These are the biggest concerns for India Inc.

Nov 22, 2011

In this issue:
» Will a falling rupee lead to mega reforms?
» What the bursting of the Chinese property bubble implies
» US is now part of an elite group
» IT spending in India set to grow in 2012
» ...and more!
---------------------------------------- Have an enriching Saturday! ----------------------------------------

Can Europe find a solution to end the current economic crisis?

Will the new economic reforms drive the stock markets?

Are we paying a price for bad democracy?

Get answers for all such complex issues straight from Jawahir Mulraj.

Click here to sign up for J Mulraj's 'Straight From The Hip' e-letter! It's Free!


The recently concluded results season for the quarter ended September 2011 has highlighted an important fact for India Inc. Namely that after two fiscals of very strong growth, the current fiscal has been a challenging one on various counts.

Indeed, there are some headwinds both medium term and long term that India Inc. will have to gear up for in the coming months. The first is the slowing demand in the Indian economy. One of the reasons why India recovered so quickly from the global financial crisis was because of the robust growth in domestic consumption at a time when the demand in the overseas markets slackened on account of recession. But the recent series of interest rate and fuel price hikes has put some brakes on the consumption story in India. Even during the current festive season demand across regions has been inconsistent and many industries, particularly auto, have witnessed a slowdown in demand as the propensity to spend reduced.

It goes without saying that high interest rates have acted as a double whammy for Indian companies. On the topline front, as mentioned earlier, high rates have not induced Indian consumers to spend. Thus, reduced demand has led to lower growth in overall revenues. On the profit front, companies having high amount of debt on their books have had to pay the price in terms of higher interest outgo. This in turn has affected net profits. Indeed, companies are also wary of making fresh investments in business when the prevailing rates are so high. The problem is compounded by the fact that while rates have been raised to tame inflation, the latter has not come down within the RBI's comfort range. In the meanwhile, industrial and manufacturing output has already begun to slowdown as is evident from the data and has raised fears of stagflation.

As if inflation itself was not a big worry, matters have been made worse by a sharply depreciating rupee. With the rupee continuing its free fall against the US dollar, the price of imports in local currency has soared. The biggest impact will be on India's oil bill, which accounts for one-third of imports. Although a depreciating rupee would mean a boost for exports, the same cannot be certain given that demand conditions in the overseas markets continue to remain weak. Meanwhile, fall in the value of the rupee is also escalating forex losses and increasing the imported cost of raw materials thereby impacting the margins of India Inc.

From a more long term and structural point of view, poor infrastructure and the government's paralysis on the policy front along with corruption issues has had an impact on investments in business and has added to the volatility in the stock markets.

Thus, while there could be pressures for most Indian companies in the medium term, investors would do well to gauge a company's prospects from a longer term perspective. Companies having a strong brand and distribution network, a sound management, healthy cash flows with little debt will be able to weather the storm better than their peers. And if the valuations of such companies are attractive, there is no reason not to be rewarded in the form of strong shareholder returns in the future.

Do you think that India Inc. will be able to display a marked improvement in performance in the coming fiscal years? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
China and India may be the fastest growing economies right now despite the slowdown. But if one compared industrial growth in both these economies then the difference is stark. As today's chart of the day shows, India's industrial growth in September 2011 has considerably slowed down, while China's has still managed to log in double-digit growth. India has been impacted by the rise in interest rates, which while it has not tamed inflation, has nevertheless taken its toll on industrial output.

Data Source: The Economist

With the rupee sliding against the dollar by the minute, India surely has a huge problem on its hands. It should be noted that India is a net importer as far as its trade with the rest of the world is concerned. In other words, it imports more than it exports and hence, it needs to have sufficient forex reserves in its kitty to bridge the gap. Now, thanks to foreigners picking up stake in our companies and also investing in corporate and government bonds, we did have enough reserves to fund our deficit on the trade front. But this resource is fast depleting. Thanks in part due to global risk aversion and also due to India's falling popularity as an investment destination. Thus, fears are doing the rounds that if things continue this way for long, we will have soon depleted most of our reserves and in worst case, even relive the dark days of 1991-92 where we were forced to mortgage our gold to borrow money from abroad. Looking at the positive side, it is the payment crisis of 1992 that paved the way for India taking up full scale reforms and enjoying its best phase of economic growth. This time too, the situation does call for another round of mega reforms. And the policymakers will have to quickly put on their thinking caps as the time is fast running out.

Banks in China do not have a reputation for the best quality of assets. However, when it comes to growth in their loan book, few banks globally have been able to match the Chinese numbers over the past 3 years. This was thanks to the unprecedented lending to Chinese realty. As per an article in Financial Times, property construction accounted for more than 13% of China's economy in 2010. However, the number of property transactions in China's largest cities has fallen to dangerously low levels in recent months. The slide in transactions has affected developers' cash flows and ability to repay bank loans. Their stories being not too different from that of some of India's highly leveraged realty players. But the problem with Chinese banks' is that they are so huge, the burst of Chinese property bubble could yield a crisis equivalent to the one unfolding in Europe. With the world's biggest importers and exporter in such financial catastrophe, the global economy does not seem to be out of the turmoil for a very long time.

The indebtedness of the US has reached a new milestone. US is now part of the elite group of indebted countries whose debt has exceeded its gross domestic product (GDP). The national debt of the US is now about US$ 15.033 trillion, marginally higher than its US$ 15.032 trillion GDP. What happens when a country's debt is as large as its GDP? Or for that matter any business entity? In such a situation, the revenue or the GDP has to grow at least at the rate at which the debt is borrowed. This is so that the borrowing entity can break even and is able pay the interest without taking on more debt. But what if the economy slips into recession? It may not be so much of a worry if there is a cyclical dip, which is part and parcel of the economy. However, it is a serious threat if the dip is due to structural imbalances in revenues and expenses. The problem which is the US is facing is the latter and that is why it is something really to worry about.

The Information Technology (IT) sector has caught the attention in recent times. Investors fear that global crisis would lead to a slowdown in demand for the sector. Basically they expect a repeat of 2009, where the sector saw a slowdown in the industry owing to a slowdown in the global economy. But one thing that such investors are ignoring is the growth in domestic demand for IT services. Large spends on IT by both the government as well as by the private sector players is expected to boost the number of projects for the IT companies. As per IT research firm, Gartner, IT spending in India is expected to grow to US$ 79.8 bn in 2012. This would be a 9.1% YoY growth from the 2011 level of US$ 73.1 bn. The demand would be primarily driven by the growth in telecommunications industry as well as by the increased demand from the tier-2 and tier-3 cities. If only the Indian IT firms concentrate more on the demand from India, they would not really suffer much due to the problems in the global markets. But unfortunately, very few of them are working hard in this area. Nevertheless, the trend is catching on.

In the meanwhile, the Indian stock markets were trading firm today after falling for eight consecutive sessions. BSE Sensex was up by 147 points (0.9%). Barring FMCG and Consumer durables, all sectoral indices were trading in the positive. Asian stock markets were a mixed bag. Indonesia, Singapore and South Korea were among the gainers while all others were on the losing end.

 Today's investing mantra
"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "These are the biggest concerns for India Inc.". Click here!

2 Responses to "These are the biggest concerns for India Inc."

sidharth thirani

Nov 22, 2011

Dear Mr Goel,
This is not a 'new'video.If it is its too boring to listen about your great company every time for so long.Your videos should also have a PAUSE/PLAY/FORWARD option else its a pain to hear so much.



Nov 22, 2011

Frankly speaking it is high time we should headed by a new government! We missed a great opportunity of reformation and infrastructure development. Mainly because we are headed by a weak but innocent leader at the helm! The leader who doesn't know what really going around ihis cabinet!! It's really a high time Soniaji should choose the one who can really lead us to the nation we dreamed.

Equitymaster requests your view! Post a comment on "These are the biggest concerns for India Inc.". Click here!