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Growth in exports to drive the next earnings cycle: Gautam Chhaochharia.

Date: 26-02-2020
Subject: Growth in exports to drive the next earnings cycle: Gautam Chhaochharia
What is really going on? Suddenly, the globe wakes up and realises that the coronavirus could be a pandemic and we need to start pricing in for equities.
Yes. I think the markets were hoping that it is a one-off thing, which will have some immediate short-term revenue or growth impact and then the growth bounces back quite sharply. But, Italy and Korea cases took the market by surprise and reacted to that. It is also about where markets were pricing in versus what the events played out. Today as we are seeing, the markets have opened on a positive note. I think markets are again looking at this being a one-off short-term issue.

So, are you saying that there won’t be any more downside? Is the worst behind us after yesterday’s fall or more is likely to come?
No one knows. I am not any health expert. The experts are still figuring it out; so, you have to track those data points.

You have talked a lot about exports driving earnings recovery. Let us get the rationale behind that. It is particularly important in light of all that we are hearing on trade and the Trump visit.
Absolutely. So that is one of the four keys that have made us turn bullish on India’s earnings cycle for the next one to three years after being bearish for the last five years. By exports, I also mean import substitution to a large extent. Why now is a big debate because exports or manufacturing has been the big pipe dream behind India’s long-term growth hope story, low cost labour, enough labour, and so on, but it never really played out.

So why now? Two simple reasons. Firstly, what is happening globally is that manufacturers themselves are looking to diversify the supply chain away from China given the rising cost, trade war uncertainties, and so on. This did not exist three to five to 10 years back; so that is a big change. All our Evidence Lab surveys of businesses in China, Korea, Japan, Taiwan (anywhere in the world) suggest the same. India is up there as a destination. They are looking at exploring it along with Vietnam and other emerging market countries. Second is about what has happened locally in India itself. Now we keep debating how good or bad infrastructure in India is, specifically if we look at Mumbai infrastructure but let us look at delta. So, you look at power, roads, and ports. From chronic shortages, there are surpluses in few infrastructure sectors. Similarly, in terms of ease of doing business, it is still not an easy place to do business but the delta is positive.

But why specifically now in our view is two simple reasons. One is the big corporate tax rate cut. The big corporate tax rate cut makes India the lowest corporate tax rate country in the entire emerging market universe, which is a really big deal and this has happened now. Secondly, what has happened now is also labour reforms. It is ongoing and this is messed up in the current pessimism news flow around us. But in terms of the labour reforms, one has been passed by both houses of parliament, three have been tabled in parliament and we have not really seen any broad-based political opposition to this reform measure. So these are happening today and it is also showing up in early data points in our view. The best example of that is net electronic imports. This was being talked about as India’s next oil two to three years back. After rising year-on-year for the last few years, for the first time this year, net electronics imports have declined and this is not a slowing economy.So if you break down the numbers, it is the exports that are rising. So can this become a big deal in the next one to three years? We all hope so. But it is too early for us to be sure of that but what we can say from an earnings cycle framework is that, compared to the last five years, the next three-year exports will be meaningfully better to drive a macro cycle or an earning cycle.

The manufacturing which is moving away from China is also moving to Thailand, Indonesia and Vietnam. That is what the data is indicating. While the first part is absolutely right; whether it is trade war or concentration or labour cost, manufacturing is moving away from China. While India may have a lower corporate tax rate cut, we have structural issues, land and labour and high cost of capital. That is where I think the challenge is.

Absolutely. And Vietnam has been one clear early beneficiary of this trend. Due to geographical proximity to China, they clearly benefited but where India has an edge over any of these markets is the scale of local markets, which China had. None of these markets have that. So any manufacturer that comes and sets up here is also targeting the local market and scale of resources and this is also relevant. For example, Vietnam is already facing double digit wage inflation so early in the move.So, it is more for India to lose rather than India not being a beneficiary. So we can debate the scale of impact and how these things play out but net-net delta should be any which way be there.

Source: economictimes.indiatimes.com

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