Do it yourself

Friday, February 17, 2023

Some notable research snippets of the week

Assumptions Have Consequences (John Mauldin)

Remember National Lampoon’s Vacation? It was a 1983 comedy film in which suburban dad Clark Griswold (Chevy Chase) takes his family on a cross-country road trip to the fabled Walley World amusement park.

Clark made one critical mistake, though. He assumed Walley World would be open and waiting for them. This was to be the family’s reward for a long, stressful journey. His assumption was...incorrect.

Many have noted the word’s first three letters hint at how assumption can make an ass out of u and me. Yet we must assume some things or life becomes impossible.

Assumptions can be wise or unwise. They can be unduly optimistic or excessively pessimistic. Slightly different assumptions can produce giant changes in predicted outcomes. Assumptions are necessary but we shouldn’t make them lightly, nor forget we are making them.

This is important because assumptions abound in our assessments of the economy and markets. They tend to sort of fade into the background while we explore everything else.

January CPI Inflation surprises on the upside (Kotak Securities)

January CPI inflation increased by 6.52% (December: 5.72%), led mainly by a sequential rise in prices of cereals (2.6% mom compared to 1.1% in December) and eggs (2.3% mom compared to 4.9% mom). On the other hand, vegetable prices contracted, but the contraction was shallower than in December ((-)3.8% mom % versus (-)12.7% mom in December).

Rural and urban inflation rose sharply by 6.85% and 6%, respectively (December: 6.05% and 5.39%, respectively). January core inflation (CPI excluding food, fuel, pan, and tobacco) remained elevated and sticky at around 6.41% while increasing sequentially by 0.53% (December: 0.31% mom). Gold and silver prices, yet again, caused an increase in the personal care and effects category. Further, rural core inflation continues to outpace urban core inflation.

Likely data anomaly in cereals’ index There appears to be some data anomaly in the cereals index for January. Our calculated series for the cereals category based on its twenty sub-categories suggests a 0.8% mom increase in the index compared to 2.6% mom increase in the official data release. Historically, the gap between our calculated series and the official series has been negligible. The January print shows a marked deviation of 1.8 ppt. If this data print was to undergo revisions, the cereal index’s sequential momentum would be around 0.8%, leading to food and beverage inflation at 5.75% (compared to 6.19% as per the official release). Consequently, the headline CPI print would stand corrected at 6.29% (23 bps lower than the official release).

Strategy: World is not secular – India continues to shine 9Elara Capital)

India’s relative outperformance in CY22 was driven by strength in earnings revision and performance, especially as its North Asian neighbors saw a sharp downward revision. CY23 would continue to offer comfort on inflation growth dynamics, and India is expected to remain the fastest-growing large economy, which clubbed with strength in India Inc’s balance sheet, is likely to provide tailwinds to earnings growth despite global challenges. This means India will continue to command a valuation premium compared to peers.

However, on an absolute basis, India equities saw time correction, with ~20% correction in 12-month forward P/E of the Nifty to ~18x from peak of ~23x. While markets may time correct for the next couple of quarters (as clarity on global rate cycles emerges), we expect earnings growth and India’s relative strength to be key drivers of Index returns, and our models based on earnings expectations and valuation (forward P/E, What’s in the price model and aggregation of bottom-up expectations) imply a Nifty trading in the range of 17000-20000, with back-ended returns in the Index. This implies ~14% upside to the Nifty from current levels.

Industries Slow Down in December (Centrum Research)

Industrial production for the month of December displayed a healthy performance, thereby registering a print of 4.3% YoY as against the 7.4% YoY growth rate a month ago. The expansion in the industrial output was a bit slower than expansion in eight core sector growth of 7.4% in December-22. Rise in the industrial output has been broad based across sectors as well as in the used based category and mainly that has kept industrial activities in a positive territory. Within the use based classification, consumer durables output entered in the contractionary territory and registered a negative print of 10.4% YoY in December against a contraction of 1.9% a year ago, thereby reflecting the existence of prevalent lacklustre demand amongst the urban households.

For December 2022, the production in the eight core industries expanded 7.4% compared to a growth of 5.7% for the month of November. It was the highest recorded number in the last three months. The December print was weighed up by a large expansion in mining, infrastructure, infrastructure and primary goods. From a consumption perspective, the results were a mixed bag as consumer durables and non-durables recorded contraction and expansion respectively.

Steel: Prices consolidate, spreads contract (ICICI Securities)

HRC prices in traders’ market consolidated after seven successive weeks of hikes. However, rebars continue to fare better with rebar-HRC premium still at Rs2,800/te. Regional HRC price stayed unchanged; however, Indian HRC export price was up US$25/te at US$715/te on higher realisation by exporting to Europe. Of late, Indian producers are concentrating on better-remunerative Europe and Middle East markets. Secondary rebar price, however, declined by Rs500/te WoW as pellet price was down US$8/te, tracking global iron ore price.

We would await more clarity on stimulus and policy in China as key debt and money supply indicators do not show any sign of a pick-up, as yet.

Technology: Moderation in Cloud growth intensifies near-term uncertainty (MOFSL)

The Cloud business growth of key Hyperscalers (Amazon, Microsoft, Google, etc.) ebbed for the fourth straight quarter. More importantly, the managements of key Hyperscalers indicated a further slowdown and a shift in focus towards cost optimization projects from enterprises due to high macro uncertainty. While our view of the near-term divergence between Hyperscalers and IT services growth continues to play out, the pace of deceleration has been steep and might impact the follow-on IT services work adversely with a lag. Given the low industry visibility, this adds to demand uncertainty despite having a substantial Cloud migration opportunity globally.

· The Cloud growth across Hyperscalers continues to taper off from its peak seen in 4QCY21. The slowdown in demand is a function of reprioritizing enterprise spends towards core operations amid the challenging macro environment.

· The deal pipeline remains healthy and robust with a few customers planning to go slow with the migration and have committed to stay for a long-term horizon.

· We believe the Cloud migration activities have taken a temporary pause before it starts to accelerate further going ahead.

· Despite the four consecutive quarters of slowdown, the IT services companies have not witnessed any material weakness in delivering Q3 performance.

Robust Credit Growth Persists in Jan, Credit Deposit Ratio Rises Further (CARE Ratings)

Credit offtake rose by 16.3% year on year (y-o-y) for the fortnight ended January 27, 2023. Incremental credit growth has risen by 12.2% so far in FY23. In absolute terms, credit expanded by Rs.14.5 lakh crore from March 2022. The growth has been driven by continued and sustained retail credit demand, strong growth in NBFCs and inflation-induced working capital requirement from sectors such as “petroleum, coal products & nuclear fuels”, and chemicals and chemical products.

With a higher base, deposits witnessed a slower growth at 10.5% y-o-y compared to credit growth for the fortnight ended January 27, 2023. The short-term Weighted Average Call Rate (WACR) has increased to 6.44% as of January 27, 2023, from 3.72% as of January 28, 2022, and from 6.09% as of January 13, 2023. Deposit rates have already risen and are expected to go up even further due to rising policy rates, intense competition between banks for raising deposits to meet strong credit demand, a widening gap between credit & deposit growth, and lower liquidity in the market. The deposit rates rise with a lag effect and are expected to increase the cost of borrowings for the banks.

RBI increased the repo rate by 25 bps to 6.5% in its last monetary policy held on February 08, 2022. This is the sixth hike by RBI in FY23 due to elevated core inflation. The RBI has continued its stance of withdrawal of accommodation and has maintained a hawkish tone.

RE at 121 GW; generation growth peaks (Elara Capital)

As per Power System Operation Corporation (POSOCO) data, power generation surged 18.4% YoY in January 2023 to 137.0BU from 115.8BU in January 2022. Robust power consumption growth in January primarily indicates sustained momentum of economic activities. We believe power demand as well as consumption will increase and continue to grow in mid-teens on increased demand as we move towards the summer season though demand in North India would be stable, led by ongoing winters and further improvement in economic activity on account of the end of the Rabi season.

India seeks to raise its installed RE generation plant capacity to 500GW by CY30E from the current 121GW. We are positive on the companies focused on RE capacity with strong balance sheets.

As per the Ministry of Power’s PRAAPTI portal, DISCOM owed INR 1,195.8bn in July 2022 versus INR 765.2bn in January 2023 to power generation companies. Outstanding dues (>45 days) of power producers from distribution companies slipped 76% YoY to INR 235.7bn in January 2023 versus INR 1,051.8bn in July 2022.

In January 2023, 14 new RE tenders with cumulative capacity of 7,966MW were issued. In December 2022, 17 new RE tenders with cumulative capacity of 6,578MW were issued. In December 2022, 1,370MW (419.6MW in December) of solar and wind capacity was added, taking the cumulative RE capacity to 120.9GW. From January 2022 until December 2022, 13,956MW solar capacity and 1,847MW of wind capacity were added in India. This is ~17.5% and 26.6% higher than in 2021, respectively. Rajasthan added the maximum utility scale solar capacity of 675MW in India followed by Chhattisgarh (138MW) and Tamil Nadu (77MW) in December 2022.

Chemical price trends (Sunidhi Securities)

Brent Crude oil has been hovering around $85/barrel mark for the last few months led by sluggish economic performance across Europe, Asia and the U.S., along with lower demand from China amid Covid new wave. Somewhat stable crude oil prices coupled with weak demand kept most of the chemical prices under pressure. However, anticipation of a bounce back in crude oil prices remains firm globally as analysts are betting high on reopening of Chinese market to spike global demand while Russia’s production cut announcement to lend support. Some early green shoots are visible in some of the chemical products but broad base recovery will take time to reflect in the prices.

Chemical prices of products like MIBK (up 52%), Ethanol (up 25%), MTBE (up 24%), Styrene (up 18%), EDC (up 16%), Caprolactam (up 16%), Butadiene (up 15%), Benzene (up 14%) and Toluene (up 14%) have gained on MoM in the domestic market. On the weaker side sharp correction was witnessed in chemicals like Chloroform (down 27%), DMF (down 17%), Caustic soda lye (down 16%) and Anhydrous HF (down 13%) on MoM basis. Soda ash remained stable on MoM basis.

Domestic demand has been fairly good in the last couple of quarters while export demand has been impacted due to ongoing geopolitical issues. We believe the global demand recovery and improvement in production activities to soon take shape with relatively steady crude oil prices, fading our higher inventory channel scenario and reopening in China. Moreover, with cooling off energy cost and lower raw material prices, margin profile for chemical manufacturers to look better in the coming quarters.

High services inflation remains a worry for central banks (Danske Bank)

Inflation drivers continue to paint a mixed picture but inflation is likely to head lower through 2023 in US and the euro area. Price pressures from food and freight rates have clearly eased as has energy and electricity prices in Europe. Labour markets remain tight, but wage pressures have showed tentative signs of easing. Core inflation pressures remained elevated in January both in the euro area and the US, and we expect the ECB and the Fed to react by continuing to hike interest rates in the spring meetings.

Inflation expectations: Both US and euro area consumer inflation expectations have remained elevated, but off the peak levels. Some short-term US indicators rose modestly, but market-based long-term inflation expectations remain broadly stable.

Logistics sector: Bumpy ride; shimmer of hope for a few (ICICI Securities)

Q3FY23 was a challenging quarter for logistics companies under our coverage. Key highlights: 1) Festive season was bleaker than expected with lower than expected e-commerce volume; 2) lower EXIM volumes owing to adverse global macros impacted earnings of container companies; 3) margins got impacted due to higher cost; 4) consensus estimates and target price post earnings have been slashed for all the companies; and 5) management commentary was cautious for Q4FY23 for most companies with upcoming price hikes and cost efficiencies in middle-mile, the key focus area. Going ahead, we believe margin improvement is likely for surface express players such as TCI Express and Gati; however, CONCOR’s margin is likely to remain tepid owing to higher decline in EXIM volumes.

Metals – Aluminium smelters in Europe still facing challenges (ING Bank)

Despite the recent drop in energy prices, aluminium smelters in Europe still face challenges, Norsk Hydro has said. The company’s CFO said a further 600,000 tonnes of aluminium capacity is still at risk if we see another spike in energy prices.

Mitsui Mining & Smelting Co., Japan’s largest zinc smelter, will raise premiums for Asian ex-Japan buyers for the second year in a row by more than 10% over LME prices for 2023. The company expects zinc supply to remain tight and sees a supply deficit of 150kt in 2023, the third annual deficit in a row. It expects zinc prices to range between $3,000 and $3,400/t in the first half of the year.

Trade: Deficit narrows owing to sharp import dip (Yes Bank)

India’s Trade Deficit narrowed sharply to USD 17.8 bn in January 2023 from USD 22.1 bn in December 2022 led by 15.8% MoM decline in imports. However, exports dropped by 13.5% MoM.

Moderation in imports is seen across oil, gold, and core imports. Drop in core imports probably reflects lower domestic demand but needs to be tracked for confirmation.

Despite fears of global slowdown, India’s services exports show strong momentum.

FY24 CAD revised to 1.8% of GDP (USD 66 bn) amid improved outlook for services exports and lower goods imports.

Thursday, February 16, 2023

No bear market likely in 2023 as well

It was spring of the year 2022. The news flow was worsening every day. The Russia-Ukraine conflict was dominating the global media headlines. NATO-Russia acrimony was at its worst since the cold war era. China committed to a zero Covid policy and implemented strict mobility restrictions, further impacting the global supply chains. Inflation was beginning to spike and most central bankers were ready to embark on an accelerated tightening cycle.

Back home, the enthusiasm created by a path breaking budget had not survived even for a whole week. Issues like macroeconomics (growth, inflation, current account, yields, INR), geopolitics (Russia-Ukraine), politics (state elections) and persistent selling by foreign portfolio investors (FPIs) was dominating the market narrative. The trends in corporate earnings also were not helpful to the cause of market participants.

By early March 2022, the benchmark indices had fallen substantially from their highest levels recorded till then, between October 2021 and January 2022. The Nifty50 was down ~11%; the second most popular benchmark Nifty Bank was down ~16%, the Nifty Midcap 100 was down ~14% and the Nifty Smallcap 100 was down ~17%. Though technically, the market was still in ‘correction’ mode, sentimentally it did feel like a ‘bear’ market.

Amidst all the gloomy headlines and bearish forecasts, I felt that we are most likely to witness a boring market rather than a bear market in India during 2022 with breadth narrowing. (see here). Since then benchmark Nifty is higher; but it has mostly moved in a range occasionally violating the range on both the sides.

Since the beginning of 2022, Nifty50 (+1%) is almost unchanged and midcap (-3%) have performed mostly in line. Nifty Bank (+10%) has been major outperformers; while Smallcap (-20%) have underperformed massively. The market breadth has accordingly been mostly negative.

Nothing much has changed in the past one year - the geopolitical situation remains fragile; the war continues; inflation remains a worry; economic growth is decelerating; earnings growth is slower than anticipated; rates are higher and expected to remain elevated for long; monsoon is expected to be below normal; and FPI outflows continue. To add to this we are entering an intense election season that should culminate with general elections in March-May 2024.

However, the narrative now is not negative. At worst it is neutral. The war is now on the 13^th page of the newspaper. It is neither mentioned in the prime time news headlines nor does it trend on social media. Central bankers have successfully anchored inflationary expectations and the popular discussion is around peaking of rates & inflation rather. The US and European recessions are not a consensus now. India growth is also estimated to be bottoming above 6%.

Given these fragile macroeconomic & geopolitical conditions; declining optimism over earnings growth; higher debt returns and optimistic equity positioning, it is important to assess what could be the market behaviour in the next one year?

In my view, we may not see a decisive direction move in Nifty50 in 2023. It may move in a larger range of 16200-20600 in 2023, averaging above 17600. We may therefore not witness a bear market in 2023. Smallcap stocks which have been underperforming for quite some time now may end up outperforming the benchmark Nifty50 for 2023; though gains could be back ended.

Wednesday, February 15, 2023

Russia, China and El Nino

In the past one year, inflation has been one of the primary concerns for most countries across the globe. Rising prices of food and energy in particular have materially impacted the lives of common people on all continents. The central bankers of most major economies have hiked policy rates in the past one year to control inflation. In the current year 2023 so far, 13 major central bankers have taken policy action(s) and all of these actions have been hike in policy rates.

However, in recent weeks inflation has shown some tendency of cooling down. It is difficult to assess how much of this cooling down is due to tighter monetary conditions; and how much could be attributed to other factors like restoration of supply chains that were broken during the pandemic and warmer winters resulting in lower energy demand in the northern hemisphere, etc. Nonetheless, some central bankers have adjusted the pace of tightening to smaller hikes. Most of them, though remain circumspect about the persistence of inflation. While the debate continues over the trajectory of price hikes in the next few quarters; an overwhelming majority of experts believe that prices may remain high for much longer.

The global growth forecasts have witnessed some downgrades in the past six months as tighter monetary conditions and higher prices are seen hurting demand for consumption and investment. As per the latest assessment of the World Bank, in 2023 “the world economy is set to grow at the third weakest pace in nearly three decades, overshadowed only by the recessions caused by the pandemic and the global financial crisis….Major economies are undergoing a period of pronounced weakness, and the resulting spill-overs are exacerbating other headwinds faced by emerging market and developing economies (EMDEs).”

With this background, three key issues that could influence the future trajectory of global prices and therefore interest rates are geopolitical situation; impact of China ending Covid restrictions and the impact of the emergence of El Nino on global food production.

Geopolitical conflict in Eastern Europe (Russia-Ukraine) has materially influenced the prices of energy and food in the past one year. Any worsening or this conflict or expansion to Western Europe could make things worse. Some events in the recent weeks have indicated that Sino-US relations may not improve anytime soon. NATO countries hardening their stand on Russia; Russia retaliating with a cut in energy output; and some key OPEC members openly expressing disagreements with US oil pricing has materially increased the uncertainty in the energy market.

China has been gradually relaxing the covid restrictions for the past many months. This has eased the logistic logjam across the world. The supply chains that were broken due to congestion at major ports, shortage of containers, short supply of key raw materials, and poor take-off have mostly been repaired. The freight rates that had become prohibitively high have eased to pre Covid (2019) levels. The debatable question however is whether China reopening will be inflationary (higher demand) or deflationary (complete supply chain restoration and consequent destocking; improved mobility of workers etc.).

As per the latest forecast of various weather agencies (see here), the probability of El Nino conditions developing in the coming summer could impact the agriculture production in major countries like India, this year. If these forecasts come true, we may see food prices remaining at elevated levels.

A variety of views prevail on these three issues and their outcome. In my view, China reopening will indubitably be deflationary for the global economy, especially metals and other raw materials).

I am however not sure about the geopolitical conditions. I would therefore continue to expect elevated crude oil prices through 2023. By the way, the RBI in its latest statement has assumed the price of Indian basket of crude oil to be US$90/bbl for FY24, against the current price of US$84.19/bbl (see here).

It is little early to talk about weather conditions in the forthcoming summer and its eventual impact on global food prices. For now, the Rabi crop in India appears to be good; and there is enough food in the Indian granaries. Thus availability of food should not be a problem for sure even if we had a poor monsoon year after three normal/excess monsoons.

Tuesday, February 14, 2023

FOMO is injurious to your capital

It has been over five year since I visited a local garbage dump in West Delhi. The visit was a revelation in many respects. A casual discussion with the rag pickers exploring the heaps of stinking garbage to collect pieces of paper, plastic and metal, was quite enlightening.

Out of seven people diligently scanning the dump, three were children under the age of 14, including one girl, and three were youth in the age bracket of 19-27. On being asked why they chose to do this menial, risky (health wise) and stinking job, when they have relatively decent options like pulling a cycle rickshaw or even driving an e-rickshaw, working at a nearby auto garage, cleaning cars in nearby housing societies etc., the youth politely answered, "We are doing this job for past 12-15yrs. How could we change it now." On prodding further, one of them admitted that many of their peers live on hope that "Someday they will find treasure in the garbage. More years you have put into the job, the greater the chances of you hitting on a treasure." Though, the best they could cite of a treasure find was a gold bangle found by one of their seniors 8yrs ago.

The discussion did two things to me: (a) it prompted me to drop the search of the lost earring of my wife, which she thought could have been dumped there with the daily kitchen waste, with the hope that it may complete the treasure hunt of some child; and (b) raised numerous pertinent but disturbing questions in my mind.

I am reminded of that instance today, because in the past three weeks I have come across an unprecedented number of “regretting stock traders”. Incidentally, they are regretting buying; not selling; and not buying the stocks of the same business group in a span of three weeks.

· Some are regretting buying Adani Group stocks at a high valuation in the past one year.

· Some are regretting not selling Adani group stocks on 25^th January itself, when the Hindenburg research first appeared on social media and stocks were down just 3-4%.

· Most are regretting not buying Adani group flagship, early morning on 3^rd February when it was locked at lower limit and went on to rise over 100% in the next three trading sessions.

My three decades of experience in studying financial markets and investors’ behaviour indicates that regret of missing an opportunity to buy or sell could be perilous for traders. This usually leads to development of severe FOMO (fear of missing out) syndrome amongst traders. Suffering from FOMO syndrome, traders take impulsive decisions, commit serious errors, incur material losses, and violate their trading strategies & plans.

Over the past three decades I have seen numerous cases of traders losing their entire capital in hunt for one elusive “20% gain in a day” opportunity. Just like the rag pickers, these FOMO patients have heard folklore of some veteran making a fortune from extreme market volatility. They are also anxious to see their names on the hall of fame of the stock markets.

In the past one decade itself, we have seen numerous instances where traders have burnt their hands badly in their attempt to make some quick gains. JPA Group, ADAG, IL&FS, DHFL, Yes Bank etc. all made traders regret the “opportunity” on multiple occasions; infected them with FOMO syndrome and caused material erosion in their wealth.

I am definitely not suggesting that Adani group is taking the same route as JPA or ADAG which incidentally had similar profile, asset base and cash flows. I am just suggesting please do not regret and avoid FOMO. It is injurious to your capital

Friday, February 10, 2023

Some notable research snippets of the week

Deposit Rates Grow Faster than Lending Rates in December 2022 (CARE Ratings)

In December 2022, the rate of increase flipped with deposit rates growing faster than lending rates on fresh loans.

· The weighted average lending rate (WALR) on fresh rupee loans of SCBs increased by 02 bps (basis points) from 8.86% in November 2022 to 8.88% in December 2022.

· The weighted average domestic term deposit rate (WADTDR) on outstanding rupee term deposits of SCBs increased by 16 bps from 5.62% in November 2022 to 5.78% in December 2022.

· Private Sector Banks (PVB) and Public Sector Banks (PSB) have maintained high spreads between lending and deposit rates, with PVBs seeing higher spreads, as banks raised rates amid RBI’s tightening moves. Rate hikes and subsequent faster resets in lending rates vs. deposit rates have led to NIM expansion in the near term however, widening gap between credit and deposit growth amidst tightening liquidity is leading to aggressive pricing of deposits.

· Expect the uptick in the deposit rate to continue given the widening gap between credit & deposit growth and tightening liquidity conditions. Further, given that the current budget proposals incentivise small savings by raising investable limits is also likely to add an edge to the banks’ deposit chase and rates.

US-China relations turn sour again (Danske Bank)

After a period of some improvement in US-China relations since the Xi-Biden meeting in November, the relationship took yet another turn for the worse following the shoot-down of a Chinese ‘spy balloon’ over the Atlantic. Below is a short Q&A on what happened and how we see the implications.

On Friday last week a large balloon flying over the US started to get media attention. It was suspected to be a Chinese ‘spy balloon’ as it was detected over Montana, a state where the US has nuclear missile sites. China’s Foreign Ministry said the balloon was a Chinese civilian airship used for research, mainly meteorological purposes and that it had deviated from its planned course due to the Westerlies and limited self-steering capability. It stated that “The Chinese side regrets the unintended entry of the airship into US airspace due to force majeure”.

Whether the balloon was indeed intentionally flying over the US is hard to tell and experts differ in their views on the matter. On the one hand, it seems like a strange gamble at a time when China seems to have moved to a softer foreign policy stance and is trying to get the US-China relationship on a more calm footing.

Phillips Capital India Index (PCI) dips (Phillips Capital)

PC India Index for December 2022 dipped due to significant fall in positives index and slight increase in the negatives index. PCI saw -5% contraction mom after two successive months of improvement; -8% lower yoy. The Index was dragged lower by higher commodity prices, capital flows, auto sales, INR depreciation and equities. Support was noted from lower inflation, trade deficit, yields, brent prices, stronger PMI, IIP, cement/steel production, air traffic, port volume, tax collections, LAF and forex reserves.

Data for January: Composite PMI robust; Oil prices rose; INR appreciated

• Composite PMI was well above the long run average at 57.5 vs. 59.4 in the last month as both manufacturers and services remained robust with slight softening in growth pace.

• Forex reserves increased by $11bn mom. INR appreciated by 79 paise mom.

• Net liquidity declined while CP issuances increased.

• Commodity prices up by 6% mom while oil prices saw 3% increased.

• FIIs net flow into equities in January was down by Rs 415bn vs. Rs 142bn decrease in the previous month. DIIs became net buyers, net inflows at Rs 334bn vs. Rs 242bn net inflows in last month.

Disinflation And A Potentially Stubborn Fed (Evergreen Gavekal)

For the first time in this cycle, Federal Reserve chair Jay Powell cheerily intoned on Wednesday that “a disinflationary process has started”. Accordingly, the Fed further slowed the pace of tightening—hiking the main policy interest rate by 25bp (to just under 4.75%), as opposed to prior increments of 50bp and 75bp. So given this apparent disinflationary dynamic, why is Powell and his policymaking committee still signaling “ongoing increases” in rates?

First, consider the growing evidence of a slowdown in US inflation (a.k.a., disinflation). The Fed’s favored measure—the price index on personal consumption expenditures—is already trending back toward 2%. Over the last three and six months, annualized PCE inflation has averaged 2.1%, down from 5.0% over the past year, to put it basically on target.

While headline inflation can be volatile, most indicators suggest this disinflation is not “transient”. The less noisy core PCE index is trending lower, averaging an annualized 2.9% over the past three months, down from 3.7% in the past six months and 4.4% in the last year. While Fed vice chair Lael Brainard and other policymakers do not see evidence of an upward wage- price spiral, they must take comfort in the recent slowdown in wage growth. The best measure—the employment cost index—released earlier this week showed wage growth slowing to 5.1% year-on-year in 4Q22, down from 5.2% in 3Q and 5.4% in 2Q. Add in another sub-50 reading from the ISM manufacturing PMI (at 47.4 for January), and this week’s data generally supports the message that existing policy and financial conditions in the US are successfully weighing on demand and price pressures.

Steel: Price hike fails to lift up the sentiment (ICICI Securities)

HRC prices in traders’ market during the week ended 2nd Feb’23 rose further by Rs1,800/te WoW to Rs60,400/te on average- the highest level since June-22 factoring end-Jan’23 and Feb’23 hikes by steel companies. However, rebar market continues to fare better with list price still at a premium of Rs1,500/te to HRC price.

That said, pellet and secondary rebar prices have corrected by Rs500/te as restrictions on sponge iron operations in Odisha have eased out. Regional HRC prices rose US$10/te on average with Indian export price at the highest level of US$690/te. On raw material front as well prices have firmed up, however, we see weakness in global iron ore prices of late as post-holiday demand recovery in China has not been as strong as expected.

We would await more clarity on stimulus and policy in China as key debt and money supply indicators as yet do not show signs of any pick up. Besides, inventory depletion post CNY has been a tad slow.

Union Budget deals a double blow to Life Insurance (Emkay Research)

Union Budget FY24 appears to have dealt a double blow to the life insurance sector via a couple of crucial changes on the personal income-tax front. By tweaking the ‘New Tax Regime’ (launched in the FY21 Budget), the government has attempted to make it attractive – it has brought down taxes under this ‘exemption-free’ regime, thus reducing the tax-saving value of tax-saving instruments (such as life insurance policies) under Sections 80C, 80D, etc.

By removing exemptions under Sec10(10D) of the Income Tax Act, the Budget has also proposed taxing the maturity & surrender amount of Non-ULIP policies (purchased after 1-Apr-2023), if the total premium paid by an individual under such polices is more than Rs5lakh (Rs0.5mn) in a year. ULIP policies have already got a limit of Rs2.5lakh (Rs0.25mn) in the FY22 Budget. On net, the two alterations will have a material impact, with Sec80C/D-related changes hurting growth in the masses segment and the removal of exemptions U/S10(10D) hitting growth of high-ticket non-ULIPs in the affluent segment as well as margins (if players choose to sacrifice margins for keeping the product competitive). Accounting for the changes, we reduce our estimates and longer-term assumptions for life/health insurance companies.

Industrials and Infrastructure (Axis Capital)

Aggregate capex for Railways, Roads and Defence in FY24BE is up 17% at Rs 7.4 trn. Capex is led by Roads (+25%) followed by Railways (+15%) and Defense (+8%). Key PSUs driving capex across O&G, steel, coal, power, renewables and infra saw 17% growth in cumulative allocation at Rs 2.7 trn for FY24. Budget proposals seek to encourage participation of private sector in Green investments. Center’s capital investment outlay for FY24 stands at Rs 10 tn (+37%); including grants-in-aid to states, the effective capex is budgeted at Rs 13.7 trn (+30%).

Capex for new lines, road over/under bridges, track renewal and gauge conversion are up by 20%+. Gross Road capex target (NHAI + MoRTH) for FY24 at Rs 2.6 trn is up 25% YoY.

Earnings so far (Motilal Oswal Financial Services)

The 3QFY23 aggregate earnings of the aforesaid 127 MOFSL Universe companies (representing 51% of total market cap and having 81% weight in Nifty) have been below estimates and have risen only 7% YoY (v/s est. +11% YoY). This aggregate underperformance has been led by a sharp drag from global commodities.

Excluding Metals and O&G, the MOFSL Universe and Nifty both have posted a solid 28% earnings growth (v/s expectations of 25% and 22%, respectively), fueled by BFSI and Autos. Along with Metals and O&G, the Cement sector too has dragged 3Q earnings.

EBITDA margin of the MOFSL Universe (excluding Financials) has contracted 260bp YoY to 13.3%.

Profits of the 35 Nifty companies that have declared results so far have risen 18% YoY (v/s est. 15% YoY), fueled by financials. Excluding these, profits would have grown 12% YoY (v/s est. 9% YoY). Twelve companies in Nifty have reported profits below our expectation, while ten have recorded a beat .

Nifty EPS remains unchanged: FY23 and FY24 EPS estimates remain unchanged at INR822 and INR990 (v/s INR820 and INR990 earlier), respectively, as downgrades in Metals and O&G are offset by upgrades in Automobiles and Private Banks.

Thursday, February 9, 2023

RBI declares victory, and deploys more enforcement

The Reserve Bank of India (RBI) governor declared victory for its policy stance in unambiguous terms while presenting the latest monetary policy statement. He stated, as a result of various policy measures taken by RBI since April 2022 “the real policy rate has been nudged into positive territory; the banking system has moved out of the Chakravyuh of excess liquidity; inflation is moderating; and economic growth continues to be resilient”.

MPC remains predictive – 25bps hike with stance unchanged

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its meeting held over the past three days decided to hike the policy repo rate by 25bps to 6.75%. The decision was taken by a majority vote with four members voting in favour and two members voting against the hike. The MPC also maintained its monetary policy stance of withdrawal of accommodation with a split vote of 4 to 2.

The decision of the MPC and voting pattern is mostly in line with the consensus forecast. The equity market nonchalant post the predictable policy statement was made public; while bonds witnessed some sell-off.

Notwithstanding the stance of a divided MPC, the RBI moderated its inflation forecast for FY24 to 5.3% and enhanced their real GDP growth forecast for FY24 to 6.4%. The growth projected for 1QFY24 is 7.8%; which appears rather optimistic under the current circumstances. Even for the full year FY24 the market consensus is close to 6%.

Rate hike and tightening to break persistence of inflation

While acknowledging that global inflationary headwinds are subsiding; food inflation outlook is encouraging; CPI inflation for FY24 is expected to remain within RBI tolerance band of 4 to 6% throughout the year; and substantial reduction in surplus liquidity in the financial system - a majority of MPC decided to hike the policy rates and also to continue with withdrawal of accommodation, ostensibly to “break the persistence of core inflation”.

Growth remains resilient

Available data for Q3 and Q4:2022-23 indicate that economic activity in India remains resilient. Urban consumption demand has been firming up, driven by sustained recovery in discretionary spending;, and rural demand continues to show signs of improvement as tractor sales and two-wheeler sales expanded in December.

Investment activity continues to gain traction. Non-food bank credit expanded by 16.7 per cent (y-o-y) as on January 27, 2023. The total flow of resources to the commercial sector has increased by ₹20.8 lakh crore during 2022-23 so far as against ₹12.5 lakh crore a year ago.

On the supply side, agricultural activity remains strong with good rabi sowing, higher reservoir levels, good soil moisture, favourable winter temperature and comfortable availability of fertilisers.5 PMI manufacturing and PMI services remained in expansion at 55.4 and 57.2 respectively, in January 2023.

Growth outlook: Real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.0 per cent; and Q4 at 5.8 per cent. The risks are evenly balanced. Key risks: Pprotracted geopolitical tensions, tightening global financial conditions and slowing external demand

Core inflation sticky

Headline CPI inflation moderated by 105 basis points during November-December 2022 from its level of 6.8 per cent in October 2022. Core CPI inflation (i.e., CPI excluding food and fuel), however, remained elevated.

Considerable uncertainties remain on the likely trajectory of global commodity prices, including price of crude oil. Commodity prices may remain firm with the easing of COVID-19 related restrictions in some parts of the world. The ongoing pass-through of input costs, especially in services, could keep core inflation at elevated levels. Fiscal consolidation and stable INR however are some positive factors for contained inflation.

Inflation forecast: Assuming an average crude oil price (Indian basket) of US$ 95 per barrel (present price US$78.5/bbl) and a normal monsoon, CPI inflation is projected at 5.3% for 2023-24, well within the RBI tolerance band of 4 to 6%.

External balance comfortable

The current account deficit (CAD) for the first half of 2022-23 stood at 3.3 percent of GDP. The situation has shown improvement in Q3:2022-23 as imports moderated in the wake of lower commodity prices, resulting in narrowing of the merchandise trade deficit.

The net balance under services and remittances are expected to remain in large surplus, partly offsetting the trade deficit. The CAD is expected to moderate in H2:2022-23 and remain eminently manageable and within the parameters of viability. On the financing side, net foreign direct investment (FDI) flows remain strong; and forex reserves have recovered to 9.4 months of import. India’s external debt ratios are low by international standards

Remittances to remain strong on buoyant IT Service and growth in gulf region

Global software and IT services spending is expected to remain strong in 2023. Remittance growth for India in H1 of 2022-23 was around 26 per cent – more than twice the World Bank’s projection for the year. This is likely to remain robust owing to better growth prospects of the Gulf countries.

Growth forecast and policy stance incongruent

The real growth forecast of 6.4% by RBI is by far the most optimistic. Most agencies have been working with close to 6% growth estimates. The forecast of RBI appear even more unbelievable if we consider that —

(i) The real rates are now mostly positive and close to the levels where these shall start hurting growth very soon. Given the current credit to deposit ratios for most of the banks, we shall soon witness the rates spiralling higher across the spectrum, further impacting the growth adversely.

(ii) The tighter liquidity in the system has already started hurting the credit growth. A further withdrawal will definitely constrict growth going forward.

Obviously, something gotta give – either this high growth target would remain elusive or the MPC will have to climb down and change its policy stance.

Governor invokes Gandhi and Subhash

To mark the 75^th anniversary of nationalization of RBI, the governor invoked Gandhi and Bose.

“I do believe that…India…can make a lasting contribution to the peace and solid progress of the world.” — Mahatma Gandhi

“…never lose your faith in the destiny of India” —Neta Ji Subhash Chandra Bose.

Wednesday, February 8, 2023

Bhatura vs Burger

Total apathy of common Indians towards intellectual property rights (IPR) of the originators is appalling. Use of pirated software, photocopied books, and spurious books sold on traffic signals and footpaths, unauthorized copies of branded clothes etc. is unapologetically common. Propriety and ethics are not taught in schools. It is common to see parents encouraging their wards to buy the “cheaper” alternative regardless of its legality and authenticity. Many cities have infamous “markets” for pirated software and duplicate merchandise.

The disdain shown by a large majority of the population could easily be listed as one of the major inhibitors of faster growth in India. It discourages innovation at the domestic level; motivates the innovators to immigrate to foreign shores and register their innovations there; and adversely impacts the transfer of critical technology by the foreign innovators to their Indian collaborators and entities.

If you are living in Delhi NCR region and travel to nearby UP and Haryana towns, you could easily spot “Bhatura King”, a fast food joint chain. The name and logo used by this chain is cannily similar to the global chain of quick service restaurants, “Burger King”. On a 25 kms stretch from Hapur to Garh Mukteshwar, there are at least 50 Shiva Dhaba, each claiming to be the “original”. There are over 50 Gulshan Dhaba, each claiming to be “original” between Mathura and Palwal. Panchhi Petha is a world famous brand of Agra. In Agra city itself there are over 500 shops claiming to be original Panchhi Petha stores. Similar is the story with Bikaner Sweets and Aggrawal Sweets.

Given this background, the reaction of investors to the news of Unilever Plc hiking royalty to be charged from its Indian subsidiary Hindustan Unilever Limited (HUL) is understandable.

On 19^th January 2023, the Board of HUL approved a hike of royalty from 2.65% of net sales to 3.45%. The hike of 80bps is to be implemented in a phased manner over three years from 2023 to 2025. The stock of HUL corrected over 6% on 19-20^th January with very high volumes.

Many investors, analysts and other commentators criticized this hike in royalty as unfair. I do not support this criticism and find the transaction transparent and reasonable. It is pertinent to note, in this context, that—

· The present agreement of royalty payment was signed between Unilever Plc and HUL in 2013 and is subject to revision every ten years.

· The royalty payment is on two counts – (i) Technology Collaboration Agreement (TCA); and (ii) Trademark Licence Agreement (TMLA). The TCA provides for payment of royalty on net sales of specific products manufactured by HUL, with technical know-how provided by Unilever. The TMLA provides for the payment of trademark royalty as a percentage of net sales on specific brands where Unilever owns the trademark in India including use of ‘Unilever Corporate logo.

· Unilever Plc runs a strong R&D program focused on product innovation, climate control and operational efficiencies. In the past 10yrs, Unilever Plc has been able to reduce its CO₂ emission from over 100kg per ton of production to less than 40kg/ton. It has reduced total waste sent for disposal from 4kg per ton of production to less than 1kg/ton. Using the technology and methods developed by Unilever Plc, HUL has also become coal free across its operations; has reduced CO₂emission by 94% since 2008; cut waste generation by 54%. It aims to attain zero emission status by 2030. Obviously, these developments do not come for free.

· In FY22, HUL paid a total of Rs8.39bn in royalties to its parent Unilever Plc. The total net sales of HUL for FY22 was Rs525bn. This comprised Rs6.52bn on account of technology and Rs1.87bn on account of brand licensing. The brand royalty (TMLA) thus was about 0.35% of the total FY22 net turnover of HUL.

· Unilever Plc spent GBP847mn on R&D activity (1.61% of turnover) and GBP6.9bn (13.1% of turnover) on brand and marketing activities in calendar year 2021.

In my view, to develop a strong innovation ecosystem in the country, it is of utmost importance that a concerted effort is made (i) to develop respect for IPR of other amongst citizens from early age; and (ii) develop consciousness amongst entrepreneurs to protect and develop their IPRs to maximize their revenues from their respective enterprises. Bhatura is definitely more popular in India than burger. It need not be presented as a poor clone.

Tuesday, February 7, 2023

Budget 2023: Reading between the lines

It’s almost a week since the union budget for FY24 was presented in the parliament. The budget documents have been analysed by a variety of experts. Most of these experts have focused their opinion on the budget as per their professional affiliations and/or ideological orientation.

If I may sum up the consensus opinions, it would be as follows:

· Development economists have criticized the budget for inadequate allocation to the social sector, especially education, health, rural welfare, MNREGA etc.

· Market economists and strategists have commended the budget for higher allocation towards capital expenditure and commitment to fiscal discipline despite political expediency.

· Accounting and tax professionals have spoken about the changes proposed in the tax laws to ease compliance and plug tax evasion loopholes.

· The changes in personal taxation have not evoked much discussion or debate, given the tiny size of taxpayer that would be impacted by the changes.

From the investors’ viewpoint, however, there are some budget proposals that may potentially have deeper and wider impact than what would appear prima facie. Investors therefore need to examine these proposals in some more detail. I would for example like to, inter alia, analyse the following in some more detail:

Impact on working capital

The budget proposes to force businesses to make prompt payments to MSME. It is proposed that if a business fails to make payments to MSME vendors within the time specified in the MSMED Act (45 days or less), the expense in respect of such payment will be allowed only on actual payment basis, and not on accrual basis.

It would be worth examining Automobile OEMs, FMCG companies, textile companies etc. who have major sourcing from MSME vendors. This provision could have a material impact on their working capital financing requirement; as the credit period of MSME dues reduces to less than 45 days.

Insurers’ demand for gilt

Life insurance companies are one of the major buyers of government securities. The budget proposes to withdraw tax concessions in respect of insurance policies where the annual premium is in excess of rupees five lacs per annum per insured person. The instant market reaction to this proposal has been quite negative for life insurance companies.

If the market reaction was valid and life insurance companies are most likely to see a sharp fall in new insurance premium; it would be worthwhile to examine the impact of lower incremental insurance companies’ demand for government securities. Given (i) most banks are facing deterioration in the credit to deposit ratio due to faster rising credit demand; and (ii) the changes in rules of TDS on interest for the foreign portfolio investors are likely to further adversely impact the foreign demand for the Indian gilt; lower insurance demand could pressurize the bond yield higher.

Investors need to analyse this factor carefully to find out if any changes in asset allocation are required.

Savings vs Tax savings

In the past couple of years, the finance minister has given clear indications that the government wants to move towards a new tax regime with minimum tax exemptions and deductions. The latest budget reaffirms this stance.

Savings linked to tax saving schemes has been particularly popular amongst the salaried tax payers. It would not be exaggeration to say that a section of tax payers has been forced to curb consumption and save. Most of these savings have been in savings schemes like EPF, PPF, NPS or life insurance. Lately, contribution to equity linked savings schemes has also attracted greater interest. Besides savings, tax concessions have encouraged investment in residential properties also.

The genesis of tax concession to encourage savings lies in the socialist regimes of yesteryears where (i) focus of governments was on curbing consumption; (ii) fiscal deficit financing was only from the domestic sources; and (iii) social security was negligible for non-government employees. The governments offered higher rates of interest and favourable tax treatment even on interest to encourage savings. This has put the banking system at relative disadvantage and prevented rates from falling materially in good times.

Most of these conditions are now changing fast. There is no need to curb consumption. Foreign borrowing is permitted for fiscal deficit financing. Changes in pension rules for government and PSE employees and introduction of a variety of social security schemes have changed the needs of savers of various categories of investors.

It is therefore appropriate that interest rate regimes are made more market oriented; and saver are encouraged to explore more attractive investment options.

An anomaly however is over reliance of the government on the small saving schemes for deficit financing. Over 40% of the deficit is now financed through high cost small savings. Considering the fiscal constraints of the central and state government, small saving schemes run the risk of turning into a Ponzi scheme where the old obligations could be discharged only from the fresh inflows. If we build even 2% probability of new flows being insufficient to fulfil redemption/maturity demand, we could have a disaster of epic proportions.

Game of Tom and Jerry continues

It has been a consistent endeavour of every finance minister in the past couple of decades to plug the loopholes that were being used for tax avoidance by the wealthy taxpayers. However, the tax experts and money managers have been able to find alternative methods. Thus, the game of Tom and Jerry continues between the tax authorities and taxpayers.

Staying with the tradition, the finance minister has sought to plug some more avenues that were frequently used by taxpayers to lower their tax liability. Rationalization of tax on income from market linked debentures (MLDs); large insurance policies; reinvestment of long term capital in buying house property, meaningful TCS on foreign travel and investments; etc. are some major proposals in the latest budget to curb tax avoidance.

Investors may note that with every budget the avenues for tax avoidance are narrowing. Thus, it is pertinent that they avoid “tax avoidance” as one of the investment objectives. The chances of them ending up more tax in their endeavour to save taxes are rising with each budget.

Friday, February 3, 2023

Budget FY24: Views and strategy of various market participants

Largely as expected; capex sustainability core focus (Phillips capital)

Budget fared well across categories – prudent fiscal position, steep rise in capex allocations, continued focus on sustainability, Atmanirbhar Bharat, and social upliftment.

Capex budgetary allocations have risen sharply in FY24 (up 37% vs. 23% in FY23); including IEBR, growth stands at 32%/10% in FY24/23. Incremental capex allocation in FY24 is highest for railways, roads, infra spending by states, and energy; defence and housing are muted; additional allocation of Rs 550bn has been made towards OMCs and BSNL capital infusion.

Sharp drop in food and fertiliser subsidy (Rs 1.6tn) is in the expected lines. MNREGA allocations have also see a sharp decline to Rs 600bn vs. Rs 894bn in FY23RE.

Fiscal deficit for FY24/23 is in line with our expectation – at 5.9%/6.4% of GDP; gross/net borrowing expectedly remains elevated at Rs 15.4tn/11.8tn, marginally higher vs. FY23. We expect this to keep yields elevated in the near future until clarity emerges on RBI rate reduction path (likely by Q3-Q4 FY24). State fiscal deficit limit has been set at 3.5% (including 0.5% for power sector reforms). Tax/GDP ratio at 11.1% bakes in all optimism, we expect marginal slippage considering likely economic softness in FY24. Revenue expenditure/disinvestment targets are realistic, marginal slippage also expected under non-tax revenue.

Strategy

Buoyant public and private capex keeps us positive on the investment sectors (capital goods, railways, cement, logistics; defence is a tad soft – as expected) more than the discretionary segments. We are also positive on the agriculture space, government’s focus on raising domestic production, and eventually encouraging exports – is a long-term positive for rural income. Near-term, we are not positive on rural demand, FY24 allocations not encouraging.

Union Budget FY24: A Fixed Income and Macro Perspective (IDFC Mutual Fund)

Central government gross borrowing through dated securities is estimated at Rs. 15.4 lakh crore in FY24, well within market expectations, after Rs. 14.2 lakh crore in FY23 which was also devoid of any surprise. States’ borrowing could pick up in FY24 in line with potentially mildly-higher fiscal deficit, higher SDL redemptions and a possible shift from the pattern in FY22 and FY23 of a consistent undershoot the borrowing calendar. This implies consolidated (centre + states) gross borrowing, moving up each year after moderating from the peak in FY21, could now rise beyond FY21 and well above pre-pandemic borrowing (Figure 4). Even net consolidated borrowing as a share of GDP will be 1.1ppt higher than FY20 (pre-pandemic). Total outstanding government liabilities remain high at 82% of GDP at end of Q2 2022, after rising to 89% of GDP in FY21 and FY22 from 75% in FY20.

However, the central government is now in a position such that if nominal growth is in the 10-11% range and expenditure does not rise sharply in FY25 and FY26, it could well be on the fiscal glide path and get to below-4.5% fiscal deficit in FY26.

Strategy

While gross borrowing announced today has positively surprised versus market expectation, the standalone number is nevertheless a significant one. We expect the yield curve to steepen further somewhat, especially over the latter part of the year when market may have better line of sight on whatever modest rate cuts to expect if at all down the line; assuming a soft-landing scenario for the developed world.

The environment for fixed income is decidedly getting more constructive given better macro stability, terminal policy rates in sight, and the consequent fall in global bond market volatility. This argues for somewhat higher duration in active funds than before. At any rate one has to compensate for the ‘roll down’ effect on portfolio duration that happens when one is passively holding the same set of bonds. For these reasons, and keeping consistent with our underlying view, we have expanded our consideration set to 3 - 6 year maturity bonds; a marginal tweak from 3 - 5 year maturities before.

Pragmatic budget with focus on Growth and Macroeconomic Stability (Canara Robeco)

Budget has managed to create investment acceleration without damaging other expenditures. This was a modestly positive for equity markets. Consistent key positive for economy has been that Govt has been trying to focus on productive spending within constraints of resources over last 8 years.

Strategy

Budget is modestly positive for Industrials, Banks and both FMCG and non-FMCG discretionary consumption. Equity market will move back to two key factors from tomorrow, the earnings (season) and cost of capital (interest rate outlook globally). We think that both these factors are neutral to negative for us from near term perspective and thus market will continue to consolidate till we get visibility on earnings upgrades or substantial decline in interest rates (Inflation globally/locally) to change multiples. India trades at premium to other Ems and thankfully that is correcting with the consolidation over last 1 year. Indian equity market trades at 19xFY24 earnings – with earnings CAGR of 13-14% over FY23-25E – in a fair valuation zone from near term perspective.

Marching ahead on sustainable growth path (JM Financials)

The main focus area of Budget FY24 was on capex, with a substantially higher allocation of INR 10tn (33% YoY) while adhering to the fiscal consolidation path. The fiscal deficit target is set at 5.9% of GDP for FY24, but the way forward to FY26 would be steep.

Capex target for FY23 missed slightly (INR 7.3tn vs INR 7.5tn FY23BE) as states could not undertake the capital expenditure. The revenue growth assumptions (10.5% YoY) look optically conservative since it is on a higher base of FY23. However; over the FY23BE figures, the revenue growth rate comes to 22% which is quite stretched.

Strategy

We have a constructive view on the markets and we believe that the high allocation towards capex and schemes like PM Awas yojana are likely to benefit real estate ancillaries like cement and building materials while companies in the industrial space are the clear beneficiaries of the governments capex push.

Capex boom all the way (Yes Securities)

Continuing from the previous years, this Budget is a futuristic blueprint that seeks to harness the full potential of the economy through universal development and to touch the lowest income pyramid with inclusive policies. Impetus for job creation and macro stability remains the economic objective of the Budget making exercise. To improve the future productive capacity of the economy, effective capital expenditure has been increased to 4.5% of GDP or INR 13.7 tn, with outlay for railways and roads respectively up by 50.0% and 25.0% respectively over the FY23RE.

We see the budget maths as being rational with the nominal GDP growth assumed at 10.5% and laud the government for being able to stick to a consolidation plan at 5.9% GFD/GDP in FY24BE from 6.4% in FY23RE.

Strategy

The yield curve has flattened out significantly as the RBI has sharply increased the short-term rates. We see some scope for the yield curve steepening once again while holding the short-end of the curve. Tighter liquidity, larger general government issuances along with probable increase in the corporate bond issuances could be the factors behind steepening of the G-sec curve.

As in most years, we see the central government front-loading its borrowings into H1 FY24, thereby creating a possibility for the 10-year G-sec yields to rise to around 7.60-7.75% in that period.

Critical would be the demand from the insurance companies to clear the market supplies. We note that the incremental buying of the insurance companies in H1FY23 is lower than in H2FY22. The demand for guaranteed returns insurance policies could also die out as banks have raised their deposit rates now and tax arbitrage at higher end of term premia is done away with in this Budget.

Balanced Budget With Capex Led Growth (Kotak Mahindra AMC)

❖7% Growth expectation for FY23 looks Conservative

❖Focus on 3G

• Growth - Fiscal consolidation & Infrastructure spending

• Governance - Improving Tax Compliance

• Green - Energy independence through green energy

❖Higher spending on Infrastructure than expectations to help Capex and Growth

❖Consumption to get a boost - Tax cuts

❖Multiplier effect on growth by pulling in private investment

❖Achievable divestment target of ₹ 610Bn

Strategy

❖Equity/Hybrid:

• Indian Markets trading at a premium to other Ems

• It’s a Buy on Dips Market

• Allocate via Hybrid Funds such as Balanced Advantage & Multi-Asset Funds

• Conservative investors can consider Equity Savings and Conservative Hybrid Funds

• Exposure to Equity Funds preferred via SIP route

❖Fixed Income:

• Market Linked Debentures will be taxed as Short Term Capital Gains at applicable rates. This will bring it at par with Debt Mutual Funds

• Yield curve has flattened in the last 1 year, 3-7 years segment of the curve looks attractive

• Short/ Medium Duration & Dynamic Bond Funds can be considered

• Some allocation to Long Duration Funds can be considered in case the long-term yields harden further

Consistent, Credible and Prudent (IIFL Asset Management)

In line with the past few budgets, the government maintained its focus on capital expenditure to improve long term growth potential. While the headline capex growth seems higher (37% growth YoY), the adjusted budget spends are still higher by 25% YoY post internal adjustments, which is commendable. Further, a larger proportion of the capex has been provisioned for the central government (against spends by states and PSUs), which should result in better execution.

The FM maintained the trend of projecting realistic and achievable estimates, leaving the potential for an upside surprise if there is a pickup in economic activity. Tax revenues are projected to grow at 10.4% (vs 12.3% in FY23). Divestments targets also seem achievable at INR 610 bn (vs INR 600 bn in FY23). Improvement in global activity and peaking of interest rates could lead to upward revisions and lower deficits compared to projections.

Strategy

We maintain our focus on creating a balanced portfolio with a mix of companies which are likely to – experience structural growth or benefit from the economic turnarounds. In terms of sectors, we see interesting opportunities in Private Sector Financials, Consumer Discretionary, Industrials and Materials to participate in the domestic economic recovery.

We continue to maintain an overweight exposure to the secular segment (31% portfolio vs 21% for benchmark) and remain underweight in value traps (20% vs 31%) across most of our portfolios. Our portfolios are also overweight cyclicals (22% vs 16%) vs defensives (25% vs 32%), we expect this trend to continue in the near term.

Growth support; fiscal consolidation (DBS)

The central government’s FY24 Budget was growth supportive whilst sticking with a

modest glide path for consolidation. The underlying math was reasonable as it factored

in the upcoming moderation in nominal GDP growth, and lower tax buoyancy, whilst prioritising long-gestation capex spending.

Accompanying sectoral announcements were a mix of tweaks to the personal income tax brackets (to provide support to the salaried class), changes in custom duties to support local manufacturing, and targeting green transition goals, which was balanced by higher allocation towards MSME credit guarantee schemes, skill upgradation and other inclusive welfare goals. The medium-term path of further fiscal rationalisation remains in place as the government reinforced its target of lowering the deficit to -4.5% of GDP by FY26.

Strategy

The high contribution of small saving scheme might be at risk as banks continue to offer competing deposit returns. Looking ahead, market conditions might be less conducive in FY24 on account of a narrower liquidity balance, squeeze on banks as credit growth continues to outpace deposit generation hurting incremental demand for bonds as well as limited progress on global bond index inclusion plans. This increases the likelihood that the central bank might show its hand via open market operations in the course of the year to contain unexpected volatility.