Vijay Kumar Gaba

Growth steady; sequential momentum decelerates (Nirmal Bang Institutional Equities)

Early data for July’23 suggest that 68.8% indicators were in the positive territory on YoY basis, up from 65.6% in June’23. Final data indicates that 70.8% indicators were in the positive territory in June’23.

On a sequential basis, 31.25% indicators were in the positive territory in July’23, down from 37.5% in June’23. Final data indicates that 45.8% indicators were in positive territory in June’23.

Rural recovery remains mixed, although July’23 did see a dip in rural unemployment, aided by a pick-up in monsoon. The Manufacturing sector remains resilient despite some sequential deceleration. In the Services sector, formal job creation is under pressure while traffic indicators witnessed a sequential deceleration.

Rural recovery mixed: Rural unemployment moderated to 7.9% in July’23 from 8.7% in June’23, aided by pick-up in monsoon and kharif sowing activity while urban unemployment rose marginally to 8.1% in July’23 from 7.9% in June’23. Central government’s expenditure was growth supportive in June’23, up by 17.3%YoY and 31.9%MoM. Tractor sales were up by 6.2%YoY in July’23 but declined by 40.5%MoM.

Meanwhile, 2W sales declined by 7.2%YoY and 3.7%MoM in July’23. On the other hand, Passenger Vehicle sales were up by 19.2%YoY and 6.9%MoM in July’23 while Commercial Vehicle sales grew at a muted pace of 3.2%YoY and declined by 2.7% MoM. Overall, Motor Vehicle sales declined by 2.3%YoY and 1.6%MoM in July’23.

Manufacturing resilient: The S&P Manufacturing PMI continued to hold up at 57.7 in July’23 vs. 57.8 in June’23. Manufacturing, as measured by the index of industrial production (IIP), grew by 3.1%YoY in June’23 vs. 5.7% in May’23 and declined by 1% MoM. Capital Goods production was up by 2.2%YoY and 4%MoM in June’23 while Capital Goods imports grew by 9.7%YoY and 15.5%MoM, implying sustained capex recovery. External sector headwinds persisted, with a sustained decline in exports and imports. Exports declined by 15.9%YoY while imports declined by 17%YoY and Non-oil, Non-gold imports declined by 12.1%YoY in July’23.

Formal jobs under pressure; traffic indicators decline MoM: The S&P Services PMI sustained at an elevated level of 62.3 in July’23 vs 58.5 in June’23. Traffic indicators sustained their downtrend on MoM basis despite some improvement from June’23 on YoY basis. Rail freight traffic was up by 1.5%YoY in July’23 after a 1.9% decline in June’23. Air passenger traffic was up by 24.4%YoY July’23 vs. 18.8% in June’23 while major port traffic was up by 4.3%YoY in July’23 vs. 0.4% in June’23. Diesel consumption was up by 3.9%YoY while petrol consumption was up by 6.2%YoY in July’23, but both sustained their decline on MoM basis. GST E-way bill generation was up by 16.4%YoY and 2.2%MoM in July’23.

The Naukri Jobspeak Index declined by 18.8%YoY in July’23, indicating pressure on the formal services sector. Non-food bank credit growth (ex-HDFC merger) slowed marginally and stood at 14.8%YoY in July’23 vs. 16.4% in June’23. The credit-to-deposit ratio stood at 74.6% in July’23 vs. 75.1% in June’23. While deposit rates continue to rise, lending rates (particularly MCLR) are flattening out. 

Utilities (JM Financial)

In an endeavour to improve our understanding of the emerging contours of development in India’s power sector amidst the tri-axial relationship of Climate change, Energy security and Economic growth, the first week of Aug’23 was truly enriching. We got the opportunity to meet senior officials from MNRE, CERC, CEA, SECI, NHPC Ltd. and SJVN Ltd. in Delhi in addition to hosting CMD & Directors of NTPC Ltd. in Mumbai. Our discussions were largely oriented towards the future of coal, developments around power markets, growth momentum in renewables, perspective on hydropower, knowing more about pumped hydro storage and the emergence of wind and nuclear on the ‘To Do List’.

Now, we know that the pumped hydro storage projects (PSP) have received unprecedented support from policymakers and the private sector. The 2,700MW of capacities (1,200MW Pinnapuram, 1,000MW Tehri, 500MW Kundah) are expected to be commissioned by 2025.

Projects totalling over 70GW are in various stages of finalisation (pre-construction). Capacity addition is likely to gain traction from 2027 onwards. We could sense the CEA’s confidence in exceeding 19GW of capacity addition by 2032. CEA looks at energy storage in totality, and PSP (19GW by FY32E) and BESS (39GW by FY32E) as the two ways to achieve it. Any shortfall in BESS (and a shortfall is increasingly becoming evident given sticky cost, lack of technology maturity and import dependence) is likely to increase contribution from PSP going forward.

NHPC, through its JV NHDC Ltd, plans to construct a 525MW PSP near Indira Sagar Dam, Khandwa, Madhya Pradesh using the existing reservoirs Indira Sagar and Omkareshwar of its Indira Sagar hydropower project.

During the last decade, India has seen an annual run rate of a meagre 700-800MW of hydropower generation capacity additions. We could sense a lot of enthusiasm among NHPC, SJVN and CEA (Hydro group), as the country is likely to have around 10GW of hydropower capacities in the next 5 years.

The government has been pushing central utilities (NTPC, NHPC, SJVN, SECI) to enhance their renewable portfolio beyond their respective core businesses. To our pleasant surprise, there appears to be constructive competition among central utilities in bagging more solar/wind projects (while remaining profitable, as they claim).

India is firmly committed to meeting its global commitments towards climate change. So, the government remains focused and determined to enhance the share of renewables in the energy mix while addressing the challenges of grid stability, power availability and affordability.

The consistent increase in solar power capacity in the generation mix requires the share of variable power and energy storage to improve, going forward. The addition of wind helps in addressing part of the problem by increasing CUF from 20-25% for solar and 30-35% for wind to 45-50% for SW hybrid power projects. MNRE is evaluating comments from various stakeholders on the draft Wind Repowering Policy. Attempts are being made to issue the revised policy soon, making repowering financially attractive for the original owners of the high-potential wind sites.

It was interesting to know that stray cases of renewable power curtailment in India are largely due to financial reasons and not due to technical issues like grid balancing as generally believed. The outstanding dues of discoms towards gencos are no longer a concern. However, in some of the places, we could read between the lines that it may suppress the demand for power in future.

We can’t wrap up the interactions during our Delhi visit without touching upon the most debatable and uncertain factor, i.e., coal, (still) the king of the power sector. Recent weather events (Himachal floods), the unseasonal rains during 1QFY24 and a relatively dry spell during 2QFY24 have led to large variance in power supply vis-à-vis the plan. During 1QFY24, hydropower generation from NHPC/SJVN declined YoY by 3%/23% despite a 1.3% increase in power demand. Similarly, the CUF of Torrent Power’s wind plants declined to 30.5% in 1QFY24 from 33.4% in 1QFY23 due to the Biparjoy cyclone in Gujarat. Such uncertainty in 6 CUF – Capacity Utilisation Factor power generation from non-coal power plants and global experience post-Ukraine crisis is gradually building momentum to kick-start coal-fired capacity additions. We heard that there has been an increase in the number of reviews on this issue by the ministry in recent months.

Accordingly, NTPC is targeting to order 7.2GW of thermal capacity by FY25. Recently, coupling in power markets has been under discussion across the sector. We also broached this issue with various officials to get a sense. To encourage active participation of other players in the power exchanges remains the priority. However, the government is evaluating various mechanisms given the operational and technical challenges in implementing any new structure.

Thermal power: Momentum is gradually building to kick-start coal-fired capacity additions. We heard that there has been an increase in the number of reviews on this issue by the power ministry in recent months. Accordingly, NTPC is targeting to order 7.2GW of thermal capacity by FY25.

Pumped hydro storage (PSP): Projects totalling over 70GW are in various stages of finalisation. Capacity addition is likely to gain traction from 2027 onwards. We could sense the CEA’s confidence in exceeding 19GW of capacity addition by 2032. Any shortfall in BESS5 is likely to increase contribution from PSP going forward.

Hydropower: India is likely to add around 10GW of hydropower capacities in the next 5 years from an annual run rate of a meagre 700-800 MW during the last decade.

Wind power: MNRE is evaluating comments from various stakeholders on the draft Repowering policy. Attempts are being made to issue the revised policy soon, making repowering financially attractive for the original owners of the high-potential wind sites.

Discom dues: The outstanding dues of discoms towards gencos are no longer a concern. However, in some of the places, we could read between the lines that it may suppress the demand for power in future.

Market coupling: The government is evaluating various mechanisms given the operational and technical challenges in implementing any new market structure. However, they are committed to encouraging broad-based participation. This was also echoed by CMD and Directors of NTPC during our interaction.

India re-designing – from charkhas to chips (Phillips Capital)

India's semiconductor industry, including software, AI, and hardware, is set to outpace global growth. The market is expected to reach US$ 110bn, at a CAGR of c.22% from FY20 to FY30, contributing 10% to the global semiconductor market by FY30.

As India’s aims for electronics production worth c.Rs 103.7tn (US$ 1,120bn) by FY32, with a major contribution from mobile phones, PCBA, IT hardware, etc, we expect India to develop as a strong manufacturing ecosystem. It shall be supported by the following factors: (1) China+1, (2) increasing government initiatives, (3) major investment announcements by MNCs, (4) huge exports opportunity, and (5) OSAT being the new growth driver. Indian EMS companies are foraying into backward integration (like OSAT/ATMP, Fabs, design, semicon, silicon) – this will lead to significant opportunity both in domestic + export market. This will also cause working capital to improve – with the component ecosystem developing in India.

Government allocated a fiscal support of c.Rs 2,550bn (US$ 30bn) for electronics manufacturing, out of which c.Rs 850bn (US$ 10bn) is towards developing the semiconductor ecosystem (display, fab manufacturing, OSAT, etc.). 

Credit Offtake Remains Robust, Deposit Growth See a 6 Year High (CARE Ratings)

Credit offtake continued to grow at a similar pace sequentially, increasing by 19.7% year on year (y-o-y) to reach Rs. 148.8 lakh crore for the fortnight ended Aug 11, 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 14.8% y-o-y fortnight compared to last year.

•      Deposits too witnessed healthy growth, increasing by 13.5% y-o-y for the fortnight (including the merger impact). 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 6.68% as of August 18, 2023, compared to 5.09% on August 19, 2022, due to pressure on short term rates basis recent incremental cash reserve ratio (I-CRR) norms by RBI.

Chemicals (IDBI Capital)

The consistent fall in chemical prices was arrested to some extent in July. Most of the management commentaries do point to slow global demand offtake and significant channel destocking especially in the agrochemical segment. China has been aggressively entering various segments and impacting them by steep pricing and volume dumping.

We expect pricing pressures to sustain for commodity chemicals with Chinese resurgence. However, realignment in the global supply chain to diversify from China and strong interest from global MNCs to source from India bode favourably for the Indian chemical sector.

Companies with long term contracts which have price variation clauses embedded in them will fare better owing to better revenue visibility and margin protection. Companies who are higher up the specialty chemicals value chain stand to perform better in the current environment.

Pricing Pressures remain: We chart out price data for various chemicals further in this report and present select highlights here. Mono Ethylene Glycol (MEG) prices increased by 9% MoM. MEG is more commonly used as a polymer precursor and as an antifreeze application. India Glycol is a major manufacturer of MEG domestically. Caustic Soda Lye prices have declined by 9% MoM as the industry is facing challenges in terms of weak demand and slow sales leading to higher inventory levels. Acetic acid prices have risen by 12% MoM. It forms a key input for manufacturing ethyl acetate and acetic anhydride. Soda ash (Dense) prices have risen by 2% MoM to Rs 41/kg . Toluene and Acetone prices are up by 20% and 12% MoM respectively.

Outlook: We believe that commodity chemicals segment would be under pressure especially in the wake of increasing competition from China. We prefer specialty chemical players with decades of rich experience, deep chemistry prowess and strong R&D and execution capabilities. Companies that are delivering value added products and moving up the value chain will fare better as compared to pure commodity plays. 

Nano fertilizers (IIFL Securities)

Nano fertilisers are nanotechnology-based fertilisers — modified form of bulk fertilisers. Nano fertilisers deliver nutrients to the crop in one of the following ways:

• Encapsulated inside nano-materials, such as nanotubes

• Nano-porous materials, coated with a thin protective polymer film

• Delivered as particles or emulsions of nano-scale dimensions

Nano fertilisers have a high surface to volume ratio and are said to be more effective than the traditional bulk fertilisers. They are also said to reduce soil toxicity and the use of excessive chemical fertilisers. Some research also suggests that they boost crop output and optimise

nutrient utilisation.

While nano fertilisers can be applied by either foliar application or soil application, studies to determine the more efficient method are ongoing. Only ~30-40% of the traditional fertiliser is estimated to be absorbed by the plant; however, the absorption rate for nano fertilisers is estimated to be ~80-90%. As per reports, nano fertilisers are also easier to mix with water vs the traditional ones.

…will Indian farmers adapt?

The recently launched nano fertilisers (urea and DAP) have been in the limelight and should farmers adopt these products, the same are expected to reduce the government subsidy bill significantly. In this note, we discuss the selling proposition of these products, their likely impact on the government-subsidy expenditure and the changing industry dynamics.

IFFCO’s nano-urea has foliar application: IFFCO has recommended that the nano-urea it launched last year be “sprayed” on plants for effective use. It claims that the product can help improve yields by up to 8%. However, adoption by the farmer has been a bit slow, as the job of mixing with water and then spraying across the field is labour intensive.

Adoption of nano-DAP could be better than nano-urea: For the last five years, the average share of imports for urea and DAP stands at ~20% and ~40% respectively. Should the government be successful in replacing this demand with nano fertilisers, it could save ~Rs485bn in subsidy (at FY23 rates). However, adoption of nano fertilisers by farmers is slow. The nano-urea bottle is priced similar to the MRP of a conventional bag and provides little incentive for the farmer to switch products. Conversely, nano-DAP will provide greater incentive to the farmer - being priced at ~50% of the current MRP.

Several capacities coming up: In addition to IFFCO, Meghmani Organics has also announced a capex of ~Rs1.5bn to set up a 50mn bottle plant for nano-urea. NFL and RCF have also tied up with IFFCO and intend to manufacture ~50mn bottles each by FY25. Additionally, Coromandel has recently launched nano DAP; Chambal Fertilisers continues to watch this space closely.

Capacities coming up for nano-DAP are unclear, yet. Till date, only IFFCO (expected to launch soon) and Coromandel (expected to launch product in CY23) have announced capacities.

Should the government be successful in replacing imported fertilisers (Urea and DAP), it is likely to save Rs485bn in subsidy outflow (~28% of FY24 estimated expenditure). The savings are accentuated at ~Rs784bn, if it can replace ~50% of total consumption with the usage of nano fertilisers. However, the product’s acceptance is facing severe headwinds and thus, we believe that replacing ~50% of urea and DAP consumption is currently improbable.