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Economy
UPDATE September 01, 2014
We expect GDP growth in FY15 to be recorded at 5.6% YoY Growth (YoY change, in %) FY14
FY15 Ambit (E)
10 yr Avg.
Agriculture 4.7% 2.0% 4.0%
Industry 0.4% 4.2% 7.9%
Services 7.0% 7.1% 9.1%
GDP 4.7% 5.6% 7.9%
Memo Item: Investment
-0.1% 5.7% 11.6%
Source: CEIC, Ambit Capital research
Analyst Details Saurabh Mukherjea, CFA Tel: +91 99877 85848 [email protected]
Sumit Shekhar Tel: +91 22 30433229 [email protected]
As expected, GDP growth recovers in 1QFY15 India’s GDP growth in 1QFY15 was recorded at 5.7% YoY, a 101bps sequential improvement as compared to 4QFY14. On the supply side, GDP growth was mainly driven by a sharp pick-up in industrial activity, which recorded a growth rate of 4.2% YoY after two consecutive quarters of contraction. Services too showed signs of healthy growth at 6.8% YoY in 1QFY15 as compared to 6.4% YoY in 4QFY14. With the Government having undergone a regime change in June 2014 and with the lagged impact of project clearances approved by the previous Government in FY14 likely to come through, we expect this growth improvement to sustain. We reiterate our FY15 GDP growth estimate of 5.6% YoY (vs 4.7% YoY in FY14), which is driven mainly by higher industrial growth.
Economic growth bounces back in 1QFY15
In line with our expectation (click here for our 11 August note, ‘1Q results point to a recovering economy’), the Indian economy clocked its strongest growth rate in eight quarters in 1QFY15. Headline GDP growth was recorded at 5.7% YoY in 1QFY15, which in turn implies a 101bps sequential improvement in the pace of growth from 4QFY14. However, the drivers of this growth rate were different across these two quarters. On the supply side, GDP growth was driven mainly by industries and services growth in 1QFY15 as against the farm sector in 4QFY14. On the demand side correspondingly, GDP growth was driven by ‘government expenditure’ and ‘investments’ in 1QFY15 as against ‘consumption’ in 4QFY14.
We expect full-year GDP growth rate for FY15 to be recorded at 5.6% YoY
Since 19 May we have maintained that we expect full-year GDP growth to be recorded at 5.6% YoY in FY15 as compared to 4.7% YoY in FY14 (click here for our 19 May thematic, ‘The rebooting of India’). We expect this improvement to be driven by: (1) the new Government catalysing private sector business confidence and thus kicking-off the capex cycle; and (2) the lagged impact of projects cleared by the Cabinet Committee on Investments (CCI) playing out, as state-level clearances finally come through and projects involving large PSUs (eg. Coal India, NTPC, SAIL, NMDC, etc) get off the ground.
However, this should not be seen as a full-fledged recovery
The community social and personal services (CSPS) component of services grew at 9.1% YoY in 1QFY15 (vs 3.3% YoY in 4QFY14). This element of GDP is entirely driven by the Government’s revenue expenditure which is usually higher in 1Q and is likely to slow down in the future, as the Government tries to achieve its 4.1% fiscal deficit target. There is a strong positive correlation between CSPS growth and the growth rate of real revenue expenditure (last 15-year correlation at 64%); as the Government throttles back on revex in 4QFY15, this is likely to impact CSPS growth adversely.
Secondly, the real test for the farm sector output will be in the 2QFY15 numbers as that is when we will really be able to gauge how the deficient monsoons in the north-west regions (Punjab and Haryana) has impacted food output.
Thirdly, the RBI has a CPI inflation target of 8% YoY by January 2015 and if it is serious about attaining this (and its 6% January 2016 target), a rate hike or two seems to be on the cards. Moreover, in the absence of rate hikes we expect the RBI to miss its CPI inflation target of 8% YoY by January 2015. Note that the next CPI print will be published on 12 September and the next RBI policy is on 30 September.
Economy
September 01, 2014 Ambit Capital Pvt. Ltd. Page 4
Supply side: Industrial and services sector growth picks up Industrial sector (Five-year average share in GDP: 28%; five-year average YoY growth: 6.0%; 1QFY15: 4.2% YoY, our FY15 estimate: 4.2%) Industrial sector growth bounced back and recorded an expansion of 4.2% YoY in 1QFY15 (vs a contraction of 0.2% YoY in the previous quarter) owing to a sharp pick up in the ‘Electricity, Gas and Water supply’ as well as in the ‘Manufacturing’ sub-sectors. On the other hand, growth in the ‘Mining and Quarrying’ picked up on a sequential basis after experiencing two consecutive quarters of contraction whilst growth in the ‘Construction’ sub-sector also registered a healthy growth. With the Government in New Delhi having undergone a regime change in June 2014 and with the lagged impact of project clearances approved by the previous Government in FY14, we expect growth in this sector to show further signs of improvement from 2QFY15 onwards. Furthermore, a pick-up in domestic exports growth (56% correlation with IIP growth) driven by stronger growth in the Western economies is likely to prove to be another tailwind that would aid in a pick-up in manufacturing sector activity despite the INR appreciation. Overall, we expect headline industrial sector growth in FY15 to be recorded at 4.2% YoY vs the 0.4% YoY growth rate recorded in FY14. Services sector (Five-year average share in GDP: 57%; five-year average YoY growth: 8.8%; 1QFY15: 6.8% YoY, our FY15 estimate: 7.1%) Services sector growth accelerated in 1QFY15 to 6.8% YoY i.e. 40bps higher than the growth rate recorded in 4QFY14. The constitution suggested that this was driven by the pickup in ‘Community, Social and Personal Services’ (CSPS; accounts of 25% of Services) as well as the ‘Financing, Insurance, Real Estate & Business Service’ (FIRB; accounts of 30% of Services). CSPS growth directly depends on the Government’s revenue expenditure which is usually high in the first quarter. Therefore, we expect this sub-segment of Services to slow down in subsequent quarters as the Government revex slows down. CSPS growth increased to 9.1% YoY in 1QFY15 (vs 3.3% YoY recorded in 4QFY14), owing to higher spending by the Central Government. Growth in the FIRB sub-sector was also buoyant and was recorded at 10.4% YoY in 1QFY15 (vs 12.4% YoY in 4QFY14). Growth in ‘Trade, Hotels, Transport and Communication’ (THTC; accounts of 45% of Services), on the other hand, slowed down 110bps to 2.8% YoY in 1QFY15 (vs 3.9% YoY in 4QFY14). In the future, we expect Services sector growth to pick-up marginally and we expect headline Services sector growth in FY15 to be recorded at 7.1% YoY vs the 7.0% YoY growth rate recorded in FY14. Farm sector (Five-year average share in GDP: 15%; five-year average YoY growth: 3.2%; 1QFY15: 3.8% YoY, our FY15 estimate: 2.0%) Farm sector growth in 1QFY15 was recorded at 3.8% YoY i.e. 250bps lower than the 6.3% YoY growth recorded in 4QFY14.
In the future, we expect farm sector growth to be recorded at a lower level in FY15 even if India again receives a near-normal rainfall, as a high base effect is likely to impede strong growth rates in this sector. We expect headline farm sector growth in FY15 to be recorded at 2.0% YoY vs the 4.7% YoY growth rate recorded in FY14.
Economy
September 01, 2014 Ambit Capital Pvt. Ltd. Page 5
Demand side: Investment growth surges; private consumption growth remains weak Gross fixed capital formation (GFCF) (Five-year average share in GDP: 34%; five-year average YoY growth: 7.3%; 1QFY15: 7% YoY) GFCF growth for 1QFY15 was recorded at 7% YoY (as compared to a contraction of 0.9% YoY in 4QFY14), thereby making it the highest growth on capital formation since 1QFY13. The inventory cycle too showed signs of improvement, as YoY growth rates in the ‘change in stocks’ component of demand-side GDP has now remained positive for five consecutive quarters, after contracting at an average pace of 26% YoY for eight consecutive quarters. For the reasons discussed on the previous pages, we expect growth in GFCF in FY15 to be recorded at 5.7% YoY vs -0.1% YoY growth in FY14.
Private final consumption expenditure (PFCE) (Five-year average share in GDP: 60%; five-year average YoY growth: 7.5%; 1QFY15: 5.6% YoY) Private final consumption growth slowed down to 5.6% YoY in 1QFY15 as compared to 8.2% YoY recorded in 4QFY14. We expect this metric to further lose some momentum in the future from the current levels, as farm sector activity is likely to be weak in 2HFY15 and as Government spending growth will be low in 2HFY15 (as the Government tries to meet its 4.1% fiscal deficit target). Government final consumption expenditure (GFCE) (Five-year average share in GDP: 11%; five-year average YoY growth: 9.3%; 1QFY15: 8.8% YoY) Government expenditure growth accelerated to 8.8% YoY in 1QFY15 vs the contraction of 0.4% YoY recorded in 4QFY14. The higher YoY growth was driven by the fact that the Government expenditure growth in the first quarter is usually high as compared to the rest of the year (see Exhibit 1 below). For the rest of FY15, given the fiscal imperatives facing the Government we expect this growth driver to slow down. Notwithstanding the Finance Minister’s statement on 30 August that he is confident of meeting his FY15 fiscal deficit target of 1QFY15, given that by the end of July 2014 the Government had already expended 28% of its total outlay for FY15, a tightening in spending seems inevitable in 2HFY15.
Exhibit 1: GFCE is usually high in 1Q
Source: CEIC, Ambit Capital research
-2%
0%
2%
4%
6%
8%
10%
12%
14%
06/
201
2 0
7/2
012
08/
201
2 0
9/2
012
10/
201
2 1
1/2
012
12/
201
2 0
1/2
013
02/
201
3 0
3/2
013
04/
201
3 0
5/2
013
06/
201
3 0
7/2
013
08/
201
3 0
9/2
013
10/
201
3 1
1/2
013
12/
201
3 0
1/2
014
02/
201
4 0
3/2
014
04/
201
4 0
5/2
014
06/
201
4
GFC
E (Y
oY,
in
%)
1QFY13
1QFY14
1QFY15
Economy
September 01, 2014 Ambit Capital Pvt. Ltd. Page 6
Institutional Equities Team
Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]
Research
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]
Aadesh Mehta Banking / Financial Services (022) 30433239 [email protected]
Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]
Aditya Khemka Healthcare (022) 30433272 [email protected]
Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]
Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 [email protected]
Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 [email protected] Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]
Karan Khanna Strategy (022) 30433251 [email protected]
Krishnan ASV Real Estate (022) 30433205 [email protected]
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]
Paresh Dave Healthcare (022) 30433212 [email protected]
Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 [email protected]
Pratik Singhania Retail (022) 30433264 [email protected]
Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 [email protected]
Ravi Singh Banking / Financial Services (022) 30433181 [email protected]
Ritesh Gupta, CFA Midcaps – Chemical / Retail (022) 30433242 [email protected]
Ritesh Vaidya Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]
Ritu Modi Automobile (022) 30433292 [email protected]
Sagar Rastogi Technology (022) 30433291 [email protected]
Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]
Tanuj Mukhija, CFA E&C / Infra / Industrials (022) 30433203 [email protected]
Utsav Mehta Technology (022) 30433209 [email protected]
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]
Deepak Sawhney India / Asia (022) 30433295 [email protected]
Dharmen Shah India / Asia (022) 30433289 [email protected]
Dipti Mehta India / USA (022) 30433053 [email protected]
Hitakshi Mehra India (022) 30433204 [email protected]
Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]
Parees Purohit, CFA UK / USA (022) 30433169 [email protected]
Praveena Pattabiraman India / Asia (022) 30433268 [email protected]
Production
Sajid Merchant Production (022) 30433247 [email protected]
Sharoz G Hussain Production (022) 30433183 [email protected]
Joel Pereira Editor (022) 30433284 [email protected]
Nikhil Pillai Database (022) 30433265 [email protected]
E&C = Engineering & Construction
Economy
September 01, 2014 Ambit Capital Pvt. Ltd. Page 7
Explanation of Investment Rating Investment Rating Expected return
(over 12-month period from date of initial rating)
Buy >5%
Sell <5%
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