India Economy - MacroTracks - Emkay

Persistent fragility overweighs scope for recovery

Track1: Peak of NPA cycle still not behind us

Structural (and also cyclical) factors that sustained decline in NPA ratio during 1994-2008 are now receding leading way for longer and structurally higher GNPA ratios. Inclusive of GNPAs and restructured asset, the stressed assets for the banking system have risen to 9% of total lending or equivalent to GNPA ratio seen during early 2000s. We see the ballooning GNPA cycle rooted to an overleveraged banking system and weak macro conditions. Sustenance of higher elasticity of GNPA/Credit growth at 3.4x post 2008 crisis and decline in credit growth in response to credit risk concerns will imply GNPA growth sustaining at 40% translating into GNPA/Advance rising to 4-6.5% in the next two years.

Track 2: Commercial vehicle: No respite

Key leading indicators are still showing no respite and a downward shift in economic growth trajectory point to a period of sub-par growth in freight availability. There remains a high likelihood of an extended period of sub-par CV industry growth with initial periods of contraction. Fleet owner profitability is at historic lows. Channel checks suggest that delinquency levels of truck loan portfolios are on the rise. Tighter credit conditions could severely impact vehicle off take.

Track 3: Benefit from lower gold Imports cannot be overstated

Reports of a sharp 38% contraction in gold demand in Q1FY13 and projection of 25% decline in 2012 by WGC have kindled hopes of rebalancing external deficit. But WGC's data do not reflect India's non-official gold import in its entirety. While we have factored in a 10.9% decline in gold imports in FY13E, we believe the benefit from it cannot be overstated. Positive price elasticity for Indian gold demand during FY08-12 is abnormal and reflects multiple structural factors supporting demand which are hard to suppress easily. Hence, we expect BoP vulnerability to sustain.

External trade: Rebounding trade deficit implies fragile external balances

In view of a) decline in global trade b) low domestic growth and c) resilient commodity prices India's trade deficit upto July continued to be high. July'12 exports marked a contraction of 15% YoY whereas Imports contracted 7% YoY. Cumulatively, trade deficit for Apr-Jul'12 has narrowed to US$55.6bn (-9%yoy) vs US$61bn for the corresponding period of the previous year.

Growth: Q1FY13 GDP at 5.5%, undercurrents remain weak

Q1FY13 GDP came in at 5.5% vs consensus estimate of 5.3%. However, we believe that better than expected GDP number is no reason to cheer with the undercurrents remaining weak. Emergence of slowdown in services sector growth and sustenance of deceleration in gross capital formation raises concerns over structural growth slowdown. Several lead indicators with regards to sales, services and consumption exhibit a marked slowdown hinting weak momentum.

Fiscal deficit: Fiscal slippage almost inevitable

Available data indicate poor fiscal management with the absolute fiscal deficit crossing 50% of budgeted amount for the entire year in the first four months itself. The deficit is expected to rise going ahead given several factors, viz. lower tax collections tracking a slower GDP, rise in subsidy burden, realization of targets from spectrum auction and disinvestment. We expect a slippage of around Rs1tn in fiscal deficit for the centre and fiscal deficit/GDP at 6.0% vs 5.1% FY13BE.

Savings: Net household financial savings at 7.8% of GDP

Slowdown in financial savings of household sector holds true as is evident from moderation in money supply growth, deceleration in term deposit growth and decline in demand deposits. We maintain that savings may have declined even lower than 27.6% in FY12E and will remain low at 26.5% in FY13E.

Services sector: Weakening global and domestic impulses

Decline in services sector GDP growth to 6.9% for Q1FY13, easing bank credit to services sector at 15.3% YoY, deceleration in commercial / heavy vehicles sales, contraction in new mobile phone connectivity and aviation data articulate our earlier stance on growth moderation across major segments of services industry.

Investments: Headwinds continue to overweigh tailwinds

After a brief pick-up in activity in Jun'12, the ECG sector witnessed moderation in Jul'12. This was in terms of decline in new tenders published, muted growth in order announcements and resumption of increase in cost indices. We reiterate that prevailing headwinds supersede any tailwinds in sight.

Inflation: Suppressed inflation weakens justification for rate cut

Lower than expected inflation at 6.9% for July provided little comfort, given the scope for considerable upward revision for the understated price indices. Articulation of preference for rate cuts by the Finance Minister and lending rate cuts announced by few banks are mounting pressure on RBI to follow suit. However, factors negating rate cut are overpowering, in our view. We believe there is little scope for rate cut in the monetary review on Sept 17, 2012.

Money & Banking: Industrial credit growth lowest since Dec-09

Lowest Industrial credit growth (17.2% YoY) since Dec-09 clearly reflects easing capex cycle due to sticky interest rates and uncertain business environment. Lower credit to personal loan segment depicts slowing consumption demand. Investment demand has been slowing as is depicted from RBI's own assessment on net financial savings for FY12. In the backdrop of above mentioned headwinds, we believe FY13 systemic credit growth would to be in the range of 15-16%.

Corporate performance: Q1FY13 results outline cautious mgmt guidance

Companies remain concerned amidst slowing growth and weaker demand outlook, sharing cautious guidance: Q1FY13 results broadly emphasize management concerns on a) Slowing topline growth, weaker demand and moderating guidance, b) Global slowdown, c) Continued margin pressure, d) Weak monsoon, e) Lack of confidence in asset creation f) High interest rates and g) Worsening asset quality for banks.

Source : Equity Bulls

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