Reserve Bank of India (RBI) deputy governor V. Leeladhar said on Tuesday that loan growth this fiscal has been higher than last year.
The latest weekly statistical supplement from RBI shows that, as on 1 August, the year-on-year (y-o-y) growth of bank credit was 25.8%, compared with a growth of 23.3% at the same time last year. The growth in non-food credit is even more impressive, at 26.2% over the year to 1 August. During the current fiscal year, loan growth till 1 August has been 2.8%, compared with a negative growth of 0.1% over the same period last year.
At first glance, this seems to be difficult to explain. After all, the economy has slowed substantially from its growth rate a year ago. Growth in industrial production, according to the government’s figures, is down to 5.4% in April-June 2008, compared with 10.3% during the same period last year. Now why will an economy growing at a much slower pace require more credit?
The answer is very simple: You need to strip out the effect of inflation. If we take the Wholesale Price Index (an admittedly flawed measuring rod) as our measure of inflation, then the annual rate of inflation, calculated on a point-to-point basis, was 12.44% as on 2 August. A year earlier, it was 4.39%. In real terms, therefore, the growth in bank credit this year is not 25.8%, but 13.4% (25.8 less 12.4).
On the same basis, y-o-y real credit growth at the same time last year was 18.9%.
In other words, the only reason why credit growth this year is so high is because inflation has shot through the roof. And since borrowers have to pay out larger sums of money to buy the things they need, they have to borrow more.
There are also other factors that could have led to higher credit offtake this year, such as increased borrowing by the oil companies. But, the bottom line is that if the high rate of inflation is taken into account, there is no contradiction between lower economic growth and a higher rate of growth in advances. Also, it’s clear that higher interest rates have slowed real credit growth. As the chart shows, real credit offtake has been slowing after 2005.
Berger Paints’ Polish buyout could pay dividends
Shares of Berger Paints India Ltd rose 6.7% when it announced it was buying Poland’s Bolix SA from a private equity firm in April. It rose another 4.6% on Tuesday after completing the acquisition.
But in the interim, its shares had fallen by about 10% and the net result is that shareholders are no better or worse after the acquisition.
The Indian paint maker had said in April that the net purchase price would be $38.6 million (about Rs166.7 crore). Bolix had revenues of $45.5 million in 2007 and is said to be among the most profitable firms within the segment it operates in.
It is a leading Polish provider of exterior insulation and finish systems, a building product that provides exterior walls with an insulated and waterproof finished surface.
While Bolix currently exports to Eastern Europe, Berger has said it plans to introduce its products in the Indian market as well.
Bolix earned revenues of about $26 million in 2003 when it was bought by Advent International, a private equity investor, which implies a healthy annual growth rate of about 15% since. Advent says the firm has maintained its high profitability. But it’s interesting to note that news reports at the time of Bolix’s acquisition by Advent in 2003 put the deal value at $40 million, close to the value of the current deal.
Advent, on its part, says that the deal has been profitable for them. The dichotomy seems to be explained by the fact that while the $40 million figure pertains to the enterprise value (which includes net debt), the current deal value of $38.6 million refers to only the net price paid to buy out Advent.
This doesn’t even amount to 100% of Bolix’s equity value, since some of its stake is held by executives.
After accounting for this, it seems like the enterprise value for the purposes of the deal could be at least as high as the annual revenue figure of $45.5 million.
The net purchase price, in that context, gives an incorrect perception that the deal was inexpensive.
An analyst tracking the company hasn’t yet accounted for any contribution from Bolix or other subsidiaries to earnings estimates, citing lack of sufficient disclosures.
But considering Bolix’s healthy track record in terms of growth and profitability, and its niche product portfolio, the acquisition should pay dividends to Berger’s shareholders.
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