Can India Inc. sustain growth? - Views on News from Equitymaster

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Can India Inc. sustain growth?

Oct 8, 2009

Asian markets have opened today on a strong note. Gains are currently being seen in China (up 1%) and Japan (up 0.5%). Banks and mining companies are leading the rise in these markets today. A return to profits for Alcoa, one of the world's largest aluminium manufacturer, is said to be the reason for rise in mining stocks. As a matter of fact, the company, on the back of aggressive cost-cutting and rising sales to automakers, has returned to profitability for the first time in three quarters. And investors are seemingly seeing this as another hint of improving macro-economic conditions around the world, thereby propping up the stock prices.Another factor that has added to investors' cheer is the data coming out of the US that suggests that Americans reduced their outstanding debt by US$ 12 bn in August, a seventh straight monthly drop. As this suggests, Americans are saving more and borrowing less as widespread job losses, stagnant wages and dwindling home values have spurred a move to greater frugality.

While this is a positive from a long term point of view, a rise in savings and thereby a decline in consumptions is what economists see as weakening the fledgling recovery. This is especially given that consumer spending powers about 70% of the US economy.

Talking about markets in India, 'irrational exuberance' seems to be catching on with investors here. This can easily be gauged from the sharp rise in stock prices and valuations over the past few months despite a not so sharp improvement in economic and corporate fundamentals. While we continue to believe that the long term India growth story remains intact, investors would do well to practice caution in the short to medium term.

Proponents of a bull run will still be making the case of improved corporate performance in the September quarter, but this seems a bit farfetched. The earnings outlook is far from rosy. While June quarter performance was driven by operational leverage in the form lower raw material and interest cost, we do not see this sustaining going forward.

Ultimately companies have to grow sales to grow their profits, which seems tougher to achieve in the current environment, at least if we are to go by our recent interactions with companies across sectors.

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