NEW HIGHS - BANK INDEX GROWTH ...LINKED WITH INDIAN GDP GROWTH

Do you know that FIIs were tired of pulling out Rs.2.6 lakhs cr from the Indian market?  What makes Indian markets to be completely segregated from the U.S and EU market is the real rationale behind the markets climbing new highs in the coming days.  Do You Know why FII's are coming back again and what makes Indian markets to be so good?  The dollar Index is currently 20 years high for India stating at 109 against the 2001 level of 120 which is negative since the higher dollar index is bad for equities. U.S 10 years yield is now 3.3% followed by higher gas prices for U.S and EU. Whereas for India the energy prices are down by 30%  followed by 10-year yields that rose  7.2% from June 2022.

 Well, the Nifty is up by 14% compared to S&P and DowJones. On the other hand, the BFSI industry will be playing a big role in the coming quarters behind the market. Banks have also accelerated tech investments for F22-23. We think F24-25 could surprise the upside on cost-to-income ratios. We need to understand the rationales and factors driving the market away from the U.S and EU market and their economic impacts.

The corporate profit to GDP of India is climbing up and has a long way to go. After rising significantly from FY20 onwards, the aggregate profit of listed India companies stood at Rs11.2trn, or 4.5% of GDP on a TTM basis (TTM: trailing 12 months). The ROE of the Indian equities is yet to touch the all-time high of 2007-08 of  25-30% which is currently hovering around 15%. The prime reason behind the same is that capacity utilization is still at 69% far from the pre-covid phase levels. On the other hand, the credit growth of the Indian corporates is yet to come up which is currently just around 10% YoY till July 2022.

 To date, we had a healthy monsoon followed by a festive season falling early which significantly pushes up the consumption climate. The August to October GST numbers will speak very loudly on the same.  The revival of the rural demand and falling industrial inflation adds significant margins to the corporate profits in the coming quarter result. The pent-up demand for festival celebrations is adding more value to the consumption which will get reflected in the quarter results.

If we look at the government CAPEX we find significant growth and a path for significant growth too. Government CAPEX continues to be robust (Q1FY23 saw a 57% YoY rise in Central government Capex at Rs1.75trn resulting in a TTM Capex of Rs6.5trn). This is getting reflected in the GVA in FY-22 to the level of 18% which is heading towards a new all-time high. The banking credit is also supportive of the same GAV contribution. Credit growth improved further although core sector growth moderated. Fortnightly non-food credit growth in Aug’22 exceeded the 15% YoY mark. Core sector growth in Jul’22 however moderated to 4.5%. If we look at the number of Capex to GDP we find that during 2012-13 it was around 35% to 40%  which is currently around 28%, hence their significant way to crossover the historical highs.

 This is further supported by the manufacturing and service Index numbers where   PMI-manufacturing and PMI-services are at 56.2 and 57.2 respectively.  Exports on the other side have been very strong for India with a depreciating rupee and a robust pipeline of exporting orders. With higher crude prices many countries are cutting down on the production of Goods and this opens up the demand for Indian companies to produce and export. This further supports and backups any domestic slowdown as well as supports the growth of Indian macro numbers.

 The banking sector is just on the verge of significant upheaval in terms of ratings as well as growth.  The asset quality improvisation has already happened in the last 2 years and now the robust demand climate will come up which improves the growth of the Industry. The loan growth acceleration sets an earnings upgrade cycle for the industry in coming quarters.  New Capex cycles, an increase in Industrial utilization of capacities, corporate sector profitability, and deleveraged banking sector balance sheets will help the Banking index to climb new highs.  PLI is also playing its cards behind the Indian GVA and GDP growth.

 The recent Apple  decision for the Apple 14 manufacturing plant in India is a big eye-opener of future growth outlooks.  Digital banking has improvised the credit market followed by significant job creation and healthy pay packages in one segment of the economy plays a key role behind consumer loan market growth. The SME segment doesn’t think of any slowdown but is planning for expansion and growth which is more supported by the PLI segment.  For the quarter ending June 2022, the applicants under this PLI scheme had undertaken sales of Rs 1,67,770 crore, including export of Rs 65,240 crore, a NITI Aayog release said on Friday (9 September).

This PLI is becoming bigger since the govt will get more manufacturing hubs in India replacing china and this would improve the performance of quarterly results. If we look at the bank index we find that the Bankex has risen 73% over the past two years, compared to 53% for the Sensex. Capital ratios of the banks have improved significantly which creates significant growth opportunities for the banking industry to contribute to the market.

 The Indian macro is completely riding on a different track which is not linked with EU or U.S slowdown factors.  Short-term hiccups are not be termed as a slowdown for the Indian economy.