The result season has almost come to an end. So far the results have been in line with estimates. The corporate earnings are improving and are broad based except public sector banks. Q4FY18 would be recalled for the confirmation that the consumer demand is back on track; the FMCG volume growth which indicates pickup in consumer demand be it rural or urban has been strikingly noticed in Q4FY18- HUL, ITC, Dabur posted excellent volume growth. HUL has reported a robust 11% volume growth and 240bps margin expansion as benefits of cost efficiency programs and improved product mix have boosted profitability. Medium term outlook looks encouraging given gradual pick up in rural demand on expectation of good monsoon, sustained benefits from GST and normalization of trade channels. Managements have been more optimistic about demand growth though worries about rising crude oil prices and interest rates still persist.
Monsoon is expected to be good. Both IMD and private weather forecaster Skymet has guided for ‘normal’ monsoon for third year in succession ruling out probability of deficiency in rainfall. Good monsoon augurs well for the revival of rural consumption. GST tax collection has been improving and with implementation of E-way bill, the collection will further improve thus bridging the gap for the Government. The collection numbers for GST for the month of Apr.’18 were reported at Rs 1.03 lakh cr.
Market is keeping a close eye on the geo-political developments in Korean peninsula in aftermath of cancellation of meeting between the heads of US & N Korea.
2. Outlook on crude :
Crude oil prices have corrected after OPEC and Russia considered easing supply curbs to offset disruptions in Venezuela and an expected drop in Iranian exports. Together they are mulling to increase the production by about 1 mn bpd thus reducing the supply –demand mismatch. Further restrictions on oil production could be eased "softly" if OPEC and non-OPEC countries see the oil market balancing in June.
All eyes would now be on US crude oil production which has risen by more than a quarter in the last two years, to 10.73 million barrels per day (bpd) next only Russia who produces more, at around 11 million bpd. Output by producers like the United States, Canada or Brazil who are not bound by the OPEC/Russian led agreement to cut, will likely rise further as higher crude prices improves their profitability. Oil is expected to consolidate in near term which would augur well for Indian economy. We expect it to stabilize around $72-75/bbl before taking any further direction based on the geo-political event and demand supply equation.
3. Key trends to watch out for :
Long term trends:-
Consumption: India is an emerging economy with rising per capita income currently around $1900 growing at 6-7%. As the per capita income crosses $2000, a drastic shift in consumption trends has been seen in the developed nations. This shift involves higher allocation to discretionary consumption the likes of consumer goods, clothing, media and entertainment. We like the FMCG and consumer goods theme, textiles etc in wake of this shift in consumption. If you find the penetration of airconditioning units is barely 4-5% in India. As the affordability rises, one can see the shift from fans to coolers to air conditioners. We expect the demand for cooler and air conditioning rising over coming years and the companies in this sector doing quite well.
Election year: We have few state elections and general election slated in coming year. Ahead of elections, there is high probability of increased governmental spends which will drive the sectors like FMCG, consumer goods, infrastructure etc. Good monsoon will also augur well for consumption sector esp the rural focused companies.
Automobiles: India produces barely 34/35 lakh PVs compared with China which produces more than 2 cr per annum; India’s CV production number is in the range of ~7/8 lakh per annum, China produces upwards of 40 lakhs. Indian auto industry is on growth phase, expecting to grow at low teens every year for next couple of years. Moreover, the vehicles are getting more electronic content, more comfort in it following the rise in the purchasing power and implementation of the regulations. We like the auto ancillaries who are positioned in providing the content for the vehicles.
Short term trends :-
Macros: The inflation is hardening which is further supported by crude oil price rise. The interest rates are already bottomed out and high probability of atleast one rate hike of 25 bps over next 6 months which would be negative for interest rate sensitive sectors like auto, housing finance, banking etc.
Global headwinds: The cancellation of US- N Korea meet scheduled for June 2018 has led to fears of intensification of tensions in Korean peninsula which will lead to risk aversion in global markets. The rising US yields, normalizing of US Fed balance sheet and hardening of rates in US is likely to have pressure in the markets in general.
4. Macroeconomic perspective :
The Inflation is expected to trend between 4.5-5% over next couple of months; though RBI has maintained status quo in last meet on Apr. 4/5 but the minutes of meeting indicated that the central bank has some concern about the inflation given the rising crude.
Depreciating INR following the likely deterioration of macros has been a cause of concern together with rising crude prices. The impact of rising crude oil bill is likely to stretch the fiscal deficit for the country.
The GST collections has been increasing, average collection per month has been (approx.) Rs 90,000 cr. for Aug.’17- March 2018; the collection for Apr.’18 has increased to Rs 1.03 lakh cr post implementation of e-way bill. E-way will help plug the loopholes if any and help improve collections. If GST revenues start picking up sufficiently to be in line with the government’s assumptions for FY19 then the bond market may actually cool off from current levels.
The corporate earnings have been in line with expectations and trending northwards. Going forward, the macro picture is expected to be impacted due to rise in oil prices. Domestic markets are likely to go through bouts of volatility time and again following the global cues, and domestic developments which include political developments but over long term, investors would be rewarded for their tenacity and patience for remaining invested.
5. Sector Outlook (Auto, Retail, Banking, Pharma, Energy, IT, Telecom, Real Estate, Metals, etc.) :
As India story is intact, be it rural or urban consumption, discretionary spends, infrastructure investments etc. look good.
Auto and Auto ancillaries are good investment options given the under penetration and rising demand in this space.
FMCG and consumer durable manufacturers would be beneficiaries of the rising spending power in rural areas along with improving electricity infrastructure in villages.
Given the massive public spending by the Government for improving infrastructure, EPC companies with execution capabilities and light balance sheet are also good opportunities for investment.
Housing and related theme like housing finance, home improvement etc are still looking good given the Govt.’s target of “Housing for all by 2022” and measures put in place for the same.
The financialization and formalization of the economy has created ample opportunities for NBFCs and Pvt. Banks with retail focus, although there would be some pressure on this segment as the rise in domestic yields would increase their cost of funds for short run.
As global economies are doing good, the export related segments like textiles and chemicals also has ample scope for growth. India holds advantage in these two sectors on account of India being largest cotton producer (thus secured on raw material front) for textiles and better production practices in chemicals industry where the West is looking for shifting production to East and India is considered as better option vis-à-vis China. In both Industries, India scores better due to lower labour cost, talented, educated workforce and stringent Intellectual Property laws.
We are not great fans of metals (neutral view) but we feel that metals sector would be beneficiaries of global inflationary trends in metal prices along with rising demand from US and China. Steel prices are expected to be elevated following rising infrastructure demand from US and aluminium prices are expected to be strong given the supply constraints from China and Russia.
IT has been benefited due to the depreciating currency despite the relatively muted growth prospects. We maintain neutral view on IT sector.
Top sectors to avoid: Pharma- the pharma sector is going through dull phase in its life cycle. In addition to USFDA issues which would probably get resolved in near term the pricing in US markets is worrying us. Hence we would recommend our investors to instead look for domestically focused sectors which have both growth potential and good pricing power.
6. Impact of global developments on Indian markets :
Global markets are joined at hip. Being part of global economy, Indian markets move in tandem to developed markets. The developments in US have major repercussions in global markets. The rise in 10 year yields has caught attention of all the markets. Currently trending around 3%, it has potential to reach 3.5% over next 6-9 months depending on the outcomes of the US economic data and actions of US Fed. If the yields breach 3.5%, there is high likelihood of shift towards US debt paper. It is every much evident from the FII sale figures over last couple of months.
The tensions in ME are likely to flare up the crude oil prices and the re-emergence of tensions in Korean peninsula has the potential to incite risk aversion in global markets. Any corrections in Indian markets following the global developments should be used as an opportunity by long term investor to accumulate good quality stocks with growth potential. It has been proved time and again that the markets have provided excellent returns after sudden knee jerk reaction to any extraneous global event in past.