See 7-10% earnings growth in FY17: IDFC's Limaye

Growth in the economy is likely to pick up in the next six to nine months, is the word coming in from Vikram Limaye, MD & CEO, IDFC.

According to him there is yet no sign of pick up in investment cycle and the rural economy. So, unless that picks up, it would be difficult for growth to see an uptick. Rural economy is likely to pick up in the coming 12-18 months, he adds.

He expects earnings growth to be in the range of 7-10 percent in FY17.

Corporates too are currently cautiously optimistic on the economy.Below is the verbatim transcript of Vikram Limaye’s interview with Sonia Shenoy and Reema Tendulkar on CNBC-TV18.Sonia: How has the conference shaped up this time. We have heard a lot of positive comments but to summarize what have the key takeaways been? A: In general what I would say is that the conference has gone exceedingly well. We have had more than 200 corporates participating, more than 600 investors, over 8,000 meetings, so it has been very good from an interaction standpoint between corporates, research analysts and investors. Some of the takeaways really are that corporates are cautiously optimistic. As you know, there are some signs of revival in the economy in variety of areas particularly on the construction side given the road sector having kicked off, railways putting out contracts and defence also seems to have a lot in the works. Rates have come off a little bit and that has contributed to increase in margins. I think it is fair to say that the decline in commodity prices is also fairing to margins and the full year impact of some of these things will be seen only in the following year.However, there has already been an positive impact on margins and it is my view that over the next six to nine months there should be a pickup in growth particularly  given the increase in government spending and government investment that has been in the works for sometime should start feeding into growth numbers over the next six to nine months. So, overall I think people are cautiously optimistic and we should be able to see the results of government spending and investment over the next six months.Reema: What did they mean when they said cautiously optimistic? When will this much awaited earnings recovery take place? In FY16, earnings have been progressively revised down, what are they now expecting in FY17? A: Overall gross domestic product (GDP) growth should come out at around 7 percent and earnings growth should also be around the 7-10 percent range for FY17. That is on average; obviously some industries are doing a lot better than others. As you know, consumption spending has held up quite well and that I think will continue to hold up well. Also, on account of some of the pay commission increases that have been announced that will start feeding into spending as well. I think the two areas of the economy that needs to pickup for growth to step up in a more significant way is the rural economy and the investment cycle. As I have said before, the private sector involvement and the investment cycle will take another 18 months or so to get started. In the meantime, government spending and investment will kick-in in order to bridge that gap.The rural economy also is not doing too well. That also should start picking up over the next 12-18 months. So, those two legs of the growth cycle needs to pickup. The consumption side is still holding up okay so it is a mixed bag in terms of how industries are affected in the near-term. However, over the medium-term I think people are optimistic that growth will pick up. Sonia: In your assessment, how much could consumption pickup because of the 7th pay commission recommendations because we were speaking with Morgan Stanley and they suggested that it could be as high as USD 6 billion lift off for consumption as a whole. What would your own assessment be? A: I don’t have a number in terms of what the multiplier effect of this could be. However, I think it is fair to say that the increase is quite large and when you look at the numbers in terms of what they mean just from an absolute standpoint, they are fairly large numbers. So, I certainly believe that this will have a positive impact on consumption led spending. Reema: You had a conversation with more than 600 investors, how are foreign institutional investors (FIIs) feeling about India? They have been selling in the cash market for the last seven or eight trading sessions and even if you see India’s performance vis-à-vis the global market, we have underperformed the S&P by nearly 6 percent, China by nearly 15 percent, Nikkei we have underperformed, we have underperformed the Korean market. How do they see India vis-à-vis the rest of the emerging as well as the developed markets and what are their expectations by way of a return from Indian equities in the next year? A: Since it is a market, you have various views that play into what the expectations are. I think it is fair to say that expectations have now corrected from what one could argue were unrealistic expectation say 12 months ago. However, that is not to say that people are not optimistic about the India growth story. I think it is more calibrated, I think they have realised that things are taking a bit longer than what they would have expected. However, it is fair to say that everything that at least we are hearing and everything that investors when they talk to various parts of the economy, whether is corporate or government, what they are hearing is that there is a lot in the works that will start feeding into growth over the next six to nine on months. So, that expectation certainly is that growth will pickup going forward. However valuations are reflecting the underlying earnings growth and that as you have rightly said, for FY16 has certainly been weaker than what people expected and that will reflect in valuations. That doesn’t indicate by any means there confidence in the future growth of the economy and you have got to keep things in perspective. A 7 percent GDP growth relative to what is going on in most parts of the world is a pretty healthy growth rate. As government spending, investment and consumption pickups, that can only trend upwards.Sonia: The Modi government has done quite a bit for the road sector in the last week or so whether it is rebooting of the 34 stalled projects or whether it is segregation of the construction cost from civil cost, etc. Do you think this is enough and what kind of growth do you forecast in the roads and the infrastructure sector now?A: I will make a broader point; I think what you have seen over the last week, 10 days, has been quite significant in terms of reforms. You first saw the liberalization from an FDI perspective in a variety of sectors. I think 15 sectors including positive impact on certain sectors which are undergoing some stress and slowdown suggests the real estate sector and as you know the real estate sector if it picks up has a much broader impact on the economy. So, that has been a positive.The second positive has been as you rightly said the reforms surrounding the road sector and that as I said roads is one large part of where we see growth in the next six to nine months from a spending perspective and a construction perspective. The third thing is the discom reform that was announced. That is also very significant and all these things will feed into positive growth going forward. The last is, there is a bankruptcy code that the government is planning to introduce in the winter session of parliament and that is again a significant piece of legislation which will give a lot of teeth to various parts of the landscape and will be quite instrumental in jumpstarting the development of the bond market. So, there has been a lot of reform that the government has announced and this should all be viewed as a positive.