Daiwa: India Economy- Corporate earnings flattered

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


India Economy
Corporate earnings flattered by surging (but unsustainable) nominal GDP 


Summary
• India’s nominal GDP rose by 21.8% YoY for Jan-Sept 2010 (much faster than
average growth of 14% YoY even in good times). We expect nominal GDP
growth to normalise as interest rates rise, likely reducing earnings growth too.



Fundamentals
• We remain bearish on India’s over-heating economy, with 13 months of
negative real policy rates pushing the current-account deficit to a 20-year high
and causing sharp real effective appreciation of the Rupee. The mild positive
surprise on India’s real GDP growth  for the July-September quarter (2QFY10/11) – with real GDP sustaining 8.9% YoY growth despite the
deceleration in manufacturing (to 9.8% YoY, from 13% in the previous quarter)
– was primarily because of the expected rebound in agriculture (to 4.4% YoY
growth, the fastest in three years). Most indications suggest that agriculture will
accelerate sharply further in the next quarter, placing mild upside risks to our
FY10/11 real GDP growth forecast of 8.7% (which is based on 4% agriculture
growth and 9.6% growth in manufacturing).
• However, India’s nominal GDP (at market prices) has risen at an unusuallyrapid rate over the past three quarters – 21.2% YoY in the latest quarter, 23.1%
YoY for April-June 2010, and 21% YoY for January-March 2010 (chart left).
Measured at factor costs (ie, before net indirect taxes), nominal GDP has rose
by 19.6% YoY for January-September 2010 (and 18.7% YoY for Jul-Sep 10).
This implies that the GDP deflator – the broadest measure of inflation across
the whole economy – rose 10.8% YoY for Jan-Sep10, peaking at 12% YoY for
Apr-Jun10, and decelerating slightly to 9.8% YoY for Jul-Sep10. Other gauges
of inflation have also been elevated,  but are beginning to moderate as food
prices edge lower, helped by the strong  kharif  (monsoon-fed) harvest now
arriving at market. However, we note that non-food WPI inflation (at 7.4%
YoY for October) is above its recent trough (7.2% YoY in July) and that core
WPI inflation (excluding food and energy) at 6.6% YoY for October remains
well above the Reserve Bank of India medium-term target for (headline) WPI
inflation (and inflationary expectations) to be anchored at 3-4% YoY.
Consequently, we expect the RBI to raise its repo rate by a further 50bp by endJanuary, thereby reining-in nominal GDP (and corporate earnings) growth.