Economy
India: Current account improves on sharp fall in gold imports

With growth bottoming out and a mild recovery likely in FY15, Nomura expects a slow rise in imports for India next year with the CAD estimated at 3.2% of GDP

The Reserve Bank of India released the quarterly balance of payment data that showed a sharp fall in the current account deficit (CAD) to 1.2% of GDP in third quarter (Q3) from 4.9% in Q2, mainly due to better exports and lower gold imports, but the capital account also moved into a deficit due to outflows in portfolio debt, short-term trade credit and other capital.
 

 

According to the data, Nomura said, the worst in terms of the quarterly balance of payment data should be behind us. "A seasonal pick-up in imports will likely widen the CAD again in Q4 (October-December), but with the Q3 numbers in line with our expectations, we maintain our FY14 (year ending March 2014) CAD estimate at $45.5 billion or 2.5% of GDP. Going forward, with growth bottoming out and a mild recovery likely in FY15, we expect a slow rise in imports next year with the current account deficit estimated at 3.2% of GDP in FY15," a research report from Nomura said.

 

India's CAD narrowed sharply to $5.1 billion or 1.2% of GDP in Q3 2013 from $21.8 billion or 4.9% of GDP in Q2 2013. The improvement in Q3 was mainly due to a sharp contraction in the merchandise trade deficit as exports accelerated (11.9% y-o-y in Q3 from -1.5% in Q2) while imports contracted (-4.8% y-o-y from +4.7%). The sharp improvement in exports is mainly led by the textiles, leather and chemical sectors, while the import slowdown reflects the clampdown on gold imports $3.9 billion in Q3 versus $16.4 billion in Q2 as well as weak domestic demand. The invisibles balance moderated to $28.1 billion in Q3 from $28.7 billion in Q2, as better financial services exports offset a flattish trend in remittances and higher investment income outflows on equity and investment fund shares, the research note says.

 


Nomura said, even as the CAD corrected sharply, the net capital account of India swung into a deficit of $5.4 billion in Q3 2013 compared with a surplus of $20.5 billion in Q2. It said, "Foreign direct investment (FDI) inflows – a stable component – remained strong, but portfolio outflows (largely debt), outflows on short-term trade credit (reflecting lower imports) as well as outflows on other capital led to net capital outflows. Overall, the balance of payments (BoP) recorded a deficit of $10.4 billion in Q3 compared with a marginal deficit of $346 million in Q2."

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Hero MotoCorp in JV with Italy-based Magneti Marelli for powertrains

Hero MotoCorp and Magneti Marelli would invest $8.5 million in three years in their JV HMC-MM Auto to produce new gen powertrains in India

Hero MotoCorp, the country's largest bike maker on Tuesday said it has partnered with Milan (Italy) based Magneti Marelli for the manufacturing new generation powertrains through a joint venture in India.

 

Both companies will be investing $8.5 million in the joint venture — HMC-MM Auto Ltd — over the next three years and around $27 million over the next 10 years, Hero MotoCorp said in a regulator filing.

 

Pawan Munjal, managing director and chief executive of Hero MotoCorp told reporters, “We have decided to form a joint venture with Magneti Marelli for next generation fuel injection systems...a total equity injection of $8.5 million in the ratio of 60:40 will be injected in the joint venture over a period of three years”.

 

He added that the joint venture company would start manufacturing by the end of 2014 and is targeting $200-million turnover in the next ten years.

 

Hero MotoCorp will hold 60% in the joint venture, while the Italian firm will hold the rest. The joint venture would also be open to supplying components to other manufacturers as well, Munjal said.

 

Hero MotoCorp has already forged alliances with the US-based Erik Buell Racing and Austria’s AVL to enhance its R&D capabilities.

 

HeroMoto closed Tuesday marginally down at Rs2048 on the BSE, while the 30-share Sensex also ended the day marginally lower at 20,854.9.

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Modest improvement in margins for T&D equipment makers, says Nomura

No sales growth and continued overcapacity in T & D makers in 2QFY14, says Nomura in its research note

An analysis of the domestic power business of Crompton Greaves, ABB India and other small listed transformer makers suggests that 2QFY14 witnessed a modest margin uptick, says Nomura in its research note on T & D (transmission and distribution) makers in the electrical equipment sector. The margin uptick in most companies is largely driven by cost-efficiency programs and other restructuring efforts rather than actual pricing improvement or economies of scale. For example, ABB India had run into several loss-making projects in its power business, from which it is now coming out from and hence the margin recovery. Among smaller transformer companies, a margin uptick is witnessed only in the case of TRIL, which is primarily led by strong sales growth. However, on a collective basis, 1HFY14 margins for smaller transformer companies are still weaker y-y (year-on-year).

 

Nomura hastens to point out that the margin uptick in the sector is backed by hardly any revenue growth, which is critical for any sector to sustain a reasonably long period of healthy margins.

 

The other trend that Nomura points out is that capacity continues to rise for the system as a whole –Chinese companies TBEA and Baoding have already set up manufacturing presence in the country, Toshiba has now entered through its stake purchase in Vijay Electricals, while other existing players, too, keep adding new capacity – the latest being Crompton Greaves, which plans to double capacity over the next two-three years. As such, Nomura does not expect the domestic transformer market pricing scenario to turn favourable any time soon.

 

For investors, there is some hope as Nomura’s research note says, “Decades of under-investment, followed by a march towards building sufficient power for the nation, have created significant opportunities, although structural constraints and rising competition suggest the need to be selective.” Overall, Crompton Greaves is Nomura’s favourite share in the market other than ABB India.

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