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Nomura expects September quarter to be the weakest one since 2008

In its latest “India Equity Strategy” report, Nomura remains very cautious going forward and has painted a bleak preview of the upcoming quarter. Media and consumer discretionary are likely to do well

Stocks are driven by earnings and sentiment. The more important of the two indicators is the former. Hence there’s a lot of anticipation on how earnings will be, especially in the just-concluded September quarter. In its latest note, Nomura Equity Research has painted a bleak picture of the just-concluded September quarter citing that it is the weakest quarter since the sub-prime crisis began. Nomura said, “In inflation-adjusted real terms, sales are expected to grow in mid-single digits, while real operating profit growth is expected to stay in negative territory for the fourth consecutive quarter.” In other words, the worst isn’t over and expect it to be a bumpy ride for the foreseeable future.

While the subdued earnings were already discounted by the stock market earlier, what was more surprising was the fact that the market has absorbed much of the positive news announced by the government vis-a-vis reform measures. It seems that, in this case, the government has largely tried the sentiment trick—by announcing various policy reforms, including FDI in aviation and retail. The market reacted immediately, by going up. The report said, “The around 8% market rally since 13 September 2012 and India’s outperformance relative to peers makes us believe that this optimism has been subsumed in recent market action.” The onus is now on earnings to deliver. Will they?

Check the charts below: The growth has been trending downwards. This hardly is any cause for optimism unless the government does something extraordinary or companies perform superbly. There are bound to be a few surprises though, which happens every earning seasons. But as far as overall economy is concerned, don’t get your hopes up. The sentiment, is by and large, negative, and policy measures are unlikely to affect this quarter earnings.


Given that the economy has been subdued as is demand, much of the earnings expectations will now rest on external factors vis-a-vis rupee-dollar movement, global factors as well as government ensuring that the reforms go through the parliament, especially FDI in retail which has been the flashpoint of late. With a weakening global economy and recent Fed QE3 (quantitative easing), the dollar has taken a hit already. In other words, the rupee has strengthened against the dollar, and this is bad news for exporters, especially the information technology (IT) sector. However, on the flip side, QE3 meant more foreign capital suddenly making investments in India vis-a-vis FII which boosted markets, only temporally.

Nomura opines that the market has not reacted negatively enough in the face of possible earnings disappointment even though the market is current quoting at a discount. It said, “At current levels, the market is trading at 13.6x 12-month consensus-based forward earnings, which translates into a 10% discount to the latest five-year average, and 6% discount to the latest three-year average. While at these levels, valuations do not appear to be sufficiently discounting the much-diminished expected growth scenario over the next 12 months, we would argue that incremental evidence of sustained reform momentum could well offset existing growth concerns, which have lingered for most of this year now.” As per Bloomberg estimates, Sensex earnings was downgraded by 4% from April 2012.

Further more, it said, “We remain cautious going into the earnings season, which we think could well drive further the wedge between recent market moves and the reality of continuing growth pressures. We note that the market still lacks meaningful support from earnings upgrades with net analyst earnings revisions remaining in negative territory year-to-date”.

The rest of the report delves into which industry and stock are likely to do well and which are expected to face challenges. While sales of its universe of 120 stocks are expected to be flat, overall profits and margins are expected to decline on a year-to-year basis. It remained largely cautious on most sectors but positive on media (in view of recent digitization) and consumer discretionary (lower inflation translating to more purchases). It expects bank shares to correct given they’ve risen sharply in the past few days.

Tomorrow: Earnings outlook of specific sectors


FDI in Retail - II: Consumers Will Win; Kirana Stores Will Lose

In the second part of the series, the author writes about supermarkets and our very own kirana stores, and their relevance in wake of opening up of the retail sector

At the bottom of the pyramid is the consumer who buys his provisions on a day-to-day basis, often limited to Rs5 to Rs10 worth at a time. For this, the kirana shop is the only provider. The consumer virtually no choice and has to be content with what the kirana shop gives him. Of course, there are personal comforts as the shop owner keeps talking to you, knows you and often gives you credit and will have stuff delivered to your home. However, you will not get to see the produce except as is laid out in the sacks and there would be very minimal choices. The kirana shop days are clearly numbered. Few of them will upgrade themselves in to supermarkets and thrive but many of them will surely shut down.

I have been in Chennai for slightly more than a decade. Even at that time, Chennai had its supermarkets—Niligiris and Spencers—for many decades. By the early nineties, many kirana shops had converted or scaled up to supermarkets. Today, these shops, with less space, command high level of footfalls and customer loyalty and offer better choices than the big-name counterparts. Most of these shops are family businesses which keep interacting with the customers and change the stocking profile as per their needs. Chennai is full of shops like these. We do the monthly provisions and groceries purchases from shops like these.

Another segment is the discerning customer who will buy a specific product from a specific location only. For instance, in Matunga, a wealthy suburb of Mumbai, Gujarati households will buy most of their stuff from a store called “Chheda Stores”, which offers premium quality at premium price—a niche that is unlikely to be disturbed.

Once the consumer reaches a level where purchases can be done in one or two rounds a month, he/she would shop in an air-conditioned comfort of a supermarket and look at different labels, and get things done under one roof. This is the aspiration for the consumer who is at the bottom of the pyramid. Everyone has a right to a better experience and this is where the future of retail lies.

Coming to the supermarket chains, there are major issues. Getting space at reasonable rents in most metro cities is ruled out, except maybe the outskirts. Even small format stores in prime locations are unable to make money. To give an example, Wal-Mart is focused on having its presence in smaller towns. It is yet to venture into New York given the rentals there. The present chains have started off in the metros and going in to tier-II cities. A few of them already have foreign tie ups and signal intent to get in to formal partnership once government policies are in place. So, let us not expect any radical changes when foreign brand names appear on the store shingle.

One thing that will become the bone of contention is that retail FDI will also hinge on what is sold through the store. The range of products sold through chains like Wal-Mart, Carrefour, etc is mind boggling and includes virtually everything that a home would need, not just be horticulture produce, textiles or home needs—everything. Whilst the domestic customer will be happy, what will happen is that most of the produce would be imported. For example, if you have been to Andheri, another suburb of Mumbai, there is a shop called ‘Alfa’ that stocks one of the biggest ranges of imported consumer products, from the latest in electronics, soaps, perfumes, toys or furniture!  The new retail chains that come in will have all of this and more. Naturally, this will drive the domestic suppliers out of business.

However, it is not that retail FDI will take off in a hurry. The biggest challenge is talent. You have to just go to any retail chain and see the problem. Talking to one of the supermarket chain managers, the feedback I got was about the staff issues relating to competence and integrity. India does not have a set of people who are willing to put in long hours in a store and wear the smile. There is apparently very little effort from the staff to learn the ropes and labour turnover is high.

And, to get the retail chain running, we need infrastructure and power. We need large properties at low rents, with huge parking lots and easy access. We need governments that do not tax movement of goods from one state to another. Without all this, FDI in retail is a non-starter. FDI in retail is like finding a brick; by itself it has no meaning and just a part of an edifice. To put the brick in place, you need everything else.

Retail chains are a financially unviable project so far in India, given that everyone seems to be losing money. Rentals are too high and nothing has been done to improve the supply chain. Going by what is happening so far, we have not even touched the surface. Who will gain?

At the end of the day, the consumer is going to gain. Lower prices? Maybe not. But surely better choice, transparency and fairness. Will the farmer benefit? He will find it very difficult to escape the middleman. Like middlemen in every profession, they will find ways to survive, especially given the reluctance of the white-collar retail chain guys to roll down their sleeves and get cracking. What about the kirana wala? Don’t worry, he will thrive one way or the other. In any case, he does you no good in terms of either quality or price. He is one whose days are numbered and has to upgrade to get better. He has ducked all taxes and cheated most consumers; no need to shed tears for him. Some professions become extinct over time.

To sum up, FDI in retail is merely a talking point for politicians. It makes no difference if it is closed or open. In any case, organised retail is spreading out big. Maybe FDI glamour will spread it out much quicker. It is best to recognise that change is upon us. Those state governments and the so called leftists, who oppose this for the sake of it, do not know what they are shouting at. They are like the dogs that bark, simply because it knows nothing else.

(The author can be reached at [email protected].)



Chandragupta Acharya

4 years ago

No one, not even one commentator or analyst has been able to explain why Indian retailers like Reliance, Tata or Birlas could not do what we are now expecting the foreign retailers to do. Do they lack management skills at backend processing or money to set up cold storage chains? No. Then, why are we expecting the foreigners to perform miracles. Could you please give your views on this?

Narain Jagirdar

4 years ago

A very optimistic picture is painted in the two articles and one hopes it does turn true, for consumers, for farmers, for government and for the overseas investors. In food retailing, the Walmarts have the entire world to source their goods from, and do. That one thing may upset all that is hoped for and by the farmers - better prices, cold chains, etc. Ultimately, please remember that pure capitalism is a search for profits led by pure greed. See the US!

nagesh kini

4 years ago

The mom-n-pop-next door kirana and vani (in Mumbai) are here to stay because of the many inherent advantages the neighbourhood derives - easy accessibility, delivery of smaller quantities on phone call, extended credit lines. We have had Niligiris, Spencers in the South, there is Baligas in Mangalore, many chains like Shoppers Stop, Trent in Mumbai.
People like Didi don't like the "F" - foreign in the Direct Investment in Retail!
Big Hospitals haven't displaced the General Practitioners, nor the MNC Audit firms the smaller CA firms. Both have niches of their own. They can co-exist.

Vaidya Dattatraya Vasudeo

4 years ago

Going by what has happened in US, once the retails have gone, it will be the turn of consumers to lose, helplessly.

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