India: Play Roullette or Craps? 3 Downgrades In A Day?

GDP growth – A bit of disappointment 

GDP data surprised on the downside at 7.0% YoY, below consensus expectations of 7.5% (Antique: 8.0-8.5%). From an industry perspective, the gross value added (GVA) data may have posted a 7.1% YoY growth, but leaving aside the more transient components such as agriculture and govt spending, growth is at 8.8% YoY which is broadly in range with the 9.1% YoY growth observed in the previous quarter. Capex growth continues its gradual recovery, up by 4.9% YoY (highest in last five quarters) possibly reflecting higher government thrust. However, despite positive internals, the overall deceleration in GDP growth is disappointing.  Factoring in a lower 1Q growth, we trim our FY16e GDP estimates marginally to 7.6% YoY. 

A bit of disappointment

1QFY16 GDP growth surprised on the downside, with a print of 7.0% YoY versus consensus expectations of 7.5%. GVA growth, meanwhile, was 7.1%. Agriculture posted a comeback of sorts growing by 1.9% YoY, highest in last three quarters while industry expanded by a healthy 6.5% YoY, especially with manufacturing registering a 7.2% YoY growth. Construction segment, meanwhile, grew at 6.9% YoY, possibly reflecting the government’s efforts to boost capital spending. Services growth at 8.9% YoY was a shade lower than 9.2% YoY registered in the previous year but that reflected the lower growth in community, social and personal services segment. The more critical trade and transport grew at a more robust 12.8% YoY. On top of a 14.1% YoY jump in 4QFY15, this reflects some kind of momentum picking up in overall growth. Excluding agriculture (which was actually a bit of a positive surprise) and government services, growth was actually 8.8%, which is in-line with the 8.8% in 4QFY15. 

From the expenditure side, private final consumption expenditure (PFCE) grew 7.4%, while government expenditure expanded by 1.2% YoY. Meanwhile, gross fixed capital formation (GFCF) grew 4.9% YoY, highest in last four quarters. 

What to look for in this data?

We expect a payback in the forthcoming quarter in some of the components where growth was disappointing such as tax collections (on account of a very low differential between GVA and GDP growth) and government spending. On the other side, the additional headwind for 2QFY16 GDP could be the lower run-rate in monsoons. 

We continue to maintain our thesis of a gradual cyclical uptick although we pare down our FY16 growth estimates slightly on the 1QFY16 disappointment. Beneficial impact of the ongoing reforms process, especially the Centre’s efforts in unlocking the coal-power cycle, and increased infrastructure spending opens the space for potential upsides, especially in manufacturing growth.