M+R+T resets: A revolution in access to end-markets
The election of Modi (M), the appointment of Rajan (R) and the advent of Technology (T) set off a collapse in earnings growth in India from FY14. Whilst the M+R+T resets have been disruptive in the short run, in this note we describe how the policy decisions triggered by M+R+T have propelled a silent revolution in ‘access’ to end-markets, capital and physical infrastructure. We expect the resultant reduction in cost of debt capital and slow but sure productivity boost to trigger a consumption-driven U-shaped economic recovery in India in FY18 (Ambit GDP est. for FY18 is 7.3% vs 6.8% in FY16). Hence, we urge investors to BUY plays on enhanced consumption, plays on a more competitive financial system and plays on the improved transport network in India. M+R+T = Earnings recession in India in the short term In our note dated December 16, 2015 we highlighted that earnings growth for India Inc is set to stay under pressure owing to three sets of structural changes, namely “…(1) PM Modi (M) who is calling time on the traditional model of crony capitalism driven capex growth; (2) Governor Rajan (R) who is increasing competition for traditional banks, deepening of corporate bond markets and reducing regulatory arbitrage between banks and NBFCs; and (3) Technology which is weakening the traditional offering of Indian IT services firms whilst increasing competition for retail lenders and B2C companies”. M+R+T = A silent revolution in ‘access’ in the long term Whilst the M+R+T resets have been disruptive in the short run, in this note we describe how the range of policy decisions triggered by Modi, Rajan and Technology has set off a silent revolution in ‘access’. In specific, we highlight: Transformation#1: Access to ‘end-markets’: The advent of e-commerce and the potential implementation of a single Goods and Services Tax (GST) hold the potential of transforming access to end-markets for producers of goods as well as services in India. Transformation#2: Access to ‘capital’: Three sets of changes are set to improve cost and accessibility of finance, namely: (1) increased competition ‘amongst banks’ and ‘to banks’ (from NBFCs, corporate bonds and other financial technology driven offerings), (2) improved access to capital for SMEs (through schemes like MUDRA and credit extended by e-commerce majors), and (3) improvement in access to consumer finance (through schemes like PMJDY and lenders competing to provide retail credit). Transformation#3: Access to ‘physical infrastructure’: The Modi-led NDA administration’s focus on improving physical connectivity (via roads, railways, air and waterways) holds the potential of dramatically improving mobility of labour as well as raw materials. Macroeconomic and investment implications The combination of superior physical infrastructure and rollout of GST will boost access to end-markets as well as inputs. Cross-country experience suggests that such reforms boost productivity in a gradual manner. Furthermore, Modi’s black money crackdown is likely to result in a reduction in the cost of debt capital in India. We expect the cost of debt capital in India (proxied by the SBI lending rate) to fall by ~360bps by FY20. Based on these two macro impacts, we expect GDP to undergo a U-shaped improvement and expect GDP growth in FY18 to be recorded at 7.3% YoY. Hence, we urge investors to buy plays on enhanced consumption (Asian Paints, Havells, TTK prestige, Trent), plays on a more competitive financial system (Axis bank, Cholamandalam and City Union bank) and plays on the improved transport network in India (Ashok Leyland, Sadbhav Infrastructure and Ashoka Buildcon).