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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
