The Hindu Business Line : Temporary lull in investment demand

The effect of the fiscal stimulus through various measures may not make a meaningful difference, at least in FY 2009.With growth in GDP set to taper by 125-200 basis points for each of the next two years from the 9 per cent-plus levels in FY 2008, earnings growth of India Inc will be under more stress; cost pressures will also have bearing over the next couple of quarters.

We have over the past nine months highlighted the likelihood of earnings growth moving to 10-15 per cent range for FY 2008 & FY 2009. This trend is now likely to spill into FY 2010, too.

Investment spending could also come under the stress radar and take more time to pick up steam. Demand contraction may mean newer capacities, which are on the anvil, could come on stream to face a tough first year. The spurt in interest rates and the virtual ruling out of equity as a financing option - for all, but the top-end companies at least for the next year - are likely to influence corporate capex spend.

The encouraging aspect on this score is the fact that the top 10 to 15 companies account for more than 50 per cent of the expected corporate capex over the next five years; these companies are low on leverage and high on

cash flows from five-years of robust growth. In this context, the major part of the planned spend should continue apace, especially as companies have already embarked on the program.

Capex could take a backseat in the mid- and small-cap spaces. As we step out of FY 2010, capacity constraints will not be a constraining factor, as growth seeks to chart a recovery path to the higher trajectory of 2003-2008.

Sundaram BNP Paribas Mutual

Risk of stagflation

The macro headwinds for equities are strong with the RBI (Reserve Bank of India ), in their first quarter review of the annual monetary policy for 2008-09, lowering growth forecast for financial year 2008-09 by half a percentage point from 8.5 per cent to 8 per cent. The RBI also raised its inflation target for end March 2009 to 7 per cent from 5-5.5 per cent. The lower growth and higher inflation conundrum gives rise to the stagflation theory, which hits equities on two fronts of lower topline and weakening bottomline. The topline growth will falter as demand drops on the back of high interest rates and high inflation, while the bottomline will be affected as companies absorb higher cost on resistance by consumers to pay higher prices for goods and services. The effects of stagflation are expected to be felt in the next few quarters as the RBI ‘s actions of increasing interest rates is felt at ground level.

IDFC Mutual

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