Vijay Kumar Gaba

Economy: Activity holds up; strong sequential rebound led by seasonality (Nirmal Bang)

Early data for March’23 indicate that 78.1% indicators were in the positive territory on YoY basis, up from 68.8% in Feb’23. Final data for Feb’23 indicate that 71.4% indicators were in the positive territory on YoY basis.

On a sequential basis, there was a sharp rebound in March’23, led by seasonality. Around 75% indicators were in the positive territory in March’23, up from 50% in Feb’23. Final data for Feb’23 indicate that 34.7% indicators were in the positive territory.

Urban unemployment edged up to 8.5% in March’23 from 7.9% in Feb’23. Rural unemployment rose to 7.5% in March’23 from 7.2% in Feb’23.

Rural wages have sustained their rebound since mid-FY23 and rose by 8.1% YoY in Jan’23 vs. 7.6% YoY jump in Dec’22. In other rural indicators, tractor sales continued to hold up, growing by 13.7% YoY in March’23 vs. 20% YoY growth in Feb’23 (up by 32.9% MoM). Two wheeler (2W) sales grew by 9% YoY in March’23 (up 8.8% YoY in Feb’23) and were up by 14.2% MoM.

Motor Vehicle sales grew by an estimated 12.8% YoY in March’23 and were up by 12.2% MoM. Commercial Vehicle (CV) sales grew by 12.8% YoY in March’23 (up 3.2% YoY in Feb’23) and were up by 27.8% MoM. Passenger Vehicle (PV) sales grew by 4.5% YoY in March’23 (up 11% in Feb’23) and were flat MoM.

The S&P Global Manufacturing PMI improved to 56.4 in March’23 from 55.3 in Feb’23. Manufacturing as measured by the Index of Industrial Production (IIP) grew by 5.3% YoY in Feb’23.

The S&P Global Services PMI moderated to 57.8 in March’23 from a 12-year high of 59.4 in Feb’23. Traffic indicators moderated from peak levels or were largely flat. Diesel consumption was up by 1.1% YoY in March’23 (up 7.4% YoY in Feb’23) and petrol consumption was up by 6.8% YoY in March’23 (up 8.8% YoY in Feb’23).

Banks’ credit-to-deposit ratio continued to inch up and stood at 75.8% in March’23. Bank’s non-food credit growth continued to moderate gradually and stood at 15.4% YoY in March’23 (up 15.9% YoY in Feb’23), although it was up 1.8% MoM. Deposit growth continued to remain under pressure at 9.6% YoY in March’23 but it was up 1% MoM.

Near-term outlook for economic activity remains uneven (ICRA)

External demand is expected to be cautious following the ongoing geopolitical tensions and continuing Monetary Policy tightening by major Central Banks of some advanced economies, which could weigh on merchandise and services exports.

The GoI has enhanced high-multiplier capital spending in the Union Budget for FY2024. The large pipeline of infra projects, scheduled to be completed in FY2024, will aid in pushing project commissioning and thereby support investment demand. Timely execution remains the key.

Private sector capex is likely to pick up in FY2024 amid the rise in value of new project announcements, improving capacity utilisation levels, PLI schemes and GoI initiatives pertaining to clean energy. Besides, the GoI’s capex push has the potential to ‘crowd-in’ private capex.

Consumption of services remains quite robust while demand for goods is somewhat uneven. A sustained moderation in inflation would be the key to support consumption of low- and middle-income households.

India strategy: Behind the relief rally are incipient concerns on banking (Systematix)

India’s ranking moves up amid optimistic projections, while ROW factors in a recessionary scenario: Following the relief rally post the recent global banking debacle, our global ranking for Nifty has moved up from 13 to 6 since the end Feb’23 on the back of only a modest downgrade F1 EPS by 0.5% compared to the pervasive cuts in expected earnings and ROEs for major global benchmark indices reflecting the deepening worries about a global recession. Notably, European benchmarks, China, and the US have seen sharper declines. India’s upgrade is despite rich valuations- Nifty (49% higher than the global average F1 PE of 14.4x) and Sensex (57% higher). India’s growth optimism embodies a decoupling thesis of sorts, which is unsustainable.

India earnings outlook: Further earnings downgrade potential remains: We expect further downside surprises to earnings due to a) lower than expected margins (as also demonstrated by initial 4Q results), b) deceleration in bank credit growth, c) slowing urban demand, and d) weak real GDP growth (4.4% in 3QFY23) amid global spillovers. Rural demand is on a moderate revival path. Hence, the forward consensus projection for NIFTY EPS growth of 14.3% CAGR (FY22-FY25E) is significantly optimistic; we continue to expect downgrades.

Episodic bounties for Indian banks dissipating now: Extending our earlier UW view on banks and BFSI sectors in general, our latest analysis and evidence fortify prospects of deceleration in lending growth and re-emergence of NPA cycle. Sectoral allocation of bank lending for Feb’23 reinforces the evidence that there is a broad-based deceleration in industrial lending even as lending to retail and NBFC remains robust. We believe with a lag the latter will also see a moderation. The slowdown in mortgage lending could be a precursor. In a scenario of credit growth decelerating to 10% from the current 15% and retail inflation falling from 6.7% to 5%, the GNPA ratio could rise by 200bps!!

Rising probability of rural wage-price; OW on consumption remains: The structural rise in dependence on the Agri sector, trend rise in cereal consumption, and the weather anomalies point towards the sustenance of rising wage-price spiral and higher terms of trade for the Agri sector. The expected drags on non-agri rural from lower remittances from urban areas and cutback in rural allocation in the Union Budget are juxtaposed against the imperative of the upcoming state and general elections. These will eventually force populism favoring the rural sector, Hence, our OW views on staples and agri sector remain supported.

Steel industry faces cost-competitiveness test as EU implements CBAM (CRISIL)

The cost of India’s steel exports to the European Union (EU) could rise as much as 17% following full implementation of the Carbon Border Adjustment Tax Mechanism (CBAM), which mandates stringent disclosures and purchase of carbon credits to offset the impact of emissions. Accounting for greenflation, which will drive overall steel prices higher, the total impact could be as high as 40%.

Under the mechanism, which the Council of the EU and European Parliament have agreed to implement from October 1, 2023, importing EU nations will seek quarterly disclosures across seven emission-intensive sectors from April 2024, and to gradually penalise emission differentials between 2026 to 2034 through purchase of carbon credits to bridge the cost differential with steel produced in the EU.

The seven sectors – iron and steel, aluminium, cement, fertilisers, electricity, as well as chemicals and polymers — account for ~35% of India’s exports to the EU in the merchandise space.

The EU move is a part of a long series of global emission-reduction measures implemented in recent years — such as COP26, under which India committed to Net Zero by 2070, and COP27, under which the milestone targets have been made more aggressive.

To be sure, the “common but differentiated responsibilities” formalised under United Nations Framework Convention on Climate Change have placed enhanced flexibilities on developing economies, providing them an opportunity to choose differentiated timelines for meeting Net Zero goals.

However, regulations such as CBAM, through which the EU wants to prevent an increase in outsourcing of product manufacturing to countries where implementation linked to carbon emission reduction is slower than in the EU — plugging carbon leakage as it were — may go a step beyond and force specific industries to expediate implementation or face heightened risk for business loss or cost-competitiveness.

Under CBAM, exporters will need to make quarterly reporting of emissions starting October 1, 2023, and from December 31, 2025, buy Emissions Trading System (ETS) certificates for their greenhouse gas emissions.

In the absence of a carbon-neutral technology, industries have been allocated free allowance starting at 100% in 2025 and ending at 0% by 2034. The ETS tax would be gradually applicable to the portion that does not enjoy the allowance.

Dollar’s rate advantage is narrowing (ING Bank)

The week has started with the market leaning again in favour of European currencies and the dollar losing some ground. The price action in short-dated bonds showed a reinforcement of European hawkish bets while the whole US Treasury yield curve inched lower.

While a 25bp hike next week by the Fed does not look under discussion, Fed rate expectations have remained rather un-anchored and volatile when it comes to future policy moves. This continues to leave ample room for speculation about Fed Chair Jerome Powell’s tone in terms of future guidance. While data will clearly play a role, recent developments in the US banking sphere are creeping back onto investors' radars. First Republic Bank reported a larger-than-expected drop in deposits in its quarterly results, sparking a new round of heavy selling in the stock after a prolonged period of calm.

Should there be fresh instability in US banking stocks, dovish Fed bets may gather more momentum, and despite its safe-haven status, the dollar could stay on the back foot to the benefit of European currencies backed by hawkish central banks and without an excessively high-beta to sentiment.

Engineering and Capital Goods (Nuvama)

India’s capex landscape has been growing energetically since FY19, evident in governmentspending data and nominal GDP growth (Exhibit 1). This begs the question– where is the money being spent? Our study of India’s capex data notes a definite uptick in ordering across ‘three key legs’ of capex growth – Railways, Renewables and Power T&D coupled with conventional industrial/infra capex. We also observe a strong degree of conviction in opportunities in new age frontiers such as EV ecosystem, data centres and defence. This brings to the surface multi-year growth opportunities in transmission and railways – each potentially bagging meaty orders (INR120–150bn annually for HVDC transmission; INR250–350bn annually for locos plus trainsets product value for railways).

Transmission: The power demand-supply dynamic in India (link) clearly spells out that, if India is to avoid a power deficit by FY28–30, its plan of adding 30–40GW/year of renewable energy (RE) comes to stand as more of ‘a need’ than ‘a choice’. The natural deduction is that this will need to be connected, and to connect RE at this scale an equally large transmission capex is imperative (INR2.4tn as per CEA estimates; Exhibit 6). Given the backdrop, we estimate PGCIL’s capex (a barometer for India’s transmission capex) will likely double over the next two–three years. Hence, a fresh capex cycle in power transmission has already begun after a gap of ~4–5 years. Capex is expected across high voltage (rising CAGR) and medium/low voltage range (bulk of volumes), at the ISTS level. CEA estimates INR2.4tn to be spent in this area over FY24–30. India plans to add transmission lines/substations in the 400–800KV range, along with four large HVDC projects (worth approx. INR1tn).

Railways/new age capex: The mega push in rail capex will benefit the entire industrials value chain over this decade. Cyclically strong industrial capex (conventional segment) along with new-age areas such as EV ecosystem, data centres, RRTS/metros, wastewater management, warehouse and logistics, defence, smart infra etc. will continue to drive order inflows especially in low/medium voltage T&D products and relevant equipment suppliers through the next decade.

The growth story continues with > 1,100 loco orders expected annually for the next 2–3 years (vs. 700 till FY21). Of ~1,000 VB train sets, ~302 have been ordered and 600–700 more VB train orders are expected in future. Siemens is present across locos and trainsets (partner required) and we factor at least one more large loco/train set order by FY25E (INR100bn).

Industrial equities across our coverage universe have significantly re-rated over the past ~12–24 months, led by high industrial capex/infra momentum, which is evident in order inflows growth (across sector) and margin expansion (not yet broad-based). Most MNC equities  are currently trading above their long-term medians.

FMCG - Macro situation yet to recover (IIFL Securities)

For FMCG to grow well, good income growth in the low-income consumers is required. These consumers have two main sources of income viz Farm income and wages. Previously, when Farm income and wage growth is robust, FMCG companies tend to post strong sales growth and vice versa.

Past 20 years can be divided into 3 periods: FY00-06 when sales growth was weak, FY07-14 when it was strong and FY15-20 when it was weak again. The strong/weak periods of FMCG growth coincided with strong/weak periods of Farm inflation and Wage inflation.

Wage growth improving: While writing our CY23 outlook, the real rural wage growth (for Sep ’22) was -2.7%. It has now improved to -0.5% (for Jan ’23), but is still not healthy enough to boost growth. Moreover, Non-agri real wage growth is even poorer at -1.4%, denoting slow pickup in economic activity outside of agriculture. The improvement over past few months is led by both nominal wage growth improving and inflation moderating. While currently still lacklustre, the trend if continued will be positive for FMCG players. We need real wage growth at ~2% or higher to sustain good volume growth.

Farm inflation moderating: While real wage growth has shown some small improvement, our proprietary IIFL Farm index has been lacklustre since past few months, and is showing a 3% YoY inflation in Feb’23. Vegetable prices, down ~20% is the main reason, despite cereals and milk prices witnessing double-digit inflation. Moreover, assuming that prices remain stable at current levels, YoY inflation will trend lower than the current 3% for each of the next 12 months.

We need further sequential inflation to pick up for the YoY growth to continue meaningfully. Over the past 3-5 months, the index has been largely flat. For FMCG growth to be strong, we need Farm inflation equal to or higher than CPI.

How to play the sector: Visibility of a good growth is better for Food companies in near term. Investors with short-term horizon can invest in Food companies, whereas HPC investors may require a slightly longer horizon. We recommend that investors start off with large companies currently in absence of visibility on the time and extent of recovery, and then shift into smaller companies in inverse proportion to the strength of the expected recovery as and when macro indicators suggest it. This is because large companies are better suited to weather the storm on account of their strong brands, better management talent, systems and processes. Smaller players tend to have a leverage to recovery as consumers as well as wholesalers increase the repertoire of categories and brands when demand conditions are robust.

Microfinance Industry Beats Covid Blues, Likely to Grow by 25% in FY24 (CARE Ratings)

The Microfinance industry (MFI) experienced a growth spurt in 9M FY23, expanding at a rate of 12% Y-o-Y due to a favourable macroeconomic climate and renewed demand from tier-III cities, which has led to a surge in disbursements over the past few months. NBFC-MFIs have surpassed banks in the overall microfinancing landscape, constituting approximately 38% of the total outstanding microfinance loans as of December 31, 2022, compared to 36% for banks.

CareEdge Ratings anticipates growth momentum to continue, with the NBFC-MFI portfolio growing at a rate of 20%-25% over the next 12-18 months. However, an increase in interest rates, high inflation, or another wave of Covid-19 could potentially impede economic growth and, as a result, impact the Microfinance sector adversely.

The removal of the lending rate cap by the Reserve Bank of India (RBI) has enabled MFIs to engage in risk-based pricing, which has boosted net interest margins (NIMs) and, in turn, increased returns on total assets (RoTA).

Credit costs have declined from their peak in fiscal year 2021 but still remain higher than pre-Covid levels, with a portion of the restructured book slipping into NPA. We expect NIMs to continue improving, resulting in RoTA rising to approximately 3.25% for fiscal year 2024, aided by controlled credit costs of approximately 2.5% for the same year.

Asset quality, although on an improving trend, still remains moderate as compared to the pre-Covid level owing to additional slippages arising from the restructured portfolio. The MFI sector has taken the cumulative impact on the credit cost of around 13% of average assets from FY21 to H1FY23 due to Covid-19. However, with an improving collection efficiency trend, GNPA is expected to improve to 3.5% and 3% in FY23 and FY24 respectively from a peak of 6.26% for FY22.

In terms of capital structure, NBFC-MFIs have managed to raise ₹3,010 crore of equity in 9MFY23, compared to ₹1,506 crore and ₹1,431 crore in FY2021 and FY2022, respectively, indicating a renewed interest from investors.

Nevertheless, due to the current global turbulence, investors are likely to exercise greater caution and selectivity in the future. Additionally, with increased support from investors and rising disbursement levels, the gearing level was 3.7x and 3.6x as of March 31, 2022, and December 31, 2022, respectively. We anticipate that the gearing level for the MFI sector will moderately increase to around 3.9x by March 31, 2024.

NBFC-MFIs Outpace Banks

The microfinance industry has experienced a shift in market share, with NBFC-MFIs overtaking banks for the first time in four years. While banks held a dominant position during the Covid-19 period, the growth rate of NBFC-MFIs has now surpassed that of banks, resulting in NBFC-MFIs commanding a higher market share in the overall microfinance sector. As of 31st December 2022, NBFC-MFIs contributed around 38% to the outstanding overall microfinance loans, compared to banks' 36%. With a growth rate of around 20% till 9MFY23, NBFC-MFIs are currently leading the industry.

FY23 sales highest ever, PVs lead, 2W lag

In FY23, the sales of passenger vehicles in India seems to have reached an all-time high of 3.9mn units, recovering fully from the Covid induced slow down in the previous two financial years. In the next three years the sale of passenger vehicles in India is estimated to cross half a million mark. Two-wheeler and commercial vehicle sales have been slow to recover. These are expected to reach their all-time high levels in FY24e.

Overall, 21.4million units of automobiles are expected to have been sold in FY23. The number is expected to increase to 24.7mn in FY24e and 28.7mn in FY25, registering an annual growth rate of over 15%.

Besides local sales, Indian manufacturers exported about 3.7mn units of two wheelers and about one million units of other vehicles to other countries in FY23.

Government pushing for faster adoption of EVs

The government has identified automobile carbon emission as one of the primary sources of air pollution in India. Decarbonization of the transport industry is therefore emphasized as a key focus area in our commitment towards climate change goals. Besides, to enhance energy security and stabilize the trade account, it is considered important to reduce reliance on imported fossil fuel for consumption by vehicles with traditional internal combustion engines.

To meet these multiple goals, the government has been pushing for faster adoption of electric vehicles. As per a recent report by KPMG, “The government, in its 2023-24 Budget, allocated INR5,172 crore to Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME-2) subsidy outlay, a 78 per cent jump than the amount earmarked in the previous Budget. The FAME-2 subsidy accounts for 85 per cent of the total Budget allocation of INR6,145 crore for the Ministry of Heavy Industries.” The incentives have resulted in decent growth in sales of electric 2Ws and 3Ws. In other segments the growth is picking up slowly. In FY22, India sold 326,000 electric 2Ws; 178,000 electric 3Ws; 18,000 electric cars and 2,000 electric buses. KPMG estimates the growth has accelerated from FY24e may see acceleration in adoption of EVs in cars, buses and LCVs.

New highways, better roads to encourage road transport

The government has approved a total of 34,800kms of highways to be constructed  

Over 12000kms of expressways have been completed under Bharatmala (phase 1) and various balance work NHDP projects till December 2022. Out of this over 25,000kms have been awarded and over 12,000kms have been completed. The remaining 9500 is expected to be awarded in FY24-25. NHAI has also started the process of awarding 8000kms under Bharatmala phase 2A.

Besides this some large projects at state government levels may also soon kick started. As per a recent Kotak Securities report, “Large bids from states are also under evaluation phase such as Hyderabad outer ring road project (Rs70-80 bn upfront payment), city ring road project in Bangalore (Rs100 bn greenfield project), Pune ring road greenfield project (Rs394 bn in packages), Jalna Nanded expressway (Rs190 bn), multi modal corridor (Rs520 bn) and another stretch of Mumbai coastal road (Rs100 bn). Bidding for these projects can be finalized in the next 6-12 months.”

This of course over and above the accelerated road development and improvement. These projects involve several economic corridors, national corridors and expressways. These will ensure accelerated industrial development and faster connectivity.

Obviously, this will lead to much higher demand for automobiles – both personal and commercial in the coming years.

Some observations

Higher demand for commercial vehicles is definitely a direct reflection of the overall economic growth of the economy. But the sharp rise in sales of personal vehicles needs to be evaluated from various viewpoints.

·         There could be a strong argument that India still has very low per capita personal vehicle ownership as compared to peer economies. But this argument needs to be tested in the light of the affordability quotient of an average Indian household. Given that over 800mn Indians are dependent on subsidized food, the denominator used for calculating per capita ownership may need some adjustments.

·         The mix of personal vehicle sales in recent years has shifted notably in favor of luxury and premium vehicles, while base models, 3Ws and LCVs have witnessed marked slowdown. This could be a sign of rising inequalities and stress in the SME segments.

·         In the past couple of decades, cars and 2Ws have seen a sharp rise in commercial use. App based taxis and e-commerce delivery have been two notable segments of demand for vehicles.

·         Internal city roads and parking infrastructure has not improved in tandem with the rise in vehicle population. Most Indian cities are crumbling due to overwhelming traffic.

·         Metro rail networks in some cities have improved the overall public transport infrastructure. However, poor last mile connectivity has led to much higher demand for 3Ws, especially e-rickshaw, increasing chaos and traffic delays. City bus infrastructure has not shown much improvement beyond a few metro cities.

·         The driver training has been mostly ignored. Most drivers and even driving instructors appear to be mistaking “knowledge to operate the vehicle” for “driving skills”. This is leading to a material rise in the cases of road accidents and road rage.

·         The management of highways and expressways is extremely poor. Most expressways lack basic facilities. Rescue operations take a long time in cases of breakdown and accidents. The equipment and personnel to regulate errant drivers are grossly inadequate.

·         Vehicle ownership is also becoming a serious vanity issue in society. In numerous cases the decision to buy a vehicle is driven by “status” consideration rather than a “need” consideration. Motorcycles and SUVs are becoming basic “dowry demands” in traditional marriages. It is observed that in many cases these demands are made despite poor affordability of the bridegroom to operate, maintain and park the vehicle.

The point is that the rise in personal vehicle ownership may not necessarily be an encouraging sign for the economy and society in all cases. The government needs to do a comprehensive impact analysis and if required consider an appropriate regulatory framework.

Notably, China has reportedly recorded a decline in population in the year 2022, as compared to the previous year. This could possibly be due to Covid related restrictions and deaths, but there is no denial that Chinese population growth has been plateauing for a few years, forcing the government to shed its legacy ‘One Child’ policy and encouraging people to have more children. In respect of India, the official data is not available as no official Census has been conducted since 2011. The data is therefore based on various estimates and extrapolations.

Interestingly, The Diplomat, reported that “India’s population has consistently been undercounted. For example, India’s last census, held in 2011, missed 27.85 million people. On the other hand, China has obfuscated its population decline for many years. Yi Fuxian, a senior scientist at the University of Wisconsin-Madison, told Time magazine that “China’s population began to decline 9-10 years earlier than Chinese officials and U.N. projections, meaning that China’s real demographic crisis is beyond imagination…””

China has however downplayed the demographic concerns. Speaking to the media, Chinese Foreign Ministry spokesman Wang Wenbin emphasized that "when assessing a country's demographic dividend, we need to look at not just the size but also the quality of its population; size matters, but what matters more is talent resource. Nearly 900 million out of the 1.4 billion Chinese are of working age and on average have received 10.9 years of education.”

Notwithstanding the statistical argument and the Chinese view, I have always emphasized on the need to focus on demographic accountability also, while accounting for the demographic dividend. No demographic dividend could accrue to us if we fail to give equal importance to demographic accountability also.

If I may reiterate, what I have been saying for the past many years.

Numerous fables have been narrated to eulogize the demographic characteristics of India. Many themes and strategies have been built around the young demographic profile of 1.25bn Indians. Almost all these stories and strategies recognize the young Indian as a great opportunity - "Demographic dividend" for the Indian economy. I have however not come across any presentation that classifies this demographic profile as the solemn accountability and responsibility of India to the world.

The global community has always valued resource rich nations and expected them to behave in a responsible manner to preserve the global order. The capital rich western world has been expected to help the poor and starved of the world. The world looked forward to them to fund technological advancement, preservation of cultural heritage, assisting global growth and development. Even after taking full cognizance of the allegations of imperialism and suppression, I believe that financially rich communities have worked for the betterment of human life by funding technological innovation, life science research & development, productivity enhancement, and development assistance to the economically lagging world.

Similarly, nations rich in natural resources like minerals etc. have been expected to prospect and exploit these resources in optimum manner to assist the sustenance and growth of the global economy.

The point is that since India now possesses the largest pool of prospective workers for the world, should it not be the responsibility of the government to prospect, grow, and develop this resource for the benefit of the global community!

This is even more pertinent in the context of the current global financial conditions. In places like Europe and Japan the root cause of the crisis could be traced to the aging demographic profile. China is also likely to join the club soon. Under the circumstances it is the responsibility of India to provide educated, skilled and trained workforce to the global economy.

A number of research papers and surveys have shown that (a) Child and mother nutrition level in India is sub-standard consequently child mortality rates are poor; (b) higher and professional education standards are extremely poor consequently a large number of Indian graduates are unemployable even in routine jobs; (c) There is acute shortage of competent scientists to scale up research and development (R&T) activities to make Indian businesses competitive at global stage.

"Skill India" and "Make in India" are noble ideas for human resource development. But we need to make sure that these do not end up prospecting and developing only blue collar low skilled workers. In that case India will not only fail in its responsibility to the global community but also slither back into the lower orbit of economic development like in 1950-80.

Banks’ ongoing technology investment programmes remain intact: Citi management mentioned in their earnings call that their overall technology expenses grew 12% YoY in Q1CY23. Management acknowledged that these investments have driven a significant increase in expenses, but believes they are crucial to modernise the firm and position Citi for success in the years to come. Citi’s ongoing technology investments include consolidation of its platforms, modernising IT infrastructure, improving data and IT security, and investing in data to create advanced decision-making and risk management capabilities. Citi is also leveraging cloud-based solutions to modernise its systems and eliminate manual processes and operating costs over time. JP Morgan management mentioned the 16% YoY increase in their expenses last quarter (Q1CY23) included technology investments among other things.

Banks are investing in technology for efficiency gains: Wells Fargo has been investing in technology for improving efficiencies in its consumer banking business for the last 1.5 years. These efficiency initiatives have led to headcount reduction by 9% YoY and branch reduction by 4% YoY in Q1CY23. But there is still considerable scope for further efficiency gains as per Wells Fargo management. Company is also investing in new tools and capabilities to provide better and more personalised advice to customers. It continues to enhance its mobile app. Its mobile active users were up 4% YoY in Q1CY23. PNC Financial Services (among the top-10 banks in the US) has set itself a goal to reduce costs by US$400mn in CY23 through its continuous improvement programme, which funds a significant portion of its ongoing business and technology investments.

US banks’ commentaries on recession expectations: Citi management believes the US is likely to enter into a shallow recession later this year. JP Morgan CEO Jamie Dimon also believes the short-term rate curve indicates higher recessionary risk. PNC Financial Services is expecting a recession starting in the second half of CY23, resulting in a 1% decline in real GDP. But despite recession expectations, their commentaries suggest they are willing to continue with their ongoing technology investments.

Indian economy: Goldilocks redux (ICICI Securities)

Industrial output accelerated to 5.6% YoY growth in Feb’23. Manufacturing strengthened to 5.3% YoY growth, offsetting the deceleration in electricity (+8.2% YoY) and mining (+4.6% YoY). Industrial output grew 5.4% YoY in Jan-Feb’23, considerably faster than its 2.1% YoY growth in Jul-Dec’22. Similarly, the 4.5% YoY manufacturing growth in Jan-Feb’23 marked a sharp pickup from its 1.4% YoY expansion in Jul-Dec’22. Although S&P’s manufacturing PMI (purchasing managers index) has a low correlation with industrial growth, its strong 56.4 reading for Mar’23 suggests a further acceleration during the month. Real GDP is thus likely to strengthen to 6.2% YoY growth in Q4FY23, ensuring 7.3% growth in FY23, outpacing the 7% officially estimated growth rate.

Consumer non-durables (+12.1% YoY), capital goods (+10.5% YoY) and infrastructure/construction goods (+7.9% YoY) led the industrial acceleration in Feb’23. Consumer non-durables ended a 2-year slump, growing 8.2% YoY in Dec’22-Feb’23, corroborating other evidence of a sharp pickup in rural consumption. However consumer durables declined 4% YoY in Feb’23, primarily because of the  persistent weakness in textiles and apparel, which offset the strong rebound in motor-vehicle output (+8.2% YoY). The weakness in key labour-intensive subsectors (also evident in the decade-long near-stagnation in textile and garment exports) is worrying from a longer-term perspective, especially given their employment potential.

CPI inflation receded to 5.66% YoY in Mar’23, moving back within the RBI’s target range of 2-6% after being above 6% YoY for a couple of months. Food and beverages inflation moderated to 5.11% in Mar’23 (a 15-month low), energy inflation to a 12-month low of 8.9% YoY, and transport and communication prices to a 40-month low of 4% YoY. Although the RBI retained its stance of ‘withdrawal of accommodation’ at its monetary policy committee (MPC) meeting last week, M3 growth of 9% YoY (as of 24th Mar’23) was already sufficiently restrictive to bring inflation back in line. Although other central banks (US Fed, ECB, BoE) will need to continue raising policy rates (since their inflation rates remain far above their targets), we believe the RBI has won its battle against inflation, and will not need to raise its policy repo rate any further.

Rise in export volumes (Axis Capital)

March merchandise trade deficit rose by USD 3.5 bn to USD 19.7 bn (from downwards revised 16.2 bn in February) despite USD 1.7 bn sequential improvement in NONG exports as imports in value terms saw sharp increase across the board. Overall, the sequential increase in imports was primarily driven by electronics (32%) crude oil (21.2%) and gold and precious stones (23.7% combined). While exports saw a sharp decline in value terms (-13.9% YoY), volume estimates for trade paint a different picture, with a 5.1% improvement in exports by volume terms. This improvement was largely due to engineering goods.

Meanwhile, services exports are holding up well at USD 13.7 bn in March. There is an element of seasonality in the deterioration of the March trade deficit. Even then, goods and services combined deficit for March 2023 quarter at USD 12 bn is lower than USD 15.7 bn seen in March 2019 quarter. CAD outlook for 2023-24 continues to look good with our estimate at 2% of GDP which assumes monthly goods & services trade deficit run rate at USD 10 bn against USD 6 bn seen in March 2023.

Strong El Nino could hamper real income growth (Axis Capital)

Weather forecasters are likely to mark 2023-24 as an El Nino year (see), which typically increases agricultural stress in many parts of the world and could adversely impact wheat and oil palm output. Some crops like rice and soyabean are insulated on a global scale from El Nino. History shows that severity of El Nino matters; India’s official weather forecaster is predicting normal monsoons as of now.

Wheat and oil palm production most at risk from El Nino Strong rainfall deviations have an impact on agricultural output growth in India. However, there is little evidence of lasting impact on CPI or rural wages. However, since India is now a key exporter of cereals (USD 1 bn per month) and imports most of its edible oil needs (USD 1.7 bn per month), global supply shocks to wheat and palm oil output is likely to increase inflation risks. The FAO already predicts a 1.1% decline in world cereal stock in 2023 due to poor expectations from the Black Sea region. A strong El Nino could reverse the decline in global cereals and edible oil prices that we have seen recently. We are already seeing signs of rural wage growth peaking which means improvement in income in real terms will have to be led by swifter fall in price inflation. A strong El Nino would be a setback for real income improvement in rural India and among urban poor.

FMCG and agrichemicals most impacted by El Nino We looked at sales growth during El Nino events since 2002 for listed corporate universe. We can see a discernible drop in growth during El Nino years only in the case of FMCG and agrichemicals. However, we don’t see evidence of drop in growth for durables like electronics and automobiles. This assessment could change in future events due to improving penetration of durable goods in non-metropolitan India. As of now, rural demand indicators are holding up and will likely trend upwards due to two factors: (1) strong urbanization leading to tighter rural labor markets; therefore, higher inward remittances and (2) firms passing on input cost declines leading to swifter pace of real income growth.

FY24 Cement Outlook: Demand to Grow 8%-9%; Profits to Recover (India ratings)

Government’s Sustained Infrastructure Thrust Key Demand Driver: Ind-Ra expects cement demand to grow 8%-9% yoy in FY24 (FY23 (estimated (E): 9%, five-year CAGR: 4.5%), with demand to GDP growth multiplier rising to 1.4x-1.5x (FY23 (E): 1.3x). The agency opines that the government’s infrastructure push ahead of the general elections in 2024 would be the growth driver like in the past three pre-election years where the GDP multiplier averaged 1.5x compared to the long-period average of 0.9x. Besides, a resilient agricultural sector aided by four consecutive normal monsoons and focus on completion of affordable housing projects would aid cement demand from housing, albeit at a lower rate as inflationary pressures hurt affordability. However, an adverse weather event such as El Nino impacting monsoons could pose a downside risk. The estimated 9% growth in FY23 is marginally higher than the 8% growth projected by Ind-Ra in its FY23 Outlook.

Capacity Utilisations to Remain Below 70% amid Large Expansion Pipeline: The cement sector continues to witness a spate of capex announcements in the anticipation of the medium-term demand growth and market share gains. Ind-Ra believes 75% of the announced expansion of around 150 million tonnes is actually likely to come on stream over FY23-FY25. With the supply growth rate broadly in line with demand growth, Ind-Ra expects capacity utilisations to remain at 67%-68% in FY24 (FY23 (E): 67%, FY22: 65%). Furthermore, with large part of the additions in the form of grinding units, clinker utilisations are likely to remain 800-1,000bp higher than cement utilisations, indicating a higher effective utilization rate.

Higher Consolidation Ahead; Large Inorganic Potential in South: Also, the sector is likely to witness increased consolidation in the near-to-medium term, given the widening gap between leading and small players amid a tough environment and the aggressive medium-term capacity targets of large players that are unlikely to be achieved organically with the available resources. The share of top 10 companies also increased to 71% in FY23 (FY20: 69%) and is likely to increase further in the next couple of years. Given the high fragmentation and a large number of small-to-mid sized players, the southern market offers a high potential for inorganic expansion followed by the Western region.

Outlook on near-term rates (CRISIl)

One-month view: In April, the factors that will influence domestic G-secs are crude oil prices, inflation print for March, rupee-dollar dynamics, global interest rates, investor appetite at G-sec auctions, further announcements of variable rate reverse repo (VRRR) auctions and foreign portfolio investor (FPI) flows.

Three-month view: During the three months through June, the yields are likely to be impacted by crude oil price movements; inflation print; fiscal numbers; rate decisions by the US Fed’s Federal Open Market Committee and the Reserve Bank of India’s (RBI) Monetary Policy Committee; India’s GDP growth trend; and FPI flows.

Home textile demand past the trough; recovery likely by end 2QFY24 (JM Financial)

Indian cotton sheet/terry towel exports to US declined 13.1%/1.2% MoM in Feb’23. Market share across a) cotton sheet stood at 58% in Feb’23 up 5.1ppt MoM b) terry towel stood at 47% in Feb’23 up 2.6ppt MoM. Our Industry checks suggest that the more painful part of global de-stocking in the home textile space is behind us and demand recovery could start trickling in by end 2QFY24. Indian home textile companies will also benefit from lower cotton prices (down 9% QoQ and ~39% from May’22 highs) which will likely aid margins going forward. The apparel companies also remain hopeful of market conditions improving from CY24 (resulting in improved order book from 2HFY24), in time for spring’24 collection.

The textile sector continues to be well placed given a) relatively subdued cotton price outlook b) GOI’s focus on developing the textile ecosystem c) likelihood of market size increase via FTAs with UK/EU over time d) market share gains as world looks for an alternate production base other than China.

MFI: Credit cost in FY24 to remain lowest since FY17 (ICICI Securities)

In a decade-long eventful journey, microfinance lenders are very close to an end of the longest asset quality cycle (FY17-22) – starting from demonetisation in FY17, floods, NBFC crisis in FY18-19, and lastly covid in FY21-22. While lenders have remained resilient as reflected in 25% AUM CAGR between FY17-21, average credit cost stood elevated at ~2.5% vs <50bps during FY14-16. However, during 9MFY23, most players have showed a sharp improvement in credit cost trajectory. Also, considering player-wise stressed asset pool as on Dec’22, we expect credit cost in FY24 to remain lower than average of ~2.5% between FY17-22.

For our coverage universe, we expect FY24 credit cost settle at average 2.3% vs 3.4% in FY23E and >5% between FY20-22.

Further, we believe recent judgements (Telangana High Court on 14th Feb’23 -Telangana HC order on MFI regulation) from higher authorities would provide better clarity on MFI regulatory framework and also eliminate any possibility of dual regulations. AP and Telangana have not participated in MFI growth journey during the past decade. Telangana High Court’s judgement would open up fresh MFI lending in these two states at an accelerated pace. Both the states combined offer potential growth opportunity of ~Rs600bn (>20% of industry AUM as on Sep’22). As on Sep’22, only ~5% of total MFI lending opportunity has been captured by the players in these two states.

Overall, we believe MFI sector is well poised to deliver 20%+ AUM growth and 3.5%+ sector RoA by FY24E. Within the sector, we prefer NBFC-MFIs like Spandana and Fusion to play the MFI theme.

Pharma: Lower API costs should start benefiting now (IIFL Securities)

Our analysis of import pricing for 16 key APIs/KSMs imported into India, shows that API import costs (weighted average) have declined marginally by 2% QoQ in 1QCY23, after having corrected 8% QoQ and 6% QoQ in 4QCY22 and 3QCY22 resp. From the peaks seen in 2QCY22, overall API import costs have declined by 15%, with prices of several key APIs (PAP, DCDA, Azithromycin, 7ACA, Artemisinin, CDA) having corrected 20-30% from peaks.

However, import prices for certain antibiotic APIs (Pen-G, Clavulanate and Erythromycin) remain sticky at elevated levels. Given that Pharma companies usually stock API/KSM inventories for 3-4 months, the correction seen in API import costs from 3QCY22 has still not reflected in the earnings performance of companies. Lower API costs and hence GM improvement should start reflecting now in 4QFY23 numbers, in order to lend comfort to our assumption of ~200bps Ebitda margin expansion for the Pharma sector over FY23-25ii, barring which the sector could again see earnings downgrades.

Real state: Scale-up in launches to exit FY23 on a high note (MOSL)

Demand momentum sustains; interest rate unlikely to be a dampener

Inventories across most of the companies under our coverage universe have declined to below 12 months as absorptions have exceeded launches over the last six quarters.

We thus expect launches for our coverage universe to pick-up in 4QFY23 to a multi-quarter high leading to 42% YoY growth in pre-sales. Operational update reported by a few companies indicates a pre-sales growth of 12%/11% YoY in 4QFY23/FY23.

According to Knight Frank, demand in top-8 cities has sustained at ~80,000 units in 4QFY23. Further, with a surprise pause by the RBI, interest rate will unlikely be a dampener on demand from hereon and we expect the industry to grow at 5-10%. While MMR, Pune and Hyderabad have posted an increase in inventories, overhang continues to remain under control at 18 months for top-8 cities. Hence, the industry will continue to witness gradual price hikes.

We reiterate our constructive outlook on the industry and prefer players with high pre-sales growth potential. LODHA, PEPL and GPL are our sectoral top picks. Launches for our coverage universe likely to be at multi-quarter high

Sales volume for our coverage universe has exceeded launches over the last six quarters that led to a decline in inventories to below 12 months for most of the players.

As demand momentum continues to sustain, we expect launches for our coverage to pick-up from 4QFY23 and reach a multi-quarter high of 18msf.

Operational update indicates a pre-sales growth of 10%/42% YoY in 4QFY23/FY23. We expect our coverage to report 42% YoY growth in pre-sales in 4QFY23 propelled by over three-fold jump in DLF’s sales. Ex-DLF, sales would grow at 4% YoY.

Demand momentum sustains; supplies inching up in a few markets

Despite over 200bp rise in mortgage rates, residential absorption has sustained at a quarterly run-rate of ~80,000 units for top-8 cities over the last five quarters.

However, supplies for the top-8 cities have exceeded absorption since the last two quarters driven by increased launches in MMR, Pune and Hyderabad. That said, inventory overhang for the industry has sustained at a comfortable range of 18 months, which is conducive for consistent price hikes.

Key markets, such as NCR and Bengaluru, continue to witness favorable demand-supply scenario (demand exceeding supply) and are likely to report higher-than-average price hikes while the same in MMR and Pune is expected to be in the 4-5% range.

Cards spend continued to zoom in Mar’23 @ 1.4tn (IDBI Capital)

Card spends at historical highs: Credit Card spends continued its strong growth momentum and stood at 1.4tn during Mar’23 (breaching its previous high of 1.3tn in Jan’23) led by strong discretionary spends. Among major players ICICI (up by 21%), KMB (up by 18%), HDFC (up by 15%) and SBI (up by 12%) witnessed strong growth in spends on a MoM basis.

New Cards additions bounced back in Mar’23: Net New Credit Card additions after moderating during Feb’23 (at 9.1 lakhs) bounced back strongly at 19.4 lakhs in Mar’23. Among the major players ICICI (+7.2 lakhs), SBI Bank (+2.6 lakhs), HDFC Bank (+2.4 lakhs) and KMB Bank (+0.3 lakhs) witnessed strong additions to their existing credit card portfolio.

Volume of transaction too grew strong in line with spends: Volume of transaction too grew strong in line with growth in card spends and stood at 264Mn (up by 17.7% YoY and 13.4% MoM). All the major players witnessed improved volume of transaction on a MoM basis during Mar’23.