First Industrialisation, then Globalisation and now it’s time for PROTECTIONISM.

The world economy has witnessed various cycles of up trends and downtrends over the past many decades which have been driven by different strategies adopted by world leaders. Since the 2008 financial crisis, the world economy is still finding its way to bring back its economy to a growth path and Protectionism is one of the latest buzz words.

Most of the major economies are trying to protect the interest of their own countrymen, including US, China, India and Australia are posing tariffs/duties on imports, restricting human flow, etc. to support their own manufacturing and services industries. US President’s recent decision to increase H-1B visa charges and imposing import duties on various products coming from China may lead to a trade war which could eventually turn up as a currency war.

Amidst all these negativism, India still looks to be a shining star amongst the investors. We still hold a very positive view for the Indian economy and Indian stock market because,

1) Fundamentals for Indian economy remain intact. India’s GDP is one of the fastest growing GDP amongst major economies in the last three years. Positive demographics, rising per capita income, urbanisation and increased rural income are driving India’s GDP

2) Government’s various reforms such as Fuel de-regulation, Housing for All, Power 24X7, Digital India, GST and Smart City are few examples which would transform India in long run and

3) Contracting fiscal deficit provides a lot of cushion to accelerate capex cycle to fuel GDP growth. With lower subsidy burden, higher excise duty on auto fuels, increased tax income, money collected under VDIS (Voluntary Disclosure of Income Scheme), divestments and Spectrum sale, the balance sheet of India has improved considerably. Fiscal deficit is continuously contracting and expected to be 3.2% in FY18. This is likely to enhance the credit rating for India which would attract more FII and FDI flows.

We have seen massive FII outflows over the past few months, but remained positive for the full year. However, the key positive surprise was the strong domestic flow which reached to US$ 5.5 billion in 2016, compared to FII inflows of US$ 3.7 billion. Except for two years in the last 10 years, FIIs were always net buyers with a cumulative investment of over US$ 200 billion. Also, due to demonetisation and lack of other investment opportunity we expect DII flows to remain robust going forward. Demonetisation in a way has helped the organised sector in a big way, which is likely to be very positive for many listed players.

Goods and Services Tax (GST) implementation is also expected to be a landmark reform which would simplify tax structures. It would bring a uniform tax structure across the country which would remove the barriers to interstate trade. Also, GST would help break the trade barriers as currently, Central Sales Tax and cross border check points hinders the movement of goods across states. GST implementation would certainly wipe out the CST from the system and would facilitate easier movement of Goods. And most importantly, GST would certainly boost the tax collection for the government as a lot of unorganised players would come under the tax net which was exempted to pay excise duty owing to its low volume.

On this backdrop, we expect the Indian economy would continue to achieve a higher growth rate compared to the rest of the major economies. Re-rating and upgradation from major rating agencies are very much on the cards with significant improvement in India’s balance sheet and robust outlook. Nifty has been traded at an average P/E multiple of 18.1x over the past 10 years. If we take Bloomberg’s EPS estimate for FY19 (Rs. 623) and give the same multiple, Nifty’s target comes to nearly 11,200 levels, ~26% higher than current levels.

Authored by: Mr A K Prabhakar, Head of Research, IDBI Capital
Views expressed are personal

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