Why rate-sensitive stocks aren't attractive yet?

There is disagreement on whether RBI’s latest rate cut can revive demand

A rate-cut by the RBI has widely been considered as a panacea for all things wrong with the Indian economy. So much so that after the recent 50 basis points-cut, a section of the business media referred to Raghuram Rajan as ‘Santa Claus’. Despite this largesse, not all analysts think that this monetary policy action is enough to turn bullish on rate-sensitive stocks. Auto and realty are facing headwinds due to weak demand. For the first five months of FY16, India’s auto sales posted an anaemic growth of 1.8% y-o-y. The impact of poor monsoon on farm income doesn’t give much reason to expect any improvement in the rest of FY16 either. In real estate, the exorbitant residential segment continues to be the Achilles’ heel. Sales have stalled with unsold inventory at an all-time high.   

With both auto and real estate sector requiring moderate to high financial commitment from households, analysts feel instead of pinning hopes on small EMI cuts, the government could provide larger doses of relief through excise duty cuts to boost demand. “The government can cut excise duty for the auto sector. Whether the EMI is ₹970 or ₹950, it matters little for the buyer, but if the prices drop by ₹50,000 or ₹100,000, then he is more likely to make the purchase,” says Daljeet Kohli, research head, IndiaNivesh.  He adds that government action can expedite revival of the capex cycle. “For new projects, machinery is required. Government can cut the duty on imports of machinery. This would make corporates take faster decisions rather than wait for a cut in interest rates.”

That would be ideal but data from Ace Equity shows that interest expense for BSE-listed companies has in fact marginally reduced in FY15, but the capex cycle remains elusive as ever. In FY15, those companies spent ₹470,000 crore on capital expenditure, 11.5% less than the previous year. Analysts at India Ratings believe that it may take 24 to 36 months to revive the cycle even if an 8% growth in demand volume is considered. Their report says that heavy spending usually starts when capacity utilisation reaches the 90% level. As far as existing projects are concerned, the rate cut is expected to ease the debt burden in stressed sectors such as realty and infrastructure. However, Sonam Udasi, head of research, Tata AMC wonders whether banks would be willing to pass on the benefit of rate-cuts to companies where stress levels are already high. “Even if the rate environment turns benign, would banks want to take that risk at a lower price? That’s the bigger question,” he says.

The clamour for passing on the rate cut to borrowers has pushed the banking industry to a cross-road. The sector has been beset by problems arising from deteriorating asset quality and falling profitability. A cut in the base rate will further hit their profitability and squeeze their net-interest margin (NIM). Banks comprising the Bank Nifty reported an average NIM of 2.9% in FY15, as against 3.3% in FY14. Unsurprisingly, banks have become risk-averse. So far this year, RBI has cut repo rate by 125 basis points, but banks have been slow to transfer this benefit. In fact, the excess liquidity in the banking system is getting parked in G-Secs. In FY15, banks’ investments in government and state government bonds stood at ₹1,400,000 crore, up 16% from previous year.

Samir Arora, founder, Helios Capital, sees nothing wrong in banks trying to protect their profitability. “There should be no onus on anyone to make sure that the rate cut is passed through. We can either have a free economy or a controlled economy, you cannot pick and choose. In any case, if banks make some additional profit for some time it may help alleviate other problems,” he says. While monetary policy is stirring up contrasting sentiment among banks, government, RBI and India Inc, the rate cut is just an enabler. The real pick-up can only be triggered by government action. “Monetary policy is just one part. You would need lot of administrative and legislative reforms. Hence, a lot of hope is pinned on the winter session for the passage of the GST bill,” points out Ajay Bodke, CEO, Prabhudas Lilladher.