Transcript The journey to 2016-17

CORPORATE OUTLOOK FY16
OPPORTUNITIES AND ISSUES
Prof. Manasi Phadke
Overall macro perspective
Indian economy stably growing at 7.5%
Inflation under firm control with WPI at -4% and CPI
inflation at around 4%
Benign oil prices beneficial for economy
Global pressures evident: US interest rate stance
important
Exchange rate and stock markets currently volatile
Benign inflation...
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Inflation in oil has eased considerably
With oil hitting $40 last week, WPI inflation went
into a lifetime low of -4%
Implies that“General prices” this year compared to
last year are down by 4%
That creates an environment wherein the interest
rates can truly be cut by the RBI
Why is the RBI so very cautionary?
RBI and India Inc.
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A lower interest rate is the biggest demand from
India Inc
CMIE Survey on 18800 firms (SMEs + Big firms)
From 2011 to 2015, corporate debt has doubled
and interest payout went up 146%
Further, the revenues are only up 77%
That indicates that net profits have reduced (by
around 32%)
FY 2015 and FY 2016
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In FY 2015, the slowdown plus corporate debt caused a
debt trap for many companies
Banks are now over-exposed and hence any further
lending would be harmful
FY16, growth has bettered but banks’ capacities to
absorb NPAs has definitely worsened
RBI is hence pushing a pause button on any interest rate
reduction that may increase bank vulnerability
External pressures
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Black Monday
Chinese markets crashed based on news of a huge overvaluation of stocks
and possibilities of a devaluation
The devaluation comes on the back of the strengthening dollar, which
implies that the Yuan had also defacto strengthened in the past year,
eroding export competitiveness
As news of a Chinese slowdown came in, commodity markets also went
bearish since China has been the biggest buyer of commodities globally
The contagion spread to other EMs as well, risky stocks and currencies
across all EMs were hurt
Interestingly, risky stocks in the US too were liquidated by the investors; but
as the dust settles, risk free US bonds and the dollar seem to have retained
levels
The RBI interest rate stance
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As a response to the Chinese devaluation,RBI has allowed the Rupee
to accordingly depreciate; there’s news that further Yuan
devaluation may be on the cards
However, INR depreciation has been the least amongst all EMs:One
of the reasons for this is the FDI interest in India currently due to the
Videsh Yatras undertaken by the PM (Around $30 billion expected
in FY16)
Most investors are now expecting the US NOT to hike interest rates
in September
Reduction in Indian rates could cause knee jerk reaction in an
already volatile environment: This scenario reduces the room that the
RBI has for cutting rates
RBI on a wait and watch...
Reasons for cutting
rates
Reasons for status
quo
• Low inflation
• Wait for US decision
• Lower fiscal deficits
promised by GOI
• Wait for further Yuan
devaluation
• Make in India pressure
from Govt
• Wait for markets to settle
and the Rupee to
stabilize at some level
• Even if SENSEX has
dipped, the reduction in
India lowest amongst all
EMs
• Industrial growth flat in
FY16
• Strengthen the
transmission mechanism:
Wait for banks to pass on
reduction from earlier
repos
What is largely
expected?
• Very very difficult to
predict how the RBI will
react
• If at all a rate cut has to
come in, it could happen
in October, when other
local demands such as
demand for agri credit
(for rabi sowing season)
How do we compare to SAARC?
India
GDP growth to reach 8-9% by FY18 on the
back of significant acceleration of
investment growth to 12% by FY16.
The country is attempting to shift from
consumption- to investment-led growth, at a
time when China is undergoing the opposite
transition.
Sri Lanka
Growth to decline to 6.9% in 2015 due to
slowing private construction activity.
Consumption growth is robust and increasing
Tourism and roads infrastructure emerging as
major driver of growth
Bangladesh
The protracted political unrest has reduced
growth by one percentage point.
Growth in 2016 is now projected at 5.6%.
However, a recovery driven by strong
domestic demand is possible. It will require
a continuation of single-digit inflation, an
improved investment climate, and above all
political stability.
Nepal
Growth will remain in the 4.5 to 5 percent
range.
To improve its growth performance the country
needs to boost infrastructure development to
support private sector investment.
Sectoral Outlook..
Irrigation
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Major thrust has come from the Government rather than from the private sector
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Rs.5300 crore outlay in FY16 for irrigation
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Pradhan Mantri Krishi Sinchai Yojana as well as Gram Sichai Yojana to provide
“More drop per crop”
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Rs.8.5 lakh crore for investment in farm infrastructure
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Irrigating each farm by 2022 is a plan priority
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Companies in Micro Irrigation Systems are in the green as farmers are being able
to pay fully through claiming subsidies
This has helped companies reduce their debt profiles since January 2015
Irrigation
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Monsoons in June 2014 and 2015 have been below normal: Agriculture growth to
be weak at 1.5% in FY16
States in deficit such as Maharashtra keen on sanctioning micro irrigation projects in
face of droughts and farmer suicides: Lower Wardha with 66000 hectares of
irrigation potential to be completed in 3 years: Ministries to clear internal overhang
in terms of rehab/ public works/ repair of affected villages
Karnataka and Maharashtra have mandated crops like sugarcane to be microirrigation compatible
This Government thrust is proving beneficial: Turnkey funded irrigation projects could
offer an MIS growth of 20% over next 5 years
Infrastructure
The Index of Industrial Production (IIP) released in July
2015 shows that output of core industries has increased
significantly in May 2015
Eight key infrastructure-related industries: coal, crude oil,
electricity, natural gas, refinery products, fertilisers, steel
and cement — rose 4.4 per cent in May, its fastest since
November 2014 and higher than 3.9 per cent growth
recorded in the same month last year
Rise in the core index is mainly on account of Government
investment in the infra space: Stalled projects are being
moved, new projects cleared, coal movement is
facilitating other sectors like steel and energy
Infrastructure
Industry
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IIP in July has shown that there is sluggishness/ even negative growth across nearly
every industry vertical: Consumer goods and durables
Industrial growth in May 2015 was 2.7% as compared to 5.6% in May 2014
(That’s why the rate cut demand)
Weak monsoon means that rural demand will continue to be weak: From 2 wheelers
to tractors, general growth expected to be dull
Growth story in FY16 will be led by Government expenditures
Growth story in FY16 will be led by Government expenditures
2.3
Near-term
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Positive for firms connected to irrigation and
infrastructure
Positive for firms connected to roads/ cement and
energy
Positive for firms connected to Government
expenditure projects
Positive for firms with lower debt-equity ratios
Positive for firms with export focus
Thank you!
[email protected]
https://manasiecon.wordpress.com