Achallenging time lies in wait for Indian businesses in FY12. It may not be a gloomy year, but one that comes with more than its fair share of policy-related issues. Some will fade away in time, but the reverberations of others will be felt for many years to come. Investors will need to be watchful, as some of these changes could affect valuations as well.
Inflation: Its refusal to die down is giving policymakers nightmares. Companies are tiring of keeping prices in check so that demand is unaffected. Some price hikes have been announced, and more may follow. Inflation not only affects consumer demand and input costs, but also calls for salary hikes and higher working capital outlays. Higher working capital could reduce the cash surpluses for cash-rich companies, and for others, mean increased borrowings.
Interest rates: Inflation is finally translating to higher interest rates, especially in recent months, which could also affect consumer demand, at some point. The immediate impact will be on short-term debt, such as working capital loans, which will become more expensive. Over a longer period, term loans will turn expensive too, affecting interest costs for companies.
The Budget 2011-12: The government had cut excise duties by 4 percentage points as part of the fiscal stimulus package. Of that, half was rolled back in the current fiscal. If the rest is rolled back in fiscal 2012, expect another round of price hikes (and more inflation). Will the government be able to balance its deficit, without hiking taxes, depending on economic growth to bring in additional revenues, and by curbing its expenditure needs? This year will not have the 3G auction windfall though disinvestment could give it comfort. Will the budget be a non-event this year, too?
Goods and services tax (GST): Can the government get GST going from 1 April? Given the current political environment it may not appear to be a priority, but companies would still be hoping for GST to be introduced in fiscal 2012. It is expected to bring down the overall incidence of indirect taxation and the cost of doing business, a boon when inflation is running high. Investors are not really counting this as a key trigger for 2012, but it will be a pleasant surprise if it happens.
Companies Bill, 2009: This is another key piece of long overdue legislation. At present, the government is reworking the Bill to incorporate suggestions given by the standing committee on finance. The Bill will affect both companies and minority investors, which will become evident when the revised document becomes public.
Direct taxes code (DTC): When the government announces the budget, it may offer an update on the implementation of DTC. The code is supposed to replace the existing tax regime on 1 April 2012, provided all the attendant legislation is in place. The new code will make significant changes to both corporate and personal taxation, including the treatment of capital gains. Two discussion papers have been released on this with several consultations held. If introduced, the effect on direct tax incidence will affect companies, individuals and investors.
International Financial Reporting Standards (IFRS): A new set of accounting standards is being introduced for Indian companies. From the June quarter, it will become applicable for companies in the Nifty, or the Sensex, and for other firms with a net worth of over Rs1,000 crore. This may make it a small sample, but large in value in terms of sales, profits and market capitalization. India is converting the original IFRS to make it acceptable to Indian companies, calling it converged standards. The final standards have not been notified. It is likely to affect financial reporting across the board. Earnings estimates may have to be revised to reflect the new norms, which would affect valuations as well. Expect some surprises in the year ahead as the new figures come in. What’s more, it’s not mandatory for companies to provide comparable figures for fiscal 2011. If firms do not volunteer this information, investors will be left comparing apples with oranges for one year.
Individually, these are one-off events that would have settled down, eventually. But if they coincide, their collective impact becomes unpredictable. After all, some of these issues can affect the earnings outlook for companies. Not knowing by how much will make life a little difficult for investors in fiscal 2012.