GDP - Now even 4.9% growth in FY14 looks ambitious - Anand Rathi

GDP growth in 3QFY14, at 4.7%, was slightly below expectation and would render it difficult to clock even 4.9% growth for FY14. Manufacturing, construction, investment and private consumption disappointed while all segments of services and net exports surprised positively. Despite the RBI's heightened sensitivity to inflation, given the growth outlook we do not see any rate hike in the next three months and a possible rate cut thereafter.

Performance. India's GDP in 3QFY14 grew 4.7%, marginally lower than market expectations (4.8%), our estimate (5%) and the 4.8% of the previous quarter. It was a service-sector-led growth, which improved to 7.6% (vs 6% in 2QFY14). The agriculture sector posted robust 3.6% growth (vs 4.6% in 2QFY14). The industrial sector, however, was a huge disappointment, registering a negative 0.7% growth (vs 2.3% in 2QFY14). While all segments of industry and agriculture did worse in 3QFY14 than in 2QFY14, all segments of services did better. Demand-side GDP growth in 3QFY14, at 4.6%, also disappointed as it grew 5.6% in 2QFY14. The 1.9% contraction in gross-capital formation, and 1.1% in fixed-capital formation, during 3QFY14 have been particularly disappointing.

Assessment. Reflecting a normal monsoon and, in line with expectations, agriculture grew robustly. No revival, however, was seen in the industrial sector. In fact, barring electricity all components–mining, manufacturing and construction—have done poorly this quarter. By contrast, the services-sector growth has been impressive. The 12.5% real growth in financial services during 3QFY14 has been surprising as listed banks disappointed in this quarter. The contraction in both gross and fixed investment and no growth in construction raise questions on whether the economy has yet bottomed out. But for the positive contribution from net exports, demand-side GDP growth would have been dismal.

Outlook. With weak 3QFY14 GDP growth, achieving the advance estimate of 4.9% growth in FY14 would be possible only if GDP revives strongly (by 5.6%) in 4QFY14. While we expect mining, manufacturing, trade hotels, etc. to do better in 4QFY14 than in 3QFY14, we expect some slowdown in financial services, personal and social services. On the demand side, private consumption and investment may do better in 4QFY14 than in 3QFY14; net exports and government consumption may lose some strength.

Recommendation. While broadly on expected lines, GDP growth was restrained in 3QFY14. While the rate of inflation is falling sharply, growth figures continue to disappoint. Despite the RBI's heightened sensitivity to inflation, the continuation of the CPI well above the RBI's "comfort zone" and the IMF's advice to continue with rate hikes, in view of the soft growth figures the RBI is unlikely to raise rates in the next three months. Any cut in policy rates, however, is unlikely to materialize before 2HCY14.

Source : Equity Bulls

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