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India’s GDP Is Expected To Double To $ 5 Trillion By 2025: Jyoti Vaswani, Future Generali India Life Insurance

In an interview with BW Businessworld, Jyoti Vaswani, Chief Investment Officer, Future Generali India Life Insurance, discusses about Indian bond markets, corporate earnings, and more

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What’s your take on the various incoming macro data prints as they stand today? Do you believe that the economy is on a recovery path? Recent numbers indicate that consumption isn’t quite picking up as expected.

The Indian macros were best in class in 2017 with all economic variables from CAD to inflation , crude prices to rupee all probably at their best levels. While the Indian macros have seen a swing from being best in class in 2017 to turning slightly adverse in 2018 in the form of rising twin deficits (CAD and Fiscal deficit), rising bond yields and deteriorating foreign flows etc., Inflation still remains very comfortable and provides the much needed cushion to these headwinds. Retail inflation prints have been trending lower in the last three months amid rising crude and depreciating rupee, largely due to benign food inflation. Besides, the recent sharp decline in crude oil prices from peaks will further support India’s macroeconomic position through stable currency and interest rates, if the oil prices stay below $75/bbl levels. It will also address a potential source of risk to India’s fiscal position, CAD etc. In addition, the GST revenues have also been stable and have crossed Rs.1 trn mark in October’18 and are slated to pick up in the ensuing months, thus abating the risk of fiscal slippage due to revenue shortfall.

As we know , India is in the midst of a structurally high growth phase and has been on a path of broad based recovery in growth over the last four quarters, thus reflecting tapering of Goods & Services Tax (GST) and demonetization led disruptions. Q1 GDP growth came in at a robust rate of 8.2% with growth being led by mining and manufacturing sectors, along with an uptrend in private consumption and export. Besides, high frequency indicators such as FMCG volume growth, domestic tractor sales, CV sales, and credit growth are also showing positive momentum, thus reflecting positive rural sentiment. Nonetheless, the consumption space has exhibited some dichotomy in the recent Q219 earnings numbers, with the FMCG companies reporting strong volume growth, while the auto companies reporting a flattish growth (partly owing to high base). However, the future demand outlook for auto space remains sanguine, given the fall in crude prices, rupee stabilising, and pick up in infrastructure and economic activity. The incumbent acceleration in rural consumption, MSP hikes and normal monsoon portend a sustainable growth trend in consumption in the economy. In terms of GDP growth, India is expected to grow at 7.3% in FY2019 and is one of the fastest growing major economies in the world. As indicators such as credit growth, reducing output gap and expected private investments pick up, GDP growth is expected to move up further in coming years. Growth in the next few years will also find support from reforms initiated by this Govt. in the form of GST, RERA, IBC & some revival in the capex cycle albeit gradually along with improving global environment. 

Bond yields have had everyone flummoxed over the past year. Where do you see the 10-yr trading over the next year or so? What factors will influence it over the next few months?

The Indian bond markets have remained volatile with the 10-year treasury yields first inching up due to rising crude, depreciating rupee, rising US 10 year and the Il&FS default and then drifting downwards and stabilising in October ’18 on the back of surprise status quo in monetary policy due to benign inflation, OMO announcements by RBI and falling crude oil prices. Going forward, we expect a steady pace of OMOs by RBI to continue over the rest of the financial year, (given the RBI’s commitment to infuse durable liquidity), which would render support to the bond yields. Besides inflation is also expected to be well within RBI’s 4% (+-2%) target band until March 19, thus signalling an extended pause by RBI. However, given the persisting upside risks to inflation , fiscal deficit concerns, uncertainty in crude and rupee movement, global liquidity tightening, escalation in China-US trade issues and rising global yields, we do not see bond yields falling substantially from here. 

What’s your take on Pharma as a sector? After a brief breakout, it seems to be going into a shell again…

While we could have probably seen the worse of the sector underperformance, we are still not out of the woods yet. Incrementally the outlook is getting better with no major US FDA issue coming out (even though there are legacy issues at some of the manufacturing sites) but the business environment remains challenging. Most of the companies are struggling with the increased competition in high value products as the approval rates by the US FDA have picked up and consolidation of the buyers, both of which have resulted in the pricing pressure. Though the recent bout of sharp INR depreciation provides strong tailwind to the US business, the API supply crunch in China due to environmental concerns is offsetting some of the benefits. Even on the domestic piece of the business, things are very dynamic with the threat of the generic-generic model, risk of extension of the NLEM list etc. Despite the near term headwinds, the sector offers interesting bottom up investment opportunity from medium to long term horizon.       

Broadly speaking, where do you see corporate earnings heading in 2019 and why? 

Corporate earnings have started picking up after a lag of 4-5 years. Q2FY19 had a multi quarter high revenue growth while the EBITDA margins were under pressure due to rising input costs. PAT growth at 10% was in line with estimates. Going forward, Banks which were a big drag on the aggregate Nifty earnings are expected to rebound strongly in FY20 which will aid earnings growth. Also, the aggregate earnings of Nifty is positively correlated to INR depreciation which should also help EPS growth.  We forecast early double digit earnings growth for FY19 and high double digit growth for FY20 aided by the weak base. 

Has the banking NPA issue bottomed out in your view, or is India’s ‘Lehmann Moment’ yet to come, in your view?

We think that we are clearly past the worse of the asset quality cycle. Incremental stress formations has reduced considerably as was evident in the second quarter results of the corporate banks. We are moving from the recognition stage to resolution stage. IBC has been a very good move by the government which should go a long way in controlling NPAs in the banking system in the long run. We have seen some early success in the NCLT process. The recovery rates have been inline or better than anticipated in the resolved cases. With a large part of the provisioning behind us, we expect these banks to show significant turnaround in profitability in FY20 which will aid aggregate Nifty earnings growth as well. Corporate banks, in our view, offers interesting investment opportunity over next 2-3 years.      

Are you worried about the recent meltdown in NBFC’s and all the talk about an impending credit bubble? Or are you seeing things as a contrarian?

Systemic liquidity conditions have tightened in recent months especially for NBFCs post the ILFS crisis. However, the good part is that, well capitalized, high pedigree NBFCs have been able to raise funds albeit at a slightly higher cost. We think that the liquidity stress per se is unlikely to culminate into a systemic credit crunch. The recent spate of OMOs by the RBI has also served to ease liquidity constraints. Nevertheless, despite manageable systemic liquidity, NBFCs are facing a challenge as many of them have significant exposure to short-term CPs, while markets have become wary of subscribing to CPs issued by NBFCs in the current environment.  Besides the current liquidity issue in NBFCs, there is also a concern on their ALM mismatches  & rising cost of borrowing. In this tough environment, the more marginal players will face challenges with regard to roll overs of their issuances.  A backstop liquidity for NBFCs and mutual funds will help restore confidence and ensure the smooth flow of credit in the economy. The willingness and ability of NBFCs to lend in support of real economic activities is imperative, as NBFCs have increased their share of credit to retail (17%+) and SME (10.5%). Also, there are NBFCs, which has risen above competition and have not only delivered spectacular financial performance, but have stuck to the highest levels of quality and corporate governance standards while doing so. It is more likely that some of these NBFCs, which are better capitalized will come out of this tough environment more stronger than before. 

Lastly, please give us your NIFTY projection for 2019 December.

India remains the fastest growing economy in the world with IMF projecting 7.3% and 7.5% GDP growth rates for FY18 & FY19 respectively. India’s GDP is expected to double to $ 5 Trillion by 2025. Several structural reforms like introduction of Goods & Services Tax (GST), Insolvency & Bankruptcy code (IBC), RERA, JAM (Jan Dhan, Aadhar, Mobility) has started showing results by removing inefficiencies from the economy and formalizing the economy. Corporate earnings have also troughed out after a protracted period of low growth and are expected to grow in healthy double digits for FY19 and FY20. The earnings growth will be led by rebound in consumption, peaking of credit cost for the financials as the resolution happens under NCLT. Post the recent correction, the valuations have also become reasonable at 17.5 x 1 year forward earnings which are a slight premium over long term average multiple of 16.5x. 

We remain constructive on the markets. Post the recent correction, the excessive valuations especially in midcap & smallcap have settled down. Markets have reverted to near long term averages which makes them more attractive. Although crude seems to have topped out as of now & NBFC issue is settling slowly, mixed festival season and upcoming elections pose medium term uncertainty. We are also cognizant of certain risks like tightening global liquidity & resultant dollar strength, crude oil prices, fragile fiscal condition & multiple domestic elections. Through the elections next year, markets could remain volatile giving a good opportunity to build a portfolio for the long term.  Return of the ruling party to power in the Centre can provide a leg up to the markets. India is in a sweet spot with major reforms like GST, RERA, IBC and clean up of the banking system laying the foundation for strong growth going forward. We believe the volatility in the markets in the next few months will provide a good opportunity to build a quality portfolio for the long term as India is firmly entrenched on the growth path.


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