BY INVITATION. ‘Revival in private investments likely to complement govt capex in 2018’

With all unexpected one-offs such as demonetisation and GST behind us, 2018 will be the year of normalisation, wherein the undercurrents of growth remain strong and we expect GDP as well as corporate growth to rebound.

One key trend that will emerge will be the resurrection of the banking sector in terms of profitability on account of a) peaking out of NPA provisioning in 2017; b) acceleration in bankruptcy resolutions; and c) infusion of capital as part of the mega bank recapitalisation will allow banks to claw back on the growth path.

Our prognosis for CY2018 suggests that government capex will continue to thrive but the same will be complemented by revival in private investment. Early signs of corporate balance sheet repair are already visible. Furthermore, low interest rate along with improvement in policy reforms has made the business environment conducive for private investment in infrastructure.

Budget in 2018 will be an important event in the short term, as we expect the government to take centre-stage in creating infrastructure and jobs. There could also be measures to alleviate rural stress. On the corporate front, however, given the limited fiscal space, the relief in corporate taxation could come in a phased manner.

Smart recovery in earnings profile of companies in Q2FY18 and ensuing management commentaries indicate a robust 2018. This coupled with stable margins (rising utilisation levels will cushion rising input costs) will lead to recovery in the Return on Capital Employed (ROCE) of corporate India. Also, the scarcity premium that equities continue to enjoy owing to the TINA (There Is No Alternative) factor. However, the key driving force for markets would be the earnings recovery which would be backed by rise in asset turnover, thereby improving the corporate ROCE profile.

We are of the view that earnings are likely to break the shackles of one-offs and witness a healthy 17 per cent CAGR over FY17-FY20E. In terms of index target, we have a CY18 Nifty target of 11,725, 11-12 per cent upside from current levels.

Consequently, we expect capex to pick up, which will, in turn, help corporate banks and allied sectors such as capital goods, and infrastructure, etc. On the consumption side, the auto sector still offers decent opportunity, more specifically in the original equipment manufacturer (OEM) space.

With limited domestic challenges, risk for the markets is likely to originate from outside. Global factors such as China’s debt implosion, commodity (especially crude) cycle reversal along with geo-political tensions, therefore, would be the key risks for the market.

(The writer is Head - Research, ICICI Securities)

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