Vijay Kumar Gaba

For example, the following are some of the red flags I have recently noted from the research reports of brokerages:

BoP almost zero, as foreign flows dry up: 3QFY22 saw a marginal net foreign investment outflow of US$1bn compared with the past five-quarter average of ~US$20bn. This is mainly due to: 1) FPI turning negative with outflow of US$6bn, and 2) FDI dropping to US$5bn compared with the recent quarterly average of US$13bn. FII selling has worsened in 4Q, with our latest estimate putting it at US$15bn vs US$7bn for the whole of 2021. As the US Fed continues tightening, FIIs may not be major buyers for the rest of the year, though they may not sell too much either, after a concentrated burst in 4QFY22.

The Balance of Payment (BoP) was close to zero for 3QFY22, as compared with the average of US$23bn, as CAD widened and foreign-flows investments dried up.

We estimate CAD at 1.6% of GDP for FY22, and believe it will widen to 3% of GDP if crude stays at around US$100/bbl. On the face of it, this could worsen as agri input prices have also spiked. But including India’s non-fertiliser agri exports, we could see a broad CAD impact from agri owing to high commodity inflation turning out to be modest, leaving direct crude imports as the main reason for CAD worsening. (IIFL Securities)

External sector headwinds will continue well into FY2023E: The external sector remains subject to major volatility amid differential monetary policy stance with the Fed and the unrelenting commodity price surge. Adjusting for the FY2022 export and import data, we estimate FY2022E CAD/GDP at 1.5%. If oil prices were to average around US$100/bbl in FY2023E, we expect the CAD/GDP to widen to 2.8% (Exhibit 6). The BOP is expected to remain hugely in deficit given (1) widening trade deficit, (2) the continued flight of capital to safe havens and high yielders due to narrowing interest rate differentials, and (3) persistence of geopolitical risks. Overall, as markets continue to assess the growth-inflation impact from the rapid global policy normalization and geopolitical risks, we expect the INR to remain under pressure. However, India’s FX buffer of US$620 bn should be sufficient to shield the economy against any major external shock. We also note that the direction and magnitude of INR moves will be in sync with the rest of the EM pack. If the risk premia of geopolitical tensions fade quickly, they can provide brief respite to the INR. We see USD-INR trade in the range of 75-77.5 in the months ahead. (Kotak Securities)

21% contraction in P/E valuation versus 14% dip in NIFTY50 index from CY21 high to CY22TD low - NIFTY50 forward P/E ratio hit a high of 22.8x during Oct’21 before reverting back sharply to 18x during the low hit in Mar’22 which is a contraction of 21% in terms of forward P/E valuation. The sharp decline is the net result of a 14% decline in NIFTY50 index price and 8.5% growth in rolled forward EPS. Post the upswing in stock prices from Mar’22 lows, the latest NIFTY50 forward P/E stands at 20x or (~5% earnings yield) which is a drop of 12% from the Oct’21 highs. (ICICI Securities)

Two-thirds of the sectors are trading at a premium to their historical averages: The Nifty trades at a 12-month forward P/E of 19.8x, near to its long period average (LPA) of 19.3x (at 3% premium). P/B, at 3.2x, is at a 21% premium to its historical average. India’s market capitalization-to-GDP ratio has been volatile, reaching 56% (of FY20 GDP) in Mar’20 from 80% in FY19. It has rebounded to 115% at present (of FY22E GDP), above its long-term average of 79%. Healthcare and Oil & Gas now trade in a reasonable range to their LPA valuations, while Technology, after the sharp run, trades at a 52% premium to its LPA. Financials are trading at near to its LPA on a P/B basis.

As we step into FY23, we believe, the next two quarters are going to see a sharp margin impact and corporate commentaries will worsen before it gets better. Secondly, while the Nifty has not seen much earnings downgrade so far (thanks to upgrades in Metals/O&G and neutral to no impact in IT/BFSI), the broader universe is clearly bearing the brunt of commodity cost inflation – a trend we saw even in 3QFY22 corporate earnings season. That said, if the input cost situations do not improve and price increases become inevitable, we are not too far away from some demand dislocation in an already weak economy. And this, at some point in time, will lead to earnings downgrade even for the Nifty, in our view. (MOFSL)

Consumption to remain subdued in FY23: Consumption demand as measured by private final consumption expenditure (PFCE) has been subdued in FY22, despite sales of select consumer durables showing some signs of revival during the festive season. Although the January 2022 round of Reserve Bank of India’s (RBI) Consumer Confidence Survey shows that Current Situation Index increased marginally on the back of better sentiments with respect to the general economic situation, it continues to be in the pessimistic zone. The Expectations Index, which captures one year ahead outlook, moderated due to the surge in COVID-19 infection cases in January 2022. Household sentiments on non-essential/ discretionary spending continue to be subdued. As the consumer sentiment is likely to witness a further dent due to the Russia-Ukraine conflict leading to rising commodity prices/consumer inflation, Ind-Ra expects PFCE to grow at ~8% in FY23, as against its earlier projection of 9.4%. (India Ratings)

Growth moderation in SME and auto to delay credit revival: The recent revival in credit demand (loan growth moving to 8-9% YoY) is likely to be tempered by the expected macro slowdown. CS sees a potential hit to GDP of up to 3%. We believe certain segments such as autos, SMEs and mortgages are more likely to see a dampening in demand and lower our overall bank loan growth estimates by 2-4%. We still expect relatively benign asset-quality outcomes and risks primarily limited to certain pockets, such as autos (particularly CVs if fuel prices increase substantially and sustain) and SMEs, particularly on the restructured and ECLGS books. Asset quality on home loans is unlikely to be materially impacted, as even after a 100bp rate hike, if banks were to increase the tenure by two years, EMIs would be flat. Corporate profitability is likely to get crimped from rising commodity prices but, given the deleveraging, we believe the risks are contained. (Credit Suisse)

Bigger risks loom on top-line, earnings: Earnings recovery has narrowed in FY22, after a broad-based rebound in FY21. While FY23 bottom-up EPS estimates reflect recovery, from top-down basis broad-based slowdown risks have increased as: i) Banks’ earnings will pivot from credit costs (now normalised) to asset growth (yet to pick up). BoP shock and weak demand could delay its recovery; ii) Domestic earnings challenges will broaden from margins to encompass demand, as tailwinds from market share gains, strong formal sector wage bill growth fade. Although, higher food prices may lift rural demand; iii) Strong exports earnings (IT, chemicals) could slow down as oil shock and tightening global liquidity weigh on demand; iv) Commodity earnings could remain stronger for longer, but hawkish Fed will eventually lower it as the war ebbs. (Edelweiss Research)