With most other indicators still weak, earnings outlook is challenging; cause for caution
India’s GDP growth slowed 40bps q-o-q to 4.7% in Q3FY20 but hopes of sundry green shoots abound and there may well be a few if the surge in power demand since late Jan is any guide. Yet, with most other indicators still weak, even before COVID-19, it may still be a hard slog keeping the earnings outlook challenging. With valuations also rich, we stay defensive, therefore, with a bias for large-caps and Financials.
Power: There is much hope that this marks the bottom, though, with frequent assertions of green shoots even if some proved premature. But, there may be some. Power demand has risen by 7% in the last five weeks, e.g., after falling for 5M with growth in Feb at a 8M-high of 6.5%, hurt a tad by a taper in the last week. Inventory rebuild may well explain it rather than a durable rebound but it is still encouraging and should reflect in a better IIP print than in December when it surprisingly contracted by 0.3%.
Credit: Non-Food bank credit growth has slowed to a 32-M low of 6.3% and may even soften a tad more with system growth even more sluggish despite a pick-up in ECBs.
Confidence: Indeed, consumer confidence also slipped further in the RBI’s surveys in Jan to decade lows with the more frequent CMIE readings suggesting that it has dipped even more since in rural India.
Exports: With exports anaemic as they have been for over a year and even before COVID-19, global markets are unlikely to help offset domestic weakness either.
RBI: The pricey INR, buffeted by strong capital inflows and perhaps even a current account surplus, hasn’t helped here but overall monetary policy, unconventional and conventional as inflation cools, can still be a growth tailwind.
Outlook: And yet, a rebound may only be gradual leaving the corporate outlook challenging. Revenues fell 4.6% y-o-y in Q3FY20, e.g., amid weak pricing power as the core WPI will attest to, with consensus Nifty FY20/21 EPS 8%/2% lower since Sep19.
Stance: And yet, valuations remain extended at 18.5x 12M P/E boosted by buoyant flows, with MSCI India now at a higher 45% premium to EMs. We remain defensive overall, therefore, with a bias for Large-Caps over Mid-Caps, which are no longer at a premium but not cheap, either, with Financials, Industrials & Tech our favoured Ows.