Vijay Kumar Gaba

Soft underbelly of India’s robust economic outlook (AXIS Capital)

Is private consumption growth weak due to job distress or weak real income growth? Official labor surveys show that jobs are not a problem in urban India. Participation rates are stronger and unemployment rates are lower than 2019 levels. Both jobs and real incomes were improving over the past few quarters. But the latest bout of high food inflation is a setback for real income and hence broad-basing in consumption.

India’s macro position is being hailed due to its relatively robust GDP growth and well-contained risk parameters like core inflation (within the headline target band) and current account deficit (<2.5% of GDP). However, the soft underbelly of India’s otherwise robust economic outlook is weak private consumption, with growth in real terms near 3% YoY as of the Mar’23 quarter.

There is reason to be hopeful of stronger private consumption over the medium term, since the current growth is primarily led by investments and exports – meaning, stronger activity in these parts of the economy will eventually spill over to a pronounced consumption growth down the line. However, in the near term, we are still confronted with the question: what is ailing private consumption – weak real income or lack of jobs?

The official labor market survey does not indicate post-Covid stress except in a few regions. Over the medium term, labor market conditions should continue to improve as India gains export market share and businesses invest to prepare for a larger domestic economy. Meanwhile, as per a private labor survey, there is job distress among women post-Covid, especially in urban India.

The reason for urban women quitting the labor force could be due to a lack of sufficient job opportunities. On the bright side, the expansion of service exports and the jobs they are generating should improve the pace of urbanization and create opportunities for self-employed women and wage workers.

Plotting changes in urban labor force participation by states against electricity

demand and vehicle registration show a modest positive relationship between the official labor market survey results and hard economic data. This means a sustained improvement in labor force participation should tighten the labor markets, improve wage growth, and broaden the consumption recovery.

Over the next few quarters though, high food inflation trends will likely suppress the pace of broad-basing in private consumption.

India Strategy – Headwinds ahead (Prabhudas Liladhar)

NIFTY has given more than 14% return in FY24 YTD as India attracted more than USD16.5bn of net FII flows. India seems well poised for growth in longer term, however coming months will be a real test for the economy and markets given 1) EL Nino impact on crops and Inflation as food inflation has spiked to more than 7.4% and rainfall outlook remains subdued and 2) dim possibility of further cut in interest rates with some possibility of an increase in 2H. We expect markets to start factoring in political risks as election related activity picks -up with state elections in November and Lok Sabha elections in April 2024. Economy is getting a big push from Union Govt induced capex even as rural India is showing faint signs of recovery and urban discretionary demand remains tepid. Expected interest rate hike in US and its impact on INR/USD with impending political and inflation risk can impact capital flows. We believe high inflation can be a political hot potato in an election year, forcing govt to slow down capex. We remain positive on Auto, Banks, Capital Goods and Healthcare. We cut NIFTY target to 20,735 given cut in earnings (impact of floods and late Diwali in 2Q) and expect markets to consolidate ahead of 2024 elections. We advise stock specific approach and avoiding sectors / companies with weak fundamentals and lack of business moats.

NIFTY EEPS has seen a cut of 1/2.8% for FY24/25 with 14.7% EPS CAGR over FY23-25 with FY24/25 EPS of Rs1013/1138 (1024/1171 earlier). PL EPSE are 3.9% and 6.1% lower than Bloomberg consensus EPS estimates.

NIFTY is currently trading at 18.3x 1-year forward EPS, which is at 11.6% discount to 10-year average of 20.7x.

Base Case: we value NIFTY at 12% discount to 10-year average PE (20.7x) with March25 EPS of 1138 and arrive at 12-month target of 20735 (21430 based on 18.3x March 25 EPS of Rs1171 earlier).

Bull Case: we value NIFTY at 10-year average (20.7x) and arrive at bull case target of 23563 (24353 at LPA PE).

Bear Case: Bear case Nifty can trade at 25% discount to LPA (25% earlier) with a target of 17672 (18264 earlier).

Microfinance Industry Beats Covid Blues, Likely to Grow by 28% in FY24 (CARE Ratings)

The Microfinance industry (MFI) experienced a growth spurt in FY23, expanding at a rate of 37% Y-o-Y due to a favourable macroeconomic climate and renewed demand, which has led to a surge in disbursements over the past few quarters. Consequently, NBFC-MFIs have surpassed banks in the overall microfinancing landscape, constituting approximately 40% of the total outstanding microfinance loans as of March 31, 2023, compared to 34% for banks.

CareEdge Ratings anticipates growth momentum to continue, with the portfolio of NBFC-MFIs expected to grow at a rate of 28% y-o-y in FY 2024. However, increasing customer indebtedness, rising average ticket size and a gradual shift from the Joint Liability Group (JLG) model to individual loans pose the risk of overleveraging for the industry. Also, considering the inherent nature of its asset class, NBFC MFIs are highly prone to event-based risks, such as political, geographical uncertainty and susceptibility to natural calamities. Moreover, the evolving global macroeconomic environment and the continuation of support from impact funds and PE investors at the same pace will also be critical and needs to be closely monitored.

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

Credit costs have declined from their peak in FY 2021 but remain higher than pre-Covid levels, with a portion of the restructured book slipping into NPA. CareEdge Ratings expect NIMs to continue improving, resulting in RoTA rising to approximately 3.8% for FY 2024, aided by controlled credit costs of approximately 2.5% for the same year.

Asset quality, although on an improving trend, still remains moderate as compared to the pre-Covid level owing to additional slippages arising from the restructured portfolio. The MFI sector has taken the cumulative impact on the credit cost of around 19% of the portfolio, as on March 31, 2020, from FY21 to FY23 due to Covid-19. However, with an improving collection efficiency trend, GNPA is expected to improve to 2.0% in FY24 from a peak of 6.26% for FY22.

India’s Carbon Credit Revolution – Stepping Ahead Of The World (CARE Ratings)

Carbon credits serve as a potent market-driven incentive, effectively catalyzing the reduction of greenhouse gas (GHG) emissions. These credits operate within the framework of international agreements such as the Kyoto Protocol and the Paris Agreement, thriving within carbon markets where projects designed to curtail emissions yield tradeable credits. These credits, in turn, can be purchased by entities seeking to offset their own emissions, thereby showcasing their unwavering commitment to fostering sustainability. The proportion of global annual greenhouse gas emissions covered by carbon credits has risen from 5% in 2005 to 22% in 2022.

However, the attainment of carbon credits is a formidable achievement, as projects undergo rigorous evaluation by impartial auditors to ensure strict adherence to established standards. Upon successful verification, these credits are introduced into various markets, effectively directing investments toward emission reduction initiatives and sustainable undertakings, particularly within developing nations.

Beyond their symbolic significance, these credits carry tangible benefits, acting as a catalyst in propelling the global transition towards a low-carbon future. By attaching quantifiable value to emission reductions, they serve to invigorate international collaboration in the ongoing battle against climate change. The adoption and incorporation of carbon credits into our practices signify an inspiring journey towards safeguarding our planet and embracing an eco-friendly, sustainable tomorrow.

The popularity of the credits could be estimated by the fact that India alone has a market share of 17% globally with 35.94 million USD currently (the global market stands at 2 billion). By some estimates, the global carbon credits market would reach 100 billion USD by the end of 2030 as per Confederation of Indian Industry. It has also been estimated by MarketsAndMarkets that global market size would reach 1,602 billion $.

The Indian Context Of Carbon Credits In India, the carbon credit system operates primarily under the Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC). The process of carbon credit generation and trading follows a structured flow, adhering to guidelines set by relevant regulatory bodies. The journey begins with Project Identification and Development, where projects contributing to GHG emission reduction are selected. These encompass renewable energy projects, energy efficiency improvements, and waste management schemes, aligning with CDM and regulatory criteria.

The Project Design Document (PDD) is pivotal, outlining the project's objectives, methodologies, baseline emissions, additionality assessment, and emissions reductions. Validation and Verification are critical turning points, with designated Operational Entities (DOEs) conducting independent assessments and rewarding projects that meet criteria with validation reports. Implementation and Monitoring are essential, with robust systems ensuring accurate emission reduction reporting. Verification and Certification culminate in Certified Emission Reductions (CERs) issuance based on verified emission reductions.

Carbon Credit Trading showcases CERs' value, drawing entities to offset emissions or meet regulatory commitments. Retirement or Surrender of CERs concludes the journey, ensuring the integrity of emissions accounting. The effectiveness of the system is amplified by the Types of Projects Allowed Under the Carbon Credits Scheme, including Renewable Energy Projects, Energy Efficiency Projects, Waste Management Projects, and Afforestation Projects.

The Current Regulation & Way Forward The Carbon Credit Trading Scheme (CCTS), outlined in the draft by the Ministry of Power, stands as a pivotal force shaping India's regulatory framework concerning carbon credits. A significant stride in this direction was taken through the introduction of the Energy Conservation (Amendment) Bill in 2022, which established the groundwork for the forthcoming Indian carbon credit market. The draft blueprint envisions the establishment of the India Carbon Market Governing Board (ICMGB) as the central entity responsible for the oversight and regulation of the carbon credit market.

This board boasts representation from critical ministries including Environment, Forest, and Climate Change; Power; Finance; New and Renewable Energy; Steel; and Coal. The multifaceted responsibilities of the ICMGB encompass policy formulation, regulatory framework establishment, and trading criteria definition for carbon credit certificates.

India IT Services (Goldman Sachs)

We see key investor debates in India IT Services to be around growth trajectory and the impact of Generative AI, where our demand trackers suggest that while revenue growth is likely to stay muted near-term on the back of macro concerns (4% YoY revenue growth in FY24E for our coverage), the market could be underappreciating the recovery and upside from FY25. We forecast a 9-10% annual revenue growth for our India IT coverage from FY25, which is a c.2x multiplier of the 5% revenue growth for GS covered global companies in CY24 (a sharp pick-up vs 1% growth in CY23).

In our view, this growth will be aided by the pent-up demand (order book has remained robust), initial tailwinds from Generative AI (our differentiated analysis suggests IT Services companies playing a meaningful role in enterprise integration), and continued shift to cloud and managed services (cloud penetration is only c.30%.

Indian IT Services companies have doubled their market share in the last 10 years (to 6.2% of the global IT spending in CY22), and given the structural advantages of a large, skilled and low-cost workforce, coupled with a diversified geographical footprint, we expect Indian IT firms to continue gaining share.

We expect operating profit growth, at 12-15% over FY25-26E, to be faster than revenue growth, as we see presence of multiple margin levers and forecast an expansion in margins for all the companies within our coverage. While India IT is trading at premium valuations vs its last 10Y average (in line with last 5Y), we argue that higher multiples are warranted as we view growth in IT/Tech spends as an industry perennial with a lower susceptibility to disruptions, and shareholder payouts having meaningfully improved over the decade.

In our view, what is different this time vs previous downturns is that order book for most IT Services companies have remained strong, as enterprises hold back on actual spend (which translates into IT revenues) until more clarity emerges on the macro.

Our economists’ recently lowered the probability of the US economy entering a recession in the next 12 months to 20%, with the team’s analysis of recent data suggesting that bringing inflation down to an acceptable level would not result in a recession; the US geography makes up c.60% of India IT Services revenues, and improving economic outlook in the region should help drive higher technology spends in our view.

In addition, aggregate data from global GS covered companies, which has a high correlation with IT revenue growth (c.2x historical multiplier), shows revenue growth of global enterprises picking up to 5%/6% in CY24/CY25, after a 1% growth in CY23.

We expect this acceleration in enterprise revenue growth to translate into c.10% annual revenue growth for our India IT Services coverage in FY25/FY26, after a 4% YoY growth in FY24.

However, we expect weakness in the communication vertical to persist for longer given pressures on telco opex/capex; we note that TechM has the highest exposure to this vertical at 38% based on 1QFY24 revenues.

Our global analyst teams expect enterprise clients to increase cloud computing spends in CY24, further aided by deployment of Generative AI (link). Adoption of cloud, and the ensuing multitude of applications created for the cloud, has a positive revenue implication for IT services companies. We forecast a 9%-10% annual revenue growth for India IT beyond FY24, and share of IT/technology in enterprises’ budgets continuing to rise.

Consumer durables - Hopes pinned on 2HFY24 (JM Financials)

Electrical Consumer Durable (ECD) companies’ revenue grew by 16% YoY (+13% 4-year CAGR) in 1QFY24, largely on the back of healthy growth in the B2B segment (particularly cables) while demand environment in the B2C segment remained subdued due to soft summer/unseasonal rains and consumption slowdown in general. Although gross margin improved on the back of a benign RM envionrment, that improvement was not reflected in operating margin due to a) high competitive intensity, and b) sustained spend on long-term strategic initiatives (A&P, GTM, etc). We continue to be positive on the space from the medium- to long-term perspective given macro tailwinds (low penetration in some categories) and category expansion opportunities. Our top picks - Bajaj Electricals, and Havells.

B2B drives revenue while B2C remains subdued in 1QFY24: ECD companies’ aggregate revenue witnessed healthy growth of 16% YoY (+13% 4-year CAGR; -4% QoQ). This was largely on the back of healthy growth in the B2B segment while demand environment in the B2C segment remained subdued due to consumption slowdown and soft summer. ECD segment saw another quarter of modest revenue growth while wires & cables continued to outperform, growing in double digits aided by strong volume growth.

Unseasonal rains and consumption slowdown impacted demand in ECD segment: ECD segment saw another quarter of modest revenue growth of 3% YoY (+8% 4-year CAGR) impacted by a) weak demand environment, and b) soft summer due to unseasonal rains. Moreover, fans segment continued to witness volatility because of BEE energy rating transition. Revenue grew 8%-16% YoY (excluding Havells/Symphony, which saw 13%/17% decline). Low volume, high competitive intensity, high discounting on non-rated fans inventory and liquidation of high-cost inventory kept margins under pressure.

Cables & wires revenue outperformance led by volume: Cables & wires segment revenue grew 30% YoY (+18% on 4-year CAGR); copper prices fell 5% YoY, implying strong volume growth in cables and wires. Within this, we believe industrial cables is growing at significantly faster pace compared to consumer wires. Healthy demand from government as well as infrastructure side aided volume growth. With most of the high-cost inventory liquidated, EBIT margin improved across companies

RM prices soften in 1QFY24: In 1QFY24, prices of key commodities fell by 5-36% over 1QFY23 but remained high compared to pre-Covid levels. However, amidst a weak demand environment, brands in an attempt to stimulate demand offered schemes/discounts leading to heightened competitive intensity, which put pressure on margins.

Maintain positive outlook from medium-term perspective: Notwithstanding near-term pain (weak consumer demand; fans energy rating transition) the industry remains optimistic of demand recovery given a) expectation of strong H2, b) recovery in rural markets, and c) stability in the input cost environment. We remain positive from the medium- to long-term perspective given macro tailwinds, low penetration for some of the categories, and category expansion opportunities for companies.

Farm Inputs & Chemicals - 2Q to be largely similar to 1Q (IIFL Securities)

1QFY24 turned out to be a shakeout quarter for Indian Chemical manufacturers, both for bulk chemicals and specialty basket. Agrochemical companies had a slow start in 1Q, owing to delayed onset of monsoon and uneven rainfall that impacted sowing pattern. Export growth got impacted as well. The common trend across companies was a steep product-price decline due to excess channel inventory — leading to demand slowdown. The management across companies commented on the customers postponing purchases because of extreme volatility in prices and continue to be in a wait-and-watch mode.

Downgrades by global agchem majors: Global crop protection majors have downgraded their revenue for CY23 and expect 2H’23 to remain muted. Recovery is expected from CY24. In 1Q, domestic crop protection revenues for PI, UPL, BASF and Rallis were under pressure. With rainfall improving, sowing has picked up in 2Q and should trigger agrochemical liquidation/consumption.

Washout quarter for Chemicals: In 1QFY24, bulk chemicals reported weak performance, on the back of steep decline in key product prices. Soda ash was an exemption as global prices stayed firm, while domestic prices were under pressure. Domestic prices of soda ash, caustic soda, refrigerants and PVC continued to be under pressure, with Chemplast Sanmar reporting Ebitda loss.

New capex announcements take a pause: Barring Deepak Fertilisers that announced Rs19.5bn capex for setting up weak nitric acid & concentrated nitric acid plant, the new capex announcements by chemical companies were muted during 1Q. However, the companies remained committed on their ongoing capex and were optimistic about recovery during 2H’24.

Resurgence of malls (Kotak Securities)

Immense scope for retail growth in India; occupancy levels at 94% India has a per capita retail space of <1 sq. ft, much lower than developed economies such as the US (23.1 sq. ft) and Canada (16.4 sq. ft), as well as some of the developing economies/cities such as Beijing (5.2 sq. ft), Jakarta (4 sq. ft) and Hanoi (3.5 sq. ft). The undersupply, coupled with rising income levels, offer a long runway of growth for retail spaces in India. The Indian retail sector has seen healthy leasing momentum after Covid, with 4.2, 5 and 2.8 mn sq. ft of (grade-A) gross leasing in CY2021, CY2022 and 1HCY23, respectively. The momentum has partly been aided by the churn of existing tenants. The demand for smaller spaces (<2,000 sq. ft) constituted 59% of overall demand, followed by 2,000-5,000 sq. ft spaces (28% share). With limited new supply additions of 4.4 mn sq. ft in the last 2.5 years, occupancy levels have risen to 94% as of 1HCY23 from 87-88% in CY2020.

Tier-1 cities lead the way, tier-2 cities catching up Of the 51 mn sq. ft of Grade-A stock in tier-1 cities in India, NCR has a 22% share, followed by Mumbai (21%) and Bengaluru (19%). There is an additional 25 mn sq. ft of under-construction retail assets, expected to be completed by 2027—North and West India should lead the new mall supply in the next few years. Key malls in tier-1 cities have seen a 12% yoy uptick in rentals in 2QCY23, which has been aided by an 18% yoy consumption increase. Among the tier-2 cities, top-5 cities (Lucknow, Ahmedabad, Chandigarh, Indore and Kochi) account for 57% of the total tier-2 stock, with another 5 mn sq. ft supply coming up in 4-5 years. These top cities have seen a rental increase of 13-17% in 4QCY22.

Healthy demand outlook to aid rental appreciation With rising income levels and spending power, the demand for luxury retail is expected to remain strong across tier-1/2 cities in India. Anarock expects a 17% CAGR in sales volumes, reaching US$136 bn by 2028, and 10-20% annual rental appreciation for key malls in India. The adoption of technology will enhance the customer experience, while collaboration in the retail space will help in fortifying the business, and also allow entry into newer markets, thereby increasing customer outreach. Institutional investments in the retail space should rise going forward, following US$1.5 bn of investments in 2019-22. 

July CPI Inflation Jumps to 7.4% on Food Prices (CARE Ratings)

Retail inflation has sustained its upward trajectory for the second consecutive month, surging to 7.4% in July from 4.9% in the previous month. Consequently, the Consumer Price Index (CPI) inflation has breached the Reserve Bank of India's (RBI) target range for the first time since February 2023. This marks the highest reading observed since the peak in April 2022 at 7.8%. The notable surge in vegetable prices and elevated inflation in other food categories such as cereals, pulses, spices, and milk have driven this increase. Notably, the contribution of food and beverages to the overall inflation has risen significantly to 65%, surpassing their weight in the CPI basket.

Specifically, vegetables alone have contributed nearly 30% to the headline inflation figure, despite having only a 6% weight in the CPI basket. Encouragingly, the core inflation has moderated to 5.1% in July, down from 5.3% in June, thereby falling below the headline inflation rate for the first time in four months.

Concurrently, the data on wholesale inflation released earlier today showed the continuation of the deflationary trend. The wholesale price index contracted 1.4% in July. The divergent trend between the two inflation measures is primarily because of the compositional differences. WPI inflation is largely influenced by global commodity prices which have been on the declining trend. Furthermore, in comparison to the CPI basket, the WPI basket gives nearly one-third of weightage to food items. Consequently, any fluctuation in food prices has a greater impact on the CPI inflation.

Food and beverages inflation (CPI) surged to 10.6% in July, the highest in about 3.5 years. Within the group, inflation in sub-groups such as cereals (13%), milk (8.3%), pulses (13.3%) and spices (21.6%) continued at elevated levels. However, the main culprit for the upswing in food inflation was a significant increase in vegetable prices during the month due to a combination of factors including high temperatures, erratic rains and virus outbreaks. Additionally, flooding in certain areas due to heavy rains also resulted in transportation and logistical challenges adding to the price pressures. Vegetables witnessed a 37% (y-o-y) inflation in July from a marginal deflation during the previous month.

Way Forward

Even though the rise in vegetable prices is transient, the sustained price pressures in categories like cereals, pulses, spices, and milk can keep food inflation elevated in the near term. Higher food prices for longer could impact households’ purchasing power and dent consumer sentiment. This could have a bearing on the growth prospects, especially amid external headwinds and uncertainty regarding rural recovery. The RBI is aware of these challenges and will closely monitor these evolving trends to decide on its future policy course.

However, given the supply-driven nature of these inflationary pressures, RBI has limited space to act. Hence, the government’s timely supply-side interventions are essential to close the supply-demand gap before the upcoming festive season.

Though the moderation in core inflation is reassuring, the possibility of elevated headline numbers in the upcoming months has pushed the expectation of a rate cut by the RBI to the next fiscal.

Goods trade deficit widened in July (Kotak Securities)

July goods trade deficit widened to US$21 bn while the services surplus remained firm at US$12.3 bn. In FY2024, we continue to see the current account buoyed by a narrowing goods trade deficit, and steady services surplus. However, we see non-oil imports being relatively stronger than nonoil exports and, hence, revise up our goods trade deficit estimate. We revise our FY2024 CAD/GDP estimate to 1.4% (from 1% earlier).

Lower oil exports weighed on July exports; non-oil exports marginally higher Exports in July contracted 16% yoy to US$32.3 bn (June: US$34.3 bn), led by a sharp fall in oil exports to US$4.6 bn (June: US$6.8 bn). Non-oil exports increased only marginally to US$27.7 bn (June: US$27.5 bn)—lower by 8.3% yoy (Exhibits 3-5). Non-oil exports were propped up by engineering goods, and organic and inorganic chemicals (Exhibit 6). Further, in 4MFY24, engineering goods were the top export, followed by gems and jewelry, and organic and inorganic chemicals (Exhibit 7). The sharp fall from July 2022 reflects the impact of lower commodity prices and gradually weakening global demand.

Imports remained broadly steady in July July imports, at US$52.9 bn (June: US$53.1 bn), declined by 17% yoy. Non-oil imports were higher at US$41.2 bn (June: US$40.6 bn), but it was offset by lower oil imports at US$11.8 bn (US$12.5 bn). Non-oil imports were buoyed by electronics and machinery imports, while gold imports contracted sequentially (Exhibit 6). Further, in 4MFY24, main imports were electronic goods, machinery, coal, coke and briquettes, and gold. Consequently, the July trade deficit widened to US$20.7 bn (June: US$18.8 bn). The trade deficit in 4MFY24 stood at US$77 bn (4MFY23: US88 bn)

Credit-Deposit Ratio Falls, HDFC Merger Pushes Credit Growth (CARE Ratings)

Credit offtake continued to show robust growth, increasing by 19.7% year on year (y-o-y) to reach Rs. 148.0 lakh crore for the fortnight ending July 28, 2023. This surge continues to be primarily driven by the impact of HDFC’s merger with HDFC Bank, as well as growth in personal loans and NBFCs. Meanwhile, if merger impact is excluded, credit grew at a lower rate of 14.7% y-o-y for the same fortnight.

•      Deposits too witnessed healthy growth, increasing by 12.9% y-o-y for the fortnight (including the merger impact). On a pro forma basis, deposits grew by 12.3% y-o-y during the same period. The growth in deposits has not been at the same pace as credit since the larger proportion of liabilities of HDFC was by way of borrowings rather than just deposits.

•      The outlook for bank credit offtake remains positive, with a projected growth of 13-13.5% for FY24, excluding the merger's impact.

•      Deposit growth is expected to improve in FY24 as banks look to shore up their liability franchise and ensure that deposit growth does not constrain the credit offtake.

•      The Short-term Weighted Average Call Rate (WACR) stood at 6.39% as of August 04, 2023, compared to 4.72% on August 05, 2022. Banking system liquidity remained in surplus through the month, at an average monthly surplus of around Rs 1.7 lakh crore in July. A temporary provision of incremental cash reserve ratio for SCBs was introduced to manage liquidity, CareEdge Economics expects this new measure to absorb liquidity worth Rs 1 lakh crore from the system which is also likely to impact short term rates.

The outlook for bank credit offtake remains positive, supported by factors such as economic expansion, increased capital expenditure, the implementation of the PLI scheme, and a push for retail credit. CareEdge estimates that credit growth is likely to be in the range of 13.0%-13.5% for FY24, excluding the impact of the merger of HDFC with HDFC Bank. The personal loan segment is expected to perform well compared to the industry and service segments in FY24. However, elevated interest rates and global uncertainties could potentially impact credit growth in India.

1QFY24 Results Review

Motilal Oswal Securities (MOFSL)

After a solid 23% earnings CAGR over FY20-23, Nifty posted 32% earnings growth in 1QFY24, a beat vs. our expectations of 25%. MOFSL Coverage Universe recorded the highest earnings growth in the last eight quarters, fueled by domestic cyclicals, such as BFSI and Auto. Healthcare has made a strong comeback with 24% earnings growth after six consecutive quarters of flattish earnings.

·         MOFSL Coverage Universe recorded the highest earnings growth in the last eight quarters, fueled by domestic cyclicals (such as BFSI and Auto). BFSI coverage universe recorded a 60% YoY profit growth while Auto posted a significant profit of INR179b (vs. a profit of INR13b only in 1QFY23). OMC's profitability surged to INR305b in 1QFY24 vs. a loss of INR185b in 1QFY23 due to strong marketing margins. Healthcare made a strong comeback with 24% earnings growth after six consecutive quarters of flattish earnings. Around 15 of 21 sectors have either met or exceeded expectations.

·         We raise our FY24E Nifty EPS by 2.5% to INR988 (earlier: INR964) due to notable earnings upgrades in TTMT, JSTL, Bharti, SBI, and KMB. We now expect the Nifty EPS to grow ~22%/16% YoY in FY24/ FY25

The beat-miss dynamics: The beat-miss ratio for the MOFSL Universe was largely balanced as 36% of the companies beat our estimates, while 38% missed estimates at the PAT level. For MOFSL Universe, however, the earnings upgrade to downgrade ratio has also been a bit unfavorable for FY24E as 66 companies have reported earnings upgrades of >3%, while 76 companies’ earnings have been downgraded by >3%. EBITDA margin of MOFSL Universe (ex-Financials) rose 330bp YoY to 17.6%.

Heavyweights drive the quarter: Earnings performances of both MOFSL Universe and Nifty were led by heavyweights. The top five companies within MOFSL Universe contributed 84% to the incremental YoY accretion in earnings (three OMCs contributed 59%, followed by SBI – 13% and Tata Motors – 12%). Similarly, within Nifty, five companies (BPCL, SBI, Tata Motors, HDFC Bank, and ICICI Bank)

Key sectoral highlights – 1) Technology: IT Services companies reported weak performance in 1QFY24 with flattish median revenue growth QoQ in CC, in an otherwise seasonally strong quarter. The weakness in key verticals continued through 1Q with BFSI and Retail reporting a median USD revenue decline of 1.2% and 0.4% QoQ, respectively. 2) Banks: The banking sector posted a mixed 1QFY24, driven by healthy loan growth and sustained improvement in asset quality; however, margin trajectory reversed due to a sharp rise in funding costs. 3) NBFCs – Lending: Most of the NBFCs (except HFCs) reported a sequential contraction in NIM, surpassing our initial projections. For a majority of the NBFCs, the principal reason behind this NIM compression was the substantial increase in borrowing costs. 4) Auto: The quarter saw upgrades for FY24E largely to factor in the benefits of better gross margin, thus aiding overall profitability and commentaries related to a sequential improvement in exports. 5) Consumer: The overall performance of MOFSL Universe was a mixed bag with a few companies reporting healthy volume growth while others posted healthy value growth during the quarter.

The top earnings upgrades in FY24E: JSW Steel (34%), Tata Motors (28%), Dr Reddy’s Lab (15%), Bharti Airtel (13%), and M&M (10%).

The top earnings downgrades in FY24E: Tech Mahindra (-10%), UPL (-7%), Tata Steel (-5%), Apollo Hospital (-5%), and HUL (-4%).

China: PBoC cuts rates amidst data weakness (ING Bank)

Rate cuts show that concern is mounting The 15bp cut to the medium-term lending facility (MLF) was unexpected. Almost all forecasters expected China's central bank, the PBoC, to wait until September to cut again. MLF lending volumes of CNY401bn were in line with expectations. The PBoC also cut the seven-day reverse repo rate by 10bp, which now stands at 1.8%.

The market responded abruptly. The CNY rose to close to 7.29 immediately after the decision, though eased lower soon after. And 10Y Chinese bond yields dropped about 6bp to 2.56%. From a macro perspective, today's policy decisions are somewhat helpful. They will help improve the debt-service ability of cash-strapped local governments and property companies. But this isn't a game-changing outcome, and so we doubt that market sentiment will dramatically improve just on this.

Activity data remains extremely poor The activity data release contained no bright spots, and quite a few downside surprises. Perhaps the worst of these was the 2.5% YoY growth in retail sales. This has declined sharply from an admittedly base-effect inflated 18.4%YoY growth rate in April as the re-opening briefly led to a retail sales surge. Now the idea of a consumer-spending-led recovery is looking very vulnerable. In year-on-year terms, industrial production slowed to 3.7% YoY, from 4.4% in June. Year-to-date, production growth remained at 3.8% for the second month. Property investment slowed at a faster pace in July, falling at an 8.5%YoY pace, weaker than the 7.9% YoY decline achieved the previous month. Property sales growth also slowed to almost a standstill in July, rising at only 0.7% YoY YTD, down from 3.7% in June. And fixed asset investment slowed to 3.4% from 3.8% YoY YTD. Topping all of this off, the surveyed unemployment rate rose to 5.3%.

What does this mean for policy?

The question of the day based on the number of times it has been posed to this author is "Does this mean the PBoC will undertake Quantitative Easing (QE), and if so, when?" At the current juncture, QE does not seem to be the right response to what we are seeing. Nor does a large dollop of fiscal stimulus.

China is undergoing a painful transition to a less debt-fuelled, less property-centric and more consumer-driven economy. An "emergency" policy like QE that primarily inflates real and financial asset prices does not appear to have a strong role to play here. QE would also put the CNY under further weakening pressure, which it is very clear the PBoC does not want and would make it much harder for them to manage the CNY. It would also raise the risks of capital outflows, which they will also be keen to avoid.

More policy measures will be needed and more will certainly be delivered. The PBoC has not ended the rate-cutting cycle yet, and there will be further iterations of policy rate cuts along the lines of what we have seen today.

As for government stimulus policies, these, we think, will tend to be along the lines of the many supply-side enhancing measures that we have already seen. The way through a debt overhang is not to print more debt, though it may be to swap it out for lower-rate central government debt, or longer maturity debt to ease debt service. Enhancing the efficiency of the private sector will also play a key role, though this and all the supply-side measures will take a considerable time to play out.

The tiresome chorus clamouring for more stimulus is unlikely to stop in the meantime. And we will continue to see weak macro data for the foreseeable future. It is a necessary part of the adjustment and is far preferable to resurrecting the debt-fuelled property model that propelled growth previously. But we do need to lower our expectations for China's growth.