Backdoor Politics A Blessing And A Curse
BMI View: It took all of the United Progressive Alliance (UPA)'s political dexterity to defeat a parliamentary motion opposing its plans to liberalise India's multi-brand retail sector. While it may yet suffer a setback in the upper house, the government's newfound resolve bodes well for foreign investor sentiment. In terms of the equity market, consumer staples have already seen aggressive multiple expansion in recent months, and while we could see the market scale new heights in the near term, we find little value at current extremes.
India's lower house of parliament ( Lok Sabha) voted on December 6 in favour of government proposals to open up the country's multi-brand retail sector to foreign direct investment (FDI). Given the magnitude of hostility towards the FDI bill, its endorsement can be considered a major coup for the United Progressive Alliance (UPA), India's ruling coalition. However, it must also be noted that the coalition won on a technicality. To be sure, the 253 lawmakers that supported the proposals would not have been sufficient to hand the UPA a majority in the 545-member lower house were it not for the abstention of two regional parties. The Samajwadi Party (SP) and Bahujan Samaj Party (BSP), which together account for 43 seats, decided to walk out rather than vote despite their opposition to the bill. This was in order to prevent a no confidence motion in the government, and because both parties will ultimately be able to decide whether to implement the policy in their respective states.
|A Technical Victory|
|India - Results From Lok Sabha Multi-Brand Retail Vote|
As such, despite the government's success, the vote highlights one of our major concerns about Indian politics at present - that the administration of Prime Minister Manmohan Singh is beholden to the fickle support of smaller non-coalition parties with their own agendas, meaning that tough policy decisions (such as major spending cuts, tax reform bills, etc) will require a similar demonstration of political manoeuvring. Indeed, the FDI bill is scheduled to be put before the upper house of parliament ( Rajya Sabha) on December 7, where the UPA has even less of a stronghold, and so may yet suffer a setback.
Nonetheless, the government's newfound resolve in terms of reform, despite vocal opposition from both inside and outside of the coalition, remains a positive signal for investors. If this can now be accompanied by renewed attempts to rein in fiscal largesse - despite hawkish rhetoric, New Delhi has already spent 71.6% of its budget in the first seven months of FY2012/13 (April-March) - we could see investment activity surprise to the upside over the coming 12 months.
|Good News Priced In|
|India - MSCI India Consumer Staples|
Little Value In Consumer Stocks
Indian consumer staples have already more than discounted the positive impact of the multi-brand retail bill, in our view. The MSCI India Consumer Staples Index has surged 52% year-to-date, which has lifted the P/E ratio from an already expensive 30.0x to 43.0x. A P/B ratio of 12.0x is also indicative of a market where prices appear to have disconnected with fundamentals. While we could continue to see the market scale new heights in the near term, with multiples already at record extremes, we find little value left at current levels.