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INDIA STRATEGY: SAILING THROUGH THE GROWTH TIDE
Markets | Beyond Markets | AMC Focus | Expert Talk | Conference | Book Summaries 09th March 2018
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INDIA STRATEGY: SAILING THROUGH THE GROWTH TIDE Sahil Kapoor Chief Market Strategist
[email protected]
Shobana Krishnan Economist
[email protected]
February 2018
When the Going Gets Tough… ● When interest rates rise they signal exceptional period of growth and inflation. At time when global growth has accelerated to nearly 7.3% in nominal terms, hardening of interest rates is warranted and a healthy sign. ● However, the long end of the yield curve in most markets across the world has failed to replicate the short end’s optimism. Over the last 3 months the acceleration in short term interest rates has been steep. US 2 Yr yield have risen by about 45bps, nearly as much as the US 10 yr yield. We flashed the first warning sign in our Budget Preview and Review notes and subsequent communication. ● Narrowing of gap between short end and long end of the curves has led to flattening of the yield curves. At most instances this would have not made much of a difference to equity markets but at a time when equity valuations are factoring in growth rates which have not been witnessed in a decade the message of the bond markets is a lot less optimistic. ● The failure of long end of the yield curve to move up indicates that other asset class may have rallied ahead of themselves in the short term. This indicates the possibility of a correction which is unfolding across markets. We had highlighted the possibility of such a correction in our Union Budget Review and notes. ● In India there have been a few trigger which are likely to weigh on the markets. Domestic Liquidity which was in surplus post demonetization has been reversing to neutrality. International experience on implementation of Long Term Capital Gains (LTCG) tax suggests that Price to Earnings (P/E) compressions are higher in the first year of implementation and stabilizes thereon. ● However we believe that this short term correction, tough severe will only be a speed bump in the ongoing bull market in India. ● Backed by the revival in global earnings. MSCI World EPS indicates CAGR growth of 19-20% by FY20. This is likely to get replicated in India which is expected to see an earrings revival in FY19 to FY21. 1
…The Tough Gets Going ● India’s gaining share in World GDP (on a Purchasing Price Parity basis) and supposed to be the third largest economy by FY20. ● Fiscal Consolidation in India till FY17 has been better than its EM peers. Government has been performing a fine balancing act by keeping subsidies flat and revenue collections especially direct tax collections have been steadily going. ● Fiscal deficit target for FY19 is 3.2% of GDP and 3.5% of GDP in FY18. Shortfall in revenue collections due to GST and expansion in expenditure led to slippage of fiscal deficit target. DBT Efficiency Gains had reduced leakages and increased impact of fiscal stimulus. Governments thrust on rural and infrastructure is likely to boost consumption and private capex respectively. ● Broad based earnings recovery, revival in growth, higher government expenditure and strong domestic & foreign inflows should keep the bull market intact in India. ● We expect Nifty EPS of FY18/19/20 to be 500/600/700. As highlighted in our union budget review we believe there are short term risks which is likely to lead to correction and consolidation in the short term. ● However the long term bull market is still intact and will exert itself once this short term correction plays out. Eventually the correction will provide an opportunity to enter sustainably profitable business with a lot of margin of safety. ● We are revising our Nifty target price for FY19 to 11,500 (from 12,000 earlier) giving it a PE multiple of ~16.5 1Yr Fwd at an EPS of INR 700 for FY20.~
2
Nifty : What is Wrong ?
3
The Bond Yields in US and India Have Been Inching Up Bonds Yield Rise in Tandem 8
3 2.8
7.8 7.6
2.8 2.6
7.2
2.2
%
2.4
7
2
6.8
1.8
6.6
1.6
6.4
1.4
6.2
1.2
6 Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
US 10 Yr Bond Yields (RHS, %)
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
%
7.6 7.4
1 Feb-18
India 10 Yr Bond Yields (LHS, %) Source: Bloomberg, Edelweiss Investment Research
• Bond yields had fallen with low inflation expectation and political stability. • With Revenue shortfall the expectation of fiscal slippage in the markets spread. This coupled with higher growth trajectory and inflation risks has hardened the bond yields. Synchronous Rise in Bond Yields in US and India has led to rise in interest costs
4
And Equity Markets React Adversely to Interest Rate Spikes Sharp Rise In Yields Can Lead To Corrections 12000
9.5
Yield 8.90
10000
9 8.5
Yield 7.35
8
6000
7.5
7
Nifty 6100 Nifty 4980 Nifty 4500
4000
%
8000
Index levels
10
Repeat OF 2010-2011 ??
6.5 6
2000
5.5
Nifty Index
Jan-18
Jul-17
Jan-17
Jul-16
Jan-16
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
5
Jan-08
0
India 10 Year Bond Yield Source: Bloomberg, Edelweiss Investment Research
Although rising interest rates due to credit demand and growth are positive for equity markets spike in Bond Yields have led to corrections historically 5
Spreads In The US Are Narrowing Indicating Flattening Of Yield Curve 2 1.5
30 Year - 10 year
Although the spreads are far from crisis levels recent narrowing of spread may lead to adjustment in equity markets
%
1
With equity markets at all time highs the failure of long end of the yield curve to move higher indicates that bond markets expectation of growth is much more sober than stocks
0.5 0 -0.5
We are here
Hosuing Bubble - Dow Jones Peak, GFC Axis Title
%
Tech Bubble - Nasdaq Peak 3.5 3 2.5 2 1.5 1 0.5 0 -0.5 -1 1994
10 year - 2 year
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Axis Title Source: Bloomberg, Edelweiss Investment Research
Flattening of curve indicates short term and long term rates being close to each other indicating lower growth and inflation expectations in the long term
6
Easy DeMo Liquidity Is Coming To An End.. Interbank Liquidity Is Back To Neutral After Big DeMo Easing 1000
Deficit
Demonetisation
0
Money Flowing into equity markets
INR Billion
-1000
-2000
-3000
-4000
-5000
Surplus
Jan-18
Jan-18
Jan-18
Dec-17
Dec-17
Nov-17
Nov-17
Oct-17
Oct-17
Sep-17
Sep-17
Aug-17
Aug-17
Jul-17
Jul-17
Jul-17
Jun-17
Jun-17
May-17
May-17
Apr-17
Mar-17
Mar-17
Feb-17
Feb-17
Jan-17
Jan-17
Jan-17
Dec-16
Dec-16
Nov-16
Nov-16
Oct-16
Oct-16
Sep-16
Sep-16
Aug-16
Aug-16
Aug-16
Apr-17
Bloomberg India interbank liquidity Index – 6 month average
-6000
Source: Bloomberg, Edelweiss Investment Research
Excess Liquidity in the banking system has been slowly turning to neutrality, this has lead to inching up even short term rates
7
Very High Issuance Of Paper….Is Sapping More Money … Equity Issuance Increased ~3.5x
INR bn
1565
760 598 443 270
207 125
48 IPOs
QIPs
OFS
Total Equity
IPOs
QIPs
CY16
OFS
Total Equity
CY17 Source: Bloomberg, Edelweiss Investment Research
FY2018 saw a very buoyant primary market. 8
And LTCG Provided The Trigger…… An Analysis On De-Rating Of The Markets 120%
Index Returns after CG implementation 30% 20% 10%
Earnings Growth after CG implementation 98%
100%
24% 25% 16% 9%
9% 10%
80% 60%
0% -1% -1%
-10% -20%
20% -21%
-30% South Africa- 2001 1 year
Hungary - 1997 3 year
Germany -2009
5 year
-18%
Hungary - 1997
Germany -2009
-6%
-9%
32%
14%
6%
-8%
11%
16% 16%
0% South Africa- 2001
Hungary - 1997 1 year
PE De-Rating after CG implementation South Africa- 2001
33% 30%
40%
3 year
Germany -2009
5 year
Cross-country analysis suggests high degree of P/E compression for the first year after LTCG implementation and then stabilizes. First year derating could be as severe as 18%
-25%
LTCG could act as a catalyst for correction in the domestic markets. -82% PE Compression / Expansion - 1 Year
PE Compression / Expansion - 3 Year
Source: Bloomberg, Edelweiss Investment Research
9
But Global Rally Is Still Young
10
Globally There Is Head Room For More…… S&P 500 Returns Are Still Below Average….
Callouts show percentage gains and declines from previous lows and highs based on monthly averages of daily closes
+203%
The Real (inflation-adjusted) monthly averages of daily closes
The latest monthly averages is 203% above the 2009 low
11
Global Earnings Revival After A Decade Global Earnings Set To Rise After Lull of More Than A Decade 160.0 147 140.0
83
85
Dec-16
86
Dec-13
Dec-96
39
44
49
54
45 30
29
Dec-02
35
84
78
57
Dec-01
33
Dec-95
40.0
40
87
66
CY95-00 CAGR 8%
60.0
86
Dec-12
80.0
88
100
96
Dec-11
CY01-07 CAGR 21.5%
CY07-09 CAGR -26%
Dec-10
98
100.0
CY10-16 CAGR -2.5%
Dec-15
MSCI World Index EPS
120.0
130
CY16-19 CAGR 20%
20.0
Dec-19
Dec-18
Dec-17
Dec-14
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-00
Dec-99
Dec-98
Dec-97
0.0
Source: Bloomberg, Edelweiss Investment Research
Earnings Revival around the corner globally after a lull. 12
And India Is Just Coming Into Stride…
13
With Rising Share In World GDP (PPP % World GDP) 1950
1980
2000
2017
2022E
US
27.3
21.8
20.6
15.3
14.0
UK
6.5
3.8
3.1
2.3
2.0
5.1
6.6
4.9
3.3
9.1
China
4.6
2.3
7.4
7.5
20.5
India
4.2
7.8
4.2
18.3
2.9
Japan
3.6
2.9
7.0
4.3
3.7
Pakistan
0.3
0.5
0.7
0.8
0.9
Germany
14
And Macro Economic Position Gaining Strength…. India’s Primary Balance Most Improved Among Its Emerging Market Peers 1.0 Brazil
Primary Balance (% GDP)
0.5
Turkey
Mexico
0.0 -6.0
-4.0
-2.0
0.0
2.0
-0.5
4.0 Mexico
-1.0 -1.5
6.0
8.0
Indonesia Turkey
Russia India
-2.5 -3.0
Improvement Deterioration
-3.5
2016
China
Indonesia
-2.0 Brazil
10.0
China Russia
India
Real GDP Growth
Average (2010-2015)
Source: IMF Fiscal Monitor, October 2017
• Country’s vulnerability can be assessed by the difference between receipts and non-interest expenditure. • India’s primary deficit was one of the poorer amongst the emerging market peers from 2010-2015.
• As Government embarked on fiscal consolidation path, primary deficit sharply reduced in 2016 (FY17). India has been spending judiciously since 2014, in contrast to other emerging market peers 15
As Govt. Does A Fine Balancing Act! 260 240
6.00
Large rise in direct taxes has helped government increase its expenditure
5.70
5.50
220
4.80
180
5.00
4.50
4.40
160
4.10 3.90
140
A slowdown in the pace of fiscal consolidation
4.00
3.50
3.50
3.50
120
%
200
Gains from higher compliance reflected in tax gains
3.30
100
3.00 FY12
FY13
FY14 Subsidies
FY15 Direct Tax
FY16 CG Expenditure
FY17
FY18 (RE)
FY19 (BE)
Fiscal Deficit (%of GDP) (RH)
*Nos for subsidies, direct tax and central govt expenditure as normalised as of FY12 Source: Budget Documents, Edelweiss Investment Research
• Subsidies and fiscal deficit has been steadily declining since NDA came to power. • Direct tax collections have been rising at a faster pace on account of widening tax base and higher compliance 16
With Focus On Maximum Governance And Minimum Government 21.0%
High Cost of Nationalization, Slower GDP Growth
19.0%
Higher Capex led
17.0%
Higher Expenditure Esp Farm Loan Waivers
15.0%
13.0%
11.0%
9.0%
7.0%
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY98
FY99
EX-Capital expenditure as a % of GDP
FY19 BE
Total expenditure as % GDP
FY97
FY96
FY95
FY94
FY93
FY92
FY91
FY90
FY89
FY88
FY87
FY86
FY85
FY84
FY83
FY82
FY81
FY80
5.0%
Source: Budget Documents, Edelweiss Investment Research
The size of the government has been declining gradually. This is visible in government’s commitment to build stronger regulatory institutions rather than do more business 17
As Government Stretches A Bit And Sacrifices Fiscal Discipline For The First Time …. Fiscal Slippage for the first time since NDA-2 7.0%
NDA- 1
NDA-2
UPA 1+2
6.5% 6.0% 5.5%
% GDP
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
Actual Fiscal Deficit
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Budget Estimated Fiscal Deficit Source: Budget Documents, Edelweiss Investment Research
Although the timing appears a little challenged the government has bought some headroom for expenditure to revive the growth trajectory.
18
But The Extra Push Is Gainfully Employed As DBT/Aadhaar Take Effect Year Wise DBT Beneficiaries
DBT/Aadhaar Savings Being Used To Finance Fiscal Push 600
60cr
60
31 cr
30
10
36cr
23 cr 11 cr
2
38
400
INR Bn
40
20
87
500
50
82
300
570
200 100
0 2013-14 PAHAL
2014-15 MGNREGS
2015-16 NSAP
2016-17
Scholarship Schemes
0
2017-18
FY16
Others
PAHAL
PDS
MGNREGS
NSAP
Total Savings Upto 2017
Nearly A Third of Amount Equal To Annual Subsidies being Paid Through DBT – Highly Efficient 95000cr 75000cr
100000 60000 cr
80000
410
40000 cr
60000
450 300
75000 cr
40000 20000
600
59
34
28
150
142
0
(No of Schemes)
120000
(Fund Transfer in INR)
No. of beneficiary in Cr)
70
0 2013-14
2014-15
PAHAL
MGNREGS
2015-16
NSAP
Scholarship Schemes
2016-17
Others
2017-18
No of Schemes
Source:www.dbtbharat.gov.in, Edelweiss Investment Research
This extra expenditure can have a larger impact as the end recipient is likely to receive larger share of benefits unlike the past which has dominated by leakages
19
As Tax Collection Increase While No Of Taxes Reduce ……… The government tax revenues are streamlining and in FY19 large tax growth is possible. Lesser number of taxes will lead to more and easy compliance Gross Tax Collection To Hit 12% (as % of GDP)
GST To Replace Taxes, Become one Third of Overall Tax Revenue 12.1
7.9 11.3 7.7 10.1
10.6 10.1
10.5
10
60
9.5 9.5 8.5
6.9
7.5
6.7 7.3
7.2
7.5
7.3
7.3
6.9
7.2
7.6
7.6
7.9
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY18 FY19 BE RE BE Net Tax
23 33
14
13
7 4
Gross Tax
6.5
15
21
5
14
11
50 40
7
13
15
70
7.1
6.5
80
11.5
%
7.3
10.1
90
11.6
%
%
7.5
10.4
11.3
100
12.5
21
23
23
23
28
29
27
FY18 BE
FY18 RE
FY19 BE
30 20
34
10 0 FY15 Corporate
Income
Excise
Services
Customs
GST
Source: Budget Documents, Edelweiss Investment Research
The complexion of the economy is likely to improve as number of taxes reduce and tax revenues increase on back of higher compliance rates. More individuals and businesses likely to participate formally in India growth story 20
And Earnings Landscape Looks Better…
21
Corporate Profits : At The Bottom Of The Cycle Corporate Profit as a % of GDP 8 7.1
6.8
7
Policy Paralysis 6
5.6
5.6
5.2 5
5.2
5
4.2
4.2
4
3.5 2.9
3
2
FY18 profits at 1.5X FY08
4.7
4.5
2.9
3
3.1
FY16
FY17
FY18E
3.3
2 1.7
1
0 FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY19E
Source: CMIE, Edelweiss Investment Research 22
Growth In Profitability Has Been More Broad Based Over The Past One Year PAT growth transition from Dec-15 to Dec-16 for Nifty 100 Index 1,05,000 1,00,000
93% of the PAT growth was driven by Banks, Metals and O&G
(INR cr)
85,000
83,976
(2,167)
3,704
553
O&G
Others
99,277
6,514
95,000 90,000
3,970
1,586
1,140
80,000 75,000 70,000 201512
Automobile
Banks
Finance
IT
Metals
201612
PAT growth transition from Dec-16 to Dec-17 for Nifty 100 Index
1,15,000
PAT growth has been more broad based over the past one year
1,10,000
(INR cr)
1,05,000 1,00,000
99,277
2,595
1,640
1,496
Banks
Finance
1,842
2,694
Metals
O&G
1,120
1,812
1,12,476
Others
201712
95,000 90,000 85,000 80,000 75,000 70,000 201612
Automobile
IT
Source: Capitaline, Edelweiss Investment Research
23
Companies Reporting Profitability In Line With Best Period In Last Decade PAT Growth Estimates for BSE 100 100% 90% 80% 70%
53%
46%
35%
35%
39%
60% 50% 27%
40%
30%
41%
47%
45%
31%
20% 10%
16%
27%
25%
2010
2013
19%
16%
2015
2018
0% 2007
Less than 0%
Between 0-20%
More than 20% Source: Bloomberg, Edelweiss Investment Research
24
Nifty Earnings Growth To Change Gears Nifty Need To Head Back To Higher Earnings Growth 800 720 700
FY17-20 CAGR 19%
600
600
Nifty FY End EPS
INR
495
FY09-17 CAGR 7%
500
424
408 400 323
FY01-08 CAGR 21%
300
275 238
226
200
160
346
356
FY12
FY13
387
384
FY15
FY16
257
179
122 100
74
70
FY01
FY02
92
0 FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY14
FY17
FY18
FY19
FY20
Source: Bloomberg, Edelweiss Investment Research 25
Foreign Investors Are Lining Up For India’s Growth Foreign Investment Flows Nearing Record
FPI Flows Turn To Primary Equity Markets
90 77 68 60
56
60
46
$ Billion
50 37
40 23
30 20
0
10 3 0 3
3 2 0 1
2 1 7
13
14
3 1 9
4 11 -1
14 1 8
16 2
23 33
19
27
21
40
10 32
1 18
24
29
7 25
37
28
27
43
20
16
8 3
30
46
20 10
5 -1
8
0
FDI
Total
CY17
CY16
CY15
CY14
CY13
CY12
CY11
CY10
CY09
CY08
CY07
CY06
CY05
CY04
CY03
CY02
CY01
-20
FII Debt
20
19.8 15
16.2
22.5 17.8
10
15
14.1 1.7
5 0
2.1
2.0
2.1
-10
-20
FII Equity
20
50 40
25
24.6
70 60
50
39
-8
-13
-10
54
23
9 -1
3
34
30
25
USD Billion
70
80
$ Billion
80
10
30
90
3.5 -0.2
3.3
6.4
1.6 1.3
10 8.0 5
2.9
-5
0 2012
2013
FPI Primary Market
2014
2015
2016
FPI Secondary Market
2017
FPI Net
Source: Bloomberg, Edelweiss
Note: For 2017 - FPI is full year; FDI is year to date til Oct
Foreign flows are coming thick and fast in both debt and equity markets. Preference of FDI and Primary market route over the earlier ‘hot’ secondary market route indicates long term commitment of these flows 26
Domestic Money Is Sticky, Expected To Remain So Mutual Funds Have Added 13 Years of AUM in Last 3 Years 12,000
10,000
INR Billion
8,000
6,000
11,307
11,114
262 X more equity purchases
4,000 2,362
2,000 9
CY02-14
MF AUM Added (LHS)
CY15-17
MF Equity Invest (Secondary Market) Source: AMFI, Edelweiss Investment Research
Steady flows into Mutual funds have been serving as an anchor in the markets. Though these flows can’t dictate the direction of the markets they have been able to reduce volatility
27
While Govt Focuses On Rural And Infra
28
Rural Focus Has Been A Blind Spot For NDA Rural spending has gone down in both NDA regimes…
…which has impacted rural wage growth
2.5%
20%
NDA I
2.0%
UPA
NDA II
18% 16% 14%
1.5%
19% 1)MSP increase by 30-40% 2)Farm loan waiver ~INR53K cr
One of the harshest drought ever In 2002 with 79% of LPA
12% 10%
1.0%
7%
8% 6%
Rural spending as % to GDP Note: Rural spending is sum of agriculture, fertilizers and rural development industry
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
0.5%
5%
4%
4% 2% 0% NDA I (FY99-03)
UPA I (FY04-08)
UPA II (FY09-14)
NDA II (FY15-17)
Nominal Rural Wage Growth Source: Budget Documents, CMIE, Edelweiss Investment Research
Rural economy has been under stress due to lesser government expenditure, bad monsoons and lower commodity prices in India and globally. Since rural economy still accounts for sizeable employment a shift in focus by the government was expected, especially ahead of 2019 general elections 29
Budgetary Allocation, Company Revenues Signal Distress Rural Focus Company Revenues Tell The Story
Agriculture GDP impacted adversely because of poor monsoons and lower government support 18000
15%
16000
30%
NDA II 9%
25%
14000
10% 9%
INR (in bn)
20%
12000 10000
15%
8000
10%
6000
5%
4000 0%
2000
Nominal Agri GDP growth
Rural centric cos revenues (LHS)
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
NDA II (FY15-17)
FY03
UPA II (FY09-14)
FY02
UPA I (FY04-08)
FY01
NDA I (FY99-03)
-5%
FY00
0
FY99
Average growth rates
14%
UPA 17%
NDA I CAGR 11%
Growth
Note: Sample set of more than 1000 companies belonging from two wheeler, agriculture equipments, consumer goods, food & agro products and textiles is included
Source: CMIE, Edelweiss Investment Research
Agricultural GDP has been slowed over the last few years. This is visible in declining revenues of rural centric corporate. 30
Rural Repair – Higher MSPs , Higher Budgetary Allocations Table: Minimum Support Prices (%Y-o-Y) Kharif Crops Paddy Paddy, Grade A Jowar, hybrid Bajra Maize Ragi Arhar(Tur) Moong Urad
FY08 20 19 11 11 15 11 13 14 14
FY09 21 20 40 40 35 53 26 45 45
FY10 11 11 0 0 0 0 15 10 0
FY11 0 0 5 5 5 6 52 33 35
FY12 8 8 11 11 11 9 6 9 12
FY13 16 15 53 20 20 43 4 10 13
FY14 5 5 0 6 11 0 12 2 0
FY15 4 4 2 0 0 3 1 2 1
FY16 4 4 3 2 1 7 6 5 6
FY17 4 4 4 4 3 5 9 8 8
FY18 5 5 5 7 4 10 8 7 8
FY19* 8 5 37 0 10 47 -5 20 -6
2
39
0
0
12
29
3
1
1
2
4
22
Cotton, Medium staple
2,500
Increase in allocation towards rural expenditure 2,027
INR (in bn)
2,000 1,500
1,779
3%
1,321
8% 1,000 500
In the union budget the government has suggested a higher rise in MSP. Minimum support prices (MSP) will be fixed so that they are 50% higher than the unit cost of production. MSP are likely to rise by more than 10% as against this government average rise of nearly 5%
0 FY10
FY14
FY18RE Source: Budget Documents, CMIE, Edelweiss Investment Research 31
MSPs impacting Rural Wages With Lagged Effect As MSPs will rise this year, average rural wages should also rise and boost consumption 25%
30.0%
25.0%
20%
15% 15.0%
y-o-y
y-o-y
20.0%
10% 10.0%
5%
5.0%
0%
0.0% FY10
FY11
FY12
FY13 MSP- RHS
FY14
FY15
FY16
FY17
FY18
Average Rural Wages- LHS Source: CMIE, Edelweiss Investment Research
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Big Infrastructure Spending, To Become Even Bigger Investments spending (INR Trillion) Power & T&D
Railways
Airports & Ports
Highways
Urban Others
Total
FY08-12 Actual
7.8
2.0
0.8
4.6
0.8
7.4
23.8
FY13-17 RE Niti Aayog
12.7
3.8
0.9
7.6
0.9
10.2
37.2
FY18-22 RE
14.7
8.0
1.0
10.0
5.5
11.0
50.2
Investing spending (Govt +IEBR+Priavte) has been rising. It is expected to see a surge in the next 4 years 33
Removing bottlenecks for faster execution
Increase in land acquisition prices
Single window approval
Fast-tracking arbitration awards
Steps taken to facilitate faster execution
Termination and re-bidding of stalled projects Easy monetization of projects Hire global consultants for better decision making 34
Sector is moving towards financial self-dependence Yearly I.E.B.R to Infrastructure sector doubled under NDA 3000
100% 2500
2x
(INR Bn)
2000
50%
1500
NDA 1000
UPA
500
0 FY10
I.E.B.R Overall Budget
FY14
807
1206
2306
3051
FY19BE
2523
5100 Source: Budget Documents, CMIE, Edelweiss Investment Research
35
Foreign Interest in Indian Infra project is at historic highs Infrastructure FDI in FY18 is highest over last decade INR 3261 bn 3500 3000 2500
(INR BN)
2000
INR 1231 bn
INR 1475 bn 2649
1500 1000
500
1400
1097
611 135
0 FY10
75 FY14 FDI in Infra/Construction
FY18E FDI in others
Overall FDI
Infrastructure has been receiving the largest share of incremental Foreign direct investment flows Source: dipp.nic.in, Edelweiss Investment Research
36
Industry to experience lower stress and higher growth Company’s Balance Sheet stress started reducing 1.5
2500
2408
2166
(INR bn)
2000
1.1
1.0
1500 1000
1.4
9000
1.3
8000
1.2
7000
1.1
6000
1.0 0.9
894
0.8 0.7
500
0.6 0
0.5 FY10
FY14 Total Debt
FY18E Debt/Equity
(INR bn)
1.4
(x)
3000
Execution is expected to pick up pace going forward
5000
21%
8%
4%
FY10
FY14
4000 3000 2000 1000 0 Order Book
Cumulative debt accumulation INR 1273 BN
FY18E
Revenue Growth
Cumulative debt accumulation INR 242 BN
Source: Capitaline, Edelweiss Investment Research
Companies in the infrastructure space witnessing a goldilocks scenario
37
Multi Year Shift From Unorganised To Organised Sector Aided By GST Home Building Materials (excluding cement)
Growth Opportunities Across Various Categories FY17-22E
MDF
FY17
16
100%
100%
Organised Growth 45
2.8x
INR 2.5tn
9.5% CAGR
FY22E INR 4.2tn
Extent of Organised FY17
Faucets
Sanitaryware
Laminates
A number of sectors likely to benefit from formalization of the economy.
47
25
27
Tiles
135
Plywood
39
65%
75%
60%
70%
53%
65%
50%
65%
22%
40%
FY17 INR Organised Share (%) 2017 Bn
95
2.0x
53
2.1x
55
2.0x
289
2.1x
121
3.1x
FY22E Organised Share (%) 2022E
INR Bn
38
Conclusion ● Rising interest rates but only at the short end indicates that its prudent to be cautious. Earnings growth needs to be higher than the short term spike in rates for FY19. ● The failure of long term interest rates, especially in US, to move higher indicates that Bond markets expectation of growth is sober than equity markets. This equity markets could correct to valuations which are more attractive and depict forward growth in a more realistic manner. ● Domestic markets could come under pressure due to confluence of short term negative. These are de-rating of earnings multiples due to application of LTCG, spike in bond yields, slower than expected pick up in earnings and tapering in emerging market inflows. ● We expect Nifty index to see a correction. However the long term bull market remains intact and even this correction will present itself as a buying opportunity later. ● We are revising our Nifty target price for FY19 to 11,500 (from 12,000 earlier) giving it a PE multiple of 16.5 1Yr Fwd at an EPS of Rs. 700 for FY20.
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