Consumption themes will stay in favour
Higher rural incomes, pay commission benefits, lower interest rates key positives
The markets might have been unimpressed by the Reserve Bank of India (RBI)’s rate cut of 25 basis points, as being largely along expectations and priced in. Yet, investors could take some cues from the event. A clear indication is that consumption demand is likely to remain healthy, aided by rural India. A consecutive normal monsoon so far, leading to a good kharif crop, and a boost to rural demand from the higher budgetary allocation to housing in these areas, would be influencers. Farm loan waivers are a bad word for state finances, as these are likely to compel a cut on capital expenditure, with adverse implications for the already damped capital expenditure cycle. Even so, it should leave more money with rural households, a little over 60 per cent of India’s population.
Implementation of higher house rent allowances (HRA) under the pay commission award in the near future, plus salary and allowance increases over the next one to two years, will also mean higher disposable incomes with government employees. The latter account for a visible share of revenue in some sectors. For instance, Maruti tends to gain more, given the share of business it gets from state employees.
“We are extremely bullish on the consumption theme for the next three-four years,” says Mayuresh Joshi, fund manager at Angel Broking. Among themes, an expert with a domestic brokerage says fast moving consumer goods (due to the rural push), automobiles (passenger vehicles and two-wheelers), white goods, affordable housing and retail (to individuals) lending should do well.
However, with stock prices having run up already and valuations high, investors will have to be selective. "The entry point, the valuation at which one enters a stock, is equally important,” adds Joshi. He advises that investors consider a staggered and bottom-up approach, looking at the top one to three players and companies. The vast growth opportunities would mean their earnings compounding in the long run.
Even if there's limited scope for significant policy rate cuts, there is scope for lowering interest rates further, as past rate cuts also haven’t been fully passed on to borrowers, restricted by the asset quality issue faced at many banks. Further, liquidity conditions remain comfortable. All these should prove conducive for consumption.
What also provides further comfort is the slew of events in the ensuing months. For instance, the goods and services tax roll-out has been relatively smooth, and restocking by the trade and the coming festive season should lead to decent demand in the September quarter. Likewise, the low-base effect of last year due to the note ban and good rural demand this year, coupled with government spending on infrastructure and social schemes around the Union Budget presentation time should mean better prospects in the December and March quarters.
Due to these events, say experts, there is also more hope that India Inc’s earnings growth should be a decent 12-14 per cent in FY18, and not disappoint investors as was the case in previous years. As for non-consumption themes will not do well. Those pertaining to roads and railways, as well as power transmission and metals, supported by global prices, should also do well.
The other take-away from RBI's policy review is that high levels of stress in the balance sheets of banks and corporations, as well as subdued business sentiment in certain manufacturing and services segments, also means the capital expenditure cycle will take a while to pick up. It is reassuring that RBI has retained the projection of real gross value added growth for 2017-18 at the June estimate of 7.3 per cent.