Vijay Kumar Gaba

FY24-25 Macro and Strategy Outlook (Phillips Capital)

The Indian economy will go through a phase of softness and consolidation in FY24 due to the higher base of the last two years, steeper interest rates, and a global slowdown. Supportive government policies and the long-term potential of the Indian economy will continue to augur well for capital formation, but other GDP components like consumption and exports are expected to weaken in FY24. Corporate earnings are currently estimated to be extremely strong but we expect disappointment and cuts ahead. So far, growth and inflation have been fairly resilient, but we anticipate weaker trends in FY24; weak demand should dent pricing power, keeping inflation under control in FY24.

Key advanced economies are not yet showing meaningful signs of slowdown/recession; so, elevated inflation and rising growth will lead to more interest rate tightening followed by rates being held higher for longer, which should lead to growth slowing down in 2023 in these economies.

As a result, equities should continue be under pressure in the near/medium term (we have been cautious to negative since Nifty was at 18.2k and as latest as last week. In case, Indian and global central bankers call out peaking of interest rates at current levels, equities will respond positively. For India, we assign a PE of 18.0-18.5x to our FY24-25 Nifty-50 earnings estimates (assuming a 6% discount to current EPS growth estimates of +18%/+15% in FY24/25), and forecast a Nifty target of 18,500-19,500 for March-September 2024. While the Indian economy should fundamentally be on a strong footing in FY25, the return of a formidable BJP in 2024 elections and controlled inflationary and interest environment can induce markets higher (19,500-20,000), ceteris paribus.

While medium-term challenges will mar stock returns across the board, from a long-term perspective, we remain positive on cyclicals vs. discretionary; sector preference – industrials, cement, defence, financials, and logistics. For others, we will adopt a bottom-up approach in stock selection.

Our base-case scenario for FY24 (India/globe) assumes stable/lower commodity prices, lower inflation trends, higher interest rates (followed by a pause), weaker economic growth (not a steep recession), and stable geo-political conditions.

More evidence of growth emanating from capex and credit cycle (ICICI Securities)

Q3FY23 GDP growth of 4.4% was largely supported by GFCF (gross fixed capital formation) growth of 8.3% while consumption (PFCE – private final consumption expenditure) lagged at 2.1%.

Central government capex spends picked pace in Jan’23 and stands at Rs7.2trn on a trailing 12-month (TTM) basis (43% YoY growth) although state capex growth is lagging at Rs5.5trn on TTM basis (10% YoY growth). Corporate capex of listed space is showing signs of improvement with TTM aggregate capex rising above Rs7trn level.

Non-food credit growth for Feb’23 was robust at 16.5%. Other high-frequency indicators supporting the ‘investment cycle’ include robust core sector growth, electricity demand, thermal PLF and diesel consumption (table-1).

Household investment in real estate, which is a significant portion of GFCF (25% share of GFCF in FY21), is showing signs of a cyclical upswing.

Momentum in Industrial Output Continues (CARE Ratings)

IIP growth improved further to 5.2% in January from 4.7% in December on account of broad-based expansion across sectors. Positive contributions to growth came from manufacturing (2.9 percentage points (PP), mining (1.2pp) and electricity (1.0 pp). Further decomposition showed that the positive momentum effect continued to support industrial activity for the third consecutive month. Core sector output also accelerated to 7.8% in January compared with 7.0% in the previous month led by coal, natural gas, fertiliser, steel, and electricity sectors.

Delving deeper into the manufacturing sector showed that 13 out of 23 categories recorded a y-o-y growth in output. However, weak external demand continued to weigh on the performance of output of some export-intensive sectors like Textile, Apparel and Leather products. Mining and electricity continued to register healthy growth of 8.8% and 12.7% respectively. Moreover, healthy growth over the pre-pandemic level (January 2019) was witnessed in all three sectors.

Analysis of use-based classification showed that consumer non-durable goods continued to record an encouraging performance for the third straight month with a growth of 6.2%. However, output of consumer durable goods remained in the contractionary zone for the second straight month and also remained 14.8% lower when compared to the pre-pandemic level (January 2019). Capital and Infrastructure goods continued to register healthy growth with 11.0% and 8.1% growth respectively in January. Thrust on capital spending and an uptick in new investment projects announced will remain supportive of industrial activity going forward.

India’s sharp outperformance in CY22 has started waning (MOFSL)

Impaired by relatively muted corporate earnings season and severe FII selling (USD2.5b CYTD), India’s sharp outperformance in CY22 has started fading CYTD. Corporate earnings were below our expectations in 3QFY23 led by weak demand and macro headwinds, with Financials and Autos holding the fort once again.

Slowdown in consumption is a material concern if trends do not reverse immediately. However, markets are trading flat YTD and valuations are in their fair value zone with Nifty trading at ~18x FY24E EPS and thus offering room for modest upside if corporate earnings do not see material downgrades ahead.

As the third earnings season of FY23 has culminated, we examine the top-100 stocks by market cap from a consensus perspective and gauge their popularity.

Decoding deposit growth (Nirmal Bang Institutional Equities)

Incremental deposit market share for PVBs continues to be below FY20 levels: Over the past few years, PVBs have gained significant deposit market share, which stood at 31% for FY22 vs 22% in FY16. Moreover, PSBs have lost market share during the same period at 60% for FY22 vs 71% in FY16. Notably, on an incremental basis, the PVBs’ market share before FY20 was ~66%, which declined significantly in FY20 to 33% after the RBI imposed moratorium on YES Bank. As a result, majority of the deposits went to the PSBs and large PVBs. However, the PVBs’ incremental market share post that did not pick up pace significantly and stood at ~43% while PSBs’ incremental market share stood at ~48% for FY22.

Household deposit growth moderates: Households’ deposits continued to contribute the highest towards total deposits at ~63% while corporate, government and NRI deposits contributed 22%/9%/6%. Households’ deposit growth moderated to ~8% in FY22 vs 13% in FY21 (this was induced by covid-19), and stands below the pre-covid growth of 9% in FY20. Notably, since FY19, PSBs have lost market share in household deposits and their market share stood at 66.8% in FY22 vs 71.2% in FY19 while PVBs have captured market share at 26.5% as on FY22 vs 22.7% in FY19. Also, SFBs have registered an increase in household deposits’ market share, which stood at 0.8% as on FY22.

Composition of deposits from Metro regions continues to remain the highest: Deposits from Metro regions has registered a CAGR of 10.1% over FY16-FY22 and constitutes ~52% of the total deposits. Non-metro regions (urban/semi-urban/rural regions) have registered a CAGR of 9.2%/10.8%/10.1% over FY16-FY22 and constitute 21.4%/16.1%/10.6% of total deposits. Moreover, post covid-19, deposit growth from Metro regions has picked up pace and consequently their composition in total deposits has inched back to pre-covid levels at ~52%.

Focus of banks shifts towards branch expansion: Branch expansion registered a CAGR of 3.5% over FY16-FY20. However, during FY20–FY22, branch expansion was muted due to covid-19 and recorded 0.8% CAGR as most banks focused on digital infrastructure. Moreover, FY22 onwards, banks have again shifted their focus towards branch expansion and registered growth of 2.21% YoY in 3QFY23. Banks are largely focusing on Semi-Urban/ Metropolitan regions with branches in these regions clocking a growth of 2.7%/ 2.4% YoY.

Credit Growth Flattens a Tad but Continues to be Robust (CARE Ratings)

Credit offtake rose by 15.5% year on year (y-o-y) for the fortnight ended February 24, 2023. In absolute terms, credit offtake expanded by Rs.15.6 lakh crore to Rs.134.5 lakh as of February 24, 2023 from March 2022. The growth has been driven by personal loans, robust growth in NBFCs, higher working capital requirements due to inflation and an Indian currency depreciation (INR) and lower borrowings from overseas markets.

With a larger base, deposit growth witnessed a slower growth at 10.1% y-o-y compared to credit growth for the fortnight ended February 24, 2023. Deposit rates have already risen and are expected to go up even further due to elevated policy rates, intense competition between banks for raising deposits to meet strong credit demand, a widening gap between credit & deposit growth, and lower liquidity in the market. The short-term Weighted Average Call Rate (WACR) has reached 6.72% (as of February 24, 2023) increasing by 104.0% y-o-y and 86.0% from March 31, 2022, due to a rise in policy rates and lower liquidity in the system.

Credit growth has remained robust even amid the significant rise in interest rates, and global uncertainties related to geo-political, and supply chain issues. The growth has been broad-based across the segments and is expected to be in the mid-teens in FY23. Personal Loans and NBFCs have been the key growth drivers for FY23. Meanwhile, a slowdown in global growth due to rising interest rates, and rate hikes in India could impact credit growth.

CPI remains above RBI’s upper band, WPI cools down (BoB)

CPI inflation eases marginally: CPI inflation data edged down modestly to 6.4% in Feb’23 after moving up to 6.5% in Jan’23. For the second-month in a row, CPI data came in above RBI’s upper tolerance band. Food inflation virtually remained steady at 5.9% in Feb’23. Stickiness of core inflation persists.

Modest changes in Food inflation: CPI food index continued to remain elevated at 5.95% in Feb’23 against 6% in Jan’23, on YoY basis. Amongst major food items, sharpest pace of increase was led by fruit prices which moved up to 6-month high at 6.4% in Feb’23 from 3% in Jan’23. Cereals continued to clock double digit inflation (highest in this series) in line with expectation at 16.7% from 16.3% in Jan’23. Even milk prices also rose to 9.6% (8-year high) in Feb’23 from 8.8% in Jan’23. Pace of disinflation in vegetable prices went down from -11.7% in Jan’23 to -11.6% in Feb’23. Notably, 5 out of 12 broad group of food and beverage noticed inflation above 6%. However, inflation of eggs, meat & fish, spices and pulses registered a fall in Feb’23.

Core CPI (excl. food and fuel) remained sticky at 6.1% in Feb’23 as well. Amongst major items of core, housing inflation accelerated to more than 3-year high to 4.8% in Feb’23 from 4.6% in Jan’23. Health inflation also rose to 10-month high at 6.5% in Feb’23 from 6.4%. However, some comfort has been seen with lower prices of gold contributing towards personal care and effect inflation going down to 9.4% from 9.6% in Jan’23. Amongst the 8 major broad group of core inflation, 4 of the items have remained above 6%.

Fuel inflation: Fuel prices eased further to 9.9% in Feb’23 from 10.8% in Jan’23. On sequential basis though, fuel inflation had inched up to 0.1% in Feb’23.

Headline WPI moderated to 25-month low of 3.9% in Feb’23 (BoB est.: 4.1%) from 4.7% in Jan’23. Food inflation eased only a tad to 2.8% in Feb’23 from 2.9% in Jan’23. Amongst these, inflation eased in food grains (11.8% versus 13%), eggs, meat & fish (1.5% versus 2.2%) and spices (12.5% versus 16.1%).

Within food grains, cereal inflation moderated (13.9% versus 15.5%) on account of wheat (18.5% versus 23.6%). However, paddy inflation continued to inch up (8.6% versus 7.2%). Inflation in pulses was also seen ticking up in Feb’23 (2.6% versus 2.4%). At the international level, World Bank’s pink sheet data shows that global paddy prices have begun to moderate in Feb’23 (15% versus 18% in Jan’23) and wheat prices are seen contracting (-3% versus 0%). Domestically, in case of vegetables, contraction in prices was slower (-21.5% versus -26.5%), while in case of fruits, pressure is seeing building up with inflation at 7% in Feb’23 versus 4.1% in Jan’23.

Aluminum—bleak demand and fading cost support (Kotak Securities)

Aluminum—bleak demand environment: Aluminum prices have been on a roller coaster ride, with an 8% decline in the past one month after a strong 25% rally in the previous two months. Demand environment continues to disappoint, with the world ex-China demand witnessing a 9% yoy demand decline in 4QCY21 and similar de-growth is expected in 1QCY23, mainly led by weakness in Europe and North America. In China, there is no evidence of strong demand pickup after the new year holidays, with all hopes of recovery now from 2QCY23. MJP, the Japanese physical premium (the most relevant physical premium benchmark for Indian aluminum producers), remains on a downtrend at US$85/ton in 1QCY23 versus US$99/ton in 4QCY22 and US$177/ton in 1QCY22, which reaffirms the bleak demand environment.

Cost support is fading with declining thermal coal and gas prices Aluminum spreads remain near a 6-month high, despite the recent metal price correction. Thermal coal prices have corrected 30% CYTD 2023 and underperformed aluminum prices. Furthermore, with the declining European gas prices, the supply risk from Europe is behind us. We note that the spot aluminum spreads are at US$900/ton, 16% higher than 5-year average of ~US$775/ton. We see limited risk of further supply curtailments on declining cost support, as spot prices are above 90% percentile of the cost curve.

Market deficit is behind us We marginally cut our demand and increase our supply estimates for CY2023-25E and now estimate a surplus of 142/73/69 k tons in aluminum market in CY2023/24/25E versus a deficit earlier (refer Exhibit 2). We expect prices to remain range-bound at current levels, with a forecast of US$2,450/2,400/ton for FY2024/25E. A combination of weak demand and reducing supply risk has increased global inventory to 10.3 mn tons, +9% yoy at a 20-month high.

Remain cautious on aluminum plays in equities Indian aluminum producers should benefit from higher spreads, sequentially in 4QFY23 on improved domestic coal supply and higher metal prices. However, we expect margins to remain range-bound along with LME prices over FY2024-25E.