In 3QFY23, the Capital Goods companies may
record strong revenue growth for the Capital Goods companies (+30.3% YoY) on
the back of robust order booking. In the Consumer Durables segment, demand
collapsed in Nov’22 after a good Oct’22 before recovering again from
mid-Dec’22. Consequently, we expect 17.3% YoY topline growth for Consumer
Durables companies. For Consumer Electricals companies, we estimate 10.7% YoY
topline growth, backed primarily by channel filling of non-rated fans ahead of
the impending transition to new BEE norms. Also expect up-stocking of Wires
& Cables by dealers and distributors as copper prices have risen by ~18%
from July’22 lows.
Capital Goods and Consumer Durables companies
are expected to show margin improvement as most of the companies are most
likely to have exhausted high-cost inventory by mid-3QFY23. Consequently,
expect a sequential improvement in aggregate EBITDA margin (+40bps). Recovery
in the capex cycle, healthy order inflows and adverse impact on working capital
will be keenly monitored for the Capital Goods sector.
Expect strong growth for Solar Industries (+50%
YoY), which reflects better off-take from Coal India and improved realizations.
Data centers in India are poised to add ~350MW
of capacity per year till CY25 fuelled by hybrid operating models and rising
internet penetration. This represents a 32% CAGR to 1.8GW over CY22-CY25,
indicating a US$ 4.4bn opportunity (at Rs 350mn/MW; USDINR Rs 80).
Among the key end users of data centers are high-growth
industries such as IT services, telecom and BFSI, where we can expect waves of
growth led by emerging trends such as 5G penetration, digital currencies and healthcare
digitization. The proposed Data Protection Bill lends further impetus to domestic
data center capex given the requirement for localized data storage/processing.
Technology and infrastructure comprise ~80% of
data center capex, with land forming the balance 20%. Of the total capex, 33%
would be expended on power equipment (UPS, HV/MV/LV switchgears, backup
generator sets) and 20% on cooling products (half of which would be for
chillers).
We expect Q3FY23E Nifty50 sales to increase 17%
YoY on low base (lingering Delta COVID-19 impact) while sequentially sales is
likely to be flat. As companies come off high cost inventory and overall
commodities cost remains low, margin strain is likely to lessen on a sequential
basis, leading to a 192bp expansion in Nifty (ex-financials) EBITDA margin, and
a 123bp expansion in Nifty PAT margin to 12%. Owing to margin improvement, we
expect healthier growth of 11% QoQ in overall Nifty PAT while Nifty
ex-financials EBITDA is set to grow 12% QoQ. Commodities, led by metals, are
expected to post the highest YoY decline on lower realization while financials,
led by Banks, are likely to post a strong show on account of several tailwinds.
Ex-commodities and ex-financials, we expect Nifty PAT growth of 22% YoY and 9%
QoQ.
Our analysis of 20 meaningful market
corrections (in excess of 10%) since 2006 suggest that growth slowdown and
rising inflation are two primary reasons for market correction.
Deterioration in both growth and inflation
outlook has led to sharp market correction and volatility (with three episodes
of sharp market correction in excess of 10% for similar reason in the past 15
month). Consensus expects macro headwind to continue in 1HCY23, with recovery
likely in 2HCY23 due to easing inflationary pressures, decline in policy rate,
and lower base.
We believe that a) Most of the macro risk is
priced in, unless there is a hard landing in advanced economies; and b) Market
buoyancy is likely as growth may recover in 2HCY23 due to easing inflationary pressures,
decline in policy rate and lower base.
We believe that overall institutional equity
may strengthen in CY23 as we expect Foreign Portfolio Investors (FPI) to return
in CY23 given a) Lowest FPI ownership in India since FY14; b) FPI equity
outflow has never been negative for two years in a row; c) Receding macro risk
in 2HCY23; d) Peaking out of Dollar index is positive for Emerging Market; and
e) India to be the fastest growing large economy. We expect domestic mutual
fund equity flow to persist given ~INR 2,400 bn sticky equity flow in FY24 through
Systematic Investment Plan, Employee Provident Fund, and National Pension
Scheme.
Our Mar-24 Nifty-50 target stands at 20,750
(19x FY25e EPS of 1094). We continue to believe that macros remain supportive
for private capex cycle recovery. In this backdrop, We believe that financials
(especially PSU Banks), industrials, commodities and real estate sectors have
higher degree of out-performance\during 2023.
Buy the World: global stocks to outperform US
stocks in 2023 driven by:
1. Interest
Rates - US “secular growth” stocks substantially outperformed during QE/zero
rates “secular stagnation”; non-US “cyclical value” stocks to outperform in
backdrop of higher rates “secular stagflation”.
2. China
– bull market in credit began in days following Communist Party of China (CPC)
Politburo....China HY $ bond spreads halved from 2900bp on 27th Oct to 1360bp
today, and speedy Zero-Covid policy exit will unleash years of precautionary
savings in boost to households consumption,
3. Tech
- in Q4 all tech as % US equity market was 40% vs 19% in EM, 13% in Japan, 7%
in Europe; derating of tech driven by regulation, penetration, rates well
underway (Big 8 stocks already down from 30% to 21% of US market), yet investor
rotation out of tech sector yet to begin, hurts US more.
4. Buybacks
- US stock market has enjoyed $7.5tn of stock buybacks since GFC (corporations
rather than investors have powered the US stock market past 15 years - mostly
tech & financials); 1% tax on buybacks now introduced (and will inevitably
rise in coming years) + higher rates = less self-serving debt issuance to
finance buybacks,
5. Energy
- higher oil prices mean "oil exporters" e.g. US, Saudi Arabia
outperform, lower oil prices mean "oil importers" e.g. Japan, China,
India, Europe outperform.
6. War
& the US dollar - dollar falls in '23 as geopolitical tensions ease, US
domestic political tensions rise, global governments & investors diversify
from reserve currency.
7. Positioning
- compare $160bn US equity inflows to $107bn EU equity outflows in '22, note US
hit all-time high (63%) as share of global market in 2022.
War and Peace (Credit Suisse Economics,
Zoltan Pozsar)
War – in one form or another – was a theme that
defined macro not only last year, but basically every year since 2019: trade
war with China; the war on Covid-19; war finance to deal with lockdowns; war on
inflation, as we overdid war finance; and war then spread to engulf Ukraine,
finance, commodities, chips, and straits as discussed above. Monetary and
fiscal responses were just that – responses to mother nature and geopolitics –
and with geopolitics getting more complicated, not less, investors should
remain mindful of the threat of non-linear risks in 2023.
In my previous posts, I noted that investors
are not particularly well trained to deal with geopolitical risk, because for
generations geopolitics didn’t matter – anyone who traded securities or ran a
portfolio since the end of World War II, did so in the cocoon of a unipolar world order, under the cover of
Pax Americana.
But as I argued here, the unipolar world order
is being challenged, and as I argue on the front page of today’s dispatch, war
has been and will likely remain a theme until the quest for world order (that
is, “control”) is settled. When Henry Kissinger writes about how to avoid
another world war (see here), and Niall Ferguson writes about the risk of Cold
War II spilling into World War III in an op-ed on Bloomberg (see here), you
know that something is definitely up...
Henry Kissinger’s year -end essay and Niall
Ferguson’s new year essay are not the types of essays that you normally read
alongside sell-side outlook pieces, which suggests that this ain’t your
parents’ “global macro environment”, and it ain’t your grandparents’ either. We
have to go way back in history for direction...
During the Great Financial Crisis (GFC), events
forced us to abandon using the term “post-WWII” in the context of recessions
and business cycles. Of course, that was because the GFC threatened to unleash
a second Great Depression, which was a “pre-WWII” event that rendered
“post-WWII” comparisons irrelevant, and turned Kindleberger’s Manias, Panics
and Crashes and, via Paul McCulley, Minsky’s Stabilizing an Unstable Economy
into required reading. Similarly, in light of the events of 2022, it seems
prudent for investors to abandon the idea that the post-WWII world order will
remain stable, or at least won’t be challenged.
Pre-WWII parallels are once again relevant,
with a new reading list: Mackinder’s The Geopolitical Pivot of History,
Brzezinski’s The Grand Chessboard, and Herman’s Freedom’s Forge. The last one
is about two industrialists who oversaw the production of the “arsenal of
democracy” that underwrote Pax Americana, which, to use Ferguson’s term, is
challenged today by the “arsenal of autocracy”.
In my “war” dispatches, I stressed four themes:
1. War is inflationary.
2. War means industry.
3. War encumbers commodities.
4. War cuts new financial channels.
I now add a fifth theme:
5. War upsets all four prices of money.
For the first three prices of money (that is,
par, interest, and FX) to be stable, the fourth price has to be absolutely
stable. It’s simple: if the price level is stable, i.e., inflation is 2%, the
Fed can “casually” manage business cycles and clean up crisis situations using
QE. With stable prices, there is a fairly narrow range in which policy rates
will move up or down, and hikes have a predictable pace. But if inflation is
above target and off the charts, all bets are off. That’s been the story of
2022.
