High inflation, interest rates slow demand will impact Q1 performance, say brokerages
Moneylife Digital Team 06 July 2011

Domestic slowdown and global uncertainty has resulted in lower FII inflows in the April-June quarter 

High inflation and high interest rates continues to be a drag on overall economic growth and will likely hurt the performance of companies in the first quarter of 2011-12, according to various brokerages. But some are optimistic that the stiff economic conditions could ease in the second half of the year, making it possible to yet achieve GDP growth of 7.5%-8% this year.

Angel Broking says that high inflation and high interest are the top twin concerns for the economy and the equity market. But the indications are that inflation and interest rates may be close to their peak levels and that there might be some respite in the second half, it said in a report published this week.

With the Reserve Bank of India (RBI) hiking rates ten times in 16 months and demand-supply pushing up broader interest rates by 200 basis points, the demand momentum in the economy has slowed down, Angel Broking said. Further, external negative factors like the Greek crisis could contribute to near-term uncertainty and volatility.

The uncertainty in advanced economies, rising interest rates and wage inflation impacting corporate earnings are responsible for the muted FII inflows of Rs5,171 crore in the April-June quarter, which consequently affected the performance of the equity market.

KR Choksey Institutional Research says that as companies report their first quarter results this month, the factors to watch will be increasing commodity prices that would lead to a squeeze on margins, the hike in interest rates that is dampening demand, and a slowdown in momentum in select sectors like automobiles.

Besides automobiles, the other sector that has been particularly adversely affected by high interest rates is real estate (and infrastructure), says Pinc Research. However, while automobile sales are going through rough weather, two-wheelers have not been affected much due to low dependence on finance and lower operational cost.

This is reflected in the record quarterly volumes by Hero Honda, Bajaj Auto and TVS Motor. Maruti Suzuki, however, suffered due to a labour strike at its Manesar facility which hurt volumes, after nine successive quarters of double-digit growth.

While credit off-take has slowed down, the banking, financial services and insurance sector continues to show strong performance, highlighting the under-penetration of financial services in India that will drive credit growth in the years ahead. The slowdown in economic activity would also likely moderate direct and indirect tax collections.

KR Choksey said inflation has remained at an elevated level due to high non-food manufacturing inflation and fuel prices. Concerns over possible deficit rainfall in major parts of the country, expressed by the Indian Meteorological Department, would increase the pressure on food prices and will be the key upside risk to inflation going forward.

In the export-oriented IT services sector, Standard Chartered Equity Research says, the focus is on pricing gains. The annual wage revision cycle and rupee appreciation will apply a squeeze on margins for all companies in the sector.

Telecom companies are expected to report a decline in profits, despite substantial top-line growth. Top line growth is estimated at a healthy 29.1% year-on-year, partially because of the inclusion of Zain's numbers in Bharti Airtel's account. But profits are expected to decline by 2.5% year-on-year due to increased competition and higher interest and other costs on account of the 3G network rollout.

Finally, the oil burden is closer to the peak of historical averages and other commodities are also expected to soften on moderating global demand. The government recently decided to hike prices of several regulated fuels due to rising under-recoveries of oil marketing companies.

The recent decline in crude prices is expected to contain inflationary pressures within comfortable levels, going forward. The US Fed has said it expects pressures from global commodity and energy prices to dissipate as it modulates its accommodative monetary policy.

Angel Broking suggests that cooling of inflation and interest rates from the second half of the year could improve credit growth and asset quality outlook for the banking sector. It believes that the RBI's tightening measures to contain demand-side inflationary pressures are bearing fruit.

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