India's Investment Led Engine Of Growth

India’s Investment Led Engine Of Growth

Christopher Wood, Investment Analyst with CLSA, and author of the widely followed and periodic Greed and Fear Report,  reiterated a Sensex target of 40,000 recently, some 5,000 points ahead of other forecasters, for December 2015. 

The Sensex and Nifty,along with the broader midcap, smallcap and sector specific indices, have been consistently outstripping the forecasts in this current bull market. This speed is evident, even though at a level of some 15 times current earnings, most fancied stocks  are   actually trading at a much less precarious level, than they were at the end of 2007.

In late 2007, just before the global crash in 2008, many Indian stocks were valued at a steep 25 times earnings. Today, real corporate earnings, at between 15% to 20% in many of the frequently bought companies, are expected to better themselves to nearer 25% in 2015.

Besides, at present, the FIIs have invested more in  debt  than equity; over $13.4 billion so far this year, particularly in Government Bonds. This is partially because debt investment ceilings for FIIs have been raised, but also reflect renewed  FII confidence in India. The FIIs have invested substantially in Indian Debt for the first time in 2014, and have  earned steady, largely risk-free and non- volatile profits, at over 10%, in the backdrop of a stable rupee. 

CLSA is particularly bullish on India, following on from Goldman Sachs. It has made investments in both equity and debt in a proportion some three times greater than other FIIs.  Christopher Wood is a strong votary for Narendra Modi’s style and substance of governance, and has influenced CLSA policy in this regard from about October 2013, when a Modi win started to look likely.

Wood thinks Modi’s investment led growth strategy is exactly right and appropriate.He  expects the Modi Government  to roll-out, as well as facilitate, a dynamic new investment  cycle, within the next twelve to eighteen months. He thinks the foundations for this are being put in currently. Wood also  predicts that the RBI will make significant cuts in the interest rates in 2015, thereby helping to restart investments in private sector manufacturing and realty sectors as well.

One of the main areas emphasised by the Modi Government  is infrastructure, in addition to manufacturing. Unfortunately, many projects are stuck in partially completed form from the UPA  era, as pointed out by the Planning Commission recently.

A significantly large number of these stalled projects, with profiles in excess of Rs. 1,000 crores each, are in the priority sector of the Indian Railways. Some of these 274 odd projects, have been stuck for as long as 12 years.

The funds necessary to revive them, and others on the list of more than 800, along with the cost escalations, are estimated to be in the region of Rs. 5.7 lakh crores. These projects have already received massive investment, and the present Government is more or less compelled to see them through.

Prime Minister Modi knows India does not have the domestic resources to make investments of this order. This even as improving infrastructure is of vital importance because multiple growth targets in diverse fields are connected to it. Modi is therefore seeking the funds from abroad.

In this, from all indications, he has been extraordinarily successful, and the pledges from various foreign countries and multilateral lending agencies should start materialising on the ground soon. Of course, this in turn, will provide a great fillip to the GDP growth rates over several years, and provide much employment too.

Large and collaborative Manufacturing, under the ‘Make in India’ programme, particularly in the area of Defence Production, is also expected to get  started over the next two years. Every effort is being made to also facilitate smaller ticket private sector cooperation with foreign investors.

All this, as it unfolds, is likely to take the Stock Markets, a major engine of India’s revival, to higher levels, and the bourses themselves are poised to become a primary source of corporate funds.   

Chronic loss-making PSUs will be closed or sold off.  PSU Banks will be partially privatised . The Government will dilute its equity in a number of other PSUs which are doing well, to achieve its early divestment  realisation targets of Rs. 60,000 crores. Subsidies will be much better targeted or trimmed.

The credibility that Prime Minister Modi is steadily earning in the international FII and potential FDI space augurs very well for the future, given that FIIs today are the prime movers of our Stock Market. They own 22% of the stock, second only to the largely static Promoters’ Equity, which accounts for 28% of shareholding. Christopher Wood’s endorsement therefore is most heartening.

(775 words)

November 18^th, 2014

Gautam Mukherjee