Demonetisation: Topline growth of India Inc seen at 6-8% in FY17: Crisil

Demonetisation has shaved off growth of two quarters, but the situation will normalise by March, said DK Joshi, Chief Economist at Crisil Ratings. A good Budget and interest rate cuts can drive the growth in the next quarter, he said. While growth has been impacted, same can't be said for the growth trend. The central bank is likely to cut rates by another 25 basis points and no more if it wants to stick to its 4 percent inflation target. Nagarjan Narasimhan, Business head at Crisil said that investment will continue to drive up the public sector. Corporate topline growth is expected to be in range of 6-8 percent for FY17. Sectors like real estate where cash component is large will see stress as far as earnings are concerned, said Narasimhan. For next year, infrastructure linked sectors will do relatively better. Sectors like IT, pharmaceutical and telecom will see slightly muted growth next fiscal. Outlook for corporate lenders remains cautious with asset quality issues pertaining for next 12 months, said Pawan Agrawal, Chief Analytical Officer at Crisil. If interest rate transmission happens, then the situation can ease a little.On the retail side, things are looking a little better.Below is the verbatim transcript of DK Joshi, Nagarajan Narasimhan & Pawan Agrawal’s interview to Prashant Nair & Ekta Batra on CNBC-TV18.Prashant: We just spoke with Mahesh Vyas at CMIE and he actually said something interesting, he said that according to him demonetisation has impacted the trend rate of gross domestic product (GDP) growth. So, this is not just a mean of quarter or two quarter kind of an impact. He is talking about a trend rate being impacted how do you see it?Joshi: It is too early to tell whether the trend has been impacted. At this juncture our call is that the two quarters growth has been shaved off and after that things can return to normal once the remonetisation part is over and things return to normal. It all depends on how quickly you normalise this situation. There is a good possibility that the growth could pick up next year on two counts. One is that you have a weak base and if the Budget is supportive of growth and interest rates already are supportive of growth. So, I think we can see growth already inching towards its trend rate of growth of around 8 percent. I think the average rate of growth in the last 13 years is 7.5 percent, so it is not a great achievement in that sense. However, clearly from the lows we could, as far as the trend rate is getting impacted is I think you will have to analyse much more you will have to look at small enterprises. What I was saying is that the trend rate of growth getting impacted I am not so convinced about that story because there are things that the government has done which lift the trend over the medium run for instances goods and services tax (GST), bankruptcy code these don’t push growth up quickly. They improve your trend rate of growth, so there are things which offset what the demonetisation has done. So, it is inter player of both these things that is going to play out over the next couple of years. It is too early to say that the trend has been damaged as of now.Prashant: You actually are calling for pick up after financial year 2018, April onwards?Joshi: Yes, I think premised on two things one that the situation returns to normal by March and second you get a normal monsoons.Prashant: Situations returns to normal you mean in terms of cash being in the system –remonetisation?Joshi: That is right, many of the sectors will pick up some sectors will see some headwinds continue for some more time. Some will recover quickly, that part is there but to say that the trend has been damaged I think it is a little early. Prashant: What are your thoughts across sector as you look at?Narasimhan: Taking on from what DK Joshi was saying I think at the broader sectoral level there are a few themes which are emerging. Investment will probably continue to drive and that to focused on public sector investments which has been the story for FY17. The private sector investment which we were expecting to start off somewhere in 2018 I think will be slightly deferred. Again the capacity utilisation levels are still not up to the levels for the corporate sector to put in investments. Also there is this general sense of uncertainty so public sector capex that is one which is a positive, the second positive is interest rates. I think you have seen some of the large lenders dropping their interest rates that should sort of help most of the corporate at least especially the ones which are stressed on their balance sheets. On the other side the commodity cycle is again picking up. Crude is again moving up, our call is that crude will probably average around mid 50’s or high 50’s in the next year. So, putting all of these together our call for FY18 is that it will be slightly better. FY17 first up was good, but second half is definitely going to be hugely impacted. So, if you look at FY17 our overall topline growth for the entire corporate that we cover looks at around mid to high single digit say 6 to 8 percent growth and that we expect to sort of inch up to around about 10 percent topline growth. On the profitability side the second half again will be muted and based on that our full year profitability call is around 10 percent earnings growth that we expect it to sort of bump up to closer to 14 or 15 percent._PAGEBREAK_Prashant: Which won’t happen now?Narasimhan: So, this year’s numbers in the first half were better, but the second half is really muted. So, average if you look at for FY17 you are looking at around about 9-10 percent. We believe that some of the aspects that I talked about should sort of help the overall numbers to move up.Ekta: You look at the banks and the NBFCs very closely besides ratings overall what is your sense in terms of the lending rate cuts that we have seen? Is it enough to spur credit growth or is there just apprehension which is possibly not going to spur credit growth say beyond the 8.50 off percent that we saw in September? Agrawal: For the credit growth to pick up fundamentals stress on the system that we are seeing in the corporate credit side should ease. We are not seeing that easing away in the near-term. It will depend upon the factors on demand which has been sustaining the credit quality so far. Because it is now weaker at least in the near term how soon it comes back both on the domestic side as well as export side I think that will be a function of that.It will also be a function of more importantly the investment side of the economy coming back. At least in the near-term we see these are aspects that have been actually pushed back a little. However, overall on the credit quality side if you look at therefore because some of these investments have been pushed off what it does is it essentially improves the balance sheet strength of companies. As a result you are still likely to see the credit quality impact because of demand potentially being offset by the improvement that may be there on the balance sheet.Ekta: What is your sense now in terms of further rate cuts? We have seen 175 basis points from the RBI since January of 2015, we are expected to see inflation to be a little subdued at least, your sense in terms of how much more we can expect and by when? Joshi: We believe that there could be another 25 basis point rate cut from RBI beyond that I think it won’t be possible because central bank has reiterated its stance that they are going to move towards 4 percent inflation target and for 4 percent I think the policy will have to be a little cautious which we have already seen the caution in the last policy. A lot depends on how the commodity cycle moves, what happens to crude prices how quickly the economy recovers because that is going to generate demand. It also depends on agriculture whether you get a normal monsoon next year or not. So, these three factors will shape the inflation trajectory and if your attention is on 4 percent then you can’t afford more than 25 percent basis point rate cut. Ekta: Had a quick question with regards to this earning season what is your sense in terms of which are the sectors which might actually buck the trend and which could possibly pull down the earnings average?Narasimhan: The ones were especially real estate, where there is larger component of cash we have seen a substantial pressure. Even within the consumption the segments which are more luxury oriented we have seen the pressure. Some of the traditional ones like say metals and cement and some of the others have not done too badly. I believe for next year also infrastructure link liked I talked about so construction, metals, cement and interest rate linked say housing, the auto segment will do relatively better even the consumer durables and FMCG. The ones which are under stress are the ones which are heavily indebted like Pawan Agrawal was talking about real estate sector. Some of the other sectors like say telecom, IT and pharma could face other types of challenges. So, you are seeing a lot of pressure globally for IT; pharma again a lot of regulatory changes. The big opportunity from new drug launches and all that is going to be relatively muted. Telecom is a going to see a lot of pressure from competition and investments, so those are sectors which we believe will be slightly muted next year. Prashant: For financials do you think incrementally things are getting better or are they getting worse?Agrawal: If you look at again the outlook for corporate lenders I think still remains cautious. Asset quality challenges we will still see continuing for at least the next 12 months; more importantly in the next at least couple of quarters. They are likely to be eased a little bit because of the interest rate transmissions if they get a little embedded because it will improve the viability of some of the underlying projects. If you look at on the retail side outlook is the shade better. Although in the near-term you will see some challenges on collection efficiencies or collection ratios. Prashant: Incrementally, things have only gotten worse there because they were looking up before this announcement.Agrawal: From demand perspective yes, but not necessarily from a profitability perspective. I think again the transmission of interest rates that has happened through the bond markets already and now that you are seeing from the bank loans what it will do is that it will reduce their cost of borrowing, but the lending rates have not necessarily come off to that extent. So, that will provide some cushion to absorb some asset quality challenges. Structurally, if we look at we just believe that over the next two to three years NBFCs should improve their share of credit in the market share by almost 200 to 300 basis points. Because structurally, they are better placed in terms of reach, the products design etc. Ekta: Do you expect them to come back to the valuations that we saw pre-demonetisation? A lot of them were at 2 to 3 times book and there has been a significant correction. So, for example Bharat Financial Inclusion is at 2.4 times versus 3.8 times when it was at its 52 week high.Agrawal: I would say that it would at least in the near-term be difficult given the fact that you will see the impact of lower disbursements playing out over the next couple of quarters. Over a longer term, I think the demand perhaps will actually be favouring them because we believe that shift from unorganised lending to organised lending will create more opportunities for non banking finance companies for the formal sector.