Stock Market

D-Streetpet investment theme hits bumps: Rising debt falling savings

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NEW DELHI: One beautiful thing about India’s stock market is that even the layman on the road can give you a 10-minute lecture on the most dominant investment theme: consumption. It’s the demographic dividend, he would boast, and then go on to add rising incomes and superfast growth rate to do the math. Problem is, he does not know there is a caveat: India’s household savings are falling and debt rising. Some analysts on Dalal Street are already red-flagging what they call unreasonable volume growth expectations for consumer players, which may have led to frothy valuations.

A peek into the household balance sheet of the average Indian family tells the story. RBI’s recent consumer confidence survey (CCS) found around three-fourth of Indian households thought their income levels either decreased or remained same.

More than half of them believed their income would either remain the same or deteriorate in next one year. Income growth confidence, price projections and spending projections are key determinants of spending power of the average consumer. Most respondents in the RBI survey felt their spending would increase in next one year, especially for non-essential items.

And a large 77 per cent of those polled believed inflation will rise in the coming year. June quarters numbers of consumption-lined companies met Street expectations.

Consumption stocks, too, have performed well.

Shares of passenger vehicle major Maruti Suzuki have climbed 21 per cent in last one year.

MM, which makes tractors and utility vehicles, has risen 40.43 per cent.

The BSE FMCG index, meanwhile, has risen 26 per cent in last one year compared with a 21 per cent rise in the BSE Sensex.

Retail-linked NBFCs such as Bajaj Finserv (up 32 per cent), Shriram Transport (up 34 per cent) also have performed pretty well in last one year.

With exceptions like Symphony, stocks of most white goods companies such as Bajaj Electriacals, IFB Industries and Havells India have gained between 40 per cent and 80 per cent.

Two-wheeler stocks, though, have failed to pick up pace.

Hero MotoCorp is down 16 per cent in last one year; Bajaj Auto, Eicher Motors and TVS Motor are down up to 8 per cent. The real test for corporate earnings from a growth perspective will come from second quarter onwards, Suhas Harinarayananan of JM Financial told ETNow. "If you look at all the consumer companies, which actually outperformed in terms of volume growth, for a whole host of those companies, the two-year CAGR growth is actually not-so-impressive.

You had a good run rate for Q3FY18, Q4FY18 and Q1FY19, but these were quarters that had some form of disruption or the other.

Let us see how the numbers look from Q2 onwards.

Harinarayananan said. He said there is a sense of optimism because one of the key engines, which have driven this growth, has been better liquidity in rural India and that continues to be strong.

"But will companies achieve Q1 numbers of very high-double digits, high-teen numbers going ahead I would be a little cautious on that," he said.

Economic data tells a storyAt a broader level, consumption growth of Indian households is outpacing income growth.

This has come at the cost.

Household savings have fallen to the lowest level in more than two decades. Here household is a broader term that includes resident households, not-for-profit institutions and quasi-corporate houses.

As real income growth lagged consumption growth, total household debt has also climbed to an all-time high level.

Such a trend is not sustainable, Mumbai brokerage Motilal Oswal Securities said in a report. Consumption on a rise, but at a costIn five years till FY18, the growth in personal consumption expenditure (PCE) outpaced the growth in personal disposable income (PDI) in India. PDI is the income available with a household for spending and saving after accounting for income-tax, while PCE is the expenditure incurred on the final consumption of goods and services by the households.

Recent trend shows a drop in household savings to 21 per cent at $370 billion of PDI in FY17 from 29 per cent of PDI at $431 billion in FY12. Households didn’t have to rely initially on debt to support higher consumption growth, and thus, their debt (institutional and non-institutional) hovered around 42 per cent of PDI between FY09 and FY15, the Motilal Oswal study showed.

This was the initial phase of higher-than-income growth in consumption, when households had almost entirely depended on their savings.

This phase was reflected by a continuous drop in household savings since FY12, even as institutional debt of households broadly remained unchanged between FY09 and FY14. But over the past three years, a combination of higher debt and weak income growth has pushed this ratio to 48 per cent at $950 billion in FY18, the report said.

This (total debt) estimate takes into account the fact that households also borrow from non-institutional sources such as professional money lenders, relatives/friends, agricultural money lenders, and thus, data for non-institutional debt is added with institutional debt to arrive at the figure, the report said.

Unlike in FY18, in FY19 nominal income will grow faster, but that will mostly be offset by higher inflationary pressures.

Real income could grow only slightly faster in FY19 at around 6 per cent vis-à-vis 5.8 per cent in FY18.

This would mean household savings would fall further to 15.7 per cent of GDP in FY19, the lowest level in three decades since liberalisation.

Household debt will also continue to grow unabated supporting consumption growth, the brokerage said. "With investments and fiscal spending likely to grow slowly in FY19, we believe a pick-up in the consumption growth should be the key determinant of FY19 real GDP growth.

Although, household income is expected to grow faster this year, rising household debt, falling savings and limited rise in assets are likely to cap consumption growth," Motilal Oswal Securities said.

Flows to stock market at riskMeanwhile, should inflation rise as expected, domestic flows to the stock market may come under pressure.

India’s household savings-to-GDP ratio currently stands at a 20-year low. If inflation rises from here on owing to the fiscal pump-priming, then not only will the household savings ratio come under greater stress, but worryingly the proportion of financial savings to total savings would fall, limiting domestic flows into the Indian stock market, brokerage Ambit Capital projected in a report.




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