Do it yourself: Monsoon

Showing posts with label Monsoon. Show all posts

Wednesday, June 18, 2025

Where did we lose our way?

My engagement with Indian financial markets began in the late 1980s, at a time when the winds of reform had just started sweeping through the economy. What followed in the 1990s was a structural reset — the kind that lays the foundation for decades of growth, even if its full implications aren’t immediately visible.

The decade of 1990s witnessed –

(i) An overhaul of the financial sector with abolition of capital controls, opening of doors for the foreign portfolio investors, entry of private banks in the markets, material liberalization of the rules for non-bank lenders (NBFCs); laying foundation for pension and insurance sector reforms;

(ii) Significant liberalization of the industrial licensing system; material dilution of the Monopolies and Restrictive Trade Practices Act and Foreign Exchange Regulation Act, de-reservation of several articles from Small Scale Industries, introduction of Liberalized Exchange Rate Management System (LERMS), etc.;

(iii) India becoming a signatory of the World Trade Organization. (Of course, India was a signatory to the GATT since 1948);

(iv) Simplification of excise classifications, introduction of VAT and MODVAT, material reduction in maximum marginal rates of IT Act and simplification of rules;

(v) Beginning of disinvestment and divestment process in public sector enterprises (PSEs). The government initiated disinvestment of its stake in many non-strategic PSEs. More importantly, the government divested government monopolies in core sectors like Oil& gas, Power, Coal, Roads, Ports, Civil Aviation, Communication, etc.

(vi) India gained recognition as a major center of information technology (IT) and pharmaceutical research and development center in the world. For the first time, thousands of Indian professionals (Software Engineers & developers, Bankers, doctors and Managers) started working and travelling across the globe, unlike decades when Indian worker mostly got low paid blue-collar jobs.

(vii) Strategically, India was recognized as a country having a nuclear deterrent. Significant advances were made in development of missile and space research technologies.

All these developments gain higher importance when we consider that this was the era of significant political instability (minority governments 1989-1995, and then three general elections during 1995-1998) and financial constraints (Balance of Payment crisis in early 1990s, economic sanctions post nuclear tests in 1998, massive stock market scams, financial sector crisis and bankruptcy of multiple development financial institutions like UTI, IDBI, ICICI, IFCI).

More notably, till 1990 Indian and Chinese economies were mostly at par. We could even say that India had a marginal edge over China as it had wider global acceptance due to its democratic traditions. China also started its economic transformation around the same time. In 35 years, the Chinese economy has sprinted miles ahead of the Indian economy. No one, not even Indian politicians, is claiming that we are even in the race to bridge this gap in the foreseeable future.

This morning, I am writing this after reading about 20 equity research reports. All these reports, without even a single exception, have expressed worries about inflation and CAD due to the spike in crude oil prices in the global markets. It felt like déjà vu.

Back in 1990-91, as the Gulf War broke out, crude prices spiked and sparked the same anxiety. Three decades on, monsoon dependency and crude oil shocks remain headline risks for the Indian economy. Three decades later, nothing seems to have really changed - we’re still haunted by monsoon uncertainties and oil shocks.

Despite a decade of brave reforms and a globalized capital base, India’s macro vulnerabilities remain eerily similar. Our reforms deepened markets and broadened participation, but left key structural risks unaddressed.

So, the question we need to ask is “where did we lose our way in the past couple of decades?”

To me, India’s growth story remains compelling, but ignoring its macro vulnerabilities is difficult. The past teaches us resilience but the future demands vigilance.

Tuesday, September 3, 2024

Waiting for a divine intervention

Last weekend I visited some villages in the Bareilly, Shahjehanpur and Hathras districts of Uttar Pradesh. I had an opportunity to speak with several medium, small and marginal farmers.

Most medium sized farmers had a good standing crop of paddy and sugarcane. Most of them were, however, circumspect about the final yield, in view of the IMD’s forecast of excess rains in September.

Many small and marginal farmers had lost their pulses and vegetable crops due to heavy rains accompanied by strong winds. They were dismayed and worried about their ability to manage the resources to plant Rabi crops, mostly potato and wheat.

Some of them, who had taken advance from the traders, were also worried about the repayment. None of the small and marginal farmers mentioned the terms like crop insurance, bank loan, Kisan credit card, etc. Thankfully, there is an abundance of fodder for their cattle this time.

After a discussion of 10-12hrs with these farmers, NGO workers helping them with farming & other issues, and village leaders I gathered that the inflation debates in Delhi (in the Parliament & outside) and Mumbai (at the RBI and brokerage offices) may not be relevant for these farmers and common men like me, because—

· Policymakers and analysts may be oversimplifying a very complex problem. Food inflation in India maybe influenced by a myriad of factors, e.g., (i) farm input prices, which are also affected by terms of trade, INR exchange rates, availability of subsidy, etc,; (ii) energy inflation as many farmers use electric or diesel pumps to water their farms, and motor vehicles to transport their produce to markets; (iii) farm labor wages, which in turn is also a function of multiple factors like food and energy inflation, availability of MNREGA wages, & other government cash payouts, demand from construction sector, etc.; (iv) weather condition affecting the volume of production; (v) productivity, which depends on the quality of soil and inputs, farming methods used and availability of equipment; (vi) cost of funds borrowed by the farmers, which also depends on access to institutional finance; and (vii) distance from the market, etc.

Bringing down food prices or slowing down food inflation may adversely impact about 60% of the Indian population that depends (directly or indirectly) on agriculture for their livelihood. The solution may therefore lie in enhancing productivity, market access, access to institutional finance, energy efficiency & renewable energy, land reforms and crop rationalization. Someone may argue that all this is already being done. True, there are government programs and policies for all these solutions but execution is seriously lacking.

· Presently, the primary problem for a majority of the Indian household could be “price affordability” rather than “price inflation”. They may need either a substantial rise in their real wages or a material deflation in the prices of their consumption basket to maintain their regular lifestyle.

· Statistical inflation being debated and analyzed by the policymakers and analysts may be entirely different from what a common household or investor faces (more on this later).

Reading minutes of the MPC’s previous few meetings, it appears that the policymakers might be waiting for a divine intervention to change their policy stance, as hardly any effective step has been taken by them to make life of people easier.

Tuesday, May 7, 2024

No margin for error

In the past two weeks, Indian markets have witnessed heightened intraday volatility. Out of the last nine trading sessions, on six occasions markets witnessed a sharp sell-off from the day’s high levels. Even though, on a weekly basis, Nifty managed to close with marginal gains, the jitteriness amongst traders is conspicuous.

The case of Last Friday is particularly noteworthy. The benchmark Nifty corrected almost 2% from the day’s high within a few minutes, ostensibly due to a media report suggesting implementation of the Direct Tax Code in the July 2024 final budget for FY25. The volatility index (India VIX) spiked over 33% to a multi-month high. The finance minister outrightly denied the report calling it “Pure speculation”.

In my view, three clear inferences could be drawn from this instance.

First, the market is bravely holding up, in line with the global trend. However, the risk appetite of investors and traders may be diminishing. The margin for error, should something go wrong, is very low. For example, if the financial performance of companies misses the elevated expectation levels; the outcome of general elections is contrary to popular expectation; and/or the monsoon is delayed or misses the “better than normal” forecast of the Indian Meteorological Department (IMD), the market may witness sharp corrections in the short term.

Second, the market participants have been very vocal in demanding material direct tax reforms for many years. The reactions to the market rumors of tax reform that may see higher tax rates indicate that the market’s idea of tax reform is nothing but lower tax rates and more exemptions (especially LTCG and dividend tax). There may be no appetite for a progressive tax structure that helps in an orderly wealth redistribution over a longer period without material impact on the revenue needed for the development effort.

Third, during the intraday sell-off, very large part of the market becomes extremely illiquid. The impact cost for selling in such a situation becomes very high. This is true, especially for the option traders. There have been many instances in the past two weeks where the hedges (stop loss) did not work; options became illiquid and even the hedged trades could not be squared; and small and midcap stocks hit lower circuits and could not be sold. If a larger correction begins in the market due to whatever reason, the losses to traders could be much more than usual.

For the record, YTD 2024 - Nifty50 is higher by ~3%; Bank Nifty is higher by ~1%; Nifty Midcap100 is up ~9.5%, Nifty Next 50 is higher by ~21% and Nifty Smallcap100 is higher by ~11%. Rationally speaking, the scope for correction is equal in the large cap and smallcap space that has seen sharp outperformance; and banking that has been weak even in good times. However, given the tendency of liquidity to dry fast on the first sign of correction, the potential losses (Value at Risk) are much higher in broader markets.

Wednesday, August 30, 2023

Sailors caught in the storm – Part 2

Recently released minutes of the meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) highlighted that the latest policy stance is primarily ‘Wait and Watch”. This stance is driven by the hopes of:

(a) Mother Nature helping a bountiful crop (especially vegetables);

(b) Current rise in inflation being transitory in nature; but MPC is ready to preempt the second-round impact;

(c) Capex (both public and private) sustaining despite positive real rates and diminishing liquidity and continuing to remain broad-based;

(d) Growth in the Indian economy staying resilient enough to withstand the external challenges; and

(e) Government taking adequate steps to mitigate supply-side shocks, while maintaining fiscal discipline, trade balance, and growth stimulus.

Evidently, RBI has no solid basis for making these assumptions.

The monsoon is not only deficient, it is poor both temporally and spatially. Only 42% of districts in the country have received a normal (-19% to +19% of normal rainfall) so far. The remaining districts are either deficient (-20% to -85% of normal rainfall) or have received excessive rainfall (+20% to +156% above normal). Key Kharif states like Easter UP, Bihar, Jharkhand, West Bengal, Maharashtra, and MP are deficient. Whereas, the western states of Rajasthan and Gujarat and the Northern states of Himachal, J&K, and Uttarakhand are in the large excess bracket. Key vegetable producing states like UP, Karnataka, Maharashtra, and West Bengal are highly deficient. Besides, the reservoir levels in the key state have fallen below long-term averages and could have some impact on Rabi crop also. Apparently, assumptions of early relief in vegetable & fruits, dairy, oilseeds, and pulses inflation are mostly based on hope.

The impact of the supply side intervention of the government post MPC meet, e.g., export duties on onions, and rice, etc., and release of onion buffer stock; fiscal support like subsidy on tomatoes, etc., could prove to be short-lived. Tax collections have started to weaken, further impeding the fiscal leverage for stimulating the economy.

Foreign flows have moderated in recent months. The pressure on INR is visible. The imported inflation, especially energy, could be a major challenge. Most global analysts and agencies are forecasting higher energy prices this winter due to depleted strategic reserves, continuing production cuts, and persisting demand.

One of the key drivers of the overall India growth story, viz., private consumption, does not appear to be in very good shape. High inflation and rates may keep the consumption growth subdued for a few more quarters at least. In any case, we are witnessing signs of heating up in personal loans and the housing market.

The other key driver of growth, the private capex, has shown some early signs of revival in the recent quarters. However, positive real rates, cloudy domestic consumption demand, and poor external demand outlook could hinder acceleration in private capex. The government is front-loaded its capex budget in the first half of the fiscal year in view of a busy election schedule in the second half. The assumption of growth acceleration may therefore be misplaced. In fact, the RBI has itself projected a much slower rate of growth for 2HFY24 and 1QFY25.

Recently, banking system liquidity has slipped into negative territory. Besides a hike in effective CRR, the RBI has been ensuring the withdrawal of ‘excess’ liquidity from the system. We may therefore see a hike in lending rates as MCLR for banks rises (even if the RBI stays put on repo rates) as we approach the busy credit season. The credit growth may be impacted due to this.

Thursday, July 20, 2023

New York to Beijing

One of the several global trends that have been developing in the past decade, in particular, is the dissipation of the US dominance in the game of Lawn Tennis. The game that was dominated by US players for several decades does not have any commonly recognizable US players. The list of top 10 rank players in the ATP Men ranking has only two US names – Taylor Fritz (9) and Frances Tiafoe (10); while the rest eight are all European players. In women ranking also only two US names – Jessica Pegula (4) and Coco Gauff (7) – appear in the top 10 lists. Within Europe also, players from Eastern Europe are dominating the court, versus Germany, the UK, and France which had a significant presence in the game for decades.

It would be interesting to study if there is a correlation between losing dominance on the Tennis court and losing dominance on the mint streets (economic muscle) and battlefields (strategic power).

In the past decade, the US has ceded significant economic power to China. For example, consider the following three data points:

· The share of Yuan in global cross-border payments is inching closer to 3%.

· The share of the USD in global reserves has declined below 60% from a high of 72%, two decades ago.

· China has become the largest trade partner of almost 75% of the countries globally, within two decades of its admission to WTO.

On the technology front also, the US has been steadily losing its edge over China in the past couple of decades. In 2020, China filed 2.5x more patents than the US and was granted 50% more patents than the US. In particular, China led the patents in the field of Biotechnology and Energy. (see here)

Maybe equity investors are taking cognizance of these trends and are de-rating the US stocks. The current risk premium for US equities is the lowest since 2004.

On an unrelated note, the pattern of rains in Rajasthan has been changing noticeably for the past decade or so. As per the IMD statistics, the normal level of average rainfall in western Rajasthan has increased by 32 percent since 2010, while in eastern Rajasthan, it has increased by 14 percent. There have been frequent instances of floods in Rajasthan over the past decade.

“A 2013 research by the Max Planck Institute tried to explain and define the effects of climate change in recent years with the help of high-resolution multimodality. The average level of rainfall in west Rajasthan will increase by 20-35 percent and east Rajasthan will increase by 5-20 percent in 2020-2049, compared with 1970-1999 data.” (see more details here)

If this trend sustains, we shall see some dramatic changes in the economy, demography, and ecology of the state. Real Estate enthusiasts might want to further explore this trend.

Friday, July 7, 2023

Some notable research snippets of the week

Monsoon, agriculture, prices (Yes Bank)

The focus for economic agents over the last few weeks was the onset of the SW monsoon, especially as the El Nino risks have been now moved to an “Alert” from “Neutral”. This year, the monsoon had a delayed start as was predicted, and its progress was also initially stalled by the cyclonic conditions that developed over the Arabian Sea. However, monsoons have now covered the whole country. From, a deficit of around 55%-60% in the initial part of June, cumulative rainfall till 3rd July shows a deficit of only 8%. This is good news, but the worry comes from an uneven spread of the monsoon. Southern Peninsula is currently seeing a large deficit of around 43% while the North-West region has a large surplus of 40%. East and North-East India sees a deficit of 16% while the deficit for Central India is 4%. Even as the IMD has predicted a normal monsoon for July, tracking the temporal and spatial progress of the SW monsoon in July and August remains important as these are the most crucial sowing months.

El Nino is forecasted to strengthen over August/September. However, apart from the El Nino, SW monsoons for India critically depends on another weather condition, known as the Indian Ocean Dipole (IOD). Currently, the IOD is neutral, and models predict a positive IOD to develop over the coming months. Only if El Nino is associated with a neutral or negative IOD does precipitation suffer. In the current situation, we are hopeful for a positive IOD developing that can neutralize the negative rainfall impact of El Nino.

As of date, Kharif sowing is 0.4% higher than last year, with rice (-26% YoY), cotton (-14% YoY), jute and mesta (- 12% YoY) and oilseeds (-3.3% YoY) registering a decline. Globally, rice market is facing significant production deficit and lower stocks, putting pressure on prices. Based on fears of lower rice supplies, mandi prices in India has started to rise. In FY23, domestic rice inflation stood at 8% YoY and in September 2022 India had banned exports of broken rice and imposed 20% export duty on non-basmati varieties, except parboiled to keep prices in check. Presently, India has adequate rice buffer stock that gives enough space to the government to intervene and keep prices in check. India has already announced open market sale of rice, even as the quantity is not known. Importantly, the major rice producing states have higher irrigation cover such as Uttar Pradesh, Punjab, Telangana, Tamil Nadu, and Andhra Pradesh.

On the other hand, pulses could be a bigger worry if rains fail as the all-India average area under irrigation is just 23%. In recent months, retail prices of vegetables and pulses have been on the rise. If late onset of rains also leads to late withdrawal of rains, onion crop can also be at risk. Having said, correlation between weak monsoons and food prices is unclear. It is a demand-supply game and food prices remain hugely dependent on global food prices and the ability of the government to draw down on domestic stocks. And domestic stocks of rice seem adequate and comfortably placed vis-a-vis the buffer norms. A recent RBI study indicates that a negative IOD (weak India SW monsoons) is a bigger risk for food prices than El Nino. IOD is currently in the neutral zone, and as indicated earlier, IOD is expected to develop into the positive zone soon.

Overall, we think that Headline CPI inflation will broadly pan out as per the RBI estimates. Our model however indicates a slightly higher average print for Q4FY24 compared to projections made by RBI. In this context and with global central banks remaining hawkish, there appears little chance for any rate cut from the RBI in FY24. The resolve from OPEC+ to keep oil prices at the current levels appear strong. Despite a not-too-robust China story, most commodity price indices appear to be finding a floor.

Crude oil: Hubbert’s peak is here (Goehring & Rozencwajg)

Conventional oil production has now unequivocally rolled over. Unconventional production, the only source of growth in global oil supply over the last 12 years, has also significantly slowed. The only growing non-OPEC basin is the Permian in West Texas. Never before has oil supply growth been so geographically concentrated. Six counties in West Texas are now 100% responsible for all global production growth.

Conventional non-OPEC oil production peaked in 2007 at 46.2 mm b/d and now stands at 44.2 mm b/d – 4% below its peak. Including OPEC, conventional global output peaked in 2016 at 84.5 mm b/d and now stands at 81.3 m b/d – 5% below its peak. Even if OPEC has its alleged 4 mm b/d of unused production capacity (something we do not believe), conventional production would barely regain its 2016 peak.

Non-OPEC oil production between 2006 and 2015 grew by 8.6 mm b/d. Conventional oil supply contracted by 1.4 mm b/d. Unconventional oil supply more than offset these declines, surging by 10 mm b/d and broken down as follows: US shales grew by 6.8 mm b/d (65% of all growth), bio-fuels grew by 1.9 mm b/d (19% of the growth), and Canadian oil sands increased 1.4 mm b/d (14% of the growth). Please note that out of this 10 mm b/d growth figure, the Permian represents only 1.4 mm b/d or 14%.

Between 2016 and 2023, unconventional production surged by another 7.4 mm b/d, representing all non-OPEC supply growth. US shales accounted for 85% of the increase. However, whereas all the major shale basins grew from 2006 to 2015, only the Permian grew afterward. The Bakken and Eagle Ford peaked at 1.5 mm b/d in 2015, and this year are each expected only to be between 900,000 and 1 mm b/d. Significant unconventional growth also came from natural gas liquids production in the liquids-rich Marcellus and Utica, which we estimate each added 1 m b/d. This source of production growth is now set to fade, while the plateauing of the Marcellus will turn into a decline.

Between 2006 and 2015, the Permian represented only 14% of unconventional supply growth. Between 2015 and 2023, the Permian represented almost 75% of this growth.

Conventional production started declining in the non-OPEC world over a decade ago. Conventional oil production has most likely turned negative in the OPEC world as well. Over the last thirty years, global oil supply growth has come from multiple geographic areas, including the North Sea, Mexico, Brazil, West Africa, and the Former Soviet Union. Over the last decade, however, these areas have had slight growth, and specific basins, such as the North Sea, have experienced considerable declines.

Consensus opinion believed global oil demand would peak in 2019 and gradually decline through this decade. Just the opposite has occurred: demand has come roaring back post-COVID. Global demand in 1Q23 surpassed 102 mm barrels per day -- three million barrels above the 1Q19 (pre-COVID) level and almost 2 mm b/d above the International Energy Agency’s (IEA) 1Q23 estimate. Strong demand and faltering supply led OECD countries to release 250 mm barrels of oil from their strategic petroleum reserves to keep prices from surging. Given the seasonality in demand and China’s ongoing reopening, the 4Q23 demand could surpass 104 mm b/d.

From here on out, just six counties in West Texas must meet all global demand growth. Given the strategic importance of the Permian, it’s imperative to understand its underlying health. Using our neural network, we have updated our basin analysis, and the results are shocking. The Permian is likely less than a year from peaking and starting its decline. The only source of non-OPEC supply growth is now primarily tapped out.

After many false starts, Hubbert’s Peak is finally here.

Electronic Manufacturing: India the Next Stop (Morgan Stanley)

Reconfiguration of global supply chains from growing multipolarization is leading to major adjustments in the tech sector. Re & friend-shoring along with India's ongoing structural transformation could see India play a major role in technology-related production, while Apple and its supply chain coming to India would bring in fresh investment. We estimate a 21% CAGR in electronics manufacturing in F22-32.

Global multipolar thematic driving tech supply chain shift: Geopolitical risk, rising costs in China and supply chain diversification has seen a move from Made in China to Made around China (Global Technology: Multipolarization – The New Normal in Tech [1 May 2023]). De-risking in the form of regionalization has gathered pace as China has expanded its move toward localization for higher value-added types of manufacturing. Vietnam has been a key beneficiary but we think India will be next. Apple has made it clear that India will be the destination for fresh new investment, and recent reports have indicated Google and HP aim to boost local production,as they diversify supply chain exposure.

Outlining key implications from this tech manufacturing transition: We look at how a changing perception among multinationals towards India from one of low-cost outsourcing to one of collaboration in advanced technologies, strong supplier ecosystems, and enabling regulatory policies is the necessary path forward to ultimately evolve into a high-tech manufacturing hub. The global tech hardware supply chain is already a growing presence in India, especially in smartphone assembly, e.g., Samsung and Foxconn, though a move up the value chain towards establishing a semiconductor supply chain could take longer to play out given the complexity.

India is uniquely positioned: In our Blue Paper, Why This Is India's Decade, we said India is set to become the world’s third-largest economy and stock market by the end of this decade. One of the key pillars of this transformation is off-shoring driven by transition to a multipolar word. Indian policy makers have taken meaningful steps to boost infrastructure investment, lower corporate tax, improve the ease of doing business and launch production-linked incentive (PLI) schemes with the goal of lifting India’s participation in global supply chains.

India's electronics manufacturing (EM) at an inflexion point: We forecast structural EM growth of 21% CAGR over the next 10 years (F22-32) to US$604bn by F32 driven by: 1) rising disposable income per capita;2) increasing number of households;3) rising urbanization; 4) improving access to electricity;5) easier availability of financing; and 6) the expansion of e-commerce. On the supply side, India has a large, increasing working age population and surplus low-cost labour.

Indian pharma: On a strong footing (ICICI Securities)

Pharma companies under our coverage are likely to report revenue/EBITDA/PAT growth of 15%/33%/28% YoY in Q1FY24E. The growth is likely to be led by new launches, market share expansion in key products and acquisition in US & India. Aggregate gross margin to improve marginally QoQ (+250bps YoY) at 64.8% as higher RM cost and mandated price cut in India may offset the benefit of better margins from niche US launches. However, operating leverage may drive a 90bps QoQ (+300bps YoY) surge in EBITDA margin to 22.4%. Aggregate PAT is expected to surge 28% YoY to Rs86.6bn.

Synopsis of expected quarterly performance: Revenue for coverage universe is likely to grow ~15%/4% YoY/QoQ to Rs641bn in Q1FY24E. Growth is likely to be led by traction across key markets of US and India. Gross margin to expand 250bps YoY (+40bps QoQ) to 64.8% in Q1FY24E. EBITDA is expected to grow 33% YoY (9% QoQ) to Rs144bn, EBITDA margin may improve 300bps YoY (90bp QoQ) to 22.4%. Profit for our coverage universe was up 28% YoY (13% QoQ) to Rs87bn led by improvement in overall operating performance. Alkem, Zydus Lifesciences, Biocon, Glenmark and Dr Reddy’s are likely to grow their profits between 28-115%.

India margins to be under pressure: India business of our coverage companies is expected to grow at ~8% YoY in Q1FY24E to Rs198bn. Better volumes and acquisitions may help companies offset the impact of price cuts on growth, while margins may be under pressure. M&A may elevate the pace of growth in India business of JB Chemicals and Torrent Pharma to 20-24% while Abbott and Ajanta can grow organically at a faster pace of 15-16%. NLEM linked price hike of 12.2% will likely boost domestic growth and profitability Q2FY24 onwards.

Better market share, launches to drive robust performance in US: Aggregate US sales of coverage universe is likely to grow US$2.3bn, up ~6% QoQ and 24% YoY. Lesser price erosion in base business and improved supplies on account of few companies vacating the market may drive sequential growth across all the companies in our coverage universe. Zydus is expected to grow the fastest at 10% QoQ, driven by products like gRevlimid, gTrokendi XR, gChantix and gVascepa. Dr Reddy’s, Zydus, Cipla and Sun are likely to benefit from the launch of gRevlimid, while Aurobindo is expected to launch this product in Oct’23.

Operating leverage to drive improvement in EBITDA: RM cost is expected to remain elevated in Q1FY24E and mandated price cuts in India may further restrict the scope for gross margin expansion. We believe benefit of low-priced inventory may not be seen in Q1FY24 as companies are unlikely to have exhausted their high-priced inventory and full quarter benefit of it will likely be visible from Q2FY24. Better revenue traction in US and India to drive operating leverage and help EBITDA margin soar by 272bps YoY to ~22%. We expect significant recovery in gross and EBITDA margins for companies under our coverage in FY24E. Better traction in US may drive margins for the next couple of quarters beyond which price increase in India and normalization of RM and logistic cost are likely to play a pivotal role in restoring the margin profile.

Key risks: Adverse outcome of USFDA inspections, currency volatility and inclusion of more products under NLEM in India.

India Auto: Volume growth moderates to single-digit (IIFL Securities)

Volume growth across Auto segments came in at low-to-mid single digits in June 2023, confirming our view that FY24 would see sharp deceleration in growth, after the strong cyclical recovery seen in FY22 and FY23. PV industry volumes grew 2% YoY in June. 2W industry volumes grew only 4% YoY and came off 7% MoM, as we entered the seasonally weak period. Tractors grew 6% YoY and 20% MoM in June (seasonal spike). MHCV industry grew 8% YoY; this is an improvement vs recent months. Reversal of pre-buy impact in Jan-Mar (related to BS-VI Phase 2) had led to weak volumes in Apr-May. LCV industry declined 3% YoY, which is a continuation of weak trend in recent months.

Based on these numbers, we believe that risk to FY24 volume projections, if at all, is to the downside.

MHCV industry recovers after “pre-buy reversal” in Apr/May; LCV stays weak: MHCV industry volumes grew 8% YoY in Jun’23. MHCV SAAR, which had collapsed to 340k in Apr/May (due to reversal of pre-buy impact in Mar-2023), normalised to 385k in Jun’23. This is close to our estimate of about 400k volumes in FY24. Ashok and Tata Motors’ MHCV market shares are quite stable, at ~31% and ~47% respectively. LCV industry declined 3% YoY; we see this as a continuation of recent weak trend. We forecast zero growth for LCV in FY24.

PV growth moderates to 2% YoY: We estimate PV industry to have grown 2% YoY in Jun’23. We expect PV volume growth to stay muted in 2QFY24 (Jul-Sep). Maruti’s Jun’23 market share stood at ~41% — lower than May (43%), and is attributable to Maruti’s 1-week production shutdown in June. Tata’s market share stood at ~14% in Jun’23; similar to FY23. M&M’s UV volumes stayed at ~32.6k; volumes are not scaling up, despite high order book (close to 300k).

Tractors grow 6% YoY: Volumes grew 6% YoY in Jun-2023. The 20% MoM jump is seasonal. Sentiment for tractor sales was mixed, as markets with good rainfall saw good momentum, and markets with delayed monsoon saw soft demand. We currently forecast 5% growth for Tractor industry in FY24. If monsoon is impacted due to El Nino effect, there would be downside risk to our estimate.

Domestic 2Ws up 4% YoY; 2W exports see sequential improvement: 2W industry volumes grew ~4% YoY but declined 7% MoM (seasonal). We understand that underlying retails are clocking mid-to-high single-digit growth. Hero continued to underperform the industry with 9% YoY decline in dispatches. Coming to 2W exports, we continue to see YoY decline in volumes (down ~30% YoY). However, on a sequential basis, we saw volumes improve by high single-digit.

Roads: NHAI flags off FY24 awarding in June (nuvama institutional equities)

After a two-month pause, NHAI awarded three projects spanning ~87km in Jun-23 (compared with 303km in Jun-22). During the same period, 262km of roads were also constructed (versus 326km in Jun-22 and 413km in May-23). After Mar-23’s blockbuster awarding, NHAI’s awarding activity came to a grinding halt – no LoAs were issued during the months of Apr-23 and May-23. That said, road awarding in FY23 stood at 6,310km across 179 projects.

Pace of road construction slows down: In Jun-23, the NHAI constructed 262km of roads (compared with 326km in Jun-22; 413km in May-23). YTD FY24 road construction stands at 844km against 863km in the same period last year. In FY23, it constructed ~4,500–4,600km of roads (~4,325km in FY22) at a pace of ~12.5km/day. As per a recent media article, the ministry is looking to increase its road construction target to ~14,000km from 12,500km, at a pace of 38km/day in FY24E (link).

Outlook: A mix of hope and caution: As highlighted in our report Road awards: More speedbumps, While NHAI awarding was disappointing in FY23, higher budgetary outlay for roads provides hope for better awarding going ahead. While commodity prices have softened, high competition remains an issue (with knock-on effect on margins going ahead). RBI’s pause in interest rate hikes, the government’s thrust on roads and the improvement in credit availability from banks are encouraging factors.

Given the backdrop, we argue, road developers must work on segmental diversification since their ability to win adequate road orders at desired margins is now under question.

Specialty Chemicals: One of the worst quarters; A similar to follow (Phillips Capital)

Indian Specialty chemical Industry is all set to face one of the worst quarters in Q1 primarily driven by a broad-based disruption in global chemical demand caused by visible economic slowdown in advanced market of EU/US, ongoing inventory rationalisation and enhanced competition from China post their Covid lock down. Not only the revenue performance, the deteriorating profitability caused by weak spreads as well as negative operating leverage look like a reality. Moreover, the likelihood of the said situation extending into Q2 and early Q3 makes the near-term earnings outlook bleak.

We estimate PC’s Specialty Chemical universe’ is likely to see 33% decline in overall earnings (-21% qoq) as the revenues decline 12% and margins face sequential correction during the quarter.

The key input prices, energy cost, freight cost has certainly moderated sequentially in Q1 but those fail to protect the margin performance of Indian Chemical industry as the final product prices corrected faster led by aggressive Chinese competition and the industry suffered negative operating leverage due to weak demand.

In fact, the average input price for Q1 saw the following trend: - crude price (-29%/-5% yoy/qoq), Benzene (-24%/+5% yoy/qoq), Toluene (-4%/+5% yoy/qoq), Phenol (-10%/+4% yoy/qoq), caprolactum (-18%/+9% yoy/qoq), Indonesian coal (-3%/-13% yoy/qoq), etc.

Friday, June 23, 2023

Some notable research snippets of the week

Key economic trends (Elara Capital)

· Deflationary impulses seem entrenched in the global economy. We believe global inflation may surprise on the downside through rest of CY23E.

· We see the Fed pausing even in July 2023 meet – Expect the first rate cut by the Fed in Dec-23.

· Historically, equities perform better in a hike cycle than a cut cycle. Bonds are a better bet in run up to rate cut cycle. Gold is the preferred commodity asset through both hike and cut cycles. The USD-INR usually fails to capitalize on the overall EM FX risk on sentiment in the run-up to a rate cut by the Fed.

· Deflationary producer prices in China suggest weakening growth in G4 – the US, the EU, the UK and Japan. We do not rule out a sub 5% GDP growth in China in 2023E. (base case 5.2%)

· India remains in sweet spot compared with the global economy. FY24E GDP is likely at 6-6.2% YoY, CPI inflation to average 4.9% and CAD likely at 1.2-1.3% of GDP. Expect the first rate cut from the Monetary Policy Committee (MPC) in Q4FY24.

· Expect India 10-year yield at 6.75% by March 2024E, led by low inflation, rate cut by the MPC and lower supply by the states. See US 10-year yield at sub 3% by March 2024E.

China outlook: Muddling through (Danske Bank)

After a strong start to 2023, economic data disappointed in Q2 and we have lowered our GDP forecast for this year to 5.8% from 6.2%. For the rest of 2023 our scenario implies muddling through with annualized quarterly growth around 41⁄2-5% underpinned by moderate stimulus. In 2024 our forecast is reduced to 4.8% from 5.0%.

• The main engines of growth are set to be private service consumption and a gradual recovery in construction and private manufacturing investments. We expect export growth to remain weak as global goods demand stays soft.

• While a leading role in many green technologies benefit China, a long list of medium term economic challenges are present, which creates uncertainty about China’s outlook. However, we still look for economic growth to be able to reach around 41⁄2% over the next 5-10 years due to a strong focus on investments in education and technology and continued support to the private sector.

• Geopolitical tensions are set to continue with intense rivalry between US and China. However, we still see a low probability of war on Taiwan in the next 2-3 years as the costs of a war would be enormous for all involved parties. In the long term the risk is real, though. Look out for Taiwan election in early 2024.

New uncertainties: While China’s re-opening rebound in Q1 was stronger than expected, the recent economic data have slowed more than projected. In effect, we have lowered our forecast back below 6% for this year. Especially manufacturing and the housing market lost pace in April and May while the service sector has continued to grow at a more robust pace reflecting pent-up demand from the zero-covid lockdown years.

The bumpy road of the recovery leaves a high degree of un-certainty about the outlook. However, our baseline scenario is for policy makers to aim for growth around 41⁄2-5% rest of the year and that stimulus will be calibrated to hit this goal. The strong service sector activity is providing decent job growth and more support to wage growth, leaving a decent picture for household income gains. Hence we expect private consumption to continue to underpin a moderate recovery. The manufacturing sector is challenged by a weak external environment but moderate growth in investments and consumption is expected to underpin manufacturing growth at or slightly above potential growth. The construction sector is still struggling but we have witnessed a lift in home sales compared to the very low levels last year, and we should see this gradually feed through to a rise in housing starts.

In the medium term, there is little doubt that China’s potential growth rate has come down as China faces challenges on many fronts: high debt level in key sectors, falling labour supply, Western technology restrictions, geopolitical uncertainty and a difficult transition to consumption driven growth. Our baseline scenario is that China will be able to grow around 4% on average over the next 5-10 years. While clearly lower than in the past, it will still make Chinese economy significantly bigger and in our view lead to a rise in the middle class by 3-400 million people over the next decade.

Deficit monsoon and delay in kharif sowing, but not yet alarming (Nomura Securities)

First fortnight of June-23 witnessed monsoon deficit – 37% below the long period average (LPA). The onset of monsoon in 2023 was delayed by a week with Kerala receiving the first rain showers around 8 June-23. While the formation of cyclone Biparjoy resulted in surplus rainfall in the states of Gujarat and Rajasthan, it weakened westerly and south-westerly winds delaying the advancement of monsoon in Maharashtra (one of the key agrarian states in West India).

No impact in the north India region: North India agrarian states (such as Uttar Pradesh, Bihar, Punjab, Haryana, etc.) witnessed a large deficit to their LPAs; however, it is key to note that historically, the onset of monsoon in North India takes place in July and deficit monsoon conditions in June are a normal phenomenon in the region.

Pick-up in rains likely over next fortnight: India Meteorological Department (IMD) and Skymet weather team both have called for pick-up in rains over the second half of June-2023, with the advancement of monsoon in western and central parts of India; moreover, they have alluded normal monsoon conditions pan India during the first fortnight in July-2023.

Delay in kharif sowing, but not yet alarming: In 2023, the agriculture season witnessed some delay in rabi harvest in April; the delayed onset of monsoon has also resulted in some delay in the sowing of kharif crops. While the kharif sowing data for the first fortnight of June is much below 2022 levels, sowing activities are expected to pick up over the next 3-4 weeks with normalcy in monsoon conditions.

Strong reservoir levels to support irrigation: While over 65% of Indian agricultural lands are dependent on monsoon for cultivation of kharif crops (paddy, maize, soyabean, cotton, sugarcane, etc.), it is important to note that the reservoir levels are above the 10-year average and should play a crucial role if monsoon falters.

No signs of softness in consumer demand visible yet with delayed onset of

monsoon: While rural market demand has been showing signs of recovery over the past two quarters, the pace of improvement has been gradual due to the delay in agriculture activities. We note the full benefit of the harvest money is yet to be seen translating into product / consumer demand. Further, the stable / softening raw material prices have resulted in price cuts across all large FMCG categories; we believe this will likely act as a stimulus to drive volume growth in the rural markets. Hence, we do not expect any softness in consumer demand with no ebbing effect on sentiments due to monsoon conditions.

India Durables and Electricals (Jefferies India)

Softer offtake in Apr-May23, also impacted by unseasonal rains. But demand has improved in H1-Jun. Transition to new BEE norms is largely done for AC & Fans, and older inventory is liquidated.

Channel inventory is normal at ~3 weeks. No major price hikes in Q1, expect +1-2% in Cables & Wires (copper pass-through).

Changing Weather Patterns Influence Demand: We spoke to ~10 channel partners pan-India. Many cited weaker offtake in Apr-May23 due to softer consumer sentiment and unseasonal rains in many parts. But Jun'23 saw better demand for summer-centric products i.e. ACs, Coolers, Fans etc.

1) Fans market has now transitioned to new BEE norms. Sales have largely normalized, with higher shift to premium/BLDC models - increasing awareness for energy efficiency.

2) Cables & Wires demand stayed strong for most dealers, with minimal impact of pricing action. Offtake here is mainly driven by construction and capex / infra projects.

3) Washing Machines demand has not seen any material uptick in the last few months, with flattish sales YoY. Q1 (Summer) is seasonally weak qtr.

4) Appliances: Many dealers cited healthy demand trends, esp in Mixer Grinders, Chimneys and Hobs.

5) Water Heaters saw mixed trends with some dealers highlighting better offtake due to unseasonal rains. A few dealers cited higher inquiries, but unavailability of SKUs in summer season.

6) Weareables & Hearables demand good.

Inventory now Largely Normal: AC channel stocking commenced in Feb-Mar23. Muted traction in Mar (unseasonal rains) led to higher than normal inventory in Apr for most dealers, which subsequently declined in May-Jun as offtake improved. Now inventory is at normal levels (~3 weeks) for most dealers, as summer season ends. In Fans, inventory has normalized post BEE transition, wherein inventory of old models has largely liquidated.

Cables and wires inventory is currently normal level (~2 weeks), as supply is typically received

within a week for most dealers.

No Major Price Hikes in Q1: Post BEE transition, prices were hiked by avg 2-5% in new AC models and avg 5-8% in new Fan models in Q4FY23. Air Coolers have seen price hike of 3-5% at the start of summer season. But since then, there has been no material price hikes in Q1FY24, as many input costs have softened. With rise in LME copper prices (+5% from 10May'23), Cables & Wires category has hiked prices by avg 1-2% in May and more hikes could be seen in coming weeks.

Competitive Landscape: In ACs, post BEE transition, LG models are offering higher energy savings (technology) vs many peers. Lloyd (HAVL) sales have been good in price-conscious consumer segment. VOLT sales are healthy in the 1.0-1.5 ton category.

Retail fuel price cut an overhang for CGD stocks (Nirmal Bang Equities)

For the imminent cut in retail petrol/diesel prices. We believe this would reduce the tailwinds for OMCs. Such a cut also poses a risk to CGD companies as the latter would be forced to cut CNG pump prices to maintain CNG growth rate, which entails a sacrifice in EBITDA/scm. Such a cut and the steep YoY decline in GRMs could dent the potential upside to OMC earnings in FY24, implied at current juicy retail margins.

Impending cut in MS/HSD prices poses risk to CNG business outlook: The impending cut in MS/SHD pump prices is likely to eat into the cost savings offered by CNG over MS/HSD, currently at 40%/20%. This combined with the fact that the APM gas price is likely to remain fixed at the ceiling of US$6.5/mmbtu (GCV), as per the latest gas pricing formula, leaves no elbow room for CGD companies.

This leaves IGL and MGL vulnerable to either a hit on margins if they seek to maintain growth or cut in CNG volume growth assuming they aim to preserve margins. GGL is relatively less impacted as its share of CNG is under 30% vs more than 75% for IGL/MGL. If OMCs were to cut MS/HSD prices by Rs1-5/litre at current crude price levels, it implies 3.3-16.5%/2.3-11.3% hit on IGL’s/MGL’s FY24E EPS vs 1.3%-6.3% hit on GGL’s FY24E EPS – assuming the cut in CNG price from Aug’23 post 1QFY24 results of OMCs.

The steep correction in diesel spreads from muti-year highs by more than 50% to ~US$15/bbl combined with the decline in crude oil by 10.8% YTD and 34.5% YoY has resulted in average retail fuel margin surging to ~Rs7.2/litre in 1QFY24 vs ~Rs2.5-3/litre in 4QFY23 – petrol/diesel retail margin per litre is estimated at Rs5.2/Rs7.9. This is likely to support hefty growth in earnings for OMCs in 1QFY24, as per our first cut estimates, and perhaps in 2QFY24 as well, depending on when OMCs decide to cut pump prices of MS/HSD.

2HCY23 revival in China demand clouds retail margin outlook: IEA and other global oil watchdogs expect a revival in China’s economy to spur growth in oil demand ahead of supply in 2HCY23 and thereby boost oil prices. This is a concern cited by OMCs to go slow on the current demand for a cut in Indian retail pump prices, as a future rise in oil prices post such a cut could again put pressure on marketing margins and earnings for OMCs. NBIE Brent oil forecast for FY24E/FY25E is US$75/bbl and US$70/bbl. This compares with FY23/4QFY23 average of US$95.3/bbl and US$81/bbl. However, a recent Reuters report shows that diesel and petrol exports from China in May’23 were up 4x YoY to 0.6mn tonnes and by 67% YoY to 1.36mn tonnes, respectively. This is due to the persistent slowdown in China’s property/industrial sectors and refining throughput in May’23, nudging the record figure of 14.9mn bpd in March’23.

Volatile refining margins may find limited solace from Russian crude: The GRMs reported by OMCs are likely to see a significant decline YoY in FY24 due to the steep decline of 47.2% in diesel spreads to US$15//bbl in 1QFY24 from 4QFY23. Even with the share of Russian crude indicated at 15% in HPCL and more than 30% in BPCL/IOC, the implied savings of ~US$1.2/bbl to US$2.4/bbl is unlikely to reverse the YoY decline in GRMs. 1QFY24 petrol/diesel spread over crude is down 43%/60% YoY to US$15.5 per bbl/US$15.1 per bbl. The pressure on OMCs to cut prices overlooks the impact of declining oil and fuel spreads, which imply potential inventory losses that could eat into the gains in retail margins from the lower crude prices.

Textile: Global retailers underpin improved inventory position by EoY (JM Financial)

Global retailers continue to lighten their inventory position: Global retailers during their latest earnings have continued their efforts to reduce the excess inventory on books. GAP saw inventory decline of 27% YoY in the latest quarter and expects inventory to be down significantly more than sales as compared to FY22. TJX and Nike (apparel segment) given their sharp focus on liquidating excess inventory have been able to achieve lower inventory. Large retailers like Walmart, Target and Costco have also lowered their inventory given their cautious approach towards fresh procurement. The global demand outlook for CY23 continues to be soft.

Indian textile players expect demand revival from 2HFY24: Indian Home textile and apparel exporters expect demand to remain muted in 1HFY24 on account of excess inventory liquidation. Any normalisation of demand in CY24 amidst improved global retailers’ inventory position leaves headroom for export demand recovery by Indian exporters.

‘China + 1’ theme picking pace: China has been losing market share across the world (refer exhi. 3/4) apparel exports aided by rising labour costs and geopolitical tensions. This has led to a potential shift of exports from China towards other countries, creating new opportunities and growth in the other Asian countries for the apparel industry. Some of the biggest brands across the globe have already begun reducing their exposure to China over the past few years. We believe India’s competency across factor cost and a well-established textile ecosystem (across cotton segment) will allow it to benefit from the ‘China+1’ theme.

UK FTA offers additional growth opportunity: UK imports USD$24bn in apparel with India’s share a mere USD$1.4bn. In contrast, UK imports UD$4.5bn from Bangladesh and US$ 6.2bn from China. Indian players have lower market penetration in UK due to tariff disadvantages vs Pakistan, Turkey, and Bangladesh. However, FTA with UK will allow duty free exports to UK, improving India’s competitiveness. A ~20% market gain from China over the next 3-4 years is required to help India near double its exports to UK. Effective implementation of UK FTA could provide a clear runway for double digit revenue CAGR in case of Indian textile exporters over the coming decade.

Commodity deflation to aid margins: Decline in cotton / yarn prices over the last 12 months to the tune of ~40%/33% is likely to aid margins for Indian textile players. Lower demand and arrival of new crop are key reasons for the price correction. Further, improving scale in 2HFY24 will aid margin expansion for textile companies.

Stable duty regime and additional steps by Govt to aid the textile ecosystem: The scheme of RoSCTL that was effective from March 2019, has been extended till March 31, 2024 for exports of apparel/garments and made-ups in order to make the Indian textile sector competitive in the international market. The maximum rate of export rebate for apparel is 6.05%; while for made-ups it is 8.2 per cent. A stable duty regime is likely to benefit the sector. Further, additional initiatives like the PLI’s, Mega Integrated Textile Region and Apparel (MITRA) Parks Scheme and National Technical Textiles Mission will help in creating a conducive textile environment.

De-leveraged balance sheets offers room to chase growth: Indian textile companies have de-leveraged their balance sheet over the past few years offering room to chase growth expected from ‘China+1’ theme playing out and possible UK FTA.

Moderate valuation multiples leaves ample room for multiple re-rating: Textile companies currently trade at moderate valuation of leaving ample room for re-rating as when structural demand drivers (UK FTA/ ‘China+1’) kick-in.

Cement: Start of an upcycle (Antique Stock Broking)

FY24 volume growth could surprise—we now factor in 10% YoY growth Public capex (center, state, and PSUs) comprising 25% of total gross fixed capital formation (GFCF) is likely to grow at a healthy 23% YoY in FY24 (ahead of the upcoming Union Election), driving aggregate nominal GFCF growth by a robust ~14.8% YoY. Besides, housing demand recovery is likely in the midst of a multi-year upcycle. Accordingly, FY24 cement demand growth could surprise positively, in our view. With early cement demand trends suggesting near mid-teens YoY growth on a low base for 1QFY24 (5-yr. CAGR of 5.5%), most managements have likely extrapolated this trend and guided/ aspired for >15% YoY volume growth for FY24 during the 4QFY23 earnings call. We now factor higher 10% YoY (5-yr.

CAGR of 4.8%) demand growth for FY24 (vs. 8% earlier) to >440 mtpa leading to 3%-4% upgrade to our FY24-25E volume growth estimate mainly for large companies.

The third consecutive year of high demand (7%–10%), could drive utilization to a 14-year high Demand at 8.5% CAGR vs. 5% supply CAGR over FY22-24E would results in pan-India cement utilization inching up to a 14-year high of 77% and clinker utilization of 80% in FY24. South utilization could cross 65%, while ex-South utilization would inch closer to 84% after 14 years in FY24. Ex-South utilization (excluding 6 mtpa Sanghi and 9 mtpa JPA, which are non-operational/partially operational for FY24) is inching closer to 87%/ 88%. More importantly, our coverage universe as well as UTCEM's utilization increased from an average of 73%/74% during FY20-22 to 81%/83% in FY23 and is likely to inch up further to as high as 83%/88% in FY24-25.

Higher consolidation in the industry

The top 6 companies enjoy 80–85% capacity share across all regions except the South and with more capacity likely to be announced by large companies and with a couple of M&A transactions likely to consummate soon, capacity/market share of large companies is likely to increase further.

Costs side pressure to recede; cost efficiencies to further aid profitability

International petcoke and coal prices are down ~50%-60% from their respective highs and our recent interactions with a few coal traders/ experts suggest the possibility of a further downside. This could translate into cost savings of INR 250-300/ton in FY24. Besides, companies are focused on increasing the share of green energy, alternative fuels, logistic optimization, premiumization, etc. which could further aid profitability. We expect the average EBITDA/ton for our coverage universe to rise from <INR 800/ton in FY23 to ~INR 1,200 by FY25E and even higher beyond FY25E. Our FY24-25E EBITDAs are 5%-10% ahead of consensus. We factor <1% realization CAGR over FY24-25E and see an upside risk to our estimates.

Start of an upcycle; many stocks near life-time high: time to BUY or SELL?

In the past upcycle from FY03–10, industry average EBITDA/ton increased from INR 350/ ton to INR 1,050/ton. Even recently, average EBITDA/ton rose from <INR 900/ton in FY19 to INR 1,200/ton in FY21 aided by higher prices and lower costs. With improving demand, ex-South utilization now high at 84%, increasing capex costs (greenfield), receding cost pressure, higher consolidation and relative price inelastic demand, we remain positive on pricing and expect industry average EBITDA/ton to exceed INR 1,200 beyond FY25E. Long-term average price CAGR has been around 4% and we expect a similar trend to continue beyond FY25 driving increasing trend of EBITDA/ton.

Metals: Signs of revival fade; steel prices correct for the 9th consecutive week (MOFSL)

Long steel, which witnessed a pre-monsoon procurement last week, has come under pressure with prices correcting to Oct’21 levels. Ex-Mumbai benchmark primary long steel prices corrected INR900/t to settle at INR53,500/t.

Reduction in domestic demand from the project segment and a fall in global long steel prices due to weak global housing and infrastructure demand have dragged the domestic prices for long steel products.

Project segment customers are under ‘wait and watch’ mode and they are only undertaking ‘need-based buying’, which has plummeted the list prices further by INR1,000/t below the prevailing market prices.

Flat steel prices that had witnessed a slight uptick last week have been relatively flat WoW at INR55,400/t.

The domestic trade-level prices have inched up by INR300-400/t WoW; however, range-bound export prices have kept the overall prices under check. We had anticipated a price correction of INR1,500-2,000/t across the steel sector and the same is now fully priced in.

The arbitrary price gap in exports between India and China is currently around USD15-20/t (~USD100/t in May’23) and hence, we believe a majority of the downside has been factored in with no major price correction likely in the near term.

However, the near-term outlook remains volatile and highly monitorable with multiple mixed signals in the domestic and international markets.