the incremental oil demand beyond the 100+ million barrels a day mark.

Historically, there haven’t been such significant differences between the forecasts of these agencies. These gaps often reflect the inherent biases of these institutions. For example, OPEC’s demand forecasts tend to be conservative because its member countries, being oil exporters, are concerned about oversupply. On the other hand, the IEA’s forecasts have traditionally been more aggressive. However, in the last couple of years, the gap has widened significantly.

Apart from institutional biases, there are a few interesting factors at play:

• China’s economic headwinds: China, as always, plays a crucial role in global oil demand. The country is facing massive challenges in its property sector, which accounts for over 30% of its GDP. Home prices have been falling since 2019, leading to a drop in sales and new construction projects hitting record lows. All of this translates to lower oil demand, putting a cap on global oil demand.
• China’s transition to electric vehicles: Even though passenger cars represent a small percentage of diesel and gasoline demand, the transformation in China’s automotive sector is remarkable. Over 50% of all new cars sold are electric vehicles. Moreover, the market share of electric heavy and light commercial vehicles has surged to 10% and 16%, respectively. Additionally, there’s a rapid shift to LNG trucks. These developments are leading to significantly lower diesel demand in China.
• Impact of tariffs: China’s strategy of dumping everything from electric cars to steel, chemicals, and solar panels across the globe has triggered concerns. In response, countries like the U.S., Canada, Brazil, and those in Europe have imposed tariffs on Chinese goods. If these tariffs increase, Chinese exports will decline, leading to reduced freight movement within the country and lower oil demand. Although this is a slower trend, it has certainly put a ceiling on Chinese oil demand.

OPEC’s role

The second aspect to consider is OPEC’s actions. Since 2022, OPEC and Russia have cut oil production by as much as 6 million barrels per day, which is about 6% of global demand. These cuts are set to expire gradually over the course of 2024 and 2025, starting in October this year. While compliance with these cuts is always a question, countries have mostly adhered to them, with only a few hundred thousand barrels of deviation.

What’s interesting is the context in which these cuts were made. Typically, OPEC reduces oil supply when crude prices fall sharply to around $50 or $60 per barrel. However, in 2022, when OPEC cut supply, crude prices were well above $90 per barrel.

Why did this happen?

OPEC countries, particularly Saudi Arabia, are increasing domestic spending, leading to higher budgetary requirements. This means they need higher oil prices to sustain their domestic spending. In fact, one Bloomberg article suggested that Saudi Arabia’s fiscal break-even oil price, adjusted for spending, is between $100 and $105 per barrel.

However, OPEC cannot maintain these cuts indefinitely. There are already signs of tension within the group, with countries like the UAE requesting to pump more oil. The longer OPEC maintains these cuts, the weaker compliance will become, leading to a potential price crash when countries start pumping oil again.

Another factor is the rising oil production from non-OPEC countries such as the United States, Canada, Brazil, and Guyana. At the current price range of $70-$80 per barrel, it’s attractive enough for U.S. shale producers and these countries to invest more and ramp up production. This means that while OPEC is trying to put a floor under oil prices, other countries are increasing their output, complicating the situation further.

Source: EIA

NSE IPO finally?

On Tuesday, NSE, India’s largest stock exchange, restarted its efforts to go public—a journey it's been on for over eight years but has repeatedly stalled due to regulatory issues.

Here’s what happened

Back in 2015, a whistleblower exposed a significant problem. They claimed that NSE was giving some traders an unfair advantage, allowing them to place their trades faster than everyone else. SEBI, the market regulator, quickly took notice.

So, what was the issue? NSE had multiple servers to handle trades, but not all servers were created equal. Some were faster than others. While this difference in speed might not matter much for regular traders, it was a big deal for algorithmic traders—those who use high-speed computers to make rapid trades. A few microseconds could mean the difference between winning or losing big.

Some savvy traders figured out that by using these 'collocated' servers (a term for servers located inside NSE), they could trade much faster than others. But some traders took it a step further. They allegedly got NSE officials to connect them to the best, fastest servers every time. This unfair advantage sent their profits soaring.

When SEBI uncovered this, they were not pleased, especially since a significant portion of NSE’s revenue—over a third—came from these collocated servers. SEBI couldn’t allow NSE to go public with this mess unresolved because if the money was tainted by unfair practices, how could they justify selling shares of the exchange to the public?

In 2019, SEBI took action. NSE was fined ?625 crores plus 10% interest and was banned from the capital markets for six months. SEBI also put a halt to NSE’s IPO plans until the situation was sorted out.

As a result, NSE’s IPO plans were put on hold.

Fast forward to May this year, and a group called ‘People Activism Forum’ stepped in, taking the matter to the Delhi High Court. They argued that SEBI’s six-month ban shouldn’t prevent NSE from going public indefinitely.

Interestingly, Indian law doesn’t explicitly stop companies with pending cases from going public; it just requires them to disclose the details of such cases.

If NSE does finally get the green light for its IPO, it would be massive. We’re talking about the 8th largest stock exchange in the world—no other exchange trades more derivatives contracts than NSE. Companies worth a total of $5 trillion are traded on it. NSE is also highly profitable. In the last quarter, it had revenues of ?4,510 crores and a profit of ?2,567 crores.

However, there’s another challenge looming. SEBI is currently looking to rein in speculative trading volumes in NSE’s options market, which have seen explosive growth from FY20 to FY24. They’re focusing on equity index derivatives, which make up a large part of NSE’s trading.

According to a report by IIFL, if these measures are approved, NSE’s trading volumes could drop by about one-third, and its earnings might take a 20-25% hit by FY26. The final decision is still pending, so the impact remains uncertain.

Back in 2016, NSE was looking to raise v?10,000 crores through its IPO. It remains to be seen what the target will be this time around.

Tidbits

Port strike withdrawn by unions

If you recall, in the 27th August edition, we discussed how the global shipping crisis had an Indian twist. We also mentioned that dock workers were planning to strike on August 28th to protest the delay in concluding their wage negotiations.

However, the union, representing 20,000 workers from 12 major Indian ports, has decided to withdraw the strike after reaching an agreement on wages with the Indian Ports Association (IPA).

The dispute over wages began when the previous settlement expired on December 31, 2021. Now, the Wage Committee and the IPA have come to an understanding. The union has accepted an 8.5% wage increase over five years, effective retroactively from December 31, 2021. Additionally, a 30% Variable Dearness Allowance will be effective from January 1, 2022.

So, all’s well that ends well!

The Zee-Sony failed merger

Zee Entertainment Ltd. and Sony India were all set to merge following an announcement in September 2021. After two years of drama, the merger was on the brink of completion, even receiving approvals from bodies like the NCLT, CCI, NSE, and BSE. But strangely, the deadline to complete the merger expired on December 21, 2023, and it was officially called off in January this year.

But the story doesn’t end there. After the merger was called off, both parties ended up in a legal battle over who would pay the $90 million termination fee.

Finally, this week, after months of back and forth, Zee and Sony announced that they would withdraw their claims against each other. Both parties have now agreed to a mutual non-cash settlement, putting the matter to rest once and for all.

Zomato acquires Paytm’s ticketing business

Zomato has acquired Paytm’s event and movie ticketing subsidiaries for a massive ?2,048 crores!

India’s events market generated ??8,800 crores in revenue in 2023. Meanwhile, India’s movie market grew by 14% in 2023, reaching a value of ??19.7 thousand crores. Naturally, Zomato wanted a piece of this action.

But why?

You see, Zomato’s going-out business, which includes dining-out and event ticketing, had already made ?3,225 crores in FY24, growing at an impressive 136% YoY. By acquiring Paytm’s ticketing business, it seems Zomato is doubling down on this segment.

This move poses a serious threat to BookMyShow’s dominance in the ticketing industry. Zomato is optimistic about growing its ‘going out’ business into a ?10,000-crore brand.

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