[T.S.R:17970] Deutsche Bank-India GDP Growth May Sink Below 7 % in FY13

Deutsche Bank

India: Praying For Monsoons And Hoping For Crude To Crack

If both eventualities work to the negative, India's FY13 GDP growth could be much lower than the currently optimistic view of a 8 per cent plus growth. 

 

While we note a trend GDP growth rate of 8-9% has been embedded in investor

expectations of India's earnings growth/ROE trajectory, policy uncertainties, the

conflicting demands and compulsions of a popular democracy on the government

and India Inc's growing discouragement, are increasing the risk of India's -

medium term - GDP trajectory slowing towards 7%. In this note we have

attempted a sensitivity analysis to assess the impact of slowing growth on BSE

Sensex earnings and answer questions associated with a slowing GDP growth

trend. However, a 7% GDP growth trajectory is not our base case scenario with

our economists forecasting a 8% average GDP growth over next two years.

 

What will be the impact of a slowing growth on India's valuation multiples?

We confess that India is beginning to lose some of its investor goodwill

accumulated over the past five to seven years. The perception of a slowing GDP

growth trend, could result in a further de-rating of the country's valuation multiple

and a compression in its average premium to MSCI Asia nudging investors into an

even more cautious posture. Over the past few months we have seen a 260bps

compression in India's PE valuation, driven by rising risk aversion (due to global

factors) and worries over policy uncertainties. While it is difficult to quantify the

extent of future valuation compression, we would think that valuations could get

reset to a level of 11x to 12x, which prevailed in the late nineties and first half of

previous decade (corresponding fair value range of 14500-16000 for the Sensex).

 

Moderate 3% downside risk to Sensex FY13 earnings

Our India research team's extensive bottom up sensitivity analysis suggests a

downside of 3.2% to our current BSE Sensex earnings expectation for FY13,

taking earnings growth for FY13 to 12.5% from our current estimates of 16.3%.

While the downside risk to FY13 earnings sensitivity may appear muted, this could

be attributed to our analysts having already cut FY13 earnings estimates by 12%

since Apr'11 (relative to a 9% cut for FY12).

 

Highest downside risk to Capital Goods, Autos, Telecom

 

Capital Goods/Construction

companies could witness the sharpest downside

risk (-11%) driven by 13% drop in L&T's earnings and 11% drop in BHEL's

earnings.

Autos earnings could be impacted by ~7% led by Maruti (12%), M&M

(8%) and TAMO (6%). Telecom earnings could decline by 6%. For Banks, slowing

GDP growth would lead to asset quality concerns, with our Banking analyst

getting more worried on asset quality in the power and SMEs segments.

However, banks could likely restructure their power assets rather than classifying

them as NPLs which may lead to valuation multiple contraction.

 

What could allay downside concerns?

Bold policy actions on state electricity board reforms (power tariff hikes),

addressing supply side bottlenecks in coal, preventing any runaway increase in

fiscal deficit (through raising fuel and fertilizer prices) and most importantly

assuaging India Inc's high pessimism, remain critical, in our opinion, to ensuring

that India's investor goodwill is not impaired. Expectations of slowing global

growth and increasing regulatory focus on commodities may well be a silver lining

for government finances, if commodity (particularly oil) prices continue to ease.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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