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Bright prospects for key sectors: Fitch

But legacy and regulatory problems persist in power and cement industries; pressure on banks' capital adequacy

— FILE PHOTO

HEADED ABROAD: `Hyundai Getz Prime' cars lined up for export to Germany at the Chennai Port.

PRESSURE ON capital adequacy of banks, especially those in the public sector with substantial pension liability, shift towards high-tonnage in the commercial vehicles industry and participation of power companies in the equity market are among the features of the short-term and medium term sectoral tendencies that analysts in Fitch Ratings have forecast.

While the pick-up in the growth rate of the Indian economy is expected to impact positively the fortunes of many industries, including cement, inadequately addressed issues of deregulation are expected to work in the opposite direction. For instance, weaknesses in the distribution segment remain a fundamental concern in the power sector, while cement, in theory a deregulated industry, depends largely on State authorities and uncertain allocations in respect limestone mine leases and coal linkage for captive power production.

Presentations on select industrial and financial sectors, made by analysts from Fitch Ratings in Chennai recently, also showed contrasts as well as similarities between India and China.

Take the case of passenger cars. The competition is much more severe in China , where the largest manufacturer commands only 11 per cent of the market, against 46 per cent in India. China, with a penetration of 18 cars per thousand population (against 8 of India's), has an annual sales volume of four million against 1.34 million in India. The compounded annual growth rate of the two markets is: China 33 per cent and India 11.2 per cent. Both countries face a threat of overcapacity owing to large investment plans, and both have high level of tax on cars. India's tariff walls are higher than China's.

China, which; has been building its infrastructure for many years now, has as much as one billion tonnes of cement capacity, while in India the figure is 160 million tonnes. The number of players in China is said to be around 5,000, while in India 52 companies operate 130 plants in seven clusters and three mini-clusters. The following are the broad trends and issues highlighted by Fitch Ratings' industry outlook in select sectors:

Basel II norms

Banking: Banks' pricing power has eroded in recent times and the growth in credit has surpassed growth in the gross domestic product (GDP) after discounting for inflation. Implementation of the accounting standard AS-15 relating to actuarial valuation of pension liability is likely to reduce the capital adequacy of banks, especially public sector banks, by up to 100 basis points. These factors plus implementation of Basel-II will put pressure on banks to raise funds from the market. There is a need for caution against excessive lending. The positives include an upward trend in profits and a distinct improvement in asset quality in the last few years. For the first time since the nationalisation of banks, investments in government securities have declined.

MNCs foray

Cement: Excepting Cemex (of Mexico), top players in the world have already entered the Indian market (Lafarge, Holcim and Heidelberg) Despite significant progress in consolidation, the level of fragmentation is still high, owing to high valuations and expansion-based strategy of existing players. There will be a tendency to achieve cost efficiencies through increased use of captive power, alternative means of transportation (namely, by sea), use of waste as fuel. Increased resort to blending is likely. The domination of housing in demand will be gradually eroded by the demand from infrastructure sectors.

Commercial vehicles: Though the favourable impact of implementation of rules against overloading will taper off, long-term growth is not a matter of concern. In the short-to-medium term, the impact of cyclicality of GDP growth will be felt. Movement towards higher tonnage as a result of improvement of highways and rising demand for LVCs (with a boost given by Ace from Tatas) will continue to serve the hub-and-spokes model in logistics. However, competition is set to intensify in these two segments.

`B' segment cars

Passenger cars: The compact or B segment has shown the strongest growth, while the C or mid-size segment growth has decelerated. The A segment has continued to shrink. Maruti Suzuki, Hyundai and Tata Motors hold nearly 77 per cent of the market, while the share of indigenous manufacturers (Tata Motors and Mahindra and Mahindra) is around 25 per cent. Tighter interest rate regime and government plans to introduce a cess on the second car to reduce congestion are likely to affect market expansion. In the face of large capacity expansion over the medium term, price cuts and dealer discounts will become more common. Investment will also be required to fulfil emission norms.

Power sector: Since volatility in retail price of electricity will impact political and social agendas, throughout the world (with the exception of the U.S.), tariff regulation is adopted and this will continue in India too. Despite an encouraging tariff policy, private investment has not been forthcoming to the extent forecast and viability gap funding is underused While private players have entered the distribution segment selectively, parallel distribution networks are highly unlikely in India as elsewhere because of their prohibitive costs.

The wholesale power market will give an impetus to merchant and captive power plants. Captial expenditure will weaken coverage and leverage ratios of power sector companies.

The fundamental operating weaknesses among distribution utilities remain a matter of concern. There is a tendency of integration of distribution and generation businesses (Reliance, NTPC, Tata Power).

R. GOPALAKRISHNAN

In Chennai

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