Indian consumption business is undergoing a transition ? from a mass market to a mid-premium market ? says Nikhil Vora, MD, IDFC Securities. In an interview with Devangi Gandhi, Vora argues that it is high time that the government takes some risks as investor hopes have been rekindled with the appointment of a new finance minister.
You have argued that India?s consumption space is turning into a mid-premium market? Is this shift sustainable, given the recent retreat in economic growth?
In the consumption business, there is an increasing built-up demand from the consumers’ sense of going premium in a number of products, which is expected to continue over a period of time. Structurally, the nature of India’s per capita income is changing for good with the rural income becoming stronger and less dependent on the monsoon. As a result, the industry is moving from a mass or convert market to a mid-premium-to-premium market. There could be a deferment to this trend due to the slowdown with a couple of quarters of slow sequential growth. However, we believe that, structurally, this shift will continue and would be distinctly evident in the next 2-3 years.
While consumer-oriented companies are re-positioning themselves for this transformation, certain key companies, which have gained domicile as the market leaders in the mass-to-convert categories may find it difficult to adjust to this change.
What is your outlook on the equity market?
We continue to believe that 16,500 is a strong base for the Sensex, based on three factors? attractive valuations, resilience of corporate India and rate cut expectations. Currently, almost a quarter of corporate India is trading at less than the capital employed, indicating that a lot of profitable businesses are available at below the book. Further, compared to the previous slowdowns, corporate India is much resilient in terms of lower gearing and higher cash on books. We expect Sensex earnings to grow at a CAGR of 12% between FY12 and FY14.
Is there a downside risk to these earnings expectations, given that economists have consistently downgraded India?s GDP growth estimates?
It is a given that businesses require capital to grow, take risks and survive. However, when a country starts to grow at sub-nominal rate, clearly there would be issues and pain involved for a lot of corporates. While, today, we think that the earnings growth for FY13-14 could be near 10-12%, the same can be under risk as some of them are benchmarked on the ability to create supply for which more capitalisation is required. Currently, 10-12% growth seems achievable, but it clearly has a downward bias.
How do you weigh the strong FII inflows that have aggregated close to $12 billion so far in 2012?
There is a slight amount of puzzle with which FII numbers are looked upon. Invariably, whenever a country is fundamentally considered as a growth market, it partially turns into a value market, and observes significant money-flows, irrespective of which quarter it has originated from. This seems to be the case with India currently. I also think that only sticky-India money has really remained in India while a lot of country-allocated capital has moved out.
How big a risk is sluggish policy implementation at this juncture?
Right now, a lot of investors have given up on any strong action from the government’s side, which, if it turns into realty, can be the biggest risk.
However, a spate of recent changes, such as appointments of a new finance minister and economic advisor, have rekindled hopes of positive steps being taken by the government, given its track record in delivering on expectations.
We believe that it is high time the government takes risks, such as fuel price deregulation as a long-term solution to the volatile crude oil prices and stepping away from non-core areas (PSUs) through bolder divestment steps to correct the fiscal position.
