Vijay Kumar Gaba

FY24 Economic Outlook (India Ratings)

India Ratings and Research (Ind-Ra) expects GDP to grow 5.9% yoy in FY24. Although National Statistical Organisation’s (NSO) first advanced estimate (AE) of FY23 GDP is 7.0%, it does not expect the growth momentum witnessed in 1HFY23 to sustain in 2HFY23. NSO estimates GDP growth to drop to 4.5% in 2HFY23 from 9.7% in 1HFY23. The pent-up demand which had provided thrust to the growth is normalising, exports which had been buoyant are facing headwinds from the global growth slowdown and credit growth is facing tighter financial conditions. The International Monetary Fund expects the global GDP growth to fall to 2.9% in 2023 from an estimated 3.4% in 2022.

Ind-Ra expects PFCE to grow 6.7% yoy in FY24 (FY23: 7.7%). Yet, it may not lead to a broad-based consumption demand recovery, because the current consumption demand is highly skewed in favour of the goods and services consumed largely by the households belonging to the upper income bracket. The goods and services of mass consumption have yet not shown a sustained pick-up. This to some extent is reflected in the way the recovery in consumer durables and non-durables in terms of Index of Industrial Production has so far panned out in FY23. While consumer durables grew 3.4% yoy during 9MFY23, non-durables contracted 1.2% yoy.

After PFCE, GFCF is the second-largest component (FY23AE: 29.4%) of GDP from the demand side. Ind-Ra expects GFCF to grow 9.6% yoy in FY24 (FY23:11.5%), due to the sustained government capex. Expenditure on the capital account and grants-in-aid for the creation of capital assets together in the union budget FY24 have been pegged at INR13.71 trillion. This is INR3.17 trillion higher than FY23 revised estimate (RE), an increase of 30.1%. This will push the government capex (including grants-in-aid for creation of capital assets)/GDP to 4.54% (FY23RE: 3.86%). GFCE had been providing the much-needed support to the economy for a while, averaging 7.9% growth during FY16- FY20. However, due to the government’s focus shifting towards capex, the size of the revenue expenditure in the union budget FY24 has been kept at INR35.02 trillion, only INR0.43 trillion higher than the FY23RE of INR34.59 trillion. Ind-Ra therefore expects GFCE to grow at 2.5% yoy in FY24 (FY23: 3.1%).

The fourth demand-side driver - net exports (exports minus imports) - has been negative over the years and thereby not contributing positively to the aggregate demand. Thus, a reduction in the size of negative net exports would be a positive for aggregate demand. However, with merchandise exports losing steam due to the global growth slowdown and merchandise imports not moderating proportionately, Ind-Ra expects the share of net exports to GDP to increase to negative 9.2% in FY24 from negative 7.1% in FY23.

On the supply side, the agricultural sector has been doing well, and Ind-Ra expects it to grow 3.1% yoy in FY24 (FY23: 3.5% yoy) on the assumption of a normal monsoon in 2023. However, industrial growth is expected to remain tepid because of the ‘K-shaped’ recovery, which is neither allowing the consumption demand to become broad based nor helping the wage growth especially of the population belonging to the lower half of the income pyramid. Ind-Ra therefore expects the industrial sector to grow 3.9% yoy in FY24 (FY23: 4.1%). Services, the largest component of GVA, is estimated to grow 7.3% yoy in FY24 (FY23: 9.1%). Services sector may face some headwinds from the tightening financial conditions, but some upside may come from the roll-out of 5G which is expected to increase the reach of online commerce, education and telemedicine to remote regions, and create new-age business and associated employment.

Ind-Ra expects the current account deficit to narrow down to 2.5% of GDP in FY24 (FY23: 3.3%) in response to the evolving domestic and global demand conditions. Due to the uncertain external demand, merchandise exports are expected to grow just 0.5% yoy in FY24 (FY23: 1.8%).

Insolvency Cases Rise by 25% in Q3, but Recoveries Still on Downtrend (CARE Ratings)

After slowing in the pandemic period of FY21 and FY22, the number of insolvency cases increased by 25% y-o-y in Q3FY23. However, despite the increase, the number of cases admitted to the insolvency process continued to be lower compared to earlier quarters in FY19/20. The distribution of cases across sectors continues to remain broadly similar, compared to earlier periods given the extended resolution timelines.

The overall recovery rate till Q3FY23 was 30.4% implying a haircut of approximately 70%. The cumulative recovery rate has been on a downtrend, decreasing from 43% in Q1FY20 and 32.9% in Q4FY22 as larger resolutions have already been executed and a significant number of liquidated cases were either BIFR cases and/or defunct with high resolution time, coupled with lower recoverable values.

The status of the cases has largely remained constant compared with the previous period. Of the total 6,199 cases admitted into CIRP at the end of December 2022:

·         Only 10% have ended in approval of resolution plans, while 32% remain in the resolution process vs. 35% as of the end of March 2022.

·         1,901 have ended in liquidation (31% of the total cases admitted). Meanwhile, 76% of such cases were either BIFR cases and/or defunct. These cases had assets which had been valued at less than 8% of the outstanding debt.

·         Around 14% (894 CIRPs) have been closed on appeal /review /settled, while 13% have been withdrawn under Section 12A. A significant number of withdrawn cases (around 54%) were less than Rs.1 crore, while the primary reason for withdrawal has been either the full settlement with the applicant (306 cases) or other settlement with creditors (210 cases).

3QFY23: New quarter, old challenges (BoB Capital)

Q3FY23 was a tepid quarter which saw Nifty 50 earnings rise 11% YoY led by the BFSI sector. Investment-led sectors such as capital goods and cement posted a healthy topline while consumption-driven sectors such as FMCG and durables found their pricing abilities put to the test. BFSI had a good quarter with margin expansion and improved asset quality. Exports were steady in both services and manufacturing sectors led by tier-I IT and electronics manufacturing services (EMS) players, though the pharma sector saw continued generics price erosion in the US.

Capital goods and cement spring topline surprises: We note clear outperformance among investment-driven sectors, such as capital goods which posted strong numbers and robust order inflows. The recent capex-heavy budget lends a further fillip to these sectors. Cement saw 18% YoY topline growth but muted margins and profits.

Consumption sector slows: Staples and durables players had a dull quarter as inflationary pressures weighed on demand. Rural consumption remained sluggish though commentary points to some respite in Q4, a view echoed by auto majors.

Exports shine: Tier-I IT companies posted 1-5% CC growth despite a seasonally weak quarter due to furloughs and also reversed their underperformance vis-à-vis tier-II players (seen over the past 4+ quarters).

Agriculture – Sugar spread strength (ING Bank)

There are reports that the Indian government has decided not to allow further sugar exports this season beyond the already approved 6mt. There have been growing concerns for several weeks now that the government would not allow further exports, given worries over the domestic crop. The government will once again evaluate the domestic balance in March, at a time when cane crushing nears its end before deciding on exports. The move does raise concerns over tightness in the global market, which is reflected not only in the strength in the flat price, but also the March/May spread, which is trading in deep backwardation of more than USc1.60/lb. Worries over tightness should ease once the CS Brazil harvest gets underway in the second quarter.

Indian Pharma (IIFL Securities)

Although pharma companies and the government are focusing on NCDs mainly cardiac, diabetes and respiratory through new launches as well as price caps through NLEM, volume growth in the domestic pharma market is not picking up meaningfully given the limited coverage of quality healthcare infrastructure for the diagnosis of these diseases and subpar availability of doctors in several rural markets. While the India Pharma Market (IPM) has grown consistently at 10-11%, volume growth currently drives only 2-3% of market growth vs 6-7% growth 10 years ago.

The doctors in India have been prescribing a higher no. of products in supporting therapies (such as vitamins, nutraceuticals, etc.) vs 10-15 years ago. This, along with price hikes, is driving a meaningful portion of the overall market growth, thereby masking weak volume growth in many of the underlying core diseases.

While lower prices can supposedly drive higher volume growth, NLEM-led price caps have not aided IPM’s volume growth meaningfully, given that there have been very limited initiatives by pharma companies and government to expand the accessibility of essential medicines across all pharmacies and hospital formularies.

However, the government and pharma companies have been focusing on driving penetration beyond Metro/Tier-1 towns, where the availability of qualified doctors seems to be an issue. A strong OTC policy could make the most commonly used medicines widely available in such smaller markets and towns. Additionally, innovative portable, digital point-of-care diagnostic testing devices can help accelerate the detection of NCDs and diagnose early conditions of NCDs (such as pre-diabetes). These two initiatives, along with focus on patient awareness and counselling, can aid accelerating volume growth in the IPM.

Banking sector (JM Financial)

Given the substantial rate hikes since May’22, it is imperative to look at the benefits that have accrued and incremental gains left from NIMs perspective. For large banks (ICICIBC, AXSB, HDFCB, SBIN, KMB, BOB, CBK, IIB), the average increase in loan yields has been 109 bps (vs RBI’s repo rate hike of 250 bps – and time weighted repo rate hike of 119bps between Apr22-Dec22). Avg NIM expansion for the above set has been 37 bps with CoF increasing by 63bps.

Avg floating rate portfolio of above banks is 69% (~38% Repo/EBLR-linked and ~31% MCLR-linked). As a result, ~3/4^th of yield increase on the portfolio can potentially be attributed to repo/MCLR changes. While repo/EBLR linked loans reprice almost immediately, avg 1-yr MCLR hike for large banks was 123bps (as of Dec22) which implies that a sizeable upward repricing of MCLR-linked loans is likely to come through incrementally as well, thereby supporting NIMs. This implies continued tailwinds on yields aiding NIMs (or ability to attract deposits by offering higher rates). We note that PSU banks’ share of floating rate portfolio is reasonably higher than private banks (~80% vs ~62% for pvt banks). As a result, we expect most large banks to sustain health NIMs – though it is desirable that incremental yield gains should be passed to drive deposit growth.

With regards to NBFCs, the NIM performance has been relatively healthy (avg NIMs +34bps ex-NBFC-MFIs), contrary to expectations of meaningful negative impact of the rate hikes on NBFC margins. Avg yield expansion for NBFCs in our coverage has been 111bps (though 68bps excluding NBFC-MFIs wherein yield increases have been quite sharp at 240bps). Of these, HFCs and diversified lenders have seen yield increase of 94 bps and 120bps resp., while vehicle financiers have seen lower hike of 46bps given higher share of fixed rate portfolio. Cost of funds increase has been 53bps over this period. Incrementally, as banks re-price their MCLR-linked loans higher, the pass through to NBFCs should see stabilization of NBFCs NIMs – which would still be a healthy outcome in light of the sharp rate upswings.

Asset Quality Improvement Continues in December 2022 (CARE Ratings)

Gross Non-Performing Assets (GNPAs) of Scheduled Commercial Banks (SCBs) reduced by 19.7% y-o-y to Rs.6.1 lakh crore as of December 31, 2022, due to lower slippages, steady recoveries & upgrades, write-offs, and transferred to Asset Reconstruction Companies (ARCs). SCBs GNPA ratio reduced to 4.5% as of December 31, 2022, from 6.6% over a year ago and is likely to reach the pre-Asset Quality Review (AQR) levels. Robust growth in advances by 18.5% y-o-y is also supporting this reduction.

Net Non-Performing Assets (NNPAs) of SCBs reduced by 32.5% y-o-y to Rs.1.5 lakh crore as of December 31, 2022. The NNPA ratio of SCBs reduced to 1.1% from 2.0% in Q3FY22 which is significantly better than pre-AQR levels of 2.1% (FY14).

SCBs credit cost stood at 0.7% in Q3FY23. Besides, it has been ranging 0.7-0.9% over the last six quarters with improvement in overall credit quality and level of economic activities.

Overall, the SCBs stress level has reduced as their outstanding SMAs and restructuring book have reduced significantly in Q3FY23, indicative of improving asset quality. This comes after covid pandemic and associated business disruptions have led to an increase in restructured standard assets over the past two years.

Liquidity: Can it be a devil in disguise? (BoB Capital)

Liquidity has been quite a pertinent issue of late when financial conditions remained stringent on account of tightening policy response to higher inflation. In this context, we look at how banking system liquidity is going to evolve in the coming year. In India’s context, relatively well placed macro fundamentals and pent up demand contributed to faster pace of credit growth, which outpaced deposit growth where transmission to rates have been relatively slower as the new rates apply to fresh or renewed deposits while the existing ones remain unaffected. This has widened deficit significantly in context of liquidity in the current fiscal.

Even in the coming year, with anticipation of moderation in pace of nominal growth, we expect a considerable gap between demand and supply of funds to the banking system. Further, significant quantum of LTROs/TLTROs are maturing in FY23 and FY24, which will put additional strain on liquidity.

This can be corrected through conduct of RBI’s long term variable rate repo operations, with the frequency being increased. Or there could be OMOs to induce liquidity in the system on a permanent basis if required. Also, since Banks’ net profit have improved significantly they are well placed in terms of capital. Thus, to continue with the higher pace of lending, they could consider digging into their own capital or reserves and surplus going forward.