Jefferies lists 6 factors bringing back economic revival seen in 2003-10

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#Business, #Economy, #India, #Jefferies

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The growth of the Indian economy is poised for a repeat of the 2003-10-style upturn with low bad assets and high corporate profitability, Jefferies said in a report.

The investment bank listed six key components of economic cycles that would drive growth as a spike in housing demand, a higher corporate profitability, more corporate deleveraging, a fall in bad assets of the bank, an increase in interest rates and a rebound in corporate capex.

#Business, #Economy, #India, #Jefferies
Stages of six cycles [Source: Jefferies]“The Indian housing cycle has seen an eight-year-long slowdown, which is now demonstrating clear signs of a turnaround. The pace of transactions in both primary and secondary markets has risen with improvements being seen across the pricing segments,” Jeffries said.

“The stage for the housing cycle revival has been set by improved affordability as an outcome of lower interest rates (the rates are at all-time lows – an offshoot of the broader interest rate cycle) and prolonged phase of weaker pricing (partly on account of high positive real rates from 2014).”

The American investment banking company said  the bad asset cycle peaked out in FY18 with Gross NPA as a percentage of loans climbing above the 10 percent level to the highest since FY01.

“Since then, the accelerated resolution programme through the bankruptcy regulations have helped to bring down the NPLs (non-performing loans). Bank lending quality has also substantially improved, which has been reflected with no major NPL surge seen post the Covid waves. Currently, bad assets are at FY04 levels and as a new lending cycle likely gets underway, and the ‘bad-bank’ furthers the clean,” the report said.

With increasing corporate profitability, Jefferies predict the overall corporate RoE to jump to 14 percent by FY24. It has currently moved from single digit to 12.5 percent. The D/E ratio for 600-plus non-financial corporations has come off from 1.0x to 0.7x in the last six years with Reliance Industries, and the property and metals sectors as key contributors, it said.

“The Industrial credit growth had more than doubled during the positive cycle over FY04-14, when industrial credit grew at an average of 23.5 percent. After the capex slowdown over the next few years, the industrial credit has grown at an average of just 2.2 percent over FY15-21.”

Interest rates will jump representing improved growth as seen in 2005. “We note that the previous cyclical recovery in India was also preceded by a bottoming of rates over 2003-05 for various benchmarks and interest rates are in significant negative territory on a real basis,” the report stated.

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