August 2018: Early signs of growth revival

Over the last few years, the Indian economic growth trajectory has been interrupted by various factors such as demonetization, GST and RERA, which have impacted revenue growth for the Indian corporate sector. Some of these measures were reforms which were required, but there was a short term impact on growth. Also, inflation has moderated over the last 3 years. Revenue growth for a typical company has two components – volume growth and price growth. Because of lower inflation, the price growth has been muted and this has impacted overall revenue growth. Inflation in the March, 2008 to 2013 period, as measured by CPI, averaged 10.2% p.a., which moderated to 5.1% p.a. over the next 5 years.

Some of these factors also reflect in the nominal GDP growth that the economy records. In the 5 year period 2010-15, nominal GDP (real GDP plus inflation) grew at an average of 14.7% p.a. Since then, nominal GDP growth has slowed down to an average of 10.1%. The real growth rate in both these time periods is about the same at 7.2%.

Given all these factors, growth rate for companies slowed down over the past 3 years. If one were to look at the companies in the Nifty, the median revenue growth of these companies was 16.3% pa in the period FY 2010 – 2015. The unusual growth partly came from higher inflation. In FY2016, the median revenue growth rate of Nifty companies fell to 6.1%, followed by 8.6% in FY2017 and 11.4% in FY2018. However, because of the disruptions of demonetization and GST, one year growth rates don’t give the correct picture. So we looked at FY2018 over FY2016 and calculated a 2 year CAGR – this comes to 9.1% as the median growth of the Nifty companies.

In the latest quarter ending June-18, we are beginning to see the first signs that growth may be getting back to a more normal trajectory. The median 2 year CAGR of revenues for the Nifty companies for June 2018 results comes to 13.7% p.a. which is a fairly healthy number. However, these are still early signs which would perhaps need to be confirmed over the next few quarters. From individual company results, one gets the sense that consumption demand seems to be stabilizing and indeed picking up. Various initiatives by the government, including low cost housing and investments in infrastructure should further aid the demand growth.

There are some concerns though. The banking sector is continuing to face challenges of NPA resolution. Though the NCLT framework for resolving bad debts is a good long term step, the large NPA recognition has impacted the banking sectors ability to lend further. It is going to take some time for the situation to improve in this space. Some sectors like telecom, airlines, power, etc have their own challenges. Manufacturing in India is yet to gain momentum. With increased oil prices and a weaker rupee, inflation is starting to creep up along with interest rates, which can affect growth over the short term.

Despite the negatives, one factor consistent over the past several years is strong domestic consumption. With the banking sector settling down, hopefully sooner than later, corporate growth rates should pick up momentum in the coming months and years. We believe that with many structural reforms out of the way, the country is poised for a strong period of consumption growth. While there are not many compelling new opportunities to invest; despite some valuation concerns, the growth prospects give us good reason to stay invested in equities.