Vijay Kumar Gaba

Banking system liquidity deficit worsens (Miscellaneous)

As per the latest RBI data, liquidity deficit as measured by fund injections by the Reserve Bank of India (RBI) into the banking system was INR1.47trn as of September 18, the highest since April 2019.

The Reserve Bank of India (RBI) injected Rs 1.47 trillion on Monday and Rs 1.46 trillion on Tuesday. Market participants believed that the disbursement of Rs 25,000 crore as the second tranche of incremental cash reserve ratio (I-CRR) will not be enough, and the liquidity might tighten further to Rs 2 trillion in short term due to tax outflows and arrival of the festival season.

“For now it looks like going into the festival season there would be more outflow and cash leakage from the system. It will lead to higher deficit for the banking system,” said Naveen Singh, head of trading and EVP at ICICI Securities Primary Dealership. “There are other factors at play. We are not seeing much dollar flows coming into the system and the RBI has been continuously defending from the other side. We are not seeing any inflow from the Fx (foreign exchange) side, and the RBI is not in the mood to add durable liquidity in the system. Gradually, the liquidity deficit might go up to Rs 3 trillion, but not in the immediate future,” Singh said. (Business Standard)

Advance tax payments took place last week, while outflows towards Goods and Services tax will be completed by Wednesday, with bankers estimating aggregate outflows of up to 2.50 trillion rupees. The impact has magnified as the twin outflows have occurred in the same reporting fortnight, at a time when a chunk of the money is not available for use as it is blocked in the incremental cash reserve ratio (I-CRR). Moreover, "another drain on rupee liquidity could be from RBI's (Reserve Bank of India) FX intervention if depreciation pressures on the rupee persist," said Gaura Sen Gupta, an economist with IDFC First Bank. (Zawya.com)

The RBI had decided on September 8 to discontinue the I-CRR by October 7 in a phased manner. Out of the total I-CRR maintained, 25% was disbursed on September 19, another 25% on September 23, and the remaining 50% will be released on October 7.

Growth and inflation upgrade (MOSL)

For the past nine months, the fears of slowdown have been totally unfounded. India’s real GDP growth was better than expected (at 6.1% YoY) in 4QFY23 and then improved in line with expectations (at 7.8% YoY) in 1QFY24. Not only India, the US economy too has been much more resilient than our predictions at the beginning of the year.

In view of this, we upgrade India’s real GDP growth projection to 6.0% YoY for FY24 from 5.6% YoY anticipated in Jun’23 (and vs. 5.2% YoY in Mar’23). We, however, keep it broadly unchanged at 5.4% for FY25E (projected at 5.5% in Jun’23). Further, nominal GDP growth forecast is also kept unchanged at 7.8% for FY24, since higher real growth is entirely offset by a cut in GDP deflator forecast. It is likely to improve ~10% for FY25, slightly lower than earlier projection.

After lower-than-expected retail inflation in Apr-May’23, CPI inflation has been much higher in 2QFY24 led by vegetables, pulses and spices. Accordingly, we raise our CPI inflation projection to 5.6% for FY24 (from 4.3% earlier) with a slight upward revision in FY25 (to 5.3% from 5.0% earlier). Accordingly, due to downward revision in GDP deflator, the nominal GDP growth forecast is kept unchanged at 7.8% for FY24, and ~10% (from 10.5%) for FY25.

Rising crude adds to upside risk to external imbalances (JM Financial)

India’s merchandise trade deficit widened to USD 24.2bn in Aug’23 (USD 20.7bn prior). Although August marked a moderation in decelerating trend in trade activity during last four months, however it is too early to call it bottoming out of the weakness in overall trade.

Manufacturing PMI indicated improved export demand, which we believe will reflect in India’s exports data in the forthcoming months. Services exports declined for the first time, this is in-line with the weak guidance given by the Indian IT companies. As crude oil prices are expected to remain elevated in the near term, it adds to the upside risk to India’s external imbalances. We re-iterate our expectation of CAD at 1.4% of GDP for FY24.

Trade imbalance widens further: The sharp deceleration in trade activity during the past four months, moderated in Aug’23. However the decline in exports (-6.9% YoY) was sharper than in imports (-5.2% YoY). Strong sequential gains in imports (10.8% MoM) vs in imports (6.9% MoM) widened the trade deficit further to USD 24.2bn in Aug’23 vs USD 20.7bn in the previous month. On a FYTD basis (Apr-Aug), trade deficit of USD 101bn in FYTD24 is lower than the levels seen in FYTD23 (USD 113bn).

Flat core exports; First decline in services exports: At USD 34.5bn, India’s exports continued to decelerate with strong sequential gains (-6.9% YoY, 6.9% MoM). Non-oil exports remained flat (0.2% YoY) however the fall in oil exports was sharp (-31% YoY). India accounted for 40% of global rice trade in 2022, the ban on exports of parboiled and broken rice was supplemented with exports duty (20%) which reflected in the sharp decline (-10% YoY, -4% MoM) in rice exports. As per the findings of the manufacturing PMI, export orders have been robust even in Aug’23. Firms reported incremental orders from Bangladesh, China, Malaysia, Singapore, Taiwan and US which we believe should reflect in the trade data of forthcoming months.

While on the services front, exports (prelim) declined (-0.4% YoY) for the first time in Aug’23 (Ex 5) after showing signs of moderation since Apr’23. Since software forms major portion of our services exports, this fall can be attributed to the reduced demand for software exports, as reflected in the moderating deal wins by Indian IT companies.

Continued deceleration in imports: The deceleration in imports continued for eight months in a row, however recorded a consistent growth of 10% on a 4yr CAGR. Sequential uptick in Aug’23 (10.8% MoM) is unlikely to sustain. Close to one fourth of India’s imports consists of oil imports; the sequential gain in oil import (12% MoM) is on the back of an uptick in crude oil prices. We expect that the crude oil prices to remain elevated in the near term which will exert pressure through rising oil imports. Coal imports (-43.5% YoY, -6% MoM) are at its lowest in last two years (USD 2.6bn), which is reflecting the downtrend in coal prices after it peaked in May’22. At USD 4.99bn, Gold imports (38.8% YoY) were the highest in last fifteen months. Imports of machinery and electronic goods have been consistently growing with 4yr CAGR of 7% and 10.3% respectively. But with the ban on imports of laptops and PCs w.e.f 1^st November, it is highly likely that imports of electronic goods will moderate.

Crude oil prices expected to remain elevated; CAD expected at 1.4% of GDP: Rising crude oil price is capable of impacting India’s external balance, India crude oil basket has risen sharply by 8% to USD 86.4/bl in Aug’23. Brent crude prices breached the USD 94/bl mark after OPEC’s prediction of supply constraints in the oil market, estimating an oil deficit of 3.3mn barrels (mbpd) while IEA estimated a moderate 1.1 mbpd deficit during Q3FY24. We expect these prices to remain elevated in the near term as this spike is not demand-led but it is engineered through curtailing supply by oil producing countries. On the demand side, we expect China’s demand to come online in a gradual manner. Hence any expectation of pull back in prices will only be on the back of increased supply. Our expectation of CAD at 1.4% of GDP in FY24 would be at risk if monthly run rate of trade deficit breaches USD 20bn mark (Currently at USD 20.2bn).

India NBFCs: Funding cost likely to peak out by 3QFY24 (Nomura Securities)

We take a deep dive into the liability profiles of India NBFCs in light of regulator (RBI) caution on NBFCs’ elevated reliance on bank funding (link ) and further increase in yields across different constituencies by ~10-15bp since 1Q24. Our analysis of rates and liability mix of NBFCs shows that cost of funds (CoF) should peak out by 3Q24, after rising ~30-40bp from 1Q24 levels. This quantum of increase is higher than guidance given by most of the NBFCs. Further, the benefit of policy rate cuts, if any in 1HFY25, on cost of funds for NBFCs should be visible only in 2HFY25.

NBFCs’ reliance on bank funding remains at elevated levels: As of FY23, bank funding to NBFC/HFCs constituted ~57%/44% of their total borrowings. Further, bank loans to NBFCs/HFCs have almost tripled to ~INR13.7tn in Jul’23 at a CAGR of 21% vs 12% for overall bank credit, with PSU banks having 65% market share in it. Bank funding to NBFCs/HFCs reached ~64% of their net worth in 1Q24 (PSU banks: 102%) vs 35% in FY17. We expect NBFCs’ reliance on bank funding to come down in coming quarters, driven by a pickup in alternate sources of funding (e.g., bond market/securitization).

Increase in CoF for NBFCs has been lower than broader increase in interest rates: During 4Q22-1Q24, when repo / 1Y T-bill /1 Y Corp AAA yield inched up by 250bp/242bp/248bp, most of the NBFCs/HFCs barring CIFC and SBI Cards saw a <100bp increase in funding cost vs a >100bp increase for large banks. Compared to CoF of 3QFY19, when the policy rate was at similar level of 6.5%, cost of funds for NBFCs are still lower by up to ~200bp.

Hence, we believe it is quite evident that repricing of NBFC liabilities is still underway, as it happens with a lag both in the upward and downward rate cycles.

Cost of funds could rise another ~30-40bp from 1Q24, and likely peak out in 3Q24: We expect CoF for NBFCs could rise another ~30-40bp from 1Q24 before peaking out in 3Q24. This increase would be driven by 1) another ~10-15bp increase in yields across buckets since 1Q24; 2) a further increase in cost of NCDs, as coupon rates for maturing NCDs in remaining FY24/25 (~25%-50% of 1Q24 outstanding NCDs) are ~100-200bp lower than current yield; and 3) MCLR-linked bank loans are still getting repriced upwards due to a lag. This CoF increase of ~30-40bp during 1Q24-3Q24 is higher than the guidance given by most of the NBFCs and the average 20bp increase built into our current estimates. Hence, there could be ~1-5% risk to our FY24F EPS coming from pressure on CoF.

Benefits of potential policy rate cut in 1HFY25 to accrue only in 2HFY25: We expect benefit of any policy rate cut in 1HFY25 on funding cost of NBFCs to accrue only in 2HFY25. Bank funding forms >50% for NBFC liability side. While repo/T-bill linked bank borrowings will get repriced downward immediately, it will take time for MCLR-linked bank borrowings to reprice downward as well. Further, we estimate that ~60% of a repo rate change gets transmitted into MCLR. On the bond side, NCDs maturing even in FY25 has lower coupon rate compared to current yield which is already factoring in repo cuts.

SBI Cards/Five Star/CREDAG to benefit the most purely from CoF/spread perspective: Only from funding cost and spread perspective keeping other things constant, SBI Cards (SBICARD IN, Reduce), Five Star (FIVESTAR IN, Buy) and CREDAG (CREDAG IN, Buy) should benefit the most in a declining rate cycle as only ~23%/27%/40% of their borrowings are fixed, while the entire loan book is fixed in nature. We expect LIC HF (LICHF IN, Buy) should be negatively impacted the most, as ~43%/99% its borrowings/loans are floating in nature. Having said that, cost of funds is only one of many factors we look at to arrive at our rating on various stocks. 

Defense stocks: No defense against any potential negatives (Kotak Securities)

A reverse valuation exercise of the major listed defense stocks implies that they will capture the bulk of defense capex in the future, which is contrary to historical trends. Indian defense stocks have witnessed an explosive rally in their stock prices over the past few months on expectations of strong spending by the government and indigenization. We concur with the growth part, but are less sure about the implied profitability assumptions.

Indian defense sector is showing signs of exuberance

The Indian defense sector has witnessed a sharp rerating and delivered massive returns over the past 3-6 months on (1) expectations of large spending by the government for an extended period of time and (2) steady increase in indigenization. Large deal wins of companies boosted investor sentiment. In our view, the stocks largely factor in the aforementioned positives, but not potential risks of (1) delays in ordering and (2) lower profitability.

Listed defense companies will need to execute Rs1.3 tn of defense orders PA

Our reverse valuation analysis based on the current market capitalization of a basket of major defense stocks suggests that these companies will need to execute around Rs1.4 tn of defense orders annually to justify their current stock prices.

For context, these companies combined revenues of Rs625 bn in FY2023. Our assumptions bake in the average margin profile for these stocks (see Exhibit 5). We would note that we have not considered a number of private companies (difficulty in segregating market cap. pertaining to the defense segment alone) and government organizations (unlisted) in this exercise.

Defense capex for domestic procurement at Rs1.6 tn in FY2026E

India’s total defense capex increased at a CAGR of 9% over FY2017-23, resulting in a steady decline in its share of overall government capex. We note that India’s defense imports were around Rs400 bn in FY2019-20. We estimate a market opportunity of Rs1.6 tn for domestic procurement by FY2026 based on our assumptions of (1) strong growth in overall defense capex and (2) low growth in imports due to indigenization.

As such, the basket of defense stocks will need to capture a significantly larger share of India’s domestic defense budget compared with history, even as more private companies are entering the sector.

Profitability may be bigger challenge for companies and investors

We are not sure about the future profitability of the defense companies, as (1) their current profitability seems to be on the higher side, (2) the defense industry could become more competitive with the entry of private sector players and (3) government may tighten procurement terms (monopsony buyer), as domestic production capabilities scale up over time. We would note that lower profitability assumptions will imply much higher implied revenues, which may not be feasible in the context of the market opportunity.

Oil & Gas - Fall of the last bastion? (Prabhudas Lilladher)

We remain cautious on PNGRB’s decision to implement common carrier for product pipelines due to the challenge it poses for OMCs. OMCs own ~90% of marketing infrastructure including pipelines, marketing terminals and depots. While pipelines constructed under bidding process already have provisions for common carrier, older pipelines are still lacking behind.

Overall utilization of product pipelines at 68% in FY23 does present an opportunity to other interested parties including private players. Pipelines provide the cheapest method of transportation, as next best coastal is ~46% costlier while roadways are even twice as costly. In addition to the cost of creating new infrastructure, uncertainty of obtaining right of using land for laying pipelines remains a key challenge limiting expansion of private players in product retailing. However, post implementation of unified tariff of natural gas pipelines, we expect PNGRB to open petroleum product pipelines, a step that may sound like fall of the last bastion for OMCs.

Although HPCL/BPCL/IOCL are trading at 0.9/1.2/0.8x FY24 PBV, a look at their long term valuation charts suggests that they could still correct from here. More importantly, the common carrier access of product pipelines may result in sustained de-rating of these stocks even lower.

Almost all marketing infrastructure owned by OMCs: India has total ~22,500km of product pipelines and ~5,000km of LPG pipelines, almost all owned by OMCs. There are 310 marketing terminals/depots, 91% of which are owned by OMCs. Out of 283 aviation fuel stations, 89% are owned by OMCs and 90% of 87,458 retail outlets are also owned by OMCs.

Pipelines are the most critical part of the supply-chain as their construction takes long time. Just to share a perspective, Kochi-Bangalore gas pipeline has still not been completed even after a decade of commissioning the Kochi LNG terminal.

Common carrier access could break the oligopoly: Private players have largely remained at bay (6-7% market share in sale of petrol/diesel in FY23) given 1) pricing interventions in petrol and diesel resulting in non-competitive environment, and 2) high cost plus time involved in laying marketing infrastructure alongside risk associated with it. However, at times OMCs have bled in terms of losses in marketing segment due to inability to pass on high cost to consumers, over a longer period of time; they have shown resilient profits.

The common carrier access in product pipelines, could thus, lower the entry barrier for private players, thereby challenging dominance of OMCs over a period of time.

Marketing margins losses continue: Average HPCL and BPCL returns have under-performed Nifty by 15/7/6% in past 3/6/12month, while IOCL’s performance has given 8% underperformance against Nifty in 3 months (overperformed 3/16% in 6/12m) due to inability of raising retail prices amidst rising crude oil prices. As per our calculation, the gross marketing margin on petrol and diesel stand at Rs5.5lit and loss of 3.8/lit respectively in Sep’23 compared to Rs10.6lit/10.2/lit in 1QFY24 and Rs8.4/2.7/lit in 2QFY24YTD. 

Economy: Weak input inflation and pullback in June trade (AXIS Capital)

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.

…CAD/GDP expected at 1.1% of GDP in FY24 (Yes Bank)

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 update (Indsec)

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.

Specialty chemicals on domestic drive, revenue seen growing 6-7% (CRISIL Ratings)

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.

Further signs of easing underlying inflation in the US (Danske Bank)

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.