The D-day is here. With polling for the great Indian elections behind, the eagerly awaited results will be unveiled today and who will form the next government at the Centre will be revealed soon.
The raging rally on Monday, after the announcement of the exit polls, seems to indicate that stock market will be extremely pleased if the NDA government returns to power.
But this might not translate into a sustained rally due to three counts. One, with the Sensex and the Nifty close to record highs and trading at extremely rich valuations, it is difficult to foresee a lasting rally even if the exit poll outcomes come true.
Two, at current prices, most of the positives have been factored into the stock prices. If the NDA gets lower number of seats than that predicted by the exit polls, the disappointment can lead to exaggerated decline.
And three, it is well known than foreign investors, mainly hedge funds, have been playing a pump-and-dump game in the Indian market since this March. They will be in a hurry to book profits and exit after the results are declared.
Also, irrespective of short-term market swings on the results day and after, it is certain that nothing will change for India Inc after the poll results.
Listed companies have gone through a tough phase over the last five years and this is expected to continue over the next couple of years as well.
Stock prices may have had a good run in the last five years with the Sensex and the Nifty gaining 58 per cent and the mid- and small-cap indices gaining 61 and 76 per cent, respectively, since Modi was sworn in as the Prime Minister, but these numbers do not reflect the fundamental reality.
Listed companies have been struggling to grow their revenue and profits in the Modi regime. Between 2014 and 2018, stocks forming part of the BSE 500 index recorded annual average sales growth of 3.79 per cent while the net profit contracted 0.41 per cent. In other words, companies have made almost no profits in the last five years.
The reasons are not hard to find. Modi’s term in 2014 began amidst challenging global conditions with slowdown caused by China rebalancing its economy and the Federal Reserve resorting to monetary policy normalisation.
Global over-capacity in commodities caused prices to crash with the CRB index that tracks commodity prices, halving in value between mid-2014 and the first quarter of 2016. Energy and commodity companies were severely impacted by this. Exporters were hit by global slowdown while two consecutive years of monsoon failure hit domestic rural demand. Just as demand began improving in 2016, demonetisation dealt a blow to smaller companies, pegging back the recovery by another year. Steep losses recorded by public sector banks, coupled with the GST rollout caused further disruption to listed players with net profit of BSE 500 companies declining 9.68 per cent in FY18.
In the first nine months of FY19, profits were hurt again due to increasing input cost, higher interest rate payouts and slack demand curtailing pricing power of larger companies.
While sectors such as power and real estate have been hampered by regulatory issues over the past five years, banks have been bleeding due to lower credit growth, rising NPA recognition due to RBI’s asset quality review initiated in 2015 and shrinking spreads.
Consumption has been the main driver of earnings in this period with sectors such as auto, auto-ancillaries, media and entertainment, FMCG and consumer durables recording strong growth.
Government spending helped some sectors such as road construction and affordable housing.
The next government will be taking charge in an equally challenging global environment. The ongoing trade war between the US and China, anti-globalisation policies of the Trump administration and slowing global trade as well as growth are set to impact Indian exporters as well as commodity companies.
Of greater concern to India Inc are signs of slowing consumption in rural as well as urban India.
An UBS survey on Indian urban consumers suggests consumers are beginning to defer purchases and down-trade. Purchase deferment is already beginning to reflect in slowing auto sales numbers and lower credit growth and can be linked to the ongoing liquidity crisis in the NBFC sector. FMCG companies that have been witnessing higher traction in sales of premium products could be hurt if customers steer away from high-margin premium products.
Alongside slowing urban demand, prospects of poor monsoon this calendar can impact rural consumption too. The Modi years have not been lucky as far as monsoons go with 4 four of the last 5 five monsoons being either deficient or below normal.
The other key sector that holds the key to the overall performance of India Inc is banking, which had 32 per cent share in the market capitalisation of NSE listed stocks in March 2019. While core performance and credit growth are picking up in some banks, there are no easy solutions to the capital crunch being faced by many banks that is holding back credit growth and having a cascading effect on the economy as a whole. The banks also continue to hold very large bad loan books and risk of slippages rising remain if business cycle or global conditions worsen. The slow progress of the cases under IBC do not help either. The government that takes charge next should take steps to move towards time-bound resolution of cases under the IBC to address the problems of banks. Ensuring adequate liquidity in the system and long-term solutions for farmers, not just doles, will help boost demand. Greater effort to create jobs is another imperative to spur demand.
With private capex still some quarters away, the government needs to keep up its infrastructure spends on roads, railways, urban transport, and affordable housing .