Do it yourself

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.

In the past three weeks our team travelled through eight out of ten administrative divisions of Madhya Pradesh (MP), covering thirty six out of fifty two districts in the state. I may share some key points from the socio-economic and political assessment made by the team.

Socio-economic assessment

From socio-economic perspective, MP comprises of easily distinguishable three states –

1.    Tribal areas that are extremely poor; lack basic amenities (especially health and education); not properly connected; agrarian; highly contended; and mostly integrated with nature. Though the non-tribal elements and cultures have started to make inroads in these areas from the fringes, the impact so far is limited. Mobile phones, packaged snacks, pan masala (chewing tobacco sachets), motorcycles (scooty), small solar panels, shirt-pants, denim, plastic crockery, are main signs of what is commonly known as “modern civilization” in the tribal areas of the state.

In a state that is least divided on religious lines, one key area of struggle in the tribal areas appears to be between missionaries attached to various religious organizations and social workers who do not subscribe to any particular religion. While all try to help the tribal population, there is a persistent strife.

2.    Modern cities like Indore and Gwalior that have emerged as prominent centers of higher education and IT services. These cities are as modern, developed, diverse and cosmopolitan as any other major city in the country. The rate of growth in this part is high

3.    Rural areas and smaller cities & towns that sustain on agriculture & horticulture, trading of farm produce, food processing, public sector undertakings, mining and government services. In the past one decade this part of the state has gathered some steam and is witnessing higher but still below potential growth. The crops have diversified to more cash crops, horticulture and forest produce; tourism has improved due to better road and civil aviation development; mining, electricity and numerous defence units have also seen faster development.

The inequalities in these three parts of the state are stark and inexplicable. City of Indore is counted amongst the top centers for higher education in the country and is ranked as the cleanest city in the country. Merely 100 miles away from Indore is Khandwa district, home to Korku Tribal who live in abject poverty and ignorance. The tribal population in the adjoining Burhanpur, Betul, Chhindwara districts areas is also not placed any better. In fact there seems to be little connect between the three parts of the state.

The state has tremendous potential for religious, historical, ecological, adventure and leisure tourism. Unfortunately, it has not been able to attract rich tourists beyond Khajuraho and Tiger Safaris. A large proportion of the tourists visiting the state are local budget tourists or poor pilgrims. The development trajectory of the state appears lacking a clear vision. A small business community owns most of the industry and mining business and follows a typical colonial business model. The native tribal population, who is the legitimate owner of the abundant natural wealth of the state, is mostly deprived of the benefits.

Thankfully, unlike the neighboring UP and Rajasthan, the educated youth of the state is still not eager to migrate to Mumbai, Bengaluru or foreign shores. A large proportion of these youth is content with whatever is available in their home towns; though the restlessness may be increasing with each passing year.

Political assessment

The state is scheduled to have assembly elections in the next seven to eight months. However, the political activities are still subdued and limited to some inaugurations and facilitation rallies by the incumbent Chief Minister Mr. Shivraj Singh Chouhan (BJP) and Mr. Kamal Nath (Indian National Congress), who claims to be the primary challenger to the incumbent chief minister.

Not much political activities are visible in hinterlands and at block & village levels; except that the aspiring candidates have started putting up random posters to increase their visibility to the decision makers in Bhopal and Delhi.

The religious fervor that is visible in neighboring UP is not present in the state except in Bhopal, Indore and Ujjain. The politics therefore is mostly focused on caste, class and local personalities.

The incumbent government appears to be facing significant anti-incumbency; but the primary challenger is not very popular outside Jabalpur and Narmadapuram divisions. Though the internal conflict within the Congress party has reduced significantly after departure of Jyotiraditya Scindia; the acceptability of Kamal Nath may not be significant in northern (Chambal, Gwalior, Sagar divisions) and eastern (Rewa and Shadol divisions), areas of the state.

The other parties like BSP, SP, AAP etc. have insignificant localized presence and may not be a relevant factor in the election. Surprisingly, despite abject poverty, exploitation and inequalities there is no presence of the communist movement in the state.

Though it may be early days to make a clear assessment, as of now the state seems to be heading towards a close contest, like 2018, with BJP having a small lead. The situation could change if either of two major parties announces a change in local leadership. The central leaderships of both the major parties have a limited role in the local politics of the state; as their appeal may be limited to a few large cities only.

Also see Exploring India – Part 1

FY24-25 Macro and Strategy Outlook (Phillips Capital)

The Indian economy will go through a phase of softness and consolidation in FY24 due to the higher base of the last two years, steeper interest rates, and a global slowdown. Supportive government policies and the long-term potential of the Indian economy will continue to augur well for capital formation, but other GDP components like consumption and exports are expected to weaken in FY24. Corporate earnings are currently estimated to be extremely strong but we expect disappointment and cuts ahead. So far, growth and inflation have been fairly resilient, but we anticipate weaker trends in FY24; weak demand should dent pricing power, keeping inflation under control in FY24.

Key advanced economies are not yet showing meaningful signs of slowdown/recession; so, elevated inflation and rising growth will lead to more interest rate tightening followed by rates being held higher for longer, which should lead to growth slowing down in 2023 in these economies.

As a result, equities should continue be under pressure in the near/medium term (we have been cautious to negative since Nifty was at 18.2k and as latest as last week. In case, Indian and global central bankers call out peaking of interest rates at current levels, equities will respond positively. For India, we assign a PE of 18.0-18.5x to our FY24-25 Nifty-50 earnings estimates (assuming a 6% discount to current EPS growth estimates of +18%/+15% in FY24/25), and forecast a Nifty target of 18,500-19,500 for March-September 2024. While the Indian economy should fundamentally be on a strong footing in FY25, the return of a formidable BJP in 2024 elections and controlled inflationary and interest environment can induce markets higher (19,500-20,000), ceteris paribus.

While medium-term challenges will mar stock returns across the board, from a long-term perspective, we remain positive on cyclicals vs. discretionary; sector preference – industrials, cement, defence, financials, and logistics. For others, we will adopt a bottom-up approach in stock selection.

Our base-case scenario for FY24 (India/globe) assumes stable/lower commodity prices, lower inflation trends, higher interest rates (followed by a pause), weaker economic growth (not a steep recession), and stable geo-political conditions.

More evidence of growth emanating from capex and credit cycle (ICICI Securities)

Q3FY23 GDP growth of 4.4% was largely supported by GFCF (gross fixed capital formation) growth of 8.3% while consumption (PFCE – private final consumption expenditure) lagged at 2.1%.

Central government capex spends picked pace in Jan’23 and stands at Rs7.2trn on a trailing 12-month (TTM) basis (43% YoY growth) although state capex growth is lagging at Rs5.5trn on TTM basis (10% YoY growth). Corporate capex of listed space is showing signs of improvement with TTM aggregate capex rising above Rs7trn level.

Non-food credit growth for Feb’23 was robust at 16.5%. Other high-frequency indicators supporting the ‘investment cycle’ include robust core sector growth, electricity demand, thermal PLF and diesel consumption (table-1).

Household investment in real estate, which is a significant portion of GFCF (25% share of GFCF in FY21), is showing signs of a cyclical upswing.

Momentum in Industrial Output Continues (CARE Ratings)

IIP growth improved further to 5.2% in January from 4.7% in December on account of broad-based expansion across sectors. Positive contributions to growth came from manufacturing (2.9 percentage points (PP), mining (1.2pp) and electricity (1.0 pp). Further decomposition showed that the positive momentum effect continued to support industrial activity for the third consecutive month. Core sector output also accelerated to 7.8% in January compared with 7.0% in the previous month led by coal, natural gas, fertiliser, steel, and electricity sectors.

Delving deeper into the manufacturing sector showed that 13 out of 23 categories recorded a y-o-y growth in output. However, weak external demand continued to weigh on the performance of output of some export-intensive sectors like Textile, Apparel and Leather products. Mining and electricity continued to register healthy growth of 8.8% and 12.7% respectively. Moreover, healthy growth over the pre-pandemic level (January 2019) was witnessed in all three sectors.

Analysis of use-based classification showed that consumer non-durable goods continued to record an encouraging performance for the third straight month with a growth of 6.2%. However, output of consumer durable goods remained in the contractionary zone for the second straight month and also remained 14.8% lower when compared to the pre-pandemic level (January 2019). Capital and Infrastructure goods continued to register healthy growth with 11.0% and 8.1% growth respectively in January. Thrust on capital spending and an uptick in new investment projects announced will remain supportive of industrial activity going forward.

India’s sharp outperformance in CY22 has started waning (MOFSL)

Impaired by relatively muted corporate earnings season and severe FII selling (USD2.5b CYTD), India’s sharp outperformance in CY22 has started fading CYTD. Corporate earnings were below our expectations in 3QFY23 led by weak demand and macro headwinds, with Financials and Autos holding the fort once again.

Slowdown in consumption is a material concern if trends do not reverse immediately. However, markets are trading flat YTD and valuations are in their fair value zone with Nifty trading at ~18x FY24E EPS and thus offering room for modest upside if corporate earnings do not see material downgrades ahead.

As the third earnings season of FY23 has culminated, we examine the top-100 stocks by market cap from a consensus perspective and gauge their popularity.

Decoding deposit growth (Nirmal Bang Institutional Equities)

Incremental deposit market share for PVBs continues to be below FY20 levels: Over the past few years, PVBs have gained significant deposit market share, which stood at 31% for FY22 vs 22% in FY16. Moreover, PSBs have lost market share during the same period at 60% for FY22 vs 71% in FY16. Notably, on an incremental basis, the PVBs’ market share before FY20 was ~66%, which declined significantly in FY20 to 33% after the RBI imposed moratorium on YES Bank. As a result, majority of the deposits went to the PSBs and large PVBs. However, the PVBs’ incremental market share post that did not pick up pace significantly and stood at ~43% while PSBs’ incremental market share stood at ~48% for FY22.

Household deposit growth moderates: Households’ deposits continued to contribute the highest towards total deposits at ~63% while corporate, government and NRI deposits contributed 22%/9%/6%. Households’ deposit growth moderated to ~8% in FY22 vs 13% in FY21 (this was induced by covid-19), and stands below the pre-covid growth of 9% in FY20. Notably, since FY19, PSBs have lost market share in household deposits and their market share stood at 66.8% in FY22 vs 71.2% in FY19 while PVBs have captured market share at 26.5% as on FY22 vs 22.7% in FY19. Also, SFBs have registered an increase in household deposits’ market share, which stood at 0.8% as on FY22.

Composition of deposits from Metro regions continues to remain the highest: Deposits from Metro regions has registered a CAGR of 10.1% over FY16-FY22 and constitutes ~52% of the total deposits. Non-metro regions (urban/semi-urban/rural regions) have registered a CAGR of 9.2%/10.8%/10.1% over FY16-FY22 and constitute 21.4%/16.1%/10.6% of total deposits. Moreover, post covid-19, deposit growth from Metro regions has picked up pace and consequently their composition in total deposits has inched back to pre-covid levels at ~52%.

Focus of banks shifts towards branch expansion: Branch expansion registered a CAGR of 3.5% over FY16-FY20. However, during FY20–FY22, branch expansion was muted due to covid-19 and recorded 0.8% CAGR as most banks focused on digital infrastructure. Moreover, FY22 onwards, banks have again shifted their focus towards branch expansion and registered growth of 2.21% YoY in 3QFY23. Banks are largely focusing on Semi-Urban/ Metropolitan regions with branches in these regions clocking a growth of 2.7%/ 2.4% YoY.

Credit Growth Flattens a Tad but Continues to be Robust (CARE Ratings)

Credit offtake rose by 15.5% year on year (y-o-y) for the fortnight ended February 24, 2023. In absolute terms, credit offtake expanded by Rs.15.6 lakh crore to Rs.134.5 lakh as of February 24, 2023 from March 2022. The growth has been driven by personal loans, robust growth in NBFCs, higher working capital requirements due to inflation and an Indian currency depreciation (INR) and lower borrowings from overseas markets.

With a larger base, deposit growth witnessed a slower growth at 10.1% y-o-y compared to credit growth for the fortnight ended February 24, 2023. Deposit rates have already risen and are expected to go up even further due to elevated 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 short-term Weighted Average Call Rate (WACR) has reached 6.72% (as of February 24, 2023) increasing by 104.0% y-o-y and 86.0% from March 31, 2022, due to a rise in policy rates and lower liquidity in the system.

Credit growth has remained robust even amid the significant rise in interest rates, and global uncertainties related to geo-political, and supply chain issues. The growth has been broad-based across the segments and is expected to be in the mid-teens in FY23. Personal Loans and NBFCs have been the key growth drivers for FY23. Meanwhile, a slowdown in global growth due to rising interest rates, and rate hikes in India could impact credit growth.

CPI remains above RBI’s upper band, WPI cools down (BoB)

CPI inflation eases marginally: CPI inflation data edged down modestly to 6.4% in Feb’23 after moving up to 6.5% in Jan’23. For the second-month in a row, CPI data came in above RBI’s upper tolerance band. Food inflation virtually remained steady at 5.9% in Feb’23. Stickiness of core inflation persists.

Modest changes in Food inflation: CPI food index continued to remain elevated at 5.95% in Feb’23 against 6% in Jan’23, on YoY basis. Amongst major food items, sharpest pace of increase was led by fruit prices which moved up to 6-month high at 6.4% in Feb’23 from 3% in Jan’23. Cereals continued to clock double digit inflation (highest in this series) in line with expectation at 16.7% from 16.3% in Jan’23. Even milk prices also rose to 9.6% (8-year high) in Feb’23 from 8.8% in Jan’23. Pace of disinflation in vegetable prices went down from -11.7% in Jan’23 to -11.6% in Feb’23. Notably, 5 out of 12 broad group of food and beverage noticed inflation above 6%. However, inflation of eggs, meat & fish, spices and pulses registered a fall in Feb’23.

Core CPI (excl. food and fuel) remained sticky at 6.1% in Feb’23 as well. Amongst major items of core, housing inflation accelerated to more than 3-year high to 4.8% in Feb’23 from 4.6% in Jan’23. Health inflation also rose to 10-month high at 6.5% in Feb’23 from 6.4%. However, some comfort has been seen with lower prices of gold contributing towards personal care and effect inflation going down to 9.4% from 9.6% in Jan’23. Amongst the 8 major broad group of core inflation, 4 of the items have remained above 6%.

Fuel inflation: Fuel prices eased further to 9.9% in Feb’23 from 10.8% in Jan’23. On sequential basis though, fuel inflation had inched up to 0.1% in Feb’23.

Headline WPI moderated to 25-month low of 3.9% in Feb’23 (BoB est.: 4.1%) from 4.7% in Jan’23. Food inflation eased only a tad to 2.8% in Feb’23 from 2.9% in Jan’23. Amongst these, inflation eased in food grains (11.8% versus 13%), eggs, meat & fish (1.5% versus 2.2%) and spices (12.5% versus 16.1%).

Within food grains, cereal inflation moderated (13.9% versus 15.5%) on account of wheat (18.5% versus 23.6%). However, paddy inflation continued to inch up (8.6% versus 7.2%). Inflation in pulses was also seen ticking up in Feb’23 (2.6% versus 2.4%). At the international level, World Bank’s pink sheet data shows that global paddy prices have begun to moderate in Feb’23 (15% versus 18% in Jan’23) and wheat prices are seen contracting (-3% versus 0%). Domestically, in case of vegetables, contraction in prices was slower (-21.5% versus -26.5%), while in case of fruits, pressure is seeing building up with inflation at 7% in Feb’23 versus 4.1% in Jan’23.

Aluminum—bleak demand and fading cost support (Kotak Securities)

Aluminum—bleak demand environment: Aluminum prices have been on a roller coaster ride, with an 8% decline in the past one month after a strong 25% rally in the previous two months. Demand environment continues to disappoint, with the world ex-China demand witnessing a 9% yoy demand decline in 4QCY21 and similar de-growth is expected in 1QCY23, mainly led by weakness in Europe and North America. In China, there is no evidence of strong demand pickup after the new year holidays, with all hopes of recovery now from 2QCY23. MJP, the Japanese physical premium (the most relevant physical premium benchmark for Indian aluminum producers), remains on a downtrend at US$85/ton in 1QCY23 versus US$99/ton in 4QCY22 and US$177/ton in 1QCY22, which reaffirms the bleak demand environment.

Cost support is fading with declining thermal coal and gas prices Aluminum spreads remain near a 6-month high, despite the recent metal price correction. Thermal coal prices have corrected 30% CYTD 2023 and underperformed aluminum prices. Furthermore, with the declining European gas prices, the supply risk from Europe is behind us. We note that the spot aluminum spreads are at US$900/ton, 16% higher than 5-year average of ~US$775/ton. We see limited risk of further supply curtailments on declining cost support, as spot prices are above 90% percentile of the cost curve.

Market deficit is behind us We marginally cut our demand and increase our supply estimates for CY2023-25E and now estimate a surplus of 142/73/69 k tons in aluminum market in CY2023/24/25E versus a deficit earlier (refer Exhibit 2). We expect prices to remain range-bound at current levels, with a forecast of US$2,450/2,400/ton for FY2024/25E. A combination of weak demand and reducing supply risk has increased global inventory to 10.3 mn tons, +9% yoy at a 20-month high.

Remain cautious on aluminum plays in equities Indian aluminum producers should benefit from higher spreads, sequentially in 4QFY23 on improved domestic coal supply and higher metal prices. However, we expect margins to remain range-bound along with LME prices over FY2024-25E.