Vijay Kumar Gaba

COP28: Initial headway, some hiccups, still a long way to go (Kotak Seurities)

COP28 kept the hope of achieving climate goal under the Paris agreement alive. While initial headway was seen in the form of adoption of Loss and Damage Fund (LDF) plan, conclusion of first Global Stocktake (GST) and commitment to transitioning away from fossil fuels, a lot more is yet to be done as we progress toward the 1.5°C goal.

LDF plan approved; climate finance needs more commitments

The adoption of LDF plan by the members was the silver lining of COP28. However, the announced contributions of US$792 mn for LDF significantly lagged the recommended initial floor funding of US$150 bn per annum.

The climate funding provided by developed nations continued to increase to US$89.6 bn in 2021 and is likely to have reached the US$100 bn/year (by 2020) goal in 2022. COP28 urged the developed nations to up their mitigation as well as adaptation finance commitments in line with the growing requirements. IEA estimates that US$4.5 tn of climate finance and clean investments will be required annually by early 2030s to achieve net zero by 2050.

The Global Goal on Adaptation (GGA) agreement called upon COP members to establish and implement national adaptation plans by 2030).

GST: Step in the right direction for making NDCs more ambitious

The first GST concluded at COP28 called for more ambitious actions on mitigation, adaptation and climate finance. It pushed for more ambitious 1.5°C aligned NDCs while recognizing that the full implementation of the latest available 168 NDCs will lower emissions only by ~2% before 2030 from 2019’s levels versus the ~43% reduction required to achieve the 1.5°C goal.

The GST outlined eight key recommendations and signed various declarations (see Exhibit 8), focusing on reducing emissions primarily by scaling up renewable energy and energy efficiency, among others. While it has ‘called on parties to contribute’ to phasing down of unabated coal and transitioning away from fossil fuels in energy systems, a tougher absolute stance on ‘phasing out/down’ fossil fuels was left out of the agreement.

India: Makes no big bang announcements; on track to meet its current NDCs

India made no big announcements at COP28 after it set forth its net zero target and Long-Term Low Emission Development Strategy (LT-LEDS) in the last two COPs. While India is progressing well on its current NDCs, it refrained from signing the Global Renewables & Energy Efficiency Pledge for tripling renewable energy generation capacity and doubling the rate of energy efficiency alongside phasing down of unabated coal-based generation by 2030.

We believe India currently is striving to fulfill its growing energy needs by adding more thermal capacities, while also continuing to add renewable energy capacities in line with its NDC targets. We expect India to announce more ambitious NDC targets in 2025 by (1) increasing the non-fossil fuel electricity generation capacity target to 65% by 2030 (versus 50% as per current NDC), in line with the Ministry of Power’s goals, and (2) increasing the ambitiousness of emission intensity reduction target.

CPI Inflation picks up to 5.6% (CARE Ratings)

CPI inflation rose to a 3-month high of 5.6% in November, reversing the downtrend seen during the previous three months. This was mainly because of the spike in certain vegetable prices as well as sticky inflation in non-perishable food items such as cereals, pulses and spices. Additionally, support from a favourable base was absent last month. The upside was contained, to some extent, with the continued deflation in fuel and light category and moderation in core inflation.

While the trajectory of headline inflation has been uncertain, core inflation has been consistently trending downwards since the beginning of this fiscal. A combination of factors including the impact of RBI’s monetary tightening on aggregate demand as well as improved supply conditions have supported this trend.

Way Forward

The consistent fall in core inflation in line with easing commodity prices and subsiding demand-side pressures is a positive. However, persistently elevated inflation in certain food categories such as cereals, and pulses pose a risk of potential generalisation of price pressures. Given the lingering uncertainty around Kharif production and Rabi sowing prospects, high food prices cannot be shrugged off as entirely transient and could further feed into the inflationary expectations. Hence, supply-side interventions by the government become crucial at this juncture to ensure sufficient buffer stock of essential food items.

An unfavourable base is further expected to push CPI inflation higher around 5.8-6% in December. However, with arrival of fresh crops in the market during January-March, the headline inflation could ease to 5.1% by the fiscal year end. For the full fiscal year, we expect inflation to average at 5.4% with risks tilted to the upside.

IIP Growth up 11.7% in October (CARE Ratings)

India’s industrial activity accelerated to a 16-month high of 11.7% in October (following 6.2% growth last month) underpinned by the statistical effect of a low base. This is better than our projection of 8.5% growth. While the growth number for the month was largely on account of a supportive base, some improvement in momentum (at 1.8%) is a positive.

Manufacturing output increased by 10.4% in October following a growth of 4.9% in the previous month. A decomposition of the growth number by base-effect and momentum reveals that growth has been primarily driven by a favourable base along with a marginal improvement in momentum. A component-wise evaluation reveals that an annual (y-o-y) increase in output was witnessed in 19 out of 23 categories. Basic metals (major component with a weight of 12.8%) logged double-digit growth for the seventh successive month rising by 11.9% in October.

Among export-intensive components, an uptick was seen in growth of textiles (6.6%) and leather and related products (16.5%) while output of wearing apparel continued to remain in the contractionary territory. Among the discretionary purchase components, output of computer, electronic and optical products have shown persistent weakness staying in the contractionary zone for the eleventh successive month. However, continued optimism is visible in the automobile component recording double-digit growth for the third month in a row.

Way Forward

Going ahead, while the prospects of infrastructure and construction goods segment remain encouraging, the strong base effect has masked the weakness in the consumer goods segment. The inching up of inflationary pressures, lower Kharif production and uncertain prospects of Rabi output are headwinds for the consumption scenario.

Additionally, given the weak global demand outlook, the trajectory of industrial activity hinges on a durable consumption recovery.

RBI: On track for a cut in Apr’24 (ICICI Securities)

There was no surprise in the RBI’s decision to persist with existing policy rates. Although its stance remains ‘withdrawal of accommodation’, the RBI governor also cautioned against the ‘risk of over-tightening’ - implicitly a more balanced stance. With the banking system’s liquidity already stretched (at a loan-deposit ratio of 79.8% in Nov’23), the RBI has had to inject liquidity almost daily for the past two months, after having had to drain liquidity for the previous 3.5 years.

The MPC warned about the risk of vegetable inflation; its forecast of 5.6% YoY headline inflation in Q3FY24 implies a spike to 6% YoY CPI inflation in Nov-Dec’23. However, with core inflation likely to ease below 4% YoY by Dec’23, and cereals disinflation from Jan’24 onwards helped by an artificially high base, we continue to expect headline CPI inflation to abate to 4% YoY by Mar’24 (several months before the RBI’s forecast of 4% inflation in Q2FY25). Consequently, we expect a 25bp rate cut in Apr’24.

Rate cut will be necessary once real policy rate hits +2.5%

A real policy rate of 2.5% (which is what India is likely to have by Apr’24) will naturally entail a cut in the policy rate. Subsequent rate cuts are likely to follow the US Fed, which we expect to cut its Fed Funds rate no sooner than Jun’24. However, the easing cycle will provide a timely boost to India’s economy, enabling real GDP to accelerate to 8.4% growth in FY25.

Trend growth is 7.5% now; stronger GFCF can boost it further

Evidence over eight of the past nine years (i.e., excluding the covid year) suggests that 7.5% is India’s new trend rate of real GDP growth, so we weren’t surprised by the upward revision to the RBI’s growth forecast for FY24. Periods of stronger fixed-investment spending (such as the past 6 quarters of over-8% YoY growth in GFCF) inevitably boost productivity, and take growth above the trend.

We consequently expect real GDP growth of 7.9% in FY24. We were forecasting 7.2% growth for FY24 from the start of the fiscal year, revised it up to 7.6% in Oct’23, and recently upped it further to 7.9% after the release of the Q2FY24 real GDP growth numbers.

Fed Prepares To Shift To Rate Cuts In 2024 As Inflation Eases (Bloomberg)

The Federal Reserve pivoted toward reversing the steepest interest-rate hikes in a generation after containing an inflation surge so far without a recession or a significant cost to employment.

Officials decided unanimously to leave the target range for their benchmark federal funds rate at 5.25% to 5.5%, the highest since 2001. Policymakers penciled in no further interest-rate hikes in their projections for the first time since March 2021, based on the median estimate.

Updated quarterly forecasts showed Fed officials expect to lower rates by 75 basis points next year, a sharper pace of cuts than indicated in September. While the median expectation for the federal funds rate at the end of 2024 was 4.6%, individuals’ expectations varied widely.

A tweak to the Fed’s post-meeting statement on Wednesday also highlighted the shift in tone, with officials noting they will monitor a range of data and developments to see if “any” additional policy firming is appropriate. That word was not present in the November statement from the US central bank’s policy-setting Federal Open Market Committee.

Federal funds futures markets are now pricing in six rate cuts for next year, up from four earlier this week, and traders have fully priced in a rate cut at the Fed’s March meeting.

While economic data in recent months has generally aligned with what the Fed would like to see — a cooling in both inflation and the labor market — figures released in the past week or so have painted more of a mixed picture.

Airlines: How long will demand-supply balance last? (IIFL Securities)

In our recent report, we had highlighted that YoY growth of domestic passenger traffic is coming off, down from +20% YoY in 1HFY24 to high single-digit growth in Nov. The industry situation from a supply perspective has been favourable so far, with capacity growth (ASK) averaging 10%. GoFirst’s bankruptcy and SpiceJet’s ‘capacity cuts’ have partly off-set the capacity growth of other carriers.

However, SpiceJet has secured equity funding of Rs23bn, which may help the company get past balance-sheet issues and possibly scale up capacity. If SpiceJet is successful in adding capacity, we may see industry capacity growth outpacing demand growth.

Unless volume growth stays strong, this may lead to pressure on load factors and/or fares. Fall in crude should support profitability in the near term, but medium-term profitability will depend on whether the favourable demand-supply equation sustains.

GoFirst’s capacity has gone to zero. SpiceJet’s capacity is declining 40% YoY. On the other hand, Indigo’s domestic capacity has been growing at about 20% YoY. Other carriers (excl. Indigo, GoFirst, SpiceJet) are growing capacity at ~30% YoY, mainly driven by Akasa. Overall, the average YoY capacity growth is about 10%.

Domestic traffic growth has moderated

Domestic passenger traffic has decelerated from +20% YoY in 1HFY24, to +10% Oct and +8% in Nov. We estimate December volume growth to be at 8-10% YoY. We recently trimmed our FY24 domestic passenger traffic growth to 12% vs 15% earlier.

GoFirst’s bankruptcy, SpiceJet’s capacity cuts supported demand-supply balance so far

GoFirst filed for bankruptcy in May 2023 and ceased operations. SpiceJet’s capacity is declining 40% YoY. On the other hand, Indigo’s domestic capacity has been growing at about 20% YoY. Other carriers (excl. Indigo, GoFirst, SpiceJet) are growing capacity at ~30% YoY, mainly driven by Akasa. Overall, the average YoY capacity growth in the industry post GoFirst’s bankruptcy has been about 10%. Against 10% capacity growth, volume growth was close to 20% till Sep, supporting YoY improvement in load factors. In Oct and Nov, capacity growth and volume growth converged.

Demand-supply balance may turn adverse if SpiceJet adds capacity aggressively

The benefit from GoFirst bankruptcy will enter the YoY base in May. If SpiceJet starts adding capacity aggressively, the industry level capacity may start increasing at more than 10% very soon. If volume growth does not stay strong, it may lead to pressure on load factors and/or fares.

SpiceJet reported losses in 2QFY24; Equity raise may support capacity growth

SpiceJet reported revenue of Rs14.3bn in 2QFY24, down 29% YoY and 27% QoQ. Although gross margin (revenue, less fuel) was higher YoY, there was significant negative operating leverage due to the sharp fall in revenue. Now that SpiceJet has secured equity funding of Rs23bn, the company may look to scale up operations.

Indigo’s market-share gains may pause

Indigo has been the biggest beneficiary of the financial troubles at GoFirst and SpiceJet. Indigo’s market-share has improved from 56-57% in the early 2023 to 63% in recent months. If Indigo’s capacity growth rate comes off due to P&W engine inspections, and other carriers add capacity, the upward trajectory of Indigo’s market-share may take a pause.

Technology: Exploring impact of GenAI on IT services industry (ICICI Securities)

With Gen AI gaining prominence, in this report, we dive into the strides IT companies, hyperscalers and SaaS players are making, and also assess its upshots on revenues/margins for IT companies. Industry reports peg Gen AI as disruptive technology. Prima facie, our analysis suggests a possible deflationary impact, to begin with, owing to productivity benefits. Yet, stronger volumes could be an offsetting factor, albeit with a time lag. Mid-tier IT firms could be better positioned to adopt this disruption due to their nimbleness, allowing rapid upskilling of their relatively smaller 20k-50k talent pool (vs. 100k-600k for large caps) – quite like how they were ahead in digital adoption. Clarity of timing of the impact is still not established with no major impact to CY24/FY25 financials, in our view.

Gen AI’s impact on IT services

Based on our preliminary analysis, we believe that Gen AI can influence revenue and margins of IT companies, driven by: 1) productivity benefits (~20-30%), which need to be passed on to customers leading to pricing pressure; 2) scope compression due to insourcing by clients and substitution by SaaS players; 3) increase in volume of work due to the emergence of new Gen AI service offerings, as well as boost to existing cloud, data and analytics services that serve as the basic foundation for implementing Gen AI; and 4) SG&A gains.

Nasscom’s industry report, coupled with project-level examples cited by IT companies, suggests that there could be a deflationary impact of ~20-30%, to begin with. However, based on our conversations with IT companies, productivity benefits stemming from the implementation of Gen AI at an enterprise scale in real life scenarios may be just ~5%, initially, due to challenges related to data quality and efforts required around compliance. Clarity on the impact’s timing is foggy; RoIs are far from established, and we see no major impact to CY24/FY25 financials.

IT companies’ efforts around Gen AI

Winners and losers IT companies are putting in efforts to leverage Gen AI, in terms of: 1) the number of people trained in Gen AI and its use cases; 2) partnering with hyperscalers, SaaS and various other players in the ecosystem; 3) embedding Gen AI in existing products and platforms; and 4) investments in IT software, infrastructure, research and intellectual property, and ratings by analyst agencies such as HFS Research and IDC. Based on these efforts, we believe that Infosys is slightly ahead of peers among large caps; Persistent is leading the mid-caps pack, followed by LTIMindtree.

Hyperscalers and SaaS players seeing strong Gen AI demand

Hyperscalars and SaaS platforms are infusing Gen AI into their tech stack and are seeing stronger interest for Gen AI embedded products. For example, Salesforce’s AI enabled Pro version saw 50% YoY growth in Q3CY23 – it expects Gen AI Pro-plus’ pricing to be at least 60% higher. Hyperscaler’s and SaaS’s multiples have re-rated as street is factoring in positive impact from Gen AI. However, there has been no significant change in consensus revenue estimates for CY23/CY24. Therefore, we do not see major uptick in revenue for IT companies due to Gen AI in the near term i.e. CY24/FY25.

Difference between traditional AI and Gen AI

AI refers to algorithms that can perform tasks that previously required human intelligence. Typically, such tasks involve perception, logical reasoning, decision-making, and natural language understanding (NLU). Machine learning is a subset of AI that focuses on discriminative tasks such as making predictions or decisions based on data, without being explicitly programmed to do so. Gen AI is a subset of machine learning (ML) that focuses on creating new data samples that resemble real-world data.

Economy meter: Post-festive slump seen, inflation mars wedding season (Nirmal Bang)

·         Motor Vehicle registrations slowed in the second fortnight of Nov’23 post the festive season. Rail traffic indicators slowed from the previous fortnight and stood below their 6-month average run-rate while air traffic and toll collections improved from the previous fortnight and were above their 6-month average run-rate.

·         UPI payments, use of credit cards at point of sales (POS) and E-commerce transactions moderated from the previous fortnight and stood below their 6-month average run-rate. This was despite ‘Black Friday’ E-commerce sales estimated to be up by ~23% YoY, according to Unicommerce, an E-commerce enablement platform.

·         In rural trends, Rabi sowing was down by 5.2% yoy with Wheat sowing down by 4.6% yoy.

·         While the wedding season is providing some impetus for the services sector, the lingering impact of inflation is being felt even on wedding related purchases.

Economy sees post-festive slump

Motor Vehicle registrations moderated from the previous fortnight but stood above their 6-month average run-rate. Electricity production moderated from the previous fortnight and stood below their 6-month average run-rate. Credit growth inched higher to 16.2% YoY from 15.9% in the previous fortnight and stood above the 6-month average run-rate. Traffic indicators – rail passenger and rail freight –moderated from the previous fortnight and slipped below their 6-month average run-rate. Air Passenger traffic and toll collections improved from the previous fortnight and stood above their 6-month average run-rate. UPI payments, use of credit cards at POS and E-commerce transactions moderated from the previous fortnight and stood below their 6-month average run-rate. In financial markets, FPI flows into Indian equities picked up pace and stood at US$2.2bn in the second fortnight of Nov’23 while DII flows moderated to US$0.5bn.

Cash is king in wedding season as inflationary pressures linger

Persistent inflation is affecting wedding celebrations to some extent in India’s rural and semi-urban regions, with demand moderating for customary wedding items such as gold jewellery and household appliances. Cash is seen replacing jewellery and electronic products as wedding gifts. “We had expected the sales momentum to continue after Diwali due to so many weddings and a recovery in rural spending and entry-level products, but it did not,” said Kamal Nandi, Busoni Head at Godrej Appliances (The Economic Times). “Festive season gifting demand has also been muted. Gift packs (FMCG products) have not done well this year and we have not been able to clear stocks till now," said Dairyashil Patil, President of All India Consumer Products Distributors' Federation (Bloomberg Quint). Reports suggest that banquet halls are booked out due to the wedding season, but anecdotal evidence suggests that customers may be cutting down on frills.

E-commerce ‘Black Friday’ sales up 23% YoY led by Tier-3 towns: The Indian E-commerce ecosystem is estimated to have posted ~23% YoY increase in sales over the ‘Black Friday’ weekend, with Fashion and Beauty products dominating sales, according to E-commerce enablement platform Unicommerce. Tier 3 cities reported the highest growth of 43% YoY followed by 19% YoY for Tier 1 and 16% YoY for Tier 2. 

Global Banks: 2024 Outlook negative; tight financial conditions sting (Moody’s)

Our outlook for global banks for 2024 is negative as central banks' tighter monetary policies have resulted in lower GDP growth. Reduced liquidity and strained repayment capacity will squeeze loan quality, leading to greater asset risks. Profitability gains will likely subside on higher funding costs, lower loan growth and reserve buildups. Funding and liquidity will be more difficult. However, capitalization will remain stable, benefiting from organic capital generation and moderate loan growth and as some of the largest US banks build up capital.

The operating environment will deteriorate under tight monetary policies: Banks face more difficult operating conditions in 2024 because of below-trend economic growth and high interest rates for the year as a whole, even as major central banks begin to cut rates. Lower economic expansion will limit business prospects, resulting in slight to moderate loan growth, which will curb higher rates' benefits to banks. Instead, elevated rates for the most part will lead to higher funding costs and greater asset risks among existing borrowers. We expect real GDP growth among the Group of 20 nations (G-20) to remain below-trend at 2.1% in 2024, down from an expected 2.8% in 2023 and 2.8% in 2022.

Tightening underwriting standards, which we are seeing among US banks and European banks, in response to rising asset risks can lead to credit contraction, which in turn reduces growth. The slowdown follows the aggressive removal of monetary stimulus and withdrawal of COVID-19 pandemic aid packages and Russia’s war on Ukraine (Ca stable). The military conflict between Israel (A1 review down) and Hamas could yet negatively influence credit conditions through oil prices and market sentiment.

However, there will be key differences in operating conditions for advanced economies and emerging economies, but also within those markets as well. GDP growth will fall among advanced G-20 economies, especially in the US, as unemployment rises and lower consumer spending, dampened by interest rates, pulls down economic activity. On the upside, large-scale infrastructure investment and industrial policies enacted in the last two years — combined with innovations in artificial intelligence and big data — could boost long-run productivity and growth.

Loan quality will be squeezed by low liquidity and tighter repayment capacity: Previous rate hikes will lead to greater asset risk and reserve buildups. Rising unemployment in advanced economies will weaken loan performance. Commercial real estate (CRE) exposure in the US and Europe is a growing risk; in Asia-Pacific, specific property markets face stress. Chinese banks face risks from slower economic growth and second-order impact from a prolonged property downturn.

Profitability will fall on higher funding costs, lower loan growth and loan-loss provisioning needs: Profitability gains from the last two years will likely start to subside, but remain sound. Higher funding costs will shrink net interest margins, while loan production will continue to weaken as rate hikes limit demand and credit standards tighten. Provisioning expenses will follow increases in asset risks, while operating expenses contend with rising tech-related investments and new regulatory costs.

Funding and liquidity will be more challenging because of monetary policy tightening Deposit growth will decelerate as deposits move to more expensive accounts or exit banking systems, while market funding increases. Lower loan growth will limit funding strains. Foreign currency shortages will strain liquidity in some frontier markets.

Capital will remain broadly stable: Banks in Europe will maintain ample buffers above regulatory minimums. In the US (Aaa negative), some of the largest banks will build capital because of regulatory changes. In Asia-Pacific, organic capital generation and prudent dividends will allow capital stability. 

Residential Real Estate: A rising tide lifts all boats (ICICI Securities)

S&P BSE Realty Index has risen sharply by ~67% YTD in CY23 as concerns over rising mortgage rates impacting demand have been addressed by all companies under our coverage which clocked record residential sales bookings in FY23 (up 43% YoY in value terms) and momentum sustained in H1FY24 in spite of the absence of big-ticket launches by most developers. All coverage companies have a large launch pipeline for festive season and H2FY24 (Sep’23-Mar’24). Hence, we estimate pan-Indian residential market share for our coverage to grow from 24% in FY23 to 28% in FY25E led by sales booking CAGR of 13.8% over FY23-25E. With developers following pricing discipline and aligning price increases in line with inflation/salary hikes (5-7%) while reining in debt levels, any downward revision in mortgage rates may boost demand further. Notwithstanding the sharp rally in stocks, we remain constructive on residential space over FY24-25E.

Festive season to see slew of launches

While H1FY24 has seen relatively few launches, all developers across our coverage universe have a large number of launches lined up for the festive season. Notable among these are Oberoi Realty’s long-awaited Pokhran Road, Thane launch, DLF’s Crest 2 project in Phase V, Gurugram, multiple projects of Macrotech, Godrej Properties and South Indian players (Prestige/Brigade / Sobha) and Mahindra Lifespaces’ Kandivali, Mumbai project.

Listed developers to see continued market share gains

While the overall Indian residential market size across India’s top 8 cities in FY22 crossed FY20 levels (pre-Covid), FY23 industry sales booking value grew 36% YoY to INR290bn. We estimate the residential market share of our listed coverage universe has risen to 24% in FY23 from 16% in FY20 at a pan-India level. While the pace of market share gains is expected to be slower given the strong market share gains already achieved over FY20-FY23, we estimate the pan-Indian residential market share for our coverage universe to grow from 24% in FY23 to 28% in FY25E.

While the pace of market share gains is expected to be slower given the strong market share gains already achieved over FY20-FY23, we estimate the pan-Indian residential market share for our coverage universe to grow from 24% in FY23 to 28% in FY25E.

Affordability of residential homes is favourable

Mortgage rates offered by most large lenders up to Mar’22 were in the 6.5-7.0% range for 20-year housing loans and were the lowest ever historically since 2005. Rate hikes in FY23 globally and in India have led to large lenders increasing home loan mortgage rates by 240-250bps from 6.7% to ~9.2-9.3%. This translates to an 18-22% higher monthly EMI outgo for new home buyers over a 20-year loan tenure. At the same time, residential prices have also risen by 9% over the last 15 months (Sep’23 vs. Mar’22).

However, we believe that this may not significantly impact demand as overall affordability levels as per HDFC Limited, remain healthy at 3.3x annual income, the best in the last 25 years. Even assuming that mortgage rates may rise by another 25-50bps in FY24E (up to Mar’24), we believe that developers would look to provide incentives such as builder subvention for a limited period of 2-3 years. While this effectively means that the developer would have to absorb the related costs, given that most leading developers have de-levered their balance sheets and enjoy far lower corporate interest rates which are 200-300bps lower than unorganized, local players, affordability for new homes will continue to be attractive. Further, given that residential housing prices in India have been fairly stagnant over FY18-22, moderate single digit price increases of 5-6% annually combined with a few incentives thrown in for home buyers will be the way forward. 

Utilities & Renewables (Elara Capital)

Festivities and better economic activities drive generation

Data from Power System Operation Corporation (POSOCO) shows India's power generation in November increased 11% YoY to 130bn units (BU) albeit onhigh base, led by an uptick in economic activity ahead of the festival season. However, generation declined 13% QoQ, due to reduced demand with the onset of Winter in North India. Rising power demand was serviced by a surge in coal-based generation. Coal-based generation rose 17% YoY to 102BU on strong generation by central power generation companies (GENCO).

Generation from central thermal plants improved 8.5% YoY to 38BU with plant load factor (PLF) improving to 75% in November vs 73% during the same time in the past year. Generation from State and independent power producers (IPP) improved 3% and 18%, respectively, to 31BU and 33BU with PLF at 64% and 67%, respectively. Nuclear generation also witnessed robust growth, up 15% YoY to 4.4BU.

Share of coal-based generation in overall generation increased to 78% in November from 74% during the same time in the past year. The share of renewables in overall generation declined slightly to 9% in November from 10% last year. The lower-than-desired share of renewables in electricity generation reflects India’s heavy dependence on coal.

Peak demand rose 9% YoY to 204.6GW in November, due to a rise in industrial activity on the back of festivities. Power generation rose 12% YoY to 1,183BU in FY24 YTD. Gas-based generation has been buoyant in FY24 to date, up 42% YoY, to 21.2BU on muted gas price.

Muted hydro generation

Rising coal generation was partly offset by reduced hydro generation. Unavailability of water kept hydro generation muted, which pared down 32% YoY to 7.2BU in November. FY24 YTD, hydro generation was muted, down 15% YoY to 119BU, due to forced outages and water unavailability at power plants. Renewables generation grew 4.8% YoY to 12.3BU in November. Gas-based generation increased 6.5% YoY to 1.6 BU. It was the first time in FY24 when gas-based generation grew by a single digit, following an 8% decline in April.

Installed capacity at 426GW as on October 2023

Capacity spiked 9.3GW in FY24 YTD, primarily led by expansion of solar energy. Around 5.0GW of solar capacity has been added, bringing total solar capacity to 72.0GW. Overall installed capacity is 426.0GW in FY24 YTD, with thermal sources (coal and gas) contributing the most at 239.0GW, followed by RE sources at 132.0GW. Hydroelectric capacity accounts for 47.0GW of the overall.

Our view: positive prospects for the power sector

We expect power generation to remain steady in the upcoming months, due to an uptick in economic activity. Soaring energy requirement, increased focus on energy transition, sizeable pipeline of capacity expansion, foray into green hydrogen, energy storage solutions (pumped storage) and regulatory reforms in the sector are expected to bode well for our power coverage universe. We remain positive on firms focused on RE capacity with a strong balance sheet.  

India Electricals and Durables (Jefferies)

Channel checks indicate healthy festive offtake in Lighting, Mobiles, select Appliances and TVs (World Cup). In Delhi-NCR, Air Purifiers demand spiraled due to pollution concerns. AC offtake was steady in Oct due to high temp. Most products have normal channel inventory, except Lighting (sharp dip in prices). C&W saw 2-3% price cut in Oct (copper trend). POLYCAB, FNXC are poised to benefit from capex/housing. Healthy festive sales can benefit HAVL, VGRD, DIXON.

Mixed Demand Trends

We spoke to ~12 channel partners pan-India. Many of them have cited that festive season (Oct-Nov) witnessed healthy offtake in select categories such as Lighting (sharp YTD dip in LED prices), Mobiles, Laptops, TVs (Cricket World Cup) and select Appliances (eg: mixers, grinders, blenders, gas stoves). Air Purifiers saw good demand in Delhi-NCR owing to pollution concerns. Cables & Wires (C&W) segment continued to showcase steady demand.

Durable segments like ACs and Washers (mainly FATL category) saw moderate demand. AC sales witnessed some traction prior to festive period owing to high temperatures in Oct. Fans is independent of festive season, hence usual demand trends. Winter season (Dec-Jan is peak) is likely to see good demand for Geysers with incremental push from installations in new real estate projects. Pumps offtake was lower in last 4-M but likely to pick-up on the Agri side, aided by Rabi season. B2C / Appliance portfolios of HAVL, VGRD, DIXON, AMBER, CROMPTON are expected to benefit from festive uptick.

Premiumization

This trend is visible across many categories such as Mobiles, Televisions, Fans. In Mobiles, sales of premium SKUs (MRP> Rs30K) seem to be growing. In TVs, demand for large screen LED and smart TVs is on the rise. Fans are seeing higher demand for BLDC fans. In Refrigerators, demand for Double-Door is higher than Single-Door. HAVL / CROMPTON have a good premium mix in Appliances / Fans.

Channel Inventory Trends Vary

Lighting products inventory was below normal across many dealers during festive season, driven by healthy demand and sharp decline in LED prices. Geyser inventory is higher, as dealers stock ahead of winter season (Dec-Jan). In Durables, inventory is largely at normal levels (3-4 weeks). In Kitchen appliances, inventory is at normal levels for most categories. In Delhi-NCR, demand for Air Purifiers spiraled due to pollution concerns - lower availability impacted sales conversion.

No Major Pricing Actions

Most categories have not seen major pricing action over the past few months. Few instances of pricing actions are as follows: In Fans, CROMPTON took 1-2% price hikes in Sept23. In Televisions, past 1-Y saw a sharp decline in prices due to decline in open-cell prices. But now, prices seem to have slightly firmed in past 4-M.

Steep YTD price decline in LED has led to double-digit YoY decline in Lighting prices. Fall in copper prices drove a price cut of 2-3% in Cables & Wires in Oct23, although prices appear to have stabilized in Nov. Festive season witnessed discount offers across many categories. Most brands offered absolute discounts on MRP, credit card cashback offers, no cost EMI offers, vouchers and gift hampers. Sale of premium products is supported by EMI options provided by companies / retail stores which boosts affordability.

 Economy: Momentum continues (Phillips Capital)

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.

IBC Resolution Timelines Continue to Lengthen for Creditors (INDIA Ratings)

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.

HH Fin savings fall: Appearances can deceive (IIFL Securities)

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%.

IT Services: Budgets ain’t budging (JM Financial)

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.

Banking: A closer look at credit costs and other aspects (Yes Securities)

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 utilities: Cautious outlook (Kotak Securities)

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.

Chart for the day 

Thought for the day

“Blessed is the man, who having nothing to say, abstains from giving wordy evidence of the fact.”

——George Eliot (English Author, 1819-1880)

Word for the day

da capo (adv)

Repeated from the beginning (used as a musical direction).

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Please refer to the attached PDF for the full report and important disclosures 

Economy: Momentum continues (Phillips Capital)

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.

IBC Resolution Timelines Continue to Lengthen for Creditors (INDIA Ratings)

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.

HH Fin savings fall: Appearances can deceive (IIFL Securities)

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%.

IT Services: Budgets ain’t budging (JM Financial)

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.

Banking: A closer look at credit costs and other aspects (Yes Securities)

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 utilities: Cautious outlook (Kotak Securities)

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.