Vijay Kumar Gaba

CAD slips in FY2023; better prospects in FY2024 (Kotak Securities)

CAD/GDP improved in 4QFY23 led by a narrowing of the trade deficit (goods and services). Capital account surplus moderated from last quarter due to outflows in FPI and banking capital. CAD/GDP in FY2023 was at 2% and BOP at (-)US$9.1 bn with most of the pressure seen in 1HFY23. The external sector balance is likely to be much more comfortable in FY2024 amid a narrowing of goods trade deficit and firm services trade surplus. We expect CAD/GDP to improve sharply to 1% in FY2024.

4QFY23 CAD supported by lower goods trade deficit and steady services surplus: CAD in 4QFY23 narrowed to US$1.4 bn (0.2% of GDP) from US$16.8 bn in 3QFY23. This was led by goods trade deficit narrowing to US$53 bn (3QFY23: (-)US$71 bn) with exports at US$116 bn (US$106 bn) and imports at US$168 bn (US$177 bn) due to lower non-oil imports. Services trade surplus was steady at US$39 bn aided by software exports and professional and management consulting exports. Transfers (remittances) softened to US$25 bn (3QFY23: US$28 bn).

Outflows in banking capital and FPI in 4QFY23 weighed on capital account: Capital account surplus in 4QFY23 moderated sharply to US$7 bn mainly due to banking capital outflows of US$4 bn (3QFY23: +US$14 bn) and FPI outflows of US$2 bn (+US$5 bn). FDI inflows increased to US$6 bn (3QFY23: US$2 bn) while ECB flows increased to US$2 bn ((-)US$2 bn). Due to a weaker capital account, BOP surplus moderated to US$5.6 bn (3QFY23: US$11.1 bn)

BOP in FY2023 slips into deficit and FDI flows reduce sharply in FY2023: CAD/GDP widened to 2% in FY2023 from 1.2% deficit in FY2022. While 1HFY23 external pressures were higher from elevated commodity prices, 2HFY23 pressures eased with narrowing of the goods trade deficit and robust services surplus. The capital account was volatile in FY2023 with a key concern of net FDI flows at US$28 bn, moderating sharply back to the pre-Covid levels (possibly a reflection of the global monetary policy cycle). Banking capital inflows were at US$21 bn (FY2022: US$7 bn) and FPI outflows were at (-)US$5 bn (FY2022: (-)US$17 bn). BOP at US$(-)9.1 bn (FY2022: +US$47.5 bn) along with a large valuation loss of US$19.7 bn (due to USD appreciation against major currencies) reflected in US$29 bn moderation in FX reserves in FY2023.

External sector balances likely to improve in FY2024: Current account pressures are likely to be lower in FY2024 relative to FY2023 amid (1) lower global commodity prices narrowing the goods trade deficit and (2) services trade surplus remaining steady. We estimate FY2024 CAD/GDP at 1% assuming average crude oil price of US$85/bbl (lower effective price due to Russia-led discount) with a BOP surplus of US$12.2 bn factoring in lower capital account (higher FPI flows offset by lower banking capital). We continue to expect USD-INR to trade in the range of 81.5-83 in the near term and average at around 82.7 in FY2024E.

Struggle for investing ideas (Kotak Securities)

We struggle to find ideas in the consumption, investment and outsourcing sectors after the sharp run-up in several of our favored sectors and stocks in the past two months. The BFSI sector is the only sector that offers value although even insurance stocks have rallied in the past few days.

Broad-based rally—reasons not very clear

The Indian market has seen a broad rally in the past few months but headline indices have seen more modest performance. We are not very clear about the reasons for the rally and the divergent performance. India’s continued weak consumption demand should be negative; recent commentaries from companies show no change) for smaller companies while the improved macro in the form of lower inflation and CAD should have been more favorable for performance of large-caps based on better top-down view of India among foreign investors. Large passive FPI flows may reflect that (see Exhibits 7-8). However, the Indian market has lagged most DMs and several EMs quite significantly.

Mid-caps and small-caps doing their own thing

We do not see any particular reason for the excitement in mid-cap. and small-cap. stocks. We note that mid-cap. and small-cap. Stocks have significantly outperformed their large-cap. peers in the past 2-3 months. We can perhaps understand the re-rating seen in certain sectors such as BFSI (smaller private banks), healthcare services (hospitals) and real estate given (1) their somewhat reasonable valuations before the recent rally and (2) strong outlook. However, we struggle to understand the rally in smaller consumption and IT services stocks given continued weak domestic demand (valid for consumption sectors) and weakening global (valid for IT services) demand.

Headline valuations may be misleading

The Indian market valuations may not look very expensive on headline basis versus recent history and bond yields. However, (1) the cheap valuations and (2) the large contribution of banks to overall profits of the headline indices may be holding down overall valuations. We focus on bottom-up valuations but find valuations very expensive in most cases in the context of (1) past valuations that were supported by low global interest rates and (2) future disruption that is not factored in valuations clearly.

Very little value in most parts of the market

The broad-based rally across sectors and stocks in the past few weeks has resulted in rich valuations for the consumption and investment sectors versus history. Most stocks in these sectors are trading at close to or above our 12-month fair values. Valuations of outsourcing sectors may look reasonable versus history but the IT services sector faces both short- and medium-term challenges. Valuations of most BFSI stocks are still attractive despite the recent run-up in insurance stocks.

Monsoon monitor: Rainfall and sowing pick up (Nomura Securities)

Rainfall deficit reduces over the week; pick up likely over coming fortnight: While the first fortnight of Jue-23 started on a weak note (37% below its long period average (LPA)) due to the formation of cyclone Biparjoy, the past week has witnessed a good onset of monsoon across regions leading to a reduction in pan India monsoon deficit to 28% below its LPA. Both India Meteorological Department (IMD) and Skymet weather team have called for a pick-up in rains over the next fortnight; moreover, they have alluded normal monsoon conditions an India in the first half of Jul-23.

Kharif sowing – steps up: The overall area sowing for kharif crops has picked up strongly over the past week with the onset of monsoon, and is currently only c.4.5% below last year levels (vs. 49% decline a week ago). Key kharif crops such as paddy, oilseeds and pulses have witnessed a healthy pick-up in sowing.

Reservoir levels – still strong to support irrigation: While over 65% of Indian agricultural lands (Fig. 11 ) are dependent on monsoon for the cultivation of kharif crops (paddy, maize, soyabean, cotton, sugarcane, etc.), it is important to note that the reservoir levels are above the 10-year average (both on yearly and weekly basis) and should play a crucial role if monsoon falters.

Aluminum: Weakness led by demand uncertainty (IIFL Securities)

Continued weakness in LME Al prices to US$2,135/t is a manifestation of uncertainties on Chinese Real Estate recovery with limited govt support. 23 months of large double-digit decline highlights that on ground, demand uptick will only be gradual. Meanwhile, domestic Chinese supply continues to improve resulting in growing exports. This comes amid a weak outlook for global demand and improving smelter production in North America and Europe, as various key costs (gas, crude, caustic, and alumina) continue to fall.

We expect global aluminium surplus in 2023, which would likely increase in 2024 before normalising, as economic recovery takes hold gradually. This would keep LME Al prices range-bound. We have baked in US$2,350-2,300/t in our FY24-25 estimates.

Demand uncertainty hurting LME Al prices: LME Al price continues to weaken, and at US$2135/t, is well below the average levels seen in 2021/22. Gains seen in early 2023 have all been lost amid sluggish recovery in Chinese Real Estate with weak new starts hurting under-construction work. Other indicators including Industrial output and PV sales are normalising as well. Meanwhile, ex-China demand outlook is weak, driven by slowdown in the western geographies.

Supply position improving in tandem: Supported by healthy production in China, Chinese net export of Aluminium jumped from 238kt in April’23 to 284kt in May’23 – well above the average monthly run rate of 250kt seen since 2020. Production from the North American and European smelters too has stabilised and improved as energy prices have normalised in a significant way. Over the medium term, supply can rise further as Chinese smelters maximise utilisation of capped 45mt capacity. We see surplus over the medium term, albeit one which shrinks as demand recovers.

Steel: Long prices continue to inch down; the prices of flat remain stable (MOFSL)

Long steel prices have been continuously sliding since Mar’23 and are currently trading at Sep’21 levels. Ex-Mumbai benchmark primary long steel prices corrected by INR600/t WoW to INR52,900/t.

·         IF route long steel prices witnessed a larger decline due to limited trading activity, as traders and vendors adopt a ‘wait and watch’ approach. The list prices for IF route 10 – 25mm long steel list prices are currently around 50,650-51,000/t. However, actual trades have been recorded at prices as low as INR46,00/t.

·         Long steel prices have remained under pressure. Steel manufacturers are dealing with higher inventory (May’23 production up 24% MoM at ~4mt); the project segment has witnessed a lower offtake; traders and vendors are engaging in destocking due to weak demand; and customers are limiting themselves to need-based buying.

·         However, domestic HRC prices have remained relatively unchanged with prices decreasing by INR200/t WoW to 55,400/t.

·         Export prices from China have inched up by USD7/t WoW and USD27/t since the start of Jun’23 at USD557/t and domestic export prices are at USD565/t. As steel prices in the export market are almost at par with no headroom for arbitration, India has not seen any major import bookings over the last week.

·         As Chinese as well as Vietnamese offers have firmed up, Indian merchants are finding it less attractive to procure from international markets. This has had a positive impact on HRC prices as they have remained relatively immune to the recent price correction observed in long steel products.

·         However, even though the inventory with traders and vendors are at recent lows, they are awaiting clear macro-economic signals and list price announcement by steel mills for the next month.

·         However, we believe, steel prices which have corrected almost 10%-15% since Feb’23 have neared its bottom, and hence, we believe the majority of the downside has been priced with no major price correction expected in the near term.

Key downside risk: China economy is showing signs of a slowdown with lower-than-expected real estate and automobile sales. If the government fails to implement stimulus to support the struggling economy and fails to excite the sector as it has done in the past, it could have a cascading effect on all industries, particularly metals sector.

Banking: Balance sheet strength to sustain though RoA peaking (ICICI Securities)

Despite the initial scare, the Indian banking system has emerged strongly post the covid pandemic in the form of all-time high CET 1 levels, decadal low gross /net NPAs and strong contingent provisions. FY23 has been a good year for the banking system with credit growth touching multi-year high and NIMs rising to the highest level in a decade. Strong NII growth has more than offset small headwinds on treasury and opex intensity, driving the highest RoAs / RoEs in the last 8-10 years. Going ahead, credit growth is likely to decelerate, but should still be healthy at 13-14% CAGR over FY24-25E, in our view.

Post 21-23% YoY rise in NII and core PPOP in FY23, we see growth tapering down to 13-15% YoY in FY24E (and then improving to 15-17% YoY) for our coverage private banks. As against 35-40% YoY growth in the last 2 years, we see PAT growth for our coverage private banks moderating to ~15-16% for FY24/25E. Unlike steep rising RoAs /RoEs trajectory in the last 3 years, we see broadly stable RoAs / RoE for FY24-25E, which along with slight moderation in credit growth / NIMs, which could limit the re-rating potential of valuation multiples in the near term, in our view.

However, strong double digit book value growth, strong balance sheet and reasonable valuations provide comfort. We prefer stocks that can deliver strong growth (both deposits and advances), have rising RoAs, visibility of MD & CEO continuity and reasonable valuations.

Credit growth to moderate to 13-14% CAGR vs ~18% of recent peak...: Credit growth started FY23 with 11.2% (YoY) and reached the peak to 17.9% (YoY) in Oct’22, partly on pent-up demand. However, a steep 250bps repo rate hike during May’22 to Feb’23 period led to a steady moderation in credit growth to ~15.0% by Mar’23. It is important to note that our bottom-up calculations aggregating >90% of the system by loans suggest credit growth stood at ~18% YoY for FY23 (vs ~20% YoY in Q2FY23). While the divergence is huge, it is not uncommon as the date for both datasets are different.

The key takeaway is that we have already seen around 200-300 bps moderation in credit growth from the recent peak and estimate further moderation limited up to 200bps. We expect systemic credit growth to moderate to 13-14% for FY24-25E (vs 15% YoY in FY23). We estimate loan growth for our coverage private banks at >16% YoY for FY24E vs ~18% in FY23. We expect SBI to grow largely in line with the overall system. There has been divergent approach to loan growth for private banks and PSBs. Unlike the initial 3 quarters of FY23, Q4FY23 saw private banks delivering higher growth QoQ vs PSBs and we expect the trend to sustain.

...which along with moderating NIMs should lead to moderation in PAT growth: FY23 has been a good year for the banking system from NIMs perspective with sharp rise in yields under EBLR regime and contained rise in the cost of deposits (due to healthy liquidity / lower LDR). Most of the banks (barring CUBK and Bandhan) have seen healthy NIMs expansion YoY. As per our calculations, NIMs expansion was visible in Q1FY23, gained pace in Q2FY23 and seem to have peaked in Q3/Q4FY23. Apart from rate cycle, there have been some structural drivers for NIMs expansion in the form of lower net slippages, reduction in net NPAs, and favourable loan mix (stronger growth in higher yielding segments such has unsecured / business banking / MSME etc.), which should continue to support NIMs going ahead. We model-in 10-20 bps NIMs decline YoY for FY24 though highlight that quarterly NIMs decline from the recent top could be as steep as 50bps YoY for select banks. Despite moderation, we see FY24 NIMs to be still better than earlier years barring FY23. We expect FY24 NII growth to moderate sharply to ~13-14% YoY, within which H2FY24 could see even sharper moderation YoY on high base.

Easing of Liquidity Unlikely to Push Down Lending Rates (India Ratings & Research)

Significant Improvement in Banking System Liquidity: The liquidity in the banking system has improved meaningfully starting from the second half of May. Overall, the net liquidity adjustment facility balance clocked INR2.4 trillion in the first week of June as opposed to the average INR0.5 trillion in April. The improvement in liquidity has largely been caused by the Reserve Bank of India’s (RBI) dividend transfer (INR874 billion) and subsequent spending by the government, an improvement in FPI flows (1QFY24: INR817 billion; till 20 June) and withdrawal of INR2,000 currency notes.

Ind-Ra expects the surge in liquidity (partly due to base money creation M0) will be adequate for 2QFY24, and therefore will ease financial conditions, based on the assumption of moderate-to-neutral net balance of payment surplus/deficit.

Asymmetric Liquidity and Conservative Approach by Banks: While the banking system has shown a surge in liquidity on a net basis, all banks are not in surplus. This has reflected in elevated borrowings from the marginal standing facility window. In addition to that, the muted response in the Variable Rate Reverse Repo (VRRR) auction further showed the banks’ conservative approach (Figure 1). The diverse nature of banks’ behaviour, as reflected in the divergence trend between high surplus liquidity and muted interest in VRRR, is actually the minimal opportunity loss between VRRR (in general average rate of VRRR) of 6.49% and standing deposit facility of 6.25%, in relation to the prevailing uncertainty in the system liquidity.

Broad Based Deposit Rate Stabilised: Ind-Ra believes deposit rates in the banking system have stabilised, driven by a moderating credit demand and the easing liquidity in the banking system. However, the agency does not see any fall in deposit rates, especially in the retail segment. The reason being, banks are still facing challenges because of multiple products in the financial market against long-term, stable deposits. Moreover, the merger of the largest housing finance company HDFC Limited with the HDFC Bank (IND AAA/Stable) will necessitate a higher demand for deposits to replace existing liabilities in the books of HFC. Moreover, in an uncertain environment of healthy credit demand and volatile liquidity and rising issuances of certificates of deposits, banks will continue to focus on strengthening their deposit base.

Lending to Continue to Face Upward Bias, albeit at a Moderate Pace: Given the large part of the incremental credit disbursement has been supported by the drawdown of cash flow with the RBI in lieu of Reverse Repo in FY23, the impact of marginal cost of funding has so far been limited. However, Ind-Ra opines that the incremental funding by banks in FY24 would have to be done by way of fresh deposits, therefore the marginal cost of funding will go up reasonably. Overall, deposit rates in the banking system have shot up by 150 to 200bp in the past one year, which has resulted a 75bp increase in aggregate deposits in the system.

Easing of Money Market Rates: Overall money market rates have softened in the last fortnight, owing to the significant improvement in banking system liquidity. The agency expects the overall liquidity to remain supportive in the coming three to four months. Therefore, overall rates in the money market will remain soft, however a significant fall in them is not expected owing to a likely pick-up in issuances.