Status of Financial, Real estate, Core, Retail sectors under inflationary conditions

Top line growth of financial institutions will be adversely affected since demand for funds is likely to contract. There is likely to be a small effect on net margins as well and perhaps a small impact on the quality of their credit portfolio, but this should be contained through provisioning.

The story with the mutual fund industry is no different. As India lost its trillion-dollar economy status, asset management companies have registered a drop of 5.09% in their asset under management (AUM) for the month ended June 2008.

As per the data released by the Association of Mutual Funds, the combined average AUM of the 33 fund houses in the country dropped to Rs 5,64,599.28 crore at the end of June as compared to Rs 6,00,266.32 crore in May. But this is not a secular trend.

If the current volatility exists, the margins may be under pressure, but overall the MF industry is insulated because of the different products it offers.

Analysts feel that while operating conditions will remain difficult in the near future, this is an opportunity for the financial sector to become even more efficient and competitive. India remains one of the most under-penetrated countries in terms of financial services and has tremendous opportunities.

Real estate markets are already down 20-25% and it seems that investors have deserted the market.

Just six months back, the sector was rocking like never before — backed by strong economy. In fact, such was the euphoria that realty rates were kissing the sky in most markets, with demand far out-stripping the supply. But a turnaround in global factors has had a toll on the sector and after some bouts of price correction, the market is now at a standstill.

The general slowdown in the economy and high inflation rate has affected the buying power of consumers. In the short-term, the real estate market would in all likelihood see another correction of 15% to 20%. For developers, a filtration process has already begun and only those who have the best fit in terms of quality, delivery and asset management will be able to meet the soaring expectations of a well-informed market.

The recent erratic behavior of the stock market has also taken its toll on the realty market. Experts feel that there is a correlation between both the realty and stock markets.

There is usually a six-eight month lag between stock market fluctuations and corresponding effects on the real estate market. And yes, a correction is definitely on the anvil but it will stay true to this buffer period, and will not be dramatic or immediately manifested.

So far, the real estate industry had been growing at the rate of 30-40%, with 2005-06 being a landmark year as property prices witnessed record highs.

Inflation is now set to impact the manufacturing sector in a big way. The worst hit will be the steel industry which is reeling under a sharp rise in the cost of raw materials. In fact, steel prices have gone up by more than 100% globally and 45% in India in the last one year. Since steel is a major raw material for most manufacturing industries, high prices will only contribute to the inflationary trend.

Among other industries, the hardest hit will be the auto industry. Raw materials such as steel, aluminum, plastic and rubber prices have increased substantially, depressing the margins of the auto companies. The industry will not only have to take care of lower operation margin but also survive in the low demand scenario.

It certainly will have an impact on the automobile industry growth. Interest rates have gone up, raw material prices have increased and all this is putting pressure on input costs.

Increasing CRR and fuel cost have pushed the cost of living. Running cost has also increased because of fuel price rise. Customers are finding it difficult to handle EMIs that have increased because of all this.

The results can already be seen as the market growth rates figures don’t look good. There has been only 6.2-6.3% growth in the last month. When compared with almost 10% growth in the first five months of this year, the figure is quite depressing, though it is expected the market will stabilise in the long-term.

Rising inflation will have a cascading impact on the cement industry, too. The sector has taken a hard blow due to increasing crude price hike. It has not only impacted production costs, but has also pushed transportation costs further. Cement industry is working on a much lower operating margins. Though the cement companies have been trying to keep the prices stable, the mounting pressure is making sustenance difficult.

All of a sudden, the growing Indian economy is facing serious challenges and retail companies are in a fix. While most manufacturers and retailers say there’s no immediate impact on their sales so far, they admit they are going through a rough patch.

They are passing through the trough and it is expected the situation may ease soon. If it continues, then retailers will have to look at ways and means to improve efficiency, productivity and optimise on costs. As of now, they have not seen any significant impact on their sales volumes, especially in the food, grocery and staples sections. If at all, there might be some impact on non-food categories and also spends on entertainment.

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