India Inc is in big trouble - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India Inc is in big trouble 

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In this issue:
» India leaps back 2 decades
» What do Wal-Mart's earnings say about the US economy?
» India's gold consumption highest in decade despite govt curbs
» Global MNCs get some relief in India
» ...and more!

00:00  Chart of the day
The first result season of the financial year 2013-14 (1QFY14) has almost come to an end. And it's crystal clear now. India Inc is in trouble. As the chart of the day shows, companies across market caps have reported dismal growth in sales and profits.

Data Source: Business Standard

As per an article in Business Standard, 1QFY14 net sales of the 1,961 companies (excluding banking & financial and state-owned oil & gas firms) that had declared results till August 13, 2013 increased marginally by 3.6% on a year-on-year (YoY) basis. Let us tell you this is the lowest sales growth in the last 13 quarters. But the impact on the bottomline was worse as aggregate interest expenses, among other costs, rose 19%. As a result, the aggregate adjusted net profit (excluding extraordinary items) dipped 5.4% YoY.

So here is a scenario wherein sales growth is weakening and higher costs are eating into profitability. Even worse is the fact that the problems are now not limited to just a few sectors. What started with sectors such as capital goods, construction and infrastructure has now spread across many other sectors.

Now the big question is- when will corporate growth and earnings rebound? To be able to answer that question we have to first understand whether India's economic problems are cyclical or structural. For a while, many believed that India was going through a temporary slowdown owing to global economic factors. But it is increasingly becoming clear that our problems are more structural than cyclical. To put it in simple words, India's economic predicament is largely a result of its own internal problems.

Factors such as lack of economic reforms, poor governance, red tape, excessive corruption, dismal infrastructure, etc. have exacerbated India's economic woes. We have a structurally weak currency and high inflation. The rupee has been severely hammered in the last couple of months. High food and fuel prices have kept inflation high. As a result, the RBI has been unable to ease interest rates.

Some industry experts believe it will take at least two years for India to solve its structural problems. And no easing in interest rates is expected in the current fiscal.

High interest rates coupled with poor corporate earnings mean that investment activity will continue to remain muted. This, in turn, will further delay the economic recovery. All in all, India seems to have entered a vicious cycle of slow growth and drying investments. A real recovery is unlikely until we see some significant improvement on the structural front.

How long do you think the Indian economy will take to revive? Please share your comments or post them on our Facebook page / Google+ page

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In its attempt to save the rupee, is India taking a step back? Well, you can even call it a leap back, since the RBI has revisited the stance after two decades! Readers will recall that the RBI had started liberalizing overseas direct investment norms in July 2004. The norms had permitted Indian entities to invest in overseas ventures as also set up 100% subsidiaries. As growth in Indian economy and strength in the rupee buoyed sentiments, the limits were gradually raised until 2007. However, the US' intent to close the tap on liquidity, has led to a flight of dollars from India like never before. And hence the RBI has once again put curbs on overseas investments as well as remittance of US dollars.

The economists see it as capital control. However, the government insists that it is a necessary measure to stem the fall of rupee. That Indian corporates are way too disappointed with the state of policy making in the economy is also a threat. Many have already stopped domestic investments and are increasingly looking at overseas opportunities. Hence the curbs will also act as a hindrance to such intentions. We believe this is yet another stop gap arrangement. It could bring only temporary relief to the rupee. However, neither the government nor the RBI should take any solace from it. Without appropriate reform measures, India Inc is unlikely to shift focus from overseas to domestic investments. And until then, the GDP growth and currency problems will stay.

As far as economic barometers are concerned, it can't get any bigger than Wal-Mart we reckon. The health of the retailing giant is in fact a reflection of the overall consumer spending pattern in the US. In other words, if Wal-Mart is doing well, there are strong chances the US economy is also doing well. Unfortunately, things are not looking all that great for Wal-Mart. The world's largest retailer recently slashed its full year profit forecasts, terming the retail environment as 'challenging' and 'disappointing'. Now, this calls to question the tall claims made by the country's policymakers who seem to be arguing that the economy is chugging along just fine.

What explains the difference of opinion? Well, Money News reckons that that the US economy has no doubt created jobs this year. But around 75% of these are low-wage, part-time jobs. And thus, real unemployment including those who have stopped looking for work and are working fewer hours than they want is much higher. As a matter of fact, it is as high as 14% as per the portal! Therefore, all the quantitative easing and all the leverage seem to be off target in a big, big way according to us. All it is ending up doing is increasing the income inequality and making the poor more poor as evidenced by the Wal-Mart numbers.

In order to curb the rising current account deficit (CAD) the government recently raised import duty on gold. However, this has had very little impact on gold consumption. In fact, in the June quarter, India's gold consumption rose to 310 tons. This figure registered in June quarter is the highest ever seen in the last 10 years. It is true that the impact of current increase in duty will be evident in the future quarters. But considering India's huge gold appetite, this may not be the case. India is the world's largest buyer of gold. In fact, India and China accounted for 60% of the world's total demand in June ending quarter. Increase in jewellery demand predominantly due to falling prices was one of the reasons of increase in consumption. Apart from that, demand for gold bar and coins was also buoyant.

It may be noted that India almost entirely depends on imports to meet its domestic demand for gold. And in 2013, the demand is expected to be in the region of 900-1000 tons. As such, rise in duty may not have the desired impact considering India's appetite is so high. Thus, we believe if government continues with its policy to increase import duty it may well lead to gold smuggling rather than curbing the demand.

The MNCs (Multi National Corporations) that have operations in India have been at the receiving end of the spectrum as far as the tax authorities are concerned. The tax authorities did state that an additional taxable income of Rs 700 bn was attributable to the MNC arms during 2012-2013. This is nearly 58% higher than the amount for 2011-2012. For the relief of the MNCs, the government has come up with additional 'safe harbor rules'. These rules would dissuade the tax officials from questioning income of things like captive software units. This is if profit margins on such assignments are less than 20%. These rules would also prevent an enquiry by the tax officials on loans extended to wholly-owned Indian subsidiaries. There are caveats like the interest rates being charged on these loans. Nevertheless these rules would give some breathing space to the MNCs. The new rules may come into effect for FY13 and FY 14 after approval. The point is that these MNCs are entering India to do business and earn a profit. But if every move of theirs comes under the tax scanner, then doing business becomes increasingly tough.

In the meanwhile, Indian equity markets have extended their losses and are trading at the day's low. At the time of writing, the benchmark BSE-Sensex was down by 692 points (-3.57%). All the stock indices were trading in the red. Consumer Durable and Banking stocks were the biggest losers. All the Asian stocks were trading weak led by China and Japan. The European markets also opened on a weak note.

04:50  Today's investing mantra
"People who are good at math naturally look for math to explain investment decisions when often the competitive advantage is not revealed by mathematics."- Charlie Munger
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7 Responses to "India Inc is in big trouble"


Aug 21, 2013



Manoj Kumar Mondal

Aug 18, 2013

Looks like the government in the long last has realized the mistake of unbridled printing of money. May be they are making desperate attempts towards soft landing in ferocity of bond buying. The hyper job numbers may be a ploy to cut QE so as to abate the money printing speed and thus keep a check on the malaise of QE. But who knows if enough damage is already done!



Aug 16, 2013

It is temp. it take 3 months to correct. No need to worry



Aug 16, 2013

Till the reservation is completly removed from the constitution and till the working as subservant to the big brothers.


Jose Abraham Kattumana

Aug 16, 2013

Instead of endless high debates and research over various economic principles to find a solution for Indi'a balance of payment / current defecit /inadequate FDI , inflation /inadequate funds for investment, let us conside the following very obvious potential solutions ( require political and public will)

1 Bring back to Indian economy at least 25% of the ten thousands of crores of Indian deposits in foreign banks ( current account deficit and balance of payments and to some extent FDI will be solved)
2 Take immediate steps to unearth Indian black money and get at least 25% of the ten thousands of crores into Indian economy ( budget deficit will be completely covered and we may have excess)

3 Setup 3 fast track courts for every 5 -10 districts all over India immediately employing retired high court judges who will be appointed by supreme court and a committee - one court to try high level corruption above certain amounts ( say 50 crores) as well as involving politicians and beaurecrats , 2nd court to try organized crime, 3rd court to try all cases involving abuse of women and children. Max time to close the case must be 6 months with rare extensions on case to case basis

4 When all the above 3 steps are IMPLEMENTED effectively, confidence of Indian public and foregners in the Indian legal system and democracy will be boosted exponentially which will result in massive inflow of foreghn money for investment.This will also bring out crores of dead money in NRE banks. Then request NRIs and PIO to invest in India. Kerala alone receives 50,000 crores of foreign exchange EVERY YEAR ( which is never utilized in the economy effectively for the last at least 25 years due to stupid Kerala politics and idiocity of literate Kerala)

5 Massive education and awareness programme to be taken on all India level by Govt. and corporates together to educate the illeterate as well as make them aware about various social issues including but not limited to health,financial management, moral education, social evils , electing sincere and efficient representatives at all levels etc.
Educate the people to kick out corrupt politicians through ballot

There can be other measures as well.
But if India can invest around let us say 2000 -5000 crores in the next 2 years for all of the above steps, India will be the top growing among BRICS and may be the whole world.

But who will do this . Public has to sincerely act through ballot , public interest litigations, rights to information law etc etc. When everyone contributes his little bit, it becomes an ocean. It is the public outcry that threw out most of the authoritarian governments or dictators world wide over centuries

Thanks you



Sathyamurthy Iyengar

Aug 16, 2013

My sense is, its into a deeper problem compared to earlier times as its more structural i believe. According to me government has started rolling back to 1991 policies. Putting ristrictions instead of opening up will lead to more smuggling of gold and black marketing of dollars as seen in INDIA. The current government, unfortunately is looking only at the 2014 election manifesto, so the policies are all sidelined. Any government in control till today has always worked only for 3 years, as the first year after election goes into cooling period or settlement period and the last one year goes truly for preparing for the new election. Congress government had a splendid chance to perforn as they had 9 full years to perform. Unfortunately they plundered the country. Especially not expected when a learned PM goes out of control with the economy, when he himself was a great economist.. My sense is it will take a long time to come out of this problem.



Aug 16, 2013

And it will remain in deep trouble so long as enforcement of existing laws is not strengthened by reforms in the twin arms of judiciary & police. All new laws will only be an attempt to white wash.

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