For a country billed not too long ago as the Next Big Thing to happen in the world after China, India presently seems to be in the dumps. The growth of Asia´s third largest economy, currently estimated to be at $1.78 trillion (around Rs 100 trillion), hit a decadal low of 5 per cent in 2012-13.
The nation´s current economic woes stem mainly from the rapid decline in the value of the rupee caused by unchecked inflation of the past few years, not to mention the high current account deficit (CAD) nudging close to $85 billion (4.5 per cent of the GDP), which needs to be funded through uneven capital inflows.
GDP in the April to June quarter came in at 4.4 per cent, the lowest since early 2009 heightening concerns about the fate of India Inc afflicted to a great extent by that contagion called dysfunctional politics, not to mention a highly volatile stock market and a currency in steep fall.
Industrial and investment angst Manufacturing, which is a dominant sector, also witnessed deceleration in growth, as did the electricity sector. The contraction in growth was largely because of deceleration in industrial output, decline in capital goods, natural gas, crude petroleum, and fertiliser output. Overall industrial performance, as reflected by the IIP, continued to moderate from Q1 2011-12 with growth turning negative in Q1 2012-13, before improving to 2.1 per cent in Q3 2012-13. Investment into the economy during the period too registered a significant decline on account of the tight monetary policy stance followed by the Reserve Bank of India (RBI) during 2010-11 and through most of 2011-12, resulted in higher costs of borrowings and a moderation in domestic and external demand. Meanwhile growth in Q4 2012-13 rose marginally to 4.8 per cent breaking the steady decelerating trend witnessed in the previous three quarters.
With the rupee touching a low there has been considerable stomach churning in the equity markets, Mumbai´s benchmark Sensex veritably turning into one of the worst performers in Asia. The sharp depreciation in the national currency has proved to be worrisome for consumers since the country imports more goods than it exports and has to pay in dollars.
That has led to a huge rise in everyday consumable products, the principal casualty being the humble onion.
Crisis management Against that background New Delhi has responded with a series of policy innovations intended to halt the rapid depreciation of the rupee. Measures like raising interest rates and tightening of monetary policy have been taken but none have been particularly effective in stabilising the recent volatility.
The Economic Survey 2013, tabled by Finance Minister Palanippan Chidambaram in March, noted that while globalisation of Indian economy had helped raise growth, it also meant greater vulnerability to external shocks. ´A focus on domestic macroeconomic re-balancing will help reduce vulnerability. India cannot take the external environment for granted and has to move quickly to restore domestic balance,´ the survey said. Admittedly it is unlikely that the support to Indian growth from the global economy would be significant. Policymakers in New Delhi and Raghuram Rajan, the newly appointed RBI Governor have now been working overtime to prop up the Indian currency. But the recent moves could result in the prospect of slower economic growth in the coming years and could well stretch global recovery time.
But obviously more structural reforms would be needed before things could be anywhere near hunky dory. The view obtaining now amongst financial experts is that the slow pace of economic reforms is hurting India´s future prospects. Last year, an important step in that direction, viz., restrictions on foreign direct investment (FDI), which has always been a politically fractious issue, was lifted after considerable discussion in the Parliament but this has only scratched the surface of the reforms plate. With the national elections now due in May 2014 time seems to be running out for taking bold steps and the UPA government hit with charges of corruption, inefficiency and mismanagement is now coming up with what can be seen as last ditch, pre-election push for reforms intended to redeem its position amongst the masses. Ergo, there is now an urgency in the political air. The earlier ´can do´ spirit has seemingly been replaced by a ´do or die´ spirit as the UPA government has in more recent months unleashed a slew of measures these include putting Rs 200,000 crore worth major infrastructure projects thus far on hold on stream, clearance to the much awaited Land Acquisition Bill in the desperate hope that they would prop up the economy.
Word is now out that despite the doomsayers, India´s economy could well be on the verge of returning to a gradual recovery in 2013, driven by large investment projects and FDI, though not necessarily of the kind witnessed before the global economic slowdown. Foreign Institutional Investors (FII) flows seem to have somewhat regained momentum after the slowdown, commodity prices have come off, corporate results are showing signs of bottoming out, and the government is acting to curtail gold imports.
Significantly, enough in the early half of 2013, there have been a number of open offers by multinationals to acquire stakes in Indian companies.
As many as five big strategic deals with nearly $11 billion capital commitment was seen in which the offer price was way above the market price. This suggests the following: that India continues to be attractive to multinationals; from the size of the amount bid, it is obvious that the Indian market is considerably undervalued. What is also revealing is that despite the premium terms offered, some of the Indian investors have preferred not to sell in the hope that they could expect even higher prices. It is easy to see that there is a growing belief from the above trends that growth will turn either in Q4FY13 or Q1FY14. The Paris-based Organisation for Economic Co-operation and Development has been led to declare in its recent economic outlook. ´Amongst major emerging market economies, a moderate cyclical upturn is getting underway in China, while a more hesitant pick-up in growth is seen to take place in India´.
That is not to say that there is no movement on the ground. The Planning Commission of India has proposed an investment of around $1 trillion in the Twelfth Five-Year Plan (2012-2017), which is double of that in the Eleventh Five-Year Plan. The objective of this allocation in the 2013-14 Budget is to ensure a sustained growth in infrastructure build up. The construction sector, which will receive a substantial portion of the proposed investments in infrastructure, stands to gain the most.
Announcements aside, the step up in investments from the previous plan assumes enlarged private sector participation in the developments that are being envisaged. The private sector´s share in infrastructure investment rose from 22 per cent in the Tenth Five-Year Plan to 38 per cent in the Eleventh Plan and is expected to increase to 48 per cent in the Twelfth Plan. Scaling up private participation would require redefining the contours of their role in a transparent and objective manner with a comprehensive regulatory mechanism in place. This, currently, is a laggard area.
Some of the innovative or breakthrough measures that have been announced in the Budget, and are intended to dramatically change the face of the country and turn around its economic fortunes, are the Delhi Mumbai Industrial Corridor (DMIC)with plans for seven cities to come up across equal number of states being finalised. Work on two cities Dholera in Gujarat and Shendra Bidkin in Maharashtra have already started; the Chennai Bengaluru Industrial Corridor for which preparatory work has begun; the establishment of two major ports in West Bengal and Andhra Pradesh adding 100 million tonne capacity; preparatory work to build a grid connecting waterways, roads and ports and a bill to declare the Lakhipur-Bhanga stretch of river Barak in Assam as the sixth national waterway to be moved in Parliament; a 5 MMTPA LNG terminal in Dabhol, Maharashtra will be fully operational in 2013-14 and the announcement of a policy to encourage exploration and production of shale gas, a PPP policy framework with Coal India Ltd (CIL) as one of the partners, to reduce coal imports. In addition, urban infrastructure is expected to receive a boost through the allocation of Rs 14,873 crore for the JNNURM scheme. Other positive measures for infrastructure include the constitution of a regulatory authority for the road sector and the promise to award 3,000 km of road projects in five states in the first six months of 2013-14. Housing and textiles stand to benefit from concessions and continuation of the Technology Upgradation Funds Scheme respectively.
Construction sector push The decline in the construction sector, the second largest after agriculture, contributed to a growth rate of only over 5 per cent as against 8 per cent in 2011-12. This has been seen particularly in the roads sector with awards from National Highways Authority of India (NHAI) sharply declining due to issues related to land acquisition, environmental clearance, unsettled dues, disputes and unsettled claims, coupled with lack of interest from players for unviable BOT projects. With bidder interest for BOT projects remaining lacklusture, NHAI intends to award a higher proportion of projects, mostly low traffic density stretches, on the EPC model. In 2012-13, awarding under the NHDP was extremely slow, with only 880 km being awarded till January 2013. Performance in other areas of construction like thermal and hydro power, industrial, railways and bridges also continued to be lacklustre though some traction was seen in buildings, water supply as well as urban infrastructure segments.
The status report of major central sector projects costing Rs 150 crore and above for the month of September 2012 shows that out of 566 projects, five were ahead of schedule, 226 on schedule, and 258 had been delayed with respect to their scheduled date of completion. The remaining projects did not have fixed dates of commissioning. Delays in land acquisition, municipal permission, supply of materials, award of work, operational issues, etc, continued to drag down implementation of the projects. Sector-wise, in the coal sector 21 projects were delayed out of 51, in the petroleum sector 37 out of 71, in the power sector 45 out of 98, in the railways 40 out of 127, and in the road sector 86 out of the total 146 projects. The overall cost overrun amounted to 16.8 per cent of the original cost and till September 2012 only 45.5 per cent of the anticipated cost of the projects had been incurred. The order book position of major construction companies showed slow revenue growth and declining profitability during the April-December 2012 period due to weak order inflows from sectors like roads, power and irrigation. The growth of the firms showed a decline also on account of delays in execution, financial stress and the weak macroeconomic environment. Profit margins have taken a dive because of the rising share of low-margin segments in the overall business, and sustained pressure on contract pricing especially in road projects. Most construction companies are in a bind due to increased leverage and reduced ability to repay borrowings.
Despite that bleak report card the Indian construction industry holds promise of enormous growth potential mainly on account of rapid urbanisation, industrialisation and economic development arising from rising public expectation of an improved quality of life. A major plus has been that the government, seen as dillydallying for a long time, has in recent months initiated steps to revive the construction sector through reforms like the Land Acquisition Bill, the delinking of forest and environment clearance, and working on modalities to provide exits.
The latter day urgency shown by the UPA government in giving a push for projects is expected to boost the construction sector´s performance marginally in 2013-2014. The sector is already witness to a strong growth wave powered by increased spending share in investment in infrastructure has increased from 5.7 per cent in 2007 to 8.0 percent in 2012 on construction activity in areas like roads, ports, water supply, rail transport and airport development, oil and gas pipelines and telecommunications.
The outlook for the sector beyond FY2012-13 is brightening up with business sentiment and monetary conditions likely to improve for construction companies in FY2013-14. With the government taking conscious steps to remove infrastructure bottlenecks across the country, the sector´s growth may well touch 7.6 per cent in FY2013-14. The growth will naturally spill over to about 250 ancillary industries such as cement, steel, brick, timber and building material. A unit increase in expenditure in this sector carries a multiplier effect and the potential to generate revenues five-fold.
Realty rage It is not difficult to see why the real estate business, which forms a huge component of the nation´s construction sector, finds itself in the doldrums. FY12-13 has been a very challenging year for the Indian real estate sector with a marked decline in business volumes, over supply in certain geographies and housing categories, and a lack of sustained activity due to rising cost of raw materials like cement, bricks and steel coupled with increase in labour costs, all of which make for almost 75 per cent of the overall construction cost.
High levels of inflation have contributed to the RBI keeping interest rates high, thereby leading to a subtraction in investments in the real estate business. Financial institutions have been cautious in project financing primarily owing to the increased gestation periods of projects. Right now liquidity is a key factor determining project execution. While some of the real estate players have entered the affordable housing segment it is also putting pressure on their profit margins. With such a situation prevailing, some of the players in the sector have sought to bolster their balance sheets by palming off their stakes in non-core businesses to improve cash flows and launching or bidding for projects on a selective basis.
Admittedly, the outlook for the short term appears uncertain for the real estate sector though the demand- supply gap in residential segment the total housing shortage in the country was placed at about 18.78 million at the start of the Twelfth Five-Year Plan as per the figures made available by the Ministry of Housing & Poverty Alleviation rising affordability levels and availability of financing options serve as big opportunity and drivers for the business in the long term.
Revenues of residential real estate developers remained almost flat year-on-year (y-o-y) during April-December 2012, owing to weak demand. High interest rates and slow economic growth resulted in tepid housing sales.
Underinvestment in housing and urban infrastructure has led to a substantial pent-up demand which coupled with increasing urbanisation is certain to drive future growth. Meanwhile the commercial segment which relies largely on leasing is going through a tough phase on account of over¡capacity, lower foreign investments and poor domestic demand.
The IT factor Slow economic growth in the US and the European markets has adversely impacted export services growth of the Indian IT industry. The sector, which comprises four segments IT services, IT enabled services, IT software and hardware expects growth only by 10 per cent in dollar terms in 2012-13, from 19 per cent witnessed in 2011-12. This is mainly because billing rates are under pressure. The assessment now is that though the IT budget is expected to remain flat through 2013, increase in the share of offshoring could contribute to higher growth next year. In 2012-2013´s bleak economic landscape, the IT sector export players´ operating margins was expected to improve on account of the benefit derived from the depreciation of rupee vis-a-vis the US dollar. According to NASSCOM, Indian ITeS exports grew by 12 per cent year on year in 2012-13. CRISIL Research estimates, however predict that in 2013-14, IT services exports could surge at a relatively faster pace of 13-15 per cent y-o-y to touch $50 billion.
With stiff competition in the customer relationship management (CRM) space, it is now expected higher-value knowledge-based and transaction services will spur forward movement in the ITeS industry. Improvements in technological infrastructure, government emphasis on egovernance and the emergence of new business model aligned to new customer segments will drive technology adoption.
The domestic IT industry, minus hardware, grew by 14.1 per cent in rupee terms in 2012-13. The hardware segment is expected to see a double-digit growth performance in rupee terms in 2013-14. The power pack Despite the creation of 55,000 MW of new generation capacity, the Eleventh Five-Year Plan was marked by overall energy deficit of 8.7 per cent and peak shortage of 9.0 per cent. Very obviously there is an energy need and energy avail¡ability mismatch. Thanks to insufficient resource allocation at present, and the country´s increasing reliance on import of crude oil, India has not been able to come anywhere closer to its long term objective of having an optimal energy mix which allows sustainable development. There is a need for favourable policy developments which will contribute to improved fuel availability and stronger offtake from discoms. The Twelfth Five-Year Plan is expected to create capacity additions of up to 80.5 GW from 56 GW in the Eleventh Plan and the increase will mainly be driven by the private sector. Currently the new capacities are facing fuel supply restraints due to slow ramp up of coal production by CIL and declining KG-D6 basin gas output. Against this background of the need to resolve the fuel shortage, CIL has been mandated to sign Fuel Supply Agreements (FSAs) with power project developers, the coal requirement to be catered to through a combination of domestic and imported coal. Apart from this, coal price pooling is being sought to improve coal supply issues to the power sector. A consequence of the increase in notified coal prices would be increase in power tariffs by 6 to 8 paise per unit. In 2012-13, the plant load factor of coal-based plants was expected to remain weak at 71 per cent but with improved coal supply, it could see levels being raised to 81 per cent by 2016-17. Meanwhile, the power distribution sectorfaces a major challenge from weak financials. The accumulated losses of state distribution utilities hovered in the vicinity of Rs 2.4 trillion in 2011-12. A financial restructuring programme for state owned distribution firms has now being cleared by the Cabinet Committee of Economic Affairs to bring back the discoms to health.
Core sector concerns The production of eight core sector industries in India contracted by 2.5 per cent for the first time in February-April 2012-13, owing to a steep decline in natural gas output. The eight industries comprising crude oil, petroleum refinery products, coal, electricity, cement and finished steel have a weightage of 37.9 per cent in the overall Index of Industrial Production (IIP). Sector-wise performance revealed that the biggest decline of over 20 per cent in the month was witnessed in case of natural gas, followed by coal (-8 per cent), electricity generation (-4.1 per cent) and crude oil (-4 per cent). Fertiliser output too showed a decline by 4 per cent against 4.1 per cent growth in February 2012. Production of coal, cement, petroleum refinery was marginally higher during the current year as compared to the corresponding period of the previous year while steel and power-sector production was comparatively lower. Fertiliser, crude oil, and natural gas production also declined during the first nine months
of this financial year. The Union Budget has announced measures to prop up the cement sector. Thanks to the increase in spending on development areas like roads and urban infrastructure, the sector is expected to receive a boost.
Transport zone In the case of infrastructure services growth in freight traffic has been comparatively higher in the railways so far. Meanwhile, the civil aviation sector and cargo handled at major ports witnessed negative growth. In the roads sector, NHAI achieved 17.3 per cent growth up to November 2012.
Steel loses sheen There was a muted demand for steel during 2012-13 owing to the subdued investment climate in the infrastructure and industrial sectors, not to mention the slowdown in end-user industries, such as automobiles and consumer durables. Compared to the healthy 8.4 per cent growth recorded in the previous five years, domestic demand saw a rise by a mere 3-5 per cent y-o-y in 2012-13. Global steel prices witnessed a 14 per cent y-o-y decline to $578 per tonne, thanks to weak global demand and an atmosphere of economic uncertainty in Europe and the US, during 2012-13 (April-January). Meanwhile on account of a weak rupee which traded 54.5 to the dollar in 2012-13 (April-January) as compared to 47.5 to the dollar, during the same period in 2011-12, domestic flat steel prices however remained flat between Rs 39,000-Rs 40,000 per tonne. Owing to tight supply in the domestic raw material market, domestic long steel prices rose marginally. In 2012-13, the ban on iron ore production in Karnataka, coupled with the move to stop illegal mining in Odisha, resulted in domestic iron ore prices remaining firm. Most of the iron and steel companies have recorded low utilisation levels or are closure of operations in the wake of an acute shortage of iron ore. Thanks to the weak demand, commissioning of huge capacities and rising domestic input costs, the Indian steel sector players faced with declining profits in 2012-13 are expected to remain under pressure through 2013-14. That said domestic demand could pick up in the second half of 2013-14, owing to heightened demand from the construction, infrastructure and automobiles sectors.
Taking stock A weak macroeconomic scenario, coupled with policy paralysis and economic headwinds have contributed to a poor performance at the capital markets in 2012-13. But things could improve at the bellwether Sensex if the perceived urgency with which the current government is getting into the act translates into real action on the ground. The monsoon this year has been good and there are prospects of heightened agricultural productivity, which could contribute to positive overall sentiment leading the stock markets to rally. CRISIL Research has assessed that the Nifty could deliver 11-14 per cent returns in FY14. It is pointed out that improvement in the economic scenario and liquidity inflows could take Nifty to 6,300-6,500 by FY14-end.The earnings growth will be driven by sectors such as financials, pharma, FMCG and information technology. However, sectors such as capital goods, metals and mining are expected to lag due to a weak capex cycle and lower volumes. Although tax incentives announced in the budget for large investments are viewed as positive, a revival in the investment pipeline can be expected only in the second half of FY14. India´s GDP is expected to grow by 6.4 per cent in FY14 as against 5 per cent projected for FY13.
A closer examination of the financial results of construction and engineering companies reveals that the top 10 account for 73 per cent of the turnover versus last year´s seven which accounted for 52.8 per cent of the total turnover; with the top L&T alone, contributing to over 36 per cent of the total versus 28.8 per cent in the previous year. L&T has further consolidated its position and has managed to attract business due to its rock-solid leadership in the segment. This is also reflected in its share price. The company commands 71 per cent of the sector´s market capitalisation while it contributes to 36 per cent of the revenue.
Way back in 2005 there were only eight construction companies having a turnover of over Rs 1,000 crore; this grew to 34 companies in 2011-12, clearly reflecting the exponential growth amongst companies. But this year we have only 27 companies keeping with the slowdown in the order book.
If one had to buy the entire share capital of the top companies accounting for 50 per cent in terms of revenues of this industry, one would shell out only Rs 19,000 crore in 2005. After the stock market recognised the potential of this sector and re-rated it, this value zoomed and with the sensex at 7,805 on August 31, 2005, one would have had to pay Rs 44,575 crore to pocket the construction industry, which was still valued at 1.19 times its turnover. The market capitalisation in January 2008 with a Sensex over 21,000 stood at a whopping Rs 200,000 crore. Well, later in 2009-10, with the Sensex hovering around 20,000, the market capitalisation for the top 10 companies eased at Rs 190,000 crore. As on September 4, 2012, the market capitalisation of top 10 construction companies with a cumulative turnover of Rs 116,422.17 crore and profits of Rs 7,720.04 crore crumbled to Rs 108,421 crore.
Currently the figure has further declined to Rs 102,000 crore for top 10 companies while the entire sector has a market capitalisation of Rs 120,000 crore. High values of turnover have been trampled under mountains of debt which has killed the potential market capitalisation in many companies. Currently, the contra¡cting companies are trading at very low values as compared to the order books they hold and once the financial stress eases up, they are likely to climb in values. This stress can be eased by infusion of fresh equity to reduce debt.
In conclusion Reform and revival of private investment is a key to raise India´s GDP growth. While the government in its wisdom has sought to improve the climate for business by announcing an investment allowance of up to 15 per cent of the total investments over Rs 100 crore in plant and machinery during the two years ending March 2015, more needs to be done. However a substantial and sustainable boost to business sentiment, and a key to the current economic imbroglio, very obviously can come from the continuation of the reform momentum. Issues such as mining rights, land acquisition, environmental clearances need to be satisfactorily resolved. There is also a growing consensus that private-public partnerships (PPP) will need to be taken up to extricate the country from the current economic and infrastructure deficit. Both the government and private sector participants will have to innovate and strategise to keep India Inc in global reckoning. For both private and public sector firms this could mean looking beyond Indian shores to new international markets for growth opportunities, diversifying and adopting new technologies or project management techniques to reduce time and cost overruns. It´s only through innovation and breaking the traditional mould that India Inc can hope to realise its global ambitions.
Global recovery, hope for india And just when you thought the global economy would continue to grapple with problems, things appear to be on the mend with the US economy back in shape - thanks to its fiscal adjustment, and the risks from the Eurozone area easing. Growth in developing economies while remaining solid, is expected to remain slower, a far cry from the frenetic pace of growth witnessed during the pre-crisis boom. According to the World Bank´s latest global economic prospects, global GDP is expected to expand about 2.2 per cent in this year and strengthen to 3.0 per cent in 2014 and 3.3 per cent in 2015. Developing-country GDP is now projected to be around 5.1 per cent in 2013, strengthening to 5.6 per cent and 5.7 per cent in 2014 and 2015, respectively, with growth in the BRIC (Brazil, Russia, India and South Africa) nations expected to remain weak. For high-income countries, fiscal consolidation, high unemployment and still weak consumer and business confidence will keep growth this year to a modest 1.2 per cent, firming to 2.0 per cent in 2014 and 2.3 per cent by 2015. Economic contraction in the Euro areas is estimated to be 0.6 per cent for 2013, compared with the previous projection of 0.1 per cent. Euro Area growth is expected to be a modest 0.9 per cent in 2014 and 1.5 per cent in 2015. Remarkably enough, China which accounts for close to 40 per cent of the emerging GDP is not at risk and will be in a position to pull all levers of policy to stay afloat. Another advantage India´s neighbour has is that low inflation and high foreign exchange reserves protects it from overdependence on money inflows.