India Inc in fast forward mood

VISION 2006 PART - I

Ravi Kant, Tata Motors managing director, is not normally given to forecasting trends in the commercial vehicles market. But about six months ago, the automobile veteran had said quite plainly that he believed growth in the sector might have peaked.

Commercial vehicles sales between April and November are up by barely 1 per cent after three strong years during which growth averaged 26 per cent.

At Bajaj Auto, too, marketing head S Sridhar says he expects sales of motorcycles, which averaged growth rates of 20-24 per cent in the last few years, to taper off. Motorcycle sales this year are up just under 19 per cent.

But neither of them is too concerned. Ravi Kant knows that growth will be muted for a while before the commercial vehicles cycle turns again and he believes that given the infrastructure development taking place in the country, the potential for growth of the industry is huge.

Sridhar, too, is not expecting motorcycle sales to grow less than 15 per cent, with an upside every year if the monsoon is reasonably good. Having made the most of an unusually strong run, industry is now learning to live at a more sedate pace.

As Crisil CEO R Ravimohan says, "We are moving from a period of growth, extraordinarily rapid, to a period of normal growth." Ravimohan is convinced that the corporate sector will turn in a solid performance over the next 2-3 years.

It is a fact that topline growth for the corporate sector has been slowing over the last four quarters. Net sales growth, which was 23 per cent year-on-year in the December 2004 quarter, had tapered off to 17.5 per cent year-on-year for the September 2005 quarter.

But, according to Mahesh Vyas of CMIE, while topline growth may have been a shade lower in some quarters, the fall is not significant. "A 19-20 per cent rise is still good and we expect companies to post strong numbers for the December quarter too, since demand is robust," he says.

Adds Ajit Ranade, chief economist, Aditya Birla Group, "There has been some dip in top and bottom line growth in the last few quarters and the numbers are certainly lower than the 25-30 per cent we have been seeing. But, there is nothing yet to suggest that growth is significantly slowing."

However, while topline growth has more or less sustained, rising input costs have already hurt operating margins, in the absence of pricing power.

With interest rates bottoming out and the capex cycle turning, the earnings growth, which has averaged 25 per cent in the last four years, will decelerate to between 15 and 17 per cent in 2005-06.

Cautions Ravimohan, "Apart from higher international crude oil prices, wage inflation can also eat into profits."

Not all firms are seeing lower growth though. Driven by the retail and housing "boom", decorative paints are tipped to grow at a faster pace of 12 per cent this year compared with the 8-9 per cent growth of the past two years, according to Jalaj Dani, president, Asian Paints.

Engineering major Siemens, which has a record order-book position of Rs 5,000 crore, according to executive director HG Gelis, should see another good year.

Industrial growth in October was 8.5 per cent, compared with 10.6 per cent in October 2004. Between April and October 2005, the index of industrial production (IIP) gained 8.4 per cent against 8.7 per cent in the same period in 2004.

"A couple of sectors such as mining and electricity have pulled down the numbers, the former due to a flare-up on Bombay High and the latter due to a coal shortage, but non-oil mining has been doing well," says Vyas.

A sharp drop in exports in November by 11.38 per cent , after a consistent double-digit growth almost every month for more than two years, is some cause for concern, though it can be an aberration.

Says Abheek Barua, economist at ABN Amro Bank, "Exports have played a critical role in the recovery of the manufacturing sector in the last two years. While there does not seem to be anything amiss right now, the increase in raw material costs, like steel, could have eroded the competitive edge of our merchandise somewhat."

The widening current account deficit, some believe, can lead to pressure on the currency, making imports more expensive. However, Barua feels given the forex reserves which are at 22 per cent of the GDP, the deficit is manageable.

There is also not too much concern about rising interest rates stifling demand. The bulk of demand is being driven by capital expenditure and that is not too sensitive at these levels of interest, says Barua.

As for consumer goods, with most products being bought with monthly instalments, users do not really feel the pinch. So higher interest rates are unlikely to hurt demand except perhaps margins.

Driving demand at home are higher disposable incomes, changing lifestyles, low interest rates and abundant credit. Favourable demographics, with the labour force growing faster than the population, should continue to fuel demand for goods and services.

Segments such as organised retail, which account for just 4 per cent of total retail, will be the beneficiaries. So far, demand has originated mainly from the urban consumer. With rural incomes rising, manufacturers are expecting stronger rural demands in the next couple of years.

The boom in consumption has resulted in capacity utilisation almost peaking and companies are now rolling out huge capex plans. Reports say, the top 300 companies propose to invest Rs 3,20,000 crore over the next 12-18 months.

Says Nandan Chakraborty, head of research at Enam Securities, "The heartening feature of the capex upturn is that it is at peak utilisation and led by both existing and future demands unlike in previous capex cycles. Also this time round, projects are being funded at much lower costs."

The question is: what can derail the growth momentum? Higher inflation as a consequence of higher input costs can dampen demand. As Ranade observes, in countries like China, input costs have risen 50 per cent in five years whereas out prices have fallen.

The other concerns are the shortage of fuels like coal, which will lead to a shortage of power. What can also stymie growth is tardy infrastructure development, especially that of roads and ports.