Sunday, December 11, 2011

>EQUITY STRATEGY: India Investor Tours: Glass half full...or half empty?

The last quarter has been challenging for Indian equities, given the macro uncertainties – both local and global. In this backdrop, we hosted Investors in a series of Tours covering Senior Policy makers, Opinion leaders and Managements of more than 30 companies from the Financials, Investment and Consumption sectors over the last week. In this note, we have summarized the takeaways from these meetings. We believe these notes should serve as a useful guide to the current mood in business circles.

Key highlights:
Policy environment – Slowdown, but no Paralysis. The pace of economic reforms has not matched expectations. But that said, senior bureaucrats opined that allegations of a ‘policy paralysis’ are over done and largely a media creation. A sense of urgency appears to be coming
through. But execution will require consensus building and coordination. We discerned a heightened commitment towards containing inflation and fiscal consolidation. Progress on rural and social initiatives appear to be solid and may not be well appreciated.

Financials – A mixed bag. Interest rates have probably peaked, but the easing cycle could be some time away. Recent regulatory changes – abolition of prepayment charges, savings bank rate deregulation and tougher priority sector norms – are not seen as disruptive to sector dynamics. Loan growth remains healthy. But asset quality concerns remain at the fore given a slowing economy and the collapse in the INR. But balance sheet risk is expected to be episodic rather than systemic.

Investment cycle – Advantage SoEs. A muddled macro is taking a toll on investment cycle, particularly as it pertains to the private sector in the infrastructure segment. Management focus appears to be on internal measures to turn around viz. de-leveraging, working capital rationalization, etc. State owned companies however appear to be bucking the weak trend. A regulatory regime with assured returns and conservative leverage have allowed them to push ahead with their investment plans.

Consumption cycle – Moderating. The slowdown in discretionary spending appears to be gathering momentum. Demand for staples has been holding out until recently. But early signs of a moderation are beginning to manifest themselves. The bigger concern for managements remains margin pressure. A weak currency is adding to their woes, even as volumes moderate and competitive pressures remain intense.

To read the full report: EQUITY STRATEGY