First the quarterly GDP growth rate has apparently improved significantly. We don't have the official estimates yet (those are due only on August 29) but several advisories by brokerages such as Barclays and StanChart reckon that the April-June 2014 GDP growth rate hit 6 per cent. If true, this is a significant change in the growth rates. Quarterly growth has not crossed 5 per cent since the April-June 2012 quarter.
When we examine corporate earnings for April-June 2014 period; the impression of a turnaround grows even further.
The net profit of 1,726 companies (excluding those in the financial and oil & gas sectors) rose 35.3 per cent on a year-on-year basis compared to April-June 2013, to ₹99,527 crore. This is the fastest NP growth in at least three years. A low base contributed since April-June 2013 was a poor quarter with a 10 per cent decline in NP versus April-June 2012. Nevertheless, Q1 2014-15 showed a Net profit increase of 21 per cent over Q1 2012-13 as well. Revenue growth was less strong. Net sales rose 11.8 per cent year-on-year to ₹7,88,047 crore in April-June 2014.
For a larger set of 2,106 companies, including those in the financial and oil & gas sectors, the net profit (adjusted for other income and exceptional items) rose a good 33.4 per cent YoY to ₹1,54,741 crore. This is an acceleration from NP growth at 8.1 per cent YoY in Jan-Mar 2014 (and a decline of 17.6 per cent in April-June 2013. Net sales recorded annual growth of 12 per cent at ₹13,36,619 crore for this larger sample.
The strong show was however, driven by few sectors. Information technology (IT) services exporters, pharmaceuticals, FMCG and a few auto companies such as Tata Motors and Maruti. Companies from these three sectors accounted for two-thirds of the incremental profit growth for all companies in the sample.
If IT, pharmaceuticals and auto makers are excluded from the sample, the adjusted net profit growth falls to 10.6 per cent, while revenue growth falls to 8.4 per cent YoY. The rupee's depreciation and the rural demand story were the key factors. This is not yet a broad based turnaround.
Companies in capital-intensive sectors saw financial ratios hitting the danger mark. The interest coverage ratio of operating profit divided by interest expenses gives a rough estimate of how comfortably the business can service debt. A ratio of about 4 or more is considered healthy. The interest coverage ratio for power companies, metal producers and capital goods makers declined to an all-time low of 1.8 in April-June 2014, from 2.5 in Jan-March 2014, and 2.3 in April-June 2013.
There may have been an "election effect" since the massive campaign spending could have driven the uptick in consumer goods. In fact, this could also have been responsible for driving the Index of Industrial Production up.
The IIP rate of change YoY was up for three months in succession and it registered a growth rate of 3.9 per cent for the entire quarter. Electricity (up 15 per cent) and Transport (up 7.5 per cent) outperformed manufacturing (up 3.1 per cent). Basic metals grew by 8 per cent and cement grew by 10 per cent. This is uneven but it does suggest some sort of recovery and it gives hope that, barring unforeseen shock, things are not going to at least get worse anymore in the days to come.
The financial situation has been quite stable through this period. Or rather, it has improved very considerably since last year. The worries on the external front have receded.
The Trade Balance has got more comfortable. The trade deficit (Imports minus exports) shrank in 2013-14 to $138 bn from a high $191 bn in 2012-13. The first four months of 2014-15 have seen a trade deficit of about $45 bn, with exports up 8.6 per cent to $108 bn while imports have declined 4 per cent to $163 bn. Most estimates suggest that the full year trade deficit will be about $130 bn.
The Current Account Deficit should stabilise at about 2 per cent of GDP according to consensus estimates. That is marginally up from 2013-14, when the CAD was at 1.7 per cent of GDP. This is high but much more comfortable than 4 per cent plus which is where the CAD was running earlier. In USD terms, the CAD should rise to about $39 bn from about $32 bn in 2013-14. Incidentally, this implies that the Indian economy will grow at about 2.4 per cent in dollar terms.
Given that most rupee-denominated GDP growth estimates are in the range of 5.5 per cent to 6 per cent, this also implies that the USDINR rate will continue to move in favour of the American dollar. However, the depreciation is unlikely to be sudden or as steep as it was in 2013-14. Again, if one compares the two rates of return (say 6 per cent in rupee terms, versus 2.4 per cent in USD terms), we could suggest that the rupee could see about 3-4 per cent depreciation versus the USD. For most of the year, the rate has range-traded between 58-62, bringing in some stability.
The RBI will not need to take emergency measures if the currency position continues to run relatively stable. Last year, it had to cope with a steep drop and that required quite a lot in the way of radical measures. Notably the central bank introduced swaps for crude-importing PSUs. Forex reserves are also up to above $310 bn which is about seven-eight months of import cover.
This will leave the RBI free to focus on inflation. If the growth cycle is turning around anyway, as seems to be the case, the central bank can afford to harsh on this front. By keeping policy rates high, it is gradually squeezing inflation down to what it considers acceptable levels.
Inflation numbers are still worrying but there has been considerable cooling off. The RBI set a target of retail inflation at below 8 per cent in January 2015 and below 6 per cent in January 2016. These are upper boundaries of tolerance. Currently the (Consumer Price Index) CPI's YoY inflation rate is running at just below 8 per cent. The Wholesale Price Index (WPI) is running at 5.2 per cent YoY. In both cases, the trend appears to be down. But, these targets at least indicate how far we are from achieving them.
Food and the monsoon could be one key variable that causes worries. The CPI gives a weight of 45 per cent to food items. A deficient monsoon has already led to a sharp rise in vegetable prices.
The other key variable would be global crude rates. So far, crude has stayed low but if the assorted wars in the Middle East affect supply, there could be a flare up. Similarly the Ukraine conflict could have some impact on gas prices. The RBI has not cut interest rates - it may not do so until January 2015. But it is also unlikely to raise rates unless there's a spike in inflation.
Everybody expects the second half of the fiscal to be better and some optimists believe it will be a lot better than one could imagine. The expectations from the new government are huge. It will clean up the mess in coal and the linkages with the power sector; it will get the 900-odd stalled infrastructure projects moving again; it will institute meaningful reforms in labour laws and induct FDI into defence and insurance. In reality, it won't deliver on many of those expectations. However, it will probably deliver on some of them. And the economy has started pulling out of the trough even though there hasn't been meaningful reform in the first 100 days.
The writer is an independent financial analyst.
This story appeared in the September 2014 Issue of Wealth Insight.
This article was originally published on October 09, 2014.
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