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| Policy momentum required |
| Devangshu Datta / New Delhi Nov 22, 2009, 00:04 IST |
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The government has to play a bigger role in infrastructure development to improve valuations of related sectors.
The health of the Indian economy is linked to the global economy. But India appears to be doing better than most parts of the world. However, India shines in comparison only because the global scenario still looks bleak.
One way to get a take on global trends is by looking at shipping rates, which are directly related to trade. A key leading indicator is the Baltic Dry Index (BDI), which tracks freight rates for commodities like coal, metals and grain. There's no speculative influence on the BDI since ships are booked only when there are cargoes. But the BDI is dollar-denominated and it gains when the dollar is weak since shipping rates then automatically inflate.
The BDI hit a 14-month high of about 4,400 last week, up from a 22-year low of about 660 in December 2008. The all time peak of 11,800, came in May 2008. Most BDI gains have been driven by Chinese imports but dollar weakness has also played a role.
The Baltic Tanker Index, which tracks crude tanker rates, is still low. At 645 last week, it's above the all time low of 450 in April 2009. But it peaked at around 2,350 in mid-2008. Finally, the Harpex, which tracks container shipping rates, is also close to its all-time (1986-2009) low.
Putting the shipping news together, one guesses the global economy is in very early recovery. Commodity traffic is up but energy demand is low and value-added goods movement down. Serious recovery is likely to see all three shipping indices heading North.
In India, goods traffic indicators are much stronger. Between April-September 2009, traffic at Indian ports increased 2.5 per cent over the first half of 2008-09. Note that FH 2008-09 was actually pretty strong – the slowdown came later.
Confirming the healthier goods traffic trend, the Railways (IR) saw 6.5 per cent increase in freight volumes during April-September 2009-10 compared to FH 2008-09. Freight earnings increased by around 8 per cent. But aviation traffic declined so, it's not all rosy.
Energy demand has also improved. India's crude import bill fell 40 per cent to around $31.5 bn in FH 2009-10. But in volume terms, India imported 70 million tonnes of crude, up from 65 MT, (costing $54 bn) in FH 2008-09.
Slack global energy demand was confirmed by India's own petro-product exports. In FH 2008-09, India exported a net 9 MT of products with net (product export-import) forex earnings of $9 bn. In FH 2009-10, it exported a net 7 MT of products for net forex earnings of $3.6bn. Other exports are also well below last year.
India has also seen wholesale prices trough and pick up. Consumer inflation never went off the boil though that was because it was a sub-par year for agriculture. Rupee interest rates haven't softened much. The rupee had hardened versus USD from 49.5 in January to around 46.5 now. This has helped attract over $7 bn in FII investments.
Coming to corporate performance, Q2 2009-10 suggests the pace is picking up slower than the optimists hoped. Sales have been flat and earnings growth marginal. Tax collections have been anaemic.
In sectoral terms, the biggest topline gains have come from automobiles and from perennials like FMCG and pharma. Manufacturing in general, remains depressed. The pickup in the Index of industrial production (IIP) between June-September may have been by inventory generated in anticipation of festival season demand. Retail bank credit has grown faster than corporate credit.
Valuations have already risen to uncomfortable levels in anticipation of a recovery. But while India is certainly better off than the rest of the world, the growth picture is very patchy. There are no signs of a jump into top gear in Q3 or Q4.
You cannot safely buy the Nifty at the current 22 PE without some visibility in terms of earnings acceleration and sales growth. The government would have to play a big role. It could for instance, improve the picture, by speeding up infrastructure project awards.
Until such time as government policy shows signs of momentum, the investor must be very selective. Right now, a stock-picker may back stocks in the auto, pharma and FMCG shares on the basis of Q2 results Sugar remains bullish. In other sectors, the strategy should be to wait for either a price correction or an earnings jump.
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