Remember National Lampoon’s Vacation? It was a
1983 comedy film in which suburban dad Clark Griswold (Chevy Chase) takes his
family on a cross-country road trip to the fabled Walley World amusement park.
Clark made one critical mistake, though. He
assumed Walley World would be open and waiting for them. This was to be the
family’s reward for a long, stressful journey. His assumption was...incorrect.
Many have noted the word’s first three letters
hint at how assumption can make an ass out of u and me. Yet we must assume some
things or life becomes impossible.
Assumptions can be wise or unwise. They can be
unduly optimistic or excessively pessimistic. Slightly different assumptions
can produce giant changes in predicted outcomes. Assumptions are necessary but we
shouldn’t make them lightly, nor forget we are making them.
This is important because assumptions abound in
our assessments of the economy and markets. They tend to sort of fade into the
background while we explore everything else.
January CPI inflation increased by 6.52%
(December: 5.72%), led mainly by a sequential rise in prices of cereals (2.6%
mom compared to 1.1% in December) and eggs (2.3% mom compared to 4.9% mom). On
the other hand, vegetable prices contracted, but the contraction was shallower
than in December ((-)3.8% mom % versus (-)12.7% mom in December).
Rural and urban inflation rose sharply by 6.85%
and 6%, respectively (December: 6.05% and 5.39%, respectively). January core inflation
(CPI excluding food, fuel, pan, and tobacco) remained elevated and sticky at
around 6.41% while increasing sequentially by 0.53% (December: 0.31% mom). Gold
and silver prices, yet again, caused an increase in the personal care and
effects category. Further, rural core inflation continues to outpace urban core
inflation.
Likely data anomaly in cereals’ index There appears to be some data anomaly in the
cereals index for January. Our calculated series for the cereals category based
on its twenty sub-categories suggests a 0.8% mom increase in the index compared
to 2.6% mom increase in the official data release. Historically, the gap
between our calculated series and the official series has been negligible. The
January print shows a marked deviation of 1.8 ppt. If this data print was to
undergo revisions, the cereal index’s sequential momentum would be around 0.8%,
leading to food and beverage inflation at 5.75% (compared to 6.19% as per the
official release). Consequently, the headline CPI print would stand corrected
at 6.29% (23 bps lower than the official release).
India’s relative outperformance in CY22 was
driven by strength in earnings revision and performance, especially as its
North Asian neighbors saw a sharp downward revision. CY23 would continue to
offer comfort on inflation growth dynamics, and India is expected to remain the
fastest-growing large economy, which clubbed with strength in India Inc’s
balance sheet, is likely to provide tailwinds to earnings growth despite global
challenges. This means India will continue to command a valuation premium
compared to peers.
However, on an absolute basis, India equities
saw time correction, with ~20% correction in 12-month forward P/E of the Nifty
to ~18x from peak of ~23x. While markets may time correct for the next couple
of quarters (as clarity on global rate cycles emerges), we expect earnings
growth and India’s relative strength to be key drivers of Index returns, and
our models based on earnings expectations and valuation (forward P/E, What’s in
the price model and aggregation of bottom-up expectations) imply a Nifty
trading in the range of 17000-20000, with back-ended returns in the Index. This
implies ~14% upside to the Nifty from current levels.
Industrial production for the month of December
displayed a healthy performance, thereby registering a print of 4.3% YoY as
against the 7.4% YoY growth rate a month ago. The expansion in the industrial
output was a bit slower than expansion in eight core sector growth of 7.4% in
December-22. Rise in the industrial output has been broad based across sectors
as well as in the used based category and mainly that has kept industrial activities
in a positive territory. Within the use based classification, consumer durables
output entered in the contractionary territory and registered a negative print
of 10.4% YoY in December against a contraction of 1.9% a year ago, thereby
reflecting the existence of prevalent lacklustre demand amongst the urban
households.
For December 2022, the production in the eight
core industries expanded 7.4% compared to a growth of 5.7% for the month of
November. It was the highest recorded number in the last three months. The
December print was weighed up by a large expansion in mining, infrastructure,
infrastructure and primary goods. From a consumption perspective, the results
were a mixed bag as consumer durables and non-durables recorded contraction and
expansion respectively.
HRC prices in traders’ market consolidated
after seven successive weeks of hikes. However, rebars continue to fare better
with rebar-HRC premium still at Rs2,800/te. Regional HRC price stayed
unchanged; however, Indian HRC export price was up US$25/te at US$715/te on
higher realisation by exporting to Europe. Of late, Indian producers are
concentrating on better-remunerative Europe and Middle East markets. Secondary rebar
price, however, declined by Rs500/te WoW as pellet price was down US$8/te,
tracking global iron ore price.
We would await more clarity on stimulus and
policy in China as key debt and money supply indicators do not show any sign of
a pick-up, as yet.
The Cloud business growth of key Hyperscalers
(Amazon, Microsoft, Google, etc.) ebbed for the fourth straight quarter. More
importantly, the managements of key Hyperscalers indicated a further slowdown
and a shift in focus towards cost optimization projects from enterprises due to
high macro uncertainty. While our view of the near-term divergence between
Hyperscalers and IT services growth
continues to play out, the pace of deceleration has been steep and might
impact the follow-on IT services work adversely with a lag. Given the low
industry visibility, this adds to demand uncertainty despite having a
substantial Cloud migration opportunity globally.
·
The Cloud growth across Hyperscalers
continues to taper off from its peak seen in 4QCY21. The slowdown in demand is
a function of reprioritizing enterprise spends towards core operations amid the
challenging macro environment.
·
The deal pipeline remains
healthy and robust with a few customers planning to go slow with the migration
and have committed to stay for a long-term horizon.
·
We believe the Cloud migration
activities have taken a temporary pause before it starts to accelerate further
going ahead.
·
Despite the four consecutive
quarters of slowdown, the IT services companies have not witnessed any material
weakness in delivering Q3 performance.
Credit offtake rose by 16.3% year on year
(y-o-y) for the fortnight ended January 27, 2023. Incremental credit growth has
risen by 12.2% so far in FY23. In absolute terms, credit expanded by Rs.14.5
lakh crore from March 2022. The growth has been driven by continued and
sustained retail credit demand, strong growth in NBFCs and inflation-induced
working capital requirement from sectors such as “petroleum, coal products
& nuclear fuels”, and chemicals and chemical products.
With a higher base, deposits witnessed a slower
growth at 10.5% y-o-y compared to credit growth for the fortnight ended January
27, 2023. The short-term Weighted Average Call Rate (WACR) has increased to
6.44% as of January 27, 2023, from 3.72% as of January 28, 2022, and from 6.09%
as of January 13, 2023. Deposit rates have already risen and are expected to go
up even further due to rising policy rates, intense competition between banks
for raising deposits to meet strong credit demand, a widening gap between
credit & deposit growth, and lower liquidity in the market. The deposit
rates rise with a lag effect and are expected to increase the cost of
borrowings for the banks.
RBI increased the repo rate by 25 bps to 6.5%
in its last monetary policy held on February 08, 2022. This is the sixth hike
by RBI in FY23 due to elevated core inflation. The RBI has continued its stance
of withdrawal of accommodation and has maintained a hawkish tone.
As per Power System Operation Corporation
(POSOCO) data, power generation surged 18.4% YoY in January 2023 to 137.0BU
from 115.8BU in January 2022. Robust power consumption growth in January
primarily indicates sustained momentum of economic activities. We believe power
demand as well as consumption will increase and continue to grow in mid-teens
on increased demand as we move towards the summer season though demand in North
India would be stable, led by ongoing winters and further improvement in
economic activity on account of the end of the Rabi season.
India seeks to raise its installed RE
generation plant capacity to 500GW by CY30E from the current 121GW. We are
positive on the companies focused on RE capacity with strong balance sheets.
As per the Ministry of Power’s PRAAPTI portal,
DISCOM owed INR 1,195.8bn in July 2022 versus INR 765.2bn in January 2023 to
power generation companies. Outstanding dues (>45 days) of power producers
from distribution companies slipped 76% YoY to INR 235.7bn in January 2023
versus INR 1,051.8bn in July 2022.
In January 2023, 14 new RE tenders with
cumulative capacity of 7,966MW were issued. In December 2022, 17 new RE tenders
with cumulative capacity of 6,578MW were issued. In December 2022, 1,370MW
(419.6MW in December) of solar and wind capacity was added, taking the
cumulative RE capacity to 120.9GW. From January 2022 until December 2022,
13,956MW solar capacity and 1,847MW of wind capacity were added in India. This
is ~17.5% and 26.6% higher than in 2021, respectively. Rajasthan added the
maximum utility scale solar capacity of 675MW in India followed by Chhattisgarh
(138MW) and Tamil Nadu (77MW) in December 2022.
Brent Crude oil has been hovering around
$85/barrel mark for the last few months led by sluggish economic performance
across Europe, Asia and the U.S., along with lower demand from China amid Covid
new wave. Somewhat stable crude oil prices coupled with weak demand kept most
of the chemical prices under pressure. However, anticipation of a bounce back
in crude oil prices remains firm globally as analysts are betting high on
reopening of Chinese market to spike global demand while Russia’s production
cut announcement to lend support. Some early green shoots are visible in some
of the chemical products but broad base recovery will take time to reflect in
the prices.
Chemical prices of products like MIBK (up 52%),
Ethanol (up 25%), MTBE (up 24%), Styrene (up 18%), EDC (up 16%), Caprolactam
(up 16%), Butadiene (up 15%), Benzene (up 14%) and Toluene (up 14%) have gained
on MoM in the domestic market. On the weaker side sharp correction was
witnessed in chemicals like Chloroform (down 27%), DMF (down 17%), Caustic soda
lye (down 16%) and Anhydrous HF (down 13%) on MoM basis. Soda ash remained
stable on MoM basis.
Domestic demand has been fairly good in the
last couple of quarters while export demand has been impacted due to ongoing
geopolitical issues. We believe the global demand recovery and improvement in
production activities to soon take shape with relatively steady crude oil
prices, fading our higher inventory channel scenario and reopening in China.
Moreover, with cooling off energy cost and lower raw material prices, margin
profile for chemical manufacturers to look better in the coming quarters.
Inflation drivers continue to paint a mixed
picture but inflation is likely to head lower through 2023 in US and the euro
area. Price pressures from food and freight rates have clearly eased as has
energy and electricity prices in Europe. Labour markets remain tight, but wage
pressures have showed tentative signs of easing. Core inflation pressures
remained elevated in January both in the euro area and the US, and we expect the
ECB and the Fed to react by continuing to hike interest rates in the spring
meetings.
Inflation expectations: Both US and euro area
consumer inflation expectations have remained elevated, but off the peak
levels. Some short-term US indicators rose modestly, but market-based long-term
inflation expectations remain broadly stable.
Q3FY23 was a challenging quarter for logistics
companies under our coverage. Key highlights: 1) Festive season was bleaker
than expected with lower than expected e-commerce volume; 2) lower EXIM volumes
owing to adverse global macros impacted earnings of container companies; 3)
margins got impacted due to higher cost; 4) consensus estimates and target
price post earnings have been slashed for all the companies; and 5) management
commentary was cautious for Q4FY23 for most companies with upcoming price hikes
and cost efficiencies in middle-mile, the key focus area. Going ahead, we
believe margin improvement is likely for surface express players such as TCI
Express and Gati; however, CONCOR’s margin is likely to remain tepid owing to
higher decline in EXIM volumes.
Despite the recent drop in energy prices,
aluminium smelters in Europe still face challenges, Norsk Hydro has said. The
company’s CFO said a further 600,000 tonnes of aluminium capacity is still at
risk if we see another spike in energy prices.
Mitsui Mining & Smelting Co., Japan’s
largest zinc smelter, will raise premiums for Asian ex-Japan buyers for the
second year in a row by more than 10% over LME prices for 2023. The company
expects zinc supply to remain tight and sees a supply deficit of 150kt in 2023,
the third annual deficit in a row. It expects zinc prices to range between
$3,000 and $3,400/t in the first half of the year.
India’s Trade Deficit
narrowed sharply to USD 17.8 bn in January 2023 from USD 22.1 bn in December
2022 led by 15.8% MoM decline in imports. However, exports dropped by 13.5%
MoM.
Moderation in imports is
seen across oil, gold, and core imports. Drop in core imports probably reflects
lower domestic demand but needs to be tracked for confirmation.
Despite fears of global
slowdown, India’s services exports show strong momentum.
FY24 CAD revised to 1.8%
of GDP (USD 66 bn) amid improved outlook for services exports and lower goods
imports.
