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.