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India Equity Research Reports, IPO and Stock News
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The last quarter has been challenging for Indian equities, given the
macro uncertainties – both local and global. In this backdrop, we
hosted Investors in a series of Tours covering Senior Policy makers,
Opinion leaders and Managements of more than 30 companies from
the Financials, Investment and Consumption sectors over the last
week. In this note, we have summarized the takeaways from these
meetings. We believe these notes should serve as a useful guide to
the current mood in business circles. Key highlights:
Policy environment – Slowdown, but no Paralysis. The pace of
economic reforms has not matched expectations. But that said, senior
bureaucrats opined that allegations of a ‘policy paralysis’ are over done
and largely a media creation. A sense of urgency appears to be coming
through. But execution will require consensus building and coordination.
We discerned a heightened commitment towards containing inflation and
fiscal consolidation. Progress on rural and social initiatives appear to be
solid and may not be well appreciated.
Financials – A mixed bag. Interest rates have probably peaked, but the
easing cycle could be some time away. Recent regulatory changes –
abolition of prepayment charges, savings bank rate deregulation and
tougher priority sector norms – are not seen as disruptive to sector
dynamics. Loan growth remains healthy. But asset quality concerns
remain at the fore given a slowing economy and the collapse in the INR.
But balance sheet risk is expected to be episodic rather than systemic.
Investment cycle – Advantage SoEs. A muddled macro is taking a toll
on investment cycle, particularly as it pertains to the private sector in the
infrastructure segment. Management focus appears to be on internal
measures to turn around viz. de-leveraging, working capital
rationalization, etc. State owned companies however appear to be
bucking the weak trend. A regulatory regime with assured returns and
conservative leverage have allowed them to push ahead with their
investment plans.
Consumption cycle – Moderating. The slowdown in discretionary
spending appears to be gathering momentum. Demand for staples has
been holding out until recently. But early signs of a moderation are
beginning to manifest themselves. The bigger concern for managements
remains margin pressure. A weak currency is adding to their woes, even
as volumes moderate and competitive pressures remain intense.
We met a few key senior Indian policy makers last week in Delhi. The
message we got is that there is a sense of urgency and willingness to
move ahead and undo the stigma of policy-paralysis. But there is also
this feeling that media has been more critical than justified. We felt a
heightened commitment towards fiscal consolidation and imperative
towards checking inflation at any cost. The constructive transformation
of rural India seems to provide a sense of achievement to Govt.
Policy paralysis and growth moderation. The pace of economic
reforms has definitely been slower than what Govt wanted it to be and
there seems to an urgency to accelerate the pace of reforms going
forward. There is also a belief that the global developments have had
significant impact on India’s economic growth. But the most important
policy development is going to be the GST, which could see
implementation sometime in FY13.
Populism and Inflation. There seems to be a muted agreement with the
view that Govt’s populist bias could have added to economy’s
inflationary problem. But the risk of wage–inflation spiral may not be
significant. The view is that the current inflationary situation is a
temporary phase of “relative – price” adjustments. Also, going forward
Inflation should ease in response to the lagged response of monetary
tightening, slower global growth and robust agri production.
Divestment and fiscal situation. Divestment ministry is considering
options like off-market deals and cross holdings to reach closer to the
budgeted target. The final plan is with the cabinet and should be made
public most likely by the first week of January. The ministry also argued
that there is a case for upgrade of India credit rating. We sensed a
heightened commitment towards sticking to the deficit target.
The rise of rural India. The official from the rural development
ministry sounded contended and enthused with the progress of the
NREGA scheme and believes that it’s been truly transformational in
nature. The confluence of various developments including NREGA,
higher MSPs, Telecom connectivity and funding through self help groups
are all catalyzing a surge of rural India.
Under-appreciated structural positives. 1. Encouraging trend in
number of children attending schools. 2. Higher allocations to Healthcare
& Education will have positive implication for the medium term growth
outlook 3. A few large states are doing well despite so much of sentiment
all around. 4 UID program is running ahead of schedule. 5. NREGA and
Mines & Mineral development act should help in containing the Naxal
problem.
Key takeaways from policy makers
meetings in Delhi
We met a few key senior Indian policy makers and policy experts earlier this week in
Delhi. The policy makers included Mr. Montek Singh Ahluwalia (Deputy
Chairman, Planning Commission), Mr. Sidhartha Pradhan (Disinvestment
Ministry), Mr. Arvind Mayaram (Ministry of Rural Development), and Team from
Department of Economic affairs (Ministry of Finance). We also met T.N. Ninan
(Chairman and Editorial director – Business Standard).
Policy paralysis and moderation in economic growth
The perception of policy paralysis has been a sore point for this Government. But,
looks like the slow pace of reforms and its impact on Indian economy has been
exaggerated by the media. There have been some noteworthy policy developments
like National Manufacturing policy, Telecom policy, Deregulation of petrol prices,
Deregulation of savings bank rate etc. Of course, much more should have been done
on the policy front but blaming not-so-speedy-policy -actions to India’s all economic
woes may not be totally correct. Corruption allegations have dented corporate
confidence and external environment has also been extremely difficult. One senior
policymaker highlighted that during 2004 -08 also the policy environment was not
conducive but India managed record 9% growth over the period. The point being that
there is less appreciation of the impact of global developments and foreign cost of
capital on India’s economic growth.
What’s likely and what should be top priority policy agenda. Given govt’s policy
bias so-far, looks like Mines & Mineral Development act and Food security bill will
most likely be approved. But the most important policy development is going to be
the GST, which could see implementation sometime in FY13. Coal and Energy
situation should also be high on the agenda given its implications on India’s twin
deficit and inflation situation.
Inflation and Outlook
A non - government official explicitly mentioned that the Govt has been populist and
that has aggravated the inflation situation. The risk of wage – inflation spiral doesn’t
appear to be significant as of now. The current situation is believed to be a temporary
“relative – price” adjustments. Inflation is expected to come down in lagged response
to monetary tightening, slower global growth and healthy agri production.
Divestment & Fiscal situation
The success of the divestment target – Rs. 400 bn - looks difficult. But, the official
indicated that the attempt is there to reach to as close to the budget. Ministry is
considering options of off-market deals, buy-backs and cross holdings also as a
possibility. The final plan is with the cabinet and will be made public most likely by
the first week of January.
The official also argued that there is a case for upgrade of India credit rating given
India is relatively better off compared to the peer group. India’s long-term foreign
currency rating is Baaa3 and BBB-u by Moody’s and S&P respectively.
We also sensed a heightened commitment towards sticking to the deficit target. The
Finance minister has already indicated that sticking with the target is going to be
difficult. But post our meetings we expect the slippage to be not as significant as
widely feared. Also, seven state elections next year could put some additional
pressure on the fiscal deficit as the Government may refrain from taking any hard
decisions to increase tax collections next fiscal year.
Rural India – Winds of Changes
The official from the rural development ministry appeared satisfied with the progress
of the NREGA scheme and believes that it’s been transformational in nature. The
scheme has successfully defined a nationwide minimum wage. He also mentioned
that there is widespread misconception about the ultimate objective of the scheme.
NREGA is not aimed towards productive asset creation but to help underprivileged
rural families.
The confluence of various developments including NREGA, higher MSPs , telecom ,
funding through self help groups are all causing a constructive change in the rural
India and this will have a healthy medium term impact on the sustainability of India’s
growth.
Surge in rural wages and impact on Inflation could have contributed to recent
inflationary pressure but view is that the urban India has been subsidized by the
cheap labor for long. The current adjustment in his opinion is much delayed but
much needed and should be healthy for the long-term growth outlook for India.
There is also increased focus on skill development for rural people and placements
into private sector companies.
Structural positives which are not getting highlighted
A few states are doing reasonably well despite the negative news flows on
Central Govt’s policy paralysis and global developments
Unique Identification program (UID) is on track and its going to be
transformational
Encouraging trend in number of children attending primary schools
Higher allocations to Healthcare & Education would have positive implication
for the medium term outlook
NREGA and Mines & Mineral development act should help in containing the
Naxal problem.
Asset quality – cautious note. The general outlook on asset quality was
cautious across the board. The key risk is from the macro, both from the
slowdown and possible incidents from the collapsing rupee. The
nervousness focused on wholesale loans, particularly small business
loans and SMEs. Banks seemed to be a little more sanguine on retail
asset quality.
Loan demand not an issue. Despite the weakness in the economy, loan
demand seems to be reasonably robust. The organized sector
employment scenario seems to be robust, with wages rising and little job
losses - this is driving retail loan demand, despite high rates. Wholesale
demand, especially from the project segment, looks quite weak, but that
doesn’t seem to be having a very dramatic effect on overall loan growth.
Regulation not a serious worry. Abolition of mortgage prepayment
charges, savings bank deregulation and tougher priority sector targets
have been seen as headwinds for the sector. The general feedback from
managements is that none of these will be very disruptive to overall
macro dynamics. On savings rates, the larger banks have not seen any
significant outflows and are reluctant to raise rates immediately – they
would only react if absolutely necessary.
Macro – tough times ahead. There seemed to be unanimity that there
would be a struggle for the economy in the coming months. Growth is
expected to slow, especially in FY13 - though the doomsday scenarios of
<7% are thought to be low-probability. The currency collapse would
inevitably lead to balance sheet stress, though it’s expected to be episodic
rather than systemic. Rates have probably peaked but the easing cycle is
unlikely to start soon.
Key takeaways from the meetings
We have summarized the key takeaways from each meeting in the sections below.
Reserve Bank of India
RBI maintained its position that it would be cautious in intervening in the
currency markets. The risk of a current account deficit country intervening
against such a strong move is that it could create serious problems later – the RBI
had taken a considered choice not to go down that path. There would be some
stresses – but the RBI believes that any balance sheet stress on corporates would
have to be dealt with at the micro level without the RBI’s intervention.
Growth is expected to slow, as a consequence of the monetary tightening of
recent quarters. Growth is expected to slip below 8% for the next 4-5 quarters,
especially with global factors coming into play. The investment cycle also
appears weak, and that would be a further drag. It's unlikely to drop below 7%,
though.
Inflation should come under control, once the slowdown takes hold for a couple
of quarters. Challenges do remain however - strong commodity prices, the weak
rupee and structural drivers of the weak inflation. The RBI maintains its stance
that it’s unlikely to raise rates in the immediate future.
The large drawals from the repo window is not as alarming as it looks. The repo
window is a useful safety valve for system liquidity, and the RBI’s assessment is
that there is plenty of further cushion in terms of excess SLR.
Public sector investment plans are chugging along: PSUs do not see
let-up in investment plans. A regulatory regime with assured returns
(e.g. power, gas investments), coupled with conservative leverage, are
big saviors in the current environment, unlike private sector counterparts
who have been too aggressive. Inter-PSU divestment-related
deliberations seem to have happened, but PSUs said they have large
capex commitments and would consider stake purchases only if they
could yield strategic benefits.
Private sector, on the other hand, needs to fix a few things before
the next growth phase sets in: Jaiprakash needs to de-leverage via
strategic stake sale of cement, and said they would, going forward, have
a more judicious mix of growth aspirations and cash flows. Tata Power
needs to take steps to reduce coal costs, for Mundra UMPP. Industry
sources cited several road concessions for sale on the secondary market,
and construction players who had bagged these clearly need to deleverage.
Key challenges / catalysts as seen by participants: (1) Severe concern
on the steep rise in land acquisition costs, if the bill on the same is
enacted, but will support the same if it will expedite land-buys. (2) The
need for bitter bill on electricity tariffs, reforms and potential SEB
bailouts, (3) Fuel – coal block auctions, shortage in gas production. (4)
High interest rates. Conversely, solution / turnaround in the above would
constitute catalysts.
Company / investor mood: Companies still see the situation as
challenging but are focused on internal measures to turn around (Eg: deleveraging,
working capital improvements). Amongst investors,
investment plays are out of favour, and most investors did not see the
case for an outright buy, although the general opinion is that some stocks
are interesting enough to be kept in the radar for a better entry point
along the line.
Staples, consumer durables, retail and media space. Key takeaways
Volume growth rates holding well for staples, though some signs of
softness appearing. Most of the companies we visited during the tour
talked about early signs of slowdown in volume offtake, attributing this to
increasing macro (inflationary) headwinds and higher base effect. While
discretionary spends (read SSS growth for retailers) have been
impacted more significantly than staples demand, companies like HUL
and Dabur have started to notice some slowdown across urban and rural
FMCG demand.
RM headwinds have been exaggerated by sharp rupee depreciation.
Most staple companies noted that input costs remain at elevated level and
incremental pricing decisions will depend on cost inflation trends
particularly owing to recent rupee depreciation. We note that for companies
under our coverage nearly 20-55% of COGS is based on direct imports or
has import price parity and hence is adversely impacted by rupee
depreciation. However the timing and extent of the impact would depend on
kind of covers and hedges they are holding.
Pricing decisions have and will be calibrated given high competitive
intensity across most FMCG categories. Domestic companies prefer to focus
on niche categories where they have competitive advantage over
multinationals and pricing power is relatively better (GCPL in HHI/Powder
hair colors, Dabur in hair oils/health supplements/juices). Most companies
noted that A&P spends will likely move up in coming quarters.
Overseas expansion is a key pillar of growth strategy for domestic
companies. Indian companies remain quite optimistic about growth
prospects in emerging economies (particularly Africa) and are significantly
increasing investments to widen their product portfolio and distribution
reach in these regions and expect margins to gradually move up in line with
domestic margins. While overseas operations do provide revenue growth
opportunities, we believe they may not merit similar valuations as the Indian
operations given lower margin/return profile for most overseas operations
and risks (currency, political, execution etc) associated with them.
GST and FDI in Retail. Nearly all FMCG and Retail companies talked
about significant benefits from GST implementation, though uncertainity
around timing and proper execution of the same remains a key concern. FDI
in multi-brand retail will help ease funding concerns for Pantaloon Retail.
Valuations, stock picks. FMCG sector has outperformed the broader market
by 21% over past six months, and on P/E Indian staples are trading at a 99%
premium to MSCI India (vs 38% 5-yr average premium). While we do not
deny the structural high-quality nature of these names (low debt, high ROE,
attractive div payout) which is leading to investor bias towards defensive
staples in current volatile markets, further re-rating looks unlikely unless
there is acceleration in growth rates. Our preferred picks in Indian consumer
staples space are ITC (OW) and GSK Consumer (OW). We would seek
better entry opportunities for Nestle India (N), GCPL (N) and Dabur (N).
We met the large auto OEMs as part of our India Consumption Tour.
Managements highlighted that the macro environment remains challenging
with elevated interest/ fuel costs impacting consumer sentiment. On
margins, the sharp depreciation of the INR will impact profitability given
the higher cost of imported components as well as it will offset the benefits
of moderating global commodity prices.
Volumes trends to remain weak for cars, moderate for two
wheelers: Maruti’s management expects consumer demand to remain
weak over 2H, and they expect volumes to decline over FY12. Hero
Motocorp is expecting sales growth to come off over 2H, given a
demanding base effect. Mahindra continues to guide for 11-13% growth
in tractors over the medium term, with the near term sales growth
momentum sustaining in healthy double digits. While demand for UVs is
likely to moderate given macro headwinds, new product launches will
drive growth.
Diesel fuel tax is widely debated issue with OEMs: Managements
believe that the government would have to address the issue in the near
future. They continued to highlight their preference to raise diesel fuel
prices rather than levying additional taxes on diesel vehicles. The
managements believe that as diesel is more fuel efficient, customers may
continue to prefer this economical fuel. However, the OEMs are
contemplating to provide alternate power train options.
Competition to remain intense across categories: Managements
believed that competition will remain intense as OEMs introduce
products across segments. Maruti highlighted that it would be launching
a new mid-end Utility Vehicle in FY12, Honda is launching a 100cc bike
in early FY12 while global OEMs would continue broad basing their
distribution network.
Currency pressures to impact profitability: Currency depreciation will
further impact costs of imports for foreign OEMs while local OEMs will
be relatively insulated. Also, while commodity prices have come off
globally, the strengthening USD will partially offset the benefits of the
same.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The last quarter has been challenging for Indian equities, given the
macro uncertainties – both local and global. In this backdrop, we
hosted Investors in a series of Tours covering Senior Policy makers,
Opinion leaders and Managements of more than 30 companies from
the Financials, Investment and Consumption sectors over the last
week. In this note, we have summarized the takeaways from these
meetings. We believe these notes should serve as a useful guide to
the current mood in business circles. Key highlights:
Policy environment – Slowdown, but no Paralysis. The pace of
economic reforms has not matched expectations. But that said, senior
bureaucrats opined that allegations of a ‘policy paralysis’ are over done
and largely a media creation. A sense of urgency appears to be coming
through. But execution will require consensus building and coordination.
We discerned a heightened commitment towards containing inflation and
fiscal consolidation. Progress on rural and social initiatives appear to be
solid and may not be well appreciated.
Financials – A mixed bag. Interest rates have probably peaked, but the
easing cycle could be some time away. Recent regulatory changes –
abolition of prepayment charges, savings bank rate deregulation and
tougher priority sector norms – are not seen as disruptive to sector
dynamics. Loan growth remains healthy. But asset quality concerns
remain at the fore given a slowing economy and the collapse in the INR.
But balance sheet risk is expected to be episodic rather than systemic.
Investment cycle – Advantage SoEs. A muddled macro is taking a toll
on investment cycle, particularly as it pertains to the private sector in the
infrastructure segment. Management focus appears to be on internal
measures to turn around viz. de-leveraging, working capital
rationalization, etc. State owned companies however appear to be
bucking the weak trend. A regulatory regime with assured returns and
conservative leverage have allowed them to push ahead with their
investment plans.
Consumption cycle – Moderating. The slowdown in discretionary
spending appears to be gathering momentum. Demand for staples has
been holding out until recently. But early signs of a moderation are
beginning to manifest themselves. The bigger concern for managements
remains margin pressure. A weak currency is adding to their woes, even
as volumes moderate and competitive pressures remain intense.
We met a few key senior Indian policy makers last week in Delhi. The
message we got is that there is a sense of urgency and willingness to
move ahead and undo the stigma of policy-paralysis. But there is also
this feeling that media has been more critical than justified. We felt a
heightened commitment towards fiscal consolidation and imperative
towards checking inflation at any cost. The constructive transformation
of rural India seems to provide a sense of achievement to Govt.
Policy paralysis and growth moderation. The pace of economic
reforms has definitely been slower than what Govt wanted it to be and
there seems to an urgency to accelerate the pace of reforms going
forward. There is also a belief that the global developments have had
significant impact on India’s economic growth. But the most important
policy development is going to be the GST, which could see
implementation sometime in FY13.
Populism and Inflation. There seems to be a muted agreement with the
view that Govt’s populist bias could have added to economy’s
inflationary problem. But the risk of wage–inflation spiral may not be
significant. The view is that the current inflationary situation is a
temporary phase of “relative – price” adjustments. Also, going forward
Inflation should ease in response to the lagged response of monetary
tightening, slower global growth and robust agri production.
Divestment and fiscal situation. Divestment ministry is considering
options like off-market deals and cross holdings to reach closer to the
budgeted target. The final plan is with the cabinet and should be made
public most likely by the first week of January. The ministry also argued
that there is a case for upgrade of India credit rating. We sensed a
heightened commitment towards sticking to the deficit target.
The rise of rural India. The official from the rural development
ministry sounded contended and enthused with the progress of the
NREGA scheme and believes that it’s been truly transformational in
nature. The confluence of various developments including NREGA,
higher MSPs, Telecom connectivity and funding through self help groups
are all catalyzing a surge of rural India.
Under-appreciated structural positives. 1. Encouraging trend in
number of children attending schools. 2. Higher allocations to Healthcare
& Education will have positive implication for the medium term growth
outlook 3. A few large states are doing well despite so much of sentiment
all around. 4 UID program is running ahead of schedule. 5. NREGA and
Mines & Mineral development act should help in containing the Naxal
problem.
Key takeaways from policy makers
meetings in Delhi
We met a few key senior Indian policy makers and policy experts earlier this week in
Delhi. The policy makers included Mr. Montek Singh Ahluwalia (Deputy
Chairman, Planning Commission), Mr. Sidhartha Pradhan (Disinvestment
Ministry), Mr. Arvind Mayaram (Ministry of Rural Development), and Team from
Department of Economic affairs (Ministry of Finance). We also met T.N. Ninan
(Chairman and Editorial director – Business Standard).
Policy paralysis and moderation in economic growth
The perception of policy paralysis has been a sore point for this Government. But,
looks like the slow pace of reforms and its impact on Indian economy has been
exaggerated by the media. There have been some noteworthy policy developments
like National Manufacturing policy, Telecom policy, Deregulation of petrol prices,
Deregulation of savings bank rate etc. Of course, much more should have been done
on the policy front but blaming not-so-speedy-policy -actions to India’s all economic
woes may not be totally correct. Corruption allegations have dented corporate
confidence and external environment has also been extremely difficult. One senior
policymaker highlighted that during 2004 -08 also the policy environment was not
conducive but India managed record 9% growth over the period. The point being that
there is less appreciation of the impact of global developments and foreign cost of
capital on India’s economic growth.
What’s likely and what should be top priority policy agenda. Given govt’s policy
bias so-far, looks like Mines & Mineral Development act and Food security bill will
most likely be approved. But the most important policy development is going to be
the GST, which could see implementation sometime in FY13. Coal and Energy
situation should also be high on the agenda given its implications on India’s twin
deficit and inflation situation.
Inflation and Outlook
A non - government official explicitly mentioned that the Govt has been populist and
that has aggravated the inflation situation. The risk of wage – inflation spiral doesn’t
appear to be significant as of now. The current situation is believed to be a temporary
“relative – price” adjustments. Inflation is expected to come down in lagged response
to monetary tightening, slower global growth and healthy agri production.
Divestment & Fiscal situation
The success of the divestment target – Rs. 400 bn - looks difficult. But, the official
indicated that the attempt is there to reach to as close to the budget. Ministry is
considering options of off-market deals, buy-backs and cross holdings also as a
possibility. The final plan is with the cabinet and will be made public most likely by
the first week of January.
The official also argued that there is a case for upgrade of India credit rating given
India is relatively better off compared to the peer group. India’s long-term foreign
currency rating is Baaa3 and BBB-u by Moody’s and S&P respectively.
We also sensed a heightened commitment towards sticking to the deficit target. The
Finance minister has already indicated that sticking with the target is going to be
difficult. But post our meetings we expect the slippage to be not as significant as
widely feared. Also, seven state elections next year could put some additional
pressure on the fiscal deficit as the Government may refrain from taking any hard
decisions to increase tax collections next fiscal year.
Rural India – Winds of Changes
The official from the rural development ministry appeared satisfied with the progress
of the NREGA scheme and believes that it’s been transformational in nature. The
scheme has successfully defined a nationwide minimum wage. He also mentioned
that there is widespread misconception about the ultimate objective of the scheme.
NREGA is not aimed towards productive asset creation but to help underprivileged
rural families.
The confluence of various developments including NREGA, higher MSPs , telecom ,
funding through self help groups are all causing a constructive change in the rural
India and this will have a healthy medium term impact on the sustainability of India’s
growth.
Surge in rural wages and impact on Inflation could have contributed to recent
inflationary pressure but view is that the urban India has been subsidized by the
cheap labor for long. The current adjustment in his opinion is much delayed but
much needed and should be healthy for the long-term growth outlook for India.
There is also increased focus on skill development for rural people and placements
into private sector companies.
Structural positives which are not getting highlighted
A few states are doing reasonably well despite the negative news flows on
Central Govt’s policy paralysis and global developments
Unique Identification program (UID) is on track and its going to be
transformational
Encouraging trend in number of children attending primary schools
Higher allocations to Healthcare & Education would have positive implication
for the medium term outlook
NREGA and Mines & Mineral development act should help in containing the
Naxal problem.
Asset quality – cautious note. The general outlook on asset quality was
cautious across the board. The key risk is from the macro, both from the
slowdown and possible incidents from the collapsing rupee. The
nervousness focused on wholesale loans, particularly small business
loans and SMEs. Banks seemed to be a little more sanguine on retail
asset quality.
Loan demand not an issue. Despite the weakness in the economy, loan
demand seems to be reasonably robust. The organized sector
employment scenario seems to be robust, with wages rising and little job
losses - this is driving retail loan demand, despite high rates. Wholesale
demand, especially from the project segment, looks quite weak, but that
doesn’t seem to be having a very dramatic effect on overall loan growth.
Regulation not a serious worry. Abolition of mortgage prepayment
charges, savings bank deregulation and tougher priority sector targets
have been seen as headwinds for the sector. The general feedback from
managements is that none of these will be very disruptive to overall
macro dynamics. On savings rates, the larger banks have not seen any
significant outflows and are reluctant to raise rates immediately – they
would only react if absolutely necessary.
Macro – tough times ahead. There seemed to be unanimity that there
would be a struggle for the economy in the coming months. Growth is
expected to slow, especially in FY13 - though the doomsday scenarios of
<7% are thought to be low-probability. The currency collapse would
inevitably lead to balance sheet stress, though it’s expected to be episodic
rather than systemic. Rates have probably peaked but the easing cycle is
unlikely to start soon.
Key takeaways from the meetings
We have summarized the key takeaways from each meeting in the sections below.
Reserve Bank of India
RBI maintained its position that it would be cautious in intervening in the
currency markets. The risk of a current account deficit country intervening
against such a strong move is that it could create serious problems later – the RBI
had taken a considered choice not to go down that path. There would be some
stresses – but the RBI believes that any balance sheet stress on corporates would
have to be dealt with at the micro level without the RBI’s intervention.
Growth is expected to slow, as a consequence of the monetary tightening of
recent quarters. Growth is expected to slip below 8% for the next 4-5 quarters,
especially with global factors coming into play. The investment cycle also
appears weak, and that would be a further drag. It's unlikely to drop below 7%,
though.
Inflation should come under control, once the slowdown takes hold for a couple
of quarters. Challenges do remain however - strong commodity prices, the weak
rupee and structural drivers of the weak inflation. The RBI maintains its stance
that it’s unlikely to raise rates in the immediate future.
The large drawals from the repo window is not as alarming as it looks. The repo
window is a useful safety valve for system liquidity, and the RBI’s assessment is
that there is plenty of further cushion in terms of excess SLR.
Public sector investment plans are chugging along: PSUs do not see
let-up in investment plans. A regulatory regime with assured returns
(e.g. power, gas investments), coupled with conservative leverage, are
big saviors in the current environment, unlike private sector counterparts
who have been too aggressive. Inter-PSU divestment-related
deliberations seem to have happened, but PSUs said they have large
capex commitments and would consider stake purchases only if they
could yield strategic benefits.
Private sector, on the other hand, needs to fix a few things before
the next growth phase sets in: Jaiprakash needs to de-leverage via
strategic stake sale of cement, and said they would, going forward, have
a more judicious mix of growth aspirations and cash flows. Tata Power
needs to take steps to reduce coal costs, for Mundra UMPP. Industry
sources cited several road concessions for sale on the secondary market,
and construction players who had bagged these clearly need to deleverage.
Key challenges / catalysts as seen by participants: (1) Severe concern
on the steep rise in land acquisition costs, if the bill on the same is
enacted, but will support the same if it will expedite land-buys. (2) The
need for bitter bill on electricity tariffs, reforms and potential SEB
bailouts, (3) Fuel – coal block auctions, shortage in gas production. (4)
High interest rates. Conversely, solution / turnaround in the above would
constitute catalysts.
Company / investor mood: Companies still see the situation as
challenging but are focused on internal measures to turn around (Eg: deleveraging,
working capital improvements). Amongst investors,
investment plays are out of favour, and most investors did not see the
case for an outright buy, although the general opinion is that some stocks
are interesting enough to be kept in the radar for a better entry point
along the line.
Staples, consumer durables, retail and media space. Key takeaways
Volume growth rates holding well for staples, though some signs of
softness appearing. Most of the companies we visited during the tour
talked about early signs of slowdown in volume offtake, attributing this to
increasing macro (inflationary) headwinds and higher base effect. While
discretionary spends (read SSS growth for retailers) have been
impacted more significantly than staples demand, companies like HUL
and Dabur have started to notice some slowdown across urban and rural
FMCG demand.
RM headwinds have been exaggerated by sharp rupee depreciation.
Most staple companies noted that input costs remain at elevated level and
incremental pricing decisions will depend on cost inflation trends
particularly owing to recent rupee depreciation. We note that for companies
under our coverage nearly 20-55% of COGS is based on direct imports or
has import price parity and hence is adversely impacted by rupee
depreciation. However the timing and extent of the impact would depend on
kind of covers and hedges they are holding.
Pricing decisions have and will be calibrated given high competitive
intensity across most FMCG categories. Domestic companies prefer to focus
on niche categories where they have competitive advantage over
multinationals and pricing power is relatively better (GCPL in HHI/Powder
hair colors, Dabur in hair oils/health supplements/juices). Most companies
noted that A&P spends will likely move up in coming quarters.
Overseas expansion is a key pillar of growth strategy for domestic
companies. Indian companies remain quite optimistic about growth
prospects in emerging economies (particularly Africa) and are significantly
increasing investments to widen their product portfolio and distribution
reach in these regions and expect margins to gradually move up in line with
domestic margins. While overseas operations do provide revenue growth
opportunities, we believe they may not merit similar valuations as the Indian
operations given lower margin/return profile for most overseas operations
and risks (currency, political, execution etc) associated with them.
GST and FDI in Retail. Nearly all FMCG and Retail companies talked
about significant benefits from GST implementation, though uncertainity
around timing and proper execution of the same remains a key concern. FDI
in multi-brand retail will help ease funding concerns for Pantaloon Retail.
Valuations, stock picks. FMCG sector has outperformed the broader market
by 21% over past six months, and on P/E Indian staples are trading at a 99%
premium to MSCI India (vs 38% 5-yr average premium). While we do not
deny the structural high-quality nature of these names (low debt, high ROE,
attractive div payout) which is leading to investor bias towards defensive
staples in current volatile markets, further re-rating looks unlikely unless
there is acceleration in growth rates. Our preferred picks in Indian consumer
staples space are ITC (OW) and GSK Consumer (OW). We would seek
better entry opportunities for Nestle India (N), GCPL (N) and Dabur (N).
We met the large auto OEMs as part of our India Consumption Tour.
Managements highlighted that the macro environment remains challenging
with elevated interest/ fuel costs impacting consumer sentiment. On
margins, the sharp depreciation of the INR will impact profitability given
the higher cost of imported components as well as it will offset the benefits
of moderating global commodity prices.
Volumes trends to remain weak for cars, moderate for two
wheelers: Maruti’s management expects consumer demand to remain
weak over 2H, and they expect volumes to decline over FY12. Hero
Motocorp is expecting sales growth to come off over 2H, given a
demanding base effect. Mahindra continues to guide for 11-13% growth
in tractors over the medium term, with the near term sales growth
momentum sustaining in healthy double digits. While demand for UVs is
likely to moderate given macro headwinds, new product launches will
drive growth.
Diesel fuel tax is widely debated issue with OEMs: Managements
believe that the government would have to address the issue in the near
future. They continued to highlight their preference to raise diesel fuel
prices rather than levying additional taxes on diesel vehicles. The
managements believe that as diesel is more fuel efficient, customers may
continue to prefer this economical fuel. However, the OEMs are
contemplating to provide alternate power train options.
Competition to remain intense across categories: Managements
believed that competition will remain intense as OEMs introduce
products across segments. Maruti highlighted that it would be launching
a new mid-end Utility Vehicle in FY12, Honda is launching a 100cc bike
in early FY12 while global OEMs would continue broad basing their
distribution network.
Currency pressures to impact profitability: Currency depreciation will
further impact costs of imports for foreign OEMs while local OEMs will
be relatively insulated. Also, while commodity prices have come off
globally, the strengthening USD will partially offset the benefits of the
same.
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