Vijay Kumar Gaba

Economy meter: Post-festive slump seen, inflation mars wedding season (Nirmal Bang)

·         Motor Vehicle registrations slowed in the second fortnight of Nov’23 post the festive season. Rail traffic indicators slowed from the previous fortnight and stood below their 6-month average run-rate while air traffic and toll collections improved from the previous fortnight and were above their 6-month average run-rate.

·         UPI payments, use of credit cards at point of sales (POS) and E-commerce transactions moderated from the previous fortnight and stood below their 6-month average run-rate. This was despite ‘Black Friday’ E-commerce sales estimated to be up by ~23% YoY, according to Unicommerce, an E-commerce enablement platform.

·         In rural trends, Rabi sowing was down by 5.2% yoy with Wheat sowing down by 4.6% yoy.

·         While the wedding season is providing some impetus for the services sector, the lingering impact of inflation is being felt even on wedding related purchases.

Economy sees post-festive slump

Motor Vehicle registrations moderated from the previous fortnight but stood above their 6-month average run-rate. Electricity production moderated from the previous fortnight and stood below their 6-month average run-rate. Credit growth inched higher to 16.2% YoY from 15.9% in the previous fortnight and stood above the 6-month average run-rate. Traffic indicators – rail passenger and rail freight –moderated from the previous fortnight and slipped below their 6-month average run-rate. Air Passenger traffic and toll collections improved from the previous fortnight and stood above their 6-month average run-rate. UPI payments, use of credit cards at POS and E-commerce transactions moderated from the previous fortnight and stood below their 6-month average run-rate. In financial markets, FPI flows into Indian equities picked up pace and stood at US$2.2bn in the second fortnight of Nov’23 while DII flows moderated to US$0.5bn.

Cash is king in wedding season as inflationary pressures linger

Persistent inflation is affecting wedding celebrations to some extent in India’s rural and semi-urban regions, with demand moderating for customary wedding items such as gold jewellery and household appliances. Cash is seen replacing jewellery and electronic products as wedding gifts. “We had expected the sales momentum to continue after Diwali due to so many weddings and a recovery in rural spending and entry-level products, but it did not,” said Kamal Nandi, Busoni Head at Godrej Appliances (The Economic Times). “Festive season gifting demand has also been muted. Gift packs (FMCG products) have not done well this year and we have not been able to clear stocks till now," said Dairyashil Patil, President of All India Consumer Products Distributors' Federation (Bloomberg Quint). Reports suggest that banquet halls are booked out due to the wedding season, but anecdotal evidence suggests that customers may be cutting down on frills.

E-commerce ‘Black Friday’ sales up 23% YoY led by Tier-3 towns: The Indian E-commerce ecosystem is estimated to have posted ~23% YoY increase in sales over the ‘Black Friday’ weekend, with Fashion and Beauty products dominating sales, according to E-commerce enablement platform Unicommerce. Tier 3 cities reported the highest growth of 43% YoY followed by 19% YoY for Tier 1 and 16% YoY for Tier 2. 

Global Banks: 2024 Outlook negative; tight financial conditions sting (Moody’s)

Our outlook for global banks for 2024 is negative as central banks' tighter monetary policies have resulted in lower GDP growth. Reduced liquidity and strained repayment capacity will squeeze loan quality, leading to greater asset risks. Profitability gains will likely subside on higher funding costs, lower loan growth and reserve buildups. Funding and liquidity will be more difficult. However, capitalization will remain stable, benefiting from organic capital generation and moderate loan growth and as some of the largest US banks build up capital.

The operating environment will deteriorate under tight monetary policies: Banks face more difficult operating conditions in 2024 because of below-trend economic growth and high interest rates for the year as a whole, even as major central banks begin to cut rates. Lower economic expansion will limit business prospects, resulting in slight to moderate loan growth, which will curb higher rates' benefits to banks. Instead, elevated rates for the most part will lead to higher funding costs and greater asset risks among existing borrowers. We expect real GDP growth among the Group of 20 nations (G-20) to remain below-trend at 2.1% in 2024, down from an expected 2.8% in 2023 and 2.8% in 2022.

Tightening underwriting standards, which we are seeing among US banks and European banks, in response to rising asset risks can lead to credit contraction, which in turn reduces growth. The slowdown follows the aggressive removal of monetary stimulus and withdrawal of COVID-19 pandemic aid packages and Russia’s war on Ukraine (Ca stable). The military conflict between Israel (A1 review down) and Hamas could yet negatively influence credit conditions through oil prices and market sentiment.

However, there will be key differences in operating conditions for advanced economies and emerging economies, but also within those markets as well. GDP growth will fall among advanced G-20 economies, especially in the US, as unemployment rises and lower consumer spending, dampened by interest rates, pulls down economic activity. On the upside, large-scale infrastructure investment and industrial policies enacted in the last two years — combined with innovations in artificial intelligence and big data — could boost long-run productivity and growth.

Loan quality will be squeezed by low liquidity and tighter repayment capacity: Previous rate hikes will lead to greater asset risk and reserve buildups. Rising unemployment in advanced economies will weaken loan performance. Commercial real estate (CRE) exposure in the US and Europe is a growing risk; in Asia-Pacific, specific property markets face stress. Chinese banks face risks from slower economic growth and second-order impact from a prolonged property downturn.

Profitability will fall on higher funding costs, lower loan growth and loan-loss provisioning needs: Profitability gains from the last two years will likely start to subside, but remain sound. Higher funding costs will shrink net interest margins, while loan production will continue to weaken as rate hikes limit demand and credit standards tighten. Provisioning expenses will follow increases in asset risks, while operating expenses contend with rising tech-related investments and new regulatory costs.

Funding and liquidity will be more challenging because of monetary policy tightening Deposit growth will decelerate as deposits move to more expensive accounts or exit banking systems, while market funding increases. Lower loan growth will limit funding strains. Foreign currency shortages will strain liquidity in some frontier markets.

Capital will remain broadly stable: Banks in Europe will maintain ample buffers above regulatory minimums. In the US (Aaa negative), some of the largest banks will build capital because of regulatory changes. In Asia-Pacific, organic capital generation and prudent dividends will allow capital stability. 

Residential Real Estate: A rising tide lifts all boats (ICICI Securities)

S&P BSE Realty Index has risen sharply by ~67% YTD in CY23 as concerns over rising mortgage rates impacting demand have been addressed by all companies under our coverage which clocked record residential sales bookings in FY23 (up 43% YoY in value terms) and momentum sustained in H1FY24 in spite of the absence of big-ticket launches by most developers. All coverage companies have a large launch pipeline for festive season and H2FY24 (Sep’23-Mar’24). Hence, we estimate pan-Indian residential market share for our coverage to grow from 24% in FY23 to 28% in FY25E led by sales booking CAGR of 13.8% over FY23-25E. With developers following pricing discipline and aligning price increases in line with inflation/salary hikes (5-7%) while reining in debt levels, any downward revision in mortgage rates may boost demand further. Notwithstanding the sharp rally in stocks, we remain constructive on residential space over FY24-25E.

Festive season to see slew of launches

While H1FY24 has seen relatively few launches, all developers across our coverage universe have a large number of launches lined up for the festive season. Notable among these are Oberoi Realty’s long-awaited Pokhran Road, Thane launch, DLF’s Crest 2 project in Phase V, Gurugram, multiple projects of Macrotech, Godrej Properties and South Indian players (Prestige/Brigade / Sobha) and Mahindra Lifespaces’ Kandivali, Mumbai project.

Listed developers to see continued market share gains

While the overall Indian residential market size across India’s top 8 cities in FY22 crossed FY20 levels (pre-Covid), FY23 industry sales booking value grew 36% YoY to INR290bn. We estimate the residential market share of our listed coverage universe has risen to 24% in FY23 from 16% in FY20 at a pan-India level. While the pace of market share gains is expected to be slower given the strong market share gains already achieved over FY20-FY23, we estimate the pan-Indian residential market share for our coverage universe to grow from 24% in FY23 to 28% in FY25E.

While the pace of market share gains is expected to be slower given the strong market share gains already achieved over FY20-FY23, we estimate the pan-Indian residential market share for our coverage universe to grow from 24% in FY23 to 28% in FY25E.

Affordability of residential homes is favourable

Mortgage rates offered by most large lenders up to Mar’22 were in the 6.5-7.0% range for 20-year housing loans and were the lowest ever historically since 2005. Rate hikes in FY23 globally and in India have led to large lenders increasing home loan mortgage rates by 240-250bps from 6.7% to ~9.2-9.3%. This translates to an 18-22% higher monthly EMI outgo for new home buyers over a 20-year loan tenure. At the same time, residential prices have also risen by 9% over the last 15 months (Sep’23 vs. Mar’22).

However, we believe that this may not significantly impact demand as overall affordability levels as per HDFC Limited, remain healthy at 3.3x annual income, the best in the last 25 years. Even assuming that mortgage rates may rise by another 25-50bps in FY24E (up to Mar’24), we believe that developers would look to provide incentives such as builder subvention for a limited period of 2-3 years. While this effectively means that the developer would have to absorb the related costs, given that most leading developers have de-levered their balance sheets and enjoy far lower corporate interest rates which are 200-300bps lower than unorganized, local players, affordability for new homes will continue to be attractive. Further, given that residential housing prices in India have been fairly stagnant over FY18-22, moderate single digit price increases of 5-6% annually combined with a few incentives thrown in for home buyers will be the way forward. 

Utilities & Renewables (Elara Capital)

Festivities and better economic activities drive generation

Data from Power System Operation Corporation (POSOCO) shows India's power generation in November increased 11% YoY to 130bn units (BU) albeit onhigh base, led by an uptick in economic activity ahead of the festival season. However, generation declined 13% QoQ, due to reduced demand with the onset of Winter in North India. Rising power demand was serviced by a surge in coal-based generation. Coal-based generation rose 17% YoY to 102BU on strong generation by central power generation companies (GENCO).

Generation from central thermal plants improved 8.5% YoY to 38BU with plant load factor (PLF) improving to 75% in November vs 73% during the same time in the past year. Generation from State and independent power producers (IPP) improved 3% and 18%, respectively, to 31BU and 33BU with PLF at 64% and 67%, respectively. Nuclear generation also witnessed robust growth, up 15% YoY to 4.4BU.

Share of coal-based generation in overall generation increased to 78% in November from 74% during the same time in the past year. The share of renewables in overall generation declined slightly to 9% in November from 10% last year. The lower-than-desired share of renewables in electricity generation reflects India’s heavy dependence on coal.

Peak demand rose 9% YoY to 204.6GW in November, due to a rise in industrial activity on the back of festivities. Power generation rose 12% YoY to 1,183BU in FY24 YTD. Gas-based generation has been buoyant in FY24 to date, up 42% YoY, to 21.2BU on muted gas price.

Muted hydro generation

Rising coal generation was partly offset by reduced hydro generation. Unavailability of water kept hydro generation muted, which pared down 32% YoY to 7.2BU in November. FY24 YTD, hydro generation was muted, down 15% YoY to 119BU, due to forced outages and water unavailability at power plants. Renewables generation grew 4.8% YoY to 12.3BU in November. Gas-based generation increased 6.5% YoY to 1.6 BU. It was the first time in FY24 when gas-based generation grew by a single digit, following an 8% decline in April.

Installed capacity at 426GW as on October 2023

Capacity spiked 9.3GW in FY24 YTD, primarily led by expansion of solar energy. Around 5.0GW of solar capacity has been added, bringing total solar capacity to 72.0GW. Overall installed capacity is 426.0GW in FY24 YTD, with thermal sources (coal and gas) contributing the most at 239.0GW, followed by RE sources at 132.0GW. Hydroelectric capacity accounts for 47.0GW of the overall.

Our view: positive prospects for the power sector

We expect power generation to remain steady in the upcoming months, due to an uptick in economic activity. Soaring energy requirement, increased focus on energy transition, sizeable pipeline of capacity expansion, foray into green hydrogen, energy storage solutions (pumped storage) and regulatory reforms in the sector are expected to bode well for our power coverage universe. We remain positive on firms focused on RE capacity with a strong balance sheet.  

India Electricals and Durables (Jefferies)

Channel checks indicate healthy festive offtake in Lighting, Mobiles, select Appliances and TVs (World Cup). In Delhi-NCR, Air Purifiers demand spiraled due to pollution concerns. AC offtake was steady in Oct due to high temp. Most products have normal channel inventory, except Lighting (sharp dip in prices). C&W saw 2-3% price cut in Oct (copper trend). POLYCAB, FNXC are poised to benefit from capex/housing. Healthy festive sales can benefit HAVL, VGRD, DIXON.

Mixed Demand Trends

We spoke to ~12 channel partners pan-India. Many of them have cited that festive season (Oct-Nov) witnessed healthy offtake in select categories such as Lighting (sharp YTD dip in LED prices), Mobiles, Laptops, TVs (Cricket World Cup) and select Appliances (eg: mixers, grinders, blenders, gas stoves). Air Purifiers saw good demand in Delhi-NCR owing to pollution concerns. Cables & Wires (C&W) segment continued to showcase steady demand.

Durable segments like ACs and Washers (mainly FATL category) saw moderate demand. AC sales witnessed some traction prior to festive period owing to high temperatures in Oct. Fans is independent of festive season, hence usual demand trends. Winter season (Dec-Jan is peak) is likely to see good demand for Geysers with incremental push from installations in new real estate projects. Pumps offtake was lower in last 4-M but likely to pick-up on the Agri side, aided by Rabi season. B2C / Appliance portfolios of HAVL, VGRD, DIXON, AMBER, CROMPTON are expected to benefit from festive uptick.

Premiumization

This trend is visible across many categories such as Mobiles, Televisions, Fans. In Mobiles, sales of premium SKUs (MRP> Rs30K) seem to be growing. In TVs, demand for large screen LED and smart TVs is on the rise. Fans are seeing higher demand for BLDC fans. In Refrigerators, demand for Double-Door is higher than Single-Door. HAVL / CROMPTON have a good premium mix in Appliances / Fans.

Channel Inventory Trends Vary

Lighting products inventory was below normal across many dealers during festive season, driven by healthy demand and sharp decline in LED prices. Geyser inventory is higher, as dealers stock ahead of winter season (Dec-Jan). In Durables, inventory is largely at normal levels (3-4 weeks). In Kitchen appliances, inventory is at normal levels for most categories. In Delhi-NCR, demand for Air Purifiers spiraled due to pollution concerns - lower availability impacted sales conversion.

No Major Pricing Actions

Most categories have not seen major pricing action over the past few months. Few instances of pricing actions are as follows: In Fans, CROMPTON took 1-2% price hikes in Sept23. In Televisions, past 1-Y saw a sharp decline in prices due to decline in open-cell prices. But now, prices seem to have slightly firmed in past 4-M.

Steep YTD price decline in LED has led to double-digit YoY decline in Lighting prices. Fall in copper prices drove a price cut of 2-3% in Cables & Wires in Oct23, although prices appear to have stabilized in Nov. Festive season witnessed discount offers across many categories. Most brands offered absolute discounts on MRP, credit card cashback offers, no cost EMI offers, vouchers and gift hampers. Sale of premium products is supported by EMI options provided by companies / retail stores which boosts affordability.