India Inc sees political stability as a big positive; corporates bullish on Modi’s initiatives
Owners and CEOs at number of Indian companies see an extended period of political stability.
According to global financial services firm CLSA, who analysed 74 annual reports for FY17, covering about $1 trillion or 50 per cent of India’s market capitalisation, the key message from corporate India is that optimism around the country’s sustainable growth potential has risen significantly.
India Inc’s owners and CEOs see an extended period of political stability, which is deepening the visibility of major reforms and key government policies being carried forward, CLSA study revealed.
All the major steps taken by Prime Minister Narendra Modi including GST, affordable housing, digitisation, rural recovery, Make in India (mostly in defence) and smart-city benefits are all on the corporate radar.
The study done by CLSA further showed that the overall corporate return on equity (ROE) remained stable but net-debt-to-equity dropped 1 percentage point YoY to 26.7 per cent in FY17.
“P&Ls are not yet reflecting interest-cost savings but should begin to from FY18. Management commentary suggests confidence in an economic revival with housing and rural improvement the key drivers, which should ultimately lead to capex-cycle recovery. This fits well with our top ideas of IndusInd Bank (raising target from Rs 1,870 to Rs 2,030 based on 4.2x September-2019 adjusted PB), ICICI, SBI, housing finance companies, metals, Larsen & Toubro, Jubilant Foodworks, Ambuja and Sobha,” CLSA said.
The global brokerage firm sees some near-term uneasiness with the rollout of GST which has already impacted economic activities during the first few months of FY18.
A potential rural recovery, affordable housing push and bottoming of private sector capex are the key opportunities that CLSA identified in the annual reports.
Rural India accounts for over 65 per cent of the total population, or about 850 million people, and is expected to be the key economic growth driver in the coming years as several services/products remain underpenetrated in rural areas.
Rural India has been under stress for over three years due to successive weak monsoons in 2014/15 and a lack of policy support (low minimum-support price [MSP] hikes and lower quantity of purchases). This is evident from the weak wage growth in rural areas, averaging 5.6 per cent YoY in FY17 versus the 10.5 per cent long-term average.
According to CLSA report most of companies are quite optimistic on the rural economy, notwithstanding the near-term distress in rural areas.