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.
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: 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.
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.
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.
