Aug 30, 2008

Business-India;Lower the growth,then reduce it again

During the first five months of 2008, air traffic grew by just 10 per cent. In June this year, fewer passenger flew than in June last year. And that may well be the trend for the rest of the year. Till the start of 2008-09, India Inc was probably getting ready to live with slower growth. The June quarter numbers showed there was still momentum in the topline and it was high input costs that were hurting. There were certainly enough takers whether for consumer or industrial products, even at higher prices. What was hurting was expensive raw materials and higher wages. That hasn’t changed, though prices of some commodities such as steel have eased. But over the last couple of months, suddenly there aren’t too many buyers for cars or airline tickets. We’ll know for sure only in October. But, anecdotal evidence — lower auto volumes, lower occupancies in hotels, less crowded airports and roads, slower growth in advertising revenues — suggests that bigger EMIs are beginning to pinch. Clearly, in a trend that was not anticipated six months back, sections of India Inc may have to learn to live with not just slower growth, but even negative growth — that is, a fall in either sales or profits, even both.
Take the case of the Rs 7,729 crore Chennai-based truck and bus maker, Ashok Leyland. Citigroup fears the company may sell lower volumes, possibly down 13-20 per cent in the next couple of years, dragging down profits to about Rs 400 crore in the current year from Rs 479 crore in 2007-08. And keep in mind that Leyland’s 16 per cent revenue growth in the June 2008 quarter came more from sales of engines, spares and defence equipment, and less from the sale of trucks. And now, with both interest rates and diesel prices up, the economics and hence purchase decisions of truck operators have clearly been thrown out of gear.
The road appears less bumpy for cars but then their sales haven’t gone anywhere in July either. CLSA forecasts that market leader Maruti Suzuki’s profits for the current year could skid to Rs 1,755 crore from Rs 1,774 crore last year. How quickly the tide has turned can be seen from the fact that just about seven months back, analysts were pencilling in a14 per cent growth in profits for India’s biggest car maker.
The problem doesn’t stop with the auto industry and on December 31, 2007, Citigroup, for instance, had forecast a 19.1 per cent growth in earnings for Sensex firms for 2008-09. After revising that figure twice in between, on August 18, Citigroup forecast a much lower 16.9 per cent earnings growth. So far this year, in fact, Citigroup has downgraded the earnings forecasts for more firms than it has upgraded.
What car companies and others need is some spending by techies and other big spenders, but that’s been missing for a while now. With everyone forking out more for home loans, the sad truth is that there just isn’t that much left to pay for extras. Which is why it’s not surprising that 12 out of 17 textile/apparel and retail firms, including Raymond Ltd and Arvind Ltd, reported a drop in operating profits in the June 2008 quarter. The pressure on margins indicates there is little pricing power even as retailers struggle to push volumes. Obviously costs are still an issue, whether for textiles or FMCG firms, and margins continue to be under pressure — nine of ten FMCG firms, including ITC, saw a fall in net profits in the June quarter.
In even the luxury segment, usually the last to be hit by a slowdown, the impact can be seen. Fewer people are staying in hotels, and topline growth for both Indian Hotels and East India Hotels went up just 9 per cent in the June quarter. Titan actually sold less grammage of gold in the June 2008 quarter as soaring gold prices made jewellery unaffordable — the 30 per cent-plus growth of the last couple of years looks like it may be a thing of the past.
Customers appear to be thinking twice before they buy even small ticket items. Shoppers Stop, for instance, posted a loss of Rs 15. 3 crore in the June 2008 quarter, with same-store sales growing at 7 per cent, the lowest in five years. Fewer people watched movies at PVR’s theatres in the June quarter — the drop in occupancies was over 11 per cent, leaving net profits stranded 35 per cent lower than they were in the June 2007 quarter. The management at Sun TV believes the slowdown could impact advertising revenues for its channels — these grew at 24 per cent last year but could taper off to a far more muted 17-18 per cent in the next couple of years. Sun’s management says it has written off Rs 33 crore in the quarter on account of cable subscriptions. Dish TV is struggling to keep going; the DTH operator continues subsidise set-top boxes despite having piled up losses of Rs 400 crore on revenues of Rs 400 core last year.
Consumers are so reluctant to spend that Merrill Lynch believes earnings for India’s biggest organised retailer may rise by just 3 per cent in year ending June 2009. Apart from a slowing topline, earnings for Pantaloon could be badly hit by rising interest rates, which could stretch an already stretched balance sheet. That could hold for others too; while it was mainly higher expenses on labour that resulted in Nagarjuna Construction’s net profit coming down in the June quarter, it also paid out much more by way of interest. Industry watchers feel that even if banks start to cut interest rates over the next six months, borrowing costs could remain high until the end of 2009.
The other problem is what this will do to investment projects. According to one report, a 6 million tonne steel plant in West Bengal is not making the kind of progress one would have expected. While Kotak Securities economist Mridul Saggar feels the fears of investment stalling in 2008-09 are overblown, Saggar adds the impact could be felt in 2009-10 on the back of high interest rates. Morgan Stanley, however, points to the slowing output of capital goods (from a peak growth of 24.2 per cent in the three months to October 2007, these fell to 6.8 per cent in the three months to June 2008) as evidence of a slowing of fresh investment. ABB’s net sales for instance slowed to just 15 per cent in the June quarter way below the 35 per cent that it posted in calendar 2007.
Corporate fund raising, Morgan Stanley points out, has also suffered and, as a result, it concludes, private corporate sector investments, which had moved up sharply to 16.1 per cent of GDP in 2007-2008 from the lows of 5.2 per cent in 2000-01, could slow to 12.2 per cent in 2009-10. In overall terms, Morgan Stanley expects the aggregate investment- to- GDP ratio to come down to 32 per cent in 2009-10 from 37 per cent in 2007-08.
Naturally, the impact of this slowdown won’t be even, and some will do better than others. Citigroup, for instance, forecasts that oil/gas/chemicals, engineering/power/construction, metals/mining, building materials and IT services will do better (these groups, for instance, have seen their earnings estimates rise). But at times like these, no one is really better off for too long.

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