Year: 2008

India’s GDP (gross domestic product) grew 7.6% in 2QFY09 (Jul-Sep ’08), in line with our estimate and ahead of consensus (7.2%).

There has been a slowdown in all the major components: agriculture (2.7%), manufacturing (6.1%) and services (9.6%). The deceleration, however, has been much more modest than what was envisaged by the Street. The growth in 1HFY09 at 7.8%.

In line with liquidity and credit problems faced in recent months, we expect GDP growth to slow in 3QFY09 to around 7.2%. The trend is likely to reverse in 4QFY09 and projected to be 7.8% in FY09. The performance of agriculture, mining, electricity and personal and social services are likely to improve in 2HFY09, while manufacturing, construction and trade, hotel, transport and communication are likely to witness deceleration.

Tax Revenues Decline in Oct-2008:

As the saying on the street goes, Teji Mein Teji, and Indian corporates got caught in the same whirlwind only to realize they have to go in for a restructuring now.

Most Corporates have built its businesses for 8-9% growth. Growth is likely to slow down to 5-6% over the next couple of years, and this will mean that profits will likely decline. If corporate India wants to avoid a significant fall in ROE, then a major restructuring cycle must get underway.

And the difference between lat 90s and now is that the former one was earnings burst was driven by high financial gearing. The coming earnings decline will be caused mainly by operational gearing. Cost structures that were built for high GDP growth will have to shrink.

The sectors that seem to be at the biggest risk of earnings decline purely on the basis of negative operating leverage include Materials, Industrials, and Utilities. These companies can undertake some mico restructuring exercises like – reduce costs – mainly relating to employees, rent, and non-operations; rationalize capacity; change product mix to reflect a possible down trading in customer spending patterns; lower exposure to asset markets, especially real estate and equity; reduce cash balances to pay down debt.

The companies with the maximum operating leverage and high financial leverage include a bunch of Consumer Discretionary, Industrials, and Real Estate companies.

Post Sept-08, the bottom up earnings growth expectations of SENSEX companies has fallen sharply to 2.9% in FY10 [originally 12.2%]. Earnings growth is falling but primarily in FY10E, with apparent resilience in 2HY09E. The key earnings swing is Tata Steel, where Citi is well below consensus estimates on the street.
For FY10E, there were 12 downgrades to every upgrade, post the September quarter.

The big earnings cuts are in the metals/commodity spaces, while earnings growth remains concentrated in energy businesses (55%+ of Sensex). There will be beneficiaries of lower commodity prices and interest rates; but given demand, pricing and asset quality overhang, analysts appear fair in not factoring them.

Industrial Production growth is a fairly good lead indicator, and when it falls, earnings growth usually falls more. With IP growth at 4.8% and Citi’s expectations at 12%, the numbers,
bottom up and updated as they are, could well change. And when IP growth touched a low of 2.6% in 2002, earnings growth touched its nadir at -14% in 2001.

As we near the end of F&O settlement, the market wide rollover stands at 43.47% on T-2 day as compared to 36.47% in the previous expiry. The Nifty November rollover stands at 38.96% compared to 44.98% in the October expiry and 41.76% in the September expiry on T-2 day. The Put-Call ratio stands at 0.84. Open interest addition of nearly 5000 contracts was seen in Call options of the strike price 2700 and 2800.

Top Sector Rollover stands as follows, [in %ge]
Capital Goods 54.86
Realty 51.88
Power 50.50
Banking 50.04
Cement 48.07

Transport at 23.90% and media at 30.84% have witnessed the lowest Rollover.