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Decline in domestic savings would spell trouble for an investment-starved economy like India with its worsening current account deficit
Nomura Research estimates that domestic savings rate is likely to fall to a decade low of 27% of Gross Domestic Product (GDP) for FY13. The savings rate was 30.8% at the end of March 2012. A reduction in domestic savings would directly mean a decline in savings available for investment, which could put further pressure on the economy. As per report from Nomura Research, “lower financial savings are a negative for an investment-starved economy like India as they reduce the amount of investible funds available to finance domestic investment, thereby increasing the dependence on foreign capital.”
Nomura Research points out that India’s current account deficit continues to worsen widening to 4.2% of GDP in FY12, despite a deceleration in GDP and a fall in investment. According to revised national accounts data, a sharp slump in gross domestic savings to 30.8% of GDP in FY12 (from 34% in FY11) was responsible. The current account deficit will likely deteriorate to around 5% of GDP in FY13, Nomura Research estimates.
However, unlike FY12, gold is not responsible for the higher CAD. Excluding oil and gold, India’s trade deficit worsened sharply to $33.2 billion in 2012 (Apr-Oct) from $22.8 billion last year. The slowdown in advanced economies lowered the demand for India’s major manufactured exports which are demand sensitive and mainly consist of non-differentiable low-end metal products and other items like handicrafts, leather, gems and jewellery. In order to meet ever-growing domestic demand, exports of refined petroleum products have slowed sharply, the research report mentioned.
According to Nomura Research, “India’s investment requirements are large, but they can be financed without increasing the current account deficit if the domestic savings rate reverses its falling trend. This requires continuing down the path of fiscal consolidation and stepping up efforts to tame inflation, which will boost corporate and household financial savings.”
Household savings contribute up to 80% of India’s gross domestic savings and it has been the highest component for over six decades. Household savings include financial assets and physical assets. Last year as per RBI (Reserve Bank of India) data, household financial savings as a percentage of GDP in India fell by 150 basis points to 7.8% in FY12. This is the lowest since 1989-90, after a period of 22 years. RBI cited high inflation as a reason for decline. In FY11 household financial savings was 9.3% of GDP. Last year the high-powered working group led by RBI deputy governor Subir Gokarn seemed rather optimistic in projecting that country's savings rate may rise to around 38-39% of GDP by 2017, with household savings rate seen rising gradually over the Twelfth Five Year Plan period (2012-17). However, household financial savings has been showing a declining trend over the past few years, averaging 11.2% from FY04 to FY08.
Households seem to be quite risk averse, and prefer to invest in assets that are safe, familiar and offer security of capital. Over a 20-year period when Indian capital markets have grown tremendously on many parameters, very few households have ventured too far beyond their bank, insurance agent, mandatory retirement funds and small savings. The poor returns earned by savers after adjusting for inflation may also have put them off traditional financial products.
Redington India has posted positive growth on strong iPhone and Samsung sales but its results are short of overall consensus estimates
Redington India announced a net income of Rs81.9 crore for the December quarter which was in line with Nomura’s estimate of Rs80.2 crore but short of market consensus estimates of Rs83 crore. The drivers of increased income were sales from iPhones and increased contribution from non-IT business. Even Samsung gadgets performed well, too.
According to Nomura, EBITDA after other income (a preferred metric as other income includes discount that company receives from vendors) was 4% above their expectation of Rs168.2 crore, while margins were at 2.86%, or 14 basis points higher than estimates. The report said, “Sales in US dollar terms grew at roughly 1.8% year-on-year as Samsung sales picked up substantially. This, we expect, is on account of improved profitability in Arena (Turkey) and incremental contribution from Samsung.”
Nomura thinks the company is a Buy on account of better performance from Turkey, one of its subsidiaries and improved sales of Samsung gadgets, as Nomura expects Samsung to perform better relative to Apple. It would seem apparent that Samsung is indeed tightening the screws on Apple, which could make Redington perform well as it is engaged in distribution of both the brands.
Apart from this, the macro-economic variable favours the Indian demographic. According to Nomura, the next 10 years will be crucial as the Indian middle-class will rise to occasion and double in numbers, which will fuel demand for consumer electronics and gadgets. As per Nomura, one of the big benefits of Redington is its end-to-end supply chain connectivity and good history of inventory and risk management. Nomura, speaking of Redington’s valuation, said, “The current valuation at 7.7x FY14F EPS is a 34% discount to its discount to its six-year average of 11.7x and is an attractive entry point, in our view.”
Redington India, one of the largest supply chain companies in India has 41 subsidiaries, all spread out at home as well as abroad in South Asia, Middle East, Turkey and Africa, and operate mainly in distribution business, supply chain business, after-sales services of IT and other products and financial services.
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