Vijay Kumar Gaba

Nominal GDP growth could be ~7.5% in FY24 (MOFSL)

It is remarkable that the first three months of 2023 have already witnessed several different moods. The year began with very strong optimism on global economic growth; however, from mid-Feb’23, the positive sentiment started fading with US economic data turning out to be much stronger than expected. With the collapse of Silicon Valley Bank on 10th March 2023, the caution was quickly replaced by serious concerns. The US Fed hiked rates by 25bp this week, continuing its inflation fight. As highlighted in our earlier QEO, owing to increasing growth concerns in the US economy, inflationary concerns will take a back seat in 2HCY23.

India, however, seems to be shrugging off these developments so far. Real GDP growth continues to remain strong but we keep our forecasts broadly unchanged at 7%/5.2%/5.6% in FY23/FY24/FY25. We see nominal GDP growth at 16.3%/7.7%/10% in FY23/FY24/FY25, slightly higher than 14.7%/7.3%/9.3% expected earlier.

Going by the recent inflationary trends and unexpected surge in food prices (especially cereals), we have raised our CPI-inflation projections to 4.6%/5% from 4.3%/4.8% for FY24/FY25. However, we continue to believe that the rate hike cycle is close to an end, with the terminal repo rate likely to be 6.75%. We expect a 25bp hike in Apr’23, after which, the rates may remain unchanged till late-CY23.

India’s external situation had worsened significantly in 1HFY23, but the worst is already behind us. We expect CAD to stay ~3% of GDP in 3QFY23, before easing further in 4QFY23. We expect it to remain comfortable at <2% of GDP in FY24/FY25. Nevertheless, we expect INR to cross 85/USD by mid-CY23, before retreating in 2HFY24.

Weather anomalies to sustain high food inflation (Systematix Institutional Equities)

Risk of weather anomalies on the agricultural produce and the food grain production is imminent. This is expected to create shortages at several fronts, given the renewed uptrend in food grain consumption over the last few years.

Given that the government buffers have been drawn down considerably due to the free food grain distribution program, the impact of the immediate weather anomalies have the potential of sustaining high food inflation.

These weather anomalies are also creating disparities between small, medium, and large farmers as adaptation of expensive technologies and agricultural inputs can be afforded more easily by the large farmers.

Therefore, policy responses are needed on multiple fronts including post harvesting storage infrastructure, water management and technological support to the wider set of the farming community to create resilience against weather anomalies.

·         Extreme temperature events are expected to happen more frequently; anomalies likely to be larger in North than South India. However, this increase in temperature is not bad news for all the crops. For example, the production of chickpeas benefits from a slight increase in temperature during the winter season. Similarly for potatoes, if the minimum temperatures are rising to some extent, it benefits.

·         The recent bouts of widespread rains are worrisome, and it is highly likely that productivity and production levels to remain strained. It happened when farmers were carrying out their irrigation process. However, the extent of the strain is yet to be determined. Not just wheat but several other crops got impacted particularly those having later phase of maturation of the crop. It seems to be a type of an alarming situation of the recent extreme climatic events.

·         Impact of El Nino is not expected to have a direct impact on the Indian monsoon. Historical records suggest that its impacts are not as straightforward. Therefore, it is too early to comment on the magnitude of its impact on the Indian monsoon. We have to wait and watch for some time.

·         Technological adaptations are only visible in some clusters of farming community suggesting that there is an evident gap in technology generation and technology adoption. Medium and large farmers are incurring substantial spending in their farm management. However, due to excess use of nutrients than required (unnecessary application of more nitrogen and pesticides, more irrigation because of the availability of those resources with them), it is damaging their agricultural system.

·         Household-level analysis indicate that the small and marginal farmers are prone to face severe losses due to climatic stress and are also susceptible to incur substantial adaptation losses as compared to medium and large farmers.

Real Estate-Demand & supply fall MoM; outlook positive (Nuvama Institutional Equities)

Housing demand in India’s top seven cities declined 2% MoM (up 17% YoY) in Feb-23. Launches continued to trend down, falling 39% MoM/21% YoY. YTD (i.e. CY23) demand increased 13% YoY; however, supply slid 18% YoY. Unsold inventory continued to decline (down 9% YoY/3% MoM) in Feb-23 with inventory months falling to 18 months from 25 in Feb-22 (18 months in Jan-23). Prices rose YoY in all the cities during the month.

Despite rising interest rates as well as housing prices, we believe the sales momentum would sustain, particularly for organised developers.

Launches continued to fall in Feb-23, with supply down 39% MoM/21% YoY. Hyderabad witnessed the highest fall of 86% MoM, followed by Chennai. Kolkata and the NCR witnessed new launches shooting up 104% MoM and 57% MoM, respectively. YTD launches are down 18% YoY, though they surged ~200% YoY each in the NCR and Chennai.

With demand outstripping supply over the past year, unsold inventory dipped 9% YoY in India in Feb-23. Bengaluru, Pune and Kolkata saw the maximum rate of correction in inventory (18–22% YoY). Inventory pan-India improved to 18 months in Feb-23 from 25 months in Feb-22. Average prices increased in all cities YoY in Feb-23.

Apparel Retail (ICICI Securities)

Companies having higher exposure to tiers-1&2 cities and value-pricing are likely to outperform: We expect companies that are over-indexed (~65-70% retail presence) to tier-1 and tier-2 cities with higher exposure to value price points to outperform in the apparel retailing space. Amongst branded players, we expect Madura, Arvind, Go Colors, SHOP, Manyavar and Kewal Kiran to be relatively less impacted by the general slowdown. However, amongst value retailers, we expect Westside and Zudio (each ~69% stores in tiers-1&2 cities) to likely outperform even the branded players by achieving >15% SSSG.

South and west regions to outperform north and east: As per our channel checks, we note that south and west regions are relatively less impacted by the general slowdown and are outperforming other markets. This we believe is led by: (1) higher share of urbanisation (chart-3), (2) higher disposable incomes due to larger share of developed industries such as IT, pharma and manufacturing. In our coverage universe, we note that DMART, Go Fashion, Westside and Zudio have higher exposure (68-96% of their overall retail presence) to south and west regions. However, for brands like US Polo, Flying Machine, Tommy, etc, tier-1 cities in the north are performing well. In north and east, we observe that VMART, W and Aurelia have higher exposure (>50%) to tier-3 and beyond cities, which are facing maximum slowdown.

Rural likely to underperform in Q4FY23: Our channel checks indicate pockets of slowdown in discretionary consumption, especially in rural markets (tier-3 and beyond). Even in the online retail ecosystem, we observe similar trends: overall online customer visits (footfalls) have declined at higher rate (12-43% during Jan-Feb’23 vs Dec’22 (chart 1) for companies that are over-indexed to tier-3 and beyond cities. Consequently, Pantaloons, VMART, W and Aurelia brands (having >45% retail presence in tier-3 locations and beyond) are likely to face revenue growth headwinds during Q4FY23, in our view.

Plastic pipes – growth Structural, Sustainable & Scalable! (Prabhudas Liladher)

Home building materials market (plastic pipes, tiles, wood panel, sanitaryware and faucets) is estimated to touch Rs 2.7tn by FY26 from Rs 1.3tn in FY22. During CY13-20, the sector was impacted by real estate slowdown, GST implementation and demonetization & Covid-19 pandemic over FY16-21, which resulted in single digit growth CAGR of ~6% during same period. The plastic pipe sector, however, has grown at 10% CAGR over FY13- 21.

Indian plastic pipes industry has historically grown faster than the GDP led by multiple factors like real estate, irrigation, urban infrastructure and sanitation projects. Then increased awareness, adoption and replacement of metal pipes with plastic pipes have also aided this growth. Currently, plastic pipes market is valued at ~Rs 400bn with organized players accounting for ~67% of the market. By enduse, 50-55% of the industry’s demand is accounted by plumbing pipes used in residential & commercial real estate, 35% by agriculture and 5-10% by infrastructure and industrial projects. Going ahead, domestic pipes industry growth is projected to witness higher CAGR against the past. Between FY09-21 industry grew at 10%-12% CAGR, while demand is anticipated to expand at 12%-14% CAGR between FY21-25 and more than Rs 600bn by FY25E led by a sharp increase in government spending on irrigation, WSS projects (water supply and sanitation), urban infrastructure and replacement demand.

Long term positive outlook on real estate to benefit building materials: The Indian real estate sector grew at ~10% CAGR from USD50bn in 2008 to USD120bn in 2017 and is expected to grow at ~17.7% CAGR to USD1tn by 2030. The key structural growth drivers for Indian real estate market are rising per capita income, improved affordability, large young population base, rapid urbanization and emergence of nuclear families. Demand for home building materials such as pipe & fittings, sanitaryware & faucets, ceramic and wood panel are correlated to real estate market’s growth. Thus, we believe that plastic pipe sector is expected to deliver healthy growth over long-term.

Healthy volume growth post stabilization in raw material prices: Plastic pipe industry has seen sharp recovery post pandemic. Organized players being well placed to handle fluctuations in PVC resin prices (main raw material) have gained significant market share. The correction in raw material prices, mainly PVC resin prices fell by 57% from recent peak of Aug-21 to Nov-22 and then stabilization in prices at Rs 85-90/kg, are expected to drive the volume.

Plastic pipes industry – fastest growing segment in building materials: The market for plastic pipes is valued at approximately Rs400bn, with organized players accounting for ~67% of the market. By end-use, 50-55% of the industry’s demand is accounted by plumbing pipes used in residential and commercial real estate, 35% by agriculture and 5-10% by infrastructure & industrial projects. Industry grew at 10-12% CAGR between FY15-20, while demand is anticipated to expand at 12-14% CAGR between FY21-25 and is expected to reach more than Rs 600bn by FY25E led by sharp increase in government spending for irrigation, WSS projects (water supply and sanitation), urban infrastructure and replacement demand.

Cement: Demand and prices fizzle out (Elara Capital)

As per our interactions with dealers, sales executives and C&F agents, the cement industry witnessed a muted price trend in March as price hike attempts failed to sustain due to volume push, lower-than-expected demand, and increased discount offerings. Thus, all-India average retail price dropped INR 8 per 50 kg bag MoM to INR 371 in March.

Central India reported a price dip of INR 5 per bag, followed by North India (down INR 6 per bag), West India (down INR 8 per bag), East India (down INR 9 per bag) and South India (down INR 10 per bag). As per market intermediaries, demand in March was subdued due to limited laborer availability in select markets, unseasonal rains, and liquidity issue given delayed payments for government projects and rising interest rates. Market intermediaries in many pockets expect cement firms to attempt price hikes in INR 10-40/bag range in April.

The cement industry witnessed a QoQ improvement in profitability in Q3FY23 post a challenging Q2. We believe margin recovery may continue in Q4 as well, on the back of: 1) better volume, 2) easing cost pressure and, 3) operating leverage benefits.

Bank credit (Axis Capital)

As per the latest RBI Weekly Statistical Supplement (WSS), non-food credit grew 16.0% YoY as of Mar 10, 2023 (vs. 15.9% YoY as of Feb 24, 2023). Outstanding credit increased by Rs 1,054 bn during the fortnight. Overall credit growth (including food) was 15.7% YoY as of Mar 10, 2023 (15.5% as of Feb 24, 2023).

Deposits growth stood at 10.3% YoY (vs. 10.1% YoY as of Feb 24, 2023). Aggregate deposits were up by ~Rs 965 bn during the fortnight. Demand deposits were down by Rs 316 bn while time deposits were up by Rs 1,281 bn during the fortnight.

Certificate of Deposits (CDs) issued during the fortnight ended Mar 10, 2023, were Rs 454 bn vs. Rs 326 bn in the previous fortnight. YTD CDs issued are at Rs 6.3 trn vs. Rs 2.0 trn for YTD same time last year.

On YTD basis, overall loan growth was 13.9% (non-food credit growth at 14.2%) and deposits growth was 9.1%. SLR ratio at the end of the fortnight stood at ~28%.

Loan to deposit ratio (LDR) stood at 74.5% (vs. 74.4% YoY as of Feb 24, 2023) while incremental LDR stood at 107% (vs. 108% as of Feb 24, 2023).

For the fortnight ended March 24, 2023, average system liquidity was deficit of ~Rs 558 bn vs surplus of ~Rs 430 bn in the previous fortnight.

Thermal Power: To Clock 64.8% PLF in FY24; Peak Demand to Grow 6% (CARE Ratings)

After growing at 9.5% and 6.4% in FY23, the base and peak demand are expected to increase by 5.5% and 6%, respectively, in FY24.

•      While the base deficit may remain near 0.5% for FY24, the peak deficit is expected to remain elevated. After spiking at 4% in FY23, CareEdge Ratings predicts it will be above 1% in FY24.

•      Coal/lignite fired thermal plants saw a reduction in plant load factor (PLF) during the Covid-19 lockdown periods, but have rebounded. PLF is estimated to be 63.8% in FY23 and 64.8% in FY24.

•      Thermal power generation accounted for approximately 73% of total generation in India during FY22, and similar levels are expected for FY23. The contribution is likely to be around 72% in FY24. With a substantial increase in renewable capacity and higher output from wind farms (due to improved wind speeds) and better availability of gas at competitive prices by FY25, the contribution of coal/lignite-fired plants is expected to decrease from current levels but likely to remain above 68% in FY25.

•      Coal dispatch to the thermal power sector, expected to peak at around 85% of total dispatch in FY23, is anticipated to continue at similar levels during FY24. Improved captive mine production during FY23 and going forward alleviates some concerns about Coal India Ltd and The Singareni Collieries Company Limited (CIL/SCCL) production ability, transportation bottlenecks, and increasing dependence on imported coal.

Telecom: Rising competitive intensity to delay tariff hikes (Kotak Securities)

R-Jio’s renewed aggression in postpaid and Bharti matching R-Jio’s unlimited data offering on 5G has raised the competitive intensity to attract premium subscribers, and would likely delay the prospects of a tariff hike and 5G monetization, in our view. The new family postpaid plans effectively caps the customer outgo at ~Rs205-235/month and provides an arbitrage for higher-end prepaid subs to move to family postpaid to reduce their outgo per connection. We also note Bharti is already at a premium to R-Jio on headline prices in most packs and taking a unilateral tariff hike (like it took on minimum recharge packs) seems difficult to us.

Industry-wide subscriber trends have been muted (down ~11mn, despite sharp growth in IoT/M2M subs) since the last tariff hike in Dec 2020. With inflation above RBI’s target range, upcoming several key state elections and general election in 2024, we believe tariff hikes would now be deferred until after the general elections. We now build in 20% smartphone tariff hikes from June 2024 (versus Sep 2023 earlier). A delay in tariff hike/5G monetization is clearly a negative, but we remain optimistic on tariff hikes as engagement picks up on 5G and telcos’ shift focus on generating returns after pan-India 5G rollouts (March 2024).

Vi is the worst impacted by tariff hike delays, with its FY2024E cash EBITDA declining to ~Rs63 bn (from Rs80 bn annual run-rate). Without an expedited fund raise, we do not expect Vi’s capex to inch-up meaningfully to bridge the gap on 4G coverage or rollout 5G, which would result in further market share erosion. According to our estimates, Vi stares at a cash shortfall of ~Rs55 bn over the next 12 months and a delay in tariff hike/fund-raise, could lead to Vi shutting shop.

India’s digital neural networks are set to step into self-regulated, self-taught proliferation zone, led by the second largest digital consumer base globally (800mn+ internet users), massive government impetus and keen private innovation. Thus, reportedly, India’s digital economy is forecasted to snowball into USD 800bn by 2030, growing 2.4x faster than its economy in FY14-19 (source). And MSMEs, the key brace structure of the economy with 26%+ GDP contribution in FY22, have sharply stepped digitisation pace. MSME digital penetration should grow 6x in FY20-25, as per Redseer. Expect plays such as Indiamart (INMART IN)/Justdial (JUST IN) that offer direct play on MSME digitisation, to set the pace for such progress and in turn benefit.

MSME business dynamics are seeing a paradigm shift, led by nuanced policy support and post-Covid recovery. Improving MSME credit growth, manufacturing revival, supportive government/RBI policies and rural demand traction enable a prolific seedbed for MSMEs. Moreover, a crest emerging off of Covid was the fast MSME digital adoption, add to which the Open Network for Digital Commerce (ONDC) variable may hasten MSME digital adoption.

Chemicals: Testing times for non-contracted players (JM Financial)

Agrochemicals demand is likely to remain buoyant on account of robust growth in world oilseed production (as per USDA). At the same time ex-agrochemicals demand is likely to remain tepid over the next couple of months and is likely to recover with increase in global discretionary spend. The only silver lining for all chemicals players currently is the continued decline in freight rates and reintroduction of export incentives from mid-Dec’22. This could help improve margins in both 4QFY23 and 1QFY24.

Agrochemicals demand likely to remain buoyant: As per US Department of Agriculture (USDA) reports, world oilseed production in CY23 is likely to grow at a robust 4% YoY; this level of growth was last seen in CY21 on account of pandemic-led disruptions. At the same time, IGC expects world grain production to moderate only a little in CY23 and sees strong growth in CY24. Moreover, in case of India, oilseed production growth in CY23 is likely to taper to 1.2% vs. ~4-5% growth over the last 3-4 years. Hence, in our view, agrochemicals demand in the exports market is likely to remain buoyant while domestic agrochemicals demand could be flat compared to CY22. This bodes well specifically for contracted agrochemicals focused players such as Navin, PI, SRF, and Anupam.

Ex-agrochemicals demand weakness to persist over next couple of months: Basis our channel checks, demand for non-agrochemicals, especially personal care, flavours and fragrances, and cleaning chemicals remains weak. As a result, we believe non-agrochemicals focused players are likely to face challenges in volume off-take in 4QFY23.

In some cases, end-customers have excess inventories lying idle for these chemicals. In our view, demand recovery for these chemicals is contingent on inventory drawdowns, which is likely with the increase in global discretionary spend.

Increase in basic chemicals prices unlikely to dent margins: Over the last couple of months, prices of most basic chemicals have risen marginally after falling 20-30% over the last 12 months. In our view, this increase in basic chemicals prices is unlikely to hinder the margin for a majority of the specialty chemicals companies under our coverage given that all chemical companies will benefit from the revised export incentives scheme (~0.8-1.2% across different chemicals) that came into effect from 16^th Dec’22.

Freight rates continue their downward trajectory: On account of decongestion at major ports and waning demand, India–North America and India–Europe freight rates have been on a continuous decline since May’22. In our view, this downward trajectory is likely to continue as the current freight rates are still 50-60% higher compared to the stable pre-Covid levels. This decline in freight rates was one of the contributors for the margin improvement of Indian chemicals players in 3QFY23. We expect this trend to continue in 4QFY23 as well.

IT Sector: Sell; Customer health deteriorating (Nirmal Bang Institutional Equities)

We believe that the Nifty IT’s outperformance vs the Nifty by ~7ppts since 30th September 2022 till date has largely been driven by the ‘delayed landing’ narrative that has developed around resilience of the US economy along with better growth prospects for both Europe as well as China in 2023 compared to earlier expectations. However, the narrative has turned very fluid post the problems that have surfaced in the banking sector in both US as well as Europe in the last fortnight. Early signs of economic stress are beginning to emerge from the fastest increase in Fed funds rate in recent history. This in our view will lead to at least our base case of a shallow recession in the US, if not something worse playing out by 2H2023.

The potential impact of the recent banking stress in the developed markets has not been incorporated in our estimates, which broadly remain unchanged since 3QFY23 results season. Our USD revenue growth estimates for Tier-1 IT companies for FY24 are still in low to mid-single digits with downside risks while consensus is anticipating high single-digit growth, implying a belief in the ‘soft/no landing’ narrative. Our EPS estimates are lower than consensus for FY24/FY25 by 5-10% due to lower revenue as well as margin estimates.

We are also working with lower target PE multiples vis-à-vis consensus as we believe that the structural IT industry growth is not going to be materially higher than where it was pre-pandemic. Our target PE multiples are not pessimistic as they are 2-3x higher than what the IT industry had witnessed during the last major downcycle in 2008-2009 and are at the higher end of the pre-pandemic range.

While many verticals/sub-verticals have come under pressure over the last nine months, including Mortgage, Hi-tech, Capital Markets, Healthcare, Retail, P&C Insurance, Telecom, etc, the banking space in 2022 was generally resilient because of improved NIMs and low credit costs. However, with deposit costs likely to rise following the SVB episode, most US banks will see NIMs compress from current expectations. With likely higher credit costs, profits will be under pressure, leading to constrained spending on IT. Investment banks could suffer because of lower capital market and M&A activity in 2023 as was the case in 2022.

We expect somewhat similar pressure for the large European BFSI institutions. We think that the top 25 western BFSI firms will form an outsized chunk of the BFSI revenue base of Indian IT companies. Regional US banks (the hardest hit lately) are likely not big clients for the Indian IT industry, but their dislocation will likely not bode well for the US economy and could have an outsized negative indirect impact on IT spend. The S&P 500 Index earnings (including those of components, see Exhibit 5,6) deteriorated throughout CY22 and are set to worsen further in CY23.

The banking problems in both US as well as Europe may accentuate the weakness. We think that all these problems could mean at best a flat tech spending scenario in 2023 (our base case), if not worse. The Russell 2000 index (US small cap index) internals and the spike in bankruptcy filings are indicating signs of stress in the broader US economy (even before the SVB/CS collapse). In FY23, the Indian IT/ITES industry’s exports are 4x of what they were at the time of GFC and believe the adverse DM macros will have a larger impact than it did in FY2010 when industry grew by just mid-single digit rate. We especially are concerned about Tier-2 IT players where exposure beyond non-Global-500 set is likely larger. PE premium of Tier-2 vs Tier-1 seems unsustainable.

Indian economy: Activity normalization (Jefferies Research)

The Jefferies Economic Indicator (JEI) shows activity slowed in February. The fourth iteration of our economy tracker composite indicator, the JEI (based on 34 monthly data), shows MoM activity slowed somewhat. The Feb'23 JEI YoY growth is down 2ppt MoM to 7%, in-line with the 3-mma. The improving / stronger data points were nearly two-fifths of the group (14).

While Jan month activity JEI helped by a low base (COVID third wave); February is on a normalized activity base; and notably better than December.

Broad-based indicators broadly inline with 3mma. The e-way bill generation for Feb'23 was +18% YoY, -2ppt MoM, but inline with the 3mma. Railway freight traffic growth at 4% YoY was inline with 3mma while port traffic at 13% YoY was 1ppt above. Petrol / Diesel consumption growth at 9%/8% YoY was -1ppt each vs. the 3mma. Electricity consumption +8% YoY, was -2ppt vs. the 3mma, partly on weather effects (early summer).

Urban consumption trends normalizing. Feb'23 urban consumption trends were mixed, impacted by the low Jan'22 base / pent-up release in Feb'22. Auto registrations for Feb'23 of 2W/PVs were +18%/+10% YoY, +7ppt/-3ppt MoM. Spending at malls was +12% vs. Feb'20, flat MoM. Credit & debit card spending +20% YoY, was inline with the 3mma. Property registrations in Mumbai/Delhi declined YoY, but for Jan-Feb combined were +1%/+37% YoY.

Rural trends somewhat better. The employment demanded under the rural employment guarantee (NREGS) scheme was -12% YoY and 5% below the pre-COVID levels. Construction indicators seeing mixed trends with steel consumption (+11% YoY) strong though Jan cement production (+5% YoY), at a 3-mth low. Housing starts are at a 9 year high and should help drive construction employment / rural transfer economy. While winter crop production (wheat expected +4% YoY) is not impacted by early summer onset, our analysts have raised concerns on a possible drought in 2023.

Trade deficit declines further. Mixed inflation trend. The CPI declined by 0.1ppt to 6.4%, but was higher than ests and stayed above the RBI's 6% upper limit. WPI declined by 0.9ppt to a 25-mth low of 3.9%, a relief. Indeed, lower WPI is now reflecting (link) in slowing bank credit growth which at 15.5% is 2.4ppt below Oct'22 peak.

Feb trade data saw the second consecutive month of decline in trade deficit, which at US$17bn was -7% YoY. Exports continued their decline for the 3rd month, with the Non-oil exports -4% YoY. The domestic demand linked imports (ex-oil, ex-Gold) were -4% YoY. Despite lower goods deficit and sharp rising services net surplus (US$15bn, +76% YoY); FX reserves were -US$15bn. Import cover is comfortable at 9.4-months.

Pharma Sector: Risk-Reward Favourable (Nirmal Bang Institutional Equities)

Almost all Pharmaceuticals companies in our coverage universe are trading at deep discounts (average ~25% discount) vs the historical 5-year average forward multiples - even excluding Covid-19 period valuations.

FY23 has been a challenging year for the sector owing to slowdown in overall growth, margin contraction and enhanced regulatory concerns. Domestic growth has been impacted by a higher covid base while US generics business has been impacted by double-digit price erosion. Margins have also contracted due to US price erosion, elevated cost inflation and a higher covid base. Apart from these headwinds, enhanced regulatory concerns, which were absent during the covid period, have also resurfaced, affecting sentiment for the sector. As the base normalises, we believe that domestic growth is expected to be back in double digits in FY24 while price erosion in the US is expected to cool off from double-digit levels to single digit levels. On the margin front, cost inflation is normalizing, and companies have to a great extent passed on the burden of additional costs, largely in branded markets. On the flip side, we believe that the USFDA inspections are still on the lower side (330 in CY19 against 77 in CY22), but the same are expected to increase from here on. Hence, our focus remains on companies that are heavy on branded generics and have the least exposure to US generics.

We also expect mean reversion in brand-centric /heavy companies with recovery in growth amid margin improvement.

Quick Service Restaurant (Centrum Broking)

Notwithstanding the hype behind the high growth western Quick Service Restaurant category, we believe companies in this space will still be valued based on their margin strategy. Our in-depth study delves into the strategies of both i.e., the Indian companies and their global parents to understand how they are evolving and shape-shifting to win in the Indian market. We give little credence (though not ignored) to beaten to a pulp words like convenience, efficiencies, digital devices, disposable incomes, etc. as they disconcert you enough to believe the woods for the forest. Hence, instead look at margins and volumes, these will define the future prospects as the companies expand out of saturated metro and tier-1 markets, because they are still consumer companies!

Western QSRs to outperform as international brands perfect product basket right: Our in-depth study reveals the strategies followed by global parent i.e. (1) follow margin expansion in the developed markets, (2) while drive the store expansion in emerging markets due to expanding QSR market opportunity and penetration beyond metros. Further, while store growth is important, margins and volumes will define the future prospects as companies expand out of saturated metro and tier-1 markets. Our study pointed three significant developments in consumption, (1) consumer affinity towards western QSRs, (2) changing consumer habits – simplicity of ordering and delivery through time efficient digital platforms, and (3) easing of competition from local outfits. Though millennials are shaping up demand favouring the shift towards organised segment, QSRs have used recent crisis to optimise cost structures, and they are capturing market share.

Surge in QSR network to drive revenue: CAGR of 13% over FY20-25E We expect India’s organised food services market to grow at CAGR of ~10.5% to Rs1,684bn over FY20-25E capturing ~46% market share from current 40%. Given vast growth potential, organised segment chains to grow at 13% CAGR garnering 12% market share of food service market to Rs383bn. Industry estimates point out Informal Eating out (IEO) market at Rs3.2trn and expecting to grow CAGR 12% in next 5 years. Growth in total addressable market (TAM) to be driven by, (1) targeting millennials, (2) consumer centric palate and choices, (3) focusing on online, time efficient delivery models, and (4) strategic pricing and promotions offering value proposition. Further, established brand acceptance helped top-5 global QSRs to garner ~50% market share with high concentration in top 25 cities, nonetheless, the brand reputation helps smoother entry in Tier 2/3 markets providing huge runway for growth. Therefore, we believe top QSR players to add +2,000 stores over FY22-25E.

India infrastructure: Strong capex in railways for FYTD23 (Nomura Research)

Central government capex (ex-highways) for FYTD23 is up 14% y-y led largely by railways (+54% y-y), and by drinking water (+19% y-y) offset by weakness in defence (down 1% y-y). Ex-railways capex growth was modest at ~3% y-y (we are not considering road capex as FY23 is entirely budget funded, while FY22 included significant extra budget funding). We note that road construction has been weaker against corresponding periods in FY22 and FY21.

Pace of state capex lower, whereas cumulative capex increased 3.8% y-y . FYTD23 (until Jan) capex for 12 key states (70% of aggregate state capex) fell to 46.4% of budgeted spending (vs 53.3% for FYTD22). However, given elevated levels of inflation, the y-y increase in capex would be lower in real terms, in our assessment.

Indian Financials In a Dislocated World: Strong Liabilities, Reasonable Vals (Jefferies)

Indian financials have also borne rub-off effect of global dislocations. They are better placed with higher share of retail deposit, limited ALM gap & MTM, limited dependence on AT-1 bonds & lower exposure to riskier segments like promoter/ acquisition finance. While equities & global bonds saw pressure off late, local bond mkt is stable. Post correction, vals of some

are near/below Covid lows

Higher share of retail deposits and lower ALM gaps. The deposit profile of Indian banks is highly dependent on household/ retail deposits that form >60% of total sector deposits. Banks have also been increasing focus on this segment to granularise deposits. ALM gaps, as measured by share of <1yr liabilities vs. share of <1yr assets, are also limited. Even NBFCs have been watching this aspect much more closely post the debacle of IL&FS few years before Covid. Interestingly on the bond side, while the prices of overseas bonds (issued by Indian issuers) have seen correction our conversation with local bond experts/ corporates indicate that local market is fairly stable and price action will be function of rate actions.

AT-1 bond market has polarised towards large/ quality banks post Yes Bank. India had a Credit Suisse like AT-1 bond issue right around Covid when Yes Bank wrote-down AT-1 bonds and still there was some franchise value assigned to equity through capital infusion by leading banks/ NBFC. Since then, the issuances have been lower and market has become polarized towards larger/ quality banks. Among banks, top-3 issuers are SBI, HDFC Bank and Canara Bank with PSU banks having higher contribution from this. Interestingly, smaller banks have a lower contribution from AT-1 bonds. Local bond mkt investors aren't really seeing risks here for Indian stocks.

Lower risk from MTM and asset quality. As discussed in our recent note, The SVB Test On Indian Banks: Sector Holds-Up, Again!, on assets side of banks, loans form 65% & investments 25%. HTM is allowed on GSecs & forms 80% of that & 15% of assets. On 4-5yr duration, impact will be just 6% of capital for Pvt. BKs & 15% for PSUs. Asset quality trends were strong, with slippages during 3QFY23 at multiyear low of 1.6% & recoveries from past NPLs helping to keep credit costs low at 1% of avg. loans.

Valuations in some cases below Covid lows. While the global events, especially in the financial sector, have stirred confidence and increased COE, we also note that valuation of Indian banks is looking fairly attractive and in some cases stocks trade below the levels during the height of Covid risk. Stocks above US$5bn in mkt cap that are trading below the Covid-low valuations are Kotak Bank, IPru Life, ICICIGI and HDFC Life. Life insurers are also attractive (and below Covid lows) but clarity on taxation of insurance policies will be key to rerating.

In the past three weeks our team travelled through eight out of ten administrative divisions of Madhya Pradesh (MP), covering thirty six out of fifty two districts in the state. I may share some key points from the socio-economic and political assessment made by the team.

Socio-economic assessment

From socio-economic perspective, MP comprises of easily distinguishable three states –

1.    Tribal areas that are extremely poor; lack basic amenities (especially health and education); not properly connected; agrarian; highly contended; and mostly integrated with nature. Though the non-tribal elements and cultures have started to make inroads in these areas from the fringes, the impact so far is limited. Mobile phones, packaged snacks, pan masala (chewing tobacco sachets), motorcycles (scooty), small solar panels, shirt-pants, denim, plastic crockery, are main signs of what is commonly known as “modern civilization” in the tribal areas of the state.

In a state that is least divided on religious lines, one key area of struggle in the tribal areas appears to be between missionaries attached to various religious organizations and social workers who do not subscribe to any particular religion. While all try to help the tribal population, there is a persistent strife.

2.    Modern cities like Indore and Gwalior that have emerged as prominent centers of higher education and IT services. These cities are as modern, developed, diverse and cosmopolitan as any other major city in the country. The rate of growth in this part is high

3.    Rural areas and smaller cities & towns that sustain on agriculture & horticulture, trading of farm produce, food processing, public sector undertakings, mining and government services. In the past one decade this part of the state has gathered some steam and is witnessing higher but still below potential growth. The crops have diversified to more cash crops, horticulture and forest produce; tourism has improved due to better road and civil aviation development; mining, electricity and numerous defence units have also seen faster development.

The inequalities in these three parts of the state are stark and inexplicable. City of Indore is counted amongst the top centers for higher education in the country and is ranked as the cleanest city in the country. Merely 100 miles away from Indore is Khandwa district, home to Korku Tribal who live in abject poverty and ignorance. The tribal population in the adjoining Burhanpur, Betul, Chhindwara districts areas is also not placed any better. In fact there seems to be little connect between the three parts of the state.

The state has tremendous potential for religious, historical, ecological, adventure and leisure tourism. Unfortunately, it has not been able to attract rich tourists beyond Khajuraho and Tiger Safaris. A large proportion of the tourists visiting the state are local budget tourists or poor pilgrims. The development trajectory of the state appears lacking a clear vision. A small business community owns most of the industry and mining business and follows a typical colonial business model. The native tribal population, who is the legitimate owner of the abundant natural wealth of the state, is mostly deprived of the benefits.

Thankfully, unlike the neighboring UP and Rajasthan, the educated youth of the state is still not eager to migrate to Mumbai, Bengaluru or foreign shores. A large proportion of these youth is content with whatever is available in their home towns; though the restlessness may be increasing with each passing year.

Political assessment

The state is scheduled to have assembly elections in the next seven to eight months. However, the political activities are still subdued and limited to some inaugurations and facilitation rallies by the incumbent Chief Minister Mr. Shivraj Singh Chouhan (BJP) and Mr. Kamal Nath (Indian National Congress), who claims to be the primary challenger to the incumbent chief minister.

Not much political activities are visible in hinterlands and at block & village levels; except that the aspiring candidates have started putting up random posters to increase their visibility to the decision makers in Bhopal and Delhi.

The religious fervor that is visible in neighboring UP is not present in the state except in Bhopal, Indore and Ujjain. The politics therefore is mostly focused on caste, class and local personalities.

The incumbent government appears to be facing significant anti-incumbency; but the primary challenger is not very popular outside Jabalpur and Narmadapuram divisions. Though the internal conflict within the Congress party has reduced significantly after departure of Jyotiraditya Scindia; the acceptability of Kamal Nath may not be significant in northern (Chambal, Gwalior, Sagar divisions) and eastern (Rewa and Shadol divisions), areas of the state.

The other parties like BSP, SP, AAP etc. have insignificant localized presence and may not be a relevant factor in the election. Surprisingly, despite abject poverty, exploitation and inequalities there is no presence of the communist movement in the state.

Though it may be early days to make a clear assessment, as of now the state seems to be heading towards a close contest, like 2018, with BJP having a small lead. The situation could change if either of two major parties announces a change in local leadership. The central leaderships of both the major parties have a limited role in the local politics of the state; as their appeal may be limited to a few large cities only.

Also see Exploring India – Part 1