RBI cautions against higher current account deficit

Mumbai: The Reserve Bank of India (RBI) today said the country's widening current account deficit due to a larger import-export gap is a cause for concern and it is difficult to sustain, reports PTI.

"If the current trend persists, current account deficit (CAD) as a percentage of the gross domestic product (GDP) will be significantly higher than in the previous year," RBI governor D Subbarao said in the second quarterly monetary policy of the central bank.

Current account deficit is the gap between the amount the country pays to the external world against what it receives from abroad, barring capital movement. It was around 3.6% of GDP in the first quarter of 2010-11.

Mr Subbarao said it is generally perceived that a CAD above 3% of GDP is "difficult to sustain over the medium-term".

The trade deficit arising out of higher imports than exports during April-September of the current fiscal was $62.83 billion against about $48 billion in the same period last year.

Net invisibles as per the latest data up to first quarter of this fiscal available with of RBI were $20.5 billion against $21.2 billion in April-June 2009-10.

The net invisible receipts, which are surpluses of receipts over payments for invisibles like services trade, were about $79 billion in 2009-10, declining from about $90 billion in the previous year.

RBI said the continuing sluggishness of the global economy led to some moderation in exports growth and invisible receipts, while import growth accelerated due to the strong domestic recovery.

"The challenge, therefore, is to rein in the deficit over the medium-term and finance it in the short-term. The medium-term task has to receive policy focus from both the government and the Reserve Bank," Mr Subbarao said.

He said the short-term task is to see that the current account is fully financed while ensuring that capital flows are not far out of line with the economy's absorptive capacity and that the component of long-term and stable flows in the overall capital flows is high.
 

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Cement stocks surge with surprisingly high October dispatches

The average 15% y-o-y rise in October dispatches is a positive surprise. However, a lot of brokerages still maintain that there is more pain ahead for cement

  •  ACC reported a 14% rise in sales for October to 1.92 million tonnes (MT). During January-October, both ACC's sales and production were down 2% at 17.51MT and 17.55MT, respectively.
     
  • Ambuja Cement reported a 17% rise in production and 20% rise in dispatches for October at 1.75MT. For January-October 2010, its production was up 8% and dispatches by 9% to 16.9MT.
  • UltraTech's October production was up 18% at 3.5MT and sales were up 21% at 3.4MT while April-October production was up 6% at 22.1MT and sales were up 6.5% at 22MT.

Even after the strong October performance, brokerages continue to be bearish by and large. In a note to its clients, Macquarie Research said, "Cement stocks have done well on the back of a sharp rise in cement prices and have even absorbed the substantially below-estimate results, also in hopes of things bottoming out. We think that today's news of cement dispatch growth in excess of 15% for October is the last of the positive news for some time. We are already hearing of price declines and think this is a good opportunity to book profits."

The note points out that cement companies have been forced to cut prices in the North as demand has failed to take off after the Commonwealth Games. Eastern India and MP have also been struggling for the past two weeks to enforce the last price increases and are likely to see discounts being offered. It said that its channel checks in the south indicated that some companies are offering cement at a 10% discount to market prices. "It is only a matter of time before these artificially-raised prices collapse, in our view."

October dispatches could have been surprisingly high because of stockists and dealers hoarding inventory in light of potential price increases, believes Macquarie. It points out that year-to-date, the demand growth remains a paltry 5.5% against full-year expectation of 9%-10% and capacity utilisation has remained around 73%-74%.



Emkay says the October sales are higher because of pent-up demand since the rainy season disrupted construction work across the country and also a favourable base effect.

"Can the industry cut production and match the lower demand?" the Macquarie note asks and concludes that producer discipline has historically never lasted beyond three months - so, no. Emkay points out that close to 65MT of new capacity has been added over the past six quarters (Q1FY10-Q2FY11), i.e., an average addition of close to 11MT every quarter. More capacity is being commissioned. "We estimate close to 33MT of new capacity additions over the next six quarters, resulting in an average addition of 5.5MT per quarter," says a note to its clients.

Macquarie does not expect costs to come down even if cement prices were to sustain and therefore, it is more likely than not that margins would continue to decline. Cost increases were the key surprise in the September quarter cement results and the biggest disappointment.

Valuations, too, are expensive, opines Macquarie - at 15-19x price-to-earnings with no expected earnings growth for two years, stocks seem expensive. Emkay also says that valuations are expensive for Ambuja Cement and UltraTech.



Of course, not all brokerages are as negative. Religare believes that, "H2FY11 and FY12 are likely to have strong dispatch numbers given the low base, pick-up in construction activity, new launches in real estate, and rising rural incomes. This in conjunction with the recent price hikes is likely to support strong profitability for cement majors in the coming quarters. Although cement prices could decline going forward, they are likely to remain stronger compared to Q2FY11."

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).

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