Favourable monsoon, govt pay hikes can herald a consumption-led rally in the Indian economy that, in turn, can boost profitability of Indian companies
New Delhi/Mumbai: Forecast of an above-normal monsoon and impending pay hikes for government employees could spur a nascent recovery in consumer sentiment in the coming months, heralding a consumption-led rally in the Indian economy that in turn could strengthen profitability of Indian companies.
The Indian economy grew at 7.6% in fiscal year 2015-16 and 7.9% in the March quarter, showing a sustained recovery in private consumption demand though investment demand continued to falter.
The forecast of an above-normal monsoon, with the reassurance of zero probability of deficit rains by the Indian Meteorological Department, could further add to the economic recovery process by ending two years of rural distress on the back of below normal rainfall.
The One Rank One Pension scheme for the armed personnel which is already being implemented and the recommendations of the Seventh Pay Commission for central government employees for which the government has allocated about ₹ 70,000 crore in this year’s budget, as and when implemented, will give a further boost to urban demand which has so far been driving the economy.
In a 1 June research report titled India Consumer Close-up, Goldman Sachs said India’s consumer story in the coming 5-10 years will be shaped by its 440 million millennials and 390 million Gen Z born after 2000. “The sheer size of India’s youth, combined with improved education, pave way for sustained growth in purchasing power and makes India’s consumer story one of the world’s most compelling for the next 20 years," the investment bank said.
Tepid global demand and slow recovery in domestic demand have led to overcapacity at most Indian companies, forcing even the ones with a lower debt profile to postpone expansion plans.
But things may just be turning around.
According to a Confederation of Indian Industry-ASCON survey of around 35,000 companies and industry associations in 102 sectors released Sunday, 30.8% of the respondents have reported capacity utilization to be in the range of 75-100% in the March quarter, compared to 21.4% in the previous quarter.
About 53% of the respondents reported capacity utilizations in the 50-75% range in the March quarter—marking a marginal improvement from the December quarter. The share of sectors witnessing a high growth rate of 10-20% surged substantially to 20.6% in March quarter against 6% in the December quarter, according to the survey.
A Mint analysis of 309 BSE 500 companies, for which comparable data was available for at least 24 quarters, also pointed to a steady recovery in the March quarter. The analysis showed that net profit rose 22% from a year earlier in the March quarter compared with a 3.27% decline in the December quarter.
The profit growth in the March quarter was the best since the quarter ended 31 December 2014, signalling a turnaround in the private sector.
Analysts say Indian companies are all set to post a double-digit profit growth in the current financial year, having seen flattish to weak growth for a few years now. Encouraging economic growth momentum, possible revival in rural demand and a recovery in commodity prices are the key drivers for a much-forecast improvement in corporate earnings.
According to Kotak Institutional Equities, an arm of Kotak Securities Ltd, March quarter adjusted net profits of the Sensex-30 Index and Nifty-50 Index grew 7.5% and 2.3%, respectively from a year before. For 2015-16, net profit increased 2% for the members of Sensex and were flat for the Nifty-50 Index.
“We believe the earnings have troughed out," Vaibhav Sanghavi, managing director, Ambit Investment Advisors Pvt. Ltd.
“Some amount of improvement in the economy is getting reflected in revenue growth. This time around, apart from margins improving, we also saw sales gaining traction," he added.
For fiscal year 2016-17, Sanghavi expects Sensex and Nifty earnings to exceed 10%. “The GDP growth is gaining traction. Domestic consumption is going to drive further growth and the rural economy is also now pitching on the back of a better monsoon and increasing government focus on it," Sanghavi said.
Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd, sees Nifty-50 earnings rising by 15-20% in 2016-17, while Kotak Institutional Equities expects a 16.8% rise.
In yet another sign of a rebound in economic activity, sales across vehicle categories inclduing commercial vehicles, three-wheelers, motorcycles and scooters, grew in higher double digits during April, according to the Society of Indian Automobile Manufacturers (Siam). Sales of two-wheelers, in particular, grew at their fastest pace in 18 months to 21.23% in April, signalling a pickup in rural demand.
India’s penchant for big and brawny utility vehicles continued in April, growing 43%, the fastest since November 2012.
Pawan Munjal, chairman and managing director of Hero MotoCorp Ltd, said a good monsoon after two consecutive years of sub-normal rainfall could lead to a change in sentiments in the rural markets, which may lead to a turnaround in the automobile industry in the second half of fiscal year 2016-17.
Sumit Sawhney, the managing director at Renault India Pvt. Ltd, is equally optimistic, but is cautious about the progress of monsoon. “Monsoon will have a positive impact, but we will have to first wait and see how good it is. Any impact will only be felt around the festive season later this year," said Sawhney.
However, R.C. Bhargava, chairman of Maruti Suzuki India Ltd, said the growth in car sales may be limited to a few companies. “In automobiles, there is a lot of excess capacity with a lot of companies. The growth is limited to three-to-four companies, and it is not happening across the companies. Apart from Maruti and Hyundai, not many are having a sustainable growth. That’s about all," said Bhargava.
Demand for cement, which is also an indicator for the labour intensive construction sector, has seen sustained improvement with growth touching 8.5% in April.
According to report by India Infoline Ltd (IIFL), cement prices increased in the southern, eastern, and central regions of India in May, led by improvement in discipline, while prices declined in the western and northern regions due to weak demand.
Amey Joshi, associate director (corporate) at India Ratings and Research said he expects cement demand to grow at 6% in the current financial year—mostly driven by government spending.
“Factors like the Seventh Pay commission and GDP (growth rate) may increase spending power, but that may translate into more demand for other sectors than housing, which is key for cement consumption. Better monsoon may help with some increase in the rural housing demand," he added.
Shailendra Chouksey, whole-time director at J.K. Lakshmi Cement Ltd, said the traction in cement demand will come from the infrastructure projects that were languishing and are now seeing some greenshoots in terms of work happening. “Real action will happen when the planned ‘housing for all’ projects pick up," he added.
Similarly, domestic steel prices have picked up following government support through measures such as the imposition of minimum import price and extension of safeguard duty up to March 2018.
After eight months of contraction, domestic steel production picked up in March and April by 3.4% and 6.1%, respectively.
“Better farm income will be a positive for the steel sector but will not be immediate. If monsoon is good, it may translate into demand for auto and even for rural construction, which in turn will lead to steel demand. The impact will however be seen with a lag," said Goutam Chakraborty, analyst at Emkay Global Financial Services.
While two years of drought has dampened demand for consumer goods in rural India, now even urban demand is under stress due to water shortages in cities, according to Vivek Gambhir, managing director at Godrej Consumer Products Ltd.
But once the monsoon sets in, rural spending will improve and water woes will get resolved in urban India," Gambhir said.
“Moreover, inflation,especially food inflation, which is inching up, will also remain under check if the agriculture yield is good. If inflation remains under check, then RBI could take a rate cut in the next six months. This could lead to a meaningful recovery in the second half of the year," he added.
Amritha Pillay and Sapna Agarwal contributed to this story.