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...

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.

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

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

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

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• Low inflation• Lower fiscal deficits

promised by GOI• Make in India

pressure from Govt• Even if SENSEX has

dipped, the reduction in India lowest amongst all EMs

• Industrial growth flat in FY16

Reasons for status quo• Wait for US

decision• Wait for further

Yuan devaluation• Wait for markets to

settle and the Rupee to stabilize at some level

• 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?

IndiaGDP 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 LankaGrowth to decline to 6.9% in 2015 due to slowing private construction

activity. Consumption growth is robust and

increasingTourism and roads infrastructure

emerging as major driver of growth

BangladeshThe 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.

NepalGrowth 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

Major thrust has come from the Government rather than from the private sector

Rs.5300 crore outlay in FY16 for irrigation Pradhan Mantri Krishi Sinchai Yojana as well as Gram Sichai Yojana

to provide “More drop per crop” Rs.8.5 lakh crore for investment in farm infrastructure Irrigating each farm by 2022 is a plan priority 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

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 micro-irrigation compatible

This Government thrust is proving beneficial: Turnkey funded irrigation projects could offer an MIS growth of 20% over next 5 years

Irrigation

InfrastructureThe 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

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

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!

manasi.phadke@gmail.comhttps://manasiecon.wordpress.com