Analysing What The Analysts are Saying

The last year has seen a staggering drop in the Indian public’s confidence in the economy, transforming India into the most pessimistic among some of the world’s major economies, including Brazil, China, the European Union and the United States, says the Pew Global Attitudes Project India Report.
Forty-nine per cent of Indians polled for the survey are satisfied with the current state of the economy, a seven percentage point drop from last year, while only 45 per cent of respondents are optimistic of the economy improving over the coming four quarters, 15 percentage points lower than the previous year’s poll. The latter is the largest fall among the 17 nations with comparable data, according to the report
“A year ago, Indians’ economic mood trailed that in China, bested that in Europe and the United States, and was comparable to that in Brazil. Today, Indians’ evaluation of their current national economic situation trails that in China by 34 percentage points and Brazil by 16 points,” the report said, “And, Indian optimism about the next year lags that in Brazil by 39 and China by 38 points.”
The reason why much of the previous optimism has evaporated is reflected in what Indians perceive to be their biggest problems. Eight in 10, or 80 per cent, of those polled said unemployment, followed by rising prices (79 per cent), were the most compelling challenges the country faces at the moment, underscoring the latent worry about an under-performing economy and spiralling prices.
The growing gap between the rich and the poor (72 per cent) and crime (71 per cent) were the other two major worries, respondents said, trailed by corrupt officials (70 per cent) and corrupt business people (65 per cent), likely candidates given the spate of scandals that have rocked the incumbent United Progressive Alliance-2 government through its current term.
Yet, this was before the ongoing alleged coal block allocation scam emerged, since the Washington-based Pew Center conducted 4,018 face-to-face interviews in the country between March 19 and April 19, representing 86 per cent of the adult population of India’s 13 most populous states for the report.
According to a recent report in the Telegraph, a crisis appears to be brewing in the banking industry as well because “ the economic slowdown has squelched demand for credit from the corporate sector”. It was pointed out that Global brokerage Bank of America-Merrill Lynch forecast that the growth in bank lending this fiscal was likely to tumble to a 14-year low at 14 per cent. The report said there were clear signs of a weak demand from industry for loans and working capital because of the slowing macro-economy. The growth in non-food credit, which constitutes around 98 per cent of bank loans, has decelerated from 22.1 per cent at the start of 2011-12 to 16.8 per cent at the end of last fiscal on account of high interest rates and the economic slowdown. The RBI has projected non-food credit of commercial banks to grow 17 per cent this fiscal.

Eight in 10, or 80 per cent, of those polled in a recent survey said unemployment, followed by rising prices (79 per cent), were the most compelling challenges the country faces at the moment, underscoring the latent worry about an under-performing economy and spiralling prices.

However, with the slowdown persisting and industrial activity not showing any major signs of improvement, loan growth for the banking sector fell below 17 per cent in August against 19-20 per cent in the recent past. According to Rajeev Varma and Veekesh Gandhi, analysts at Bank of America-Merrill Lynch, non-food credit has been slowing sharply led by a sluggish industry demand. However, the growth has been sustained because of agriculture, large companies and retail. The analysts added that demand for loans from SMEs has slowed to less than 10-12 per cent.
While the large industry is still showing a growth of around 20 per cent, the global financial major said this was because of the drawdown of past projects under implementation and working capital demand from rising crude prices and domestic input costs. Bankers concede that loan growth from the corporate sector will be a challenge over the coming months and a mere rate cut from the RBI will not be enough to turn around the sentiment.
“What is essential is some definite action from the central government to kickstart investments in the corporate sector,” said a senior official with a public sector bank who did not wish to be identified.
Lenders led by the SBI have trimmed their lending rates in a bid to boost their lending portfolio. They have also brought down deposit rates amid comfortable liquidity and easing of loan growth. It is felt that such lending rate reductions may continue as credit growth weakens further. The lending rates are falling even though the central bank has chosen not to cut the policy rate aggressively as it continues to battle inflation.
However, the slowing loan growth has implications for banks’ net interest margins, the analysts warned. “The sharp moderation in loan growth in the coming quarters is likely to have more visible implications for both rates and bank margins,” they added.
Espirito Santo Securities says in its latest market update report that “ The urban job squeeze is the biggest problem for marketing managers to increase sales in consumer products in India.” The lack of inclusive growth in the economy poses a structural risk to consumption, which includes spending on low ticket items. At current levels the brokerage firm observes that consumer stocks are priced to perfection and do not discount the brewing storm. The firm has recently turned bearish on the sector overall, and after the recent run-up.
Hit by global economic woes, policy paralysis and a series of political scandals, India is facing one of its worst periods of growth and unemployment, as noted by recent ASSOCHAM surveys on 32 sectors, Espirito Santo Securities goes on to say. Hiring has dropped by 20% in Q1FY13 versus Q4FY12; the financial sector that was immune to the 2008 financial crises is now very vulnerable to non-performing assets and hiring in other sunrise sectors are at levels insufficient to absorb the supply of fresh graduates coming into the work force, observes Espirito Santo Securities.
FICCI’s survey suggests a drop in the business confidence index from 60.3 in Q4FY12 to 51.8 in Q1FY13. Indian consumers have become progressively more pessimistic about future prospects over the last two years (as inferred from RBI consumer confidence surveys), following negative real wage inflation (based on an analysis of BSE-200 companies) and a plunge in hiring. The market update report sees risks to overall consumption from: (a) further job losses, (b) delayed hiring in IT and financial services and (c) prolonged job search period post redundancies.
According to FICCI, the waiting period to find a job has increased from two to three months to 9-10 months, with people also settling for relatively junior positions. Slowing GDP growth, a poor monsoon and sustained inflationary pressure could provide the catalyst to temporarily reverse the virtuous consumption cycle that India has benefitted from in the past decade, i.e. as consumers lose confidence in future income, they decrease consumption. The market update report has highlighted structural risk to consumption and downgraded the consumer sector
Espirito argues that the negative real wage inflation of BSE-200 companies employees and the plunge in the Monster listing primarily reflect urban populations. This is distressing as the majority of sales for the FMCG sector are generated in urban markets. Investors have chosen to hide in the consumer sector and trades are getting crowded. Downtrading in essentials and prolonged delays in discretionary spending will lead companies to take price cuts and increase advertising and sales promotion (A&P), thus affecting the bottomline. The imminent slowdown in the consumer sector may result in the ‘defensive sector’ losing its crown, according to Espirito Santo Securities
The analysts opine that in times of continued uncertainty and concern around corporate governance, investors are playing it safe and focusing on a narrow list of companies in the consumer sector, and flow into those names is causing P/E (price-to-earnings ratio) expansion, rather than an expectation of increases in earnings or any underlying change in the industry to merit a major expansion in the multiple.
Further, according to the analysts, the BSE FMCG index has outperformed the broader market by about 17% YTD (year-to-date), despite starting the year on already high multiples (consensus 12-month forward P/E of 24.6 times). Several companies (like Emami and Godrej Consumer Products) have been top performers, and the P/E rerating has meant the stocks have outperformed the market.

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