The India Cost of Capital Survey 2021 aims to understand the cost of capital that companies use for capital allocation and strategic decision making.
This study is based on the views of 197 respondents, comprised primarily of finance professionals from a mix of Indian and multinational as well as listed and unlisted companies, collected between December 2020 and February 2021.
Research at NSE
For countries experiencing rapid growth, development of a healthy financial sector is critical. As the economy grows, and complexity increases, the financial sector needs to become more efficient at managing resources. In parallel, the eco-system surrounding the growth of the financial markets too need to grow and there needs to be the development of supplementary sources of investment capital.
A critical element of a well-developed financial sector is the contribution of its key components and human resources to the reforms and policy that underpin the development of the industry, by provide quality intermediation and insights to market participants. Growth cannot be lopsided and benefit a section of a society by keep the other at bay. Hence, understanding of the role of the financial sector has increased markedly, but research and insights continue to mount.
At NSE, we have identified 3 focus areas of research to aid the development of an efficient micro-system to continue on the path of growth and financial inclusion, we set as a roadmap of this journey we started in 1994.
Financial Research Initiative
The Effect of Conflict on Lending: Evidence from Indian Border Areas
Author: Mrinal Mishra and Prof. Steven Ongena, University of Zurich
Corporate Governance Initiatives
Quarterly Briefing on: Shares with Differential Voting Rights
Chief Contributor: Bala N Balasubramanian
Latest Macro Review
Q4FY22 Balance of Payments
India’s current account deficit (CAD) narrowed to US$13.4bn or 1.5% of GDP in Q4FY22 vs. US$22.2bn or 2.6% of GDP in the previous quarter but was higher than US$8.2bn (1% of GDP) reported in the year ago period. The sequential moderation in CAD was due to lower trade deficit, thanks to a stronger growth in export bill vis-à-vis imports, as well as strong invisibles. The capital account balance, however, slipped into deficit for the first time in 34 quarters, thanks to record-high net foreign portfolio outflows and strong banking capital outflows during the quarter. Consequently, the Balance of Payments (BoP) recording a deficit of US$16bn in Q4FY22—the first deficit quarterly deficit in 13 quarters and the highest in 13 years.
Looking at annual figures, India’s current account balance slipped into deficit again in FY22 after registering a surplus in the previous year and came in at US$38.8bn or 1.2% of GDP. This was led by a sharp expansion in trade deficit, attributed to higher commodity prices as well as improved demand environment in the wake of reversal of COVID-induced restrictions. Strong external loans, banking capital inflows and SDR allocation from the IMF more than compensated for record-high net foreign portfolio outflows and moderation in foreign direct investment (FDI) in FY22, translating into a BoP surplus of US$47.5bn.
Deteriorating global growth prospects is likely to weigh on export growth momentum in FY23. Imports, however, are likely to remain strong, aided by surging commodity prices. In our base case scenario, we expect current account deficit to widen to 3.1% of GDP in FY23—the highest in last 11 years—assuming average crude oil price at US$107/bbl. This, along with continued foreign capital outflows—a consequence of heightened macro and geopolitical uncertainty and tighter monetary policy setting across the globe—is expected to translate into a record BoP deficit in FY23. This is likely to continue to pose a depreciating bias on the INR, even as alignment of RBI with the US Fed in terms of rate hikes should provide some breather. Additionally, despite a drop over the last few months, India’s foreign exchange reserves (US$596bn as on June 10th, 2022) remain relatively strong and should provide enough cushion to the RBI to intervene in the forex markets as and when required.
Latest Market Report
Q1FY23 Corporate Earnings Review: Revenues holding up, input costs hit profitability
The first quarter of the current fiscal (Q1FY23) saw aggregate top-lines improving, reflecting improved discretionary consumption and recovery in investment demand. Overall net sales for Nifty 50/Nifty 500 companies grew by 31.7%/35.5% YoY—a four-quarter high—even as sequential momentum abated, thanks to weakening external demand and recent fall in commodity prices. Profit of non-financial Nifty 50/Nifty 500 companies at the operating level (EBITDA) grew by a much lower 11.4%/10.4% YoY, reflecting incomplete pass-through of higher input costs. In turn, this led to operating margins contracting by nearly 450bps on a YoY basis. Aggregate adjusted PAT growth at 15.4%/19% YoY in Q1FY23 for the Nifty 50/Nifty 500 companies was the lowest in eight quarters, and led by Financials thanks to improved asset quality, less provisioning and higher lending rates, partly offset by mark-to-market losses due to rising yields. Excluding Financials, net adjusted PAT grew by a much lower 8.5%/8.3% YoY for Nifty 50/Nifty 500 companies.
Export-oriented (IT, Pharma) and commodity companies have been feeling the heat of a slowing global economy, while domestic sectors have benefited from recovering consumption and investment demand. This is also reflected in downward earnings revisions this year that have been dominant in these sectors. Consensus earnings estimates (from Refinitiv) for FY23/24 for the top 200 covered companies by market cap have seen a cut of 6.8%/4.7% since March-end (As on August 22nd, 2022), following a spree of upgrades during the whole of last fiscal year. This translates into an expected aggregate profit growth of 11.5%/18.1% in FY23/FY24 (vs. +41% in FY22), implying a CAGR of ~15% during FY22-24. Excluding Materials, where downgrades have been the steepest, expected profit CAGR for the top 200 companies during FY22-24 is pegged at a strong 20.6%. Downgrades in earnings estimates is also reflected in the Earnings Revision Indicator (ERI) trend for the Nifty 50 universe, which has remained in the negative territory since early this year, implying downgrades outnumbering upgrades.
Earnings trajectory over the next two years hinges on persistence of consumption and investment demand, as evident from a visible increase in share of Financials, Consumer Discretionary and Industrials to aggregate expected corporate earnings during this period. On the positive side, falling commodity prices should ease input cost pressures and provide fillip to earnings.