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Strong earnings cycle raises PAT / GDP ratio to decadal high of 4%; Signs of pick-up in capex from Q2 earnings

* Capex shows improvement so far.

Aggregate capex by companies in H1FY22 so far has reached Rs1.55trn (Rs1.29trn in H1FY21) in a seasonally weak period due to monsoons hampering construction activity. To be sure, India Inc’s capex in FY21 was relatively better as it remained flat at Rs5.6trn as against the 9% fall in nominal GFCF in the economy. Also, noteworthy within the management commentary is the sanguine outlook on capex or investments driven by improving demand outlook across sectors ranging from brick and mortar retail outlets to Industrial companies in sectors such as infrastructure companies, cement and steel.

* Outlook:

Q3FY22 is starting on a strong footing with Oct’21 PMImanufacturing rising sharply MoM to 55.9 and GST collections of Rs1.3trn. We classify the current phase of correction in Indian equities as a typical bull market pull back after significant global outperformance CYTD. Market valuations improve (rolled forward P/E of NIFTY drops to 22x) as prices correct and earnings base expands. Q2 earnings of NSE200 universe (123 companies so far) continues to be robust with sales, EBITDA and PAT growth of 33%, 22% and 32% (free-float basis), while including financials PAT growth is 28%. As indicated earlier (link), bulk of demand (YoY sales & volume expansion) is visible in core sectors, financials, discretionary consumption and exports.

* Consequently, PAT to GDP on trailing 12M basis of listed space has reached 4% (highest since FY12). Also, conservative forecast of PAT to GDP ratio based on consensus PAT estimates for around 600 companies and nominal GDP estimates indicates the ratio will reach 4.5% by FY23E.

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