Barclays Downgrades India

While the 1QFY16 earnings performance of India Inc. was by and large weak, on account of a weaker-than-expected demand recovery, there nevertheless were some bright spots: 1) operating performance (EBITDA) was better than top-line performance, suggesting a decent pass-through of low input cost pressures; and 2) the demand environment showed signs of improvement in a few sub-sectors in the consumption and industrial sectors. Barclays analysts expect an earnings bounce back in H2 FY 16 in several sectors – consumer, financials, healthcare and capital goods. However, postponement in earnings recovery leads us to reduce our 12  month forward NIFTY index target to 9,642 from 10,219. 

 

1QFY16: Overall earnings trend remained underwhelming: Indian earnings have now remained stuck in single-digit growth territory for the past three years. This year is following a similar pattern with downgrades to FY16 estimates persisting (consensus earnings now projecting 16% EPS growth for FY16 compared to 19-20% at the beginning of the year). Weak revenues are ostensibly to blame, though a closer look indicates top-down issues led by high real interest rates and a negative WPI culminating in lacklustre IP growth are the real culprits. 

Barclays analysts expect bounce-back in H2FY16: Our analyst team thinks growth could rebound in the second half of this year helped by consumer (staples and discretionary), financials, healthcare and capital goods sectors. On a top-down basis, we note that our forecasts are underpinned by an expectation of better fiscal policy in terms of higher capital expenditure by the government and also an improvement in consumption as lower oil prices trickle down to consumers. Our expectations from monetary policy are more muted: our economists look for a 25bps rate cut before March 2016 and FY16 average CPI of 5%.