Property Market, Corporate Spending To Keep India's Growth Resilient, Says Jefferies

India’s growth is likely to remain resilient despite the global slowdown, aided by its property market and corporate spending, according to Jefferies.

The global phenomenon of rising interest rates, which has stirred most markets, will fail to weigh on the country’s property markets and corporate spending, the brokerage said in a note.

That is because "the Indian property cycle has a multi-year pent-up demand and is more dependent on pricing sentiments than mortgage rates", the brokerage said. Meanwhile, corporate sector leverage is at a cyclical low, and spending will likely rise, it said.

Jefferies expects India’s GDP growth to witness at best a marginal slowdown due to these rising rates.

The Indian housing market, unlike the western one, is not dependent on mortgage rates but rather on pricing traction, according to Jefferies.

In the west, even at the lowest level of mortgage rate of 6.5%, a residential rental yield of 3% is too low to make a compelling investment case unless there is a price appreciation angle to it, the brokerage said. The Indian real estate market, due to rising prices, is seeing a surge in volumes driven by pent-up demand.

This price appreciation, the research firm said, should sustain for the next four to five years riding on pent-up demand and 12-year low inventory.

The mortgage rate has increased from 6.6% in January to 8.5% currently, with housing volumes continuing to rise over 25% on an annualised basis. The mortgage industry grew 21% over the last 12 months, the brokerage said.

Jefferies said the incremental impact of higher interest costs on GDP--calculated as incremental outgo as a percentage of nominal GDP--would be 1.8%.

Whereas the same ratio for the developed world would be a substantial 4-6% of the GDP on much lower growth, the brokerage said.

The company fundamentals are improving in India, which is visible in higher credit growth, order flow growth, it said. "Hence higher interest rates won't reflect in lower corp spending."

The negative impact of non-performing loan cycle, bankruptcy law, and disruptive GST implementation, all of which put a lid on corporate spending, is now fully factored in the numbers, Jefferies said.

Based on its analysis of the balance sheets of more than 600 companies, the brokerage said that gearing is at cyclically low levels, leaving companies with a "significant" appetite for capital expenditures.

In India, the private corporate debt-to-GDP ratio has decreased significantly over the last decade. Against 103% of the GDP in other economies, it is much lower in India at 53%.

The brokerage pointed out that sectors like cement are adding a lot more capacity. This is partly because infrastructure and government spending are increasing and the housing market is getting better.

Jefferies also that Grasim Industries' recent move into the paints market is driving the industry's capital expenditures to record highs. And order inflow for Larsen & Toubro is set to rise by 15-20% year-on-year in fiscal 2023.