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India Strategy - Economy gathers steam…

This note highlights growth in digital transactions (reported by RBI), which we believe reflects the strength in ground level economic activity. Adjusted overall transaction value* is up by robust 23% yoy in last six months (Sep-17 to Feb-18), that too on a high base (46%yoy growth in six months post demonetization, Nov-16 to May-17). Industry (particularly manufacturing) too is showing early signs of revival post disruption from demonetization and GST implementation; the latter has started to bear fruit. Hence, we observed a) turnaround in Industry/manufacturing gross value added (GVA) growth, b) sustainable uptick in Index of Industrial production (IIP) and core industries growth on a 6-month (6M) moving average basis, c) simultaneous uptick in consumer durable IIP series and falling imports of consumption items, and, d) growth in SCB’s (scheduled commercial banks) Industry credit, which has turned positive after a 15-month decline. Consequently, we expect companies with high earnings growth to outperform, irrespective of their business model (asset heavy or asset light).

Transactions data robust despite demonetization: As transactions are the most basic economic activity that takes place, measuring them paints a fair picture of economic activity at ground level. Though India is primarily a cash driven economy, digital transactions are picking up and are increasingly replacing cash transactions in organized businesses (with GST facilitating movement from the unorganized to organized sector). Hence, ongoing strength in overall adjusted transactions* data along with fair strength in key sub-segments underpin our view (Exhibit 1-4). RTGS (~72% share of total adjusted transaction value) transactions have grown at 29% yoy in last three months (despite demonetization) with 25% growth FYTD (until Feb 2018). Retail transactions (~12% share) too have registered 39% yoy growth during the period with 46% yoy growth FYTD. Keeping demonetization, GST and strength in other high frequency data in mind (IIP, Core Industries, CV volumes, credit growth), we attribute the growth trajectory in transactions data to a) increased acceptance of digital payments, and, b) uptick in economic activity.

Domestic manufacturing and not imports to fulfill domestic demand: As domestic manufacturing took a hit post demonetization and GST implementation, we saw 33% yoy FYTD (until Dec 2017) growth in consumption related imports (classified commodity-wise based on end use for this category, Exhibit 16). However, consumption-related imports fell 3% in Feb 2018 with FYTD18 (until Feb 2018) growth rate falling to 27% yoy, as effects of demonetization is in the base. Total imports however, continue to be driven by oil and commodity prices, where the decline is not by similar margins. Simultaneously, consumer durables IIP series, which has been intermittently negative in last 8-10 months, has picked up and is showing a trend reversal on 6M moving average basis (Exhibit 18). A look at the two abovementioned data points in conjunction with industry (in GVA) and IIP and core Industries growth, further supports our thesis of a recovery in domestic manufacturing.

IIP and core industries show a trend reversal: After a weak trend in early FY18, we see a clear trend reversal in IIP growth on a 6M moving average basis (Exhibit 11, our analysis on 6M moving averages is to decipher the trend, given the volatile nature of the series); IIP and 8 core industries (38% of IIP) are key indicators of industry growth. We observe the strongest turnaround is seen in manufacturing series (under economic activity-based classification), with most series showing a clear trend reversal (in terms of usage-based classification; Exhibit 12, 13). Within the 8 core industries, the sharpest turnaround was seen in refinery products and cement production (Exhibit 14, 15).

GVA growth bottomed out; turnaround visible in Industry (read manufacturing) growth: With GST implementation settling down and domestic manufacturing starting to fill domestic demand, we observed a turnaround in Industry/manufacturing GVA (Exhibit 7). We believe we have moved on from GDP/GVA growth bottom in the current cycle and expect growth trend to sustain hereon. Moreover, we don’t see any challenges to services growth in the near term. However, agrarian economy could pose a challenge to GVA growth, depending upon how rainfall distribution, sowing and minimum support price (MSP) implementation pan out.

Industry credit growth positive after long: In Feb 2018, non-food credit grew 9.8% yoy, with the trend strengthening over last few months. We are upbeat about a revival in the economy, spurred by pick up in Industry credit growth, which has turned positive after hovering in the negative territory for 15 months (Aug-16 to Nov-17) (Exhibit 20). Credit growth in a sector is generally an indicator of business growth and capex opportunities in a sector. Moreover, we observe robust growth in personal loans and services loans (Exhibit 21, 23) but see NPA issue as an overhang on revival in private investment, which will be key for an upswing in business cycle.

*Adjusted for ATM withdrawals and CCIL transactions