Look for opportunities, whining can wait

budget 2019
Look for opportunities, whining can wait

Most of the market participants appear disappointed by the maiden budget of the NDA-2 government. Reactions on social media are rather uncharitable. For example consider the following few representative examples:

We have been highlighting this since past few years that higher compliance cost and effective taxation rate (ETR) is inevitable in Indian context. For example, in our last post of January 2019 post titled “EODB means higher CODB” We had stated as follows:

“…in India the fall in corporate profitability is structural and not a temporary phenomenon. We need to admit that the policy of protectionism and localization may not work in India, if we really want to grow at 7-8% rate. Higher foreign capital (monetary, intellectual as well as technological) would be needed even to sustain the present rate of growth.

We also need to assimilate that the cost of doing business would increase in direct proportion to the ease of doing business. Global competition, higher cost of capital, better & stricter compliance standards, enhanced social responsibility standards, transparent and accountable administration will inevitably force a whole lot of businesses out of business.”

(EODB = Ease of doing business; CODB = Cost of doing business)

For the benefit of those who are finding the situation hopeless, We may reiterate what We wrote in January.

1.    The businesses in India shall continue to face multiple disruptions (compliance rules, taxation, technology, changing consumption patterns and global competitive landscape, etc.) resulting in lower aggregate profitability.

2.    The policy environment in India is still in state of flux. Ideally, the direction will be towards further opening of the economy to global capital, technology and competition. Save for a total failure of political establishment (not likely), we may see more and more global players dominating the Indian industrial space in near future. Influx of foreign competition in services sector may be rather gradual and partial. This may make many large Indian corporate operationally uncompetitive, financially unviable and technologically redundant. Though, some smaller niche businesses that can potentially play a supporting role to global players can see substantial growth in their businesses.

3.    Historically, Indian businesses have enjoyed state patronage in terms of lower cost of compliance, natural resources, land, capital and wages. This may no longer be the case going forward. The legal and regulatory changes made in recent past that the businesses pay market price (or even higher in some cases) for land, natural resources, capital, wages. The standards for corporate governance, social responsibilities and sustainability etc. have also been raised materially. This all shall have a material bearing on the corporate profitability.

The rising competitive intensity of businesses, may materially impact the margins of domestic businesses, for example due to (a) erosion of pricing power; (b) higher investment in technology and therefore lower ROCE; and (c) higher compliance cost due to adoption of best global business practices.”

Besides the point, the budget might have opened a window of opportunity somewhere. The following is an illustrative list of companies having less than Rs450cr revenue, and a strong 15% + ROCE for FY18. There may be numerous such companies which will enjoy the benefit of lower tax rate of 25% fro FY20 onwards.

Author: Midas Finserve

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