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Loss pool/GDP approaching decadal low level; GDP revival, fiscal push, lower interest and tax rates to further augment PAT/GDP!

* Loss pool /GDP in listed corporate India ballooned to a two-decade high of ~1.8% in FY18 largely driven by cyclicals such as corporate banks, Telecom, Metals and NCLT cases. However, the loss pool has been receding since FY18 and extending into FY21 so far has reached ~0.7% of GDP which is the lowest since FY12 and will help in improving the overall PAT/GDP.

* Aggregate consensus PAT of ~360 stocks is expected to rise from 4.6 trn in FY20 to 9.6 trn (~5% of GDP) in FY23 which is a CAGR of 27 %. Biggest swing in profits over FY20-23 is expected to be delivered by Banks, Energy, Auto and Telecom which is largely a function of normalization of depressed earnings. Sales CAGR over FY20-23 for the above set of stocks at 6.8% is marginally below nominal GDP growth rate and does not imply strong demand expectations for the corporate sector.

* Sustainable trajectory of PAT/GDP will depend on how the demand environment pans out. Encouragingly, aggregate demand will get a boost from a classical ‘countercyclical fiscal policy’ unveiled in Union Budget 2022, with a focus on capital outlay which has a higher multiplier effect (3.6x) on demand and a longer impact (4-5 years). Progressive reforms done in the recent past and in the budget will create an enabling environment for growth.

* Private investments and Private consumption key to sustained growth: Desired effect of crowding-in of private sector investments due to pick up in government spending yet to be seen while the jury is still out on a sustained pick-up in household consumption given the effects of pent-up demand, higher propensity to save and low current consumer confidence.

* Liquidity and interest rates expected to remain sanguine: RBI’s latest monetary policy continues with an accommodative stance while promising to manage the Rs 12 tn government borrowing program in a non-disruptive manner and providing ample liquidity (despite the CRR restoration to 4% by May’21). The autonomous drivers of liquidity (Government spending and foreign inflows) are largely supportive although growth in ‘Cash in circulation’ remains a drag. CPI (4.6% in Dec’20) has trended lower due to food prices but core inflation remains sticky at 5.65%.

* Base corporate tax cut in 2019 from 30% to 22% will also boost PAT/GDP in an improving growth environment.

* Equity valuations are stretched at ~ 22x one year rolled forward basis but earnings upgrade cycle and low discount rate will remain supportive of the high valuations.

* Q3FY21 is the third consecutive quarter of earnings beat: To date, Q3FY21 is turning out to be the third quarter in a row to show more beats than misses (beat/miss ratio of 4.6 within the NIFTY200 index) indicating corporate profitability continues to be ahead of expectations, which should lead to further upgrades.

* Economic recovery continued in Jan’21

* PMI manufacturing and services continued to expand MoM at 57.7 and 52.8. Manufacturers indicated employment levels continued to be weak while input prices continued to rise.

* GST collections improved to Rs1.2trn and credit growth improved to 6.1% in Dec’20. Preliminary trade data indicates imports grew by 5.37%, while imports rose by 2%.

* Auto wholesale dispatches: Post the wholesale push to capture year-end sales before sticker prices increase, Jan’21 dispatches softened due to a combination of demand slack and supply-chain issues.

Top picks: SBI, Axis Bank, ICICI Lombard, SBI Life insurance, NTPC, CESC, Gujarat Gas, Ultratech Cement, Prince Pipes, Motherson Sumi, TVS Motors, Bajaj Consumer, Jyothy Labs, Bharti Airtel, Infosys, Alkem Labs and Abbott India.

* Loss pool /GDP ballooned to a two-decade high level of ~1.8% in FY18 largely driven by cyclicals such as corporate banks, Telecom, Metals and NCLT cases. However, the loss pool has been receding since FY18 and extending into FY21 so far has reached ~0.7% of GDP which is the lowest since FY12 and will help in improving the overall PAT/GDP

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