Systematix

Institutional Equities

India Economy 01 September 2022

Lesser-than-expected 1Q GDP print forebodes a much slower 2H

DATA RELEASE The statistical spurt in India’s real GDP growth at 13.5%, significantly lower than RBI
and our expectations, reflecting the fact that the post-COVID recovery has been
slower than anticipated. Hence, we see downside risk to our and RBI’s real GDP
India real GDP growth (% YoY) growth projection of 7.2% for FY23; the sub-4% growth we were expecting for
30
2HFY23 may need to further shift downwards. Our medium-term real GDP growth
20
projection stands at 4% (same as the latest Conference Board projection for 2022-
26, Aug 2022), and in an optimistic scenario, could average between 4-5%. Thus, we
10
expect consensus earnings estimates for corporate India to be adjusted further.
0
Likely tailwinds: further improvement in domestic consumption, correction in crude
-10
prices; Likely headwinds: Mild recession in the US and Europe and slowdown in
-20
China, tighter financial conditions, and INR/USD depreciating beyond our target of
-30
80-82 per USD.
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Jun-23

Real GDP expanding 13.5% in 1Q, but the momentum is fading: India’s economy
Real GDP (% YoY) printed real GDP growth of 13.5% YoY and real GVA growth of 12.8% YoY during the
June quarter of FY2023, recording a slower statistical bounce and lower-than-RBI
Pre Covid trend (% YoY)
projection of 16.2% YoY vs ours at 17%. At the outset, considering the favourable base
Source: CMIE, Projected after Q1FY23 effect of wave 2 last year, the print for 1QFY23 is weak. When measured sequentially,
the economy contracted by 1.5% QoQ on a seasonally adjusted basis. Reflecting the
structural moderation, the 3-year average declined further to a low of 1.3% from 3.1%
in 4QFY22. The fading of momentum is visible across major components of
expenditure GDP; government spending declined by 10.4% QoQ (SA), followed by
capital formation (-6.8%), and private consumption (-2.4%). The only component that
saw an expansion was imports (+11.8% QoQ). Also, compared to the pre-COVID GDP
trend (growing at 4.5%), the post-COVID structural trend is lower by 8%.
Expenditure GDP also highlights the fact that global trade (imports+exports of goods
and services) continues to be a major contributor to nominal GDP, rising to 50% of
total in 1QFY23. However, during 1QFY23, exports/GDP flattened at 21-22%, while
imports/GDP continued to rise to 28%, creating an external sector deficit at 5.3%,
highest since 2013.
The widening deficit in 1Q amid declining government consumption/GDP (11.3% vs
12% QoQ), and capital formation rate (30.7% vs 32.5% QoQ) indicates that the
widening current account deficit is driven by rising proportion of private consumption
(61.2% of GDP vs 59.2% QoQ).
Outlook - India’s growth projections may need to be scaled down: The Indian
economy is growing at a slower-than-expected pace, reflecting the impact of high
inflation, tighter financial conditions and fading of the clustered demand due to the
“opening up” of the economy. Despite private consumption improving at 3.2% (3-year
CAGR), it is still below the pre-COVID trajectory by a huge 10%, reflecting scope for
further gains.
Going ahead, recovery in domestic demand would be crucial, as the impact of global
Dhananjay Sinha slowdown has still not been factored in. Global growth is projected to half in 2022 to
dhananjaysinha@systematixgroup.in
2.7% from 6% in 2021, and further to 1.7% in 2023 (Conference Board, Aug 2022,
(+9122 6619 8095)
Exhibit 12); India has on average, shown sensitivity of the order of 3x for changes in
Purvi Mundhra average global growth, which is on the higher side. We therefore expect the real GDP
purvimundhra@systematixgroup.in
(+9122 6704 8078) growth for FY23 to be around 5%-5.5% mirroring highlighted downside risks.

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01 September 2022 India Economy

Key tailwinds for India’s growth: Expected further improvement in consumption,

decline in global crude oil prices, high capital buffer with banks, deleveraged large
corporate balance sheets.
Headwinds for India’s growth: Tighter global financial conditions, widening external
deficit, INR depreciation beyond 80-82 levels, slower global trade volumes, weakening
global momentum, mild recession in Europe and the US, and considerable slowdown
in China. Elevated uncertainty would continue to weigh in on private capex. The likely
fall in agricultural production due to erratic monsoon would play a spoiler for rural
demand, as well as for the kharif production taking a hit, rendering the next few
quarters challenging.
Slowing economy and Nifty earnings: In our latest strategy note (see here) we have
noted that the latest consensus EPS estimates for FY23E and FY24E at Rs 825 and Rs
959 are 3.5% and 2.5% lower than Mar’22 estimates, which imply growth of 14.5% and
16% YoY, following a 39% rebound in FY22.
We think this is still optimistic, and expect further cuts in 2HFY23, as real GDP growth
slows to 4% or lower, along with the expected slowdown in global economy. The 5-
year EPS CAGR of 14.6% over FY19-FY24E is much higher than the decadal average of
6.7% during FY09-FY19. Thus, we maintain our earlier views of 15-20% earnings cuts
for FY22E and FY24E.
Sectors in highlight
Private consumption holding up well, how long will it sustain? Growth in private
consumption was much faster than expected, which grew by 25.9%. With inflation on
the rise, globally and domestically, and with the central banks across the globe on the
move to put the inflation genie back in the bottle, it is expected that the pace of growth
in private consumption could slow henceforth. The RBI have already raised the policy
rates by 140 bps and is expected to follow suit in future as well, thereby impacting the
domestic spending in general.
Exports are slowing, impacted by moderating global PMIs: Exports of goods and
services have moderated to 14.7% YoY (5-quarter low) during 1QFY23, on the back of
emerging cautiousness in export demand and the subsequent slowdown in global
demand. On seasonal adjusted basis, exports declined 0.2% QoQ. High global
commodity prices are impacting volumes as well, causing margins to moderate in
global manufacturing and hence the demand globally. Global manufacturing PMIs are
slowing, with 95% of major countries showing a sequential decline in Jul’22 (Exhibit
13).
Elevated oil prices averaging USD 113 per barrel during the period, however, have kept
up the pace of imports (37% YoY), thereby widening the external deficit. On year CAGR
basis, exports (6.3%) and imports (9.2%) outpaced real GDP at 1.3%.
The recent moderation in crude oil and commodity prices, if sustained, could help ease
inflationary pressures and improved demand.
Government capex remain supported: Gross fixed capital formation improved at
20.2% YoY, highest in a year, corroborating with government’s comfortable fiscal
position, with the capex on target for roads and railways. The share of gross fixed
capital formation increased from 32.8% during Q1 FY22 to 34.7% in the current
quarter, and this augurs well for growth in the coming quarters.

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01 September 2022 India Economy

Full recovery in the services sector still incomplete: The services sector posted 17.7%
YoY growth, contributed significantly by revival in trade, hotels, transport and
communication have (25.7%). However, on a 3-year CAGR basis, the services sector
grew by just 1%, with trade hotels, etc., still showing 5.5% annualized contraction.
Financial services grew by 9.2% YoY and at 3.4% on a 3-year CAGR. Public services also
recorded 26.3% YoY growth and surged at 5.9% on a 3-year CAGR.
Agri sector also saw favorable base effect, erratic monsoon is the key risk: The
agriculture sector recorded 4.5% YoY growth during the quarter, which was over a low
base of 2.2% in the same period last year, while QoQ growth contracted 13.2%. This
comes in as a reflection of a good rabi harvest. Early arrival of monsoon and lucrative
crop prices have over-shadowed the early heat wave woes. Yet, the spatial distribution
remained uneven, thereby affecting the progress of kharif sowing, as India recorded
its worst rainfall distribution in last six years. This is expected to impact rural demand,
and therefore expenditure.

Exhibit 1: Real GDP growth (% YoY), widespread QoQ decline amid statistically high YoY GDP growth of 13.5%, 3-year CAGR at 1.3%
Private Gross capital Exports of goods Imports of goods
Real GDP Govt Consumption
consumption formation & services & services
Q4FY21 2.5 6.5 29.0 10.1 3.7 11.7
Q1FY22 20.1 14.4 -4.8 62.5 40.8 61.1
Q4FY22 4.1 1.8 4.8 5.1 16.9 18.0
Q1FY23 13.5 25.9 1.3 20.1 14.7 37.2
FY22 8.7 7.9 2.6 15.8 24.3 35.5
Q1FY23 QoQ SA -1.5 -2.4 -10.4 -6.8 -0.2 11.8
Q1FY23 3-year CAGR 1.3 3.2 3.1 2.2 6.3 9.2
Source: CMIE, Systematix Research

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01 September 2022 India Economy
Exhibit 2: Real GDP (INR bn) trends, post COVID 8% lower vs pre Exhibit 3: Real private consumption (INR bn) trends, post COVID
COVID 10% lower vs pre
45,000 30000
40,000 25000
35,000 20000
30,000 15000
25,000 10000

20,000 5000

15,000 0

Dec-06
Nov-07

Jun-12

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Jun-23
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Jul-22
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Oct-19
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Sep-20
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Mar-15

Jan-17
10,000
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Jun-12

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Oct-19

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Apr-14
May-13

Mar-15

Jan-17
PFCE (SA) PFCE (pre covid trend)

Post Covid trend Real GDP (SA) Pre Covid trend PFCE (post covid trend)

Source: CMIE, Systematix Research Source: CMIE, Systematix Research

Exhibit 4: Gross capital formation (INR bn), recovery driven by Exhibit 5: Real exports of goods & services, post COVID trend 4%
government spending, 1QFY23 7.8% lower than pre COVID trend higher than pre COVID (INR bn)

16000 10000
14000
8000
12000
10000 6000
8000 4000
6000
4000 2000
2000 0
Apr-11
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0
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Sep-16

Exports of goods & services SA Post covid trend

GFCF(SA) Pre COVID trend Post COVID trend Pre covid trend

Source: CMIE, Systematix Research Source: CMIE, Systematix Research

Exhibit 6: Real imports 16% higher than pre-COVID trend, Exhibit 7: Projected real GDP growth during 2Q-4QFY23 could
resulting in widening current account deficit (INR bn) decline significantly below the pre-COVID trend of 4.5%
14000 25
20
12000 15
10000 10
5
8000 0
6000 -5
-10
4000 -15
2000 -20
-25
0 -30
Dec-06

Jun-09

Dec-11

Jun-14

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Dec-21
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Feb-11

Oct-12

Feb-16

Oct-17

Feb-21
Aug-08

Apr-10

Aug-13

Apr-15

Aug-18

Apr-20

Dec-09

Dec-13

Jun-22
Dec-07
Jun-08
Dec-08
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Dec-10
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Jun-14
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Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Dec-22
Jun-23

Imports of goods & services (SA) Post covid trend

Real GDP (% YoY) Pre Covid trend (% YoY)
Pre covid trend

Source: CMIE, Systematix Research Source: CMIE, Systematix Research, projected after Q1FY23

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01 September 2022 India Economy
Exhibit 8: Expenditure GDP (% GDP), Widening external deficit Exhibit 9: Private consumption has recovered from the post-
fueled by higher private consumption COVID decline, but momentum is slowing (% GDP)
120 Domestic comsumption Private+Govt/GDP (%)
100

32.5
29.8

30.7
28.9

32.5
33.4

28.7
33.7
27.5
20.7
31.6

32.0

30.3
31.7
31.8

28.7

29.8
80 80
60 11.9 12.2 9.8 9.5 11.1 12.7 10.2 10.0 16.7 10.6 10.0 12.1 12.9 10.3 9.6 11.9 11.3 75
40 70

63.2
63.0

62.9

61.2
61.1

61.0
60.7

60.6
60.2

59.8

59.5
59.3

59.2
59.1
58.2
57.9

55.5
20 65
0 60
-20 -4.6 -5.3
55
Q2FY20
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20

Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
50

Jun-07

Dec-09

Jun-12

Dec-14

Jun-17

Dec-19

Jun-22
Oct-10

Oct-15

Feb-19

Oct-20
Apr-08
Feb-09

Aug-11

Apr-13
Feb-14

Aug-16

Apr-18

Aug-21
Private consumption Govt Consumption
GCF Net exports (goods & services) Govt+household/GDP Private consumption

Source: CMIE, Systematix Research, GFC=gross capital formation Source: CMIE, Systematix Research

Exhibit 10: Global trade feed into trade as % GDP (50%), driven by Exhibit 11: Real GVA, 3-year CAGR driven mainly by government
commodity prices, exports slowing, imports outpacing services, agri and utilities, reflects weak private sector activities
3year
70 % YoY Jun-21 Jun-22 FY22
CAGR
60
Real GVA 18.2 12.8 8.1 1.5
50
40
Agri & allied 2.2 4.5 3.0 3.2
30 Industry 46.6 8.6 10.3 1.8
20 - Mining 18.0 6.5 11.5 1.1
10 - Manufacturing 49.0 4.8 9.9 2.3
0 - Electricity, gas, utilities 13.8 14.7 7.5 3.6
Q1FY11

Q2FY19
Q1FY08
Q4FY08
Q3FY09
Q2FY10

Q4FY11
Q3FY12
Q2FY13
Q1FY14
Q4FY14
Q3FY15
Q2FY16
Q1FY17
Q4FY17
Q3FY18

Q1FY20
Q4FY20
Q3FY21
Q2FY22
Q1FY23

- Construction 71.3 16.8 11.5 0.4

Services 10.5 17.7 8.4 1.0
Export+Imports/GDP Exports of goods and services
-Trade, hotels, transport, etc 34.3 25.7 11.1 -5.5
Imports of goods and services
- Financial services + 2.3 9.2 4.2 3.4
Source: CMIE, Systematix Research
- Public admin 6.2 26.3 12.6 5.9
Source: CMIE, Systematix Research

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01 September 2022 India Economy
Exhibit 12: Global growth expected to halve in 2022 and slow further in 2023

Source: The Conference Board Global Economic Outlook (August 2022).

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01 September 2022 India Economy
Exhibit 13: Manufacturing PMIs across the world, significant declines in Jul’22, several in the contraction zone (<50)
Jul’22 Jun’22 Max (since COVID) Max date Min (since Oct'20) Min date

US ISM 52.8 53 63.7 Mar-21 52.8 Jul’22

China 49 50.2 52.1 Nov-20 47.4 Apr’22

US PMI 52.2 52.7 63.4 Jul-21 52.2 Jul’22

Euro zone 49.8 52.1 63.4 Jun-21 49.8 Jul’22

Germany 49.3 52 66.6 Mar-21 49.3 Jul’22

Taiwan 44.6 49.8 62.4 Apr-21 44.6 Jul’22

UK 52.1 52.8 65.6 May-21 52.1 Jul’22

Japan 52.1 52.7 55.4 Jan-22 48.7 Oct’20

France 49.5 51.4 59.4 May-21 49.5 Jul’22

India 56.4 53.9 58.9 Oct-20 48.1 Jun’21

South Korea 49.8 51.3 55.3 Feb-21 49.8 Sep’20

Canada 52.5 54.6 58.9 Mar-22 52.5 Jul’22

Poland 42.1 44.4 59.4 Jun-21 42.1 Jul’22

Denmark 38 70 71.4 Oct-21 38 Jul’22

Brazil 54 54.1 66.7 Oct-20 47.8 Jan’22

Turkey 46.9 48.1 56.9 Jul-20 46.9 Jul’22

Italy 48.5 50.9 62.8 Nov-21 48.5 Jul’22

Spain 48.7 52.6 60.4 Jun-21 48.7 Jul’22

European Union 49.3 51.6 63.1 Jun-21 49.3 Jul’22

Source: Bloomberg

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01 September 2022 India Economy

Institutional Equities Team

Nikhil Khandelwal Managing Director +91-22-6704 8001 nikhil@systematixgroup.in
Navin Roy Vallabhaneni President & Head – IE +91-22-6704 8065 navin@systematixgroup.in
Equity Research
Analysts Industry Sectors Desk-Phone E-mail
Dhananjay Sinha Director and Head – Research, Strategy & Economics +91-22-6704 8095 dhananjaysinha@systematixgroup.in
Ashish Poddar Consumer Durables, Building Materials, Small & Midcaps +91-22-6704 8039 ashishpoddar@systematixgroup.in
Himanshu Nayyar Consumer Staples & Discretionary +91-22-6704 8079 himanshunayyar@systematixgroup.in
Pradeep Agrawal NBFCs & Diversified Financials +91-22-6704 8024 pradeepagrawal@systematixgroup.in
Pratik Tholiya Specialty & Agro Chem, Fertilisers, Sugar, Textiles and Select Midcaps +91-22-6704 8028 pratiktholiya@systematixgroup.in
Rahul Jain Metals & Mining, Cement +91-22-6704 8066 rahuljain@systematixgroup.in
Rakesh Kumar Banking, Insurance +91-22-6704 8041 rakeshkumar@systematixgroup.in
Ronak Sarda Auto, Auto Ancillaries +91-22-6704 8059 ronaksarda@systematixgroup.in
Sudeep Anand Oil & Gas, Telecom, Logistics +91-22-6704 8085 sudeepanand@systematixgroup.in
Vishal Manchanda Pharmaceuticals and Healthcare +91-22-6704 8064 vishalmanchanda@systematixgroup.in
Bezad Deboo Pharmaceuticals and Healthcare +91-22-6704 8046 bezaddeboo@systematixgroup.in
Girija Ray Cement, Building Materials, Paints +91-22-6704 8098 girijaray@systematixgroup.in
Hena Vora NBFCs & Diversified Financials +91-22-6704 8045 henavora@systematixgroup.in
Nikhil Shah Banking, Insurance +91-22-6704 8091 nikhilshah@systematixgroup.in
Poorvi Banka Auto, Auto Ancillaries +91-22-6704 8063 poorvibanka@systematixgroup.in
Pranay Shah Consumer Durables, Building Materials, Small & Midcaps +91-22-6704 8017 pranayshah@systematixgroup.in
Pratik Oza Midcaps +91-22-6704 8036 pratikoza@systematixgroup.in
Purvi Mundhra Macro-Strategy +91-22-6704 8078 purvimundhra@systematixgroup.in
Rajesh Mudaliar Consumer Staples & Discretionary +91-22-6704 8084 rajeshmudaliar@systematixgroup.in
Shweta Dikshit Metals & Mining +91-22-6704 8042 shwetadikshit@systematixgroup.in
Varun Gajaria Midcaps +91-22-6704 8081 varungajaria@systematixgroup.in
Equity Sales & Trading
Name Desk-Phone E-mail
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Operations
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01 September 2022 India Economy

DISCLOSURES/APPENDIX

I. ANALYST CERTIFICATION
I, Dhananjay Sinha, Purvi Mundhra ; hereby certify that (1) views expressed in this research report accurately reflect my/our personal views about any or all of the subject securities or
issuers referred to in this research report, (2) no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this
research report by Systematix Shares and Stocks (India) Limited (SSSIL) or its group/associate companies, (3) reasonable care is taken to achieve and maintain independence and
objectivity in making any recommendations.

Disclosure of Interest Statement Update

Analyst holding in the stock No
Served as an officer, director or employee No

II. ISSUER SPECIFIC REGULATORY DISCLOSURES, unless specifically mentioned in point no. 9 below:

1. The research analyst(s), SSSIL, associates or relatives do not have any financial interest in the company(ies) covered in this report.
2. The research analyst(s), SSSIL, associates or relatives collectively do not hold more than 1% of the securities of the company(ies) covered in this report as of the end of the month
immediately preceding the distribution of the research report.

3. The research analyst(s), SSSIL, associates or relatives did not have any other material conflict of interest at the time of publication of this research report.
4. The research analyst, SSSIL and its associates have not received compensation for investment banking or merchant banking or brokerage services or any other products or services
from the company(ies) covered in this report in the past twelve months.

5. The research analyst, SSSIL or its associates have not managed or co-managed a private or public offering of securities for the company(ies) covered in this report in the previous
twelve months.
6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party in connection with this research
report.

7. The research analyst has not served as an officer, director or employee of the company(ies) covered in this research report.

8. The research analyst and SSSIL have not been engaged in market making activity for the company(ies) covered in this research report.

9. Details of SSSIL, research analyst and its associates pertaining to the companies covered in this research report:

Sr. Yes /
Particulars
No. No.
1 Whether compensation was received from the company(ies) covered in the research report in the past 12 months for investment banking transaction by SSSIL. No
2 Whether research analyst, SSSIL or its associates and relatives collectively hold more than 1% of the company(ies) covered in the research report. No
3 Whether compensation has been received by SSSIL or its associates from the company(ies) covered in the research report. No
Whether SSSIL or its affiliates have managed or co-managed a private or public offering of securities for the company(ies) covered in the research report in the
4 No
previous twelve months.
Whether research analyst, SSSIL or associates have received compensation for investment banking or merchant banking or brokerage services or any other
5 No
products or services from the company(ies) covered in the research report in the last twelve months.

10. There is no material disciplinary action taken by any regulatory authority that impacts the equity research analysis activities.

STOCK RATINGS

BUY (B): The stock's total return is expected to exceed 15% over the next 12 months.
HOLD (H): The stock's total return is expected to be within -15% to +15% over the next 12 months.
SELL (S): The stock's total return is expected to give negative returns of more than 15% over the next 12 months.
NOT RATED (NR): The analyst has no recommendation on the stock under review.

INDUSTRY VIEWS
ATTRACTIVE (AT): Fundamentals/valuations of the sector are expected to be attractive over the next 12-18 months.
NEUTRAL (NL): Fundamentals/valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months.
CAUTIOUS (CS): Fundamentals/valuations of the sector are expected to deteriorate over the next 12-18 months.

III. DISCLAIMER
The information and opinions contained herein have been compiled or arrived at based on the information obtained in good faith from sources believed to be reliable. Such information
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01 September 2022 India Economy
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