Vijay Kumar Gaba

Strategy: Are companies and investors both being ‘short-termish’? (Kotak Securities)

We are quite puzzled by (1) consumer companies’ excessive focus on near-term profitability and (2) investors’ endorsement of the same. Companies seem willing to compromise on market share and volumes to improve profitability. However, this strategy may create fertile ground for more competition from regional players in the short term and from new entrants in the short to medium term. Their high profitability and returns are unlikely to sustain anyway, given weakening business moats and models.

Consumer companies focusing on near-term profitability, despite weak demand

The sharp improvement in profitability of consumer companies in the past four quarters, despite sluggish demand would suggest that they are prioritizing profitability over volumes. In fact, the profitability of automobile companies has risen dramatically in FY2023, despite a sharp increase in RM prices over FY2022-23 and collapse in volumes over the past few years (see Exhibit 6). The companies’ strategy of profitability-maximization through constant price increases may have also impacted volumes negatively through lower affordability.

Preparing against competitors or preparing competition

We are not sure about the logic of the profitability-maximization strategy of the incumbents. They may be keen to maximize profitability/profits in preparation for forthcoming competition. However, they may also be arming competition inadvertently. (1) Consumer staple companies are seeing market share loss to regional players, who have been faster to cut prices and pass on the benefits of declining RM prices to consumers. (2) Incumbent companies could see a major dent in profitability as and when entrants achieve scale. The entrants may be content with lower profitability and still earn reasonably high returns (higher than cost of capital). The high profitability/returns of incumbents has already attracted deep-pocketed competition in several consumer categories.

Investors also focusing too much on near-term profitability

The sharp rerating in multiples of 2W and paint companies over the past 2-3 quarters would suggest that investors are (1) endorsing the short-term profitability-maximization strategy of companies and (2) ignoring the medium-term risks of this strategy. These sectors will see tremendous increase in competition in the next 1-3 years. As articulated in our earlier reports “Disruption of valuation models too, disruption is a matter of ‘when’ and not ‘if’ in several sectors”.

Investors may be dancing to ‘flows’

We are unclear about the rationale behind the endorsement given by investors to the profitability-maximization strategy of companies, given near-term weak volumes and medium-term risks to business models. Strong FPI and DII ‘flows’ (see Exhibits 9-10) may have brought the near-term positives of improvement in profitability to the forefront and pushed short-term issues of weak demand and medium-term concerns of a likely sharp profitability cut to the background.

Strategy: What happens when household spending slows down? (MOFSL)

We believe that personal consumption and/or household investments will slow down this year, which has the potential to disrupt the retail lending boom that India has witnessed over several years. The primary assumption behind this thought process is that net financial savings (NFS) of the household sector is likely to pick up in FY24, after falling to a three-decade lowest level in FY23. In this note, we discuss whether history supports our thesis.

Based on data for almost the past quarter of a century (FY00-FY23E), the following two questions arise:

1. How strong is the synchronization between personal consumption and household investments (or physical savings)? and

2. How correlated are the movements in household spending (consumption +investments) vis-à-vis household debt?

Our analyses confirm that consumption and investments of the household sector have moved in similar directions in two-thirds of the period between FY00 and FY23E. In 16 years of the 24-year period, both personal consumption and household investments have either grown at a faster pace or decelerated (or contracted) together. Of the remaining eight years, they moved in different/opposite directions, i.e., when consumption grew faster, investments grew slowly (or declined) and vice-versa.

During the past 24 years, the growth in household spending and debt has synchronized 13 times, of which it happened eight times since 2010. Of the remaining 11 episodes, spending growth had weakened in six years, while debt rose at a faster pace (only twice since FY

`10). In other words, of the 14 years in which household spending growth weakened (including FY21 when it declined), household debt growth also decelerated in eight episodes – about three-fifths of the time. Further, we find that the relationship between household spending and their debt has improved in the post-2010 period, more so with banks’ exposure to the household sector.

Overall, the historical analysis does not give us any reason to change our thesis. We continue to believe that due to weak income growth and an assumed pick-up in NFS, personal consumption and/or residential investments growth would grow slowly in FY24, which could disrupt the retail lending boom this year.

Alternatively, NFS could drop further this year, supporting household spending and debt growth at the cost of higher investments.

Wages recover in FY23, IT and rural jobs are key near-term concerns (ICICI Sec)

In FY23, the aggregate wage bill of the listed private corporate space expanded by a robust 17% to reach Rs11.5trn driven by NBFC, private bank, IT, consumer discretionary, industrial and auto sectors. Aggregate wage bill, or ‘compensation of employees’ (CoE), of the entire private corporate space in the economy grew by a sturdy 21% YoY in FY22 to reach Rs30trn. This overtook the public sector wage bill (~Rs28trn) for the first time as per the National Accounts Statistics (charts 1&2).

The rising trajectory of private corporate wage bill appears structural having grown from ~9% of GDP in FY12 to ~13% in FY22 as the formalisation effect takes effect. This has resulted in a 10-year CAGR of 14% as against nominal GDP growth of 10% (chart 1). A developed economy like the US has a private sector ‘compensation of employees’ to GDP ratio of ~45% vs ~13% for India – thus indicating significant runway ahead.

Private corporate wage bill growth over the past decade was driven by the twin effect of robust wage growth for existing employees (8-10% as per salary surveys) and new additions to the formal workforce. Rapid expansion of the formal workforce is corroborated by EPFO data (14mn net additions over the past 12 months) and rising personal income tax collections.

Key near-term risk to private corporate wage bill expansion lies in the significant

weight of IT services in private corporate sector wage bill in India (~42% for the listed space) in an environment of slowing IT and tech start-up hiring, as well as slow wage increase in the near term. However, in terms of the number of employees, the IT/BPO sector accounts for just 12% of the organised sector workforce, or ~1% of the overall workforce (chart 8).

Growth in aggregate wage bill of the informal segment holds the key for aggregate

income growth as it accounts for the lion’s share of non-agri working population (~72% of the non-agri workforce – chart 9). It can be assumed that the agri-related workforce, which makes up ~46% of the overall workforce, is largely informal thereby taking the overall informal workforce north of 85%. As per the Economic Survey 2022, the informal sector constituted ~89% of the workforce in FY20.

Informal job demand in urban India appears strong due to the cyclical recovery in investment rate, real estate, construction, leisure, hospitality, etc., which can potentially generate more informal jobs. Annual PLFS study indicates that, for a casual labourer in urban India, the daily wages increased from Rs385/day in Q2FY21 to Rs464/day in Q1FY23. Also, the monthly average income of a salaried person in urban India grew from Rs20,030/month in Q2FY21 to Rs21,647/month in Q1FY23. Private surveys indicate strong demand for ‘blue collar’ jobs (link to media reports on blue collar jobs demand).

On the flip side, average income of a salaried person in rural India has stagnated at ~Rs14,700/month for the 18-month period ending Q1FY23 as per the annual PLFS study. However, daily wages of rural casual labourers have increased from Rs302/day in Q2FY21 to Rs368/day in Q1FY23.

Key near term risk to rural income is the uncertainty around agricultural output in FY24 due to severe weather conditions.

Monsoon and Sowing: Positive changes seen (Bank of Baroda)

India’s South-West monsoon has gathered momentum with higher rainfall at 5% (above LPA) till 23 Jul 2023. With this pickup, overall kharif sowing is also higher by 1.2% with rice acreage in green though pulses continue to register lower sowing compared with last year. Region wise, North West and Central Region have recorded higher rainfall, while Southern peninsula and Eastern region rainfall are in the deficient zone. A total of 8 subdivisions and 6 states, have received lower rainfall during this period (1 Jun-21 Jul 2023). Distribution of rainfall needs careful monitoring along with sowing of Kharif crops. Any shortage or excess might play a significant role on prospects of agriculture growth.

Where does Kharif sowing stand? The overall kharif sown area has increased by 1.2% as of 21 Jul 2023, (-2% in the previous week) compared with last year. Acreage of rice picked up pace (2.7%) and is in surplus for the first time in this season. Led by improvement in sown area of Bajra (11.3%) and steady pick up in Jowar and maize, the overall sown area of coarse cereals (4.8%) has improved compared with last year. Steady improvement was also registered in the sown area of sugarcane and oilseeds. However, pulses sowing has declined by 9.8% led by Arhar (-18.4%) and Urad (-9.7%). Even cotton and Jute & Mesta has registered lower sowing this year.

Utilities: Smart metering – a game changer? (IIFL Securities)

The state-owned discoms forego Rs1.4-1.5tn revenue p.a. due to billing inefficiencies. To plug such revenue losses Govt is fast-tracking installation of 250mn smart meters by FY26 which can read, store data, and bill power consumption remotely (GPS/radio frequency, etc). Several players (NTPC-PWGR JV, TPWR, Genus, etc) are eyeing this opportunity (EPC/system integration).

Seamless execution can fetch these players ~15% RoE. Smart meters with pre-paid feature can significantly alter the sectoral landscape; this however remains politically sensitive. As such we maintain a positive stance on the sector.

Smart meters can alter the sectoral landscape: As per CEA, due to billing inefficiencies (due to human intervention, etc) the state-owned discoms are estimated to forego revenues of Rs1.4-1.5tn p.a. Installation of smart meters can potentially plug such revenue losses through real time automatic remote reading. The Govt is persuading discoms to install 250mn smart meters by FY26, for which a grant of Rs233bn is set aside (~25% of the cost); as such if executed well, it can significantly alter landscape of the Indian power sector.

Vendor base can earn ~15% RoE: As of now only 6.6mn smart meters are operational; given the policy push, several states may expedite the installations; however instead of incurring capex on their own, discoms will likely opt for the TOTEX mode (vendor incurs capex, undertakes O&M and earns monthly rental), which avoids upfront investment and yet improves billing efficiency. Several players such as EESL (PWGR-NTPC JV), TPWR, Genus Power, HPL Electric, etc. are eyeing this business opportunity from pick up in smart metering activities. Such activity can earn 12-15% RoE if executed well; meter manufacturing will also see a ramp up, where however barriers to entry are relatively low.

Not the ultimate solution: Installation of smart meters is the first step towards improving billing efficiency; it needs to be followed with improvement in collections, which is equally challenging; hence installation of pre-paid meters combined with smart meters can bring desired results. Pre-paid smart meters, while logical and efficient, may not go down well politically, particularly in an election heavy year.

How do smart meters differ from traditional ones? The billing activity in a discom is conducted by physical inspection of meters at the customer premise; this is either done by employees of discoms or a contractor to whom the activity is outsourced. Given human involvement, such a process often leads to inefficiencies in billing data and lower collections for the discom.

As per CEA India’s average billing efficiency was ~85% (i.e. of every 100 units sold, only 85 units are billed); that means, nearly 227-230BU were not billed to consumers by utilities across the states, leading to a revenue loss of Rs1.4-1.5tn; if this is contained the revenues of discoms can potentially increase by 10-15%, and they may not need constant financial support from various financial institutions including PFC/REC. As such there is a need to cut down human intervention, enhance automation, data storage, etc, which can potentially be done by the installation of smart meters.

In case of smart meters, the power consumption data is shared through wired/wireless means to the service provider on a real-time basis; there is no human intervention for reading, reconciliation, etc. Smart meters keep records of power consumption by the customer, encrypt the data, and transmit it using communication protocols to a meter data management system at the utility centre, basis which the consumers are billed at the end of the month.

India Chemical: No respite yet from cheaper imports (IIFL Securities)

Import volumes across DAP, complex fertilizers, Bromine and Phenol rose sharply QoQ while that of PVC, Soda Ash and Ammonium Nitrite declined. Though imports of some chemicals have declined sequentially, they remain at elevated levels creating headwinds for domestic import substitution products. Benign freight costs have only aggravated the pain.

DAP and NPK imports on the rise: Imports of NPKs rose ~41% YoY in 1QFY24, while it rose 31% sequentially. The growth in volumes was primarily driven by higher imports from Russia which rose 43% YoY. DAP import volumes rose ~2.9x YoY to 2.3 mn MT as availability improved. This was also due to government of India’s push to have sufficient inventory ahead of kharif season. China accounted for ~49% in DAP imports as against ~20% in FY23.

Imports decline sequentially, but remain elevated: India became net importer of Caustic soda as imports rose sharply from Iran. Even though PVC volumes declined sequentially, imports remained at elevated levels. Phenol imports saw spike of 18% YoY while Bromine and Ammonia rose 19% and 20% YoY respectively. Imports of Fluorspar and Acetic Acid remained flattish.

Soda ash imports remain elevated: Imports of Soda Ash rose 61% YoY to ~185,000 MT. Though imports from US were down from abnormally high levels witnessed during 4QFY23, it still remained at elevated levels. Turkey’s share of imports increased from 26% in FY23 to 30% in 1Q. The higher imports have compelled domestic players like Tata Chemicals to take cumulative price cut of ~13-14% during 1QFY24 with the company taking price cut in Apr, May and June 2023.

Infrastructure: Road activity slows down in June 2023

Total road awards by the NHAI and MoRTH combined stood at 229km in Jun-23 (268km in May-23 and 473km in Jun-22). After blockbuster awarding in Mar-23, the NHAI had halted project awards—no LoAs were issued in April and May. However, they awarded three projects spanning ~87km in Jun-23. The NHAI and MoRTH together constructed 785km of roads in Jun-23 (942km in May-23 and 659km in Jun-22).

Project awards and construction decelerate The total road awards (NHAI + MoRTH) stood at 229km in Jun-23 (268km in May-23, 473km in Jun-22). All the projects awarded in April and May 2023 were by MoRTH as the NHAI did not award any new road project. However, after a two-month pause, the NHAI awarded three projects aggregating ~87km in Jun-23.

Combined awarding in FY23 stood at 12,375km (12,731km in FY22), of which the NHAI awarded ~6,310km (6,306km in FY22). Road construction in Jun-23 stood at 785km (NHAI + MoRTH) versus 942km in May-23 and 659km in Jun-22. Of this, the NHAI constructed 262km (413km in May-23 and 326km in Jun-22). In FY23, road construction stood at 10,993km in total, of which the NHAI constructed 4,500–4,600km of roads. According to a media article, the ministry is looking to increase its road construction target to ~14,000km from 12,500km, implying a pace of 38km/day in FY24E.

Outlook: A mix of hope and caution While NHAI awarding was disappointing in FY23, higher budgetary outlay for roads provides hope for better awarding going ahead. While commodity prices have softened, high competition remains an issue (with knock-on effect on margins going ahead). The pause in interest rate hikes by the RBI, government’s thrust on roads and improved credit availability from banks are notable encouraging factors.

Given this backdrop, we argue road developers must work on segmental diversification since their ability to win adequate road orders at desired margins is now under question. We prefer road companies with robust balance sheets.

Economy: Weak input inflation and pullback in June trade (AXIS Capital)

Input inflation continues to fall and should exert downward pressure on CPI goods inflation hereafter. Meanwhile, trade trends are showing signs of weakness after a sustained improvement in recent months. On the one hand, the moderation in the global industrial cycle, as seen from manufacturing PMIs due to tighter financing conditions, could keep a lid on India’s goods exports growth. On the other hand, pockets of buoyant domestic demand and food inflation will likely dictate RBI’s pause.

June merchandise trade deficit fell by USD 2 bn to USD 20.1 bn, led by a weaker oil imports bill. Exports, in value terms, have slowed further, on ‘gems & jewelry’, engineering goods, and petroleum. Meanwhile, the imports bill was also weaker, led by oil, coal, machinery, and electronics. Our volume estimates for goods trade also indicate some pullback in exports and imports after witnessing a ramp-up in May. Weaker petroleum and engineering exports are seen in volume terms as well. Services exports and imports slowed YoY but were unchanged MoM. Services exports have averaged at USD 27.7 bn in the first half of 2023, viz. only USD 230 mn below the highs seen in the last quarter of 2022. More importantly, services exports on average are 40% stronger than 2019’s levels.

June WPI slowed further to (-)4.1% YoY vs (-)3.5% in May, led by the energy segment. Overall, the wholesale inflation in manufactured goods rose marginally, with eight of 22 sub-classifications showing higher inflation sequentially, led by basic metals and food.

What we think. While the correction in wholesale input prices continues, shocks to perishables in combination with stronger pricing power for firms indicated by PMIs should establish a bottom soon. Meanwhile, there is moderation indicated by trade in both value and volume terms. However, we should read the YoY trends with some skepticism due to the impact of the war. When we look at the exports and imports re-indexed to 2019, the trade data shows some resilience in value terms. In volume terms, there is some pullback, which could prove to be noise. We must see if Indian manufacturing gains export market share at a time when the trade pie may not grow and could shrink even for industrial goods due to tighter financing conditions.

…CAD/GDP expected at 1.1% of GDP in FY24 (Yes Bank)

tight band for the last three months is trading higher at ~ USD 80-81 pb. Market expectation of end of rate hiking cycle as also expectations of a policy boost for China has led to some bounce in the commodity space. Earlier, the top crude oil exporters including Saudi Arabia and Russia had announced a series of output cuts to support prices. But this failed to have any notable impact on prices as the focus was mainly on the slowing demand in the global economy. However, in its latest report, IEA has pointed out that the output cuts could lead to substantial deficits in global oil supplies starting from July, potentially pushing up prices.

OPEC has also recently hiked the demand estimate for oil for the globe for FY24. Above developments is a risk for India’s import bill. The external demand is weakening, reflective in weaker core export prints. After peaking in March (due to year-end seasonality) core exports have been on a glide path. Similarly on the imports side, core (NONG) imports have been on a moderating trend, possibly indicative of slowing growth in India too.

Microfinance: Unlocking growth; empowering lives! (MPFSL)

The Indian MFI industry is entering the growth phase and we expect the industry to post a healthy 20%+ loan CAGR over FY23-25 along with a further improvement in asset quality and expansion in return ratios. The industry after facing both growth and asset quality disruptions during the Covid-19 period, reported a strong recovery in FY23 that is likely to pick up further pace in the coming years.

Growth trends recovering; industry size to increase to INR5.1t by FY25

The microfinance industry reported a healthy 24% CAGR over FY18-23 despite high inherent business cyclicality. Industry growth further improved in FY23, with total disbursements amounting INR3.0t of microfinance loans in FY23. Growth was driven by improving penetration in existing states and the expansion into new states. As per CRISIL, the microfinance industry is likely to post a CAGR of 18-20% over FY23-25 to INR5.1t, with NBFC-MFIs set to grow at a faster pace.

Microfinance – the fastest-growing retail product

Among major retail segments, microfinance loans have grown at a faster pace compared to other categories such as credit cards, housing loans and auto loans (see Exhibit 19). We believe that a large untapped market presents a significant growth opportunity for the industry. The share of microfinance loans within total credit stood at 1.3% as of FY23, up from 0.9% in FY18. Within retail loans, the mix of microfinance loans stood at 4.3% as of Mar’23, down from 4.6% as of Mar’22.

NBFC-MFIs to maintain growth leadership

NBFC-MFIs witnessed the fastest growth over FY18-23 with a 24% CAGR to INR1.4t as of FY23. Loans from banks/SFBs saw a CAGR of 9%/13% over FY20-FY23. Accordingly, the share of NBFC-MFIs in total microfinance loans improved to 40% in Mar’23 from 31% in Sep’19, while the share of banks/SFBs moderated to 34%/17%. As per CRISIL, the gross loan portfolio (GLP) of NBFC-MFIs is expected to grow at a faster pace of ~20-22% to ~INR2t by FY25.

Increasing penetration to further augment loan growth

Growth in the microfinance industry has been driven by an increase in the number of unique borrowers and a rise in the ticket size. We note that the number of loan accounts more than doubled to ~130m in FY23 from 57m in FY18, while the number of unique borrowers increased to 66m as of FY23 from 49m in FY19. We further note that MFIs’ presence in the fast-growing regions of North, Central and West remains considerably lower compared to other geographies; hence, we believe increasing penetration in these regions provides significant opportunities for growth and geographical diversification. Penetration remains low in key states, UP, Gujarat, Maharashtra and Rajasthan, and these markets can provide healthy growth opportunities over the medium to long term.

PAR-30 book moderates steadily; profitability set to improve

The microfinance industry witnessed a sharp deterioration in asset quality due to Covid-19. The PAR-30+ book, which stood at ~1.3% before Covid (Dec’19), increased to 14.8% in Jun’21 (2nd Covid wave). However, with improvement in the macro environment and the collection run rate, the PAR >30 book improved to 2.2% as of FY23. While NBFC-MFIs have taken a lead in the asset quality turnaround, we saw broad-based improvements in PAR-30 portfolios for most MFIs in FY23. A recovery in the profitability of the industry, a sustained uptick in collection efficiency and improvements in PAR ratios should help MFIs lower credit costs and drive healthy profitability over the medium term

Power Transmission: Grid metamorphosis (ICICI Securities)

Indian transmission needs a makeover to accommodate higher proportion of renewables. The new grid is likely to have 500GW (+340GW) of RE capacity by 2030 (as per government targets). Essentially, this entails building a grid to evacuate power from these RE projects worth Rs2.5trn – equivalent to building the current grid. The National Committee on Transmission in recent meetings had finalised a large number of transmission projects worth Rs0.8trn in Rajasthan and Gujarat for evacuation renewables. As a result, we estimate projects worth Rs1.8trn have been recommended for implementation. Note that bidding is compulsory for all new transmission projects. The bidding pipeline has now swelled to Rs600bn, with the approval being received for Rs1.8trn, which includes 3 major HVDC projects worth Rs625bn.

Transmission pipeline has spiked to Rs1.8trn as of Jun’23: The National Committee on Transmission approved twenty (20) transmission projects worth Rs760bn on Jul 7, ’23. As a result, the total pipeline of projects has increased to Rs1.8trn as of Jun’23 with bid floated for projects worth Rs600bn. We expect bids of Rs250bn in FY24E and Rs350bn in FY25E (vs Rs126bn in FY23). Note that these opportunities are only for inter-state transmission projects.

3 HVDC projects under finalisation: 3 HVDC projects worth Rs820bn have been approved by the committee in the last two years. These projects are Leh Ladkah, Bhadla Fatehpur and Khavda – Nagpur with cost of Rs265bn, Rs127bn and Rs.241bn, respectively. Siemens and GE T&D are the likely beneficiaries of a pickup in HVDC projects, in our view.

RE capacity addition to drive transmission opportunity of Rs2.5trn: India has set an ambitious target to achieve 500GW (vs 170GW as of FY23) of renewable capacity by 2030. RE projects are usually located in remote areas, far from the national grid and hence pose a significant challenge in setting up the evacuation infrastructure. We expect transmission opportunity of Rs2.5trn while setting up this RE capacity. Note this opportunity does not include 125GW of RE capacity expected for green hydrogen production and intra-state transmission opportunities.

Regulatory issue is behind us; awarding likely to pick up: Transmission project awarding activity had taken a major hit in the recent past after an ESG-related litigation in the Supreme Court for projects in Rajasthan and Gujarat. However, after a positive ruling from the court, project awarding has already picked up from Q4FY23. Transmission awarding in FY23 stood at Rs126bn (vs Rs23bn in FY22).

Steel update (Indsec)

Steel: As per world steel association, the global steel production in May fell by 5% YoY to 161.6 MT this decline in production was due lower production in China, Europe, Japan, and USA. In June, the Indian crude steel production stayed flat as compared to May, at 11.28 MT. In June, the production of crude steel increased on MoM basis while the production and consumption of finished steel declined on MoM basis. Inventory of finished steel with steel producing companies increased by 5.5% MoM/42% YoY to 12.07 MT.

In June, India turned out to be net exporter of steel. The imports stood at 4.84 LMT which was a 5.9% increase on MoM basis and a 7.9% increase on YoY basis. Major contributors of these imports turnout to be China, Japan, and Korea, where China’s contribution in imports in India increased from 26.1% in June ’22 to 37% in June’23. This increase was due to their muted domestic demand.

Exports for the month declined to 27.6% MoM basis and by 21.3% YoY basis to 5.02 LMT this was due to subdued demand in Europe, also due to Vietnam and UAE preferring China’s cheap steel.

HRC prices for June stood at Rs. 55412/t which was a decline of 2298/t while the CRC stood Rs. 58500/t which Rs.3000/t. The decline was due to rising sustained Chinese imports. The coking coal prices continued to fall to $243/t which is $7/t lower from last month.

Overall, the Indian steel companies in June continue to get impacted by falling steel prices, declining exports and rising imports. In our view, the steel prices could remain rangebound. However, due to monsoon Q2FY24 would be a seasonally weak quarter. As per steel mint, the global steel prices have improved as result due to better economic conditions in Europe and the channel restocking expected in Europe due summer season. This higher global price will also make the imports expensive this by narrowing the gap between the domestic and import prices. Going forward, we expect the exports in Q2FY24 to be better due resurgence of demand in Europe. Media reports have hinted at a Chinese stimulus which could be supportive for steel prices.

Specialty chemicals on domestic drive, revenue seen growing 6-7% (CRISIL Ratings)

The Indian specialty chemicals sector will see revenue growth of 6-7% in fiscal 2024, with higher domestic demand (~60% of total revenue) driving up volume growth even as macroeconomic headwinds in the US and Europe subdue exports. Besides, realisations are expected to remain flattish this fiscal, which will have a moderating effect on the overall revenue growth.

Last fiscal, revenue growth had plunged to ~11% from 41% in fiscal 2022 owing to steep correction in realisations in the second half triggered by dumping from China, where consumption fell sharply owing to strict zero-Covid policy.

An analysis of 121 specialty chemical companies rated by CRISIL Ratings, accounting for nearly a third of the ~Rs 4 lakh crore industry, indicates as much.

That said, growth trends would be different across sub-segments, with the agrochemicals and fluorochemicals sub-segments (over ~35% of total revenues) likely to see double digit growth in fiscal 2024. Agrochemicals help improve nutrient in crops besides control pests, and has been growing at a steady pace, while fluorochemicals cater to niche emerging verticals such cold storage, semi-conductors, EV batteries, and hydrogen fuel cells. On the other hand, sub-segments such as dyes & pigments, personal care & surfactants, and flavours & fragrances (together contributing over 40% of total revenues) shall see relatively lower growth as their demand is linked to discretionary spending.

With realisations having bottomed out, higher sales volume and moderated crude-linked raw material prices will support operating margin, which is expected to stabilise at 14.0-14.5% this fiscal, almost similar to last fiscal.

Operating margin had fallen 300-350 basis points last fiscal following dumping by China. Some companies, especially in the polymer segment, suffered material inventory losses.

Capital expenditure (capex) is expected to remain high as manufacturers focus on augmenting capacity and expanding downstream to value-added products to seize opportunities emanating from Europe, where high labour cost makes local operations less competitive. This will be in addition to the continuing China+1 strategy adopted by global majors as part of their diversification strategy.

Steady cash generation and healthy balance sheets will ensure debt metrics remain adequate, despite higher debt for capex and incremental working capital lending stability to credit profiles.

 China begins to export deflation (Elara Capital)

Lowest producer prices since CY15; consumer prices stagnate China’s producer price inflation (PPI) for June declined 5.4% YoY – levels last seen in CY15 in continuation of the deflationary trend since October 2022. Retail inflation stagnated in June and likely remains on course for deflation in the upcoming months. Barring the COVID period of CY20, China’s CPI is at the lowest level since the CY08 Global Financial Crisis. Falling crude and coal prices were the primary drivers of deflation in China’s PPI coupled with subdued demand for industrial products evident from new manufacturing orders index staying in contraction for three consecutive months and industrial capacity utilization below pre-COVID levels.

Our analysis using data since CY02 shows China’s PPI impacts exports to India with a three-month lag. The model with China’s PPI as the independent variable shows a 100bp fall or rise in PPI leads to a similar magnitude of rise or fall in exports to India at statistically significant levels. This indicates China’s producers are unable to fetch prices domestically and tend to offload inventory in healthier domestic markets.

While some sectors in India, particularly oil & gas, consumer electricals, auto and staples, should benefit given that falling prices of commodities such as oil, gas, copper, steel and edible and palm oil are beneficial, others, such as chemicals especially agro-chemicals, textiles, toys, and plastics, may face the heat of rising cheaper imports from China.

INR’s appreciation vs CNY further eroding India’s competitiveness: As China’s domestic markets fail to clear the produce and inventory, product dumping has intensified. Adding to the price differential is the appreciation of the INR against the CNY (the yuan), which appreciated 4.6% YTD, further eroding India’s competitiveness. While imports of China-based chemicals, especially agrochemicals, has increased in the past two months, our analysis shows price differential and continued deflation in China also have encouraged imports of items other than chemicals. The sectors that are most vulnerable to exports of China’s deflation are likely to see pain in the form of inventory losses.

Changing composition of India’s imports from China: We deep dive into data of India’simports from China during March-April 2023 to compare to the period when China’s domestic growth began to lose steam & the rate of producer price deflation began to intensify and analyze commodities where a sharp spike in import volume is visible.

Further signs of easing underlying inflation in the US (Danske Bank)

Overview: Inflation drivers continue to paint a mixed picture, but inflation is likely to head lower through 2023 in the US and euro area. Price pressures from food, freight and energy have clearly eased. Underlying inflation pressures even in the services sector have started to ease in the US, although wage pressures still remain elevated. In euro area, broader price pressures remain high, with tight labour markets continuing to point towards sticky core inflation going forward. We expect the ECB to hike rates two more times, and the Fed to hike a final time in July.

• Inflation expectations: Consumers’ short-term inflation expectations have edged lower especially in the US, but remain elevated. Markets’ longer-term expectations have moved modestly higher in the euro area, and remained stable in the US.

• US: The June CPI surprised to the downside in headline and core terms (both +0.2% m/m SA). Services sector disinflation continues on a broad basis, as core services ex. shelter and health care inflation slowed down for the 4th month in a row (+0.13% m/m, down from February high of +0.80%). Core goods inflation also stalled (-0.05% m/m), as positive contribution from used car prices eased. Shelter inflation continued to cool gradually, and while the latest ‘real-time’ rent measures (such as Zillow Observed Rent Index) have started to edge higher again, usual lags suggest shelter contribution will continue to moderate further over the coming months. With underlying inflation clearly easing, we doubt the Fed will hike rates beyond the July meeting.