Last Updated on Sep 13, 2022 by
Despite the ongoing global economic turbulence, India’s economy appears to be cruising at full throttle.
As discussed below, several macro factors indicate a strong demand pull. But lest you read too much optimism into these, remember that a huge part of this uptrend in macro data is a result of inflation.
For instance, higher prices of goods and services would imply higher tax collection. It would also mean higher GDP growth.
But tax collection is only one factor. Other factors, such as strong credit growth, indicate strength independent of inflation.
So without much ado, let’s look at these data:
- Direct tax collection: The direct tax collection, which includes corporate tax, personal income tax, securities transaction tax, and so forth, had risen by 33% this financial year, i.e., from March to August 2022 to Rs. 4.8 lakh cr., compared to the same period last year when it was Rs. 3.6 lakh cr.
- Indirect tax collection: The indirect tax collection too, which includes GST, has increased 28% to Rs. 1.43 lakh cr. Remember that this is the 6tth straight month of the collection above Rs. 1.4 lakh cr.
- Credit growth: Bank loans to industries also grew by 10.5% over last year to Rs. 31.82 lakh cr. — the most in 8 yrs. Remember that the credit to industry ranged on an average of Rs. 28-29 lakh cr. in the past 3 yrs. So recent improvement in credit offtake is meaningful. This offtake comes on the back of deleveraging measures (which means reducing debt) undertaken by the companies over the past few years. Low levels of existing debt imply companies have more room to borrow without seeing a deterioration in their balance sheet. And since banks have also been witnessing an improvement in their non-performing assets or NPAs of late, they have more room to lend. Higher lending helps companies engage in their expansion plans, thus boosting economic growth. For further reading, you may visit this link: https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54289
- Auto sales: In August, auto companies’ sales (that is, dispatches of cars to dealers) rose 30% year on year to 3.05 lakh vehicles as semiconductor issues seem to have eased out. To be sure, a lot of this may comprise pent-up orders from months ago, and the increase may be coming on the back of a low base of last year. So I’d be careful before reading too much optimism into this.
- Manufacturing activity: India’s manufacturing activity, measured by the PMI or Purchasing managers’ Index compiled by S&P Global, which measures production and new orders, registered at 56.2 in August. This is slightly lower than July’s 56.4, but it’s still meaningful. A number above 50 indicates an expansion in manufacturing activity.
What does this mean for the Indian stock market?
For the past few months, I have maintained that even though indices such as Nifty 50 or Sensex may appear undervalued by looking at just the price-to-earnings ratio, most “quality” individual stocks still remain much overvalued. This includes stocks in sectors such as IT, building materials, chemicals, capital goods, infrastructure, and FMCG (both discretionary and non-discretionary). These are sectors that are trading above their 5-yr median price-to-earnings multiples.
In IT, for instance, TCS is trading 10% above its 5-yr historical PE multiple; Infosys at 27% premium and a smaller Larsen and Toubro Infotech at 30% premium. This is especially discomforting given the recent change in the global macro dynamics. Both the US and Europe are staring at a recession, which may impact IT spending and thus revenue growth of domestic IT companies. Note that most of these companies are already struggling with historically low margins due to high talent costs.
Similarly, in the defence sector, which has been a darling of the markets of late, companies such as Bharat Electronics and Data Pattern are trading at over 50% premium to their 5-yr price to earnings. In the auto sector, companies such as Tata Motors or Ashok Leyland have been rallying swiftly even though earnings have been elusive.
This, of course, is not to say that these are not long-term growth stories. But only that one would be served well by resisting the fear-of-missing-out (FOMO) sentiment and waiting for a meaningful discount to appear in these stocks before entering.
This article is authored by Harsh Vora. He is a proprietary investor and day trader with more than 10 yrs of experience in financial markets and is interviewed on ET NOW.
