Profit growth high in the holdings
The Indian economy grew by 6.3% in the last quarter, a bit better than the preceding quarter, when activity weakened due to the national VAT system introduced in July.
In other good news, Moody’s upgraded India’s credit rating by one notch. This opens the door to lower bond rates and lower funding costs for the banking system. After the report season, the Indian stock exchange is in something of a vacuum. Corporate profits for the quarter rose by an underwhelming 6% overall. Expectations for the full year 2017 are that profits will rise by 12%. Considering that the market is valued at 18.5 times annual profits, this feels a bit anaemic.
Profits are weak this year for several reasons. Corporate investments are lagging, partly because firms have free capacity and no need to invest, partly because debt in the business sector is already high. The state-owned banks cannot increase lending until earlier credit losses have been written off. Household consumption in rural India has been negatively affected by low global grain prices. The government has big plans for infrastructure investment, but implementation is going slowly. Trends are also weak for the export industries of IT, service and pharmaceuticals.
We are seeing growth in the selective industrial companies, urban household consumption, the private banks and certain commodities companies. Consequently, the fund’s exposure is mainly to banks, capital goods like cars and motorcycles, and companies that are suppliers to global carmakers. Cement, air conditioning and tyres are other areas that are doing well.
Carnegie Indienfond’s holdings thus have considerably higher profit growth than the market as a whole. Profits are growing by 15–20% for most companies in the portfolio. The next potentially good news will come in mid-December, when we will find out whether BJP and Narendra Modi will stay in power in the state of Gujarat, which will control developments in the short term.