Worried about NBFCs' lack of growth: Credit Suisse's Neelkanth Mishra

Neelkanth Mishra said the relative underperformance of private corporate banks is staggering.

Neelkanth Mishra is managing director and India Equity Strategist, Credit Suisse. He has been rated among the best analysts in India by the Institutional Investor and Asia Money polls.

He has been an advisor to committees appointed by the government such as the RNR committee on GST and the FRBM Review committee. Mishra also covers Metals and Mining, and has earlier worked on Indian Pharmaceuticals.

Mishra said the relative underperformance of private corporate banks is staggering and the banks are getting enormous pricing power now because the non-banking financial companies (NBFCs) have disappeared from the space.

In an exclusive interview to CNBC-TV18, Mishra said he is worried about the lack of growth in NBFCs space as balance sheets of several firms in this sector are smaller than they were in September.

In a wide-ranging interview, Mishra also discussed the power sector and its future, NBFC sector, among a variety of topics.

As you said, the gross fixed capital formation which is the broadest measure and that is what everyone tracks and there was a very sharp decline in the gross fixed capital formation (GFCF) to gross domestic product (GDP) ratio.  This is the broadest measure of investment that you can see.

In our market, everyone is looking at investment stocks, investment revenues and it so happened that it coincided with a decline in industrial earnings and price to earnings as well. So we investigated this and given that in the last six instances GFCF to GDP ratio has been climbing steadily.

The question was can they sustain. We found that if you drill down into GFCF most of the slowdown has come from the informal sector. In fact, private corporate capex has been growing in the mid-teens, actually 14 percent CAGR. Of course, the machinery capex was up only about 10 percent and it is much larger than what we had expected.

Intellectual property investment has been growing at 22 percent a year. So there is still quite a bit of investment happening. What is surprising to us was that household even in nominal terms, there was effectively no change. The third big surprise was that contrary to the consensus view that the government has been responsible for pick up in capex. Actually, the government sector has been investing at the same pace for most of the last 7-8 years.

So the GFCF to GDP from the government or the public sector has actually been flat. Second, the fact that the GFCF from the government or the public sector has been keeping pace with GDP means that it’s much more sustainable. It is not that they are suddenly going to dry up as the government sector competes with each other on fiscal profligacy which makes this much more sustainable and last.

On the private sector, we took a list of 12,000 companies and looked at their capex and what was quite surprising was that the slowdown seems to be in two segments; metals and power. Now we think that steel capex has started, our view remains that power capex also, in two-three years, will start off. So I think that this is setting the ground for a very meaningful and sustainable recovery investment activity.

What is the percentage, a composition of the informal sector, private capex and government in gross fixed capital formation basket?

Private sector contributes 43 percent, 25 percent is public sector and 32 percent is household. To give you the numbers as well – of that 25 percent in public sector, about 2/3rd comes from state government and Central Public Sector Enterprises (CPSE) and a very small percentage is actually the central budgetary allocation.

For the private sector, all of this is MCA21 data, so this is as solid as you get. The household is actually the residual.

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