Money & Banking
Lending at subsidised rate: Inconsistency in public policy approach, says Nomura

The government is prodding public sector banks to lend at a subsidised rate at a time when the RBI has just hiked the repo rate - a signal to banks to hike their lending rate

The government is prodding public sector banks to lend at a subsidised rate. The government's objective is to stimulate consumer durable demand ahead of the festival season. Consumer demand, particularly in the discretionary segment, has been flagging for many months now. Income growth remains muted and the rise in lending rates over the last quarter has further hurt demand. In fact, the RBI had recently banned banks from offering 0% EMI schemes on purchase of consumer goods, which many feared would hit demand during the festive period (October-November 2013).

 

But how sensible is this policy at a time when the RBI has just hiked the repo rate - a signal to banks to hike their lending rate. According to a First Insights research note from Nomura Financial Advisory this is not a sustainable strategy to kickstart consumption. This is because the job market and income growth - the key drivers of consumption - remain lacklustre. This suggests an inconsistency in public policy approach, criticises Nomura.

 

The government has decided to increase the amount of capital to be infused into public sector banks over and above the budgeted amount of Rs140 billion for FY14 (year ending March 2014). The additional amount is being provided to enable banks to lend to borrowers in selected sectors such as two wheelers, consumer durables, etc, at lower rates in order to stimulate demand.

 

Nomura points out that fiscal finances are under pressure and the government will have to further cut spending in order to meet its budgeted fiscal deficit target (of 4.8% of GDP). As both fiscal and monetary policies are tightening during a slowing economy (pro-cyclical), Nomura expects domestic demand, including consumer demand, to remain weak.

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A faltering US economy recovery could affect Indian IT sector adversely, says Nomura

In the IT sector in India, Nomura prefers companies that provide revenue upside possibility with margin comfort and are available at reasonable valuations in the stock market

While the IT sector companies in India are performing well, a faltering US economy recovery could affect the sector adversely, according to Nomura Financial Advisory and Securities (India) Private Limited in its research note on prospects in the IT sector. The sector is also likely to lower its performance if the rupee appreciates materially against the US dollar from the current scenario.

 

Nomura’s assessment is that India’s tier-1 IT stocks have outperformed the Nifty by 35-80% YTD (year-to-date) driven by about 15% rupee depreciation, favourable market set-up for the export-led IT sector in a worsening domestic scenario and an improving US macro situation.

 

While hand-picking IT companies for the IT sector, Nomura prefers companies that provide revenue upside possibility with margin comfort and are available at reasonable valuations.

 

Nomura’s recommendations on individual stocks in the IT sector are given in the table below:

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Margins to improve by 50 basis points in consumer sector, expects Nomura

Growing household incomes, low penetration across several categories and expanding distribution network combine to make consumer one of the most attractive growth sectors in the medium term, says Nomura Equity Research in its research note

It is expected that margins will improve marginally year-on-year across the HPC (home and personal care) sub-sector of the consumer sector. For the sector, operating margins are likely to improve by 50 basis points, according to a research note from Nomura Financial Advisory and Securities (India) Private Limited.  However, going into H2FY14F, it expects margins to come under pressure as rupee depreciation starts to hit companies with some lag. Overall, it expects some toning down of consensus margin expectations across the sector for FY14F.

 

Nomura expects price hikes will be likely to start to reflect in revenue growth, which should provide some comfort, particularly given recent rupee depreciation.

 

Growing household incomes, low penetration across several categories and expanding distribution network combine to make consumer one of the most attractive growth sectors in the medium term, says Nomura in its advice to investors in the consumer sector.

 

The comparative valuation for key players in the consumer sector is given in the table below:

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