Foreign appetite for Indian assets is surging on the back of expectations for a strong rebound in corporate earnings, particularly for smokestack industries such as cement, steel and metals as government investment in infrastructure-related sectors picks up momentum. This should augur well for stocks in the new financial year that begins on April 1.
Overseas investors have bought shares worth more than $3.2 billion so far in March, fuelling a rally that lifted one benchmark index to a record high and another within sight of the peak. The underlying sentiment is bullish, buoyed by the country’s huge domestic market that would be a cushion in a world edging toward protectionism.
A follow-on stock sale through qualified institutional placement by Yes Bank, India’s fifth largest private-sector lender, for up to $750 million received bids for $2.2 billion from foreign investors.
Economic activity is picking up across the country, led by building of roads, flyovers, metro rail networks, airports and ports. New Delhi has budgeted $59 billion for infrastructure spending in 2017-18 financial year, and by presenting the annual budget on February 1, instead of the traditional last day of the month, the government is set to hit the ground running when the fiscal year begins.
“This government is shaking up the system like never before,” said equity salesman Ramesh Maniar. “It is shedding worn-out practices and focusing on practical solutions to move things faster. The changes are bound to make an impact on growth.”
Annual budgets usually were approved by parliament only by May after recess and debates, and allocations began only in June, robbing two months or more of inaction at the start of the financial year.
Foreign investors are also ploughing cash into debt, drawn by relatively better returns. Franklin Templeton Investments bought government bonds worth $1.2 billion over two days this week, Bloomberg reported.
Political risk diminishes
Strong popular support for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) in provincial elections has lowered political risk, and fund managers believe the verdict will encourage more radical reforms in the coming months.
The stunning victory in Uttar Pradesh, the country’s biggest state with a population matching Brazil, gave the BJP four-fifths of the legislature seats. It was a vote of confidence for Modi’s daring economic gambles, specifically last November’s shock withdrawal of 86 per cent of the currency in circulation.
The demonetisation drive, ostensibly to thwart tax dodgers and terror funding, triggered a severe cash shortage in the economy, disrupted normal life, dented consumer spending and forced factories to shut some shifts as inventories piled up in warehouses. For 50 days long winding queues at bank counters hogged TV screens highlighting the misery.
Many pundits thought the move would backfire on Modi in the elections. The sheer size of the sweep, including in municipal and local body polls in Maharashtra and elsewhere, for the BJP is seen as strong support in the heartlands for reforms that would rein in corruption, dismantle red-tape and end discretionary powers to officials, channel money into productive sectors and create jobs.
Fund managers are coming around to the view that the currency shake-up may not have caused as much damage as feared. Economic growth lost some momentum, but was still robust. Government data showed the $2 trillion economy expanded 7 per cent in the three months to December, below the previous quarter’s 7.4 per cent but ahead of consensus forecasts of around 6.5 per cent and as low as 4 per cent projected by one brokerage house.
Though the latest figure is provisional and can be revised downward there are signs the economy has withstood the shock and is poised for faster expansion.
“The situation has improved after an initial 50-day hiccup,” said Biju Dominic, who advises rich investors. “Cash supplies are back to normal and activity has picked up dramatically.”
Tackling bad loans
New Delhi is working on proposals to resolve non-performing assets (NPAs), loans that borrowers are incapable of paying back, which some estimates as high as $180 billion.
The government and the Reserve Bank of India have been debating many measures, including creation of a private asset management company as well as a national asset management company with a minority government stake for companies that are more stressed.
Finance Minister Arun Jaitley hinted this week that resolving stress assets of banks was a priority. “The problem of big NPAs is confined to at best 50 companies and therefore those 40-50 accounts need to be resolved. Now, in way of that resolution, several issues come up: You have to find a buyer, strategic partner to find a solution. And if people are slow at doing so, thinking that the system is somewhat hopeless, the system will have to bring in some other instruments.”
Shares in state-run banks, which have some of the biggest sticky loans on their books, were among the gainers this week while the main indices dropped on profit-taking. State Bank of India, Bank of Baroda, Bank of India and Central Bank of India rose. The top-30 Sensex and the NSE-50 dropped 0.8 and 0.6 per cent respectively, their first weekly decline in three weeks, to 29,421.40 and 9,108.
Sanjay Nayar, CEO of private equity firm KKR’s India unit, told a Bloomberg conference recently that New Delhi is seeking to assure bad loans are resolved in an unbiased manner and ensure private capital is not taking anyone for a ride.
“We need a proper process to resolve the asset quality issues. We have provided them with some schematics and diagrams on that,” Nayar said.
IPOs in flavour
Investors are lapping up initial public offers as well as fresh issues, betting on stocks as a preferred avenue for better returns. Falling interest rates have diminished the lure of bank deposits, while a resurgent stocks rally that took the Nifty-50 to a series of record highs recently have caught the eye of investors.
This week an IPO by Shankara Building Products to raise Rs. 3.45 billion received bids for more than 41 times the shares on offer. Education services provider CL Educate Ltd’s Rs. 2.4 billion IPO that closed on Wednesday was subscribed nearly two times.
Earlier Avenue Supermarts, which runs the D’Mart retail chain, received bids for 105 times the shares on offer for its Rs. 18.7 billion IPO, and the stock doubled its value on listing rocketing the company’s founder, Radhakishan Damani, to the richest 20 billionaires in India.
Cochin Shipyard, India’s biggest public sector ship builder, has filed papers for an IPO to raise up to Rs. 15 billion. The offer would be partly government divestment and issue of fresh shares.
State Bank of India, the country’s biggest lender, said on Friday it aims to sell a 10 per cent stake in its insurance arm, SBI Life, in an IPO later this year. While SBI would offer eight per cent, joint venture partner BNP Paribas Cardif would sell two per cent.
In December, SBI had agreed to sell a 3.9 per cent stake in SBI Life to affiliates of KKR and Temasek for Rs. 17.94 billion.
Top private sector life insurer ICICI Prudential Life Insurance Co Ltd had raised Rs. 60.57 billion last September through an IPO.
The writer is a journalist based in India.
