An analysis by Jefferies of 6 key components of India’s economic cycle suggests conditions are ripe for a repeat of a 2003-10 style upturn. Housing, NPL and corporate profitability cycle have convincingly turned positive whereas corporate leverage is at a cyclical low, Jefferies said in a recent note.
Demand for housing, drop in bank NPAs, corporate profitability, interest rates, corporate leverage and capex revival are the six key components of the economic cycle as analysed by the brokerage.
The broader capex cycle has not turned yet, but it usually follows housing cycle with a lag. Interest rates will likely move up but same was the case over 2003-10, and a rate upmove should not be a worry in the initial stage of the cycle, the note stated.
Housing Cycle:
Historical analysis since 1996/97 suggests that Indian housing up-cycle and down-cycles typically last for 6-8 years. 2012/13 – 2020 was a prolonged downcycle and 2021 is the first year of upcycle with a visible uptick in volumes and pricing. “Best-in-2-decade affordability (last seen in 2003/04), huge pentup demand and now visible price action imply that all the ingredients are in place,” said Jefferies.
Corporate Profitability Cycle:
Financials and other cyclical sectors are leading the upswing. Overall Corp RoE has moved from single-digit to 12.5% now and is set to jump to 14.0% by FY24.
Corporate Deleveraging Cycle:
Over the last 6 years, the debt-to-equity ratio for 600+ non-financial corp has come off from 1.0x to 0.7x. Key contributors to the same have been Reliance Ind, property, and metals sectors. The low debt on balance sheets will create space for the next economic upcycle.
Drop in NPLs:
While banks are still risk-averse, we believe that the stage is now set for an increase in risk appetite. Strong capability and 7-year high RoE’s further support lending growth.
Interest Rate Cycle:
Interest rates have probably bottomed out globally as well as in India. This is unlikely to be a big economic headwind. During 2003-2010 economic upcycle, the Indian 10-year rates increased 3.2ppt. The initial rate rise will be seen as policy normalisation, not a worry.
Corporate Capex Cycle:
Govt’s infra capex is picking up but that’s a small component. Corporate investments is still sluggish as capacity utilisation and risk appetite is low. Property uptick should help reduce risk averseness.
Banks (ICICI, IIB, SBI) and housing plays (GPL, Lodha, DLF HDFC, ACC, Kajaria & Supreme) are the brokerage’s preferred early cycle plays. L&T is also seen to benefit from the housing cycle and the eventual corporate investments upturn. (Mint)
