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Services Activity Accelerates to Three-Month High in Dec

Services Activity in India Reaches Three-Month High in December 2023: Opportunities and Risks Across Industries

Source and Citation: Original reporting from ET Bureau, published on January 6, 2024, on the Economic Times website.

Analysis for Layman

The HSBC India Services Purchasing Managers’ Index (PMI) climbed to 59 in December, up from 56.9 in November. A PMI above 50 indicates expansion, driven by robust demand both domestically and internationally. The services industry, covering financial services, hospitality, retail, transportation, healthcare, and more, accounts for over 50% of India’s GDP, signaling strength in the broader economy.

New business orders, particularly from exports to countries like Australia, Canada, Europe, the Middle East, and South America, contributed to this growth. Firms responded by adding jobs at the fastest pace in three months, remaining optimistic for 2024. In essence, India’s services industry ended 2023 on a high note, setting a positive economic outlook for the upcoming year.

Services Activity Accelerates to Three-Month High in Dec

Impact on Retail Investors

For retail investors, this report suggests potential opportunities in stocks of major Indian services companies, including banking, IT, transportation, hospitality, and healthcare. In banking and financial services, firms like HDFC Bank, ICICI Bank, Axis Bank, and State Bank of India could benefit from increased lending and investment activity. IT majors such as TCS, Infosys, and Wipro might see growth as global clients invest more in technology.

Transportation companies like IndiGo and Air India, as well as logistics players like TCI Express, could be boosted by strong domestic and global demand. Hospitality majors like Indian Hotels, Chalet Hotels, and Lemon Tree Hotels may thrive as travel and tourism expand. Additionally, consumption-linked stocks in retail, media, consumer goods, and auto could indirectly benefit from higher services activity.

However, investors should be cautious about downside risks, particularly if global growth slows. Industries like IT and pharma exports may be impacted, financial services’ credit quality could suffer, and oil prices remain a key variable that could affect airline and transport profits. Overall, while the report paints an optimistic view of resilient services demand, prudent investors should balance growth opportunities with potential risks by maintaining a diversified portfolio.

Impact on Industries

Financial Services

India’s financial services industry, including banking, investments, insurance, and lending, could significantly benefit from accelerated services growth. Higher consumer and business activity will drive credit demand, expanding lending profitability for both public and private banks like SBI, ICICI, and HDFC. However, defaults could rise if debts mount or growth retreats, impacting bank asset quality.

Information Technology

With strong global demand, India’s IT majors like TCS, Infosys, and Wipro could see increased contracts from overseas clients for digital transformation and tech upgrades. Exports may keep rising, and domestically, increased activity and consumption will necessitate tech investments across sectors like banking, retail, healthcare, etc. However, potential US/EU recessions remain a risk if they dampen client budgets, and currency volatility also impacts profit margins.

Transport and Logistics

Higher domestic and global trade flows will directly benefit transport companies like TCI Express and Mahindra Logistics in warehousing, shipping, and freight movement. Air passenger and cargo volumes are also rising, aiding airlines like IndiGo and Air India. Their fleet expansion and new route plans may accelerate, though oil prices are a risk. Higher imports and exports also aid shipping firms and cargo handlers at major ports.

Long Term Benefits & Positives

The reported acceleration in India’s services activity signals several long-term benefits for the economy:

Employment Generation

Higher services output directly implies faster job creation across sectors like IT, banking, retail, transport, hotels, etc., raising living standards.

Urbanization

More services jobs will continue driving migration from rural areas to cities, fueling urban development and boosting ancillary industries.

Skill Development

Manpower skilling programs in tech, financial services, and vocations like tourism will ramp up, raising productivity over time.

Infrastructure Building

Expanding services sectors necessitate investments in roads, ports, airports, real estate, etc., boosting long-term productivity.

Global Integration

Fast-growing services exports expand India’s share in world trade flows, aiding the “Make in India” drive via integrating domestic players in global supply chains.

Digital Transformation

Escalating services activity incentivizes technological upgrades across verticals through digitization, communications, and automation, building digital capacities.

However, services growth depends greatly on avoiding domestic inflationary pressures and maintaining export competitiveness. Policy stability is vital, focusing on ease of doing business, credit access, and labor flexibility on one hand, while upgrading skills and infrastructure on the other.

Short Term Positives & Negatives

Positives

  1. Business Sentiment
    • Accelerating services activity is a leading indicator of overall economic momentum, incentivizing private investments across manufacturing and services.
  2. Consumption
    • Higher service sector jobs and incomes directly boost India’s consumer economy, benefiting various sectors like autos, mobiles, real estate, and lifestyle products.
  3. FII Flows
    • Solid services sector data signals economic stability, attracting more equity inflows from FIIs in the short term, providing liquidity to India Inc. and buoying the Rupee.
  4. Fiscal Health
    • Expanding services also boosts overall tax revenues from GST collection and direct/indirect taxes on rising transactions/outputs, giving the government more fiscal leg room.

Negatives

  1. Inflation Pressures
    • Rapid services growth is accompanied by rising input costs like high energy, labor, and raw material prices, leading to wage-price inflation loops, prompting the RBI to potentially hike rates further.
  2. Current Account Deficit
    • While exports rise, imports of oil, electronics, and gold have also climbed, widening the CAD. The Rupee weakening as the US Fed hints further hikes may exacerbate imported inflation.
  3. Global Shocks
    • Diminished export order growth signals external risks from recessions in the US/EU or China’s real estate crisis, potentially impacting Indian services if global growth suffers abruptly. Geopolitical events, especially the Russia-Ukraine war, remain uncertain.

In summary, strong services activity is a macro positive, indicating robust domestic demand and employment. However, policymakers must address external risks and supply-side inflationary threats through prudent fiscal-monetary coordination to maximize short-term growth.

Analysis of Companies Impacted by Strong Services Activity in India

Indian Companies Likely to Gain:

  • Infosys Ltd (INFY): As a leading IT services provider, Infosys stands to benefit from the continued robust demand for digital solutions and outsourcing. Strong Indian service sector activity suggests potential for increased IT spending and project contracts, boosting Infosys’ revenue and growth potential.
  • Wipro Ltd (WIPRO): Similar to Infosys, Wipro’s diverse portfolio of IT services catering to various industries positions it well to capitalize on the service sector momentum. Increased corporate spending on IT solutions could lead to higher demand for Wipro’s offerings and improve its growth prospects.
  • ICICI Bank Ltd (ICICIBANK): Stronger service sector activity can translate into higher loan demand from businesses as their revenue and investment increase. ICICI Bank’s strong presence in the corporate banking sector makes it well-positioned to capture this growing demand, boosting its loan book and profit margins.
  • ITC Ltd (ITC): As a diversified conglomerate with major revenue streams from hotels, travel, and fast-moving consumer goods (FMCG), ITC stands to benefit from increased consumer spending driven by a buoyant service sector. Stronger tourism and higher disposable income could boost demand for ITC’s hospitality and FMCG products, improving its overall performance.
  • Mahindra & Mahindra Ltd (M&M): The robust service sector suggests potential for increased demand for commercial vehicles used in logistics and transportation. M&M’s strong position in the commercial vehicle segment could benefit from this trend, leading to higher sales and market share gains.

Indian Companies Likely to be Less Impacted:

  • Coal India Ltd (COALINDIA): While a strong economy might indirectly increase energy demand, the focus on clean energy initiatives could limit significant gains for Coal India in the long term. This might lead to a neutral or slightly negative impact on its stock price.
  • Indigo (INDIGO): The aviation sector’s dependence on discretionary spending makes it somewhat vulnerable to economic fluctuations. While a stable service sector is positive, Indigo might see slower growth compared to sectors directly benefiting from increased business activity.

Global Companies Likely to Gain:

  • Accenture (ACN): As a global leader in consulting and outsourcing services, Accenture stands to benefit from the overall positive sentiment and potential increase in IT spending across different countries, including India. Strong performance in the Indian market could further elevate investor confidence in its global operations.
  • Mastercard Inc. (MA): Increased economic activity and consumer spending in India could lead to higher transaction volumes for Mastercard. Continued service sector growth and focus on digital payments could benefit Mastercard’s market share and revenue in the region.
  • Nestlé SA (NESN.SW): As a leader in the consumer staples sector, Nestlé benefits from stable demand for food and beverage products. A strong Indian service sector suggests continued household spending, potentially boosting Nestlé’s sales and market share in the region.

Global Companies Likely to be Less Impacted:

  • Luxury goods companies: Although the Indian economy is performing well, it might not reach the spending levels necessary to significantly impact luxury brands like LVMH or Kering. These companies might primarily focus on other high-growth markets for significant revenue growth.
  • Airlines: While domestic demand in India might improve, global airlines heavily reliant on international travel might see limited benefits from this news. Continued geopolitical uncertainties and travel restrictions could overshadow the positive Indian domestic market for these companies.

Please note: This analysis is based on the provided information and is limited to a short-term perspective. Long-term impacts could differ depending on the evolution of economic conditions and individual company strategies.

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