Vijay Kumar Gaba

Seven reasons to expect faster disinflation (Nomura Securities)

... driven by softer momentum and not just base effects. Most Asian central banks are

now on a pause, and the window to easing should open up later this year.

By mid-2023, we expect inflation momentum (m-o-m, seasonally adjusted) to be closer to central bank targets in most economies. This means most Asian central banks are now in a policy pause phase and, if underlying inflation moderates durably, as we expect, the window to easing would open up later in 2023.

#1. Asia’s inflation is driven more by supply than demand-side factors Asia’s inflation differs from inflation in the US/Europe, as it is more supply-side driven, and these drivers are gradually abating. Oil prices are around one-third lower than almost a year ago. FAO food prices have fallen for eleven consecutive months, and this has historically transmitted to Asia’s food inflation with a lag of around six months. Pandemic-driven supply-chain disruptions have fully normalised. Currency depreciation pressures have abated. The full impact of these easing supply-side pressures has yet to reflect in Asia’s inflation. That said, risks remain. There are upside risks to food inflation, such as climate change and El Niño (associated with less rainfall in Asia). Geopolitical risks are a threat. Lagged adjustments to utility prices or the removal of subsidies are also risks, although amid slow growth, we expect any such tweaks to be delayed into 2024.

#2. Base effects: The role of base effects in lowering headline inflation is well recognized. For instance, assuming unchanged monthly momentum, base effects alone could moderate percentage year-on-year headline inflation from current levels by 5.9pp by year-end in Singapore, 4.9pp in the Philippines and 2.9pp in Korea.

#3. Easing food/energy prices should lower headline and core inflation: Food and fuel have dominant weights in the consumption basket in EM Asia. They drive headline inflation, play important roles in expectations formation and often spill into core inflation, due to second-round effects. This is a key reason why policymakers pre-emptively use supply-side and fiscal measures to limit the pass-through from high food/energy prices to consumers. Now playing out in the reverse direction, the moderation of food/energy price pressures should lower headline inflation and curtail household inflation expectations, while also easing (sticky) core inflationary pressures.

#4. No wage-price spiral in Asia: Labour markets in Asia are less flexible, so the post-pandemic frictions caused by mass layoffs and early retirements (as seen in the US) are less of an issue. Countries like Singapore and Malaysia that are dependent upon migrant workers have already addressed the supply mismatch. Asia also continues to experience labour market slack, as a more restrained post-pandemic fiscal response has resulted in a more gradual demand recovery.

#5 Goods disinflation: Pipeline price pressures have eased materially across Asia, with falling import prices, lower PPI inflation and a moderation in the PMI input price index. Manufacturing firms used the past two quarters of lower input costs to recoup their margins; however, with weaker goods demand and subdued input cost pressures, we expect faster core goods disinflation.

#6 Services inflation is likely to moderate: Services catchup in Asia is largely complete and as wage growth moderates, this should have a salutary impact on services inflation. In countries where consumption is at a greater risk of slowing due to restrictive domestic monetary policy (e.g., South Korea), we expect services inflation to slow more rapidly. Housing rental inflation remains elevated, but higher interest rates are slowing residential property price growth, which will likely feed through to rental inflation, albeit with a lag. That said, our view is that services inflation in Asia is likely to moderate, rather than collapse, since domestic monetary conditions are broadly neutral.

#7. China is unlikely to be a source of inflation: China’s growth cycle is desynchronized from the rest of the world, but we do not view China as a material source of inflation risk, either to itself or globally. China’s growth rebound since its re-opening has underwhelmed in the cyclical segments like autos and property, and lacklustre export growth remains a challenge. With lower consumer confidence, weak income and job prospects, our China economics team expects the release of China’s pent-up consumption demand to disappoint market expectations, at a time when its policy stance is still one of support, but with restraint. For the rest of Asia, China’s services-led rebound is likely to have limited growth spillover effects on goods demand (which is what matters for Asian exports). Moreover, weak demand from US/Europe amid high uncertainty is likely to more than offset any positive spillovers from China reopening. In our view, the decision by OPEC+ to cut oil production, despite China’s reopening, suggests underlying demand is much weaker than broadly believed.

Q4FY23 Preview (Elara Capital)

We expect Q4FY23E Nifty50 sales to increase ~13% YoY and ~5% QoQ. Sequentially, we see an 81bp expansion in Nifty EBITDA margin (ex-financials) and a 71bp expansion in Nifty PAT margin (ex-Axis Bank due to one-offs following merger of the Citi portfolio), driven by overall lower raw material cost and easing off of commodity prices. We expect Nifty EBITDA (ex-financials) to grow at 9% QoQ and Nifty earnings to grow by ~3% QoQ, owing to margin improvement. If we were to consider one-off effect of Axis Bank-Citi merger, we expect Nifty earnings to post healthy 11% QoQ and 17% YoY growth.

Commodities, led by metals, are expected to post the highest YoY decline in earnings on lower prices and weak realization, while banks (ex-Axis Bank) are likely to grow by 33%, led by improving NIM and lower credit cost. Autos (ex-Tata Motors), fueled by raw material cost moderation, is expected to drive 32% YoY earnings growth.

We expect basic materials, led by metals, to erode 95% of Nifty’s incremental PAT YoY, implying materials will offset half of Nifty’s incremental profit, owing to lower realization and commodity prices. However, improved volume and recovery in steel prices since the past quarter means metals will add 95% to Nifty’s incremental PAT sequentially.

We see banks (ex-Axis Bank) contributing 72% to Nifty incremental YoY PAT, owing to sustained credit growth, improving NIM and lower credit cost, followed by energy, which would contribute 59% on improved marketing margin of oil marketing companies (OMC) and higher GRM of Reliance, due to Russia’s crude discount.

Overall, we expect financials and energy to contribute 131% to Nifty’s incremental YoY PAT. QoQ we see energy and materials contributing 216% to Nifty’s incremental QoQ PAT.

Despite geopolitical tensions, FII outflows, high inflation & interest rates, and the US-Europe banking crises in FY23, India remains resilient, with healthy corporate earnings in the first three quarters. In Q4FY23, financials are expected to dominate with improving net interest margin and lower credit cost. Double-digit growth is expected in consumption-oriented sectors, due to volume growth and softer raw material cost despite subdued demand in rural areas. The metals sector also is likely to recover sequentially, following removal of exports duties and easing off of COVID-19 related curbs in China. As the interest rate cycle peaks, macroeconomic tailwinds are expected to support earnings growth, even as global demand-led growth may falter.

India Autos: Staying Constructive (Jefferies Equity Research)

We remain positive on Indian autos with the sector in midst of strong earnings cycle. We see healthy 11-18% volume CAGR for PVs, 2Ws and trucks over FY23-25E, with 2W growth outpacing 4W. Strong top-line growth and better margins should fuel double-digit EPS CAGR for most OEMs.

2W growth to outpace 4Ws over FY24-25: India's auto demand, after suffering its worst downturn in decades, appears poised for continued double-digit growth in FY24-25. Two-wheelers (2Ws) have lagged in recovery but the abnormal 35% fall over FY19-22 created a very favorable base for the segment that is core to personal mobility; we believe 2Ws are ripe for a replacement cycle too. We see 2Ws outpacing 4Ws with 18% CAGR over FY23-25E (FY23E:+19%). While PVs (passenger vehicles) have witnessed some demand moderation in recent months, we see tailwinds from low penetration, aging vehicles-in-use, and reverse shift from shared to personal mobility, driving 11% CAGR over FY23-25E (FY23E: +26%). Trucks have entered the third year of up-cycle, and we expect 12% CAGR over FY23-25E (FY23E: +39%). Tractors, conversely, are at risk of a downturn, and we expect 15% fall in FY24E (FY23E: +12%).

Improving margin trajectory: Weak demand and a severe metal price rally weighed on auto OEM margins in the last 2-3 years. Steel (Indian HRC flat) and aluminum prices doubled over mid-2020 to Apr-2022, but then corrected 27-32% by Dec-2022, led by weakening China macro and tightening interest rates elsewhere. With China showing signs of cyclical recovery, metal prices are likely to have bottomed out; however, we believe the intensity of any potential price increase is unlikely to be similar to 2020-22. We expect 1-4ppt EBITDA margin expansion for most of our covered auto OEMs over FY23-25E, led by better pricing power amid good demand, and operating leverage benefit.

TVSL and TTMT strengthening EV franchise: The sharp increase in govt incentives, along with new product launches, has resulted in share of EVs in 2Ws rising from just 0.4% in FY21 to 5% in Mar-Q; we expect 10% by FY25. TVS has risen to #2 position in E2Ws in recent months; with its market share in E2Ws approaching that in ICE scooters, TVS is turning the electrification risk into an opportunity. While EV adoption in PVs is slower (2% of industry in Mar-Q), Tata is leading, with EVs forming 15% of its India PV volumes in Mar, and we believe it will benefit from rising EV adoption.

Valuations attractive; still time to Buy: We remain positive on Indian autos, with the sector in a positive demand and margin, and hence earnings, cycle. Most stocks are trading near or below their respective last 10-year average PE on our FY24 estimates; we find this attractive in the context of a strong earning cycle. We have fine-tuned FY24-25E EPS estimates for our coverage within +/-4% range.

Infrastructure: Stable awarding; calibrated aggression (HDFC Securities)

The NHAI had set a target of awarding 6,500 km in FY23, of which it awarded ~3,750 Km (vs. 6,306 Km in FY22) at an NHAI cost of INR 1trn. Ordering seems to have spilt over to FY24 with our checks suggesting ~INR 350bn of bids expected to be awarded during early H1FY24. During the year, HAM continued to be its preferred mode of awarding with 75/31/3 projects awarded on HAM/EPC/another basis. Competitive intensity reduced towards the FY23 end as developers maintained calibrated aggression. Non-road players outperformed their inflow guidance, while road players need to catch up on missed guidance.

Reduction in competition intensity: The competition intensity cooled off with the top-6 listed players placing their bids at an average of 14.3% over and above the NHAI cost vs. a 6.5% discount in FY22. Similarly, the top-6 unlisted players’ bids were at a 4.8% premium over the NHAI cost vs. a 2.9% discount in FY22. Further, HAM projects were bid at an average premium of 6.7/4.4/2.8/5.6% in Q1/Q2/Q3/Q4FY23. However, EPC projects continued to be bid at an average discount of 5.4/22.2/21.4/28.7% in Q1/Q2/Q3/Q4FY23. Out of the total 109 projects awarded during the year, 38 projects worth INR 361bn were awarded at an L1 cost of INR 418bn i.e. an average premium of 16% over the NHAI cost whereas, 71 projects worth INR 683bn were awarded at an L1 cost of INR 573bn i.e. an average discount of 16% over the NHAI cost.

FY23 order inflows; very few companies surpass/meet their FY23 guidance: Out of the coverage universe, companies like LT, Ahlu, ASBL, DBL, HG Infra, KEC, and KPTL have either surpassed or met or marginally missed their FY23 order inflow (OI) guidance. Companies like JKIL, PNC, and KNR have not even achieved 50% of their FY23 OI guidance. This is more a function of broad-based ordering beyond roads and well-diversified companies benefitting from the same.

Power T&D, Railways, Metro, Water, O&G, Hydrocarbon, and Building EPC witnessed robust ordering. Pickup in export orders aided inflows for the EPC companies like LT, KEC and Kalpataru. We expect a pickup in domestic power grid awards for capital goods and railways and private capex pickup shall aid strong inflows.

Valuation remains supportive: Tier-1 infrastructure companies are trading at ~9.5x FY25E EPS. We expect the competitive intensity to reduce further. Infrastructure asset creation is the top priority, which may lead to robust ordering.

Personal Loans Cross Rs 40 L cr in Feb; Industry Growth Moderates (CARE Ratings)

Gross bank credit offtake rose by a robust 15.5% year on year (y-o-y) in February 2023 due to strong growth across all the sectors, especially in the Non-Banking Financial Companies (NBFCs), and unsecured personal loans segments.

Personal loans growth accelerated to 20.4% y-o-y in February 2023 from 12.5% a year-ago period, driven by other personal loans, credit cards, housing and vehicle loans.

Credit growth for the services was robust at 20.7% y-o-y in February 2023 as compared with 6.2% a year-ago period due to growth in NBFCs and retail trade.

Industry credit offtake growth moderated at 7.0% (compared over the last couple of months), registering a lower growth compared to personal loans and services. Infrastructure witnessed a 0.6% growth due to slow growth in the power sector and a decline in the telecom sector and railways.

Housing loans (share of 47.6% within personal loans) grew by 15.0% y-o-y in February 2023 compared with 13.1% in the year-ago period. In spite of reporting healthy growth in the month, the share of housing loans dropped to 47.6% in the personal loans segment as of February 24, 2023, vs. 49.8% over a year ago as unsecured loans grew at a faster pace.

Unsecured loans reported a robust growth of 26.3% y-o-y in February 2023 due to the miniaturization of credit, digitalization of loans (faster loan turnaround and easier process), and preferences for premium consumer products. Its share increased to 32.5% in the personal loans segment as of February 24, 2023, vs. 30.9%% over a year ago. After housing, unsecured loans are the second biggest component in the personal loan segments.

Given the strong demand for different retail loan verticals, we anticipate retail credit growth to remain in the high digit for FY24.

Vehicle loans (a share of 12.4% within personal loans) registered a robust growth of 23.4% y-o-y in February 2023 as compared to 10.0% in the year-ago period. Outstanding for vehicle loans stood at Rs.4.96 lakh crore on February 24, 2022. Nonetheless, it declined by 0.1% over January 2023, witnessing a drop after 20 months.