Share prices have finally fallen prey to the laws of gravity as investor hope battles economic reality.
The Bombay Stock Exchange’s benchmark Sensex ended at 15,975 on Friday, nearly a quarter lower than its 8 January peak of 20,873. The steep fall in share prices in recent weeks has been analysed in terms of macroeconomic risks—the ever higher chances of a US recession, the rise in the yen that has hit the popular carry trade, the persistence of the global credit freeze, a mild slowdown in India and resurgent inflation that makes lower domestic interest rates more unlikely.
That’s the bird’s-eye view. It’s time to take a worm’s-eye view and ask how companies will cope with various macroeconomic risks that hover over markets like dark clouds.
We have warned in these columns over the past year that Indian companies will have to come to terms with slower profit growth and deterioration in financial health. Already, most brokerage houses are saying that profit growth in the quarters ahead will be below 20%, a significant slowdown from the 30%-plus profit surge that the average listed company posted over the past four years. Credit rating agency Icra Ltd said last week that the number of downgrades exceeded the number of upgrades for the first time in three years. Earlier, credit rating agency Crisil Ltd, too, had reported the same trend in its ratings. These are advance warnings.
Indian companies are still in good health. Leverage is far lower than what it was in 1997, when the Asian crisis upset many business plans and ended a three-year economic boom. But there could be pressures ahead. Huge investments and ambitious global acquisitions (often funded by debt or convertibles) in a slowing global economy have increased the risk profile of Indian companies.
The other problem is funding. We have still not seen any problems because of currency mismatches and dependence on short-term funding. But bank credit is no longer growing at a hectic pace. The overseas convertible bond market has shut down for all practical purposes, one reason why bankers are complaining of a “dollar shortage” (which is nothing more than a way to describe the fact that overseas investors are not lending to Indian companies). A weak initial public offer market has already put many real estate and airlines companies in a spot of trouble. Corporate fundamentals will need to be tracked closely.
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