Vijay Kumar Gaba

Banks’ ongoing technology investment programmes remain intact: Citi management mentioned in their earnings call that their overall technology expenses grew 12% YoY in Q1CY23. Management acknowledged that these investments have driven a significant increase in expenses, but believes they are crucial to modernise the firm and position Citi for success in the years to come. Citi’s ongoing technology investments include consolidation of its platforms, modernising IT infrastructure, improving data and IT security, and investing in data to create advanced decision-making and risk management capabilities. Citi is also leveraging cloud-based solutions to modernise its systems and eliminate manual processes and operating costs over time. JP Morgan management mentioned the 16% YoY increase in their expenses last quarter (Q1CY23) included technology investments among other things.

Banks are investing in technology for efficiency gains: Wells Fargo has been investing in technology for improving efficiencies in its consumer banking business for the last 1.5 years. These efficiency initiatives have led to headcount reduction by 9% YoY and branch reduction by 4% YoY in Q1CY23. But there is still considerable scope for further efficiency gains as per Wells Fargo management. Company is also investing in new tools and capabilities to provide better and more personalised advice to customers. It continues to enhance its mobile app. Its mobile active users were up 4% YoY in Q1CY23. PNC Financial Services (among the top-10 banks in the US) has set itself a goal to reduce costs by US$400mn in CY23 through its continuous improvement programme, which funds a significant portion of its ongoing business and technology investments.

US banks’ commentaries on recession expectations: Citi management believes the US is likely to enter into a shallow recession later this year. JP Morgan CEO Jamie Dimon also believes the short-term rate curve indicates higher recessionary risk. PNC Financial Services is expecting a recession starting in the second half of CY23, resulting in a 1% decline in real GDP. But despite recession expectations, their commentaries suggest they are willing to continue with their ongoing technology investments.

Indian economy: Goldilocks redux (ICICI Securities)

Industrial output accelerated to 5.6% YoY growth in Feb’23. Manufacturing strengthened to 5.3% YoY growth, offsetting the deceleration in electricity (+8.2% YoY) and mining (+4.6% YoY). Industrial output grew 5.4% YoY in Jan-Feb’23, considerably faster than its 2.1% YoY growth in Jul-Dec’22. Similarly, the 4.5% YoY manufacturing growth in Jan-Feb’23 marked a sharp pickup from its 1.4% YoY expansion in Jul-Dec’22. Although S&P’s manufacturing PMI (purchasing managers index) has a low correlation with industrial growth, its strong 56.4 reading for Mar’23 suggests a further acceleration during the month. Real GDP is thus likely to strengthen to 6.2% YoY growth in Q4FY23, ensuring 7.3% growth in FY23, outpacing the 7% officially estimated growth rate.

Consumer non-durables (+12.1% YoY), capital goods (+10.5% YoY) and infrastructure/construction goods (+7.9% YoY) led the industrial acceleration in Feb’23. Consumer non-durables ended a 2-year slump, growing 8.2% YoY in Dec’22-Feb’23, corroborating other evidence of a sharp pickup in rural consumption. However consumer durables declined 4% YoY in Feb’23, primarily because of the  persistent weakness in textiles and apparel, which offset the strong rebound in motor-vehicle output (+8.2% YoY). The weakness in key labour-intensive subsectors (also evident in the decade-long near-stagnation in textile and garment exports) is worrying from a longer-term perspective, especially given their employment potential.

CPI inflation receded to 5.66% YoY in Mar’23, moving back within the RBI’s target range of 2-6% after being above 6% YoY for a couple of months. Food and beverages inflation moderated to 5.11% in Mar’23 (a 15-month low), energy inflation to a 12-month low of 8.9% YoY, and transport and communication prices to a 40-month low of 4% YoY. Although the RBI retained its stance of ‘withdrawal of accommodation’ at its monetary policy committee (MPC) meeting last week, M3 growth of 9% YoY (as of 24th Mar’23) was already sufficiently restrictive to bring inflation back in line. Although other central banks (US Fed, ECB, BoE) will need to continue raising policy rates (since their inflation rates remain far above their targets), we believe the RBI has won its battle against inflation, and will not need to raise its policy repo rate any further.

Rise in export volumes (Axis Capital)

March merchandise trade deficit rose by USD 3.5 bn to USD 19.7 bn (from downwards revised 16.2 bn in February) despite USD 1.7 bn sequential improvement in NONG exports as imports in value terms saw sharp increase across the board. Overall, the sequential increase in imports was primarily driven by electronics (32%) crude oil (21.2%) and gold and precious stones (23.7% combined). While exports saw a sharp decline in value terms (-13.9% YoY), volume estimates for trade paint a different picture, with a 5.1% improvement in exports by volume terms. This improvement was largely due to engineering goods.

Meanwhile, services exports are holding up well at USD 13.7 bn in March. There is an element of seasonality in the deterioration of the March trade deficit. Even then, goods and services combined deficit for March 2023 quarter at USD 12 bn is lower than USD 15.7 bn seen in March 2019 quarter. CAD outlook for 2023-24 continues to look good with our estimate at 2% of GDP which assumes monthly goods & services trade deficit run rate at USD 10 bn against USD 6 bn seen in March 2023.

Strong El Nino could hamper real income growth (Axis Capital)

Weather forecasters are likely to mark 2023-24 as an El Nino year (see), which typically increases agricultural stress in many parts of the world and could adversely impact wheat and oil palm output. Some crops like rice and soyabean are insulated on a global scale from El Nino. History shows that severity of El Nino matters; India’s official weather forecaster is predicting normal monsoons as of now.

Wheat and oil palm production most at risk from El Nino Strong rainfall deviations have an impact on agricultural output growth in India. However, there is little evidence of lasting impact on CPI or rural wages. However, since India is now a key exporter of cereals (USD 1 bn per month) and imports most of its edible oil needs (USD 1.7 bn per month), global supply shocks to wheat and palm oil output is likely to increase inflation risks. The FAO already predicts a 1.1% decline in world cereal stock in 2023 due to poor expectations from the Black Sea region. A strong El Nino could reverse the decline in global cereals and edible oil prices that we have seen recently. We are already seeing signs of rural wage growth peaking which means improvement in income in real terms will have to be led by swifter fall in price inflation. A strong El Nino would be a setback for real income improvement in rural India and among urban poor.

FMCG and agrichemicals most impacted by El Nino We looked at sales growth during El Nino events since 2002 for listed corporate universe. We can see a discernible drop in growth during El Nino years only in the case of FMCG and agrichemicals. However, we don’t see evidence of drop in growth for durables like electronics and automobiles. This assessment could change in future events due to improving penetration of durable goods in non-metropolitan India. As of now, rural demand indicators are holding up and will likely trend upwards due to two factors: (1) strong urbanization leading to tighter rural labor markets; therefore, higher inward remittances and (2) firms passing on input cost declines leading to swifter pace of real income growth.

FY24 Cement Outlook: Demand to Grow 8%-9%; Profits to Recover (India ratings)

Government’s Sustained Infrastructure Thrust Key Demand Driver: Ind-Ra expects cement demand to grow 8%-9% yoy in FY24 (FY23 (estimated (E): 9%, five-year CAGR: 4.5%), with demand to GDP growth multiplier rising to 1.4x-1.5x (FY23 (E): 1.3x). The agency opines that the government’s infrastructure push ahead of the general elections in 2024 would be the growth driver like in the past three pre-election years where the GDP multiplier averaged 1.5x compared to the long-period average of 0.9x. Besides, a resilient agricultural sector aided by four consecutive normal monsoons and focus on completion of affordable housing projects would aid cement demand from housing, albeit at a lower rate as inflationary pressures hurt affordability. However, an adverse weather event such as El Nino impacting monsoons could pose a downside risk. The estimated 9% growth in FY23 is marginally higher than the 8% growth projected by Ind-Ra in its FY23 Outlook.

Capacity Utilisations to Remain Below 70% amid Large Expansion Pipeline: The cement sector continues to witness a spate of capex announcements in the anticipation of the medium-term demand growth and market share gains. Ind-Ra believes 75% of the announced expansion of around 150 million tonnes is actually likely to come on stream over FY23-FY25. With the supply growth rate broadly in line with demand growth, Ind-Ra expects capacity utilisations to remain at 67%-68% in FY24 (FY23 (E): 67%, FY22: 65%). Furthermore, with large part of the additions in the form of grinding units, clinker utilisations are likely to remain 800-1,000bp higher than cement utilisations, indicating a higher effective utilization rate.

Higher Consolidation Ahead; Large Inorganic Potential in South: Also, the sector is likely to witness increased consolidation in the near-to-medium term, given the widening gap between leading and small players amid a tough environment and the aggressive medium-term capacity targets of large players that are unlikely to be achieved organically with the available resources. The share of top 10 companies also increased to 71% in FY23 (FY20: 69%) and is likely to increase further in the next couple of years. Given the high fragmentation and a large number of small-to-mid sized players, the southern market offers a high potential for inorganic expansion followed by the Western region.

Outlook on near-term rates (CRISIl)

One-month view: In April, the factors that will influence domestic G-secs are crude oil prices, inflation print for March, rupee-dollar dynamics, global interest rates, investor appetite at G-sec auctions, further announcements of variable rate reverse repo (VRRR) auctions and foreign portfolio investor (FPI) flows.

Three-month view: During the three months through June, the yields are likely to be impacted by crude oil price movements; inflation print; fiscal numbers; rate decisions by the US Fed’s Federal Open Market Committee and the Reserve Bank of India’s (RBI) Monetary Policy Committee; India’s GDP growth trend; and FPI flows.

Home textile demand past the trough; recovery likely by end 2QFY24 (JM Financial)

Indian cotton sheet/terry towel exports to US declined 13.1%/1.2% MoM in Feb’23. Market share across a) cotton sheet stood at 58% in Feb’23 up 5.1ppt MoM b) terry towel stood at 47% in Feb’23 up 2.6ppt MoM. Our Industry checks suggest that the more painful part of global de-stocking in the home textile space is behind us and demand recovery could start trickling in by end 2QFY24. Indian home textile companies will also benefit from lower cotton prices (down 9% QoQ and ~39% from May’22 highs) which will likely aid margins going forward. The apparel companies also remain hopeful of market conditions improving from CY24 (resulting in improved order book from 2HFY24), in time for spring’24 collection.

The textile sector continues to be well placed given a) relatively subdued cotton price outlook b) GOI’s focus on developing the textile ecosystem c) likelihood of market size increase via FTAs with UK/EU over time d) market share gains as world looks for an alternate production base other than China.

MFI: Credit cost in FY24 to remain lowest since FY17 (ICICI Securities)

In a decade-long eventful journey, microfinance lenders are very close to an end of the longest asset quality cycle (FY17-22) – starting from demonetisation in FY17, floods, NBFC crisis in FY18-19, and lastly covid in FY21-22. While lenders have remained resilient as reflected in 25% AUM CAGR between FY17-21, average credit cost stood elevated at ~2.5% vs <50bps during FY14-16. However, during 9MFY23, most players have showed a sharp improvement in credit cost trajectory. Also, considering player-wise stressed asset pool as on Dec’22, we expect credit cost in FY24 to remain lower than average of ~2.5% between FY17-22.

For our coverage universe, we expect FY24 credit cost settle at average 2.3% vs 3.4% in FY23E and >5% between FY20-22.

Further, we believe recent judgements (Telangana High Court on 14th Feb’23 -Telangana HC order on MFI regulation) from higher authorities would provide better clarity on MFI regulatory framework and also eliminate any possibility of dual regulations. AP and Telangana have not participated in MFI growth journey during the past decade. Telangana High Court’s judgement would open up fresh MFI lending in these two states at an accelerated pace. Both the states combined offer potential growth opportunity of ~Rs600bn (>20% of industry AUM as on Sep’22). As on Sep’22, only ~5% of total MFI lending opportunity has been captured by the players in these two states.

Overall, we believe MFI sector is well poised to deliver 20%+ AUM growth and 3.5%+ sector RoA by FY24E. Within the sector, we prefer NBFC-MFIs like Spandana and Fusion to play the MFI theme.

Pharma: Lower API costs should start benefiting now (IIFL Securities)

Our analysis of import pricing for 16 key APIs/KSMs imported into India, shows that API import costs (weighted average) have declined marginally by 2% QoQ in 1QCY23, after having corrected 8% QoQ and 6% QoQ in 4QCY22 and 3QCY22 resp. From the peaks seen in 2QCY22, overall API import costs have declined by 15%, with prices of several key APIs (PAP, DCDA, Azithromycin, 7ACA, Artemisinin, CDA) having corrected 20-30% from peaks.

However, import prices for certain antibiotic APIs (Pen-G, Clavulanate and Erythromycin) remain sticky at elevated levels. Given that Pharma companies usually stock API/KSM inventories for 3-4 months, the correction seen in API import costs from 3QCY22 has still not reflected in the earnings performance of companies. Lower API costs and hence GM improvement should start reflecting now in 4QFY23 numbers, in order to lend comfort to our assumption of ~200bps Ebitda margin expansion for the Pharma sector over FY23-25ii, barring which the sector could again see earnings downgrades.

Real state: Scale-up in launches to exit FY23 on a high note (MOSL)

Demand momentum sustains; interest rate unlikely to be a dampener

Inventories across most of the companies under our coverage universe have declined to below 12 months as absorptions have exceeded launches over the last six quarters.

We thus expect launches for our coverage universe to pick-up in 4QFY23 to a multi-quarter high leading to 42% YoY growth in pre-sales. Operational update reported by a few companies indicates a pre-sales growth of 12%/11% YoY in 4QFY23/FY23.

According to Knight Frank, demand in top-8 cities has sustained at ~80,000 units in 4QFY23. Further, with a surprise pause by the RBI, interest rate will unlikely be a dampener on demand from hereon and we expect the industry to grow at 5-10%. While MMR, Pune and Hyderabad have posted an increase in inventories, overhang continues to remain under control at 18 months for top-8 cities. Hence, the industry will continue to witness gradual price hikes.

We reiterate our constructive outlook on the industry and prefer players with high pre-sales growth potential. LODHA, PEPL and GPL are our sectoral top picks. Launches for our coverage universe likely to be at multi-quarter high

Sales volume for our coverage universe has exceeded launches over the last six quarters that led to a decline in inventories to below 12 months for most of the players.

As demand momentum continues to sustain, we expect launches for our coverage to pick-up from 4QFY23 and reach a multi-quarter high of 18msf.

Operational update indicates a pre-sales growth of 10%/42% YoY in 4QFY23/FY23. We expect our coverage to report 42% YoY growth in pre-sales in 4QFY23 propelled by over three-fold jump in DLF’s sales. Ex-DLF, sales would grow at 4% YoY.

Demand momentum sustains; supplies inching up in a few markets

Despite over 200bp rise in mortgage rates, residential absorption has sustained at a quarterly run-rate of ~80,000 units for top-8 cities over the last five quarters.

However, supplies for the top-8 cities have exceeded absorption since the last two quarters driven by increased launches in MMR, Pune and Hyderabad. That said, inventory overhang for the industry has sustained at a comfortable range of 18 months, which is conducive for consistent price hikes.

Key markets, such as NCR and Bengaluru, continue to witness favorable demand-supply scenario (demand exceeding supply) and are likely to report higher-than-average price hikes while the same in MMR and Pune is expected to be in the 4-5% range.

Cards spend continued to zoom in Mar’23 @ 1.4tn (IDBI Capital)

Card spends at historical highs: Credit Card spends continued its strong growth momentum and stood at 1.4tn during Mar’23 (breaching its previous high of 1.3tn in Jan’23) led by strong discretionary spends. Among major players ICICI (up by 21%), KMB (up by 18%), HDFC (up by 15%) and SBI (up by 12%) witnessed strong growth in spends on a MoM basis.

New Cards additions bounced back in Mar’23: Net New Credit Card additions after moderating during Feb’23 (at 9.1 lakhs) bounced back strongly at 19.4 lakhs in Mar’23. Among the major players ICICI (+7.2 lakhs), SBI Bank (+2.6 lakhs), HDFC Bank (+2.4 lakhs) and KMB Bank (+0.3 lakhs) witnessed strong additions to their existing credit card portfolio.

Volume of transaction too grew strong in line with spends: Volume of transaction too grew strong in line with growth in card spends and stood at 264Mn (up by 17.7% YoY and 13.4% MoM). All the major players witnessed improved volume of transaction on a MoM basis during Mar’23.