What slowdown?

BS Compass

It's time for the Reserve Bank of India to ease the monetary policy

Where's the credit slowdown? Despite all the talk of credit not picking up, there has actually been a sharp pick-up in non-food credit in the last couple of months.

For the four-week period from October 3 to October 31, non-food credit rose by Rs 10,493 crore, more than double the rise during the corresponding period of 2002.

For the prior four-week period in 2003, i.e. between September 5 to October 3, non-food credit had increased by as much as Rs 23,398 crore, compared to only Rs 17,824 crore over the same period last year.

Nor was the pick-up in credit all that bad in previous months either. Over the eight-week period from July 11 to September 5, 2003, the increase in non-food credit was Rs 9312 crore, marginally less than the Rs 10,912 crore rise notched up in the same period of 2002.

Almost every banker points out, however, that the increase in credit is mainly on account of retail loans, and some of them point out that corporates have in fact been busily borrowing abroad and repaying domestic loans.

Nevertheless, it's hard to believe that with large-scale expectations of a turnaround in the economy, companies are not increasing inventories, for which they need finance.

Perhaps the RBI should ensure that weekly credit data are also available for retail lending separately.

In any case, the level of rise in non-food credit during September and October has been the highest in the last few years.

For the eight-week period from September 5 to October 31, 2003 non-food credit rose by Rs 33,891 crore, compared to Rs 22,409 crore in the corresponding period last year.

In 2001, the rise during the same period was Rs 16,294 crore, and in 2000 it was Rs 13,052 crore. Even after adjusting for inflation, the increase in credit has been higher this year.

It's no surprise, then, that bond yields are firming up. Perhaps it's time for the Reserve Bank to loosen its monetary purse strings.

Apollo Tyres

The acquisition of a 15 per cent stake by Michelin in Apollo Tyres sparks a change in the structure of the Indian tyre industry where tie-ups so far have been of a technical nature.

The tie-up with Michelin also involves a joint venture (51 per cent held by Michelin) between the two companies for truck and bus radial tyres.

Meanwhile, Apollo's plans of a 1.44 lakh tyres per annum truck radial tyre plant with technical assistance from Continental will also change as a result of the new tie-up.

With the exit of Continental, the plant will now be converted to manufacture car radials.

The $28 million preferential allotment to Michelin for a 15 per cent stake in Apollo Tyres values the company at Rs 235 per share.

This has clearly not found favour with investors, since the stock closed at Rs 279 last week. This resulted in a 6.74 per cent drop in Apollo's stock price on Monday.

On the positive side, Apollo's role in the whole deal will be to market Michelin's radial tyres for CVs, which will bring in distribution revenues. The CV radial tyres will be initially imported from Michelin's Malaysia plant.

While the deal has some upsides, financial performance of the company is still plagued due rising prices of key raw materials like rubber, carbon black and steel cord.

While the higher volumes have resulted in good topline growth, higher raw material costs have led to a sharp decline in operating margins.

For instance, in the second quarter of FY04, while topline grew 27 per cent its operating margins fell 650 basis points to 8 per cent.

Though Michelin spells good times for the group, it will be a while before the benefits are visible on the bottomline.

With contributions from Sameer Ranade