Healthy balance sheet of corporate India to outweigh election results
Kenneth Andrade, Founder Old Bridge Capital
Feb 22, 2019 | Source: Economic Times
Worry for the markets? : Our big challenge comes up in the next few months, trying to understand which way the election results would swing. Whichever way it goes, we will have to give a quarter or two to the new government. If there is a new entrant, then we need to give time before we stabilise, and the growth continuity starts.
Historically, it has been seen that it does not have a long-standing impact on the markets. Most governments have been progressive and worked for development of the economy and as we go into the event, we think the construct of the Corporate India balance sheet will far outweigh the outcome of the elections.
Macro challenge remains another big worry. While a couple of years back, we would discuss solvency problems, most corporates are beyond that now. At a larger level, debt is grinding down and capacity utilisation is going up. So, from a business perspective, corporate balance sheets are fine and we need slight amount of macro tailwinds to be out of the woods.
On capex cycle? Brownfield capex is happening, though greenfield is sometime away. Broadly capacity utilisation is at 75%. Private sector capex comes when you are at 90% utilisation. The big driver to capex has to be energy, power, and oil and gas.
Will there be a slowdown in NBFCs? We had a minor hiccup with the NBFCs. There are two changes that have happened. NBFCs on ground have stopped getting incremental capital flow from the bond market and more importantly their equity valuations have dropped low enough to fund growth. So, in the near term, a slowdown in consumer economy is expected. We will have to wait and watch this out for six months.
On themes or sectors? In this year, there are two parts of the economy where portfolio is positioned —infrastructure and rural economy. The way the capex cycle will begin is that you will get a kickstart to infra and that will lead to some exhaustion of capacity in engineering and capital goods and will eventually move to manufacturing. We see a fair amount of traction in infrastructure.
The second part of portfolio is rural footprint. The past year had been lukewarm in terms of demand and profitability. Many companies have been impacted by two variables: higher raw material prices and exchange volatility. This has kept profitability under check. While balance sheets have not deteriorated, there has been no growth in 2018. The price remuneration has not met farmer expectation. This will change in the coming year. We are seeing volumes at an all-time high. We expect fertiliser, seeds to have a robust year.
On financials: In financial services, we see some amount of traction in corporate banks in 2019. Despite that we prefer to play infra and consumer companies funded by financial institutions. Hence no exposure to financials as of now