People stand in line to exchange Indian five hundred and one thousand rupee banknotes outside the Reserve Bank of India (RBI) headquarters in New Delhi. (Photographer: Anindito Mukherjee/Bloomberg)

Ambit Capital Slashes FY17 GDP Growth Estimate To 3.5%

The government’s demonetisation-driven cash crunch has prompted brokerage house Ambit Capital to cut its GDP growth estimate by 330 basis points to 3.5 percent.

The demonetisation-driven cash crunch that is playing out in India will paralyse economic activity in the short term. Hence we expect GDP growth to decelerate from 6.4 percent in H1FY17 (as per Ambit estimate) to 0.5 percent year-on-year in H2FY17 with a distinct possibility of GDP growth contracting in Q3FY17. However, from Q3FY17 until Q4FY19, we expect a strong ‘formalisation effect’ to play out as nearly half of the non-tax paying businesses in the informal sector (40 percent share of GDP) become unviable and cede market share to their organised sector counterparts. We expect this dynamic to crimp GDP growth in India in FY18 as well and hence we cut our FY18 GDP growth estimate to 5.8 percent year-on-year (from 7.3 percent).
Ambit Capital Slashes FY17 GDP Growth Estimate To 3.5%

Contraction In Growth

The Ambit Capital report warns of a possible contraction in growth in the third quarter of the current fiscal.

In specific, we highlight the high probability of GDP growth being recorded in the negative territory in Q3FY17.
Ambit Capital Report (November 18)
Ambit Capital Slashes FY17 GDP Growth Estimate To 3.5%

Sensex Target Revised

The brokerage house has scrapped its current March 2017 Sensex target of 29,500 and unveiled a new March 2018 Sensex target of 29,000.

The current Ambit FY17 Sensex EPS (earnings per share) estimate stands at Rs 1,496 (implying 7.4 percent earnings growth over FY16) while the consensus FY17 Sensex EPS estimate stands at Rs 1,466 (implying 5.6 percent earnings growth in FY16). However, in light of our expectation of weak GDP growth expected over the next two quarters, it is highly unlikely that FY17 Sensex EPS would be able to reach the kind of levels being estimated by our analysts currently. In light of this, our March 2017 Sensex target of 29,500 (first published in June 2016) is rendered meaningless.
Ambit Capital Report (November 18)