How is the current cycle placed compared to what happened in the last two decades?
India pulled through in the last cycle because of the global recovery. The capacities [in the 1990s] around textiles, metals and other commodities gave companies the ability to price products in the international market in dollar terms. I remember steel prices going all the way down to $160 per tonne between 1998 and 2000 and then rally to $1,000 per tonne midway through the last decade. This, plus the rupee depreciation, helped these companies/assets become financially solvent in 2008, a recovery exactly a decade from where these assets got laden with financial excesses (high debt and low equity). Large commodity companies, notably Tata Steel, had RoEs in excess of 40 percent for almost two years, something they had not seen for a very large part of the company’s history.
In short, India depreciated itself out of the problem in the last cycle.
However, power and fertiliser plants set up in that era did not see as much benefit compared to export-oriented companies or firms which manufactured commodities, which linked their prices to landed costs. Power and fertilisers were sold in the local market which was rupee-denominated and they clearly could not make supernormal profits to get through the excesses of the ’90s.
We have a larger part of the latter problem this time around. Infrastructure assets have to earn revenues based on the earning capacity of the domestic economy. They are rupee-linked. So even if there is depreciation of the currency, a lot of these companies will not see a rise in turnover or asset prices connected to the fall.
Another thing that does not help is that India again had a number of commodity companies that acquired assets at the peak of the cycle, and all through debt. This plays out very negatively at a time when commodity prices have virtually halved in value.
Read more: http://forbesindia.com/article/investment-guide-2016/choose-the-volatility-you-are-happy-to-live-with-kenneth-andrade/42027/2#ixzz3yi03xxOy
India pulled through in the last cycle because of the global recovery. The capacities [in the 1990s] around textiles, metals and other commodities gave companies the ability to price products in the international market in dollar terms. I remember steel prices going all the way down to $160 per tonne between 1998 and 2000 and then rally to $1,000 per tonne midway through the last decade. This, plus the rupee depreciation, helped these companies/assets become financially solvent in 2008, a recovery exactly a decade from where these assets got laden with financial excesses (high debt and low equity). Large commodity companies, notably Tata Steel, had RoEs in excess of 40 percent for almost two years, something they had not seen for a very large part of the company’s history.
In short, India depreciated itself out of the problem in the last cycle.
However, power and fertiliser plants set up in that era did not see as much benefit compared to export-oriented companies or firms which manufactured commodities, which linked their prices to landed costs. Power and fertilisers were sold in the local market which was rupee-denominated and they clearly could not make supernormal profits to get through the excesses of the ’90s.
We have a larger part of the latter problem this time around. Infrastructure assets have to earn revenues based on the earning capacity of the domestic economy. They are rupee-linked. So even if there is depreciation of the currency, a lot of these companies will not see a rise in turnover or asset prices connected to the fall.
Another thing that does not help is that India again had a number of commodity companies that acquired assets at the peak of the cycle, and all through debt. This plays out very negatively at a time when commodity prices have virtually halved in value.
Read more: http://forbesindia.com/article/investment-guide-2016/choose-the-volatility-you-are-happy-to-live-with-kenneth-andrade/42027/2#ixzz3yi03xxOy
