As India Inc commends GDP growth, some concerns: private capex, sluggish rural demand

In a similar view highlighting the continuing mismatch between public and private capex, the chief financial officer (CFO) of L&T Ltd said that he does not expect “a wholesale surge in private capex” for basic infrastructure like roads and railways because “private capital does not get the respect that it deserves in terms of return”.

The correlation between growth in paints industry and India’s GDP growth rate has “gone for a toss”, Asian Paints’ managing director (MD) and CEO Amit Syngle noted in the recent Q4FY24 earnings call on May 9. Syngle also added that GDP figures do not seem to correlate to core sectors like cement and steel, the call transcript showed. “You are correct that the GDP correlation has really gone for a toss, in the current year. I also feel that today, I am not very sure as to how the GDP numbers are coming,” Syngle said in response to an analyst’s question.

“And sometimes you feel that there is such a variation happening across industries. How does that GDP really correlate to the actual GDP what we are kind of talking of. So, even if you look at the core sectors, whether it is steel, cement, so on and so forth, nowhere it is correlating with the kind of possibly overall GDP growth… So, we are also looking at ways and means in terms of finding out what is the real GDP,” he added.

Rohit Jawa, MD and CEO of Hindustan Unilever, said that while GDP growth has been driven largely by government capex, it has not yet led to a recovery in consumer demand in rural areas.

“The GDP growth is driven a lot by government capex, but also – – and that trickle down effect will take time. But if we — if all of those jobs and livelihoods that get created, there is — I mean that money should end up going back to the households more in the mass end, and that should democratise consumption. And we should, in my view, start to see that. And how long it takes? I do not have the ability to forecast, but I think we do see gradual recovery in rural,” Jawa told analysts in the earnings call on April 24.

During the call, Jawa also clarified that the consumer goods major is “not waiting for the macro to shift one way or the other… we are focusing on transforming our business to go where the growth is, to go where the people are, go where the money is”. For Hindustan Unilever then, the focus will be on “urban consumption [which] has been more resilient especially at the premium end” until the macro picture improves.

Even though senior government officials have consistently underlined that private capex is on the rise, R Shankar Raman, CFO of L&T Ltd, told analysts on May 8 that the “government has to take responsibility” to get basic infrastructure like road and rail networks in place as he does not expect a wholesale surge in private capex.

“The private capex soared when the government successfully announced BOT (build-operate-transfer) programs in several areas, including roads. So, if you recall 5-8 years ago, everybody wanted to become a power plant sponsor. Everybody wanted to become a road owner. Everybody wanted to become a transmission line owner. Now, the private capital has realised that having government at the other end of the equation is a very uneven equation. And slowly, including us, we have pulled out of all the concession agreements because we think that private capital does not get the respect that it deserves in terms of return or in terms of play,” Raman said.

“So, the investment in private sector capital will be very opportunistic and situation dependent. Such industries where they are able to see return on their private capital invested will invest and like they have done in the past. So, I don’t expect a wholesale surge in private capex. If the country wants to get its basic infrastructure in place, basic road network, rail network in place, basic urban infrastructure in place, world over it has been done on public capital. It can’t be any different in India. So, the government has to take responsibility for this and get out of businesses which are suitable for the private sector. For example, does the government have any business to be in as many defence production areas? I don’t think so,” he added.

For Varun Berry, MD of Britannia Industries Ltd, the impact of GDP growth on consumer demand will be visible in FY25. “India is doing much better than all the other countries from a GDP growth standpoint. However, the only point to be made is that private consumption is down. The GDP numbers are looking good because of the gross fixed capital formation that’s happening in the country.

However, we are confident that as we go through this year, things will change on the private consumption side as well,” Berry told analysts on May 6. According to HDFC Securities’ Head of Retail Research, Deepak Jasani, an analysis of 465 companies’ Q4FY24 results shows that while the PAT of these companies has risen by 12 per cent, sales have grown by 11.5 per cent on a year-on-year basis, largely because of inflation in goods and services.

“Topline growth (of 465 companies) has been slightly better than expected mainly because of the impact of inflation in goods, services and interest rates. There is pressure on the bottom-line due to margins contracting a bit. Profit growth has been not as robust as it used to be in the previous quarters,” Jasani said.

Axis Securities Head (Fundamental and Quantitative Research) Neeraj Chadawar said the Q4 results of some set FMCG companies indicates recovery in demand in the rural sector.

“The commentaries coming from the FMCG sector are showcasing some green shoots in the rural recovery. We still need to notice a concrete trend in the upcoming quarters, but there is some rural recovery underway which companies are highlighting,” he said. If the monsoon and Union Budget, scheduled to be announced in the first week of July, are as per the expectations of the market, FMCG companies could see an uptick in volume in the second half of FY2025, Chadawar said.