Vijay Kumar Gaba

Formalisation of the logistics sector is a multi-year theme that should play out. We adjust our numbers for lower international cargo volume growth seen in 3QFY23, but believe that follow-ups to the National Logistics’ Policy (NLP), continuing GST driven organised players’ share gain, Dedicated Freight Corridor (DFC) traffic increase, Concor privatisation should play out in 2023.

NLP targets dropping logistics costs to less than 10% of GDP from the current 14-15% with initiatives including 1) Integration of Digital System (IDS) 2) Unified Logistics Interface Platform (ULIP) 3) Ease of Logistics (ELOG) and 4) Network Planning Group (NPG) and System Improvement Group (SIG). Under the IDS, thirty different systems of seven departments will be integrated and will include data of the road transport, railways, customs, aviation and commerce departments. We believe results will take time but systematically the government will reduce red tape and put in processes that ensure organised sector gains share vs the unorganised disproportionately.

Public sector banks (Motilal Oswal Investment Services)

Over the past few years, PSBs have focused on strengthening their balance sheets and consequently the GNPA/NNPA ratio for PSBs improved sharply to 6.5%/1.8% in Sep’22 from the peak of 14.6%/8.0% in FY18, respectively. PCR over similar period also improved markedly to ~72% from 45% in FY18. With the NPA cycle being largely over and no large ticket corporate accounts under stress we expect PSB’s asset quality to strengthen further over the coming quarters. Further, SMA book across top seven PSBs stands modest at 19-50bp that augurs well for incremental slippages. This will keep the credit cost benign and support overall profitability.

Margin trajectories for PSBs have revived and expanded ~8-31bp over 2QFY23 for top seven PSB’s. We, however, note that bulk of the loans for PSBs is linked to MCLR (6-12m tenure), which will drive the lagged re-pricing even as MCLR rates rise gradually. We note that against a 225bp rise in repo rate, MCLR rates across these PSBs have risen 85-100bp (barring SBIN at 130bp) thus leaving room for further expansion.

We believe that PSBs are on track to undergo complete earnings normalization, aided by lower credit costs. We expect average credit cost of top seven PSBs to moderate to 1.2% by FY25 from 3.3% over FY18–21. Overall, we forecast top seven PSBs under our coverage to report a PAT of INR1.3t in FY25 v/s a loss of INR594b in FY18. Thus, we expect 29% earnings CAGR over FY22–25 and estimate these PSBs’ RoA/RoE to improve to 0.9%/14.2% in FY25, respectively.

We note that the current RoA despite a lower treasury income forecast stands significantly lower than the average seen over FY04-13. Our current credit cost estimate too stands 14-35bp higher than the 10-year average for most banks barring BoB, BoI and SBIN. Thus, the quality of earnings also has improved which will enable PSBs to sustain ~1% RoA and possibly improve further to 1.1%-1.2%.

We continue to believe that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of the stocks. We note that while the improvement in RoE’s has been encouraging, a sharp moderation in NNPA ratio has resulted in a much higher increase in ABVs. Thus, ABV for top seven PSB’s is likely to grow at 12-23% range over FY22-25E v/s 14-19% for top private banks. Valuations thus appear attractive considering the growth/profitability outlook.

WPI at 22months low (BoB Capital)

WPI inflation slipped down to 5% in Dec’22 from 5.8% in Nov’22. This was led by moderation in food (0.7% from 2.2%) and manufactured product inflation (3.4% from 3.6%). However, fuel inflation inched up (18.1% from 17.4% in Nov’22). Within food, prices of fruits and vegetables, especially tomato pulled down the prices. However, there is an uptick in cereal inflation. Improvement in rabi sowing bodes well for wheat prices. Core WPI softened to 2-year low of 3.2% in Dec’22 from 3.5% in Nov’22 owing to the dip in manufactured inflation. Going ahead, we expect further easing in WPI inflation on account of base effect in H1FY24.

Banks: New provisioning norms (Kotak Institutional Equities)

The RBI has placed a discussion paper which would ask banks to shift to Expected Credit Loss (ECL) based provisions from the current norm of building provisions after an occurrence of default. Provisions have to be built on the basis of self-designed models that capture the regulatory guidance and would have to be approved by the regulator. Banks shall measure ECL of an applicable financial instrument by classifying the loans in three stages (Stages 1, 2 and 3). It would have to look at (1) probability of default by evaluating a range of possible outcomes, (2) time-value of money, and (3) past events, current conditions and forecasts of future economic conditions. There is no timeline for the implementation, but the regulator is likely to give a (1) one-year transitioning period from the time of final implementation to place the necessary infrastructure and (2) a one-time five-year adjustment period to capture the initial cost of transmission. This would be captured through a relaxation in the CET-1 calculation.

The initial reading suggests that the RBI probably wanted banks to complete their provisions from the previous corporate NPL cycle before migrating into a new regime. We are seeing provisions come off sharply and are likely to reach historical lows that we saw in FY2004 in FY2024-25. A five-year transitioning period of the initial migration costs should make it comfortable for most banks. The previous cycle (2004-22) saw credit costs at 200 bps annually, with the cycle showing higher provisions for FY2014-20. The challenge: quality of the data is not sufficient to build these models.

A key challenge is the data that goes behind these assumptions. Estimating default probabilities or losses requires rich data sets that capture various cycles. We have had two long credit cycles in India in the past three decades. Both these cycles were characterized by large defaults in the corporate sector. The first cycle (1994-2002) was mostly with public banks, while the next cycle had the impact visible in a few large private banks. The retail cycle was probably tested once during Covid and the regulatory dispensation provided at that time masks the probable performance post default. While ECL is the best way forward, we need to acknowledge that we are also moving with less quality of data as well.

Electricals & Durables: Better days ahead after last year of pain (Axis capital)

Just when the industry was seeing a silver lining in the clouds (after multiple waves of Covid-19), the Russia-Ukraine war outbreak in Feb’22 led to global spike in commodities, which impacted margins for the sector over the last 4 quarters. The storm clouds have receded somewhat now through a mix of fall in commodity prices, price hikes, cost cutting and industry consolidation. Hence, we are more constructive on the sector given double-digit growth opportunity over next 5 years still exists.

China reopening boosts copper outlook (ING Bank)

Beijing has released a raft of policy measures in recent weeks which have increased confidence that the economy is stabilising, improving the outlook for industrial metals, including copper. For almost two decades, China’s property sector growth and the country’s rapid urbanisation have been the key driver of growth for copper demand.

China will return to “normal” growth soon as Beijing steps up support for households and businesses, Guo Shuqing, party secretary of the People’s Bank of China, told state media recently. The world’s biggest consumer of copper is expected to quickly rebound because of the country’s optimised Covid response and after its economic policies continue to take effect, Guo said.

In its most recent move, China is planning to allow some property firms to add leverage by easing borrowing caps and pushing back the grace period for meeting debt targets. The move would relax the strict “three red lines” policy which had contributed to a historic property downturn, hitting demand for industrial metals. The easing would add to a raft of policy moves issued since November to bolster the ailing property sector, which accounts for around a quarter of the country’s economy.

Credit Offtake Moderates on Base Effect, Deposit Growth Stays Slow (CARE Ratings)

·         Credit offtake rose by 14.9% year on year (y-o-y), for the fortnight ended December 30, 2022. The growth has been driven by a healthy rise in NBFCs, retail credit, and working capital demand driven by inflation and capex.

·         Deposits saw a slower growth at 9.2% y-o-y compared to credit growth for the fortnight ended December 30, 2022. The short-term Weighted Average Call Rate (WACR) has increased to 6.36% as of December 30, 2022, from 3.33% as of December 31, 2021. Further, deposit rates have already risen and are expected to go up even further due to rising policy rates, intense competition between banks for sourcing deposits to meet strong credit demand, widening gap credit & deposit growth, and lower liquidity in the market. Over the last couple of years, (i.e., from March 27, 2020) credit offtake has almost reached the Covid-induced lag, rising by 29.6% in absolute terms compared to 30.7% of deposit rates.

·         The credit growth has continued to be in double digits and has been broad-based across the segments and is likely to remain strong in FY23. Meanwhile, this reduction would have to be monitored in the coming fortnights to determine if the credit offtake has peaked and is returning to a lower growth rate.

OMCs: Low oil and strong refining ease pain (Kotak Institutional Equities)

We believe as oil demand recovers, oil markets will get progressively tighter in 2023. We moderate our FY2023 oil price assumption to US$95/bbl (earlier US$105/bbl). We assume oil price of US$90/bbl for FY2024/2025E, and US$80/bbl for LT (earlier US$90/bbl for FY2024, US$80/bbl for LT).

OMCs: Concern on under-recoveries ease; full compensation looks unlikely With lower oil prices, strong refining margins (particularly middle distillates), and exports tax (OMCs negotiate lower refinery transfer price, and effectively pass on some marketing losses to refiners), the worries on marketing losses are now lower. Also, with weakness in gasoline cracks, OMCs now have over-recoveries on petrol. Compared to nearly Rs1.1 tn under-recoveries in 1HFY23, we estimate only ~Rs150 bn under-recoveries in 2HFY23E.

In our view, unlike the past when OMCs were near-fully compensated for fuel under-recoveries, the compensation will be much lower. As such, with petrol/diesel officially deregulated and OMCs having freedom to price, the compensation is difficult. For past LPG losses (June-2020 to June-2022), government had given one time compensation of Rs220b in 1HFY23. Recently, the media has reported that OMCs are seeking further compensation of Rs500 bn. For our forecasts, we do not assume any further compensation.

Preview of Union Budget 2023 (Axis Capital)

FY23 performance: Total receipts is likely to be higher than budget by INR 3.3 trillion due to strong nominal growth and tax buoyancy on the back of consumption recovery. However, this gain in receipts is fully spoken for via higher food and fertilizer subsidies of INR 1 trillion each. The government’s cash outgo in the recently announced supplementary grants is also ~INR 3.3 trillion. We expect fiscal deficit in FY23 to slow to 6.1% of GDP from 6.7% in FY22 and 6.4% budget target.

FY24 budget expectations: Central government’s fiscal deficit is likely to fall further to 5.7% and will be on track to achieve 4.5% of GDP by FY26. The 0.4% of GDP fiscal consolidation is supported by INR 1.5 trillion drop in food and fertilizer subsidies due to merging of food subsidy under PMGKAY with NFSA and correction in global fertilizer prices. This outcome along with modest tax buoyancy (12% YoY growth) should give the government space to target low double digit spending growth in rural development and capex.

Key expectations in the budget

·         Tinkering with personal income tax slab to provide relief on real disposable income.

·         Expand scope of Production Linked Incentive (PLI) schemes and green hydrogen.

·         Bump-up allocation for rural development and social welfare to ensure outcomes don’t suffer due to cost inflation.

·         Target double digit capex with increase in capital allocation to new DFI and special long-term loan to states for capex.

·         Increase scope of asset monetization pipeline.