Vijay Kumar Gaba

GDP growth surprises on the upside (Kotak Securities)

4QFY23 real GDP growth of 6.1%—higher than expected—was supported by investment and net exports, while private consumption remained weak. Consequently, FY2023 real GDP growth also surprised on the upside. We expect 1HFY24 growth to remain steady, while in 2HFY24, we expect domestic demand to be weighed down by a global slowdown and the lagged impact of the RBI’s rate hike cycle. We revise up our FY2024 real GDP growth estimate to 5.8% (from 5.6% earlier).

4QFY23 GDP growth led by investments and net exports: 4QFY23 real GDP growth improved to 6.1% (3QFY23: 4.5%; consensus: 5.1%), led by investment (GFCF) growth at 8.9% and a sharp improvement in net exports. Private consumption growth remained weak at 2.8% (3QFY23: 2.2%). On a 4-year CAGR basis, in 4QFY23, GDP grew 4.1%, with private consumption growth of 4% and GFCF growth of 6.6%.

4QFY23 real GVA growth led by construction and contact-based services: 4QFY23 real GVA growth was at 6.5% (3QFY23: 4.7%), led by services at 6.9% and industrial activity at 6.3% (Exhibit 2). Growth in the construction sector at 10.4% (3QFY23: 8.3%) propped up industrial activity, while trade, hotel, transport, etc. growth at 9.1% (though lower than 3QFY23 at 9.6%) continued to push up service sector growth. We note that the buoyancy in manufacturing and services has been reflected in exports (but not as much in consumption).

FY2023 GDP growth surprises on the upside: FY2023 real GDP growth at 7.2% was largely supported by GFCF growth of 11.4% (FY2022: 14.6%), while private consumption growth of 7.5% was supported by 1HFY23 growth at 13.6%. On a 4-year CAGR basis, real GDP grew by 3.4%, while real GVA grew by 3.8% (Exhibit 3). Nominal GDP growth in FY2023 stood at 16.1% (FY2022: 18.4%).

Revise up our FY2024 real GDP growth estimate to 5.8%: We pencil in stronger 1HFY24 growth amid expectations of steady global growth. However, in 2HFY24, we factor in slowing demand conditions amid (1) a likely global slowdown, (2) domestic demand weighed down by the lagged impact of the RBI MPC’s rate hike cycle and (3) risks of a weak monsoon weighing on the rural sector (IMD has forecast normal monsoon at 96% of LPA; lower bound for normal monsoon). We note that private consumption is already showing signs of weakness. Balancing these risks, we revise up our FY2024 real GDP growth estimate to 5.8% (5.6% earlier) (Exhibit 3). A steady growth in 1HFY24 will also support the RBI staying on a prolonged pause while the rate hike cycle transmits through the economy.

Declining imports reflect falling prices, not declining demand (ICICI Securities)

India’s imports declined 6.2% YoY in Jan-Apr’23, leading many commentators to assert that this was evidence of declining domestic demand. Our conclusion from a deep dive into the key sources of decline in India’s imports is that 50% of them saw the value of their imports decline because of big YoY declines in import prices (oil, coal, fertilisers and vegetable-oil). Imports of machinery and base metals (together comprising 14% of India’s imports) continued to grow in FY22 and FY23, and saw no let-up in recent months – evidence of continued strength in India’s investment demand.

Electronics and chemical imports (which together comprise 19% of India’s imports) declined over the past half-year, while their exports continued to grow (very robustly in the case of electronics), suggesting that the import decline was actually evidence of import-substitution. Gems and jewellery imports (9% of total imports) are strongly correlated with gems and jewellery exports, so the latter’s sluggishness explains much of the decline in those imports, although a small portion likely also represents weaker domestic demand. That leaves just another 8% of total imports –among which plastic & rubber products (5% of imports) also grew in recent months.

So the import data provide scant evidence of any weakness in domestic demand.

From Electronics to Semiconductors (Jefferies)

As chips become the new oil, India has embarked on a path to replicate its success in autos to electronics and semiconductors. India offers a compelling China+1 choice, along with tailwinds of rising domestic demand and big incentives. India is already #2 in mobile manufacturing, while Apple is increasing exports. Govt is incentivizing chip & display fabs and test facilities, supplementing PLI, as it targets $300bn electronics production by FY26, ~3x from FY23.

Chip is the new oil. Electronics, and semiconductors as its building blocks, have become critical not only for economic progress of a nation but also for its national security. India's electronics demand is accelerating, led by rising incomes and digital adoption. Net electronic imports rose to $54bn in FY23, forming 21% of trade deficit, next only to oil (43%). India's per-capita electronics consumption is still a quarter of global average, providing big headroom for growth.

Aggressive targets. Recognizing the rising importance of electronics, Indian govt has embarked on a path to promote domestic manufacturing. The govt has set a target of raising electronics production to $300bn by FY26 (FY23: ~$100bn), which includes growing exports to $120bn by FY26 (FY23: ~$25bn). While targets seem ambitious, prudent policies have propelled India on the right path with electronics production and exports rising 3-4x in the last 7 years. Value addition is still low due to high dependence on imported components, which is the next focus area for the govt.

Big push for semiconductors. Indian govt has launched a ~$10bn program, providing incentives for ~50% of the project cost for chip and display fabrication, and testing facilities. Certain states are offering further ~20% incentive, taking total benefit to ~70%, along with subsidized land, water and power. These incentives supplement the ~$10bn allocated to electronics and related sectors under the PLI scheme.

States governments have started to complement the central incentive to attract investments too. Gujarat, for instance, is offering additional incentive of ~20% of the project cost along with 50-70% subsidy on land, 25-30% subsidy on power for 10 years, access to water and one-time reimbursement of stamp duty and registration charges. The state intends to set up a new electronics manufacturing hub to generate around 500,000 jobs in the sector.

Attracting global investments. Rising geopolitical uncertainty is prompting global electronics firms to a China+1 strategy, and India offers a compelling choice. India now forms 5-7% of Apple's global production and govt expects this to rise to 25%. Companies like Foxconn, Pegatron, Samsung and Dixon are expanding footprint in India, while others like Cisco plan to start new plants. A joint venture of Vedanta Group and Foxconn has made some progress for chip and display fabs. Tata Group, HCL Group, and Syrma seem interested in testing & packaging facilities.

A long journey but right path. Based on our discussions with govt officials and industry participants, we believe India possesses several key ingredients for success such as rising demand, low manufacturing cost, large fiscal support and strategic goodwill with the West; although, might need to strengthen supply chains and tech partnerships. India, in early 1980s, struggled to attract global auto companies. With prudent policies and rising demand, India is now #4 in auto production volumes globally and a market dominated by early entrants and domestic OEMs. Establishing electronics and semiconductor ecosystem is a multi-decade journey too, and, we believe India is on the right path.

Q4FY23 earnings review (Phillips Capital)

Q4FY23 revenues were largely in-line with expectations, EBITDA/earnings were above expectations. Similar number of companies recorded inline revenue and beat in earnings expectations.

In Nifty, strong earnings growth (yoy) was seen in Automobiles, Telecom, FMCG, and Financials while substantial contraction was recorded in Metals, Cement followed by pharma and power.

Nifty Revenue/EBITDA/PAT (yoy) stood in-line with estimates, at +11%/+11%/+0%.

On qoq basis, aggregate EBITDA margins increased by 60 bps for Nifty; PAT margins decreased by 10bps for Nifty. On yoy basis, EBITDA margin increased by 10bps for Nifty; PAT margins dip by 140.

Nifty EPS changes (consensus): For FY24 & FY25: Metals, Pharma, IT, Power and Industrials saw more downgrades while Financials, and FMCG were majorly upgraded.

Of the 46 Nifty companies (ex-Bajaj Finserv, Adani Enterprises, Adani Ports and Apollo Hospitals), 13 beat and 27 in-line with Revenue estimates, while 20/24 exceeded EBITDA/Earnings expectations; 6/15/14 companies missed expectation on Revenue/EBITDA/Earnings.

4QFY23: Financials reprises its role; Auto shines! (MOFSL)

Amid a challenging global macro backdrop, India Inc.’s profitability remained healthy in 4QFY23 – in line with our expectations. Our coverage universe reported the highest earnings growth in the last four quarters. Corporate earnings were driven by Financials and Auto, while Metals dragged aggregate profitability.

Among Nifty constituents, 42% beat our PAT estimates while 26% missed.

Excluding Financials, profit for Nifty constituents rose 7% YoY (est. 7% growth).

SBI, Tata Motors, BPCL, Reliance Industries, Axis Bank, ITC, HDFC, JSW Steel, Kotak Mahindra Bank, Bharti Airtel, Mahindra & Mahindra, Bajaj Auto, Asian Paints, Eicher Motors, Hero Motocorp, SBI Life, Nestle, and Britannia reported higher-than-estimated earnings. While ONGC, Infosys, Coal India, Maruti Suzuki, Bajaj Finserv, Tata Steel, UPL, Dr Reddy’s Labs, Cipla, HDFC Life, Tata Consumer, Grasim Industries, and Apollo Hospitals missed our profit estimates.

Eight Nifty companies saw an upgrade of over 5% in their FY24 EPS estimates; while ten witnessed a downgrade of over 5%.

Nifty EPS for FY23 was reduced by 0.6% to INR807 (earlier: INR812) largely due to notable downgrades in ONGC, Coal India, and BPCL.

FY24 Steel Outlook: Profitability to Sustain amid Global Headwinds (India Ratings)

India Ratings and Research (Ind-Ra) has maintained a neutral outlook for the steel sector for FY24. The agency forecasts steel demand growth in the range of 7%-9% yoy for FY24 (FY23: 12%; five-year CAGR ending FY23: 5%). This is mainly driven by a sustained increase in the government infrastructure spending for the 2024 general elections coupled with a healthy domestic demand from other end-user industries and a moderate pick-up in export demand post the roll back of the 15% export duty by the government in November 2022. Demand is likely to be supported by a high correlation of 0.8x-0.9x with gross fixed capital formation, which Ind-Ra expects to grow 9.6% yoy in FY24 (FY23 estimate: 11.5%). High demand growth in FY23 of 12% yoy on back of a strong domestic demand outpaced capacity addition in FY23, resulting in increased capacity utilisation for the industry. Growth in demand as well as capacity addition are likely to be in line, balancing the demand-supply scenario.

Global steel prices could face headwinds in FY24, while exceeding the pre-pandemic levels. Ind-Ra does not consider cheap imports into India as a big threat as China, being the largest supplier of steel globally, might continue with its supply discipline policy and cut on production for 2023 lower than 2022’s. Also, China’s domestic demand could rise, preventing an oversupply scenario. Ind-Ra expects the sector will continue to face headwinds from global macro trends, and a more rigorous enforcement of environmental protection policies will be a key monitorable.

Furthermore, a softening of raw material prices due to a normal demand-supply balance and China’s recent policy to maintain low iron ore price and higher use of domestic coking coal will protect the margins; however, a continued global growth slowdown in the major steel export region mainly EU and uneven steel demand recovery from China could result in range-bound prices over FY24.

India eCommerce - A 150 Bn Dollar market (Bernstein)

India's retail market is dominated by the unorganized sector (~88%). However, the mix is expected to change with organized retail gaining share and e-commerce accelerating. The food & grocery market is the largest retail category in India, accounting for ~75% of the market share, and we expect it to grow at 9% CAGR (2023-2030) to reach USD1,277 Bn by 2025.

E-Commerce is a concentrated market globally. Amazon has 40%+ share in the U.S. Alibaba has 60%+ share in China. India is evolving into a three-player market with Top 3-Amazon, Walmart & Reliance. The conventional retail business model starts out either offline (Walmart) or online (Amazon). Given distribution challenges and India’s propensity to “skip a generation” in most technologies, we believe Indian E-Commerce market will be different. An integrated model (offline + online + prime), strong distribution capability and superior cost advantage (against online players) are required from the start.

Reliance Jio's disruptive playbook: Reliance Industries (market cap of US$180 Bn) is building the largest digital ecosystem in India. Jio has 430 Mn mobile subscribers. Its digital ecosystem is compelling. Its retail arm has 18,300 retail stores in India (US$30 Bn sales, EBITDA +ve ~7.5%). Digital mix is scaling up ~17-18% ($ 6 Bn, ecommerce ). It’s a disruptive playbook – integrate offline + online + prime makes it the strongest competitor to Amazon/ Walmart.

Market structure: India is one of the few large and under-penetrated E-Commerce markets. The market is expected to reach ~US$150 Bn by 2025, with online penetration doubling in the next 5 years. Flipkart ($23 Bn GMV) & Amazon ($18-20 Bn GMV) lead on scale with ~60% market share. Reliance is No 3 (~$ 5.7Bn e Com sales) driven by attractive categories of Fashion (Ajio) & JioMart (E-Grocery). All 3 players are focused on -Get Big (scale), Get Close (customer loyalty) & Get Fit (profitability).

Consumers want offline + online + prime bundled: Indian consumers are being conditioned to expect an integrated value proposition, offline + online (E-Commerce, private brands) + prime (entertainment, OTT, gaming). Companies are bundling services to capture value from the real + virtual economy.

Get Big & Get Close : E-Commerce companies are focused on — acquiring scale (Get Big), building loyalty (Get Close). E-com companies are expanding TAM by going deep into Tier 2/3 markets & on niche premium categories (e.g. Beauty). Get Close is led by loyalty/prime programs. Amazon has ~15% of its active customers as prime members.

Focus on profitability (Get Fit): E-Commerce players are focusing on Get Fit (profitability) while balancing Get Big (scale). Few factors that have enabled improving margins incl. (1) Fashion (superior margins) has become the largest e-Commerce category capturing ~25% of GMV ahead of Mobile phones. (2) Mix of Ad sales (>80% GM%). (3) Increase in private labels as E-Commerce companies look to expand from low single digit margins.

We believe Reliance Retail/Jio is the best positioned player in the largest and fastest growing E-Commerce market. The advantages of its retail network, mobile network, digital ecosystem and “home field advantage” in a famously complex regulatory and operating environment mean in the Long Term, it will likely claim the lion’s share of the US$150 Bn+ eCommerce marketplace.

Automobile: 2Ws recovering gradually; CNG demand picking up in PVs...(MOFSL)

PVs: May’23 retails are expected to decline 2-4% YoY as chip shortage continues to hurt volumes. Our interactions indicate up to 10% hit on volumes due to chip shortages, resulting in lower inventory for high-end models/variants across OEMs. However, there is sufficient inventory for lower-end models resulting in average dealer inventory of 4-5 weeks (v/s 3-4 weeks until last month). MSIL’s new launches – Fronx/Jimny – have garnered initial bookings of over 30k units each. While the initial feedback suggests Fronx is witnessing cannibalization of up to 20% with Baleno, we will still wait as it further stabilizes. For MM, waiting period for Scorprio-N AMT (Z8 and Z8L) has reduced to 5-6 months, as the company is prioritizing its production, while waiting periods for other models remain intact. There has been an initial pickup in demand for CNG vehicles after the price cap imposed by the government. Consequently, discounts for CNG models have moderated by INR5-10k/unit. We expect dispatches for MSIL/MM (including pickups)/TTMT PV to grow 2%/11%/9% YoY.

2Ws: The segment has outperformed overall auto sector in May’23 with expected retail growth of 3-5% YoY. This is attributable to healthy demand in urban and low base of last year. The marriage season demand, which contributes 20-25% of the sales in key region of UP, Bihar, MP, etc., has not been effective this month. Our interactions indicate HMCL is expected to launch new products such as Passion Plus (in next few months) and Karizma (by late-FY24).

The launch of Karizma would be in line with the company’s aim to gain market share in the competitive premium segment. After the recent announcement of reducing e2W subsidy cap to 15% (from 40% earlier), the actual cost impact for the vehicles should range between INR25k-40k. This, as a result, is expected to increase the payback period by 1.5-2.0 years for e2Ws. Inventory across most of the 2W stands at a healthy level of 5-6 weeks. Within 2Ws, HMCL has the highest inventory (7-8 weeks) and HMSI has the lowest as there was unavailability of key models due to production shutdown for six days. We expect dispatches for HMCL to decline 14% YoY while the same should grow for TVSL (including 3W)/BJAUT (including 3W)/RE by ~3%/18%/17% YoY.

CVs: MHCV retails are expected to decline by 4-6% YoY due to the pre-buying effect before OBD-2 transition in Mar’23 and impact of seasonality. However, fleet availability remains healthy led by demand from infra-led activities, auto carriers and FMCG. This has consequently resulted in healthy fleet utilization level between 75% and 78%. On the other hand, bus demand continues to improve as the retails are expected to grow by mid-single sequentially. This has also been supported by healthy demand from education institutions. Led by lower retails, inventory levels have improved to 25-30 days (vs ~20 until last month). We expect dispatches for TTMT CV/AL to decline ~7%/3% YoY, while the same should grow by ~10% YoY for VECV.

Tractors: Our channel checks suggest May’23 retails to grow marginally by 1-3% YoY. States such as MP, UP, Rajasthan and Haryana have been benefitted due to better realization for crops such as wheat (15-20% higher than the average), barley and mustard. Demand from non-agri segment has improved as sales declined just 8-10% YoY (v/s 15-20% YoY decline in 2HFY23). While the enquiry levels are slowing down in agri segment, we expect marginal growth should continue to be led by subsidies announced by several states before elections such as – Chhattisgarh (40-50% subsidy on tractors/implements), MP (interest waiver scheme), Rajasthan (free tractors and implements to limited farmers), etc. We expect dispatches for MM tractors/Escorts to fall ~6%/4% YoY in May’23.

Global Strategy: What are we buying (CLSA)

What’s hot and what’s not. North Asian frenzy versus Asean indifference.

Year-to-date foreign investor appetite for EM equities has undergone a volte-face versus 2022 both in terms of the stronger aggregate (albeit selective) commitment to the region and the country composition of net purchases. Semi-annualised non-resident net equity buying of EM for 1H23 at US$52bn is the joint highest with 1H19. Ex-China, 1H23 net EM purchases are US$21bn, the highest since 2H20. The focus of enthusiasm has shifted to Taiwan, Korea and India and away from Brazil, Saudi Arabia, Thailand and Indonesia which were the 2022 favourites.

Foreign investors are buying EM again at the strongest pace since 1H19 There has been a reassuring sea change in non-resident investor interest in EM equities since our early November note (Throwing in the towel) highlighting what then appeared to us as a cyclical trough in sentiment. The year-to-date run rate of non-resident purchases of EM (with China) equities is the strongest since 2019. In developed Asia, the pace of accumulation by foreign investors of Japanese equities has also quickened through 2Q23 to the swiftest since 2021.

But foreign buying of EM is selective: Taiwan, Korea, and more recently India The favourites of 2022—Brazil, Saudi Arabia, Thailand and Indonesia—have given way to Taiwan and Korea, which as a proportion of total market capitalisation are the largest EM year-to-date recipients of net foreign flows at 0.6% and 0.5%, respectively. This represents a stark reversal in fortunes versus the sustained episode of foreign net selling endured by Taiwan and Korea over the previous two years for a cumulative 3.2% and 1.3% of market cap, respectively.

Collectively this amounts to Asia ex China being in vogue versus LatAm in 2022 Regionally, Asia ex China has recorded the strongest semi-annualised 1H23 foreign net purchases at US$23bn since 1H19 while Latin America (essentially Brazil) has seen net inflows dry up this year after receiving US$16bn in 2022.

Foreign ownership of EM remains depressed and there’s scope for accumulation The c.1ppt—uplift in the EM ex-China equity non-resident ownership level from the December 2022 low represents regaining less than a quarter of the two-year 4.2ppt decline in EM foreign ownership post the recent January 2021 peak. Indeed, Taiwan (-6.8ppt), Korea (-5.0ppt), have much lower foreign exposure than two years ago.