Latest data for the week ending 28th November
saw pick-up in activity. Energy consumption, railway freight and Maharashtra
property registrations improved W-o-W while vehicle registrations dipped
slightly from the Diwali associated strength in registrations. Economic and
industrial activity in India has been progressing well post the strong festive
season. Q2FY24 GDP data is estimated to be strong around 7%. With FII flows
turning positive and Indian growth fundamentals remaining strong, equities are expected
to trend higher after remaining range-bound for a prolonged period.
Industrial data: (1) Energy consumption grew by 2% wow vs. -1% drop in the previous
week; 4% higher yoy. Consumption saw 21% growth yoy in October vs. 10% in the
previous month. (2) E-way bill generations surged to a record high with 9% mom
growth; 31% yoy growth in October vs. 10% in the previous month. (3) Daily
railway freight tonnage improved by 2% wow vs. 3% growth in the previous week;
monthly freight registered 9% yoy improvement in October vs. 7% growth in the
previous month. (4) Vehicle registrations at an all-India level fell by -7% wow
vs. 25% growth in the previous week. Registrations down by -13% yoy in October,
but saw 6% mom growth; PVs/2Ws saw -8%/-18% decline yoy while MHCV was up 16%.
(5) Property registrations in Maharashtra (excluding Mumbai) improved by 12%
wow vs. 4% growth in the previous week; Registrations was 20% higher yoy in
October vs. 11% in the previous month. (6) FASTag toll collection volume growth
at 13% yoy in October vs. 15% growth in the previous month.
Macro data: (1) Net new EPFO subscribers increased to 1.72mn in September from
1.50mn in the previous month, registering 15% mom growth. (2) LAF deficit
worsened to average Rs -1,1342bn vs. Rs -735bn in the previous week. (3) CIC
fell wow; yoy growth at 4%. (4) Bank credit improved by Rs 1,422bn fof as on
3rd November; growth at 16% yoy. (5) Food stock increased by 14% mom in
November vs. -8% dip in the previous month; 7% growth yoy.
The recovery timelines under the resolution
through the Insolvency and Bankruptcy Code (IBC) route continue to lengthen
with those resolved in 2QFY24 touching an all-time high of 662 days for
financial creditors with a consistent increase across all creditor classes for
the past three years. Process-related challenges such as legal tussles between
stake holders, case execution bandwidth, delay in judgments, information
asymmetry and a lack of standardisation (e.g. valuation process) are leading to
elongated timelines.
On the other hand, recoveries for financial
creditors have stabilised in the range of 33% to 35% though operational
creditors have shown some uptick in recoveries from to 18.3% in 2QFY24 from
16.5% in 2QFY23. In Ind-Ra’s opinion, recoveries from the resolution are slowly
reverting to the pre-IBC days after the initial success when they were in the
range of 40%-45%. This could further delay a deepening of the bond markets,
which, besides information asymmetry, are exposed to significant losses in the
event of a default by the issuer, given their unsecured nature. In comparison
with other resolution mechanisms, IBC has displayed an improved level of recoveries.
The experience of liquidating assets also shows
extended timelines for recovery for all asset classes and recoveries in the
region of 5% to 10% with financial creditors on average recovering lesser than
operational creditors.
While liquidation remains the option which has
shown the maximum closures under IBC, its lower realisations is likely to
encourage creditors to seek resolutions either outside the IBC or register only
those cases under IBC where the recoveries through resolution are likely to be
higher.
Realisation Stay Lower and Timelines
Stretched Further: The average time taken for
closure during 2QFY24 was 493, 468 and 394 days for FCs, OCs and CDs,
respectively, which is the highest since FY21.
Liquidation Continues to Dominate Closure
of CIRP: The closure through the resolution
plan route in 2QFY24 saw a slight improvement compared to that in 2QFY23. While
the resolution through liquidation saw a 2% yoy dip in 2QFY24, it remains the
most preferred route with 44% of overall cases being closed through
liquidation.
Gap Between Admission and Closure Reduces
This is the first time since 1QFY22 that the
cases closed during the quarter have been higher than those admitted. In
2QFY24, the gap between the closed cases and admitted cases reduced; in this
quarter, the cases closed were 292 more than those admitted 232.
We argue against popular perception that fallen
HH Fin savings (down from 11% to 5.1% of GDP in 13yrs) have hurt deposit growth
and will hurt investments (as they have been largely financed by HH savings)
and/or cause CAD to widen. We argue that investments drive savings, and not
vice versa, and policy response has to focus on investments. What will help is
if the gap between NGDP growth and Borrowing Cost rises, incentivizing
investments, as happened in the naughties. The chances of this are reasonably
bright for India in the medium term.
Investment drives savings, not vice
versa: Of late, Indian consumption has indeed
risen and savings fallen, but more due to investments falling. 70 year data
shows that consumption growth is far less volatile than investments’ and when
the latter accelerates, consumption as % of GDP falls, and savings % naturally
rises. Barring episodes of crude spiking, CAD broadly stayed stable, averaging
2.4% of GDP. These trends have held, almost monotonically, for decades. Also, overall
deposits are down from Covid high but at LT mean (68% of GDP).
But ICOR has deteriorated and growth has
worsened globally: Further, compared to other
emerging economies, India’s savings and investment, each currently at around
30-31% of GDP, are respectable, though down over a 15 year period. In our 15
country sample including EMs and DMs, almost everywhere, growth has slowed down
and ICOR worsened, a significant deterrent to investments globally. But India’s
ICOR has been amongst the best in our sample over the past 2 decades.
What can trigger investments? In India, consumption (and HH non-mortgage debt) has risen in past
decade, but this is insufficient to spur demand and trigger investments.
Further, a widely believed inflection point for GDP growth at around the $2,000
per capita GDP mark ($ 4,000 in PPP terms) is not evident from our 15 country
sample except in the case of China. What can help is if the NGDP growth –
Borrowing Cost (G-BC) gap, currently 2-3ppt for India, rises. This gap was very
high for most sample countries during the naughties boom. In India, low
inflation, strong govt. revenues and tax buoyancy, policy friendliness (barring
politics risk), inflows from JP Morgan bond index inclusion, all point to G-BC
gap expanding uniquely. We remain optimistic over the medium term.
Debt-fuelled consumption can sustain for
a while: Decline in overall HH savings has been
due to increase in HH consumption – up from almost 56-57% of GDP in FY07-13 to
around 61% currently. Consequently, we see HH physical savings / investment (in
RE, which is the mirror image) fall from 14-16% of GDP to around 12% and net financial
savings falling to 9-11% to around 5-7%.
A soft OND will likely cap off a challenging
2023 for IT Services companies. Most available guidance for the quarter have
even quantified it. We therefore pored over the most recent earning
commentaries from global players to distill early signs of 2024 outlook.
Seasonal weakness aside, underlying volumes appear stabilising. Unexpected
ramp-downs are less frequent now. Deep budget cuts in 2023 have raised hopes of
some let up next year. But a soft discretionary environment is unlikely to see
a rapid rebound. IT budget increases, if at all, are likely to be limited and
incremental. Capgemini hopes of demand inflection in 2024, but does not see
that in Q1. Cognizant reckons that in aggregate, 2024 starting point is similar
to 2023’s.
Hyperscalers, although pointing at attenuating
optimization trends, have not called out a reversal yet. A potentially soft
start to the year could lock-in pricing at current levels, nullifying chances
of price hikes through 2024. These could put the Street’s FY25 estimates at
risk. Hopes of rate cut in US could support multiples. But that would barely
offset potential earning moderation, in our view, limiting meaningful upside.
Relatively benign outlook by mid-scale digital players suggest mid-cap’s relative outperformance
could continue.
Q4CY23 - No respite: Q4 is likely to see a double whammy. Hopes of budget flush have
waned. Likely impact of furloughs, on the other hand, seems to have elevated.
CAP says clients are squeezing early to bring down their technology cost.
CTSH’s Q4 guidance is wider than usual to reflect heightened uncertainty. EPAM
will witness planned ramp down from EU clients. Amdocs’s Telco clients are
reducing discretionary spend, including legacy modernization. Unsurprisingly,
most available guidance imply sequential decline.
2024 budget – a sneak peek: Budget discussions have started. There are reasons to be hopeful.
CAP believes that after deep cuts in 2023, clients need to get projects done in
2024. TWKS is hearing from clients that budget pressures are starting to ease.
But these do not necessarily equate to any imminent budget expansion. In fact,
TWKS mentioned that client mood (in their budget discussions) is still very
cautious. CTSH cited limited visibility around discretionary spend. It feels
2024 start is similar to 2023’s. Even CAPP ruled out any demand inflection at
least till Q1, reflecting low near-term visibility. Our checks indicate
flattish budgets for 2024.
Digital providers’ optimism not
extrapolatable: Surprisingly, mid-scale digital
providers (EPAM, DAVA, GLOB) sounded upbeat in their outlook. This is at slight
odds with a more circumspect view of scaled GSIs. EPAM is seeing stability in
client program and budgets, specifically in North America. GLOB has been a
standout player in terms of growth and expects the momentum to sustain. DAVA
expects growth recovery from Q3FY24 (AMJ quarter). Note, these players suffered
material client specific challenges in past few quarters which now seem behind
them, explaining their optimism. Their specific situations however make the
extrapolation difficult, in our view.
Smaller deals and pricing: CTSH stated that ACV of recently won large deals will start
contributing from 2024, aiding growth. However, declining smaller (<USD 5mn)
deals offset that. Almost 50% increase in its average deal duration – from two
to three years – indicates the extent of deceleration in smaller deals.
Besides, smaller deals result in better pricing transmission. A still uncertain
environment means annual pricing is likely to get locked-in at current levels,
leaving little scope of price increases through 2024.
Read through for Indian IT: Ramp-up of large deals underpin the Street’s confidence on
large-cap IT’s FY25 revenue growth. But deflationary pressure from declining
smaller deals is not appreciated enough, in our view. A likely flattish budget
for 2024 means the pressure on smaller/discretionary projects is unlikely to
relent anytime soon. We therefore see risks to the Street’s FY25 estimates.
NIFTY-IT is up 5% over the past one month, likely on hopes of US rate-cuts in
2024. That could support multiples, but barely to offset EPS cuts, in our view.
Mid-caps with growth momentum are better bets.
We took a closer look at 1HFY24 credit costs
and other aspects of all our coverage banks and drew the following key
conclusions (1) Banks whose normalized credit cost run rate most exceeds or
matches FY24E consensus are IIB, RBL, KMB, HDFCB, DCB and IDFCB (2) Banks whose
normalized credit cost run rate most lags FY24E consensus are BOB, INBK, AXSB,
SBI, FED and ICICI (3) Banks with the largest proportion of loan book impacted
by the new RBI risk weight guidelines are DCB, RBL and IDFCB (4) While NIM may
see lesser volatility going forward, there are multiple moving parts to monitor
in this regard (5) AXSB and INBK have the most improved liability profile over
the past 12 months, achieved without resorting to premium SA rates (6) AXSB and
BOB are the largecap banks with the most improved fee income traction over the
past 12 months.
Banks whose normalized credit cost run
rate most exceeds or matches
FY24E consensus are IIB, RBL, KMB, HDFCB, DCB
and IDFCB Notably, these are the banks that are either (1) already in our least
preferred list (RBL, KMB, IDFCB and DCB, in descending order) or (2) was in our
least preferred list till recently (HDFCB) or (3) has been in the middle of our
pecking order (IIB). We believe that normalized credit cost in 1HFY24 gives us
a good directional sense of credit cost for full year FY24E because we do not
think credit cost should likely decline in 2HFY24 in an environment where
interest rates are elevated and will remain so for some time.
Banks whose normalized credit cost run
rate most lags FY24E consensus
are BOB, INBK, AXSB, SBI, FED and ICICI Again,
notably, these are the banks that are already in our most preferred list (BOB, AXSB,
SBI, INBK, ICICI and FED, in descending order). We believe that comparing normalized
credit cost in 1HFY24 to Bloomberg consensus is key to understanding how banks
are delivering compared with what is priced in.
Banks with the largest proportion of loan
book impacted by the new RBI
risk weight guidelines are DCB, RBL and IDFCB The
proportion of loan book impacted for DCB, RBL and IDFCB are 31.6%, 29.7% and 26.5%,
respectively. This is assuming LAP book is also impacted. Our coverage banks would
see an erosion of CET1 ratio ranging between 42-135 bps due to the new risk weight
guidelines. The risk weight guidelines, as such, do not necessitate common
equity capital raise by our coverage banks. The guidelines are more a
pronouncement on what segments the RBI feels the banking sector should slow
down in.
While NIM may see lesser volatility going
forward, there are multiple moving parts to monitor in this regard
Tactically, BOB, INBK and SBI have a larger
share of non-EBLR floating rate loans at 63%, 59% and 42%, respectively, which
implies some residual potential of yield rise from upward MCLR book repricing.
Structurally, over FY18-23, IDFCB, RBL, AXSB and ICICI have seen the greatest
decline in share of low-yield loans, amounting to 17.4%, 11.1%, 10.9% and 8.2%
points, respectively. We do not regard the loan book mix of IDFCB and RBL to be
optimal and hence, the evolution of AXSB and ICICI is most admirable in this regard.
Loan mix change trends in 1HFY24 have been directionally similar.
AXSB and INBK have the most improved
liability profile over the past 12 months, achieved without resorting to
premium SA rates
IDFCB, INBK and AXSB have seen the greatest
improvement in share of LCR retail deposits over 12 months, amounting to 858,
652 and 529 bps, respectively. IDFCB, however, has depended on premium SA rates
to achieve this. KMB, IDFCB and AXSB have CASA ratios of 48.3%, 46.4% and 44.4%
but, again, KMB and IDFCB have achieved the same using premium SA rates.
AXSB and BOB are the largecap banks with
the most improved fee income traction over the past 12 months
The fee income to assets for AXSB and BOB has
risen 21bps and 7 bps, respectively, over 12 months. The rise has also been
healthy for IDFCB, CSB and RBL at 31 bps, 29 bps and 21 bps, respectively.
However, IDFCB and RBL are achieving this basis a sub-optimal dependence on
small-ticket unsecured lending.
Gas consumption at record highs, growth
now to trickle: Indian gas consumption is up
sharp 15% yoy to ~185 mmscmd in FY2024TD. Apart from the increased HPHT gas
production, LNG imports have been markedly higher. After multi-year declines,
gas offtake by the power sector picked up due to seasonal factors. New fertilizer
capacity also fully ramped up. With lower prices, oil to gas switch demand also
recovered. But growth will likely trickle now. CGDs segment growth has
considerably slowed, and fertilizer may not need much additional LNG. We remain
cautious on gas utilities with SELL on PLNG and REDUCE on GAIL, IGL and MGL.
Gas consumption up strongly in FY2024: Several stars have aligned to push Indian gas usage to record highs
this year. KG-D6 production has ramped up to ~30 mmscmd. Most of new fertilizer
capacity that has been gradually commissioning is also fully operational now.
After five years of decline, gas offtake by the power sector recovered
temporarily due to seasonal factors. Also, with much lower LNG prices (versus
past two years), oil-to-gas arbitrage demand recovered in refining and other
industries.
CGD demand growth has considerably slowed:
While gas volumes are up strongly in FY2024, we
note that from 2012 levels (previous KG-D6 production peak), gas consumption
has grown at below 1% CAGR. With policy focus, priority gas allocation and low
APM prices, over 2012-22 CGDs’ gas demand was up 2.2X (8% CAGR), whereas growth
was weak for most other key demand segments. With rising APM shortfall and
higher APM prices (new formula did not bring much relief), CGD’s pricing
advantage has withered and growth has considerably slowed (~3% CAGR over
FY2022-24E).
Medium-term volume outlook weak; LT
outlook even weaker: In our view, with new APM
price formula and rising shortfall, CGDs’ gas cost will keep rising. Despite
several new CGDs starting operations, CGDs’ demand growth will be weak. For
other consuming segments, outlook is weaker.
In power sector, APM gas allocation keeps
declining. Also, at current APM/LNG prices, gas-based generation has limited
offtake in merit-order dispatch regime. Volumes will likely remain weak, unless
there is policy support (such as for offsetting impact of renewable power
intermittency issues).
In fertilizer, no new gas-based fertilizer
capacity is planned. Rather with policy focus now on green hydrogen, there will
be mandates soon to switch to green hydrogen usage, with entire fertilizer
capacity moving to green H2 over LT.
For other segments, gas usage will continue to
be dependent on price arbitrage of liquid fuels versus gas. With not much
incremental domestic gas, and relatively tighter global LNG markets, we believe
the pace of switch to gas will remain slow. Also, similar to fertilizer, there
will be rising policy focus to switch to green H2 usage instead of gas in the
longer term.
Remain cautious on gas names: Gas consumption in FY2024 has been higher versus our earlier
estimates. However, with CGD sector demand growth considerably slower, the
growth outlook remains weak. We remain cautions on gas utilities.
“Blessed is the man, who having nothing
to say, abstains from giving wordy evidence of the fact.”
——George Eliot
(English Author, 1819-1880)
da capo (adv)
Repeated from the beginning (used as a musical
direction).
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