Nifty EPS grew around 7% in Q1FY24 and may grow 8% in FY24

Subdued discretionary consumer spending amid higher cost of living, higher cost of borrowings, and lingering global macro-headwinds affecting earnings

On 31^st August, the MOSPI flash data shows India’s Q1FY24 real GDP was around Rs.40.37T vs 43.62T sequentially (-7.45%) and 37.44T yearly (+7.83%); i.e. the Indian economy contracted -7.5% sequentially, but expanded +7.8% yearly in April-June’23 QTR (Q1FY24). The market was expecting an annual/yearly real GDP growth of +7.7% in Q1FY24. The sequential contraction in Q1FY24 is in line with the prior trend due to the FY year-ending adjustment.

Sequentially, the Indian economy expanded in the last QTR (Dec-Mar) of the FY unusually, while contracted deeply the following quarter (Apr-Jun), the 1^st QTR of the FY., while sequential growth seems normal for Q2 and Q3. Considering all these factors and trends, the real GDP of the Indian economy should reach around Rs.171.25T by FY24 against 160.07T for FY23 (+6.53%); i.e. the Indian economy (real GDP) may grow around +6.5% in FY24 after +7.24% growths in FY23. In Q1FY24, consumer spending (PFCE), which is almost 67% of Indian GDP, surged +6.0% yearly but contracted -3.63% sequentially while government spending (GFCE) slipped -0.73% yearly and -15.88% sequentially. Indian exports contracted -7.76% yearly and -15.09% sequentially, while imports grew y/.+10.00% yearly and +10.30% sequentially.

For FY23, India’s real GDP was around Rs.160.07T vs Rs.149.26T in FY22 (+7.24%), while nominal GDP was around Rs.272.41T in FY23 vs 234.71T in FY222 (+16.06%). The Indian nominal GDP was around $3.41T in FY23 against real GDP of $2.00T (at average USDINR 80.00) for FY23, and $2.02T for FY22 (at average USDINR 74.00). But if we consider the average USD INR for FY12 (? in line with real GDP at constant prices for FY12), the Indian real GDP was around $3.33T for FY23 vs. $3.11T for FY22.

India’s real GVA was around Rs.37.74 for Q1FY24 vs 39.79T sequentially (-5.15%) and 35.00T yearly (+7.83%); i.e. Indian real GVA grew +7.8% in Q1FY24 yearly (y/y), but contracted -5.2% sequentially (Q/Q). In Q1FY24, India’s GVA (Production based economic activities) was boosted by financial, real estate & professional services (+12.2%); trade, hotels, transport, communication & services related to broadcasting (+9.2%); public administration, defense & other services (+7.9%); construction (+7.9%); mining and quarrying (+5.8%); manufacturing (+4.7%); agriculture (+3.5%); and utilities (+2.9%). As per the present trend, India’s real GVA may grow around +6.7% in FY24; Real GDP=Real GVA+ Net taxes on products & services (at 2011-12 constant prices-adjusting inflation).

India’s Manufacturing PMI Grew at 3-Month High in August:

On 1^st September, the S&P Global data shows India’s Manufacturing PMI increased to a 3-month high of 58.6 in August from 57.7 sequentially, above market estimates of 57.5 while indicating the 26^th consecutive month of expansion in factory activity.

In August, new orders rose the most since January 2021; while output gained for the 26th month and to the greatest extent in nearly 3 years. Also, export sales expanded at the fastest rate in 9 months amid robust demand from, among others, China and the US. Buying levels rose sharply to hit the fastest growth in over 12 years. Meantime, employment went up the least in 4 months but was above the series trend. Buying levels rose sharply and at one of the fastest rates in over 12 years. Delivery times were shortened for the 6^th month. On prices, input cost rose the most in a year, while factory gate charges rose at the slowest pace in 4 months. Finally, sentiment remained historically elevated despite the degree of optimism slipping to a 3-month low, due to inflation concerns

The S&P Global Comments on India’s August Manufacturing PMI:

"The PMI results for India painted a vibrant picture of the nation's manufacturing landscape in August. Robust and accelerated increases in new orders and production suggest that the sector looks set to provide a strong contribution to second-quarter (fiscal) economic growth. Companies' strategic focus towards a global orientation was evident via a sharp and quicker expansion in international sales. Export-centric tactics should help ensure that production remains on an upward path in the coming months.

The near-record increases in buying levels and input stocks underscore firms' methodical approaches to ensuring that production lines are not interrupted. To aid this, manufacturers also hired additional workers again in August. The presence of stronger cost inflationary pressures serves as a reminder of the challenges inherent in managing growth. Firms addressed rising input prices by lifting selling charges. However, the need to maintain competitiveness helped restrict charge inflation."

India’s Service Sector Growth Remains Robust in August:

On 5^th September, the S&P Global data shows India’s Services PMI dropped to 60.1 in August from an over 13-year high of 62.3 and below market forecasts of 61.0. Both new orders and output remained at elevated levels. Output growth was one of the strongest observed in 13 years, while new exports continued to rise for the twenty-fifth consecutive month, driven by a series-record surge in new export business.

In August, India’s service sector (private) employment slightly increased, with the rate of job creation reaching its highest point since November. As for prices, output price inflation accelerated to the joint-strongest in over six years, as strong demand conditions facilitated the passing on of cost increases to clients. Input price inflation, although moderating since July, remained higher than output charges, primarily due to rising food, input, and labor costs. Finally, optimism reached its peak so far this year, as firms were confident that their production would continue its positive growth in the next year.

India Composite PMI Remains Robust in August:

Finally, the S&P Global data shows India’s Composite PMI fell to 60.9 in August, slightly slowing from a record high of 61.9 sequentially but remains one of the strongest expansions in over twelve years. New orders continued to rise, extending the ongoing period of growth to just over two years, but easing from July. Nevertheless, new order growth remained robust and was one of the best seen since mid-2010. On prices, input costs were little changed from a month earlier, as an acceleration in the manufacturing sector was more than offset by a slowdown in the service economy. Meanwhile, output charges picked up midway through the second fiscal quarter, with the service providers posting a faster rate of increase.

The S&P Global comment about India’s composite PMI in August:

"Indian services companies achieved a remarkable milestone in August, as they welcomed a series record surge in new export business. Several regions contributed to the upturn, including Asia Pacific, Europe, North America, and the Middle East. This spike in international demand supported one of the best sales performances recorded over the past 13 years and acted as a catalyst for firms to expand their workforces as well as output. Demand strength also fostered a heightened sense of optimism regarding the outlook, boding well for economic growth prospects. However, favorable demand trends also led to the joint-fastest increase in prices charged for Indian services in over six years, which may prompt attention from policymakers and potentially delay cuts to the benchmark repo rate."

On 12^th September, the MOSPI data showed India’s annual (y/y) total CPI (inflation) eased to +6.83% in August from +7.44% in July and below market expectations of +7.00%. On a sequential (m/m) basis, India’s headline CPI contracted by -0.05% after surging +2.87% sequentially in July amid skyrocketing vegetable prices due to elevated logistics and irregular rainfall/production issues. Overall, the 3M rolling average of underlying inflation (CPI) may be now running around +9.19% due to elevated food as well as fuel inflation.

But India’s annual core inflation eased to +4.80% in August from +4.90% in July.

Overall, India’s 3M rolling average of underlying core CPI may be now running around +5.02%, still substantially over RBI’s targets of +4.0%.

Looking ahead, India’s core CPI is expected to be elevated & sticky amid higher oil prices/higher logistic costs and core service inflation. Although, RBI will hold the rate on 6^th October with a hawkish stance, going forward, if the Fed goes for another +25 bps hike on 1^st November, RBI may have to respond/match by hiking another +25 bps on 8^th December to manage USDINR and imported inflation, everything being equal.

Higher cost of living and higher borrowing costs may affect consumer spending and corporate earnings in the coming days. Fed may not go for any rate cuts before Sep’24 and thus all other major G20 central banks including ECB, BOE, and RBI may not be in a position to cut rates.

Nifty EPS grew by only around +6% in FY23 and is projected to grow +8% in the coming years on average:

Nifty reported a consolidated EPS of around 858 in FY23 against 809 in FY22; i.e. grew by only +6.06%. Further Nifty reported a consolidated EPS (annualized rate) around 885 in Q1FY23 against 858 sequentially (+3.15%) and 828 yearly (+6.88%).

At around 885 TTM EPS (Q1FY24), the current Nifty PE is around 22.20 against the average fair PE of 20. At the present trend rate, the projected FY24 Nifty EPS may be around 927 assuming +8% annual growths, and at an average PE of 20, the projected fair value may be around 18533. Further, if we assume +8% annualized growth in Nifty EPS in FY: 25-26 (depending on actual Fed/RBI rate action, Russia-Ukraine war, and inflation trajectory), projected Nifty EPS maybe around 1001 and 1081, which translates to a fair value of Nifty around 20015 and 21617. As the financial market usually discounts 1Y EPS in advance, Nifty may scale 20050 by March ’24,  and 21650 by March ’25 while FY23's fair value may be around 18532.

The Q4FY23 Nifty EPS was around 858 against 850 sequentially (+0.94%) and 809 yearly (+6.06%); at this and the previous average QTR/YLY run rate, Nifty consolidated EPS may grow around 1.5-2.5% sequentially or 6-10% yearly for FY: 24-26. The subdued Nifty earnings are due to lingering global macro-headwinds, geo-political tensions, and resultant sticky elevated inflation, both locally and globally, and higher borrowing costs are affecting discretionary consumer/corporate spending, affecting earnings.

If inflation indeed comes down and RBI/Fed goes for pause/pivot, i.e., rate cuts in H2FY24, Nifty EPS may grow around at least +10% CAGR rate on an average considering huge fiscal/infra stimulus, growing affluent middle class, and higher USDINR (growing policy/macro divergence between RBI and Fed)-positive for export savvy Nifty blue chips (almost 60% of Nifty earnings comes from export). Subdued external trade amid the chorus of synchronized global stagflation/recession may affect Nifty EPS despite upbeat domestic macros. Overall, if India’s real GDP grows around +6% and core inflation/inflation also grows around +5.5%, then Nifty earnings may also grow around 6-10% in the coming days; i.e. +8% on average.

India is now enjoying scarcity premium not only among EMs but also DMs due to political & policy stability (Modinomics), the mantra of reform & perform, and the appeal of 6D (development, demand, demography, democracy, deregulation, and digitalization). India has a strong banks & financial system due to a strong capital buffer and regulatory system. India’s low external debt and manageable trade deficit are a huge advantage compared to many EM peers.

But looking ahead, if India begins to take more external funds (in USD) as public debt taking advantage of JPM global bond inclusion, it may make the country (India) more vulnerable to FX volatility. But overall, India may accept only around $30B loan through this route against the present FX reserve of around $600B at a comparatively lower coupon rate and it will also help the Indian banking system to lend more to the real economy rather than the risk-free government lending.

But going ahead, India also has to bring proper political reform, especially on the political funding/black money aspect, proper policy for population control, and more targeted infra stimulus (transport-specially railways and social especially quality medicare and education).

Thus the scope for future improvement in GDP and GDP/Capita is immense. This, along with a deluge of quality companies, good business models, growing deleveraging, and impeccable/credible management, the Indian stock market may outperform not only its peers (EMs) but also many DMs. The Indian economy has to grow +8% in real terms (if not +10% potential) over the next 10/15 years, keeping core inflation stable around 4/5% so that Nifty EPS/Corporate earnings should also grow 15-20% CAGR on an average. India’s huge and growing population is itself a ‘virtual guarantor’ for +6.00% real GDP growths and +5.00% core inflations in the coming days.

India’s core inflation may stay elevated and sticky due to underlying structural issues like higher logistic costs, higher local taxes, and still a robust flow of black/unaccounted money through various channels. If the Fed goes for a hike on 1^st November, then RBI may have to go for the final rate hike in December to manage USDINR and imported inflation under control, everything being equal, keeping policy repo rate differential at +100 bps (present levels).

If the Fed opts for some cuts (-50 bps) in H2CY24, then RBI may also follow and may go for a -50 bps cut in H2CY24. RBI may like to ensure at least +50 bps real interest concerning core CPI; if core CPI indeed stabilizes around +5.00% in early 2024, then RBI may indicate rate cuts, by changing its stance to neutral in April ’24 MPC meeting, just ahead of India’s general election expected in May-June’24 to boost Dalal Street.

Bottom line:

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (19674) now has to sustain over 19600-19575 levels for any recovery to 19850/900 and 20000/20275 levels; otherwise sustaining below 19540, may further fall to 19500/19450-19225/19100 and 18875/18525 levels.

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