Capex plans to continue growth momentum

After a disappointing financial year 2008-09 (FY09), the markets recovered during FY10 with earnings growing about eight per cent year-on-year. The first quarter was a watershed, which set the momentum going for Sensex with earnings rising 12 per cent year-on-year from a decline witnessed in the last two quarters of FY09.

The rise was driven by cost-led margin surprises and benefits from lower interest rates, a stronger rupee and the change in accounting norms. This was followed with earning upgrades and growth outlook being revised upwards. Sensex saw upgrades of three-five per cent in earnings per share (EPS) for FY10-11 on the back of a visible global recovery and domestic investment upturn.

The monetary policy also became accommodative and credit was made freely available, resulting in renewed demand from sectors like autos and housing, which had its own multiplier effect. The expectation is that the real GDP growth would be around 8.5 per cent in FY11 (15 per cent nominal GDP growth, assuming an inflation of around seven per cent). Hence, the base case for broad-based earnings growth is around 15 per cent. However, considering that the PSU oil space could deliver flattish growth, other areas can report better earnings and most companies could deliver around 20 per cent earnings growth, which is expected to be broad-based but led by commodities sectors, real estate and banking.

The first half of 2010 has seen the growth outlook for Indian economy being improved, the reforms process gathering further pace, and the government’s fiscal position improving with the 3G auctions. Data on investment projects for the June quarter reinforce that the investment cycle will gather momentum during FY11. New project announcements continue to come in, even if concentrated in a few sectors like power, metals and transportation services.

The value of projects under implementation has grown 12 per cent sequentially in the first quarter, too, with a discernable pick-up in the construction sector. In the second half of the fiscal, capital expenditure (capex) by corporate India is expected to keep the growth momentum strong. However, there are challenges. The momentum of several commodity prices has been broken with the slowdown in the developed west and there may be impairment in earnings expectations from the commodity pact going forward. Rising interest rates may also start to impact earnings though marginally.

With the turnaround in investment cycle, consumption growth momentum remaining intact, we believe India is well-positioned to report real GDP growth of 8.5-9.0 per cent in FY11. Based on current trends, FY12 growth will likely be higher. We do not think calibrated policy rate hikes (increase in reverse repo rates) represent a risk to growth expectations. Macro tailwinds are strong enough for a well-positioned strong growth.

The author is Head – Equity, Bharti AXA Investment Managers