Professional forecasters remain upbeat about the performance of the Indian economy this fiscal.
The Reserve Bank of India’s survey of professional forecasters in the first quarter of 2008-09 (the June quarter) shows that the country’s gross domestic product is now expected to grow by 7.9% in 2008-09, only slightly lower than the 8.1% growth forecast in its last survey, carried out in the March quarter. What’s more, the professionals expect growth to improve to 8% in 2009-10.
But, the growth outlook for corporate sector profit has been revised sharply downwards. Profit after tax is forecast to grow at the rate of 16% (the median forecast) in 2008-09 against 25% expected in last survey. Note that this was as high as 34% in the survey conducted in the December 2007 quarter, and it’s rather obvious that even professional forecasters have much in common with their less well-paid brethren, the fortune-tellers.
Nevertheless, for what it’s worth, here’s the quarterly trajectory of profit growth as expected by the best and the brightest among the economic forecasting profession: Q2 median: 17.4%; Q3 median: 16%; Q4 median: 19.5%; Q1 2009-10 median: 20%.
In other words, the expectation is that the slowdown in corporate profit growth will continue for another two quarters, reaching its nadir in the third quarter of the current fiscal before bouncing back. That seems to be too optimistic a scenario, given the recent monetary tightening measures by the central bank and the fact that these will have a lagged effect. The numbers will doubtless be revised downwards again.
Interestingly, the mean forecast for the Sensex is: 13,546 by end-September; 14,700 by end-December; 16,025 by end-March 2009 and 17,900 by the end of June 2009.
During the survey done in the March quarter, the median forecasts for the Sensex were: 16,907 by end-June; 18,235 by end-September and 19,477 by end-December.
The large downward revisions are an indication of how much sentiment has changed in the last quarter.
But, perhaps the biggest surprise has been in the inflation numbers. The forecasts now peg wholesale price inflation at 11.7%, 11.4% and 9.2% in the second, third and fourth quarters of the current fiscal, respectively—the forecast in the March quarter survey was for inflation to be 6.9%, 7.0% and 6.8% in the first three quarters, respectively, of the current fiscal.
Clearly, few forecasters expected inflation to take such a dramatic turn for the worse.
And, lastly, while everybody is assuring us that the “long-term India story” remains fine, professional forecasters have toned down their expectations for the long term as well. During the March quarter’s survey, they expected GDP growth to average 8.5% over the next five years and 8.9% over the next 10 years. In the June quarter survey, they lowered these expectations to 8% for five years and 8.5% for 10 years. Hopefully, these forecasts will be proved to be as pessimistic as their short-term predictions have proved over-optimistic.
Pantaloon’s differential voting rights issue
Auto maker Tata Motors Ltd was the first large Indian corporate to announce the issue of shares with differential voting rights, or DVRs. The company needs to raise a large sum to pay back the loan it took to finance its purchase of Jaguar and Land Rover. DVR is one of the instruments it would be using to do so.
Although Tata Motors was the first to announce the issue of such shares, Pantaloon Retail (India) Ltd may beat it by being the first company to have DVR shares trade on the stock exchange. The company recently announced a bonus issue of shares with differential voting rights. Although there is no fund-raising involved in a bonus issue of shares, the idea is get the markets familiar with such instruments and create another alternative to raise funds in the future.
DVR shares are used extensively in developed markets—one benefit being the ability to raise large sums of money without diluting promoter stake.
From a minority shareholder’s point of view, most investments are made for capital gains and dividend. In India, few shareholders exercise their voting rights. And, even if they do, they don’t normally stand a chance against the promoter group, which usually has a majority stake in the company.
So, most investors would be happy owning shares with lower voting rights. These shares trade at a discount to that of normal shares and, hence, the dividend yield on them is higher.
Pantaloon, in fact, has decided that DVR shares will entitle owners to an additional 5% dividend.
Why hasn’t this instrument taken off in India despite the benefits to promoters and minority shareholders, and the fact that broad regulations have been in place since 2001?
Says Pankaj Jaju of Enam Securities Ltd, who helped Pantaloon structure the product, “One of the hindrances for the issuance of DVR shares was the lack of any precedence in pricing these shares.”
Pantaloon’s bonus issue takes care of this problem in large part, since the issue doesn’t have to be priced. Once the shares list, the consensus view of the market will decide what price they would trade at.
This should serve as a reference for not only Pantaloon’s future fund-raising plans using the same instrument, but also for other companies wanting to take that route.
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