It?s becoming increasingly evident that next year (2012-13) could be a much tougher than this one. Bankers confirm that funds being disbursed right now relate to sanctions given earlier; and that no corporate is asking for loans for new ventures.
If companies are announcing fewer projects?CMIE data shows new investments announced in the September quarter at R2.6 lakh crore, were the lowest in the last nine quarters?then the capex cycle is not about to turn in a hurry. The output of capital goods was up 3.9% yoy in August, which is although better than the 13.8% y-o-y contraction in July, is fairly anaemic. The sector may have just a 9% weightage in the index but it signals the progress of projects and investments and the three month moving average of 9.9% is not encouraging.
Companies will not add capacity unless they are sure demand is on an uptrend, they get clearances quickly and money becomes cheaper. There are few signs that this is about to happen soon.
The IIP number for August at 4.1% has come in below expectations thanks mainly to the sharp slowdown in the production of basic goods, which has 46% weight in the index and grew at just 5.4%.
Overall, manufacturing has grown a dismal 4.5%, and the three month moving average is now just 6% while the consumer goods category has grown at just 3.7%yoy compared with 7.7% in July.
So clearly demand is coming off and as such most economists expect GDP to come in at around 7.5-7.6 for the year. Unless the government springs into action to speed up legislation and money becomes more affordable, it could be a while before demand and growth pick up.
It?s a tad ironic, therefore, that banking stocks rallied on Tuesday because they are a proxy for the economy.
Of course, the market is hoping that the weak IIP numbers will convince the Reserve Bank of India (RBI) that it?s time to pause and that there will be no further hikes in interest rates. But it?s more likely the central bank will focus on the near 10% inflation given that prices of some commodities, including that for crude oil remain high.
It?s true banks are no longer increasing their lending rates; on the contrary some have actually started offering discounts, especially on products like home loans. But money is expensive and will stymie investments and given the hostile global environment and the government?s inertia, GDP for 2012-13 could come in even below 7.5%.
That means there could be further downgrades to corporate earnings. Some of the fall in corporate profits expected for the September quarter has been built into earnings forecasts for the full year, now around 1160-65 levels. Hopefully this number would hold but even a 15% growth over this would translate into an EPS of around R1, 335 in 2012-13, way below the current estimate of R1,380. The Indian markets are once again nudging 17,000 and now trade at close to14 times one year forward earnings, below the historical average of 15 times but not cheap. Unless prospects for 2012-13 improve, however, it?s hard to see the Sensex trading at higher multiples.