 "Q1 FY15 could be a turning point from consumption viewpoint: Madan Sabnavis")
Madan Sabnavis, chief economist, CARE Ratings in an interview with Puneet Wadhwa expands on the recent CARE Ratings report that said that the financial performance of the large-caps is better than that of companies with sales less than Rs 100 crore in the first nine months of this fiscal. He also suggests that Q1 of the next financial year could be
a turning point from the point of view of consumption. Edited excerpts:
A recent CARE Ratings report suggests that the financial performance of the large-caps is better than that of companies with sales less than Rs 100 crore in the first nine months of this fiscal. Can you elaborate on this?
Sales have been affected mainly by low demand conditions which has its genesis in low consumer demand. High inflation has put pressure on consumption patterns of households which are spending more on food and have less to spend on consumer goods. This has had backward linkages with other sectors of the economy. Also government spending has been compromised to meet fiscal targets, which has affected demand for goods.
Companies have hence seen sales growth slowing down over time. Add to this the fact that they have faced rising input costs, they have not been able to pass this on through higher prices (core inflation remains low at around 3%). This combined with higher interest rates has put pressure on profits.
Do you think the tide could turn over the next few quarters as regards the financial performance of India Inc is concerned? Why/ why not? In which sectors do you see the recovery happening first? Which ones will be the laggards?
One does hope that the investment and consumption cycle will turn around in FY15. First inflation should come down so that consumption increases for non-food items. Second, interest rates should come down, which will happen when inflation is under control, which in turn will help investment.
Presently, there is surplus capacity cross industry which makes it unnecessary to invest when demand is low and interest rates are high. Third, the government should spend, which can happen only from Q2 onwards once the elections are done. But again one is not sure as to how strong this will be. Last, there can be supplements from exports when world economy recovers- which is expected too this year.
Therefore, practically speaking things will happen from Q3 onwards provided there is a good monsoon and rural spending increases. This did not happen in FY14 but one can hope for a turnaround provided the Union Budget provides fiscal incentives to industry.
More From This Section
Typically auto, consumer goods, textiles should see an increase in demand from the consumer side, while government spending on infra will be manifested in demand for cement, steel, machinery - basic and capital goods. Both can happen simultaneously and the former will provide backward linkages with intermediate and basic goods industries.
By when do you see a meaningful recovery / restart of the capex cycle that will get reflected in the financial performance of India Inc?
Q1 of the next financial year could be a turning point from the point of view of consumption - the Rabi harvest and spending would help as this coincides also with festival and marriage seasons - up to May or so.
Also election process will provide boost for industry as demand picks up for autos, fuel, paper, printing, food items, etc as the campaigning season gets on the way. But for the capex cycle to start, it would be after elections and given the monsoon impact. Realistically, the third quarter, that is, October onwards would be the time to look at it.
Have the markets and corporate India factored in a possible impact of El-Nino that can possibly again stoke inflation and dent financial performance? How do you see the inflation trajectory panning out?
This is always a factor that can distort the picture. A clearer picture emerges only in May when the first view is obtained. But we have seen that a good monsoon no longer means low inflation and therefore, while absence of El Nino and presence of a good monsoon is a necessary condition for low inflation, it is no longer sufficient.
A crop failure like that of vegetables upset the shopping cart sharply this year. One assumes inflation will be under control if we have a normal monsoon. But we have seen that in the past a late withdrawal of monsoon or damage to crops like vegetables or pulses has pushed up prices. Also any global disturbance can make oil dearer. These factors can distort financial performance of companies.
The recent Purchasing Managers' Index (PMI) data for China and India has not been too encouraging. Do you think there is more pain in store?
There will be pain until we actually see things turning around. Today it is based more on hope that we say that things have bottomed out. Our GDP (gross domestic product) numbers show that there has been really nothing positive in the growth in Q3, and the main sectors that should be growing are lacklustre - manufacturing and construction (which reflects consumption and investment).
Also at the theoretical level we have not seen a correlation between PMI and IIP or GDP (services) as their concepts are different and point of comparison is different - PMI is over last month perception while IIP is over a year. Therefore, there can still be pain until things really bottom out and spending restarts.
In this context, how do you see the rupee panning out and what will be the Reserve Bank of India's stance as regards the monetary policy?
The rupee will remain stable in the 61-63 range in the absence of any disturbances. The tapering effect has not been very stark once it has been imposed as the markets have adjusted to it. On the other hand, our external situation looks stronger thanks to the forex inflows and control of imports. The view is that RBI would be comfortable to keep it above 60 levels to retain the competitive edge for exports at a time when the global markets are recovering.
The RBI will be calibrating interest rates to inflation and has to be convinced that CPI inflation has come down and will remain low and stable. While inflation will move downwards given that the Rabi crop is expected to be good, one is still not sure if the RBI would be in a hurry to lower rates as they will be looking at inflationary expectations too and things like El-Nino will weigh on them more than anything else.