Visit http://indiaer.blogspot.com/ for complete details �� ��
The five megathemes that will characterize the Indian economy over the
next five years are the persistence of high inflation, the rise of the
“aspirational consumer”, a capex boom, the rise of financial intermediation
and the spread of social unrest and civil conflict. The sectors best placed to
benefit are NBFCs, Aspirational Consumer Goods manufacturers and
Capital Goods providers. The sectors which stand adversely exposed are
export oriented ones, particularly IT.
Narratives on India, especially those written in a rising stock markets, tend to paint
a picture of a country with limitless investment opportunities. Whilst we believe that
there are several structural drivers of such opportunities (for example, the economic
and demographic boom which is driving a surge in aspirational spending on
goods as diverse as cars, LCDs, designer underwear, jewellery and high protein
food ), we also highlight in this note several major qualifiers to these
opportunities. In particular, the biggest negatives for India are structurally high
inflation which will consistently erode profit margins of all but the
strongest companies and rising social unrest and civil conflict driven
by deep rooted divisions in Indian society.
Amidst these conflicting forces, the best positioned sectors are:
- NBFCs: Not only are NBFCs well placed to benefit from the surge in
household financial savings, they are also the least exposed to high
structural inflation .
- Aspirational Consumer Goods manufacturers: The high share of youth
and rising affluence suggest that consumer goods with an “aspirational”
spin will outperform essentials.
- Capital goods manufacturers: Cross-country experience suggests that
India is primed for a capex boom. Capital goods manufacturers stand to
benefit most from this development .
The sectors most adversely exposed are export oriented ones (and particularly IT) as
high inflation, high interest rates (which are likely to prevail to dampen such
inflation) and a strong rupee are likely to combine to erode their competitiveness.
Sectors where the prognosis is more mixed are:
- Banks: Whilst banks are well-placed to gain from the rise of financial
intermediation, high structural inflation will be a clear headwind on account
of exposure to high employee costs.
However, historical evidence suggests that banks outperform in a high
inflation environment.
- Mining & metals: Escalation of the Maoist insurgency in the mineral-rich
areas of India spells headwinds for this sector. However, if you believe
global commodity prices are set to rise then this sector is the obvious hedge
against inflation
---
Megatheme 1: Structurally high inflation
Supply constraints in India’s manufacturing sector have historically caused core
inflation to spike every time the economy expands rapidly (see Exhibit A on the
left). Limited access to finance, hard infrastructure deficits and labour market
issues have and will prevent timely supply responses in this demand
powerhouse thus driving manufacturing inflation higher. Furthermore, a
growing and young population with rising incomes will cause food demand to
grow rapidly, while supply responses continue to be weak. This supply-demand
mismatch will drive food prices higher over the next decade.
High inflation has historically been a negative for stock market returns
(see Exhibit B on the left) as it crunches companies’ margins through
higher input costs. Financial services’ companies emerge as being the
most inflation-immune due to their limited exposure to employee costs
as well as to raw material costs. Commodity-driven sectors emerge as
an obvious hedge against higher commodities’ prices. IT and other
labour-intensive export-facing sectors appear to be the most
vulnerable to high inflation as higher domestic wages erode their price
competitiveness.
Megatheme 2: the rise of the “aspirational” consumer
As a country’s per capita incomes rise, the consumption basket of its citizens
changes away from food (see Exhibit C on the left) and essentials to non-food
and aspirational items (such as cosmetics, motorbikes and jewellery). India’s
consumption basket has been undergoing just this sort of change. Given the
structural drivers of this trend (rising incomes, high share of youth and
urbanisation), investors should focus on aspirational product
manufacturers vis-à-vis essentials within India’s broader consumption
story.
Megatheme 3: a capex boom in the making
The experience of India’s Asian neighbours suggests that a high GDP growth
rate coupled with the investment:GDP ratio hitting 33% triggers a surge in
capex These trigger points along with India’s
infrastructure deficit and the Government’s desire to address this deficit has set
the scene for a seven year surge in capex. History suggests that the Indian
Capital Goods sector stands to gain most, both from profitability and
from a stock price perspective, from this impending surge in capex.
Megatheme 4: The coming of age of financial intermediation
India’s per capita income in PPP terms recently breached the $ 3K and its
savings to GDP ratio stands at a healthy 32%. Cross country experience
suggests that India’s savings ratio should touch ~40% in FY15(see Exhibit E on
the left) and will continue to rise until India’s per capita income reaches $ 8 K
the quantum of India’s savings over the next decade heralds
tremendous opportunities for financial intermediaries as the Indian
saver looks to channelize these savings into not just bank accounts but
into stocks and bonds as well.
Megatheme 5: India will become a hotbed of conflicts
Whilst the ongoing and widespread conflict in central India between the Indian
establishment and Maoists generates headlines, we see a broader theme in
these stray instances of conflict and expect their intensity to trend upwards over
the next decade as inequalities persist.
As corroborated by cross country experience, the unequal distribution of gains
of economic development across social groups and individuals will be the main
driver of this trend. A vast and stratified populace with
a youth bulge will add to the conflict risk.
The escalation of the Maoist movement, indisputably the biggest threat
to internal security will pose challenges for the Metal and Mining Sector
. Security costs for the corporate sector as a whole will rise as
crime rates and the frequency of conflict trends upwards. Indirect costs
in terms of political donations, bribes and CSR initiatives will be the
other head under which costs will rise. Additionally, the corporate sector
will continue to partially fund the Government’s fiscal transfers directed
at rural India. FMCG and aspirational product companies stand to gain
from these transfer payments.
No comments:
Post a Comment