CLSA: More Than Half Of The Malls Built In India Will Go Defunct in 3-5 Years

“More than half of the 600 malls expected to open in the next 3-5 years will be defunct…” - a candid view from B. S. Nagesh, CEO, Shoppers’ Stop, one of India’s largest retailers.

This is a just a sample of what you can take away from CLSA's 10th Indian company Q&A, a 500 page tome that is set to hit your desks next week. While investors planning visits to companies will find it particularly useful, for any overseas investor daunted by rising air travel prices, $500/night hotel rooms, and the headache of traveling the length and breadth of India, the 10th CLSA Indian Company Q&A is all that you need.

The Q&A quizzes company managements on all issues relevant to making an investment decision on the stock, with CLSA’s sector analysts providing their own comments and financials to help put the responses in the ‘right’ context.

The 10th CLSA Indian Company Q&A titled “ A tightrope walk” is our largest ever, including 64 companies and an interview with Dr M. S. Swaminathan, father of the Green Revolution, and is also very well timed.

The BSE Sensex is off 34% YTD, reflecting the swing in investor confidence in the economy, corporate earnings and market valuations – as India grapples with the pressures of high inflation and the burden of oil at US$130/bbl. Some blue-chips are off 50-60% YTD and, in the view of CLSA analysts, are near stress value.

The Q&A should thus help you identify companies with strong medium-term prospects, where stocks may be trading not far from stress value. Our favoured picks, among the companies that participated in the Q&A, are Bharti, BHEL, ICICI Bank, HUL.

Highlights of the Q&A report;

* Q&A with 64 of India’s leading companies (39 first timers), covering 13 sectors



* A survey of India Inc.’s views on key economic variables, outlook for domestic demand and key challenges .



* A survey with nearly 100 fund managers on their views on the outlook for the economy and the markets

Key message from the Q&A;

· Companies remain optimistic on their prospects, notwithstanding stockmarket’s concerns on Indian growth story. On average, corporations expect India to achieve a 7-8% annual GDP growth for the next two years.

· However, 72% of companies surveyed felt the deterioration of the overall business environment versus 2007. Top three concerns were rising raw-materials costs/commodities prices (69% of respondents), potential demand slowdown and ‘higher interest rate and credit availability’. We were surprised that ‘poor infrastructure’ was less of an issue.

· Metals companies see stronger growth in FY09, while most other sectors expect growth to be in-line with FY08; only airlines, software and retailers are cautious.

· While firms across sectors were concerned about rising input costs, consumers saw good pricing power, while capital goods saw volumes offsetting margin pressures. Banks saw 20% loan growth as achievable, but admitted to a rise in delinquencies.

· Investors were far more bearish – seeing GDP-growth moderation to nearly 7%, earnings growth falling to 15-20%; 31% saw negative returns from the market, even from here. IT, consumer and pharma were seen as outperformers over a 12-month horizon; interest-rate sensitives such as property, auto and financials to be underperformers.

We sense some dissonance between these firms’ assessment of macro environment and their own growth outlook (only 26% expect their domestic business to slow) and see downside potential to their “guidance” on growth.

Overall market earnings growth could remain supported by commodity price boost for a few large companies, but variance in company performance across our universe will rise. The steep fall in stocks does provide opportunities, but for medium-term bets, we would focus on execution, risk-management skills and balance-sheet quality


Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.