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  • Mihir Sharma - Editor - Opinion, Business Standard

    Mihir Sharma

    Editor - Opinion, Business Standard

    DATE: August 10, 2015, 01:00 PM

    SUBJECT: First quarter results and what will it take to kick-start the economy




    Hello and welcome to a webchat with Mihir Sharma, Editor - Opinion, Business Standard, on his interpretation of the Q1FY16 results of India Inc and what will it take to kick-start the economy

  • V


    Capital goods makers catering to the power sector have reported mixed earnings. By when do you see prospects of earnings growth for most of these companies? What is your forecast for industrial growth in June 2015?


    OK, good question. We ran a page one story today that linked poor earnings for equipment makers in the power sector to empty order books. Nobody is building or planning new plants, and so the order books are lying empty. BHEL dominates the sector, and saw its order book fall 20 per cent last year; L&T's went down by a humungous 57 per cent. When will this recover? Not in the short, or even medium term. Power generation utilities are running at 50-60 per cent capacity, and so don't want to order more machinery. Why are they plagued by over-capacity? Because the state boards that are supposed to buy power from them are too deep in debt to do so. So, unless we clean up state board finances - linked to public-sector bank lending - we won't be able to see a virtuous ripple run all the way to capital-goods companies. So far, there has been very little movement on this front. Thus I don't see a recovery in this sector any time soon.

  • A


    What is your call on the earnings of PSU banks so far? By when do you see non-performing assets in some of the major PSU banks easing out?


    Sadly, the marginal changes, up or down, in the earnings of PSU banks depend far too much on whether they are provisioning properly for non-performing assets or not. So this has given rise to a great deal of mistrust. The pattern: a new bank chairman takes over, profits go down because he/she provisions for past NPAs, then profits increase over their tenure because they don't provision for their own. So I tend to distrust the headline numbers. Look more at the trends, and at the NPA and deposit growth numbers. When will they fix NPAs? When they are forced to. When will they be forced to? When they are subject to market discipline. When will they be subject to market discipline? When their principal shareholder, the government, lets them be subject to that discipline? When will the government let PSU banks be subject to that discipline? Only Modiji knows.

  • S


    Recent reports suggests that the real estate sector is saddled with huge inventory levels as prices remain out of reach for most of the buyers. Do you see any economic impact for the current fiscal ?


    Yes, everyone agrees that high-end real estate is suffering from unsold inventory. Supply and demand is not working because the big builders can't cut prices. The moment they cut prices, they have to re-value the inventory on their books, and suddenly their entire flimsy facade of profitability collapses. Frankly, I am not certain of the broader impact of a real-estate crash. Unlike in, say, pre-2008 US, I don't think financial institutions are as vulnerable to it. The presence of a sizeable black economy, the firewalling of housing finance from banking, all these things mean that there may not be substantial contagion. Frankly, a crash in real estate might be a net positive. It will drive down land costs for genuine innovators, including in retail.

  • P


    The MET department has predicted lower rainfall during the last two months (August-September) of the monsoon season. What is your take on consumer price inflation in the back drop of rising food prices? What factors could restrain the RBI again from lowering key policy rates at its next policy meet?


    The shift from targeting wholesale to targeting consumer price inflation means that vegetable prices have more of an impact on RBI calculations now. So the moderation in rice/wheat prices may not be enough to control food inflation if the early burst of the monsoon trails off and short-term crops like veggies begin to struggle. Onions have already started to increase; I expect we will see the familiar mid-monsoon, early fall spike in the price of perishables. That will definitely spook the RBI, if it happens. Even more, if there is a slight recovery in Q1 GDP growth numbers as compared to Q4 2014-15, then I think it would be foolhardy to expect Rajan to cut rates.

  • R


    Although the index of industrial production has shown a positive sign, several sectors including power, steel, cement and infrastructure are witnessing weakness. Do you foresee a recovery in these sectors and how will it impact the Indian economy?


    Frankly, I'm a little worried about the Index of Industrial Production. While some sectors in the IIP closely track output, others don't seem to do so well. So I think it's much safer to rely on corporate results or on the GDP numbers that now, of course, are based on results rather than an IIP-like survey. Infra sectors will take a while to recover. The current thinking seems to be that the Rs 70,000 crore government push, front-loaded into Q1 of this financial year, will be enough to spark an infra revival. I am doubtful that it will be enough to sustain a revival. Here are some numbers: capital goods companies have seen a fall in revenue of 11.4 per cent year on year in Q1. Power companies have also seen a fall, as has steel. But these are also the sectors with among the highest interest costs as a percentage of revenue - power at 8.5 per cent, steel at 5.8 per cent, and so on. Meanwhile there is chronic over-capacity in the system at the moment, particularly in coal plants and steel. So where will you see a recovery? That will need unpaid debt to be turned into a loss of control and equity; new owners who will come in and take over old assets, and be able to raise new debt to finish it; and enough such occasions that there is an overall recovery in confidence sufficient to overcome existing over-capacity. ET today pointed out that Lanco's lenders are taking control of its Teesta hydro plant. This is a first. More such clean-ups need to happen before the sectors will recover.

  • A


    What are the positive implications on the economy for an oil importing nation like India after global crude oil prices have dropped more than 50% from their peaks last year? Secondly, why is there no significant reduction in petrol and diesel prices despite the sharp fall in crude oil prices?


    Let me be clear: that we are not a basket case right now, economically, is almost entirely due to the oil price fall, and the commodity downturn in general. Govt saved vast amounts last year, allowing it to look good and keep both subsidies and investment high. This year, too, it may save as much as Rs 90,000 crore. Meanwhile, the impact of low commodity prices on India Inc can be gauged by the fact that, in spite of weakness in sales, overall profit margins (excluding banking and finance) are at an all-time high - driven, essentially, by low input costs. Narendra Modi was right to say he is lucky. Why have petrol prices at the pump not changed? because the government - including some state governments - have raised taxes as the world price has gone down. This is not a bad thing in my opinion. It bolsters revenue, helps the environment - and allows from some leeway if world prices temporarily spike upwards.

  • D


    Has the govt in its one year come up with any legislation that will actually help India Inc and the economy?


    They have proposed a few. I was very excited by the prospect of a new bankruptcy law. The (controversial) Indian Financial Code is also a big step forward. There have been a few minor tweaks to labour law, including a not-so-minor change to provident-fund rules. But many of the proposals, once proposed, have vanished from sight. Bankruptcy law was promised by Jaitley in the Budget, and he gave a timeframe (that session? next session? I don't remember, but it was a short timeframe). We haven't heard anything of it since. The problem has been that coming up with comprehensive legislative changes seems to be beyond either this government's interest or its competence. Remember, even the financial code was an existing draft.

  • J


    Performance of banks, an effective barometer of the state of India Inc and the economy, are largely mixed. A lot has been written about the indebtedness of the indian corporates and banks sitting on a ticking time bomb. Do you think this crisis will show up in a scary form not anticipated yet by any of the analysts and economists?


    The banking sector is like the circulatory system of a modern economy. In the end, your arteries can keep hardening, clots can form, and you can walk around unconcerned. But you never know where and when an aneurysm can strike you. Let's be clear: private banks aren't doing that badly. It's public banks, still 2/3 of the system (more?) that should concern us most. While private banks have been able to clean up their books, reduce non-performing assets and so on since the aftermath of the financial crisis, public banks have just gotten worse. The estimates of problematic debt are frankly terrifying. Anything from 3 to 8 per cent of GDP! The power sector is a particular problem, but infra in general, including real estate, is also unreliable. This has meant recovery is slow. PSU banks are unwilling to take even the slightest new risk now, so credit growth is at its lowest in decades. Companies are looking at other forms of financing - corporate paper, for example. Are our credit rating agencies up to the task of an explosion in that market? I'm not sure. There's another stress point there. In the end, when your circulatory system is so stressed, you can't predict where it will give way. But we should watch carefully for smaller and more exposed banks - Andhra Bank, for example - to need to be rescued, and perhaps pushed into mergers. Much depends on how swiftly and efficiently disinvestment in the banks, and administrative reform of PSU bank management, is carried out.

  • R


    India Inc is disappointed with the RBI’s decision of keeping the policy rates unchanged. According to them, the economic growth of the country accruing from sluggish demand conditions will stall investments. What is your take on the above? Do you agree with it? What according to you will be the RBI’s move in the forthcoming monetary policy?


    I rarely trust India Inc on rates - they will always want a rate cut. But they are right in one way - they are hurting from high rates. By our estimates, interest costs increased 12.75 per cent in the first quarter of 2015-16; as a percentage of sales, interest payments are 2.84 per cent, the highest in recent times. Are high rates the constraint on demand? I am no longer sure about that. Consumer demand seems to have recovered in EMI-sensitive sectors like automobiles, that saw decent revenue growth and profit margins of almost 10 per cent in Q1. Meanwhile, I don't think big capital-goods investment is plagued by a shortage of capital as the biggest constraint. The problem is existing over-capacity, regulatory hurdles, and so on - the same problems we've been facing since 2010-11. What will Raghuram Rajan do? It's always wise to bet on the RBI being cautious. If GDP growth sees a significant uptick in Q1 - as it has in Q1s the past few years - then I see a rate cut as very unlikely.

  • A


    How do you see the jump in FDI & FII figures in India as against a slowdown in global economies? India was ranked no 1 in the Baseline Profitability ranking and the recent Foxconn, Xiaomi investments gave a big boost to the economy. Do you feel this is a sign of the good times ahead?


    Well, I think the jump in FII, if not FDI, is a sign of the global slowdown - and thus a hunt for return - as much as of any improvement in the domestic environment. We must be cautious here. Until the rupee becomes cheaper, until wage costs reflect our labour abundance, we will not be a genuinely competitive investment destination. Foxconn in particular is very good news - if it happens. We have a bad history in this country of MoUs, and even partial investment, not translating into final output. Similar headlines accompanied the arrival of, say, Posco 10 years ago. So while I am hopeful, I recognize that a lot more needs to be put in place for MoUs to become real.