Exploring India – Part 3

In the past couple of weeks, we travelled to the states of Punjab, Himachal Pradesh (HP) and Haryana. In our nine days of travelling, we covered ten districts of Punjab spread across three divisions, viz., Jalandhar, Rupnagar and Patiala; six districts of HP spread across two divisions, viz., Mandi and Shimla; and eight districts of Haryana spread across five divisions, viz., Gurugram, Rohtak, Hissar, Karnal, and Ambala.

It is pertinent to note that these three states in the present form came into existence in November 1966, after enactment of the Punjab Reorganization Act 1966. Through this act, the erstwhile province of East Punjab was divided into largely Punjabi speaking state of Punjab and largely non-Punjabi speaking state of Haryana. Some areas of East Punjab were transferred to the union territory of Himachal Pradesh, and it was granted a full state status. The city of Chandigarh also became a union territory, serving as temporary capital of Punjab and Haryana. The division of East Punjab was a consequence of the Punjab Suba Movement led by the Shiromani Akali Dal.

Many historians find roots of the Punjabi Suba Movement in the demand for a separate country for Sikhs during pre-partition days. The Punjab Reorganization Act did not satisfy the Punjab leaders who were now insisting on a constitutional autonomous state.

A highly violent movement for an autonomous Sikh state took place in the 1980s; killing several thousand innocent civilians; invasion of the sacred Golden temple by Indian army to flush out the separatists hiding there; followed by gruesome murder of the then prime minister Mrs. Indira Gandhi. A small section of the majority Sikh population still continues to agitate for autonomy. The reorganization left many issues unresolved, which continue to affect the relations between Haryana and Punjab to date.

I may now share some observations made during the trip.

Socio-economic assessment

·         Haryana is making significant progress in the area of gender equality.

·         The obsession with overseas migration is catching up fast in HP and Haryana. The immigration consultants and IELTS coaching centers are mushrooming in many smaller towns. Canada and Australia are the most favorite destinations for the aspiring immigrants.

·         Both Haryana and HP are witnessing a significant surge in the number of students aspiring for medical and engineering courses. JEE and NEET coaching centers are visible in every town.

·         Farmers in all three states appeared stressed due to unusual weather conditions. It was unusually wet and cold for the month of April. We witnessed good snow in HP. Rains, hailstorm and snow damaged the standing and harvested wheat crop; apple flowers and vegetables. For wheat crop, the margins of many farmers could be materially lower despite higher crop; since the cost of harvesting could be higher and realization poor. The market price is reportedly lower than MSP and FCI is not procuring normal quantity.

·         Small industries in Punjab and Haryana appear to be recovering from the Covid led slowdown, but expect a long road to normalcy. Many micro unit owners indicated that significant investment might be needed to reach the pre Covid level of profitability. A decent number of SME unit operators indicated that the relaxation in credit parameters as part of Covid stimulus packages has helped them significantly in sustaining, upgrading and advancing.

·         The tourist services (guides, transports etc.) are mostly unregulated and malpractices are rampant. In popular places like Manali, Shimla etc., it appears as if a mafia is firmly in control.

·         The infrastructure has improved materially over the years; but the administration remains insensitive to the plight of tourists.

·         In Punjab we could see a Gurudwara, on an average, every five kilometers. Many of these Gurudwaras have been constructed in the past few decades. But in the neighboring Haryana and HP, which have significant Punjabi population, few new Gurudwaras seem to have been constructed in post 1966.

General observations

We made some observations during our trip, which may be true for most of the country. These are important since these highlight the changing behavioral patterns in our society.

·         The construction in the hill state of Himachal Pradesh may be ignoring sustainability concerns, not learning anything from the neighboring Uttarakhand which is facing fury of nature for pursuing unsustainable development. Cloud bursts, stone falling, and landslides may become more common in HP in a few years.

·         Traditionally, on highways the truck drivers were considered to be the most efficient and innocent users of the road. They would drive slow and mostly in the left or middle lane; never overtake; and mostly avoid driving side by side. This paradigm seems to have completely changed. A significant proportion of truck drivers are now the most ill-trained and risky drivers. They overspeed; drive rashly; frequently overtake; and drive side by side blocking two or more lanes forcing the car drivers coming from behind to take undue risk and overtake them dangerously. This practice could be seen even in hills.

Apparently, a large number of less trained or untrained drivers have entered the truck driving profession. Interaction with some older drivers indicate that the fleet owners may be compromising on the quality of drivers to save wage cost. Another reason is that the pressure on drivers to meet tighter timelines has increased. Besides, there could be unreasonable resetting of delivery schedules accounting for time saving due to Fastag, GST and better roads.

·         Motorcycle has been one of the major traffic nuisances in most parts of the country. In the hill state of Himachal Pradesh, small passenger cars (especially Maruti Alto) have emerged as a serious challenger to motorcycles. Most local taxis are now small cars. Besides, a large number of households own small cars. Rash driving and irregular parking are common problems. In Punjab two-wheeler drivers usually do not wear helmets. They driving on expressways and highways are a major safety hazard for all road users.

·         Motorcycles and small cars are a significant component of households’ occupational necessities; Public transport in non-metro towns, cities and villages is not showing significant improvement; and the affordability quotient of lower middle-class households has improved. The demand for personal vehicles, especially small cars may therefore sustain.

·         The construction practices of NHAI contractors are worsening. They are totally insensitive to the convenience of the users who use the road while the construction is continuing. They blatantly violate the safeguard and obligations provided in their contracts; seldom care about the pollution control norms; do not follow safe practices for their workers and road users. The worst part is that the road construction quality is below par in most cases.

Political assessment

·         Himachal Pradesh people appear satisfied with the recently elected Congress government. The incumbent chief minister is not doing anything to disturb the status quo and continuing with the extant practices, schemes and programs.

·         The Punjab population appears to be vertically divided in their opinion about the incumbent government. Large farmers, SME operators, students and public servants are disenchanted with the government, while laborers, artisans, small farmers and government contractors appear happy. The state has always been divided on caste lines. The abyss may be widening further. Law & Order is becoming a core issue with people. Many people complained about the rise in corruption, citing that the incumbent government may be losing control over lower bureaucracy and law & order enforcement machinery.

·         The Haryana population is also divided in their opinion about the incumbent government. Traditional Jat voters, especially women, who had supported the incumbent BJP government in past two elections, seem to be disenchanted and looking to return to Congress. INLD and its various offshoots, AAP, BSP etc however are not in much favor.

The perception about the incumbent government’s performance is mixed. It is scoring well on corruption parameters; while on execution it is scoring poorly.

·         The visibility of Prime Minister Modi in public spaces is very poor in HP and Punjab.

·         In 2019 Lok Sabha elections, BJP secured 16/27 seats, while Congress secured 8/27 seats in these three states. If Lok Sabha elections are held today, in my view, BJP might secure 10-13 seats, with Congress taking 8-10 seats.         

Also see

Exploring India – Part 1

Exploring India – Part 2

Some notable research snippets of the week

Nominal GDP growth could be ~7.5% in FY24 (MOFSL)

It is remarkable that the first three months of 2023 have already witnessed several different moods. The year began with very strong optimism on global economic growth; however, from mid-Feb’23, the positive sentiment started fading with US economic data turning out to be much stronger than expected. With the collapse of Silicon Valley Bank on 10th March 2023, the caution was quickly replaced by serious concerns. The US Fed hiked rates by 25bp this week, continuing its inflation fight. As highlighted in our earlier QEO, owing to increasing growth concerns in the US economy, inflationary concerns will take a back seat in 2HCY23.

India, however, seems to be shrugging off these developments so far. Real GDP growth continues to remain strong but we keep our forecasts broadly unchanged at 7%/5.2%/5.6% in FY23/FY24/FY25. We see nominal GDP growth at 16.3%/7.7%/10% in FY23/FY24/FY25, slightly higher than 14.7%/7.3%/9.3% expected earlier.

Going by the recent inflationary trends and unexpected surge in food prices (especially cereals), we have raised our CPI-inflation projections to 4.6%/5% from 4.3%/4.8% for FY24/FY25. However, we continue to believe that the rate hike cycle is close to an end, with the terminal repo rate likely to be 6.75%. We expect a 25bp hike in Apr’23, after which, the rates may remain unchanged till late-CY23.

India’s external situation had worsened significantly in 1HFY23, but the worst is already behind us. We expect CAD to stay ~3% of GDP in 3QFY23, before easing further in 4QFY23. We expect it to remain comfortable at <2% of GDP in FY24/FY25. Nevertheless, we expect INR to cross 85/USD by mid-CY23, before retreating in 2HFY24.

Weather anomalies to sustain high food inflation (Systematix Institutional Equities)

Risk of weather anomalies on the agricultural produce and the food grain production is imminent. This is expected to create shortages at several fronts, given the renewed uptrend in food grain consumption over the last few years.

Given that the government buffers have been drawn down considerably due to the free food grain distribution program, the impact of the immediate weather anomalies have the potential of sustaining high food inflation.

These weather anomalies are also creating disparities between small, medium, and large farmers as adaptation of expensive technologies and agricultural inputs can be afforded more easily by the large farmers.

Therefore, policy responses are needed on multiple fronts including post harvesting storage infrastructure, water management and technological support to the wider set of the farming community to create resilience against weather anomalies.

·         Extreme temperature events are expected to happen more frequently; anomalies likely to be larger in North than South India. However, this increase in temperature is not bad news for all the crops. For example, the production of chickpeas benefits from a slight increase in temperature during the winter season. Similarly for potatoes, if the minimum temperatures are rising to some extent, it benefits.

·         The recent bouts of widespread rains are worrisome, and it is highly likely that productivity and production levels to remain strained. It happened when farmers were carrying out their irrigation process. However, the extent of the strain is yet to be determined. Not just wheat but several other crops got impacted particularly those having later phase of maturation of the crop. It seems to be a type of an alarming situation of the recent extreme climatic events.

·         Impact of El Nino is not expected to have a direct impact on the Indian monsoon. Historical records suggest that its impacts are not as straightforward. Therefore, it is too early to comment on the magnitude of its impact on the Indian monsoon. We have to wait and watch for some time.

·         Technological adaptations are only visible in some clusters of farming community suggesting that there is an evident gap in technology generation and technology adoption. Medium and large farmers are incurring substantial spending in their farm management. However, due to excess use of nutrients than required (unnecessary application of more nitrogen and pesticides, more irrigation because of the availability of those resources with them), it is damaging their agricultural system.

·         Household-level analysis indicate that the small and marginal farmers are prone to face severe losses due to climatic stress and are also susceptible to incur substantial adaptation losses as compared to medium and large farmers.

Real Estate-Demand & supply fall MoM; outlook positive (Nuvama Institutional Equities)

Housing demand in India’s top seven cities declined 2% MoM (up 17% YoY) in Feb-23. Launches continued to trend down, falling 39% MoM/21% YoY. YTD (i.e. CY23) demand increased 13% YoY; however, supply slid 18% YoY. Unsold inventory continued to decline (down 9% YoY/3% MoM) in Feb-23 with inventory months falling to 18 months from 25 in Feb-22 (18 months in Jan-23). Prices rose YoY in all the cities during the month.

Despite rising interest rates as well as housing prices, we believe the sales momentum would sustain, particularly for organised developers.

Launches continued to fall in Feb-23, with supply down 39% MoM/21% YoY. Hyderabad witnessed the highest fall of 86% MoM, followed by Chennai. Kolkata and the NCR witnessed new launches shooting up 104% MoM and 57% MoM, respectively. YTD launches are down 18% YoY, though they surged ~200% YoY each in the NCR and Chennai.

With demand outstripping supply over the past year, unsold inventory dipped 9% YoY in India in Feb-23. Bengaluru, Pune and Kolkata saw the maximum rate of correction in inventory (18–22% YoY). Inventory pan-India improved to 18 months in Feb-23 from 25 months in Feb-22. Average prices increased in all cities YoY in Feb-23.

Apparel Retail (ICICI Securities)

Companies having higher exposure to tiers-1&2 cities and value-pricing are likely to outperform: We expect companies that are over-indexed (~65-70% retail presence) to tier-1 and tier-2 cities with higher exposure to value price points to outperform in the apparel retailing space. Amongst branded players, we expect Madura, Arvind, Go Colors, SHOP, Manyavar and Kewal Kiran to be relatively less impacted by the general slowdown. However, amongst value retailers, we expect Westside and Zudio (each ~69% stores in tiers-1&2 cities) to likely outperform even the branded players by achieving >15% SSSG.

South and west regions to outperform north and east: As per our channel checks, we note that south and west regions are relatively less impacted by the general slowdown and are outperforming other markets. This we believe is led by: (1) higher share of urbanisation (chart-3), (2) higher disposable incomes due to larger share of developed industries such as IT, pharma and manufacturing. In our coverage universe, we note that DMART, Go Fashion, Westside and Zudio have higher exposure (68-96% of their overall retail presence) to south and west regions. However, for brands like US Polo, Flying Machine, Tommy, etc, tier-1 cities in the north are performing well. In north and east, we observe that VMART, W and Aurelia have higher exposure (>50%) to tier-3 and beyond cities, which are facing maximum slowdown.

Rural likely to underperform in Q4FY23: Our channel checks indicate pockets of slowdown in discretionary consumption, especially in rural markets (tier-3 and beyond). Even in the online retail ecosystem, we observe similar trends: overall online customer visits (footfalls) have declined at higher rate (12-43% during Jan-Feb’23 vs Dec’22 (chart 1) for companies that are over-indexed to tier-3 and beyond cities. Consequently, Pantaloons, VMART, W and Aurelia brands (having >45% retail presence in tier-3 locations and beyond) are likely to face revenue growth headwinds during Q4FY23, in our view.

Plastic pipes – growth Structural, Sustainable & Scalable! (Prabhudas Liladher)

Home building materials market (plastic pipes, tiles, wood panel, sanitaryware and faucets) is estimated to touch Rs 2.7tn by FY26 from Rs 1.3tn in FY22. During CY13-20, the sector was impacted by real estate slowdown, GST implementation and demonetization & Covid-19 pandemic over FY16-21, which resulted in single digit growth CAGR of ~6% during same period. The plastic pipe sector, however, has grown at 10% CAGR over FY13- 21.

Indian plastic pipes industry has historically grown faster than the GDP led by multiple factors like real estate, irrigation, urban infrastructure and sanitation projects. Then increased awareness, adoption and replacement of metal pipes with plastic pipes have also aided this growth. Currently, plastic pipes market is valued at ~Rs 400bn with organized players accounting for ~67% of the market. By enduse, 50-55% of the industry’s demand is accounted by plumbing pipes used in residential & commercial real estate, 35% by agriculture and 5-10% by infrastructure and industrial projects. Going ahead, domestic pipes industry growth is projected to witness higher CAGR against the past. Between FY09-21 industry grew at 10%-12% CAGR, while demand is anticipated to expand at 12%-14% CAGR between FY21-25 and more than Rs 600bn by FY25E led by a sharp increase in government spending on irrigation, WSS projects (water supply and sanitation), urban infrastructure and replacement demand.

Long term positive outlook on real estate to benefit building materials: The Indian real estate sector grew at ~10% CAGR from USD50bn in 2008 to USD120bn in 2017 and is expected to grow at ~17.7% CAGR to USD1tn by 2030. The key structural growth drivers for Indian real estate market are rising per capita income, improved affordability, large young population base, rapid urbanization and emergence of nuclear families. Demand for home building materials such as pipe & fittings, sanitaryware & faucets, ceramic and wood panel are correlated to real estate market’s growth. Thus, we believe that plastic pipe sector is expected to deliver healthy growth over long-term.

Healthy volume growth post stabilization in raw material prices: Plastic pipe industry has seen sharp recovery post pandemic. Organized players being well placed to handle fluctuations in PVC resin prices (main raw material) have gained significant market share. The correction in raw material prices, mainly PVC resin prices fell by 57% from recent peak of Aug-21 to Nov-22 and then stabilization in prices at Rs 85-90/kg, are expected to drive the volume.

Plastic pipes industry – fastest growing segment in building materials: The market for plastic pipes is valued at approximately Rs400bn, with organized players accounting for ~67% of the market. By end-use, 50-55% of the industry’s demand is accounted by plumbing pipes used in residential and commercial real estate, 35% by agriculture and 5-10% by infrastructure & industrial projects. Industry grew at 10-12% CAGR between FY15-20, while demand is anticipated to expand at 12-14% CAGR between FY21-25 and is expected to reach more than Rs 600bn by FY25E led by sharp increase in government spending for irrigation, WSS projects (water supply and sanitation), urban infrastructure and replacement demand.

Cement: Demand and prices fizzle out (Elara Capital)

As per our interactions with dealers, sales executives and C&F agents, the cement industry witnessed a muted price trend in March as price hike attempts failed to sustain due to volume push, lower-than-expected demand, and increased discount offerings. Thus, all-India average retail price dropped INR 8 per 50 kg bag MoM to INR 371 in March.

Central India reported a price dip of INR 5 per bag, followed by North India (down INR 6 per bag), West India (down INR 8 per bag), East India (down INR 9 per bag) and South India (down INR 10 per bag). As per market intermediaries, demand in March was subdued due to limited laborer availability in select markets, unseasonal rains, and liquidity issue given delayed payments for government projects and rising interest rates. Market intermediaries in many pockets expect cement firms to attempt price hikes in INR 10-40/bag range in April.

The cement industry witnessed a QoQ improvement in profitability in Q3FY23 post a challenging Q2. We believe margin recovery may continue in Q4 as well, on the back of: 1) better volume, 2) easing cost pressure and, 3) operating leverage benefits.

Bank credit (Axis Capital)

As per the latest RBI Weekly Statistical Supplement (WSS), non-food credit grew 16.0% YoY as of Mar 10, 2023 (vs. 15.9% YoY as of Feb 24, 2023). Outstanding credit increased by Rs 1,054 bn during the fortnight. Overall credit growth (including food) was 15.7% YoY as of Mar 10, 2023 (15.5% as of Feb 24, 2023).

Deposits growth stood at 10.3% YoY (vs. 10.1% YoY as of Feb 24, 2023). Aggregate deposits were up by ~Rs 965 bn during the fortnight. Demand deposits were down by Rs 316 bn while time deposits were up by Rs 1,281 bn during the fortnight.

Certificate of Deposits (CDs) issued during the fortnight ended Mar 10, 2023, were Rs 454 bn vs. Rs 326 bn in the previous fortnight. YTD CDs issued are at Rs 6.3 trn vs. Rs 2.0 trn for YTD same time last year.

On YTD basis, overall loan growth was 13.9% (non-food credit growth at 14.2%) and deposits growth was 9.1%. SLR ratio at the end of the fortnight stood at ~28%.

Loan to deposit ratio (LDR) stood at 74.5% (vs. 74.4% YoY as of Feb 24, 2023) while incremental LDR stood at 107% (vs. 108% as of Feb 24, 2023).

For the fortnight ended March 24, 2023, average system liquidity was deficit of ~Rs 558 bn vs surplus of ~Rs 430 bn in the previous fortnight.

Thermal Power: To Clock 64.8% PLF in FY24; Peak Demand to Grow 6% (CARE Ratings)

After growing at 9.5% and 6.4% in FY23, the base and peak demand are expected to increase by 5.5% and 6%, respectively, in FY24.

•      While the base deficit may remain near 0.5% for FY24, the peak deficit is expected to remain elevated. After spiking at 4% in FY23, CareEdge Ratings predicts it will be above 1% in FY24.

•      Coal/lignite fired thermal plants saw a reduction in plant load factor (PLF) during the Covid-19 lockdown periods, but have rebounded. PLF is estimated to be 63.8% in FY23 and 64.8% in FY24.

•      Thermal power generation accounted for approximately 73% of total generation in India during FY22, and similar levels are expected for FY23. The contribution is likely to be around 72% in FY24. With a substantial increase in renewable capacity and higher output from wind farms (due to improved wind speeds) and better availability of gas at competitive prices by FY25, the contribution of coal/lignite-fired plants is expected to decrease from current levels but likely to remain above 68% in FY25.

•      Coal dispatch to the thermal power sector, expected to peak at around 85% of total dispatch in FY23, is anticipated to continue at similar levels during FY24. Improved captive mine production during FY23 and going forward alleviates some concerns about Coal India Ltd and The Singareni Collieries Company Limited (CIL/SCCL) production ability, transportation bottlenecks, and increasing dependence on imported coal.

Telecom: Rising competitive intensity to delay tariff hikes (Kotak Securities)

R-Jio’s renewed aggression in postpaid and Bharti matching R-Jio’s unlimited data offering on 5G has raised the competitive intensity to attract premium subscribers, and would likely delay the prospects of a tariff hike and 5G monetization, in our view. The new family postpaid plans effectively caps the customer outgo at ~Rs205-235/month and provides an arbitrage for higher-end prepaid subs to move to family postpaid to reduce their outgo per connection. We also note Bharti is already at a premium to R-Jio on headline prices in most packs and taking a unilateral tariff hike (like it took on minimum recharge packs) seems difficult to us.

Industry-wide subscriber trends have been muted (down ~11mn, despite sharp growth in IoT/M2M subs) since the last tariff hike in Dec 2020. With inflation above RBI’s target range, upcoming several key state elections and general election in 2024, we believe tariff hikes would now be deferred until after the general elections. We now build in 20% smartphone tariff hikes from June 2024 (versus Sep 2023 earlier). A delay in tariff hike/5G monetization is clearly a negative, but we remain optimistic on tariff hikes as engagement picks up on 5G and telcos’ shift focus on generating returns after pan-India 5G rollouts (March 2024).

Vi is the worst impacted by tariff hike delays, with its FY2024E cash EBITDA declining to ~Rs63 bn (from Rs80 bn annual run-rate). Without an expedited fund raise, we do not expect Vi’s capex to inch-up meaningfully to bridge the gap on 4G coverage or rollout 5G, which would result in further market share erosion. According to our estimates, Vi stares at a cash shortfall of ~Rs55 bn over the next 12 months and a delay in tariff hike/fund-raise, could lead to Vi shutting shop.

FY23 – A year of normalization

After two years of disruptions, uncertainty and volatility, FY23 appeared a rather normal year. Both the markets and the economy regained a semblance of normalcy in terms of the level of activity, trajectory of growth, direction, and future outlook. Though, it would be inappropriate to say that skies are blue and bright; it can be reasonably stated that we have reverted to a market that is no longer euphoric.

Pendulum swinging back to equilibrium

The global economy that witnessed two years of extreme pessimism followed by a period of steroid stimulated exuberance began to normalize in FY23. Central bankers began the process of normalizing monetary policies by withdrawing liquidity and hiking rates. The broken supply chains have been mostly restored. Inflated asset and commodity prices are returning to more reasonable levels. The organs of the global ecosystem which were infected badly by the excessive liquidity, irrational exuberance and unsustainable stress are now getting amputated. For example, we have already witnessed in FY23—

·         A large number of tech startups built on unrealistic assumptions and traded at astronomical valuations materially downsized, downgraded or weeded out of the system.

·         Energy and metal prices revert to pre Covid prices, commensurate with the economic activity.

·         The global shipping freight rates that had jumped to unsustainable levels have actually corrected back to below pre Covid levels.

·         Central bankers hiking rates from near zero levels to the highest levels in a decade.

·         Some financial institutions that thrived purely on easy liquidity, without forming a strong commercial base, facing the prospects of getting eliminated or downsizing.

The Russia-Ukraine conflict that dominated the headlines during the first half of 2022 has been mostly relegated to the inner pages of the newspapers. The energy and food grain markets that witnessed huge disruption due to the conflict have mostly normalized.

Following the law of physics, the pendulum may be swinging from one extreme to the other extreme in many cases. Of course it will settle in a state of equilibrium over the next couple of years.

Indian economy normalizing

Most spheres of the economic activity in India have recouped from the sharp decline due to the pandemic induced lockdown. Vehicle sales, mining, construction, travel, hospitality, cement and steel sales, power generation, freight movement, port activity etc. are all at or above pre Covid levels. The Indian economy is expected to grow ~6% in FY24, on a normalized FY23 base.

The bank credit growth that was languishing for almost five years has picked up. The financial sector has mostly recovered from the debilitating asset quality issues.

The capacity building, especially in the core infrastructure sector, is showing signs of accelerated growth. Many key infrastructure projects that have faced material delays, e.g., Dedicated Freight Corridors, are now closer to completion.

Market performance for FY23

For equity markets, FY23 was a year of consolidation. The benchmark Nifty50 yielded a marginally negative return (down 3%); whereas Nifty Midcap was mostly unchanged and Nifty Smallcap lost 14.5%. Thus, the abnormal gains made in the past couple of years have been normalized to some extent.

Some highlights of market performance in FY23 could be listed as follows:

·         Underperformers of the past three years, PSU Banks, FMCG and Auto sectors were the top outperformers for FY23; whereas Media, IT, Realty, Metals, Pharma and Energy sectors were notable underperformers.

·         For a period of 3yrs, Metals, Auto and IT are still the top performing sectors in the Indian markets.

·         Nifty50 yielded negative returns in 8 out of 12 months in FY23 – Jul '23 being the best month and Jun’23 being the worst month. A monthly SIP in Nifty50 during FY23 would have yielded a negative return of 2.1%.

·         India’s performance was mostly in line with the Asian peers like Indonesia, South Korea, Singapore, Japan etc. in local currency terms.

·         The market breadth was negative in 9 out of 12 months in FY23. Overall, the market breadth was negative.

INR weakened against USD & EUR

Despite challenges on macro (higher fiscal and current account deficit and inflation) INR remained mostly stable. It weakened ~8% against USD and ~6% against EUR, and was mostly unchanged against GBP and JPY.

RBI hiked aggressively, transmission pending

RBI hiked the policy rates aggressively from 4% at end of FY22 to the present 6.5%. However, the rate hikes have not been fully transmitted to the markets so far. The Average Base Rate of scheduled commercial banks has increased around 140bps from 7.25% - 8.8% to 8.65% -10.1%. Similarly the term deposit rates have increased from 5%-5.6% in March 2022 to the present 6%-7.25%. There is no change in savings deposits rate of 2.7% -3%.

Foreign investors remained net seller

Foreign portfolio investors (FPI) remained net sellers in Indian equities for the third consecutive year, selling over Rs626bn worth of equities in the secondary market.

The domestic institutions (DII) remained net buyers. With highest ever annual net buying of Rs251bn. DIIs were net buyers in 10 out of 2 months.

The net institutional flows (DII+FPI) in Indian markets were positive in 11 out of 12 months; even though the market yielded negative return in 9 out of 12 months in FY23.

Valuations more reasonable now

Nifty EPS is expected to grow ~15% in FY24, over and above a similar growth in FY22 and FY23. Negative in movement in FY23, has thus moderated the one year forward valuation of the benchmark Nifty50 closer to its long term average of 18x. Mid and smallcap valuations have also corrected accordingly.

The premium of Indian markets as compared to the global emerging market peers has also somewhat rationalized after the recent underperformance; though it still trades at a decent premium.

Some notable research snippets of the week

 India Internet: Powerful watershed unfolding (Elara Capital)

India’s digital neural networks are set to step into self-regulated, self-taught proliferation zone, led by the second largest digital consumer base globally (800mn+ internet users), massive government impetus and keen private innovation. Thus, reportedly, India’s digital economy is forecasted to snowball into USD 800bn by 2030, growing 2.4x faster than its economy in FY14-19 (source). And MSMEs, the key brace structure of the economy with 26%+ GDP contribution in FY22, have sharply stepped digitisation pace. MSME digital penetration should grow 6x in FY20-25, as per Redseer. Expect plays such as Indiamart (INMART IN)/Justdial (JUST IN) that offer direct play on MSME digitisation, to set the pace for such progress and in turn benefit.

MSME business dynamics are seeing a paradigm shift, led by nuanced policy support and post-Covid recovery. Improving MSME credit growth, manufacturing revival, supportive government/RBI policies and rural demand traction enable a prolific seedbed for MSMEs. Moreover, a crest emerging off of Covid was the fast MSME digital adoption, add to which the Open Network for Digital Commerce (ONDC) variable may hasten MSME digital adoption.

Chemicals: Testing times for non-contracted players (JM Financial)

Agrochemicals demand is likely to remain buoyant on account of robust growth in world oilseed production (as per USDA). At the same time ex-agrochemicals demand is likely to remain tepid over the next couple of months and is likely to recover with increase in global discretionary spend. The only silver lining for all chemicals players currently is the continued decline in freight rates and reintroduction of export incentives from mid-Dec’22. This could help improve margins in both 4QFY23 and 1QFY24.

Agrochemicals demand likely to remain buoyant: As per US Department of Agriculture (USDA) reports, world oilseed production in CY23 is likely to grow at a robust 4% YoY; this level of growth was last seen in CY21 on account of pandemic-led disruptions. At the same time, IGC expects world grain production to moderate only a little in CY23 and sees strong growth in CY24. Moreover, in case of India, oilseed production growth in CY23 is likely to taper to 1.2% vs. ~4-5% growth over the last 3-4 years. Hence, in our view, agrochemicals demand in the exports market is likely to remain buoyant while domestic agrochemicals demand could be flat compared to CY22. This bodes well specifically for contracted agrochemicals focused players such as Navin, PI, SRF, and Anupam.

Ex-agrochemicals demand weakness to persist over next couple of months: Basis our channel checks, demand for non-agrochemicals, especially personal care, flavours and fragrances, and cleaning chemicals remains weak. As a result, we believe non-agrochemicals focused players are likely to face challenges in volume off-take in 4QFY23.

In some cases, end-customers have excess inventories lying idle for these chemicals. In our view, demand recovery for these chemicals is contingent on inventory drawdowns, which is likely with the increase in global discretionary spend.

Increase in basic chemicals prices unlikely to dent margins: Over the last couple of months, prices of most basic chemicals have risen marginally after falling 20-30% over the last 12 months. In our view, this increase in basic chemicals prices is unlikely to hinder the margin for a majority of the specialty chemicals companies under our coverage given that all chemical companies will benefit from the revised export incentives scheme (~0.8-1.2% across different chemicals) that came into effect from 16^th Dec’22.

Freight rates continue their downward trajectory: On account of decongestion at major ports and waning demand, India–North America and India–Europe freight rates have been on a continuous decline since May’22. In our view, this downward trajectory is likely to continue as the current freight rates are still 50-60% higher compared to the stable pre-Covid levels. This decline in freight rates was one of the contributors for the margin improvement of Indian chemicals players in 3QFY23. We expect this trend to continue in 4QFY23 as well.

IT Sector: Sell; Customer health deteriorating (Nirmal Bang Institutional Equities)

We believe that the Nifty IT’s outperformance vs the Nifty by ~7ppts since 30th September 2022 till date has largely been driven by the ‘delayed landing’ narrative that has developed around resilience of the US economy along with better growth prospects for both Europe as well as China in 2023 compared to earlier expectations. However, the narrative has turned very fluid post the problems that have surfaced in the banking sector in both US as well as Europe in the last fortnight. Early signs of economic stress are beginning to emerge from the fastest increase in Fed funds rate in recent history. This in our view will lead to at least our base case of a shallow recession in the US, if not something worse playing out by 2H2023.

The potential impact of the recent banking stress in the developed markets has not been incorporated in our estimates, which broadly remain unchanged since 3QFY23 results season. Our USD revenue growth estimates for Tier-1 IT companies for FY24 are still in low to mid-single digits with downside risks while consensus is anticipating high single-digit growth, implying a belief in the ‘soft/no landing’ narrative. Our EPS estimates are lower than consensus for FY24/FY25 by 5-10% due to lower revenue as well as margin estimates.

We are also working with lower target PE multiples vis-à-vis consensus as we believe that the structural IT industry growth is not going to be materially higher than where it was pre-pandemic. Our target PE multiples are not pessimistic as they are 2-3x higher than what the IT industry had witnessed during the last major downcycle in 2008-2009 and are at the higher end of the pre-pandemic range.

While many verticals/sub-verticals have come under pressure over the last nine months, including Mortgage, Hi-tech, Capital Markets, Healthcare, Retail, P&C Insurance, Telecom, etc, the banking space in 2022 was generally resilient because of improved NIMs and low credit costs. However, with deposit costs likely to rise following the SVB episode, most US banks will see NIMs compress from current expectations. With likely higher credit costs, profits will be under pressure, leading to constrained spending on IT. Investment banks could suffer because of lower capital market and M&A activity in 2023 as was the case in 2022.

We expect somewhat similar pressure for the large European BFSI institutions. We think that the top 25 western BFSI firms will form an outsized chunk of the BFSI revenue base of Indian IT companies. Regional US banks (the hardest hit lately) are likely not big clients for the Indian IT industry, but their dislocation will likely not bode well for the US economy and could have an outsized negative indirect impact on IT spend. The S&P 500 Index earnings (including those of components, see Exhibit 5,6) deteriorated throughout CY22 and are set to worsen further in CY23.

The banking problems in both US as well as Europe may accentuate the weakness. We think that all these problems could mean at best a flat tech spending scenario in 2023 (our base case), if not worse. The Russell 2000 index (US small cap index) internals and the spike in bankruptcy filings are indicating signs of stress in the broader US economy (even before the SVB/CS collapse). In FY23, the Indian IT/ITES industry’s exports are 4x of what they were at the time of GFC and believe the adverse DM macros will have a larger impact than it did in FY2010 when industry grew by just mid-single digit rate. We especially are concerned about Tier-2 IT players where exposure beyond non-Global-500 set is likely larger. PE premium of Tier-2 vs Tier-1 seems unsustainable.

Indian economy: Activity normalization (Jefferies Research)

The Jefferies Economic Indicator (JEI) shows activity slowed in February. The fourth iteration of our economy tracker composite indicator, the JEI (based on 34 monthly data), shows MoM activity slowed somewhat. The Feb'23 JEI YoY growth is down 2ppt MoM to 7%, in-line with the 3-mma. The improving / stronger data points were nearly two-fifths of the group (14).

While Jan month activity JEI helped by a low base (COVID third wave); February is on a normalized activity base; and notably better than December.

Broad-based indicators broadly inline with 3mma. The e-way bill generation for Feb'23 was +18% YoY, -2ppt MoM, but inline with the 3mma. Railway freight traffic growth at 4% YoY was inline with 3mma while port traffic at 13% YoY was 1ppt above. Petrol / Diesel consumption growth at 9%/8% YoY was -1ppt each vs. the 3mma. Electricity consumption +8% YoY, was -2ppt vs. the 3mma, partly on weather effects (early summer).

Urban consumption trends normalizing. Feb'23 urban consumption trends were mixed, impacted by the low Jan'22 base / pent-up release in Feb'22. Auto registrations for Feb'23 of 2W/PVs were +18%/+10% YoY, +7ppt/-3ppt MoM. Spending at malls was +12% vs. Feb'20, flat MoM. Credit & debit card spending +20% YoY, was inline with the 3mma. Property registrations in Mumbai/Delhi declined YoY, but for Jan-Feb combined were +1%/+37% YoY.

Rural trends somewhat better. The employment demanded under the rural employment guarantee (NREGS) scheme was -12% YoY and 5% below the pre-COVID levels. Construction indicators seeing mixed trends with steel consumption (+11% YoY) strong though Jan cement production (+5% YoY), at a 3-mth low. Housing starts are at a 9 year high and should help drive construction employment / rural transfer economy. While winter crop production (wheat expected +4% YoY) is not impacted by early summer onset, our analysts have raised concerns on a possible drought in 2023.

Trade deficit declines further. Mixed inflation trend. The CPI declined by 0.1ppt to 6.4%, but was higher than ests and stayed above the RBI's 6% upper limit. WPI declined by 0.9ppt to a 25-mth low of 3.9%, a relief. Indeed, lower WPI is now reflecting (link) in slowing bank credit growth which at 15.5% is 2.4ppt below Oct'22 peak.

Feb trade data saw the second consecutive month of decline in trade deficit, which at US$17bn was -7% YoY. Exports continued their decline for the 3rd month, with the Non-oil exports -4% YoY. The domestic demand linked imports (ex-oil, ex-Gold) were -4% YoY. Despite lower goods deficit and sharp rising services net surplus (US$15bn, +76% YoY); FX reserves were -US$15bn. Import cover is comfortable at 9.4-months.

Pharma Sector: Risk-Reward Favourable (Nirmal Bang Institutional Equities)

Almost all Pharmaceuticals companies in our coverage universe are trading at deep discounts (average ~25% discount) vs the historical 5-year average forward multiples - even excluding Covid-19 period valuations.

FY23 has been a challenging year for the sector owing to slowdown in overall growth, margin contraction and enhanced regulatory concerns. Domestic growth has been impacted by a higher covid base while US generics business has been impacted by double-digit price erosion. Margins have also contracted due to US price erosion, elevated cost inflation and a higher covid base. Apart from these headwinds, enhanced regulatory concerns, which were absent during the covid period, have also resurfaced, affecting sentiment for the sector. As the base normalises, we believe that domestic growth is expected to be back in double digits in FY24 while price erosion in the US is expected to cool off from double-digit levels to single digit levels. On the margin front, cost inflation is normalizing, and companies have to a great extent passed on the burden of additional costs, largely in branded markets. On the flip side, we believe that the USFDA inspections are still on the lower side (330 in CY19 against 77 in CY22), but the same are expected to increase from here on. Hence, our focus remains on companies that are heavy on branded generics and have the least exposure to US generics.

We also expect mean reversion in brand-centric /heavy companies with recovery in growth amid margin improvement.

Quick Service Restaurant (Centrum Broking)

Notwithstanding the hype behind the high growth western Quick Service Restaurant category, we believe companies in this space will still be valued based on their margin strategy. Our in-depth study delves into the strategies of both i.e., the Indian companies and their global parents to understand how they are evolving and shape-shifting to win in the Indian market. We give little credence (though not ignored) to beaten to a pulp words like convenience, efficiencies, digital devices, disposable incomes, etc. as they disconcert you enough to believe the woods for the forest. Hence, instead look at margins and volumes, these will define the future prospects as the companies expand out of saturated metro and tier-1 markets, because they are still consumer companies!

Western QSRs to outperform as international brands perfect product basket right: Our in-depth study reveals the strategies followed by global parent i.e. (1) follow margin expansion in the developed markets, (2) while drive the store expansion in emerging markets due to expanding QSR market opportunity and penetration beyond metros. Further, while store growth is important, margins and volumes will define the future prospects as companies expand out of saturated metro and tier-1 markets. Our study pointed three significant developments in consumption, (1) consumer affinity towards western QSRs, (2) changing consumer habits – simplicity of ordering and delivery through time efficient digital platforms, and (3) easing of competition from local outfits. Though millennials are shaping up demand favouring the shift towards organised segment, QSRs have used recent crisis to optimise cost structures, and they are capturing market share.

Surge in QSR network to drive revenue: CAGR of 13% over FY20-25E We expect India’s organised food services market to grow at CAGR of ~10.5% to Rs1,684bn over FY20-25E capturing ~46% market share from current 40%. Given vast growth potential, organised segment chains to grow at 13% CAGR garnering 12% market share of food service market to Rs383bn. Industry estimates point out Informal Eating out (IEO) market at Rs3.2trn and expecting to grow CAGR 12% in next 5 years. Growth in total addressable market (TAM) to be driven by, (1) targeting millennials, (2) consumer centric palate and choices, (3) focusing on online, time efficient delivery models, and (4) strategic pricing and promotions offering value proposition. Further, established brand acceptance helped top-5 global QSRs to garner ~50% market share with high concentration in top 25 cities, nonetheless, the brand reputation helps smoother entry in Tier 2/3 markets providing huge runway for growth. Therefore, we believe top QSR players to add +2,000 stores over FY22-25E.

India infrastructure: Strong capex in railways for FYTD23 (Nomura Research)

Central government capex (ex-highways) for FYTD23 is up 14% y-y led largely by railways (+54% y-y), and by drinking water (+19% y-y) offset by weakness in defence (down 1% y-y). Ex-railways capex growth was modest at ~3% y-y (we are not considering road capex as FY23 is entirely budget funded, while FY22 included significant extra budget funding). We note that road construction has been weaker against corresponding periods in FY22 and FY21.

Pace of state capex lower, whereas cumulative capex increased 3.8% y-y . FYTD23 (until Jan) capex for 12 key states (70% of aggregate state capex) fell to 46.4% of budgeted spending (vs 53.3% for FYTD22). However, given elevated levels of inflation, the y-y increase in capex would be lower in real terms, in our assessment.

Indian Financials In a Dislocated World: Strong Liabilities, Reasonable Vals (Jefferies)

Indian financials have also borne rub-off effect of global dislocations. They are better placed with higher share of retail deposit, limited ALM gap & MTM, limited dependence on AT-1 bonds & lower exposure to riskier segments like promoter/ acquisition finance. While equities & global bonds saw pressure off late, local bond mkt is stable. Post correction, vals of some

are near/below Covid lows

Higher share of retail deposits and lower ALM gaps. The deposit profile of Indian banks is highly dependent on household/ retail deposits that form >60% of total sector deposits. Banks have also been increasing focus on this segment to granularise deposits. ALM gaps, as measured by share of <1yr liabilities vs. share of <1yr assets, are also limited. Even NBFCs have been watching this aspect much more closely post the debacle of IL&FS few years before Covid. Interestingly on the bond side, while the prices of overseas bonds (issued by Indian issuers) have seen correction our conversation with local bond experts/ corporates indicate that local market is fairly stable and price action will be function of rate actions.

AT-1 bond market has polarised towards large/ quality banks post Yes Bank. India had a Credit Suisse like AT-1 bond issue right around Covid when Yes Bank wrote-down AT-1 bonds and still there was some franchise value assigned to equity through capital infusion by leading banks/ NBFC. Since then, the issuances have been lower and market has become polarized towards larger/ quality banks. Among banks, top-3 issuers are SBI, HDFC Bank and Canara Bank with PSU banks having higher contribution from this. Interestingly, smaller banks have a lower contribution from AT-1 bonds. Local bond mkt investors aren't really seeing risks here for Indian stocks.

Lower risk from MTM and asset quality. As discussed in our recent note, The SVB Test On Indian Banks: Sector Holds-Up, Again!, on assets side of banks, loans form 65% & investments 25%. HTM is allowed on GSecs & forms 80% of that & 15% of assets. On 4-5yr duration, impact will be just 6% of capital for Pvt. BKs & 15% for PSUs. Asset quality trends were strong, with slippages during 3QFY23 at multiyear low of 1.6% & recoveries from past NPLs helping to keep credit costs low at 1% of avg. loans.

Valuations in some cases below Covid lows. While the global events, especially in the financial sector, have stirred confidence and increased COE, we also note that valuation of Indian banks is looking fairly attractive and in some cases stocks trade below the levels during the height of Covid risk. Stocks above US$5bn in mkt cap that are trading below the Covid-low valuations are Kotak Bank, IPru Life, ICICIGI and HDFC Life. Life insurers are also attractive (and below Covid lows) but clarity on taxation of insurance policies will be key to rerating.

Fed stays on course

The US Federal Reserve Open Market Committee (FOMC) decided to hike the key federal fund rate by 25bps to 4.75% - 5% range. This is the eighth straight hike decision by the FOMC since the Fed started its fight against inflation in March 2022; bringing the rates to highest since September 2007.

Speaking to the press post FOMC meeting, the Fed chairman Jerome Powell, dismissed the speculation about any imminent rate cuts, stating “FOMC participants don't see rate cuts this year, it is not our baseline expectations”.

The post meeting statement of FOMC indicated that the policy may remain sufficiently restrictive though future hikes shall be data dependent. The statement read “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time” and “The Committee will closely monitor incoming information and assess the implications for monetary policy”.

The market participants interpreted the statement to imply that at least one more rate hike of 25bps will be done this year, before the Fed hits a pause button.

Powell emphasized that the Fed is “committed to restoring price stability, and all of the evidence says that the public has confidence that we will do so.” Speaking about the recent banking sector crisis, the chairman assured that “US banking system is sound and resilient” and the Fed is “prepared to use all of its tools to maintain stability.” He however admitted that recent banking turmoil is “likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes.”

The Fed maintained that the current pace of quantitative tightening (QT) shall continue, though recent emergency measures to mitigate the impact of the banking crisis have resulted in expansion of its balance sheet.

The US equities ended the session with a cut of 1.6%; while US dollar index 9DXY) lost 0.7%.