Vijay Kumar Gaba

India macro outlook (Gavekal Research)

India’s economy is at an inflection point. The damage wrought by the pandemic still lingers, weighing on private-sector demand. But there are nascent signs that the government’s focus on investment spending is starting to pay off. Moreover, inflation is cooling more rapidly than anticipated, paving the way for policy to turn more supportive. These macro tailwinds, along with geopolitical currents, favor continued outperformance by Indian equities, despite their high valuations. By contrast, the rupee and Indian bonds are likely to remain anchored at current levels.

GDP growth accelerated to 6.1% YoY in 1Q23, from 4.4% in 4Q22. The pick-up was largely driven by a sharp rise in investment, led by government spending on infrastructure. Growth in the fiscal year to March 31 (FY22-23) was 7.2%, a better-than-expected outcome, albeit slower than the 9.1% recorded in FY21-22.

•      A combination of high public-sector spending, monetary policy easing, and an improving external environment will buoy growth ahead of elections in April-May 2024. Cooling inflation should give the central bank room to cut rates later this year, while an upturn in the global trade cycle will reduce the drag from negative net exports.

•      Although weak private consumption and investment remains a concern, both are showing signs of green shoots. We expect GDP growth in FY23-24 to slow to 5.5-6%, with the balance of risk tilted to the upside.

The inflation outlook has improved quicker than anticipated, paving the path to easier monetary policy. Fears that El Niño would disrupt India’s monsoon and put upward pressure on food prices have not played out. But bond yields are unlikely to fall far, given that fiscal deficit targets could be breached as election spending ramps up.

1QFY24 - Margin expansion to stay; heed demand growth (Elara Capital)

Profit boost from lower input costs to continue

Expect the broad theme of margin expansion to likely continue in Q1FY24, with lower input prices as the key contributor. Sectors that may benefit are FMCG, Power, Pharma, Auto (also helped by product price increase), Agrochem, Infra, Alcoholic Beverages, Aviation and Paints. Key exceptions may be Consumer Durables and Cement, wherein subdued demand and high-cost historic inventory may likely play spoil-sport.

Metals/Chemicals may be hit by lower commodity prices

Lower commodity prices may hit profitability of Metals and Chemicals in Q1. Expect EBITDA/tonne for Elara Steel universe to contract in INR 1,300-16,000 YoY/INR 1,950-3,850 QoQ range in Q1E. Also, cumulative EBITDA margin for Elara Specialty Chemicals universe may drop to 21.2% from 22.8%/23.4% in Q4FY23/Q1FY23 as prices correct on rising supply from China.

Financials – Growth strong, but higher funding costs to show up

Expect stable loan growth, high treasury income and low credit costs to continue benefitting banks/NBFCs. However, higher funding costs due to interest rate hikes may show up sharply in Q1FY24. Since lending yields are unlikely to have repriced materially, NIM may contract QoQ. Heed the extent of the decline, which may determine the trajectory of changes in forward estimates. Within NBFCs, financiersin micro/CV/power/MSME domains may be the growth leaders.

Management commentaries – Monitor ‘domestic demand’ focus

The key monitorable should be management commentaries on domestic demand scenario, especially rural demand. Loan book growth guidance by banks, comments on residential real estate demand and large capex guidance may be the other key factors to watch for from a macro perspective. Among sector-specific comments, global demand outlook for IT and US generic market pricing for the Pharma sector may be crucial.

Q1FY24 – Top picks

Expect Q1 results to strengthen momentum in Auto, FMCG, Pharma, Real Estate and Power sectors. Our top picks in these sectors include Maruti Suzuki India, TVS, Hero Motors, Tata Consumer, Zydus Lifesciences, Prestige, Brigade and NTPC.

We also expect select banks – ICICI Bank and IndusInd Bank – and some NBFCs – PFC, MMFS, CREDAG and SBICARD – to deliver results in-line or better than market expectations. Major weakness in Metals/Cement stocks due to weak Q1 may be an opportunity to add positions in these sectors.

India Strategy: Aiming for a new orbit (Prabhudas Lilladhar)

NIFTY has given more than 10% return in FY24 YTD led by resilient domestic demand and USD14bn of net FII flows. India continues to be epitome of global growth with 6.5%+ expected GDP growth for FY24 (highest globally) even as growth is slowing down in US and Europe is embracing recession.

India has witnessed revival in FII inflows (Strong global markets) and we expect the same to sustain post USD23bn outflow in last two years and decline in FII ownership by 300bps to 20.3%. Given strong domestic growth, declining inflation (Food and Fuel), revival in industrial capex and strong Infra push by GOI and demographic dividend, we expect sustained traction in FII inflows to continue. We estimate that FII inflows of USD35.7bn to increase market ownership by 1%. Rural India is showing green shoots post and soft inflation and favorable monsoons can accelerate demand further in a pre- election year.

We remain positive on Auto, Banks, Capital goods, Hospitals, Discretionary consumption and Building Materials. El Nino and 2024 elections remains a key risk. Stable Govt. post elections and continuation of economic policies can take markets to next level.

We estimate flat sales, 48% growth in EBIDTA and 81% growth in PBT of coverage universe. Ex oil & Gas, we estimate 30.6% growth in EBIDTA and 30% in PBT. Auto, Banks, Oil and Gas, Capital goods and travel will report high growth.

1Q24 is actually first normal quarter after 1Q20, devoid of any covid wave during the quarter or base quarter. Demand scenario is mixed, with some green shoots in 2-wheelers and FMCG in rural India. Urban discretionary spending shows seasonal uptick in QSR, strong growth in Jewellery while other segments are depressed. However, travel, tourism, and spending on marriages continues to show strong growth.

Global commodities continue to soften as fears of recession following sharp increase in global interest rates continue to weigh on prices. The impact of softer commodities has started to reflect in price reductions selectively.

Banks, Travel, HFC’s, Auto and capital goods will report strong growth. Consumer, Hospitals, Pharma and Telecom will report moderate growth in sales. Agri, Building materials and Oil and Gas will report decline in sales on lower product prices. Auto, travel, pharma, oil, and Gas will report sharp margin expansion. Auto, Travel, Building materials, capital goods and durables rank high in PBT growth.

NIFTY EEPS has seen an increase of 1.3/2.0% for FY24/25 with 16.3% EPS CAGR over FY23-25 with FY24/25 EPS of Rs1024/1171. Our EPS estimates are 3.9% and 3.7% lower than Bloomberg consensus EPS estimates.

NIFTY is currently trading at 18.3x 1-year forward EPS, which is at 12% discount to 10-year average of 20.8x.

Base Case: we value NIFTY at 12% discount to 10-year average PE (20.8x) with March25 EPS of 1171 and arrive at 12-month target of 21430 (21013 based on 18.2x March 25 EPS of Rs1148 earlier).

Bull Case, we value NIFTY at 10-year average (20.8x) and arrive at bull case target of 24353 (23878 at LPA PE).

Bear Case: Bear case Nifty can trade at 25% discount to LPA (25% earlier) with a target of 18264 (17909 earlier).

Model Portfolio: We remain overweight on Auto, Banks, IT services, capital Goods and Healthcare. We are Underweight on Metals, Cement, Consumer, Oil & Gas and Diversified Financials

India and US Equities: An odd tale of two markets (Kotak Securities)

The divergent performance between large-cap. and mid- and small-cap. Stocks in India and the US markets in the past few months may reflect a combination of hype and reality regarding certain developments in the two markets. The large-cap. stocks continue to be general laggards in a recovering economy in India, while the mega-cap. stocks are leaders in a slowing economy in the US. Both markets could be reaching their limits, given economic (US) and valuation (India) headwinds.

India: Long tail wagging the dog

The muted performance of several large-cap. stocks in the past 3-6 months has been a drag on the overall market performance despite the strong performance of other large-, mid- and small-cap. stocks (see Exhibit 2).

The recent revival in the performance of a few large-caps suggests the market is either (1) finding value and/or (2) seeking safety in large-cap. stocks.

India: Valuation headwinds

We are not sure how to explain or interpret the odd movement in the Indian stock market. Large-cap. stocks typically lead mid- and small-cap. stocks in bull-market rallies but the current rally is the other way around. ‘Liquidity’ seems to be most-cited argument among investors about the rally in smaller names, but that presumably reflects bullish sentiment among domestic institutional and retail investors. Foreign active (institutional) investors are unlikely to chase smaller stocks and passive (retail) investors will deploy money into ETFs with a disproportionate weight of large-cap stocks. Valuations are expensive in India, a natural headwind for the market.

US: Long tail is struggling somewhat

The strong performance of a few mega-cap. stocks in the past 3-6 months has been a driver of overall market performance despite rather muted performance of other large-, mid- and small-cap. stocks.

The 6-8 technology-oriented mega-cap. stocks have performed presumably on expectations of them dominating the emerging AI space. However, we note that the AI landscape has several large players, unlike the segments that the megacap. companies have dominated for the past 10-15 years. Each of the segments such as consumer electronics, cloud, e-commerce, search and social media has only 1-2 dominant players even now. AI will see each of these entities pitted against each other, a very different landscape compared with the landscape when these companies and industries first emerged and achieved scale.

US: Economic headwinds

We are not sure if the AI-driven rally in the US market will sustain against the harsh reality of (1) high interest rates for an extended period of time, as the US Fed strives to tame demand and inflation and (2) eventual slowdown in household consumption as and when some of the current factors (tight labor markets, excess household financial saving; supporting household sentiment and spending fade.

India Cement Sector: Rock-solid competition (UBS Securities)

Contrarian negative view on rising competition and expensive valuations: In the near term, we expect strong earnings in the next two quarters to be driven by robust demand and margin tailwinds, but any sharp uptick in stock prices could offer good opportunity for booking profits. Strong demand is likely to slow after the general elections in May 2024, and fresh capacity is rising fast and likely to exceed medium-term demand, in our view. We expect players to resort to pricing to grow or defend market share, as Adani’s entry to the sector significantly intensifies competition. Also, contrary to consensus, we see limited room for value-accretive M&A. With valuations of 15x one-year forward EV/EBITDA and 30x FY25E PE for a sector tracking close to GDP growth rate, rising competition, low entry barriers and return profile of low double digits, we see little room for potential upside. Structurally, we would sell any rally, not buy the dip.

Margin tailwind for now but pricing is fading and may worsen on overcapacity: Despite strong demand and high utilisation, prices were flat in Q1 FY24, in what is normally a strong quarter for price hikes. Pricing is where we see the big negative delta in the medium term: competition is likely to intensify with about 110mtpa of capacity coming onstream in the next 2.5 years versus incremental demand of 70m. The top-five firms (47% of the sector's FY23 capacity) guide for aggressive capacity expansion at 8-14% CAGRs in the next 5-7 years, whereas cement volumes in India have grown at 5-6% CAGRs or 1-1.2x GDP over the past three decades, creating excess capacity risks.

Companies resorting to organic expansion while inorganic deals dry up? Facing overcapacity, we expect companies to defend their market share. Unlike consensus, we see little scope for value-accretive M&A for the top-five firms. Our analysis of the next 23 largest firms (about 44% of FY23 capacity) reveal they also have good performances and capacity expansion plans. There is limited incentive to sell for the top 6-28 companies and balance sheet strengths provide a buffer to absorb margin hits from weak pricing. We therefore believe notable market share gains from the top 6-28 companies remain difficult for the top-five firms – organically or inorganically. This raises the threat of overcapacity or expansion lagging guidance. Both are de-rating risks for an expensive sector in the 90th percentile of its five-year valuation range.

Household debt growth at 21-quarter high in 4QFY23 (MOFSL)

India’s non-financial sector (NFS) debt grew at a seven-quarter low of 11.5% YoY in 4QFY23/1QCY23 (quarter-ending Mar’23), vs. 12.6% YoY in 3QFY23. Outstanding NFS debt touched USD5.4t (or INR446.7t) in 4QFY23, equivalent to 164% of GDP, down from its peak of 180.9% in 4QFY21 but up from 161.8% in 3QFY23.

In real terms, however, total debt (using GDP deflator) grew 7.1% YoY in 4QFY23, the highest in the past 11 quarters. Nevertheless, the growth was still lower than the average growth of 8-9% YoY witnessed during the pre-Covid period.

Within NFS debt, non-government non-financial (NGNF) debt also grew at a four-quarter low of 10.7% YoY in 4QFY23, while government debt jumped 12.3% YoY over the quarter. Within the NGNF sector, household (HH) debt spiked at 19% YoY in 4QFY23 – marking the highest growth in 21 quarters – driven by a decade-high growth of 20.8% YoY in the non-mortgage debt segment. Corporate debt, on the other hand, rose by just 4.6% YoY during the quarter – the lowest in seven quarters and more than half of 11% growth reported during 1HFY23. This weakness in corporate debt is in line with the dip in corporate investments that we had highlighted in our earlier report.

An analysis of NGNF debt by sources/lenders suggests that scheduled commercial banks (SCBs) and NBFCs posted strong lending growth, while HFCs’ outstanding loans grew 4.3% YoY in 4QFY23. Corporate Bond (CB) issuances and commercial papers (CPs), however, declined during the quarter. External/foreign borrowings grew decently.

A comparison of India’s NFS debt vis-à-vis a few other major economies confirms that while India’s debt-to-GDP is, by far, the lowest, it is much higher than other developing economies, except China.

Passenger Vehicles to grow at 7-9% After a Stronger FY23 (CARE Ratings)

The passenger vehicles (PV) industry is likely to record moderate volume growth of around 7-9% in FY24 as the pent-up demand levels off amid hike in vehicle prices. Further high interest rate, erratic monsoon expectation given EL Nino effect and subdued exports volume is expected to restrict volume growth.

However, strong order book, improvement in supply chain and semi-conductor supplies, robust demand for new model launches and increasing demand in the sports utility vehicle (SUV) segment is expected to keep the sales momentum rolling.

·         The demand remains healthy across both passenger cars and utility vehicles. Utility vehicles are likely to grow by 9-11% while passenger cars & vans are expected to report moderate growth of 5-7% in FY24.

·         With an improving penetration rate, electric vehicle volumes in the PV segment are likely to clock around 1 lakh for FY24. Monthly electric car sales have gradually improved in the previous two years from fewer than 1,000 units to around 8,000 units and are expected to continue at similar levels.

•      Average inventory holding with dealers is expected to reduce from the current 45-49 days in the following months due to expected strong sales momentum in the upcoming festive season beginning August 2023.

The PV industry is likely to record moderate volume growth of around 7-9% in FY24 as the pent-up demand levels off amid a hike in vehicle prices, high-interest rate environment and subdued exports volume growth on account of a global economic slowdown amid inflationary concerns. Strong order book, improvement in supply chain and semiconductor supplies, robust demand for new model launches and increasing demand in the sports utility vehicle (SUV) segment are expected to keep the sales momentum rolling. The demand for premium variants is expected to remain healthy led by increasing demand for the luxury and premium models, while the demand for entry-level variants is expected to continue to remain under pressure due to high-interest rates and an inflationary environment.