Slow, but steady

THE market is going through a very tricky situation with a lot happening on the policy front, including insurance and mining Bills being cleared and allocation of coal blocks progressing with satisfactory speed, yet the widely held perception of not much happening at the ground level is taking its toll. Though this may be due to a multiplicity of factors—both global and local out playing— the tension between the market participants and the government can be best described in this cricket season as resulting from the former wanting to play a One-Day International and the government having no option but to play a Test match.

The market may be in for a consolidation phase with the US Fed likely to raise interest rates around September-October, strengthening the dollar. Though economic fundamentals have greatly improved with shrinking current account deficit, controlled fiscal deficit, accelerating growth, moderating inflation, lowering interest rates and key reforms being pushed up, the dollar may yet affect an emerging market like India in two ways—one, involving the tapering FII inflows and two, companies with lots of dollar debt getting into serious trouble. This may not only add to banking sector NPAs but also reduce lending in the medium term.

A recent IMF report has found that the stress level for Indian firms is at its highest since the early 2000s on all the four parameters viz, interest cover ratio, profitability, liquidity and leverage. The prevailing low-growth environment, coupled with possible external shocks, can lead to a potential doubling of such vulnerable companies.

A CARE Ratings post-December quarter results analysis of 2,894 companies finds that 1) net sales dropped 1.8 per cent y-o-y, 2) net profit declined by 31.6 per cent y-o-y, and 3) interest cover declined from 2.9 in Q3 FY14 to 2.2 in Q3 FY15. The IMF doesn’t expect a great FY16 either and estimates a growth of 7.5 per cent as per the new CSO numbers since it doesn’t expect revival of investment demand anytime soon.

Corporate results for the March quarter are also likely to remain muted. The terrible shape of the banking system is further cause for worry. The recent untimely rains have further raised concerns with regard to food inflation and may lead to the RBI deferring any further rate cut. Business sentiment has fallen to its lowest level since April 2014 and demand has seen decisive moderation. The HSBC Purchasing Managers’ Index for manufacturing firms for February was at a five-month low with IIP data also not inspiring any confidence.

However, in the larger picture, India still looks as the most investible alternative amongst the emerging markets. Russia, due to a drop in oil prices, and Brazil, due to lower commodity prices, stand on a weak wicket. China is slowing down. The valuations at a PE of around 16-17 times, though a bit stretched, are in line with the long-term average and the expectations of earnings expansion may still support them. Investors with a long-term commitment for 3-5 years may not only stay invested but may use any steep correction to get into quality low-debt company stocks.

The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to editor@gfilesindia.com with Bhardwaj’s name in the subject line.