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Ahead of the pack

Corporate India has done better than its counterparts elsewhere and the economy is humming again, argues Nandan Chakraborty.

Nandan Chakraborty | Print Edition: Nov 28, 2010

Diwali is the festival of lights, and the equity markets certainly seem to be in a festive mood. Global investors continue to pour money into the emerging markets, and India in particular. This year, foreign institutional investors, or FIIs, have already poured in $25 billion, the highest ever. The Coal India issue reaffirmed the faith in India as FIIs scrambled to get an allocation. And if the US Fed has its way, this Diwali may last much beyond November 5 as billions of additional dollars, by way of quantitative easing, will again chase out-performance in markets like India.

The Sensex is close to its peak and one of the key reasons is the upbeat performance of India Inc in this earnings season. In fact, corporate India has done much better than its counterparts in most parts of the globe, where earnings fell sharply in 2009 and are showing a tepid recovery only now. India Inc.'s earnings growth, which was flat in 2009, has spurted to a new high.

It could possibly slow down in the coming quarters because of headwinds such as rising costs, but pricing power is likely to be better and may be a source of upside surprises. The main market risk now will be from a sustained rise in crude oil prices.

Consumer discretionary demand has shown a sharp spurt in India. For example, passenger vehicle sales grew 33 per cent year-on-year (YoY) in the second quarter, higher than the growth reported during the first quarter and the year ended March 2010. While investors continue to watch expectantly for signs of continuation of the traditional consumer-led cyclical rebound, we think that a pick-up in business spending instead will be the key over the coming quarters. Thus, it is not consumer spending but corporate spending that will propel stronger growth. This, in turn, will create opportunities for companies operating in the consumer as well as industrial and capital goods sectors. Let us now look at some interesting trends across sectors.

FMCG companies reported mixed volume growth trend across the categories. Extended monsoons, floods, high food inflation and communal tensions (Ayodhya verdict) resulted in lower offtake in mass market, highpenetration categories like soaps and shampoos. However, the secular growth trend remains intact. Lower food inflation and rural demand will aid growth in the second half.

For IT companies, volume momentum was maintained as billing rates stabilised. Headwinds included the rupee appreciation, salary hikes and increased marketing investments. Volumes are expected to be steady, while deal signings are likely to improve. But profitability could be hit by currency appreciation and higher attrition for select players.

Most banks saw their margins widen, supported by lower growth in their deposit base and redeployment of resources. Credit growth was strong for most players but dominated by large infrastructure loans.

19% is the topline growth of India Inc in Q2 at the time of going to press

Analyst's take

India Inc's earnings growth, which was fl at in 2009, has touched a new high

Consumer discretionary demand has shown a sharp spurt in India

The main market risk now is a sustained rise in crude oil prices

The improved business climate will strengthen the capex cycle

Pick-up in business spending will be the key over the coming quarters

Policymakers must avert overheating and prevent formation of asset bubbles
The improving business environment would mean that the infrastructure credit growth for banks would remain strong over the next few quarters despite interest rates hardening.

During the second quarter, the profits of cement companies were under severe pressure following a sharp correction in prices caused by overcapacity. The demand growth this year was also subdued at five per cent. However, we expect demand growth to touch double digits from October when construction activity will pick up.

This, along with a series of price increases, particularly in south India, should improve industry profitability considerably. Increased government spending and the pick-up in the infrastructure cycle augurs well for cement offtake.

The key challenge for policymakers now will be to avoid overheating and prevent formation of asset bubbles, especially given the fact that the developed world will continue taking more stimulus measures.

Yet, at the same time, policymakers will have to ensure that the move from consumption to infrastructure creation happens smoothly. So the trick will lie in the tightrope walk of keeping inflationary pressures at bay without disrupting growth.


The author is Managing Director for Institutional Equity Research at Enam Securities

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