Now, cut to the chase

The disruption caused by DeMo and GST has hopefully been digested as the process of formalisation of the economy has begun in right earnest. The merging of the black and formal economy and its convergence operation is one of the byproducts of the government’s sustained obsession with black stash. A reaffirmation and vindication of recent government action on reforms by Moody’s has been viewed positively by one and all. Interestingly, the equity side of the Indian ledger has been brimming with positivity since earlier this year, but it is the debt side which is leashed down due to the twin balance sheet problem that afflicts our financial system — over leveraged companies and banks encumbered with debt acting as cement boots dragging us down. By announcing a big bang recapitalisation programme, the palliative is seen as something that offsets imminent capitulation. Of course, the Insolvency and Bankruptcy Code is vital to the betterment of what has become an imperiled system. It may well function as centrifugal force for its revival in totality, once the glitches are resolved. In conjunction with a mammoth road building problems which even offers man days of work and strategic sale of profit making PSUs like Dredging Corporation, the Modi government is finally showing intent, sincerity and gumption to take hard decisions which are needed to jump start a failing and sputtering economy facing an almost 18 month slowdown, with the last five quarters showing a downward trajectory. The Bharatmala project is expected to create nearly 100 million man days of jobs during the road construction and subsequently 22 million jobs as a result of the increased economic activity across the country. The construction will be billed via several routes including debt funds, budgetary allocation, private investment, toll operator transfer model etc. Now with all this done and dusted, the proof of concept is what people are waiting to see. The momentum cannot be lost, building quickly on these gains is the only way forward.

Analysts too are buoyed by the Moody’s upgrade only the second in the last 25 years, and the first since January 2004 when Atalji helmed BJP/NDA was in power. Yet they are circumspect because while the upgrade is out of the way, read foundation has been laid, the super structure has to be built quickly on it. Fiscal discipline can be breached, the path of fiscal consolidation and prudence can be given the go by. JM Financial has an interesting take on the happenings —  Greeting the economy with optimism, rating agency Moody’s upgraded India’s government bond rating from Baa3 to Baa2 while changing the outlook on the rating from Positive to Stable. This was done in anticipation of the recent economic and institutional reforms to over time enhance the growth potential of the economy and hence reduce government debt in the medium run. However, it remains questionable whether the ratings upgrade by Moody’s is positive enough to offset the negative sentiments triggered by disappointing data releases during the week-

a) CPI inflation touched 3.58 per cent YoY in Oct’17, 15bps higher than consensus view (ruling out a rate cut in the Dec’17 monetary policy review);

b) trade deficit worsened to $14bn (highest since Apr’17) and

c) Services surplus in Sep’17 contracted 3.4 per centYoY.

Other policy highlights recently included-

a) the approval of the anti-profiteering authority under GST,

b) removal of prohibition on exports of all types of pulses, and

c) increase in carpet area of houses under Pradhan Mantri Awas Yojana (subject to specific conditions). With 5.2 per cent YoY growth (vs. 1.5 per cent YoY for the Centre) in states’ net market borrowings (NMB), the ratio of states-to-centre’s NMB stood at 63 per cent (on 10 Nov’17) vs. 61per cent during the same time last year.

On the external front, the economy remains secure, with steady forex reserves and a stable rupee. In the coming week, we look forward to data releases on CPI inflation for rural and agricultural labourers, something that cannot be ignored given that the inflation genie is out of the bottle. Earnings growth in 2Q has been in-line with expectations of a moderate recovery and rebound in earnings. For the companies under our coverage, PAT grew 5.5 per cent YoY (Ex-Fin, TATA Motors vs JMFe of 5.6 per cent) with metals showing the highest growth. Including all companies, the reported PAT came in at 6.3 per cent YoY vs. estimated 6.9 per cent. In terms of beats versus misses, auto, cement, IT and real estate surprised positively while building materials, chemicals, industrials and utilities were misses. The beats-to-misses (BTM) ratio was strong at 1.42x, highest in past three  quarters. The EBITDA, though, surprised positively with a reported 15 per cent YoY growth versus an estimated 10.9 per cent. The Nifty PAT grew 6.1 per cent YoY with materials and utilities registering the highest growth. Telecom and healthcare expectedly had a steep YoY decline in PAT. At end 1H, Nifty PAT growth is at 2.1 per cent leaving high ask for 2HFY18 even as analysts retain ~20 per cent YoY growth for FY19E.

Net net, it appears that a turnaround is upon us, albeit slowly. The edifice is laid and the door of opportunity slightly ajar, beckons. The central nervous system has been re-engineered and time for roll outs and rapid implementation is running out. Rural consumption has returned by all accounts, GST rate rollback on several items will speed up the process. Two wheelers, tractors, farm equipment, FMCG are seeing enormous traction in Bharat and its mirror image in urban agglomerates will only galvanise things.

On Tuesday Bloomberg reported one of Asia’s richest bankers Uday Kotak as saying that the insolvency process is a once in a life time opportunity. Just as this writer had pointed out in these very columns (Great Indian fire sale, published on November 14): What has billionaire Uday Kotak salivating is the government’s attempt to finally draw a line under delinquent loans, with recent steps to overhaul India’s bankruptcy laws and recapitalise state-owned banks. The moves are intended to lift a burden from the country’s banks and encourage them to accelerate lending, supporting economic growth. Over the next year, the assets and debts of about 50 of India’s biggest defaulters may be sold off by court-appointed professionals, in a process in which banks are expected to take deep haircuts on their loans. The companies’ borrowings total an estimated at $46 billion, close to one-third of total recognised bad loans in India’s banking system. By cauterising this running sore, the financial system could return to health

Selling off these companies to suitors who have the wherewithal and expertise to turn them around is going to be a challenge, but it is a necessity, we now need to see closure on a couple of deals — Essar Steel, Monnet Ispat, Bhushan Steel et al. This will act as a catalyst for other such deals, for the pipeline of such companies is long. A wilful defaulter will be “explicitly prohibited” from the proceedings, according to a Cabinet note on changes to the Insolvency and Bankruptcy Code fashioned through an Ordinance sent for Presidential assent on Wednesday. The debate on this thus ends. Other changes that will be brought to bear include — provide eligibility requirements of a resolution applicant, Committee of Creditors to consider viability of resolution plan and Insolvency and Bankruptcy Board of India to specify further requirements for viability of resolution plan. This means that the government is seized of the urgency and the imponderables in the contemporary Fire sale and is malleable and ductile to change things.

Similarly, while the government has cleared the sale of Dredging Corporation, the deal has to fructify with a new owner in place. Air India privatisation should gather momentum and other sick and profit making PSUs should be put on the block with rapidity. The Rubicon has been crossed, unpalatability overcome. There is no going back like in the privatisation of IDBI Bank, announced in the 2015 budget, but yet to see any resolution. The decisions have been taken, time for actualisation has to take shape before us in a short duration. From here on till the budget, government needs to move with alacrity on all these fronts.


Sandeep Bamzai