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ESSENCE OF THE WEEK
Nov 20, 2017 | Source: AxisDirect
In a span of just 20 days, India got two big goodies: (1) it entered Top -100 global ranking in ease of doing business and (2) Moody’s upgraded India’s credit rating from Baa3 to Baa2 after 14 years. These two in quick succession lifted investor spirits after a dull and weak period of growth effected by demonetization and GST.
Moody's upgraded India's sovereign rating by one notch to Baa2 (we've never been at this level), reinforcing bond markets faith in sovereign debt. The upgrade comes on the back of higher growth potential relative to the peer group. However, the press release refers to India's high public debt as a point of continued concern, though recent spate of reforms have provided a stable domestic financing base.
This announcement is positive for the INR since it makes investing in India eligible for many FII long only funds, who were hitherto unable to e.g. certain pension funds. Having said that, there is very little headroom for FII in bonds at this time. The INR/USD closed the day marginally stronger at 65.02 vs. 65.32 on the previous day despite falling well under 65 during opening trade. We don't see a need for fundamental change in the gradual rupee depreciation call yet since India still runs twin deficits and inflation remains higher than the developed world.
10y bond yields have breached the 7% mark in recent sessions and news of the rating upgrade helped lower yields below 7% briefly, with yields quickly rising to close at 7.05% (vs 7.06% the previous day) after the finance minister hinted at a change in the fiscal consolation glide path.
Q2 earnings encouraging: Q2FY18 was a crucial quarter for India Inc. as companies had to work around GST. After a poor performance in Q1FY18, which saw the transition to GST coupled with disruption from demonetization, performance fared better in Q2YF18. Aggregate numbers (ex OMCs) for key metrics (revenue, EBITDA) in Q2 saw YoY double digit growth of 10% and 11% respectively. Importantly, earnings growth swung from negative 4% in Q1 to positive 10% in Q2
The quarter saw a broader earnings mix with most sectors posting growth uptick over the previous quarter; hence, more surprises than disappointments (surprise ratio at 37% vs. 27% in Q1). As expected, global commodities were the main contributors in the quarter, followed by Autos (mainly Tata Motors), Engineering, Power and FMCG. Drag in earnings was seen in Cement (freight and power cost escalation), Pharma and Telecom (mainly Bharti Airtel).
Our Sensex EPS saw marginal upgrade of ~2% for both FY18E and FY19E. The upgrades were in heavy weights such as Reliance Industries, Tata Motors, Tata Steel, ONGC, and L&T. EPS for FY18E stands at 11% (Rs 1,595) and for FY19E at 21% (Rs 1,931).
We believe the medium term outlook is encouraging on the back of likely revival in capex cycle. Lead indicators like capex sanctions data of banks, PMI, power generation, auto volumes, etc are encouraging.
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