India Suffering From A Spate Of Downgrades

It seems to be a period of downgrades for the Indian markets. Earlier it was S&P as well as Fitch which had downgraded the outlook on India citing policy paralysis, inflation burden and rising fiscal deficit. Here now arrives a downgrade from various global research houses also. While the Indian government has set a target of GDP growth of 7.60 per cent for FY13, various leading research houses have actually reduced the GDP growth targets. For example, the World Bank had revised the GDP growth rate at 7.1 per cent from the earlier higher levels.

Similarly other leading research houses have also reduced the growth targets. Goldman Sachs has revised the target to 6.60 per cent from its earlier target of 7.20 per cent. Bank of America has revised the GDP growth target for India at 6.5 per cent from the level of 6.80 per cent and Morgan Stanley has revised it to 6.3 per cent.

Along with them, Nomura Financial Advisory & Securities has also revised the GDP growth target to just 5.80 per cent from the earlier level of 6 per cent. With so many downgrades it seems that the government has set a target which actually seems difficult to attain. In such a scenario Crisil has come up with a report that indicates further slowdown in the topline of the companies. CRISIL Research, India’s largest independent and integrated research house, expects India Inc.’s revenue growth to be the weakest in the last six quarters as demand moderates in the current quarter.

The report states, “Revenue growth in April-June 2012 (Q1 FY13) is forecast to drop to around 14 per cent from 17.5 per cent in Q1 FY12, given the slowdown in economic activity and gross fixed investments.” It further suggests EBITDA (earnings before interest, taxes, depreciation, and amortization) margins are projected to decline by 100-150 basis points (bps) on a YoY basis to be around 19-20 per cent but remain flat compared to the Jan-Mar 2012 quarter (Q4 FY12).

The report also notes that depreciation charges as a percentage of revenues fell to its lowest level in the last 10 years while growth in fixed asset creation was at its lowest in the last five years, reflecting the sharp deceleration in the investment cycle. The analysis is based on the aggregate financial performance of 247 large companies across 26 key sectors (excluding banks and oil & gas companies).

However, the report has also suggested that export-oriented sectors like IT services and pharmaceuticals are expected to report strong QoQ margin expansion aided by the 7 per cent QoQ depreciation in the rupee. Further, the telecom sector is expected to see a modest expansion in margins QoQ on account of reducing competitive intensity coupled with cost control measures adopted by the companies.

We feel that after a dismal performance by India Inc. in March 2012, a poor June 2012 quarter is not good news. But we feel that at least the deteriorating economic situation may guide the government to take some action. If positive steps are taken in terms of policy reforms front, one can start accumulating the stocks.