Vijay Kumar Gaba

3QFY23 GDP: Slowdown in private consumption alarming (MOFSL)

Real GDP expanded by 4.4% YoY in 3QFY23: Real GDP/GVA grew 4.4%/4.6% YoY in 3QFY23 (v/s our forecasts of 4.5%/4.1% and the Bloomberg consensus of 4.7%/4.6%). It implies that real GDP/GVA rose 7.7%/7.2% in 9MFY23. Importantly, there were upward revisions in FY21/FY22 growth to -5.8%/9.1% from -6.6%/8.7% earlier.

The CSO expects 5.1% YoY growth in 4QFY23, which means full-year growth of 7% in FY23. Anything between 4.7% and 4.9% in 4QFY23 implies 6.9% growth in FY23 and 4.6% or below implies 6.8%. We believe that real GDP growth could be ~4.5% in 4QFY23, implying full-year growth of 6.8% in FY23. We maintain our forecast of 5.2% growth in FY24, led by weak consumption and some moderation in investments.

Consumption growth collapsed, though investments grew decently: Details suggest that total consumption growth weakened to just 1.7% YoY in 3QFY23, dragged down by much weaker-than-expected growth of 2.1% YoY in PFCE and the second consecutive contraction in GFCE. In contrast, real investments (GFCF + change in inventories) grew 8.1% YoY in 3Q. External trade deducted only 0.2pp from real GDP growth in 3QFY23, compared to more than 3pp each in the previous two quarters.

Domestic savings fall sharply: India’s investments fell to 28.4% of GDP in 3QFY23, the lowest in more than a decade, except in 1QFY21. However, net imports of goods & services were still elevated at 4% of GDP. It suggests that implied GDS declined to 24.3% of GDP, lower than 25% of GDP in 3QFY22 and the lowest in more than a decade (except in 1QFY21).

Infrastructure: Project awarding accelerates after Nov’22 (MOFSL)

Project awarding activity has picked up pace after Nov’22, with 4,290km of projects awarded till date in FY23 (v/s only 1,549km awarded in the first eight months of FY23). Road construction by NHAI till date in FY23 stood at ~3,150 km. With a target of 6,500 Kms in FY23, the remaining part of FY23 would require further acceleration in project awarding to achieve the targets.

Toll collections have been improving, with FASTag-based toll collections of INR444b as of Jan’23 with a daily run rate of ~INR1.5b.

Asset monetization is the key focus area for NHAI to raise funds outside of budgetary resources. The National Highways Infra Investment trust (NHAI InVIT) is planning to raise up to INR80b in the third tranche of asset monetization by Mar’23. NHAI InVIT successfully raised INR14.3b in the second tranche to partly fund three road assets stretching 246km. Additionally, NHAI InvIT raised INR15b from the issuance of non-convertible debentures (NCDs) in Oct’22.

NHAI has prepared a pipeline to monetize 1,750km of assets in FY23, but a faster execution is required to meet the monetization target.

DFCCIL has revised the timeline for Dedicated Freight Corridor projects and they are now expected to be completed by mid-2024.

Farm Input & chemicals: Challenges visible across pockets (IIFL Securities)

Domestic agchems saw limited revenue growth, owing to excess inventory in channel. While Rabi acreages progressed steadily, inventory liquidation would be critical for the ease of working capital. SRF, NFIL, PI and ANURAS are seeing tailwinds from buoyancy in global agchems.

Fertiliser companies witnessed elevated finance costs as subsidy receipts are lagging behind. As anticipated, several chemical companies reported sluggish 3Q earnings at the outset of 2023. Comments offered by several companies reiterate our cautious view on the sector, with a prolonged recovery.

Rabi season a flop show: Despite remunerative crop prices and higher wheat sowing, excess channel inventory affected agchem volumes. Few companies took price hikes to pass elevated input costs. Domestic growth was the strongest for BESTAGRO, CHMB and UPL (includes Advanta Seeds). Domestic businesses of RALI and PI were muted during the quarter. The exports of ANURAS and PI grew significantly YoY. ASTEL and CRIN saw challenges in exports.

Mixed quarter for Chemicals: SRF’s Chemicals business, NFIL (driven by CDMO), AETHER and NEOGEN were outperformers in 3Q. However, FINEORG and bulk chemical companies like TTCH (India business) and DFPC experienced moderation in profitability. Despite this, global supplies for refrigerants (SRF, NFIL, FLUOROCH) and soda ash (TTCH) remain tight. Re-opening of China would be critical for PVC (CHEMPLAS), caprolactam (GSFC) and phenol (DN).

Capex slips into FY24: Ongoing projects for ATLP, DN, PI, FINEORG, TTCH and GNFC are lagging, and appear to be distant from their original timelines. This could possibly lead to downgrades for the expected growth pegged in FY24/25. Nevertheless, several companies are scouting new land parcels to safeguard future requirements. New projects announced in 3Q: SRF – specialty fluoropolymers, DN - polycarbonates complex, CHEMPLAS – CSM capex, and NEOGEN - greenfield unit for electrolytes.

Monsoon fear looms amid good rabi (Nuvama)

Domestic agri input industry to benefit from bumper rabi crop (output up by 6% YoY) coupled with stable crop prices (wheat up 20% YoY) leading to strong cash flows for farmers. However, fear of poor monsoon looms, emanating from El-Nino conditions, while the industry is focused on collections offering attractive cash discounts. We remain cautious on domestic agrochemicals players given concern on monsoon and increasing competitive intensity with new players targeting to gain market share. Domestic fertiliser players to continue gaining momentum while global agrochem players witness strong growth.

Textile #QFY23 hit by higher input costs (Elara Capital)

The Textile value chain was hit by volatility in cotton prices, which corrected significantly in Q3FY23. Use of older high-cost inventory in the quarter led to margin strain, as input costs remained high for most of these players whereas output was pushed at corrected spot prices.

Going ahead, expect the cost structure to turn favorable with exhaustion of older inventory and with companies cautiously procuring raw material in batches at lower prices. We expect cotton prices to remain firm this season, led by expected demand improvement, downward revision in cotton production in key countries (India and the US) and weaker arrivals. We opine that a mild recession is already priced in cotton prices and prices can correct in a scenario of severe global recession.

Demand from the export market was muted for large part of Q3, with signs of improvement towards the end, led by subsiding inventory pile-up. Most retailers reduced inventory positions through promotional/discounting sales in Q3 but inventory was still elevated. Expect the benefit of such reductions to reflect in Q4, with order flow improvement. However, any aggressive buying is unlikely as the stance remains cautious.

Despite inflationary pressure squeezing consumer pockets, overall domestic sentiment improved in the first half of the quarter, led by festival/wedding season. However, sales were muted post the festive season amid delayed winters and lesser number of wedding days in Q3FY23. Domestic brands/retailers launched ‘end of season’ sale earlier than normal to retain the shopping momentum and reduce higher-cost inventory. Thus, expect Q4FY23 to be stronger as the wedding season is falling predominantly in Q4, which will likely revive demand.

Revisiting Developer Valuations (Jefferies Equity Research)

A potentially delayed pause in the rate hike cycle and risk-off sentiments, particularly for leveraged cos has led to significant property stock underperformance. We find the 40% valuation contraction since late'21 is already near past cycle levels. Valuations are now at pre-RERA reform levels; ignoring the much improved sector discipline and also the strong housing cycle. Developers with valuations at/below average include Lodha, GPL, PEPL and DLF.

Observations from past rate-cycles: Even though we have seen limited evidence of mortgage rates impacting physical property sales (link); the property stock valuations demonstrate a reasonably high correlation (0.7 correlation coefficient over pas 14 years) with the mortgage rates. Higher mortgage rates of ~225bps over the last 12-mths have led to the residential heavy developers (Lodha, GPL, Sobha) decline by 18-32%; and the average valuations (Price-to-book basis) of the developers with long history having declined by ~33% to 2.2x. Past rising mortgage rate cycles (2011/12 & 2013/14) also coincided with a de-rating of property stocks; although the broader property cycle conditions were much different (late-cycle) during those periods.

Derating already near prior risk-off episodes: General periods of risk-aversion / low-liquidity have also seen property stocks correct significantly. The 2018 NBFC crisis and partly the 2013/14 EM risk-off / sharp INR depreciation period was also derating event for realty sector. Overall, peak-to trough derating in the current episode (~40%) has already reached levels similar to the ones in prior (~45%).

Cement: EBITDA fall Arrested; sector awaiting growth (Jefferies Equity Research)

3QFY23 saw sharp moderation in total EBITDA (YoY) decline to single digit (-3% YoY vs est -6%) for coverage vs 20-40%+ decline in past 4 qtrs. Unit EBITDA/T (avg) improved Rs190/T QoQ, on px hike, cost decline and Vol led oplev. Improving trends should continue in 4Q with small QoQ price inc in 4QTD, better FC absorption coupled with lower fuel cost. While recent slump in Coal costs is comforting, +ve pricing action in next 3-months critical to meet FY24 estimates.

Double-digit volume growth again: Aggregate volumes grew ~11% YoY in 3Q (9MFY23 growth at ~12% YoY). 3-yr/5-yr Cagr for 3Q is 5-6%. Most of the players indicated that a strong pickup in government projects is driving volume growth for the industry; few players indicated increase in share of non-trade segment; urban housing and rural housing also showing reasonable growth. Most of the players expect strong volume growth to sustain in 4QFY23 and extend for FY24.

Ebitda/T improves QoQ: Aggregate Ebitda/T (coverage) for 3Q was at ~Rs780 (JEFe Rs760) a decline of Rs120 YoY and inc of Rs190 QoQ. YoY fall in Ebitda/T was driven by continuing lag in passing cost inc by industry. Highest QoQ uptick in EBITDA/T was reported by ACEM/ ACC (on profit normalization), DALBHARA and TRCL. JKCE and HEIM reported QoQ decline.

Trends in IT Services (Kotak Securities)

Slowdown for sure but with no incremental pockets of weakness: The demand environment has stabilized with weakness in mortgages, capital markets (some segments), discretionary retail, hi-tech, medical devices and some segments of telecom. Possibility of outlasting the inflationary environment with just a slowdown/mild recession and continuous prioritization of tech spending has led to optimistic outlook on tech spending by some clients even in the current weak macro. Growth is likely to be back-ended.

Expect considerable growth divergence in FY2024:  Gap between leaders and laggards will widen in FY2024. Among Tier 1, TCS and Infosys offer a full suite of services, robust delivery and excellence in multiple digital competencies. Both are well-positioned in cost take-out deals and will likely emerge net gainers in vendor consolidation exercises. HCLT is confident of industry-leading services growth in FY2024 aided by healthy deal win and a good order book. We expect TCS, Infosys and HCLT (services) to perform better than industry growth in FY2024. Wipro and TM are vulnerable.

Cost take-out deals entering pipeline; both mid-tier and Tier 1 have plays: Discretionary spend is slowing down and so is the flow of smaller projects that was a key driver of growth for the industry in FY2022 and FY2023. Cost take-out deals are increasing in the deal pipeline but they tend to have a higher tenure, longer deal cycles and longer time to ramp up – essentially slower revenue conversion. Mid-tier IT can address a few cost take-out themes ranging from simple offshoring to complex IT operating model transformation deals in areas where they have strong domain understanding, capabilities and client relationships. Tier 1 IT is better-positioned in larger and more broad-based cost take-out programs that require strength in multiple domains and services, a global delivery model and ability to offer competitive pricing across a whole range of competencies. A deep recession can see more such deals being signed but that is not the base case currently.

White goods & durables (ICICI Securities)

Steady increase in copper prices: Copper, a key raw material (>35% of raw material cost) is back in inflation zone after remaining in deflation zone over July’22-Dec’22. While it is likely to affect the entire sector, we expect white goods to get impacted the most. Cable and wire companies have raised the prices to pass on the impact.

Other raw materials are still in deflation zone: Other key raw material prices such as aluminium, steel and HDPE have remained in deflation zone. Prices of aluminium, steel and HDPE have declined 16.3%, 1.3% and 7%, respectively YoY in Feb’23.

Margins to inch upwards steadily: We model gross and EBITDA margins to inch upwards YoY as well as QoQ in Q4FY23 with correction in input prices. Freight prices have also corrected with reduction in fuel prices. While we model most companies to increase ad-spend YoY, we believe there is a strong scope to see EBITDA margin expansion of 100-300bps YoY in Q4FY23.