Vijay Kumar Gaba

COP28: Initial headway, some hiccups, still a long way to go (Kotak Seurities)

COP28 kept the hope of achieving climate goal under the Paris agreement alive. While initial headway was seen in the form of adoption of Loss and Damage Fund (LDF) plan, conclusion of first Global Stocktake (GST) and commitment to transitioning away from fossil fuels, a lot more is yet to be done as we progress toward the 1.5°C goal.

LDF plan approved; climate finance needs more commitments

The adoption of LDF plan by the members was the silver lining of COP28. However, the announced contributions of US$792 mn for LDF significantly lagged the recommended initial floor funding of US$150 bn per annum.

The climate funding provided by developed nations continued to increase to US$89.6 bn in 2021 and is likely to have reached the US$100 bn/year (by 2020) goal in 2022. COP28 urged the developed nations to up their mitigation as well as adaptation finance commitments in line with the growing requirements. IEA estimates that US$4.5 tn of climate finance and clean investments will be required annually by early 2030s to achieve net zero by 2050.

The Global Goal on Adaptation (GGA) agreement called upon COP members to establish and implement national adaptation plans by 2030).

GST: Step in the right direction for making NDCs more ambitious

The first GST concluded at COP28 called for more ambitious actions on mitigation, adaptation and climate finance. It pushed for more ambitious 1.5°C aligned NDCs while recognizing that the full implementation of the latest available 168 NDCs will lower emissions only by ~2% before 2030 from 2019’s levels versus the ~43% reduction required to achieve the 1.5°C goal.

The GST outlined eight key recommendations and signed various declarations (see Exhibit 8), focusing on reducing emissions primarily by scaling up renewable energy and energy efficiency, among others. While it has ‘called on parties to contribute’ to phasing down of unabated coal and transitioning away from fossil fuels in energy systems, a tougher absolute stance on ‘phasing out/down’ fossil fuels was left out of the agreement.

India: Makes no big bang announcements; on track to meet its current NDCs

India made no big announcements at COP28 after it set forth its net zero target and Long-Term Low Emission Development Strategy (LT-LEDS) in the last two COPs. While India is progressing well on its current NDCs, it refrained from signing the Global Renewables & Energy Efficiency Pledge for tripling renewable energy generation capacity and doubling the rate of energy efficiency alongside phasing down of unabated coal-based generation by 2030.

We believe India currently is striving to fulfill its growing energy needs by adding more thermal capacities, while also continuing to add renewable energy capacities in line with its NDC targets. We expect India to announce more ambitious NDC targets in 2025 by (1) increasing the non-fossil fuel electricity generation capacity target to 65% by 2030 (versus 50% as per current NDC), in line with the Ministry of Power’s goals, and (2) increasing the ambitiousness of emission intensity reduction target.

CPI Inflation picks up to 5.6% (CARE Ratings)

CPI inflation rose to a 3-month high of 5.6% in November, reversing the downtrend seen during the previous three months. This was mainly because of the spike in certain vegetable prices as well as sticky inflation in non-perishable food items such as cereals, pulses and spices. Additionally, support from a favourable base was absent last month. The upside was contained, to some extent, with the continued deflation in fuel and light category and moderation in core inflation.

While the trajectory of headline inflation has been uncertain, core inflation has been consistently trending downwards since the beginning of this fiscal. A combination of factors including the impact of RBI’s monetary tightening on aggregate demand as well as improved supply conditions have supported this trend.

Way Forward

The consistent fall in core inflation in line with easing commodity prices and subsiding demand-side pressures is a positive. However, persistently elevated inflation in certain food categories such as cereals, and pulses pose a risk of potential generalisation of price pressures. Given the lingering uncertainty around Kharif production and Rabi sowing prospects, high food prices cannot be shrugged off as entirely transient and could further feed into the inflationary expectations. Hence, supply-side interventions by the government become crucial at this juncture to ensure sufficient buffer stock of essential food items.

An unfavourable base is further expected to push CPI inflation higher around 5.8-6% in December. However, with arrival of fresh crops in the market during January-March, the headline inflation could ease to 5.1% by the fiscal year end. For the full fiscal year, we expect inflation to average at 5.4% with risks tilted to the upside.

IIP Growth up 11.7% in October (CARE Ratings)

India’s industrial activity accelerated to a 16-month high of 11.7% in October (following 6.2% growth last month) underpinned by the statistical effect of a low base. This is better than our projection of 8.5% growth. While the growth number for the month was largely on account of a supportive base, some improvement in momentum (at 1.8%) is a positive.

Manufacturing output increased by 10.4% in October following a growth of 4.9% in the previous month. A decomposition of the growth number by base-effect and momentum reveals that growth has been primarily driven by a favourable base along with a marginal improvement in momentum. A component-wise evaluation reveals that an annual (y-o-y) increase in output was witnessed in 19 out of 23 categories. Basic metals (major component with a weight of 12.8%) logged double-digit growth for the seventh successive month rising by 11.9% in October.

Among export-intensive components, an uptick was seen in growth of textiles (6.6%) and leather and related products (16.5%) while output of wearing apparel continued to remain in the contractionary territory. Among the discretionary purchase components, output of computer, electronic and optical products have shown persistent weakness staying in the contractionary zone for the eleventh successive month. However, continued optimism is visible in the automobile component recording double-digit growth for the third month in a row.

Way Forward

Going ahead, while the prospects of infrastructure and construction goods segment remain encouraging, the strong base effect has masked the weakness in the consumer goods segment. The inching up of inflationary pressures, lower Kharif production and uncertain prospects of Rabi output are headwinds for the consumption scenario.

Additionally, given the weak global demand outlook, the trajectory of industrial activity hinges on a durable consumption recovery.

RBI: On track for a cut in Apr’24 (ICICI Securities)

There was no surprise in the RBI’s decision to persist with existing policy rates. Although its stance remains ‘withdrawal of accommodation’, the RBI governor also cautioned against the ‘risk of over-tightening’ - implicitly a more balanced stance. With the banking system’s liquidity already stretched (at a loan-deposit ratio of 79.8% in Nov’23), the RBI has had to inject liquidity almost daily for the past two months, after having had to drain liquidity for the previous 3.5 years.

The MPC warned about the risk of vegetable inflation; its forecast of 5.6% YoY headline inflation in Q3FY24 implies a spike to 6% YoY CPI inflation in Nov-Dec’23. However, with core inflation likely to ease below 4% YoY by Dec’23, and cereals disinflation from Jan’24 onwards helped by an artificially high base, we continue to expect headline CPI inflation to abate to 4% YoY by Mar’24 (several months before the RBI’s forecast of 4% inflation in Q2FY25). Consequently, we expect a 25bp rate cut in Apr’24.

Rate cut will be necessary once real policy rate hits +2.5%

A real policy rate of 2.5% (which is what India is likely to have by Apr’24) will naturally entail a cut in the policy rate. Subsequent rate cuts are likely to follow the US Fed, which we expect to cut its Fed Funds rate no sooner than Jun’24. However, the easing cycle will provide a timely boost to India’s economy, enabling real GDP to accelerate to 8.4% growth in FY25.

Trend growth is 7.5% now; stronger GFCF can boost it further

Evidence over eight of the past nine years (i.e., excluding the covid year) suggests that 7.5% is India’s new trend rate of real GDP growth, so we weren’t surprised by the upward revision to the RBI’s growth forecast for FY24. Periods of stronger fixed-investment spending (such as the past 6 quarters of over-8% YoY growth in GFCF) inevitably boost productivity, and take growth above the trend.

We consequently expect real GDP growth of 7.9% in FY24. We were forecasting 7.2% growth for FY24 from the start of the fiscal year, revised it up to 7.6% in Oct’23, and recently upped it further to 7.9% after the release of the Q2FY24 real GDP growth numbers.

Fed Prepares To Shift To Rate Cuts In 2024 As Inflation Eases (Bloomberg)

The Federal Reserve pivoted toward reversing the steepest interest-rate hikes in a generation after containing an inflation surge so far without a recession or a significant cost to employment.

Officials decided unanimously to leave the target range for their benchmark federal funds rate at 5.25% to 5.5%, the highest since 2001. Policymakers penciled in no further interest-rate hikes in their projections for the first time since March 2021, based on the median estimate.

Updated quarterly forecasts showed Fed officials expect to lower rates by 75 basis points next year, a sharper pace of cuts than indicated in September. While the median expectation for the federal funds rate at the end of 2024 was 4.6%, individuals’ expectations varied widely.

A tweak to the Fed’s post-meeting statement on Wednesday also highlighted the shift in tone, with officials noting they will monitor a range of data and developments to see if “any” additional policy firming is appropriate. That word was not present in the November statement from the US central bank’s policy-setting Federal Open Market Committee.

Federal funds futures markets are now pricing in six rate cuts for next year, up from four earlier this week, and traders have fully priced in a rate cut at the Fed’s March meeting.

While economic data in recent months has generally aligned with what the Fed would like to see — a cooling in both inflation and the labor market — figures released in the past week or so have painted more of a mixed picture.

Airlines: How long will demand-supply balance last? (IIFL Securities)

In our recent report, we had highlighted that YoY growth of domestic passenger traffic is coming off, down from +20% YoY in 1HFY24 to high single-digit growth in Nov. The industry situation from a supply perspective has been favourable so far, with capacity growth (ASK) averaging 10%. GoFirst’s bankruptcy and SpiceJet’s ‘capacity cuts’ have partly off-set the capacity growth of other carriers.

However, SpiceJet has secured equity funding of Rs23bn, which may help the company get past balance-sheet issues and possibly scale up capacity. If SpiceJet is successful in adding capacity, we may see industry capacity growth outpacing demand growth.

Unless volume growth stays strong, this may lead to pressure on load factors and/or fares. Fall in crude should support profitability in the near term, but medium-term profitability will depend on whether the favourable demand-supply equation sustains.

GoFirst’s capacity has gone to zero. SpiceJet’s capacity is declining 40% YoY. On the other hand, Indigo’s domestic capacity has been growing at about 20% YoY. Other carriers (excl. Indigo, GoFirst, SpiceJet) are growing capacity at ~30% YoY, mainly driven by Akasa. Overall, the average YoY capacity growth is about 10%.

Domestic traffic growth has moderated

Domestic passenger traffic has decelerated from +20% YoY in 1HFY24, to +10% Oct and +8% in Nov. We estimate December volume growth to be at 8-10% YoY. We recently trimmed our FY24 domestic passenger traffic growth to 12% vs 15% earlier.

GoFirst’s bankruptcy, SpiceJet’s capacity cuts supported demand-supply balance so far

GoFirst filed for bankruptcy in May 2023 and ceased operations. SpiceJet’s capacity is declining 40% YoY. On the other hand, Indigo’s domestic capacity has been growing at about 20% YoY. Other carriers (excl. Indigo, GoFirst, SpiceJet) are growing capacity at ~30% YoY, mainly driven by Akasa. Overall, the average YoY capacity growth in the industry post GoFirst’s bankruptcy has been about 10%. Against 10% capacity growth, volume growth was close to 20% till Sep, supporting YoY improvement in load factors. In Oct and Nov, capacity growth and volume growth converged.

Demand-supply balance may turn adverse if SpiceJet adds capacity aggressively

The benefit from GoFirst bankruptcy will enter the YoY base in May. If SpiceJet starts adding capacity aggressively, the industry level capacity may start increasing at more than 10% very soon. If volume growth does not stay strong, it may lead to pressure on load factors and/or fares.

SpiceJet reported losses in 2QFY24; Equity raise may support capacity growth

SpiceJet reported revenue of Rs14.3bn in 2QFY24, down 29% YoY and 27% QoQ. Although gross margin (revenue, less fuel) was higher YoY, there was significant negative operating leverage due to the sharp fall in revenue. Now that SpiceJet has secured equity funding of Rs23bn, the company may look to scale up operations.

Indigo’s market-share gains may pause

Indigo has been the biggest beneficiary of the financial troubles at GoFirst and SpiceJet. Indigo’s market-share has improved from 56-57% in the early 2023 to 63% in recent months. If Indigo’s capacity growth rate comes off due to P&W engine inspections, and other carriers add capacity, the upward trajectory of Indigo’s market-share may take a pause.

Technology: Exploring impact of GenAI on IT services industry (ICICI Securities)

With Gen AI gaining prominence, in this report, we dive into the strides IT companies, hyperscalers and SaaS players are making, and also assess its upshots on revenues/margins for IT companies. Industry reports peg Gen AI as disruptive technology. Prima facie, our analysis suggests a possible deflationary impact, to begin with, owing to productivity benefits. Yet, stronger volumes could be an offsetting factor, albeit with a time lag. Mid-tier IT firms could be better positioned to adopt this disruption due to their nimbleness, allowing rapid upskilling of their relatively smaller 20k-50k talent pool (vs. 100k-600k for large caps) – quite like how they were ahead in digital adoption. Clarity of timing of the impact is still not established with no major impact to CY24/FY25 financials, in our view.

Gen AI’s impact on IT services

Based on our preliminary analysis, we believe that Gen AI can influence revenue and margins of IT companies, driven by: 1) productivity benefits (~20-30%), which need to be passed on to customers leading to pricing pressure; 2) scope compression due to insourcing by clients and substitution by SaaS players; 3) increase in volume of work due to the emergence of new Gen AI service offerings, as well as boost to existing cloud, data and analytics services that serve as the basic foundation for implementing Gen AI; and 4) SG&A gains.

Nasscom’s industry report, coupled with project-level examples cited by IT companies, suggests that there could be a deflationary impact of ~20-30%, to begin with. However, based on our conversations with IT companies, productivity benefits stemming from the implementation of Gen AI at an enterprise scale in real life scenarios may be just ~5%, initially, due to challenges related to data quality and efforts required around compliance. Clarity on the impact’s timing is foggy; RoIs are far from established, and we see no major impact to CY24/FY25 financials.

IT companies’ efforts around Gen AI

Winners and losers IT companies are putting in efforts to leverage Gen AI, in terms of: 1) the number of people trained in Gen AI and its use cases; 2) partnering with hyperscalers, SaaS and various other players in the ecosystem; 3) embedding Gen AI in existing products and platforms; and 4) investments in IT software, infrastructure, research and intellectual property, and ratings by analyst agencies such as HFS Research and IDC. Based on these efforts, we believe that Infosys is slightly ahead of peers among large caps; Persistent is leading the mid-caps pack, followed by LTIMindtree.

Hyperscalers and SaaS players seeing strong Gen AI demand

Hyperscalars and SaaS platforms are infusing Gen AI into their tech stack and are seeing stronger interest for Gen AI embedded products. For example, Salesforce’s AI enabled Pro version saw 50% YoY growth in Q3CY23 – it expects Gen AI Pro-plus’ pricing to be at least 60% higher. Hyperscaler’s and SaaS’s multiples have re-rated as street is factoring in positive impact from Gen AI. However, there has been no significant change in consensus revenue estimates for CY23/CY24. Therefore, we do not see major uptick in revenue for IT companies due to Gen AI in the near term i.e. CY24/FY25.

Difference between traditional AI and Gen AI

AI refers to algorithms that can perform tasks that previously required human intelligence. Typically, such tasks involve perception, logical reasoning, decision-making, and natural language understanding (NLU). Machine learning is a subset of AI that focuses on discriminative tasks such as making predictions or decisions based on data, without being explicitly programmed to do so. Gen AI is a subset of machine learning (ML) that focuses on creating new data samples that resemble real-world data.