India’s nominal GDP and Nifty EPS may grow by double-digits in FY: 24-30

Summary

Higher USDINR, policy/macro stability, huge CAPEX, lower borrowing costs, and robust domestic demand may help GDP & Nifty EPS in the coming years

On 30^th November, MOSPI flash data showed India’s real GDP for Q2FY24 was around Rs.41.74T vs 40.37T sequentially (+3.39%) and 38.78T yearly (+7.63%). The Indian economy has expanded in real terms (inflation-adjusted at FY12 constant prices) annually by +7.6% in Q2FY24 against +7.8% in Q1FY24 and higher than the market expectations of a +6.8% rise. But in our previous article, we projected around +7.2% real GDP growth for India in Q2FY24. In this way, the Q2FY24 real GDP growth was also much higher than the RBI forecast of +6.5%.

On the expenditure side, government spending rebounded sharply (+12.4% vs -0.7% in Q2) and gross fixed capital formation rose faster (+11% vs +8%), namely, infrastructure spending mostly financed by central and state governments. At the same time, exports recovered (+4.3% vs -7.7%) and imports increased more (+16.7% vs +10.1%). On the other hand, India’s private consumer spending was slowed (+3.1% vs +6%) in Q2FY24 (y/y).

Overall, India’s TTM real GDP reached Rs.165.96T in Q2FY24 against 163.00T sequentially, while in USD terms, considering average USDINR (YTD) around 82.50, India’s Real GDP reached around $2.01T vs 1.98T sequentially. At current run rate, India’s real GDP may scale around Rs.43.41T in Q3FY24 (+4.00% sequentially) and Rs.46.23T in Q4FY23 (+6.50% sequentially), which will translate FY24 real GDP at around Rs.171.75T against Rs.150.07T in FY23 (+6.80%); i.e. Indian economy may grow by around +6.80% in FY24 in real terms (INR-local currency).

But if we consider gradual but steady depreciation of INR against USD and current average rate of USDINR at around 82.50, India’s real GDP may be around $2.01T in Q2FY24 against $1.98T sequentially and FY23-22 levels of $2.00-2.02T (average USDINR 80.00-74.00); i.e. India’s real GDP growth is almost flat from FY22 till Q2FY24 due to steady appreciation in USDINR by around +11.50% in the same period. Looking ahead, USDINR may reach/appreciate further to around 85.00-90.00 by FY: 24-25.

Again, if we consider India’s nominal GDP (at current prices-inflation not adjusted) was around Rs.272.41T in FY23 against Rs.234.71T in FY22 and Rs.198.30 in FY21. In that scenario, considering average USDINR (80.00-74.00), India’s nominal GDP was around $3.41T in FY23 vs $3.17T in FY22 (+7.6%) and $2.85T in FY21 (+11.23%). Further at around Rs.285T TTM nominal GDP at Q2FY24 and an average USDINR 82.50, India’s nominal GDP may be around $3.45T.

Although India’s nominal GDP may be now around $3.50T, at the 5^th largest position in the world, in terms of nominal GDP/Capita, India may be now still at the lowest in G20 simply because of its huge population. As per the UN estimate, India is now approaching a huge population of almost 1.50B by 2030, surpassing even China. India's population is expected to continue to increase until 2064 when it will peak at 1.7B. India's population is expected to grow by 15.5 million people each year. By 2030, India will have 1.04B people of working age (favorable demography, but needs quality employment).

It’s also a fact that due to the huge and growing population amid no official population control policy/effort for decades after decades, demand is always far above supply in India, resulting in both high inflation and high growth. Thus to cope with rapidly higher demand, the Indian economy has to grow at least +8.00% in real terms (if not at a double digit of +10.00%) to ensure higher supply, so that it can balance with elevated demand, resulting in price stability and quality employment.

India has to also create/produce foods in adequate quantities to ensure food price stability for the general public and thus needs higher productivity in the agriculture/farm sector through modern technology/marketing strategy. India also needs a quantum jump in public transportation infra, especially in railways (both normal/slow and high-speed railways) and also social infra like quality hospitals and schools to cater to its huge population. Despite there being a huge difference/gap between India and China (democracy & autocracy), India needs to compete/follow the Chinese model in public infra (traditional/transportation/social) and agriculture with a feasible PPP model.

For example, despite being the world’s 5^th largest economy in nominal GDP terms, with rapid growths in around last ten years under PM Modi (from 2014) coupled with political and policy stability at the Federal levels and most state levels, the general public still faces huge problems in booking train tickets reservation at short notice, while the average speed of Indian passenger railway is still around 55 kmph, the same at around 1975 and also during 2000-2014 UPA/INC era (previous governments).

Although India has now semi-high speed trans (Vande Bharat), capable of running around 160 kmph, and also normal trains at around 130-100 kmph, due to huge railway traffic congestion, lack of quality high-speed tracks at most of the routes, and old/manual signaling system at most of the railway track around 68000 km, India’s railway average speed is still very slow around 55 kmph, compared to China’s equivalent ‘slow/normal train’’ average speed of around 140-120 kmph (speed 140-160 kmph).

In other words, despite comparable capacity (speed, population, railway track length, etc), India’s functional railway speed is almost half that of China’s conventional/normal railway due to inadequate modernization of normal railway infra. Thus there is a huge scope for improvement in India’s railway infra and the Modi admin is also doing that, it should be more targeted in terms of railway tracks, signaling/safety system, quality of railway locos/coaches, etc., and require much more investment/faster work to cope with growing population/demand.

Although India should have followed China's population control model (structural reform) from at least 1975 (if not 1955), the reality of Democracy may not allow such policy, at least officially; otherwise who will fill up huge grounds in political/election rallies, and who will ensure assured/block voting box? In this way, most of the middle/lower middle-class families now prefer a child policy, considering the higher cost of living and the cost of private education. But still, to cater to the huge population demand, India needs to grow at least +8.00% in real terms for the next 15 years to ensure proper price stability (by ensuring higher supply against higher demand) and quality employment.

Thus RBI will ensure lower borrowing costs to fund both public/government and private capex at affordable borrowing costs, ensuring price & financial stability. India is now already paying around 45% of its revenue as interest on public debt, which is a huge negative for its credit rating (despite negligible external borrowing in FX currency). India has also a huge scope to grow exponentially to improve its public and social infra in comparison to its neighbor and arch-rival China. Also, India has political, policy, and currency stability unlike most of the comparable big/small democracies, which is a great advantage apart from Modinomics and the attraction of 6D (demand, development, demography, deregulation, digitalization, and democracy).

Last Friday (1^st December), the S&P Global data showed India’s Manufacturing PMI rose to 56.0 in November from October's 8-month low of 55.5, in line with market consensus and was the 29^th straight month of increase in factory activity, as output expanded at an above-trend pace. Also, new order growth improved from October's one-year low and outpaced the series average; while exports gained for the 20^th month, albeit at the slowest rate since June.

Further, employment increased for the eighth month, amid a slight rise in outstanding business. Buying activity and stocks of inputs rose, in many cases owing to buoyant demand conditions. The vast majority of panelists reported no change in delivery times since October, amid modest deterioration in vendor performance. On prices, purchase costs went up the least in 40 months. Meanwhile, charges rose modestly as most firms opted to leave their fees unchanged since October. Lastly, confidence dipped to a 7-month low, due to rising inflation expectations.

The S&P Global comments about India’s Manufacturing PMI:

"India’s manufacturing industry maintained its robust performance in November, with output regaining growth momentum. Firms’ ability to secure new business, both domestically and from abroad, remained central to the success of the sector. Sustained new order growth continued to be good news for the sector’s labor market, with recruitment remaining on an upward path. Expanded capacities, rising workloads, and the need to replenish stocks of finished goods collectively indicated that India's manufacturing economy is clearly in good shape as 2023 draws to a close, with expectations for a continued strong performance in 2024.

Prices for raw materials and components still rose in November, but improved availability at suppliers amid subdued global demand for inputs led to a considerable retreat in cost pressures. Some concerns over prices increasing in the near-term were reflected in the data for business sentiment, but there was also a softer uptick in output charges amid a reduced inflationary environment.”

On Tuesday (5^th December), the S&P Global data shows India’s Services PMI declined to 56.9 in November from 58.4 sequentially, below market forecasts of 58.0 and the lowest pace of expansion in the last year (since Nov 22) amid a slowdown in rates of growth for both new orders and output, with new export orders rising the least in five months.

Employment continued to increase despite the job creation being the slowest in seven months. On the pricing front, input price inflation slowed to an eight-month low and was below its long-run average amid a further increase in labor, food, material, and transportation costs. Output cost inflation also eased to the weakest since March, though the rate of increase was above the series trend. Lastly, business sentiment remained positive, although confidence somewhat faded due to rising inflation expectations.

Finally, the S&P Global data shows India’s Composite PMI slipped to 57.4 in November from 58.4, at the lowest pace of expansion (private sector activities) since Nov’22. The decline came mainly due to services activity that expanded at the slowest pace in a year. New orders increased at the weakest rate since November 2022, amid easing demand for services.

Meantime, cost pressures receded, with both input prices and output charges going up at the slowest rates since March. Inflation was more pronounced at service companies than at their manufacturing counterparts. Despite seeing price pressures waning in November, private sector companies signaled rising inflation expectations through qualitative data for growth prospects. Optimism remained strongly upbeat but faded to a six-month low.

The S&P Global comments about India’s Composite PMI for Nov’23:

"India’s service sector has lost further growth momentum midway through the third fiscal quarter, but we continue to see robust demand for services fueling new business intakes and output. The current rates of expansion look very healthy when considering their respective long-run averages and the outlook for business activity remains bright in spite of optimism fading due to rising inflation expectations.

There was some relief for service providers in India on the cost front, with the rate of input price inflation receding to the weakest in eight months. Fewer companies hiked their own fees as a result, an aspect that might provide a further boost to demand as 2023 draws to a close. Understandably, given the lack of pressure on operating capacities signalled by stable backlog levels, services firms became more cautious when it comes to hiring. Net employment still rose in November, but the rate of job creation was marginal and the slowest in seven months."

Nifty EPS may grow by over +10% in FY: 24-30

Overall, S&P Global also sees upbeat economic growth and moderating inflation in Q3FY24. India’s real GDP has grown around +9.04% in FY22, +7.24% in FY23, and projected +6.80%; i.e. around +7.00% trend rate in FY: 23-24. Indian real GDP is projected to grow by around 8.00-10.00% on an average in FY: 25-30, and Nifty EPS should also grow by around +15% CAGR (from present trend rate 10%) considering possible RBI/Fed rate cuts (lower borrowing costs), another stable government led by PM Modi/BJP (policy stability), huge thrust on infra spending, possible GST/income tax rate cuts, lower oil prices, adequate pricing power by producers, increasing government spending and also private capex coupled with higher USDINR, positive for export heavy Nifty earnings.

At the present run rate, Nifty EPS may grow by around +20% in FY24 to INR 1030 against FY23 EPS 858 (+6%) amid higher USDINR, robust performance by banks & financials (higher bond yield positive for higher NIM/NII), and vibrant domestic demand. The current TTM EPS of Nifty for Sep’23 QTR is around 936 and at 20 averages PE, the fair value of Nifty may be around 18720; Nifty made a recent low around 18837 in late October after the Israel-Hamas Gaza war broke out.

Now looking ahead Nifty may report a TTM EPS of around 983 and 1030 in Q3FY24 and Q4FY24, assuming an average sequential growth rate of around +5%, in line with the present trend. Thus at 20 average PE, the fair value of Nifty may be around 19656 and 20650 by Mar’24. Further, assuming an average growth/CAGR of around +15% (against projected real GDP growth of around 8-10%), Nifty EPS may be around 1184-1362; and Nifty fair value may be around 23700-27250 by FY: 25-26. As the financial market usually discounts EPS at least one year ahead, Nifty may scale 23700-27250 by Dec’24/Mar’25 and Dec’25/Mar’26.

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (21075) now has to sustain over 21300 for a further rally to 21425/21525-21725/22000 levels in the coming days; otherwise sustaining below 21250-21200, may fall to 20900/20700-20300/20100 and further 20050/20000-19950/19900. And sustaining below 19900, Nifty Future may again fall to 19700/19600-19500/19380 and 19300/19150-19050/18950 and 18830/18750-18625/18490-18275/18075 in the coming days in the worst case scenario, like an all-out Middle East war.