GIVE IT SOME TIME!

We all will agree to the fact that a patient who was on ventilation for some time cannot start running immediately, even if the best of the doctors has administered the best of the medicine available to the patient. Recovery takes its own sweet time and the patient too will respond to the medicine in due course of time and not instantly. The analogy aptly fits to the Indian economy and corporate earnings also.

In the fourth quarter of FY14, Indian economy was suffering from multiple ailments as its growth was at multi-year lows while at the same time inflation was constantly above the comfort level of both the policy maker and the RBI governor. This left no room for the RBI to take assertive action on the rate front, thus keeping the repo rate as high as 8 per cent. Even the government’s finances were in shambles with its fiscal and current account deficits wide enough to call for negative action by rating agencies.

This was the economic landscape under which BJ- led NDA government came to power. The expectation for a turnaround was sky high from every corner of society, be it corporate or general investors. We all expected that the new leadership at the centre would in no time at all return vitality to the sagging economy. There is no doubt that those expectations have not been met so far; however, a lot has been achieved on the macro economic front. Growth has started to pick up, inflation is under control, and government finances are much more contained.

We need to understand that this government is not working with a short-term aim but has a long-term vision of improving India’s potential growth rate. The strategy is to take many small steps in the right direction which over a period of time will accumulate and eventually have a significant impact on the macro economic performance. Many of its actions such as shifting savings from physical assets to financial assets, getting away from crony capitalism, and restructuring the entire subsidy mechanism are those small steps. All these will go a long way in improving the availability of the factors of production (land, labour and capital) at competitive prices.

We are already witnessing early signs of recovery in capital expenditure, which shows that the small steps have started to yield results. For example, capex announcements tracked by various agencies show that for the March quarter they remained strong and were up 60 per cent on a yearly basis. Even credit and deposit growth (private sector banks are leading the race) are improving from their recent lows of below 10 per cent. As another analysis points out, stalled projects are declining, which will improve demand for capital goods. The government is taking the lead to revive the investment cycle as banks, primarily state-owned, are marred by bad loans and reluctant to lend.

On the other side, India Inc. is shying away from any investment ha the companies are already debt-laden. The government has increased capital spending to Rs 35,160 crore in April, the first month of fiscal 2015-16. That is up more than 50 percent from a year ago. Moreover, this government is working on a different model that entails building assets with the private sector, largely providing EPC services. Once the cash inflows from these projects stabilise, the government might then sell the assets to the private sector.

I believe these steps will take couple of quarters more to percolate down to corporate earnings. Till that time we may see a tepid earnings growth as we saw for the fourth quarter of FY15. Our cover story this time looks at the financial performance of corporate India for the quarter ending March 2015. Our entire research and editorial team has analysed the results of more than 3s000 companies under 10 different sectors along with how these sectors are going to perform in the coming quarters. Overall, the result analysis shows that they were muted and there were more downgrades than upgrades. DSIJ, however, believes that the pain will continue till the September quarter or the first half of FY16; nonetheless the situation will change for good in the second half of FY16 and earnings will start to pick up.

We have also done a special report on the aviation sector and how the fall in aviation turbine fuel (ATF) and other changes are going to impact the performance of the airline companies. Besides this we are also carrying a special report on sectors that have given the most capital appreciation in the last one year and how the retail shareholders have participated in that.