Q4FY23 GDP: GFCF zooms; slowdown looms

1 Jun 2023 , 10:16 AM

Sectorally, growth was led by Construction and Services, ex-Public Admin. Manufacturing picked up from contraction; Agri also posted solid growth. However, a global slowdown from monetary tightening looms and will impact exports and investments in India as well as hurt consumption further. Analysts at IIFL Capital Services have maintained their FY24 GDP growth forecast at 5.8% for now — marginally below consensus.

Q4FY23 GDP

Real GDP accelerated to 6.1% YoY versus 4.5% in Q3. Nominal GDP growth came in at 10.4% – gap with real growth narrowing due to fall in inflation (WPI is negative). For a short period of time, this gap will narrow further and sharply. FY23 real GDP growth was 7.2% YoY versus 9.1% last year. Nominal for FY23 was 16.1% versus 18.4% last year.

Q4 – investments pick up

On the demand side – growth was led by investments (8.9% YoY) and exports (12%), outpacing imports (5%) handsomely. Consumption — Private (2.8%) and Government (2.3%) continued to struggle. All sectors accelerated – Agri (5.5% YoY); Industry (6.3%); Services (6.9%) — all improving on Q3. Within Industry, Manufacturing (4.5%) picked up post 2 consecutive quarters of contraction. Construction (10.4%) continued its strong growth momentum. In Services, growth was led by Trade, Hotels & Transport (9.1% YoY) and Financial, RE & Prof. Services (7.1%); Public Admin & Defence saw muted growth (3.1%).

Outlook

Expect growth slowdown, EPS cuts, policy rate cuts, low long yields, limited private capex for now:

Indian economy zooms

Signs are: 1) PAT/GDP having bounced back decisively from a low of just over 1% in FY20. 2) Reduced corporate leverage (down from 41% of GDP to 31% over the last 9 years). 3) Banks being better capitalized as well as better regulated. 4) Relatively low inflation during and in the wake of the pandemic. 5) Strong external position with FX reserves now around US$600 billion (nearly 20% of GDP). 6) Political stability with pro-business policy making. 7) Improving geostrategic relevance. However, GFCF-to-GDP ratio has been stagnant at 28% for 6 years versus 34% 10 years ago, with underinvestment particularly stark in thermal power; this may eventually trammel growth. Private consumption is struggling, highlighting the problems regarding K-shaped recovery being real.

Lag effect looms

Elsewhere in AEs, thanks to steep monetary tightening (500bps in the US in last 14 months), analysts at IIFL Capital Services fear a pronounced growth slowdown centered around Q42023, some signs of which are already visible. They expect earnings estimate cuts across geographies (S&P500 EPS has been cut by 10% in the last 6 months; though stable in the last month) and do not pin much hope on China recovery (their anecdotal feedback had indicated that China shutdowns were very precisely targeted and had not dragged down the economy a whole lot). In India too, export-led sectors will initially see an impact, but this could spread. Central banks will react at some point with rate cuts; however, it would be too late to stop downgrades. We will probably see outflows from EMs.

Q4 GDP’s capex buildup not dependable

In this environment, analysts at IIFL Capital Services do not see a major capex wave happening, though monetary easing later in the year, or Q12024, could trigger a risk-on phase and a strong period of FII inflows. With Nifty at 18.5x i.e. 1SD above the long-term average and no material downgrade to Nifty FY24 earnings yet, analysts at IIFL Capital Services see limited upside from here. They prefer Banks, Life Insurance (SBI Life), India-focused Pharma, Healthcare (Hospitals), FMCG (Food), Cement, Construction, Building Materials, Real Estate, Utilities, Telecom and select Auto. They are negative on IT, Consumer Discretionary, Capital Goods (too expensive now), Conglomerate, US-focused Pharma, Chemicals, Metals and Paints.