India’s GDP grew an impressive 6.7% sequentially in Q4FY22; what’s... India’s GDP grew an impressive 6.7% sequentially in Q4FY22; what’s about Nifty EPS? Read more

Summary

Indian economy and Nifty EPS may continue to grow at a reasonable pace despite various headwinds

Last week, the Indian market focus was also on India’s GDP data. The MOSPI flash data shows that India’s real GDP was around Rs.40.78T in Q4FY22 against Rs.38.22T sequentially (+6.70%) and Rs.39.18 yearly (+4.08%) The yearly growth of +4.1% in Q4FY22 was in line with market expectations +4.0% (y/y), but it was also lowest in last 4-quarters amid muted consumer spending due to elevated inflation and lower net trade as import bill soared on higher global oil prices.

But the Indian economy also clocked the lifetime highest real GDP of Rs.40.78 so far in Q4FY22 with a sequential growth of +6.70%, in line with quarterly sequential GST collection growth of +6.12%. Consumer spending contracted around -2.92% sequentially on higher inflation. The elevated cost of living may be prompting a cut in discretionary consumer spending. The FY22 real GDP clocked around Rs.147.35T vs Rs.135.49T in FY21 (+8.67%) and Rs.145.16T in FY20 (-6.59%); i.e. the Indian economy has grew +8.67% in FY22 after contracting -6.59% in FY21 and in FY22, grew only +1.51% from FY20, pre-COVID real GDP levels.

Looking ahead, as per present and past (pre-COVID) run rates, Indian real GDP should grow by around +1.74% sequentially (q/q). But elevated inflation and higher prices of global oil may affect the economy adversely. The GST collection for April slips -by 16.07% sequentially to Rs.1.41T after growing +18.31% from March to April; i.e. +2.24% growth in Q1FY23 till May. Considering all these factors and subject to actual GST collections trend, the real GDP may grow or even contract around 1% sequentially in Q1FY23. Although higher exports will help, at the same time, the higher import will also drag the real GDP output.

Assuming a sequential growth of around +1% on an average in FY23, the real GDP may scale around Rs.167.24T, which would be a +13.50% growth from FY22 real GDP levels around Rs.147.35T. But the market is expecting around +7% growth of real GDP in FY23 as sequential growth may slow or even contract due to sticky inflation and fragile global economy amid lingering geopolitical conflict between Russia-Ukraine, various economic sanctions on Russia, and faster Fed/global tightening. India’s export may also be adversely affected, especially IT export revenue if there is any significant slowdown or recession on both sides of the Atlantic (America/Europe). In Q4FY22, India’s real GVA was around Rs.37.09T vs Rs.35.25T sequentially (+5.72%) and Rs.35.70T yearly (+3.89%). As a pointer, GDP (gross consumption) = GVA (gross production) + Taxes

On 1^st June, Markit/S&P Global data shows that India’s manufacturing PMI was little-changed to 54.6 in May from 54.7 in April, higher than market expectations of 53.8. S&P Global said the latest reading marked the 11^th straight month of expansion (above boom/bust line 50.0) in the manufacturing sector, as both output and new orders grew at the same pace in the prior month, with new export orders rising to the fastest since April 2011, amid global loosening of COVID restrictions. At the same time, input purchasing rose sharply and the quickest since last November, with supplier delivery times, further lengthening; and employment increased to the strongest since January.

On the price side, input prices continued to rise due to higher prices in electronic components, energy, freight, foodstuff, metals, and textiles. Meanwhile, output price inflation accelerated to an over eight-and-a-half-year, as companies continued to transfer additional cost burdens to their clients. Finally, sentiment weakened to the second-lowest in just over two years on inflationary concerns

The S&P Global said:

“India's manufacturing sector sustained strong growth momentum in May. Thanks in part to the sharpest rise in international sales for eleven years, total new orders expanded further. In response to demand resilience, companies continued with their efforts to rebuild stocks and hired extra workers accordingly.

While firms appear to be focusing on the now, the survey's gauge of business optimism shows a sense of unease among manufacturers. The overall level of sentiment was the second-lowest seen for two years, with panelists generally expecting growth prospects to be harmed by acute price pressures.

There was little movement in the rate of input price inflation during May, which remains historically high, but output charge inflation surged to its highest in over eight-and-a-half years as companies continued to transfer additional cost burdens to their clients."

On 3^rd June, the S&P Global data also shows India Services PMI increased to 58.9 in May from 57.9 in April, the highest since April 2011 and higher than the market expectations of 57.5. The May service PMI also marked the 10^th straight month of expansion in services activity, buoyed by a substantial pick-up in new business growth as demand continued to recover following the reopening of the economy after COVID lockdowns.

Meanwhile, foreign demand declined each month since the onset of the pandemic in March 2020 amid mounting global uncertainty from the war in Ukraine and persistent supply chain issues. At the same time, employment fell marginally, with backlogs of work expanding for the 5th straight month and the fastest in a year. On the price front, input price inflation accelerated to the highest in 16-1/2 years on a higher food, fuel, labor, raw material, and transport costs. In turn, output cost inflation hit the second-highest in nearly five years. Looking ahead, sentiment remained subdued as concerns lingered over inflationary pressures.

Ultimately, the composite PMI in India increased to 58.30 in May from 57.60 points in April and pointed to the fastest rate of expansion since last November. Overall, stronger growth of private-sector output accompanies mounting cost pressures. May data showed a combination of quicker output growth and intensification of cost pressures across India's private sector. Services led the increase with the quickest upturn in activity in over 11 years.

Underpinned by a stronger upturn in input prices in the service economy, aggregate cost burdens rose at the fastest rate since March 2011. By comparison, there was a mild slowdown in cost inflation in the manufacturing industry. Concurrently, output charges at the composite level rose further, with the overall rate of inflation little changed from April's nine-year high.

Business confidence among private sector firms in India remained subdued in May, despite improving from April. Manufacturers and service providers were concerned that inflationary pressures would restrict output growth over the coming 12 months.

The S&P Global said:

"The reopening of the Indian economy continued to help lift growth in the service sector. Business activity rose at the quickest pace in over 11 years in May, supported by the fastest upturn in new orders since July 2011. That said, the inflation outlook appeared to have worsened as input prices rose at the sharpest pace in the survey history. Services firms again reported substantial pressure from food, fuel, input, labor, and transportation costs. Output charge inflation softened only marginally from April, being the second-highest in just under five years, as several companies mentioned the need to transfer mounting costs through to clients.

Elevated price pressures continued to restrict business optimism. Despite picking up from April, the overall level of sentiment among service providers was historically subdued. Consumer Services remained the brightest spot of the service economy, posting the strongest increases in both new business and output during May. It was here too that the steepest rate of input cost inflation was seen."

In brief, S&P Global said India’s manufacturing activities are quite upbeat as export jumped amid the easing of COVID restrictions. As per S&P, product inflation may be peaking in May after substantial pass over of input cost pressure on output prices over the last few months. But overall elevated inflation pressure remains. As per S&P, India’s service sector is now booming despite inflationary pressure as the pandemic now turned into an endemic.

Overall, the S&P Global PMI indicates strong manufacturing activity as India’s export, especially refined petroleum products jumped recently to Europe (led by RIL, India’s biggest merchandise exporter), which is shunning Russian products. Also, exports of engineering goods, gems & jewelry, organic & inorganic chemicals, drugs & pharmaceuticals, textiles, and electronic goods are increasing rapidly as ‘democratic’ India is now a ‘reliable’ source of the global supply chain, especially to America, Europe, and even China.

In April, as per a preliminary estimate by Indian Commerce & Industry Ministry, India’s merchandise (product) export was around $40.19B vs $30.75B yearly (+30.70%), while service export was $27.60B vs 18.06B yearly (+52.87%). India’s total export was around $67.79B vs $48.80 yearly (+38.90%), while overall trade balance (deficit) was only $-8.08B vs $-6.86B yearly (-17.83%). This along with very low external debt and comfortable FX reserve of around $600B, and stable currency, there is no significant concern of a balance of payment crisis in India despite elevated oil & USD.

India’s IT export coupled with booming merchandise export and re-opening for travel & tourism for foreigners are now supporting overall economic activities. Also, India’s service sector is now operating 100% normally (domestically) after COVID and is booming on pent/catch up demand despite elevated inflation. In India, almost 30% of the population has significant purchasing power due to adequate or even more than adequate wage levels/ increase in the secured government sector as well as reliable corporate sector; i.e. there is strong wage inflation, which is supporting consumer spending despite elevated inflation.

Also, despite DEMO in 2016, India’s consumer spending is still heavily boosted by black money (unaccounted money), thanks to rampant corruption, be it with government fiscal stimulus (capex, grants, etc) or with a bank loan (NPA frauds). For such ‘corrupted’ high-value consumer spending, inflation or even higher borrowing costs is not a deterrent. This coupled with a booming stock/capital market; the Indian discretionary consumption story may continue to be upbeat despite various macro headwinds.

In any way, Nifty Q4FY22 consolidated EPS was around 808, and grew almost +5% sequentially (in line with real GDP growths); the market was expecting around 15-20% CAGR between FY22-24; but considering higher inflation, higher borrowing costs, higher input cost pressure, reasonable pricing power by producers, leveraged corporate balance sheet, controlled NPA, higher USDINR (positive for exporters; almost 40/50% of Nifty earnings comes from exports), supply chain disruptions, robust domestic demand (despite higher inflation), Nifty EPS may growth around +7.5% at least in FY23-24 (considering the average CAGR for last few years and expected real GDP growth around +7.20% in FY23-24). Thus the FY23 consolidated EPS may come to around 870-935. And considering an average PE of 25, the fair value of Nifty may be around 21750-23375 by FY23-24.