India Inc turns the corner

For much of last year, the market grappled with macro-economic concerns related to stubbornly high inflation, ballooning current account deficit (CAD), slowing GDP growth, and a slowdown in policy actions. In 2013, policymakers spent some time addressing those issues, thereby creating a significant shift in macro parameters.

Now as we move forward, we are witnessing a gradual recovery taking place in most of the macroeconomic parameters. Inflation appears to be softening helped by a moderation in food inflationdriven by lower Minimum Support Price increases and good monsoon. The reform measures by the RBI to curb gold imports aided in reducing the CAD significantly.

On the GDP front, our view is that we are in the process of bottoming out. In the near term, we would see growth aided by the agricultural sector and exports. The rupee’s significant depreciation relative to global currencies has resulted in improved competitiveness for Indian exporters compared with other countries, leading to strong export growth. Indian exports have managed average growth of 8 per cent for the past six months against 1 per cent for the earlier six months. Thus, net exports, which were earlier a drag on the GDP, have started contributing positively.

While agriculture and export-led growth could help in creating a cyclical recovery in the growth, the major impetus to growth in our view can only come from a pick-up in investment activities.

The recent CERC decision to hike power tariffs and the formation of Cabinet Committee on Investments (CCI) and Project Monitoring Group (PMG) to resolve issues related to clearances of infrastructure projects are two key positive developments.

Investment growth is directly linked to governance, thus the general election outcome will remain a key event pertinent to this. We believe that recovery could be faster if a strong Government is elected.

As for India Inc’s earnings, the latest quarterly results saw Sensex companies’ aggregate sales and operating profit grow by 13 per cent and 15 per cent, respectively, over the same period last year. Aggregate sales growth was driven by sectors, such as technology, healthcare, auto and finance.

For the last couple of years, earnings growth for Indian companies has lagged nominal GDP growth due to higher operating and interest costs, despite the sales growth keeping pace. After almost ten successive quarters of downgrades, we saw earnings estimates being upgraded for the Sensex companies in the December quarter signalling a change in growth trajectory.

In fiscal year 2015, we expect earnings growth to accelerate to the mid-teens, primarily driven by pharma and IT sectors, after two years of single-digit growth. The other sectors are also likely to follow a similar trajectory, though gradually. We expect market returns to be primarily driven by earnings growth going into the next year.

The writer is Co-Chief Investment Officer of Birla Sun Life Asset Management Company

COMMENT NOW