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Q&A: Prabhat Awasthi, Nomura India

'Companies will face margin erosion'

Malini Bhupta  |  Mumbai 

Prabhat Awasthi

After two straight years of double-digit returns and spectacular foreign inflows, Indian seem to be losing steam. From policy inaction, scams to intense pressure on profitability, the India story seems to be at risk. To make matters worse, India looks to be the worst hit, if geopolitical risks emanating from West Asia and North Africa don’t abate. Prabhat Awasthi, managing director and head of equities research at Nomura India, flags off key concerns facing the stock in an interview with Malini Bhupta. Edited Excerpts:

Do you think there are chinks appearing in India’s growth story? Do you see India clocking nine per cent growth in 2011-12?
Inflation is the biggest chink — high income growth and supply-side constraints are causing inflation. Slowdown in policy making is exacerbating supply side response. Additionally, some lagged impact of monetary tightening on industrial growth is bound to show up. Our economy team forecasts are close to eight per cent than nine per cent.

Will the finance minister’s Budget proposals actually translate into higher foreign inflows?
The proposals essentially refer to: First, allowing foreign investors to buy Indian mutual funds, and secondly, raising the FII limit for corporate bonds issued in infrastructure sector. The first step would not lead to an immediate uptick in inflows as the ability of the Indian funds to raise money from abroad would be limited by their reach and the fact that there are other well know overseas vehicles already in existence for investment into India. Over the longer term this would be positive, of course upfront investments would be needed in order to build reach and recall overseas. The second one is a tougher one. The fact that general corporate bond market limits remains unutilised, this means there may not be an immediate uptick in FII flows into the infra sector corporate bonds. This is especially true given the high risk profile attached to lending to this sector.

With profitability of companies coming under pressure due to rising costs, how do you expect corporate India to perform over the next six to eight months?

Corporate India is facing significant profitability pressures at this time. On cost side, there is pressure on raw material due to recovery in global commodity prices. Second, energy costs — again due to increase in coal and oil costs. Third, wages — as inflation and high bargaining power of labour on account of labour shortage would continue to put pressure. And, finally, rising interest costs would continue to impact the bottom lines. We believe profitability of corporates would suffer somewhat in the coming months. At this time, consensus expectations are for corporate India net margins to remain flattish. Corporates would face margin erosion both at operating and net profit levels.

Do you see FIIs rotating funds out of India this year, as developed show signs of revival?
Relatively speaking that is our house view. Whether it would mean outflows or smaller inflows still remains to be seen and depends on the overall macro environment.

Going by the current economic environment, which sectors are likely to outperform and which ones will be worst hit?
Given the rising inflationary pressures coupled with some industrial slowdown, we remain more positive on exporters and consumer facing sectors. If the global commodity prices remain elevated, the policy action would likely hurt domestic cyclical sectors and banks.

What worries foreign investors the most about India’s apparent chaos?
The worries are largely around the policy environment. The recent corruption scandals have worried the investors. However, at the same time they are hopeful that there would be a resolution in policy circles to make the system more transparent and responsive. The other concern is rising oil prices. India is one of the most exposed economies, so far as oil prices are concerned. The West Asia crisis puts India at a bigger disadvantage than other economies in Asia.

What kind of FII inflows is India likely to attract compared to $28 billion last year?
The best guess is that the number would likely be lower than $28 billion.

How do you see corporate India faring in FY12?
As we mentioned before, the corporate sector is facing significant margin pressures. Additionally, policy hurdles in terms of environmental clearances, land acquisition, among others, are not helping quick turnaround of project activity. Prosperity of rural economy has created a shortage of urban labour and is causing not only wage pressures but a shortage of labour which is, in some cases, getting to be a constraint on growth.

Do you expect the finance minister to meet the fiscal deficit target set for 2012?
We believe there could be a slippage primarily because there has been some under provision of subsidies in the recent Budget.

Nomura believes oil will touch $220 a barrel. Your view on crude prices and how will that impact India’s macroeconomic situation and consequently earnings of corporate India?
We believe that in case there is a significant supply disruption, then oil can go there. This is not our base case.

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First Published: Wed, March 09 2011. 00:24 IST
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