India rates: Liquidity update (Nomura Securities)
Liquidity update: Over the past few months, liquidity in the interbank market has been relatively range bound, largely tracking the normal inter month seasonal patterns. However, overall system liquidity, including the government’s cash balance, has increased because of the larger-than-expected RBI dividend and the liquidity infusion from the INR2,000 note’s withdrawal.
As of 26 July, interbank liquidity was approximately INR1.24trn, while overall system liquidity was INR3.6trn on 14 July. As a percentage of NDTL, interbank liquidity is approximately 0.7%, while overall system liquidity is 2%. Despite the increase we have seen MIBOR spike above the MDF rate on various occasions.
What has been affecting INR liquidity? Currency in circulation (CIC) has been decreasing since the RBI announced that the INR2,000 note would be withdrawn . Since the announcement, CIC has declined by INR1.36trn up to 14 July. This is in line with our assumption that there would be a INR1.5trn injection of liquidity into the system by September. Going forward, we would expect a reversal of this, as Q3 FY23 approaches, as CIC usually picks up around election season.
On the FX side, the RBI bought approximately INR1.25trn worth of US dollars in the first two months of FY24. This has led to a large injection of liquidity, while weekly data show the numbers have been more muted in June and July. We continue to monitor the forward book, as we have seen a reduction in the outstanding long USD position.
On the government’s cash balance, we currently estimate this was around INR1.6trn on 14 July. The recent boost has come from the larger-than-expected RBI dividend (INR874bn). The government has repaid the Way and Means Advances (WMA) drawdown taken at the end of FY23. Bond supply will remain high over the coming months with no maturities; however, there will be a net maturity of INR1.5trn in T-bills. Overall, for now we expect a somewhat stable government cash balance over the coming period.
In terms of RBI actions on the liquidity front, OMO sales stopped in the early part of this year and the RBI has remained absent in the market since. However, under the LAF facility, the RBI has continued to intervene via the VRRR and VRR route. In June and early July the RBI intervened asymmetrically, by taking out liquidity on the VRRR once the MIBOR/call rate dropped below the policy rate, while remaining hesitant to inject when MIBOR/call rate spiked.
Liquidity projections From our projections, we continue to see FX interventions as the largest driver for FY24, and if the RBI continues to buy US dollars aggressively for its reserves, we can see a liquidity infusion of over INR2.5trn from this channel. While on the flip side, if INR comes back under pressure owing to global growth concerns or rising commodity prices this may flip back negative. As noted above, we expect outflows from CIC to resume over the coming months and pick up owing to the elections. On OMOs, we still expect the natural drains on liquidity to warrant the RBI conducting OMOs in Q3 FY24; however, as our economists have pushed back on the timing of for the RBI’s rate cuts to February 2024, we think the RBI is unlikely to start OMOs significantly before the RBI’s first rate cut. Subsequently, we have pushed back our timing on the start of OMOs to Q4 FY24, but still expect INR500bn of OMOs this year. For Q3, we would expect the RBI to be more proactive with tools under the LAF, predominantly through the VRR route.
Center’s fiscal in check in 1QFY24 (Kotak Securities)
The Center’s fiscal deficit remained under control in 1QFY24 at 25% of FY2024E. Though corporate tax collections remain weak, receipts were buoyed by CGST and personal income tax. Expenditure remained well-supported by capital expenditure in railways and roadways, even as revenue expenditure is being tightly controlled. For now, we maintain our GFD/GDP estimate at 5.9%, in line with FY2024E.
GST collections remain in range: GST collections for June (collected in July) were 10.8% higher yoy at Rs1,651 bn (May: Rs1,615 bn), with CGST at Rs298 bn (Rs310 bn), SGST at Rs376 bn (Rs383 bn), IGST at Rs859 bn (Rs803 bn) and compensation cess at Rs118 bn from Rs119 bn in May. After the distribution of IGST, June CGST and SGST revenues (before refunds) were at Rs696 bn and Rs708 bn, respectively (Exhibit 2). CGST + IGST collections are currently at a monthly run-rate of Rs663 bn in 1QFY24, with the required run-rate at Rs683 bn. For now, we expect CGST collections to be close to the FY2024E target.
Receipts in 1QFY24 buoyed by RBI dividends, income tax and CGST: Gross tax revenue in 1QFY24 was 20% of FY2024E (3.3% higher than 1QFY23) and net tax revenue was 18.6% of FY2024E (14% lower than 1QFY23). Total receipts were at 22% of FY2024E (0.5% higher than 1QFY23), led by non-tax revenues (mostly due to RBI dividends) at 51% of FY2024B. On the tax front, CGST+IGST collections were at 25% of FY2024E (11.4% higher than 1QFY23) and personal income tax was at 22% of FY2024E. The drag in revenues was from corporate tax collection in 1QFY24, at only 15% of FY2024E ((-)14% growth over 1QFY23) and excise duty collections at 15% of FY2024E ((-)15% growth over 1QFY23). Direct tax was at 18.3% of FY2024E ((-)1.9% growth) and indirect tax was at 22% of FY2024E, (9% growth).
Railways and roads support capex; revenue expenditure kept in check: Expenditure in 1QFY24 was at 23% of FY2024E. This was propped up by capital expenditure at 28% of FY2024E (59% higher than 1QFY23), which continued to be supported by (1) roads at 39% of FY2024E (23% higher than 1QFY23) and (2) railways at 33% of FY2024E (70% higher than 1QFY23). Loans to states for capex rose sharply in June, pushing the 1QFY24 spend to 23% of FY2024E.
Revenue expenditure in 1QFY24 at 22% of FY2024E was in line with last year’s levels, 0.1% lower than 1QFY23.
Maintain our FY2024 GFD/GDP estimate at 5.9%: We see a limited slippage risk in FY2024’s fiscal estimates. Though the higher-than-budgeted RBI surplus transfer provides a significant buffer, it could be offset by a divestment shortfall (market risk), downside risks to tax receipts (trend in 1Q shows some weakness in corporate tax collections) and/or risk of higher spending, given the busy election cycle. For now, we see limited risks of fiscal slippage in FY2024 and maintain our GFD/GDP estimate at 5.9%.
India’s Core Sector Index Rises to 5-Month high (Centrum Broking)
Eight core industries, with 40.27% weightage in the index of industrial production (IIP) recorded a growth of 8.2% in June. Previous months eight core index was revised up from 4.3% to 5%. The cumulative growth across these eight industries during the April to June period in the current fiscal stood at 5.8% compared to 13.9% in the previous fiscal. The recent figures for core infrastructure thereby indicates healthy growth in the economy. However, demand side continues to remain weak on the global side, but the government expenditures helped to keep the core industries afloat. As per government’s front-loading of capex, have helped the cement and steel production to perform well this quarter. We continue to expect strong growth in the production of cement and steel sector in the upcoming months. India’s Fiscal deficit for the first quarter of FY23 stood at Rs. 4.51 lakh crore against the full year target of 17.87 lakh crore.
Eight core industries shows healthy growth
· Production of crude oil continued to see a contraction for 13th consecutive month. Crude oil production contracted by 0.6% in June’23. The cumulative index contracted by 2.0% during the first quarter. On monthly basis the index contracted by -3.05% compared to a growth of 4.93%.
· Refinery products recorded growth of 4.6% compared to a growth of 2.8% in the previous month. Whereas Natural Gas grew for the month and recorded 3.6% compared to a contraction of 0.3% in May’23. The oil basket in general has been disappointing for the past few months as demand has been low which can be seen as the prices have been low.
· Coal production registered a high single digit print of 9.8% in June compared with growth of 7.2% in May. To the contrary, on monthly basis coal production saw a contraction of -3.1% compared to a growth of 3.97%. The cumulative index increased by 2% during April to June period. The rate of growth has picked up after slowing down for the last three months, indicating revival in demand.
· Steel production grew by 21.9% in June compared to 10.9% in the previous month on YoY basis. On a monthly basis as well, the steel production performed well, as it recorded a growth of 1.15%, compared to 0.79% Its cumulative index increased by 15.9 per cent during the quarter April to June.
· Fertilizer production rose by 3.4% in June compared to 9.7% in Mau, on YoY basis. Whereas, on a month on month basis the fertilizer production contracted by 5.35% compared to 16.43% increase in the month of May. Its cumulative index increased by 11.3 per cent during the quarter April to June.
· Cement production witnessed a growth in May by 9.4% compared to an increase of 15.3% in May, on YoY basis. The growth in cement production was led by the current capex push by the government. Moreover, on monthly basis it expanded by 1.68% compared to a contraction of 0.31% recorded in the previous month. The cumulative index increased by 12.2 per cent during the quarter April to June. We continue to believe that this sector will see major growth due to robust increase in construction activity in upcoming months.
· Electricity production recorded encouraging numbers as it recorded 3.3%. The May numbers were revised up from -0.3% to 0.8%. On monthly basis, it recorded a positive growth of 0.89% compared to 4.84% in the previous month. The cumulative index increased by 1.0 per cent during the quarter April to June.
India Auto: Slow growth for PVs and 2Ws in July 2023
Our dealer surveys for July-23 indicate: 1) passenger vehicle (PV) demand has been tepid, especially for the small car segment, with discounts inching up further, and waiting periods lowering (Fig. 8 ) (Fig. 7 ) ; 2) Medium and heavy commercial vehicles (MHCVs) wholesale volumes were up, but given seasonal weakness, discounts have also inched up; 3) two-wheeler (2Ws) demand recovery remains slow, especially given a delayed festive season.
Overall, we maintain our view that consumption will see a re-balancing of growth in FY24F, where the mass segment such as 2Ws can witness a demand pick-up, albeit from a low base, while PV demand is likely to slow down.
Monsoon activity has picked up well (7% above normal as of 27 July [link ]), and bodes well for rural demand as well, in our view.
For Jul-23, we estimate PV industry wholesale volume at ~353k units, up 3% y-y. However, retail sales would be slightly lower, leading to ~15k inventory build-up, on our estimate. We maintain our PV industry growth estimate at ~6% y-y for FY24F.
In 2Ws, we expect wholesales to be up 1% y-y in Jul-23F. Retails are likely up 8% y-y, implying limited inventory build-up, given a delayed festive season in 2023. We expect MHCV wholesale volume to rise 11% y-y.
For tractors, we expect volumes to be up 10% y-y in Jul-23F.
EV registration data for July-23: 2W EV retail sales have increased marginally from 3.5% in Jun-23 to 4.3% in July. Ola Electric, TVS Motor and Ather Energy continue to dominate the segment. We note that the FAME-II scheme is unlikely to be extended beyond Mar-24 which can lead to slower adoption rates.
Our Commodity Cost Index has stabilized (Fig. 13 , Fig. 14 ) while OEMs have taken price hikes. Hence, OEMS will have gross margin tailwinds in FY24F, partly offset by higher A&P and discounts.
IT Services: Q1 fails to live up to modest expectations (AXIS Capital)
Q1FY24 results reflect weaker-than-expected performance vs modest expectations across Tier 1 techs, while Tier 2 techs saw mixed performance – Coforge, PSYS, and KPIT fared better, while LTIM and MPHL continued to struggle. Margins were ‘flat to up’ YoY although down QoQ, due to seasonal factors aided by easing of supply side and tight cost control (including delayed wage hikes in some cases). Hiring remains in check.
Q1FY24 weaker than expected
Tier 1 techs saw a weak start to FY24, with companies missing modest growth expectations, except Infosys. Tier 2 techs also had mixed fortunes like the prior quarters – Coforge and PSYS fared better, while LTIM and MPHL struggled relatively. Within the ER&D coverage, KPIT continued to sustain steam, while LTTS and Tata Elxsi struggled relatively. Growth moderation spread to Europe sequentially, while North America continued to be weak. Amongst verticals, companies continued to see near-term challenges in financial services, hi-tech, and communications.
Margins held up YoY; seasonality pulled down margins QoQ EBIT margins for Tier 1 techs (except for TechM) were up YoY, driven by easing supply side pressures and tight cost optimization (in some cases, delayed wage hikes as well). Margins were down sequentially on account of seasonal factors, including increments, visa costs etc. Companies continued to see tightness in sub-contracting and utilization, as hiring stayed tempered, with Tier 1 techs seeing headcount decline for a third quarter in a row.
Guidance cut Infosys’s FY24 outlook on both growth and margins was below par, after the disappointing exit for FY23. Wipro’s Q1FY24 revenue guidance confirms fears of the company’s historical troubles resurfacing, as industry demand tailwinds have ebbed. HCLT’s guidance was along expected lines, while Coforge’s revenue guidance is reassuring, given street’s concerns around higher BFS exposure for the firm. KPIT retained its growth guidance (while math indicates it should have been upgraded), and it will review its guidance in Q3FY24 (we expect an upgrade). Despite the Q1 miss, LTTS retained its overall growth guidance of 20%+ YoY cc – guidance ask rate for the next three quarters at 4.1% CQGR.
Continue to advocate a tactical approach In line with our sector reports (on Tier 1 techs and Tier 2 techs), we continue to suggest a selective approach within the sector, based on a combination of earnings and valuation comfort, unlike the quasi-uniform rebound seen for Indian IT services firms through FY20-H1FY23, as growth is likely to remain polarized in the current macro backdrop.
