Nilesh Shah on why the right time to invest is now

By Morningstar |  28-12-15

It's been close to about a year-and-a-half since the government came into power. What are some of the positives that you've drawn out from the initiatives they have taken? How do you see that as an investor?

What we have seen from the government is that at least in certain segments they are doing good work. So, for example, in FY15 India's coal production went up by more than 34 million tons which was more than incremental coal produced between FY11 to FY14. So, in one year we have produced more coal than what we produced in previous four years. All the coal trucks which come out of coal mines now have a GPS. Straightway, it plucks the leakages, it improves the efficiency.

On the road sector we have started building 18 kilometers of road a day. We were previously about 7 kilometers of road a day. Today tender happens on an electronic platform. Your settlement of tender happens on an electronic basis. And you get letter of commencement within 3 hours of closure of tender which previously used to take a lot of time.

So, there are sectors like road, railway, defense, mining where the government has brought e-governance, removed the discretionary power to a great extent, not eliminated but to a great extent removed, and is trying to encourage a mechanism where whether you knew someone or whether you have ability to do business in a noncommercial manner, it does not matter anymore.

This is all changing the way India is doing business and it's going to have an impact on some of the sectors. By taking such steps the government is improving the country and eventually it will be reflected in an improved corporate sector.

But it's been a year-and-a-half and we haven't really seen corporate growth come back the way people initially expected it to.

Our economy has many sectors which are linked to global markets. If steel prices go down, steel companies in India will lose money or make less money. The government cannot do anything to improve their profitability. This is the price we pay for global linkages. Commodity prices have corrected globally and lot of Indian companies which were exposed to the commodity sector have been hit, hence profitability is lower.

In the case of public sector banks, profitability is depressed. This is the year where they have started recognising their NPAs in a slightly more aggressive manner. These NPAs were not created this year; they were created long before but they are being accounted for today. Now just because it is accounting today we say “after Modi government profitability is not coming back”. You have to look at cycles.

In last 18 months, corporate profitability growth has been a bit depressed, a bit subdued, and it is proving all of us wrong for the last nine months. There are many reasons.

One, the commodity cycle has been on the wrong side, on the lower side, and it's impacting profitability.

Second, we have started recognizing some of the issues in the banking system a bit late. So, it's not the result of last year but it's a result of many years before that.

Third, our corporate sector is paying one of the highest interest rate. In real terms if I calculate on a wholesale price basis, we have very high real interest rates running into double-digits. If I ignore WPI and just look at CPI, real interest rate is very, very high. Our real interest rate is more than the nominal interest rates of most of the countries. On top of it, in FY15 our currency appreciated against the yen, euro and GBP. So, I'm making my entrepreneur, who is already paying high interest rate, noncompetitive in currency terms.

All these factors put together has resulted in subdued corporate profitability. Today corporate profit as a percentage of GDP is at 4.3% of GDP. Historically, it has been averaging about 6% to 6.5%, so we are about 33% lower than our historical average in terms of making money, making profit, making margins.

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