Economy showing buoyancy across the board!

What’s the Point?

Indian Equity Markets have largely continued their positive run in 2024 and are hovering around their all-time highs. In such a time, it is pertinent to see this trend in light of the broad-based positivity in this growing economy, visible in indicators such as GDP growth, Tax collections, Corporate Profits, Banking credit, and Consumption levels. Low foreign ownership levels combined with our relative growth advantage to the world makes India’s investment case even stronger, making investors recognise India’s potential opportunities.

Numbers in perspective

Source: Bloomberg, NSDL, I-Sec Research

How are some of the Economic Indicators placed?

India is witnessing strong economic growth momentum which is evident across indicators:

-  India GDP continues to hit ‘all-time highs’: India’s nominal GDP is a constantly growing number, and what we usually worry about its growth rate. Barring quarters around the Covid-19 pandemic, India has been a constantly growing economy in the past decade. It is pertinent to consider that India’s GDP growth has surpassed economic projections in the past two quarters.

-  India’s tax collections are also at a high: India’s net direct tax collections for FY24 stood at 19.58 Lakh crore, growing by 17.7% YoY. Direct tax collections exceeded the budgeted estimates by 7.4%, and also the revised estimates by 0.67%. The start to FY25 has also been positive for tax collections, with GST collections crossing Rs 2 Lakh crore for April 2024, growing 12.4% YoY. Net GST collections stood at Rs 1.92 Lakh crore for April, reflecting an increase of 15.5% over the same time last year.

-  Banking credit continues to grow: India’s banking sector credit continues to grow at a fast clip, reporting growth of 19.1% in April 2024. Its sectoral breakup is also encouraging, with Industry credit growth picking up from its sluggish growth a few years back.

-  Corporate profits: Indian corporate profits have continued to grow above the GDP growth rate in the past few years, and are now at 5% of GDP (from being 1.6% of GDP in FY20). Net Profits for listed companies till the December 2023 quarter for a full year (4 quarters) stood at Rs 14.37 Lakh crore, up 22% from FY23.

-  Other real economic numbers, such as power consumption, Auto Sales are also encouraging. Electricity consumption in India continued to grow at a fast pace, growing at 9.7% in Mar’24. Retail registrations for 2 and 4 wheelers grew in excess of 10% in Jan-March 2024.

Lower leverage and inflation worries reduce risks as well

-  Low leverage vs other economies: India continues to have low leverage at a systemic level, with total debt to GDP within the economy being at 175%, while advanced economies are at 257% and emerging market economies at 222%. What is also important to note, that India’s total debt to GDP has actually reduced from its 2009 high of 186%, while similar numbers for advanced and emerging economies then were at 240% and 119%, indicating the rest of the world today has more overall debt to GDP vs 2009. (Source: BIS)

-  Inflation trends: India’s inflation continues to soften, with March retail inflation easing to 4.85% vs 5.09% in February. Inflation in India is well within the target range of 4%±2%, and is largely expected to continue being within that range. In contrast, the US continues to see inflation higher than their target of 2%, with the past 2 months reporting inflation in the range of 2.8%.

Valuations above average, fundamentals could support

As on April 30, 2024, NIFTY 50 was trading at ~20.8x FY26E price to earnings multiple. Further, Market cap-to-GDP stood ~111% (based on CY25 GDP estimates) and the gap between 10Y G-sec yield and 1Y-Forward NIFTY 50 earnings yield* remains at elevated level [*Earnings yield = 1/ (one year forward P/E)]. In general, current valuation indicators are at premium to their historical averages. Nifty50 Index EPS is projected to grow at 15% for FY24-26E as per Bloomberg consensus estimates. However, one should view these valuations in the context of structurally attractive nominal GDP growth, a healthy corporate earnings outlook and robust de-levered corporate and banking balance sheets.

Conclusion

Robust economic growth across parameters continues to validate India’s positive outlook in Amrit Kaal. As India witnesses steady growth, the world continues to see mixed trends. Looking forward, the outlook for India's economy in the medium term seems positive. Favourable government policies, the benefits of Production-Linked Incentive schemes, opportunities stemming from shifts in the global supply chain, increased infrastructure spending, potential recovery in private sector investment, and the enduring strength of personal consumption support the outlook.

We maintain a positive outlook on equities for the medium-to-long term, driven by the structurally robust domestic growth outlook, healthy corporate profitability, and supportive pro-growth policies. However, near-term risks include a significant global growth slowdown, heightened geopolitical tensions, and a resurgence of inflation either globally or domestically.

Sources: Bloomberg, I-Sec Research, NSDL, I-Sec Research, and other publicly available information

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