With each passing day, the trade deal appears to be looking more and more elusive. Donald Trump has confirmed that the US may not be keen to cut a trade deal with China. Speaking during his state visit to Japan, Trump suggested that the US may not be too keen on a trade deal since China had sought to renegotiate the trade at the last minute. In fact, Trump had announced a total black-listing of Huawei, which was later diluted under internal and external pressure. China has refused to negotiate till Huawei ban was full lifted and it has already sensitized the Chinese people to be ready for a trade war.
Bond yields are again on a downtrend after the new government was elected with a thumping majority. In fact, the benchmark 10-year bond yields touched a 1 year low on Monday. The benchmark yield on the GOI security touched the yearly low of 7.16%. Bond yields have shown distinct weakness in the last couple of weeks and got accentuated after the exit polls. The US bond yields have also fallen sharply closer to the 2.3% mark. In the last one year, Indian benchmark 10- year bond yields have lost more than 100 bps since the peak of October 2018 in the aftermath of the liquidity crisis.
For the March quarter, the big challenge appears to be getting top line growth. In fact, revenue growth in March 2019 quarter hit a 6-quarter low for India Inc at just 10.4%, with most results already out. This is the lowest revenue growth recorded in 6 quarters and can be largely attributed to weak capital spending, slowdown in consumer demand and pressure on rural demand. Consumer companies saw (-2.3%) de-growth in the quarter. EBITDA margins were 93 bps higher on lower commodity prices. Auto and FMCG have taken the biggest hit from the weak top line growth effect.
The sustained visa harassment by Trump is beginning to show up in the bottom lines of Indian IT companies, which are largely into cost arbitrage. CRISIL expects the profit margins of IT companies to narrow by 80 bps in the fiscal year 2019-20 on the back of adverse policies like the H1-B visa rules. While the revenues are expected to grow at close to 8% in the coming year, the higher manpower costs could put pressure on OPMs. Employee costs grew by 17% last year as against the secular median rate of 6%. Most of the IT companies need to seriously focus on re-skilling and relying more on automation.
The ongoing fracas at Jet Airways appears to have come as a blessing in disguise for other aviation companies in India. Indigo has reported record jump in profits as it got the benefit of higher fares in this quarter due to the Jet shutdown. But the real beneficiary could be government owned Air India. The irony is that the Jet Airways shutdown could ensure better valuations for Air India. According to a report in the Business Standard, Air India could be the biggest beneficiary since Jet and Air India were the two major players in the full service carriers (FSC). Air India has already seen a 140 bps growth in its market share in April. Also since Air India owns most of the aircraft, the investors will be able to do sale-and-leaseback. Overall, Air India could become more attractive for potential investors.
One of the first announcements made by the RBI after the election of the new government was on prudential norms for NBFCs. However, tighter regulation is likely to chip away at NBFC profitability in FY-20. According to a report in the Economic Times, the Liquidity Coverage Ratio (LCR) proposed by the RBI for NBFCs was likely to hit their profits in the coming fiscal year. The LCR is supposed to be maintained in liquid government bonds. However, the primary focus of the NBFCs at this point of time is on making liquidity available to them for their core business, which is more of an existential challenge for NBFCs.
