Growth hit on fiscal profligacy, falling rupee: Baring PE

It is difficult to convince anybody to buy assets in this environment because of the pressure on rupee, fiscal profligacy of the government and sustained inflation, says Rahul Bhasin, Managing Partner, Baring Private Equity Partners India. Going by the real economy and tempered growth, he sees further downside.

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He says: "Even to conceptualise a revival is some way off and the Parliament has not done itself any great credit by passing the Food Security Bill in the manner in which they have done it." Below is the verbatim transcript of Rahul Bhasin's interview on CNBVC-TV18 Q: You are the person who is seeing value in this market. You have seen purchase of an asset. Do you think at least that will continue that people will look for value companies and more buying can happen because stock markets are indicating more correct valuations?
A: The real issue is that stock markets discount the Net Present Value (NPV) of cash flows of companies, but just look at what that discount entails. It discounts a particular set of earnings growth and you have been systematically seeing the earnings growth paradigm reducing. The second thing is that most of the incremental buyers in the markets over the last 6-7 years have been foreigners. You are seeing pressure on the rupee which means that dollar denominated earnings are reducing even further.
With fiscal profligacy of the government you are seeing possibilities of sustained inflation and therefore the discounting rate not coming down. It is tough to convince yourself to buy assets in this environment and market. I think that it is very unfortunate, but one has to believe that there is more downside. Look at the real economy, forget about the markets for now. Growth has tempered. Manufacturing has virtually come to a standstill. If you see the Index of Industrial Production (IIP) numbers over the last 12 months, they have been close to zero. If you see the Purchasing Managers' Index (PMI) it has been below 50 of late. You might get a boost in agricultural growth because of good monsoons, but even your services growth has been tempering.
If you look at projects and project delays and you look at the balance sheets of companies 33 percent of companies today have debt servicing cost which is in excess of their free cash generation in a year. That is a very frightening number and it has implications both on bank balance sheets and on overall demand of the economy as a whole. If you look at capex cycle and capex cycle revivals, capex cycle revivals are usually 1.5-2 year after you see good project announcement growth and in 2011-12 you had minus 57 percent growth in new projects, in 2012-13 you had minus 37 percent growth in new project announcements.
So even to conceptualise a revival is some way off and I do not think that the Parliament has done itself any great credit yet by passing the Food Security Bill in the manner in which they have done it. To state to people that you want to feed the hungry is always going to be something which everyone is going to support, but you got to do it in a sustainable manner in which they can continue to have jobs. Q: How are you sensing the investment mood at this point in time? Do you see any kind of silver lining? Do you see any pick up in investment and how long do you think it would take before we could see any resumption of activity?
A: I think that it is going to be something which is long and drawn out. I do not see any snap back in any sense of urgency. It is very tough to convince anybody to put money into India. I think the fiscal position is just too murky at this moment. If you look at the way the fiscal is being managed one can thump the table and say that we will manage it at 4.8 percent, but selling capital assets for revenue expenditure just tells you that it is not a sustainable correction.
You takeout Life Insurance Corporation (LIC) from the market which is the only natural buyer because they have to save their money to buy government divestments, you do not have any natural buyer in the market. Retail left the market almost 7 years ago in India, there are various reasons as to why and I do not see them coming back anytime soon. Foreigners are going to be very circumspect.
You cannot run Current Account Deficit (CAD) of the magnitude that we have and that is not going to get fixed till you fix the fiscal and even in this world if you look at most debt crisis globally, what happens? Yes, asset prices fall, earning capacity falls, unemployment tends to go up, but the last stage of any such debt crisis at any global level tends to be a vicious fall in tax collections. This is plainly available academic data. For the government to have been behaving the way it has the last 4-5 years in light of what the circumstances are, I just think that it is just very, very unfortunate that we have been so irresponsible fiscally and systematically.