Nomura-India 2011
Slowing Growth, Rising Inflation and Interest Rates, With falling momentum are negative tailwinds for the market, in a region generally accustomed to high growth rates with low PE multiples backed by sustained earnings growth. Clearly, there is no visibility in earnings as of now.
Investment cycle/capex
Strong government focus on rural development, salary hikes to government employees amidst high growth has
vastly expanded aggregate demand. Labour shortages are becoming a binding constraint on growth and risk
compressing margins of companies. We prefer consumer-facing, less labour-intensive companies with
pricing power. IT/BPO, mid-caps, construction and real estate companies are more vulnerable to labour
shortages.
Labour shortages
Macro outlook for earnings would be tough next year: wage pressures, rising commodity prices, elevated inflation,
tight liquidity, downward sticky interest rates, strong rupee, government expenditure in the backdrop of strong
domestic consumption and below-trend global economic growth. See downside risk to consensus-based
growth expectations of 20% for FY12F.
Earnings
See strong headwinds to inflation on rising global commodity prices. Labour shortages and rising wages could
exacerbate the wage-price spiral. Expect some tapering off in 1HCY11F on base effects. Market momentum at
risk amidst rising inflation. See downside risk to banks while metals would likely benefit from rising
commodity prices.
We expect some disappointment in short to-medium term. See several obstacles to the capex cycle despite strength
in demand. With a few large sectors driving organised manufacturing capex, the investment outlook for these key
capex-driving sectors remains muted next year. Meanwhile, the unorganised manufacturing sector suffers the
most in an environment of very tight liquidity.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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