THE BIG STORY. India Inc Modified?

The Modi government has tried to live up to the promise it held out two years ago, some reforms have been pushed through and some initiatives that will bear fruit over the long term have been rolled out.

India Inc has, however, had a torrid time over the last couple of years. Barring a handful of sectors, others have been grappling with slowing demand, high debt and compressing margins. This state of affairs is due to factors beyond the Centre’s range of influence — such as the global economic slowdown, crash in commodities and two consecutive years of monsoon failure. Some sectors such as energy, road construction and railways have benefited from the Centre’s reforms. But the overall picture is pretty glum.

One of the biggest achievements of the Modi government was in using the positive global sentiment towards India to attract foreign direct investments (FDI). The ‘Make in India’ drive, which was one of the first schemes to be launched, along with the Prime Minister’s many sojourns to various countries, helped project India’s strengths (strong GDP growth, declining inflation, consumption-led economy, and demographic advantage of a large workforce) in the best possible light to the world. This seems to have worked, since FDI inflows hit a record high in 2015-16, with $29 billion received between April and December 2015; 40 per cent higher than in the same period of 2014.

This was a good ploy since the Centre did not have too much surplus to invest in infrastructure and other capex needs, given the fiscal constraints, slowing credit growth and a tepid primary market.

Infrastructure has been the Centre's focus area and efforts have been made to re-start stalled projects and make funding available. While road construction and railways are witnessing smart improvement in project execution, power sector woes are too complex to be solved immediately. Similarly, projects such as Sagar Mala aimed at developing coastal shipping and ports, Smart Cities scheme, and Digital India scheme will take time to translate into order inflow for India Inc. Energy companies have, however, seen immediate relief through diesel price decontrol and other reforms.

Banks, struggling with growing stressed assets and slowing credit offtake, could not show too much of an improvement in earnings. But the financial inclusion drive of the Modi government, through the Jan Dhan Yojana, is one of the key successes of the first two years. While the new accounts have not had any immediate impact on banks’ profitability, they will help in the long run by expanding the client base. Other banking reforms, including helping launch small and payments banks and moving towards a cashless payment system, will help the sector in the coming years.

While these are some of the success stories, the Modi government’s inability to push through critical Bills such as the GST Bill and the dilution of the Land Bill are major disappointments for India Inc. Other issues include policy flip-flops in taxing foreign investors, poor progress in bringing black money holders to book, tax reforms moving at snail’s pace and failing to produce a road map for reduction of corporate tax rate to 25 per cent.

While the Modi government had its hits and misses, India Inc has found the going quite tough over the last two years. This was mainly due to several external factors. One, slowing global growth resulted in exports consistently trending lower. This impacted sectors such as information technology, pharmaceuticals and auto and auto component makers.

Two, global overcapacity and slowing imports from China made commodities dive sharply. The Thomson Reuters core commodity index that tracks the movement of major commodities is down 40 per cent since Modi took charge. Crude oil has been at the epicentre of this commodity meltdown, losing around 55 per cent.

Three, new investments in the country slowed down due to over-leveraged balance sheets of companies in the power, steel and infrastructure sectors and over-capacity in some sectors. Growth in gross fixed capital expenditure is down from 32 per cent to 27.7 per cent since Modi took charge. This affected capital goods manufacturers with the capital goods index in IIP down, consistently recording contraction. Four, two years of poor monsoons have resulted in severe stress in rural India, leading to declining rural consumption that affected FMCG companies, two-wheeler and tractor manufacturers and agri-input makers.

Given these shortcomings, it is not surprising that India Inc’s report card has been quite dismal over the last two years. Revenue growth of Nifty 500 companies (excluding those in financial services), which had been growing in healthy double digits, declined to 6 per cent in the nine months ended December 2014 when compared to the same period in 2013. The situation has worsened in 2015, with revenue contracting 3 per cent in the nine months ending December 2015.

Profitability, too, was severely dented as pricing pressure eroded the benefit from lower input costs. Growth in operating profits slowed to 5 per cent and net profit grew just 3 per cent in the first three quarters of FY16. This was despite raw materials as a percentage of sales declining from 42 per cent in the first three quarters of FY15 to 37 per cent in FY16. Interest costs too hurt corporate bottomlines.

Stock market overview

Modi’s first two years have been full of sound and fury, signifying nothing, as far as stock performances were concerned. If an investor had purchased a Nifty ETF on May 26, 2014, he would be richer by just 6 per cent. The gains will be lower if the investment had been in Sensex ETF; at around 4 per cent. The Nifty did scale the 9,000 peak and the Sensex went above 30,000 in 2015. But the crude price meltdown and fear of a rate hike by the Federal Reserve have since whittled the gains.

The benchmark indices are, however, more expensive now than they were two years ago. While the Nifty traded at a price earning multiple of 18 times in May 2014, it now trades at 20.4. This is higher than the five-year average of 17.5. These elevated valuation multiples reflect the optimism among investors that achhe din will be here, perhaps in the future.

Surprisingly, the sectors that have been the focus areas for the Centre, such as realty, infrastructure, power and oil and gas, have all recorded losses ranging between 18 and 27 per cent. Investors appear to have preferred defensive sectors. Healthcare stocks were the top gainers in the two-year period, with 54 per cent gains. IT and FMCG stocks too regained their mojo, after trailing cyclicals in the pre-Lok Sabha elections rally.

Urban consumption was a theme that performed well in the Modi rule and sector indices such as auto (24 per cent) and media and entertainment (35 per cent) helped investors rake in the moolah.

The earnings of the fourth quarter of 2016 are displaying some signs of a turnaround in the fortunes of India Inc. If the monsoon this year is normal, that will help boost rural consumption. The rate cuts put through by the RBI will start aiding corporate profitability in the coming quarters. With many commodities, including crude oil and some base metals, too, in a slow recovery mode, commodity companies too can get some respite. The Modi government needs to continue its focus on troubled sectors to help a more broad-based recovery for companies.