Corporate profile cycle is fragile

Prime Minister Narendra Modi and his government were sworn in on 30 May 2019 for a follow on second term with a decisive majority in the election, but market analysts see a wide range of economic challenges.

“Modi may have swept back to power, but he cannot rest of laurels,” wrote Sharmila Whelan of Aletheia Capital who publishes on Smartkarma in the latest commentary on 30 May 2019.

Japan’s Nomura banking group sees the return of incumbent Bharatiya Janata Party (BJP)-led by Modi amidst a vulnerable economic environment, where a cyclical slowdown is being exacerbated by the shadow banking liquidity crisis.

Elaborating, Whelan pointed out that the growth is slowing.

The corporate profit cycle is fragile at best and suggest that large companies in the capital goods space are yet to repair their balance sheets. Unsurprisingly the private investment cycle remains weak and the credit cycle in downturn.

“Until it becomes clearer how Modi plans to address the current economic malaise, we would stay underweight Indian equities,” said Whelan.

For domestic demand driven India, the loss momentum cannot be blamed on slower exports which dragged down growth in a number of Asian countries towards the end of last year.

In India’s case the weakness of the business cycle is due to the softness of private investment spending.

This is mostly down for public sector infrastructure spending and to a less extent investment by the fast-moving consumer goods sector.

Large private capital and related goods companies, traditionally the main drivers of the private investment cycle, are yet to step up spending decisively, according to Whelan.

“Political uncertainty ahead of the general elections has delayed investment decisions is part of the explanation but high balance sheet leverage and the unwillingness of Non-Performing Loans (NPLs) laden public sector banks are also contributing to the malaise,” Whelan pointed out.

Japan’s Nomura banking group has a similar reading of the Indian economy, pointing out that a resurgence of trade tensions and its knock-on effect on global growth will also inevitably drag domestic growth, believes Nomura.

The slump in consumption indicators deepened in March/April. On the urban side, passenger car sales continued to contract sharply, reflecting concerns over tight financial conditions, election-related uncertainty and higher insurance costs, observed Nomura.

Diesel consumption growth also remained lacklustre, while rural indicators like two-wheeler and tractor sales growth remained deeply red.

The pickup in rural agriculture wage growth remains insipid despite the favourable base.

“In our view, the weak economic climate appears to reflect the lack of corporate profit growth momentum in Q1,” said the investment bank.
The slowdown appears to have spread to investment demand.

“As the government scales down public capex to meet its fiscal targets for FY19, we see broader fatigue in the sector, with a contraction of capital goods output growth, and moderating growth in infrastructure & construction, and railway traffic,” it said.

External indicators have also been weakening over the past few months. The weakness in domestic demand can be seen in slower core (non-oil) imports growth, while export volume growth has held up against strong global growth headwinds. fiinews.com