Doctor's prescription for indian economy's health

The Indian Government led by Dr Manmohan Singh has been concerned about the impact of the global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem.

The first priority was to re-assure the people of the stability of the financial system in general and of the safety of bank deposits in particular. To this end, steps were taken to infuse liquidity into the banking system and also to address problems being faced by various non-bank financing companies. These steps have ensured that the financial system is functioning effectively without suffering the kind of loss of confidence experienced in the industrialised world.

Having assured stability of the system, the Government has focussed its attention on countering the impact of the global recession on India's economic growth. On the monetary side, the RBI has sought to pump sufficient liquidity into the banking system to enable bank credit to meet the expanded requirements of the economy keeping in mind the contraction in credit from non-bank sources. Banks have been provided adequate liquidity through a series of reductions in the CRR and additional flexibility in meeting the SLR requirement. Interest rate reductions have also been signalled by reductions in the repo and reverse repo rates, the most recent of which was announced on Saturday when both the repo rate and the reverse repo rate were cut by 100 basis points. Access to external commercial borrowings has also been liberalised so that borrowers capable of accessing funds from abroad are allowed to do so. The banks are being encouraged to counter what might otherwise become self-fulfilling negative expectations by enhanced lending to support economic activity.

These measures in the area of money and credit are being supplemented by fiscal measures designed to stimulate the economy. In recognition of the need for a fiscal stimulus, the government had consciously allowed the fiscal deficit to expand beyond the originally targeted level because of the loan waivers, issue of oil and fertilizer bonds and higher levels of food subsidy. In addition, the following steps are being taken:

1. Plan Expenditure:

In order to provide a contra-cyclical stimulus via plan expenditure, the Government has decided to seek authorisation for additional plan expenditure of upto Rs 20,000 crore in the current year. In addition, steps are being taken to ensure full utilisation of funds already provided, so that the pace of expenditure is maintained. The total spending programme in the balance four months of the current fiscal year, taking plan and non-plan expenditure together is expected to be Rs.300,000 crore.

The economy will continue to need stimulus in 2009-2010 also and this can be achieved by ensuring a substantial increase in plan expenditure as part of the budget for next year.

2. Reduction in Cenvat:

As an immediate measure to encourage additional spending, an across-the-board cut of 4% in the ad valorem Cenvat rate will be effected for the balance part of the current financial year on all products other than petroleum and those where the current rate is less than 4%.

3. Measures to Support Exports

i) Pre and post-shipment export credit for labour intensive exports, i.e., textiles (including handlooms, carpets and handicrafts), leather, gems & jewellery, marine products and SME sector is being made more attractive by providing an interest subvention of 2 percent upto 31/3/2009 subject to minimum rate of interest of 7 percent per annum

ii) Additional funds of Rs.1100 crore will be provided to ensure full refund of Terminal Excise duty/CST.

iii) An additional allocation for export incentive schemes of Rs.350 crore will be made.

iv) Government back-up guarantee will be made available to ECGC to the extent of Rs.350 crore to enable it to provide guarantees for exports to difficult markets/products.

v) Exporters will be allowed refund of service tax on foreign agent commissions of upto 10 percent of FOB value of exports. They will also be allowed refund of service tax on output services while availing of benefits under Duty Drawback Scheme.

4. Housing

Housing is a potentially very important source of employment and demand for critical sectors and there is a large unmet need for housing in the country, especially for middle and low income groups. The Reserve Bank has announced that it will shortly put in place a refinance facility of Rs.4000 crore for the National Housing Bank. In addition, one of the areas where plan expenditure can be increased relatively easily is the Indira Awas Yojana. As a further measure of support for this sector public sector banks will shortly announce a package for borrowers of home loans in two categories: (1) upto Rs.5 lakhs and (2) Rs 5 lakh-Rs 20 lakh. This sector will be kept under a close watch and additional measures would be taken as necessary to promote an accelerated growth trajectory.

5. MSME Sector

The Government attaches the highest priority to supporting the medium, small and micro enterprises (MSMEs) sector which is critical for employment generation. To facilitate the flow of credit to MSMEs, RBI has announced a refinance facility of Rs.7000 crore for SIDBI which will be available to support incremental lending, either directly to MSMEs or indirectly via banks, NBFCs and SFCs. In addition, the following steps are being taken.

(a) To boost collateral free lending, the current guarantee cover under Credit Guarantee Scheme for Micro and Small enterprises on loans will be extended from Rs.50 lakh to Rs.1 crore with guarantee cover of 50 percent.

(b) The lock in period for loans covered under the existing credit guarantee scheme will be reduced from 24 to 18 months, to encourage banks to cover more loans under the guarantee scheme.

(c) Government will issue an advisory to Central Public Sector Enterprises and request State Public Sector Enterprises to ensure prompt payment of bills of MSMEs. Easing of credit conditions generally should help PSUs to make such payments on schedule.

6. Textiles

(a) An additional allocation of Rs.1400 crore will be made to clear the entire backlog in TUF Scheme.

(b) All items of handicrafts will be included under 'Vishesh Krishi & Gram Udyog Yojana'.

7. Infrastructure Financing

A large number of infrastructure projects are now being cleared for implementation in the Public Private Partnership mode. These projects may experience difficulty in reaching financial closure given the current uncertainties in the financial world. In order to support financing of such projects, Government has decided to authorise the India Infrastructure Finance Company Limited (IIFCL) to raise Rs.10,000 crore through tax-free bonds by 31/3/2009. These funds will be used by IIFCL to refinance bank lending of longer maturity to eligible infrastructure projects, particularly in highways and port sectors. In this way it is expected that IIFCL resources used for refinance can leverage bank financing of double the amount. Depending on need, IIFCL will be permitted to raise further resources by issue of such bonds. In particular, these initiatives will support a PPP programme of Rs.100,000 crore in the highways sector.

8. Others

(a) Government departments will be allowed to take up replacement of government vehicles within the allowed budget, in relaxation of extant economy instructions.

(b) Import Duty on Naphtha for use in the power sector will be eliminated.

(c) Export duty on iron ore fines will be eliminated and on lumps will be reduced to 5%.

The Government is keeping a close watch on the evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain the pace of economic activity.

It's real! Realty sector facing rough weather

Reliance Money has come out with report on various key sectors of Indian Economy. Here is the one pertaining to Real Estate.

Slowdown visible in Topline

Negative macro factors have taken a toll on the real estate sector. Except Akruti and
Phoenix mills all the other companies reported negative growth in topline (QOQ) in
the range of 2% to 16%. Companies in our universe reported negative growth of 1%
and 8% on YoY and QoQ respectively. Lower volumes were realized by most of the
developers because of increase in home loan rates and high price points. Companies
like DLF launched mid income housing (lower margins) which received a positive
response. Companies like Puravankara and Omaxe are planning to develop 64,500
and 10, 00,000 affordable house units in medium to long term.

Input cost pressure dents profitability

Higher input cost clearly impacted margins. Companies in our universe reported
negative EBITDA growth of 11% on QoQ basis and 2% on YoY. Except Phoenix, Akruti
and Peninsula all companies reported negative EBITDA growth QoQ. EBITDA Margins
remained flat YoY and declined by 200 bps on QoQ.

Bottomline under pressure

The current low volumes, rising input cost and tight liquidity has lead to a decline in bottomline. Liquidity crunch in the global and domestic market impacted the sector
adversely. Drying out of funds from all sources has lead to rise in cost of debt to 15% for most of the companies. Interest cost increased significantly by 123% from Rs.
1295 mn in Q2FY08 to Rs. 2889 mn in Q2FY09. With recent measure like reducing
CRR, Repo rate, & SLR by government to reduce interest rates most of the banks has
responded positively by reducing their PLR. PAT reported negative growth of 500 bps
YoY and 200 bps QoQ. PAT margins for top two real estate i.e. DLF and Unitech
declined 1000 bps and 400 bps YoY.

We beleive there is a close relationship between the economic growth and the prices
of commercial (office) market and retail demand. Demographic factors determine
the prices of housing segment though the interest rates in the economy also plays
important role in price discovery of housing segment. The BSE real estate index has
slipped by over 85% from its high of 13848 on 08th Jan 2008. Liquidity crunch in the
economy has badly hit the sector in the last quarter. Fund flow from the primary
market and private equity (PE) has dried out and therefore real estate companies are
in need for more debt. Raising debt has become difficult due to global liquidity crunch in the international market and ECB restrictions. Banks continues to postpone leading decision, despite sanctioned limits to the sector. As per various media reports property prices have corrected in the range of 15% to 35% from its peak depending upon the location and region. Most of the developers which were confident of sales picking up in the diwali festival season were wide of the mark.

Sector Outlook

Drying up of volumes, liquidity issues along with rising input cost is a curse to real estate companies. Inspite of these issues developers are not ready to reduce the list price. However indirect reduction in prices through discounts and freebies are part of the transaction. Real estate companies are taking several cost cutting measures to improve their margins in the face of the global economic turmoil. Most of the developers are now focusing towards Lower Income Group (LIG) and Middle Income Group (MIG)housing segment (Affordable housing). Also the focus has shifted from accumulating land to execution of current projects. Most of the developers are keeping away from launching of new projects. Malls rental rates are also expected to rationalize. In commercial space focus has shifted from IT/ITES commercial development segment to non IT/ITES commercial development as slowdown is expected in the sector. It’s time for the developers to recalibrate and reprice their products. On the other side buyers are in “Wait & Watch Policy” and are in no hurry to entry any transaction. We expect Q3FY09 will be tough ride for real estate sector. Decreasing commodity prices and interest rates will help the sector get rid of dark clouds in medium to long term. However atleast for the next 12 - 18 months, real estate companies are likely to face rough weather.

Bad news from earnings' season

India Inc. Profit, Growth Continues to Slip
Morgan Stanley has pointed out in its India Strategy report that Corporate India’s growth and profits continue to be south bound reflecting the Indian Economy scenario amid global financial crisis.

Here are our key takeaways from the recently concluded September 2008 quarterly earnings season:

• Corporate India (represented by a MS sample of 105 companies) reported a 29% fall in net earnings for the quarter ended September 2008 – an alltime low. This compares with a trailing five-year quarterly average growth of 28%.
• Excluding the Energy sector, growth was 11% YoY – a five-year low compared with a trailing five-year quarterly average growth rate of 30%.
• Our coverage universe surprised negatively versus MS analysts’ expectations. MS analysts’ were expecting net profit growth of 3% for our coverage universe (12% ex-energy).
• Given that F2009 earnings were revised down for nine out of 10 sectors and for market aggregates at the end of the season, it could be said that the quarterly earnings disappointed consensus. Downward revisions outstripped upward revisions 2:1 at the end of the season versus where earnings were at the start of the season.
• The Sensex constituents grew earnings 5.5% YoY on an aggregate basis, behind MS analysts’ forecasts and its worst performance since June 2002.
• Broad market earnings (sample of 1,038 companies) continued to show weak performance with earnings falling 7% YoY.
• Notably, four out of the 10 sectors reported 20%-plus growth in profits.
• At the sector level, the best performances came from Utilities and Technology. The laggards versus the aggregate numbers were Consumer Discretionary, Energy, and Healthcare. Save for Technology and Financials, all sectors reported a slippage in operating margins YoY.
• Versus MS expectations, the biggest positive surprises came in Consumer Discretionary and Financials while the negative surprises came in Energy and Healthcare.
• Excluding the volatile Energy sector, revenue for our sample rose 26% YoY – a seven-quarter high and a strong performance considering the macro environment, explained in part by high inflation.
• EBITDA margins fell 720bp YoY and 122bp YoY excluding the Energy sector. This took EBITDA growth to a two-year low of 26.6% for the sample Ex-energy and to a 5½ year low of 14.6% for the aggregate sample.
• The key problem for net profit growth was the declining share of net financial income in pretax earnings and the rising depreciation expense. Other income fell YoY whereas interest costs rose at their fastest pace in history.