Mumbai: Ahead of the official release of the first quarter GDP readings later this week, German brokerage Deutsche Bank Markets Research has pegged the final print at an eight quarters high of 5.6 percent saying a cyclical recovery has begun.
The optimistic report is drawn on the robust jump in the first quarter IIP that rose to a three-year high of 3.9 percent against -0.5 percent in the final quarter of FY14.
"The robust pickup in industrial sector GDP growth in the April-June period may push the headline GDP growth for the quarter higher by about 100 bps over 4.6 percent reported in Q4 of FY15," Deutsche economists Taimur Baig and Kaushik said in a report.
They sounded more confident about Q2, saying the recovery seen in 1Q seems to be continuing into July, with power demand rising 11 percent (vs 0.7 percent y-o-y), four-wheeler demand jumping 6.5 percent against -7 percent a year ago and most importantly, diesel consumption rising 6.3 percent against a negative 1.1 percent a year ago.
Stating that government is focused on improving ground level execution than big bang reforms, the report admitted that for the first time since the polls, there are some signs of waning investor momentum.
But the report said this worry is misplaced as they see an urgent focus on policy execution, particularly focused on clearing stalled projects and in attempting to simplify and streamline government processes and not unveiling big bang reforms.
The environment, power and road ministries and the Project Monitoring Group in the Cabinet Secretariat are currently at the forefront of execution, it noted and said "in our view an urgent focus on project clearances, simplifying regulation and streamlining approvals is far more critical in catalysing a manufacturing revival and create an environment conducive for a manufacturing turnaround."
Though they warned that investor patience may be tested if big bang reforms are not unveiled in a time-bound manner over the next few months, they said they are confident that government will move towards big bang reforms progressively, beginning with a gas price hike and the Insurance Amendment Bill by the year end.
The report said since May, as many as 41 projects received environmental clearances (8 coal mines, 11 industrial projects, 11 infra projects, 7 non-coal mines and 3 thermal projects). As many as 44 percent of the total stalled projects worth Rs 21 trillion delayed due to environmental clearances.
Reiterating its December Sensex target at 28,000, implying an upside of 6.4 percent, the report said, "We continue to maintain constructive outlook on Dalal Street. Our target implies a PE of 18 times on FY15 EPS well supported by 17.5 percent earnings over FY14-16."
On the sectors and top pick stocks, the report said, banks and consumer discretionaries remain the most preferred. "We continue to be overweight on banks in our portfolio and believe that asset quality concerns should ease as economic environment improves."
"A potential compression in credit costs will drive return on equity improvement for banks. Therefore, our preferred picks are Maruti, M&M, Titan, Axis Bank, ICICI Bank, HPCL and ONGC," the report concluded.
