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Thursday, June 8, 2023

World Bank cautions on impending global financial crisis

In its latest flagship Global Economic Prospects (June 2023) report, the World Bank has highlighted numerous weak spots in the global economy, which if not handled promptly and properly could result in a financial crisis culminating in a deep downturn in 2024.

The report emphasizes that the global economy is far from full recovery from the impact of coronavirus induced slowdown. It severely lacks the strength necessary to make progress on “global ambitions to eliminate extreme poverty, counter climate change, and replenish human capital.”

It is further emphasized that “years before COVID-19 arrived, governments had already been turning their backs on free and fair trade. And long before the outbreak of the pandemic, governments across the world had developed an appetite for huge budget deficits. They turned a blind eye to the dangers of rising debt-to-GDP ratios. If a lost decade is to be avoided, these failures must be corrected—now, not later.”

The following are some of the noteworthy excerpts from the 186 pages report released earlier this week.

· All the major drivers of global growth—including productivity, trade, labor force and investment growth—are expected to weaken over the remainder of this decade. Potential growth—the maximum growth the global economy can sustain over the longer term without igniting inflation—is expected to fall to a three-decade low over the remainder of the 2020s.

· Emerging markets and developing economies (EMDEs) lack wherewithal to create jobs and deliver essential services to their most vulnerable citizens. These problems must be tackled promptly if the world is to establish the economic footing necessary for even a semblance of success on global development goals.

· Despite the steepest global interest-rate hiking cycle in four decades, inflation remains high; even by end-2024, it will remain above the target range of most inflation-targeting central banks. Policymakers in most economies will need to be exceptionally agile to cope with the risks that come with such rate hikes. Today, high interest rates aren’t merely crimping growth in EMDEs; they are also dampening investment and intensifying the risk of financial crises. These challenges would intensify in the event of more widespread banking-sector strains in advanced economies.

· The world economy will remain frail—and at risk of a deeper downturn—this year and in 2024. Our baseline scenario calls for global growth to slow from 3.1 percent in 2022 to 2.1 percent in 2023, before inching up to 2.4 percent in 2024. Even this tepid growth assumes that stress in the banking sector of advanced economies does not spill over to EMDEs.

· Rapid interest-rate increases of the kind that have been underway in the United States over the past year are correlated with a higher likelihood of Foreword financial crises in EMDEs. And if the current banking stress in advanced economies metastasizes into widespread financial turmoil affecting EMDEs, the worst-case scenario would have arrived: the global economy would experience a deep downturn next year.

· Interest payments are taking an ever-bigger bite out of these resources—more than one-fifth of revenues in many countries—leaving them with little fiscal space to cope with the next shock or make the investments necessary to revive growth.

Global Outlook

Growth: The global economy remains in a precarious state amid the protracted effects of the overlapping negative shocks of the pandemic, the Russian Federation’s invasion of Ukraine, and the sharp tightening of monetary policy to contain high inflation. The resilience that global economic activity exhibited earlier this year is expected to fade.

Growth in several major economies was stronger than envisaged at the beginning of the year, with faster-than-expected economic reopening in China and resilient consumption in the United States. Nonetheless, for 2023 as a whole, global activity is projected to slow, with a pronounced deceleration in advanced economies and a sizable pickup in China.

After growing 3.1 percent last year, the global economy is set to slow substantially in 2023, to 2.1 percent, amid continued monetary policy tightening to rein in high inflation, before a tepid recovery in 2024, to 2.4 percent. Growth in advanced economies is set to decelerate substantially for 2023 as a whole, to 0.7 percent, and to remain feeble in 2024. In EMDEs, aggregate growth is projected to edge up to 4 percent in 2023, almost entirely due to a rebound in China following the removal of strict pandemic-related mobility restrictions.

Global growth could be weaker than anticipated in the event of more widespread banking sector stress, or if more persistent inflation pressures prompt tighter-than-expected monetary policy. Weak growth prospects and heightened risks in the near term compound a long-term slowdown in potential growth.

Inflation: Inflation remains above target in almost all inflation-targeting economies. With supply chain pressures easing and energy prices declining, excess demand appears to be a key driver of continuing high inflation in advanced economies, though lingering impairments to supply capacity may also still play a role.

India: In India, which accounts for three-quarters of output in the South Asia region, growth in early 2023 remained below what it achieved in the decade before the pandemic as higher prices and rising borrowing costs weighed on private consumption. However, manufacturing rebounded into 2023 after contracting in the second half of 2022, and investment growth remained buoyant as the government ramped up capital expenditure. Private investment was also likely boosted by increasing corporate profits. Unemployment declined to 6.8 percent in the first quarter of 2023, the lowest since the onset of the COVID-19 pandemic, and labor force participation increased.

India’s headline consumer price inflation has returned to within the central bank’s 2-6 percent tolerance band.

Growth in India is expected to slow further to 6.3 percent in FY2023/24 (April-March), a 0.3 percentage point downward revision from January. This slowdown is attributed to private consumption being constrained by high inflation and rising borrowing costs, while government consumption is impacted by fiscal consolidation.

Growth is projected to pick up slightly through FY2025/26 as inflation moves back toward the midpoint of the tolerance range and reforms payoff. India will remain the fastest-growing economy (in terms of both aggregate and per capita GDP) of the largest EMDEs.

(Full report is available here)

Wednesday, June 7, 2023

Not looking forward to hear the governor Das tomorrow

The Monetary Policy Committee (MPC) is currently holding its bi-monthly meeting. This particular MPC meeting is perhaps one of the least discussed by the market participants. There is not much anticipation about the outcome that will be known tomorrow morning. The consensus overwhelmingly believes that RBI will maintain the status quo on rates and monetary policy stance.

A quick reference to a note prepared by the research team of the State Bank of India would be apt to highlight the extent of the lack of excitement amongst market participants over this MPC meet. The SBI team devoted three full pages to verify a humorous US study that correlates the height of Fed chairman to the rate hikes and discovered that incidentally it is true in the case of India also.

Though the market is divided in its expectation about the course of action the Federal Open Market Committee (FOMC) of the Federal Reserve of the US would take in their meeting scheduled on 13-14 June 2023; few expect a 25bps hike by the Fed would have any bearing on the RBI decision making. To that extent RBI policy making effort may have already diverged from the developed market central bankers, particularly the US Federal Reserve.

The reasons for this divergence in the direction of monetary policy are obvious – strong growth data; inflation within tolerance range; stable bonds and currency markets; comfortable liquidity; positive foreign flows; much improved current account; and better than expected corporate performance. Specter of an erratic monsoon is definitely a red flag; but it may influence the timing to begin easing the monetary policy rather than the decision to maintain the status quo.

I find it interesting to note that economists are not bothered to mention the probability of the MPC to consider accelerated tightening due to heating of economy, especially given the GDP growth has outpaced RBI’s own much above consensus forecast; spike in unsecured personal loans; and sharp rise in real estate prices in most urban and semi urban pockets.

Like market participants, I am not eagerly waiting to hear what the governor Das has to say on the MPC decision tomorrow morning. Nonetheless, I would be keenly watching if the RBI takes some precautionary steps to check unsecured personal loans and credit to the real estate market. I am also not keen to look for a hint of rate cut in the August meeting, though the real rates are now in the territory where these could constrict growth.

Tuesday, June 6, 2023

“Peak coal” – not yet

The benchmark Newcastle thermal coal future prices have fallen to US$131/ton, the lowest price since June 2021. Though the current prices are down over 70% from the highs witnessed in September 2022; these are still materially higher from the pre covid 10yr average of close to US85/ton.

The sharp spike witnessed in the past couple of years was initially due to logistic constraints due to Covid-19 and was further exacerbated by the geopolitical issues presented by Russian invasion of Ukraine in early 2022. NATO’s economic sanctions on Russia, the single largest supplier of energy to Europe, resulted in a rush to secure energy supplies from the alternative sources, catapulting the prices of coal and natural gas, most common fuels used for power generation, sky high.

Now, since the supplies from other large coal producers, e.g, Indonesia, Australia and the US have improved materially, and European countries have built strong reserves, it is likely that the coal prices may remain stable or even decline further in the near future. Alongside correction in the thermal coal (used mostly in energy generation) the prices of metallurgical (met) coke, calcined petroleum coke (CPC) and coking coal (used by a variety of industry to fire blast furnaces, smelters, etc.) have also corrected, though in proportion to the thermal coal; easing cost pressures a wide spectrum of industries.

Some experts have forecasted the thermal coal prices to bounce back to US$175-200/ton range by the end of 2023 and stabilize there, though the World Coal Council believes that it all depends on how the economies of India and China would behave. July Ndlovu, chairman of the World Coal Association (WCA) and chief executive of South Africa's Thungela Resources (TGAJ.J), was recently quoted by Reuters saying “Europe's "disproportionate" role in deciding coal prices was over. Going forward ... what happens with China and India is what would drive the fundamentals for energy, because that's where growth and energy demand is". (see here)

Interestingly, while “peak oil” has been a regular topic of discussion amongst the market participants, the discussion on “peak coal” is not that popular. In a recent article Observer Research Foundation, highlighted that the sharp rise in coal demand in India may have pushed back the “peak coal” by a few years.

As per the article—

In 2020, the International Energy Agency (IEA), categorically stated that global coal demand peaked in 2014 and coal use in power generation is likely to peak before 2030. Coal use in China, which accounted for 50 percent of global coal consumption, was expected to peak around 2025. Global coal demand was not expected to return to its pre-COVID-19 levels and coal’s share in the global energy mix was expected to fall below 20 percent for the first time since the industrial revolution.

Though coal demand in India was projected to increase in the foreseeable future accounting for 14 percent of global demand by 2030, growth in coal demand was projected to be substantially lower than what was expected earlier. The IEA expected demand for coal (for power generation) in India to increase only by 2.6 percent annually till 2030. Some reports suggested that demand for coal for power generation in India peaked in 2018 and is unlikely to return to pre-COVID-19 levels given the high target set for RE by the government. Post COVID trends in coal demand growth in India suggests that this view reflected hope rather than reality (emphasis supplied).

In 2014, the year that was supposed to represent “peak-coal” according to the IEA, global coal demand was 5.680 billion tonnes (BT) in which thermal coal used for power generation accounted for 4.347 BT or over 76 percent. In 2021, global coal demand was 7.947 BT in which thermal coal demand was 5.350 BT. Coal demand growth stubbornly refused to oblige projections of peak coal in 2014. In 2021 coal demand was close to its all-time high contributing to the largest-ever annual increase in global energy-related carbon dioxide (CO2) emissions in absolute terms. (emphasis supplied).

Global coal use is set to surpass 8 BT for the first time in 2022 eclipsing the previous record set in 2013, according to the IEA. Globally higher natural gas prices amid the global energy crisis have led to increased reliance on coal for generating power. In China, the world’s largest coal consumer, a heat wave and drought pushed up coal power generation during the summer, even as strict COVID-19 restrictions slowed down demand. In India heat waves in 2021 and 2022 increased the demand for coal-based power for cooling and irrigation. The demand for coal-based power in India and elsewhere is likely to continue in 2023 as record heat waves are anticipated on account of El-Niño.

In spite of the ambitious clean energy targets, Coal continues to be a critical factor in India’s growth and development plans during the next decade. According to a government-appointed high-level committee headed by the vice-chairman of NITI Aayog to advise on liberalization of the coal sector, “coal is not to be viewed as a source of revenue but instead, be considered as an input to economic growth through the sectors consuming coal.”

The committee recommended that the government should focus on early and maximum production of coal and work towards its abundant availability in the market, especially to bring faster economic development to the ‘aspiring regions’ of the country.

Accordingly, ambitious targets have been set for domestic coal production, coal bed methane, and coal gasification. To attract investment, the government has opened coal resources for commercial mining and it expects that commercial production of coal will have a positive impact on the production and processing of steel, aluminium, fertilisers and cement.

Obviously, it will have an impact on a number of businesses, primarily producers, importers, users and transporters of coal. The most interesting would be to watch how the private competition impacts the public sector coal producers. For investment, I would be exploring mining equipment and coal logistics companies rather than the coal producers and consumers.

Friday, June 2, 2023

Some notable research snippets of the week

GDP growth surprises on the upside (Kotak Securities)

4QFY23 real GDP growth of 6.1%—higher than expected—was supported by investment and net exports, while private consumption remained weak. Consequently, FY2023 real GDP growth also surprised on the upside. We expect 1HFY24 growth to remain steady, while in 2HFY24, we expect domestic demand to be weighed down by a global slowdown and the lagged impact of the RBI’s rate hike cycle. We revise up our FY2024 real GDP growth estimate to 5.8% (from 5.6% earlier).

4QFY23 GDP growth led by investments and net exports: 4QFY23 real GDP growth improved to 6.1% (3QFY23: 4.5%; consensus: 5.1%), led by investment (GFCF) growth at 8.9% and a sharp improvement in net exports. Private consumption growth remained weak at 2.8% (3QFY23: 2.2%). On a 4-year CAGR basis, in 4QFY23, GDP grew 4.1%, with private consumption growth of 4% and GFCF growth of 6.6%.

4QFY23 real GVA growth led by construction and contact-based services: 4QFY23 real GVA growth was at 6.5% (3QFY23: 4.7%), led by services at 6.9% and industrial activity at 6.3% (Exhibit 2). Growth in the construction sector at 10.4% (3QFY23: 8.3%) propped up industrial activity, while trade, hotel, transport, etc. growth at 9.1% (though lower than 3QFY23 at 9.6%) continued to push up service sector growth. We note that the buoyancy in manufacturing and services has been reflected in exports (but not as much in consumption).

FY2023 GDP growth surprises on the upside: FY2023 real GDP growth at 7.2% was largely supported by GFCF growth of 11.4% (FY2022: 14.6%), while private consumption growth of 7.5% was supported by 1HFY23 growth at 13.6%. On a 4-year CAGR basis, real GDP grew by 3.4%, while real GVA grew by 3.8% (Exhibit 3). Nominal GDP growth in FY2023 stood at 16.1% (FY2022: 18.4%).

Revise up our FY2024 real GDP growth estimate to 5.8%: We pencil in stronger 1HFY24 growth amid expectations of steady global growth. However, in 2HFY24, we factor in slowing demand conditions amid (1) a likely global slowdown, (2) domestic demand weighed down by the lagged impact of the RBI MPC’s rate hike cycle and (3) risks of a weak monsoon weighing on the rural sector (IMD has forecast normal monsoon at 96% of LPA; lower bound for normal monsoon). We note that private consumption is already showing signs of weakness. Balancing these risks, we revise up our FY2024 real GDP growth estimate to 5.8% (5.6% earlier) (Exhibit 3). A steady growth in 1HFY24 will also support the RBI staying on a prolonged pause while the rate hike cycle transmits through the economy.

Declining imports reflect falling prices, not declining demand (ICICI Securities)

India’s imports declined 6.2% YoY in Jan-Apr’23, leading many commentators to assert that this was evidence of declining domestic demand. Our conclusion from a deep dive into the key sources of decline in India’s imports is that 50% of them saw the value of their imports decline because of big YoY declines in import prices (oil, coal, fertilisers and vegetable-oil). Imports of machinery and base metals (together comprising 14% of India’s imports) continued to grow in FY22 and FY23, and saw no let-up in recent months – evidence of continued strength in India’s investment demand.

Electronics and chemical imports (which together comprise 19% of India’s imports) declined over the past half-year, while their exports continued to grow (very robustly in the case of electronics), suggesting that the import decline was actually evidence of import-substitution. Gems and jewellery imports (9% of total imports) are strongly correlated with gems and jewellery exports, so the latter’s sluggishness explains much of the decline in those imports, although a small portion likely also represents weaker domestic demand. That leaves just another 8% of total imports –among which plastic & rubber products (5% of imports) also grew in recent months.

So the import data provide scant evidence of any weakness in domestic demand.

From Electronics to Semiconductors (Jefferies)

As chips become the new oil, India has embarked on a path to replicate its success in autos to electronics and semiconductors. India offers a compelling China+1 choice, along with tailwinds of rising domestic demand and big incentives. India is already #2 in mobile manufacturing, while Apple is increasing exports. Govt is incentivizing chip & display fabs and test facilities, supplementing PLI, as it targets $300bn electronics production by FY26, ~3x from FY23.

Chip is the new oil. Electronics, and semiconductors as its building blocks, have become critical not only for economic progress of a nation but also for its national security. India's electronics demand is accelerating, led by rising incomes and digital adoption. Net electronic imports rose to $54bn in FY23, forming 21% of trade deficit, next only to oil (43%). India's per-capita electronics consumption is still a quarter of global average, providing big headroom for growth.

Aggressive targets. Recognizing the rising importance of electronics, Indian govt has embarked on a path to promote domestic manufacturing. The govt has set a target of raising electronics production to $300bn by FY26 (FY23: ~$100bn), which includes growing exports to $120bn by FY26 (FY23: ~$25bn). While targets seem ambitious, prudent policies have propelled India on the right path with electronics production and exports rising 3-4x in the last 7 years. Value addition is still low due to high dependence on imported components, which is the next focus area for the govt.

Big push for semiconductors. Indian govt has launched a ~$10bn program, providing incentives for ~50% of the project cost for chip and display fabrication, and testing facilities. Certain states are offering further ~20% incentive, taking total benefit to ~70%, along with subsidized land, water and power. These incentives supplement the ~$10bn allocated to electronics and related sectors under the PLI scheme.

States governments have started to complement the central incentive to attract investments too. Gujarat, for instance, is offering additional incentive of ~20% of the project cost along with 50-70% subsidy on land, 25-30% subsidy on power for 10 years, access to water and one-time reimbursement of stamp duty and registration charges. The state intends to set up a new electronics manufacturing hub to generate around 500,000 jobs in the sector.

Attracting global investments. Rising geopolitical uncertainty is prompting global electronics firms to a China+1 strategy, and India offers a compelling choice. India now forms 5-7% of Apple's global production and govt expects this to rise to 25%. Companies like Foxconn, Pegatron, Samsung and Dixon are expanding footprint in India, while others like Cisco plan to start new plants. A joint venture of Vedanta Group and Foxconn has made some progress for chip and display fabs. Tata Group, HCL Group, and Syrma seem interested in testing & packaging facilities.

A long journey but right path. Based on our discussions with govt officials and industry participants, we believe India possesses several key ingredients for success such as rising demand, low manufacturing cost, large fiscal support and strategic goodwill with the West; although, might need to strengthen supply chains and tech partnerships. India, in early 1980s, struggled to attract global auto companies. With prudent policies and rising demand, India is now #4 in auto production volumes globally and a market dominated by early entrants and domestic OEMs. Establishing electronics and semiconductor ecosystem is a multi-decade journey too, and, we believe India is on the right path.

Q4FY23 earnings review (Phillips Capital)

Q4FY23 revenues were largely in-line with expectations, EBITDA/earnings were above expectations. Similar number of companies recorded inline revenue and beat in earnings expectations.

In Nifty, strong earnings growth (yoy) was seen in Automobiles, Telecom, FMCG, and Financials while substantial contraction was recorded in Metals, Cement followed by pharma and power.

Nifty Revenue/EBITDA/PAT (yoy) stood in-line with estimates, at +11%/+11%/+0%.

On qoq basis, aggregate EBITDA margins increased by 60 bps for Nifty; PAT margins decreased by 10bps for Nifty. On yoy basis, EBITDA margin increased by 10bps for Nifty; PAT margins dip by 140.

Nifty EPS changes (consensus): For FY24 & FY25: Metals, Pharma, IT, Power and Industrials saw more downgrades while Financials, and FMCG were majorly upgraded.

Of the 46 Nifty companies (ex-Bajaj Finserv, Adani Enterprises, Adani Ports and Apollo Hospitals), 13 beat and 27 in-line with Revenue estimates, while 20/24 exceeded EBITDA/Earnings expectations; 6/15/14 companies missed expectation on Revenue/EBITDA/Earnings.

4QFY23: Financials reprises its role; Auto shines! (MOFSL)

Amid a challenging global macro backdrop, India Inc.’s profitability remained healthy in 4QFY23 – in line with our expectations. Our coverage universe reported the highest earnings growth in the last four quarters. Corporate earnings were driven by Financials and Auto, while Metals dragged aggregate profitability.

Among Nifty constituents, 42% beat our PAT estimates while 26% missed.

Excluding Financials, profit for Nifty constituents rose 7% YoY (est. 7% growth).

SBI, Tata Motors, BPCL, Reliance Industries, Axis Bank, ITC, HDFC, JSW Steel, Kotak Mahindra Bank, Bharti Airtel, Mahindra & Mahindra, Bajaj Auto, Asian Paints, Eicher Motors, Hero Motocorp, SBI Life, Nestle, and Britannia reported higher-than-estimated earnings. While ONGC, Infosys, Coal India, Maruti Suzuki, Bajaj Finserv, Tata Steel, UPL, Dr Reddy’s Labs, Cipla, HDFC Life, Tata Consumer, Grasim Industries, and Apollo Hospitals missed our profit estimates.

Eight Nifty companies saw an upgrade of over 5% in their FY24 EPS estimates; while ten witnessed a downgrade of over 5%.

Nifty EPS for FY23 was reduced by 0.6% to INR807 (earlier: INR812) largely due to notable downgrades in ONGC, Coal India, and BPCL.

FY24 Steel Outlook: Profitability to Sustain amid Global Headwinds (India Ratings)

India Ratings and Research (Ind-Ra) has maintained a neutral outlook for the steel sector for FY24. The agency forecasts steel demand growth in the range of 7%-9% yoy for FY24 (FY23: 12%; five-year CAGR ending FY23: 5%). This is mainly driven by a sustained increase in the government infrastructure spending for the 2024 general elections coupled with a healthy domestic demand from other end-user industries and a moderate pick-up in export demand post the roll back of the 15% export duty by the government in November 2022. Demand is likely to be supported by a high correlation of 0.8x-0.9x with gross fixed capital formation, which Ind-Ra expects to grow 9.6% yoy in FY24 (FY23 estimate: 11.5%). High demand growth in FY23 of 12% yoy on back of a strong domestic demand outpaced capacity addition in FY23, resulting in increased capacity utilisation for the industry. Growth in demand as well as capacity addition are likely to be in line, balancing the demand-supply scenario.

Global steel prices could face headwinds in FY24, while exceeding the pre-pandemic levels. Ind-Ra does not consider cheap imports into India as a big threat as China, being the largest supplier of steel globally, might continue with its supply discipline policy and cut on production for 2023 lower than 2022’s. Also, China’s domestic demand could rise, preventing an oversupply scenario. Ind-Ra expects the sector will continue to face headwinds from global macro trends, and a more rigorous enforcement of environmental protection policies will be a key monitorable.

Furthermore, a softening of raw material prices due to a normal demand-supply balance and China’s recent policy to maintain low iron ore price and higher use of domestic coking coal will protect the margins; however, a continued global growth slowdown in the major steel export region mainly EU and uneven steel demand recovery from China could result in range-bound prices over FY24.

India eCommerce - A 150 Bn Dollar market (Bernstein)

India's retail market is dominated by the unorganized sector (~88%). However, the mix is expected to change with organized retail gaining share and e-commerce accelerating. The food & grocery market is the largest retail category in India, accounting for ~75% of the market share, and we expect it to grow at 9% CAGR (2023-2030) to reach USD1,277 Bn by 2025.

E-Commerce is a concentrated market globally. Amazon has 40%+ share in the U.S. Alibaba has 60%+ share in China. India is evolving into a three-player market with Top 3-Amazon, Walmart & Reliance. The conventional retail business model starts out either offline (Walmart) or online (Amazon). Given distribution challenges and India’s propensity to “skip a generation” in most technologies, we believe Indian E-Commerce market will be different. An integrated model (offline + online + prime), strong distribution capability and superior cost advantage (against online players) are required from the start.

Reliance Jio's disruptive playbook: Reliance Industries (market cap of US$180 Bn) is building the largest digital ecosystem in India. Jio has 430 Mn mobile subscribers. Its digital ecosystem is compelling. Its retail arm has 18,300 retail stores in India (US$30 Bn sales, EBITDA +ve ~7.5%). Digital mix is scaling up ~17-18% ($ 6 Bn, ecommerce ). It’s a disruptive playbook – integrate offline + online + prime makes it the strongest competitor to Amazon/ Walmart.

Market structure: India is one of the few large and under-penetrated E-Commerce markets. The market is expected to reach ~US$150 Bn by 2025, with online penetration doubling in the next 5 years. Flipkart ($23 Bn GMV) & Amazon ($18-20 Bn GMV) lead on scale with ~60% market share. Reliance is No 3 (~$ 5.7Bn e Com sales) driven by attractive categories of Fashion (Ajio) & JioMart (E-Grocery). All 3 players are focused on -Get Big (scale), Get Close (customer loyalty) & Get Fit (profitability).

Consumers want offline + online + prime bundled: Indian consumers are being conditioned to expect an integrated value proposition, offline + online (E-Commerce, private brands) + prime (entertainment, OTT, gaming). Companies are bundling services to capture value from the real + virtual economy.

Get Big & Get Close : E-Commerce companies are focused on — acquiring scale (Get Big), building loyalty (Get Close). E-com companies are expanding TAM by going deep into Tier 2/3 markets & on niche premium categories (e.g. Beauty). Get Close is led by loyalty/prime programs. Amazon has ~15% of its active customers as prime members.

Focus on profitability (Get Fit): E-Commerce players are focusing on Get Fit (profitability) while balancing Get Big (scale). Few factors that have enabled improving margins incl. (1) Fashion (superior margins) has become the largest e-Commerce category capturing ~25% of GMV ahead of Mobile phones. (2) Mix of Ad sales (>80% GM%). (3) Increase in private labels as E-Commerce companies look to expand from low single digit margins.

We believe Reliance Retail/Jio is the best positioned player in the largest and fastest growing E-Commerce market. The advantages of its retail network, mobile network, digital ecosystem and “home field advantage” in a famously complex regulatory and operating environment mean in the Long Term, it will likely claim the lion’s share of the US$150 Bn+ eCommerce marketplace.

Automobile: 2Ws recovering gradually; CNG demand picking up in PVs...(MOFSL)

PVs: May’23 retails are expected to decline 2-4% YoY as chip shortage continues to hurt volumes. Our interactions indicate up to 10% hit on volumes due to chip shortages, resulting in lower inventory for high-end models/variants across OEMs. However, there is sufficient inventory for lower-end models resulting in average dealer inventory of 4-5 weeks (v/s 3-4 weeks until last month). MSIL’s new launches – Fronx/Jimny – have garnered initial bookings of over 30k units each. While the initial feedback suggests Fronx is witnessing cannibalization of up to 20% with Baleno, we will still wait as it further stabilizes. For MM, waiting period for Scorprio-N AMT (Z8 and Z8L) has reduced to 5-6 months, as the company is prioritizing its production, while waiting periods for other models remain intact. There has been an initial pickup in demand for CNG vehicles after the price cap imposed by the government. Consequently, discounts for CNG models have moderated by INR5-10k/unit. We expect dispatches for MSIL/MM (including pickups)/TTMT PV to grow 2%/11%/9% YoY.

2Ws: The segment has outperformed overall auto sector in May’23 with expected retail growth of 3-5% YoY. This is attributable to healthy demand in urban and low base of last year. The marriage season demand, which contributes 20-25% of the sales in key region of UP, Bihar, MP, etc., has not been effective this month. Our interactions indicate HMCL is expected to launch new products such as Passion Plus (in next few months) and Karizma (by late-FY24).

The launch of Karizma would be in line with the company’s aim to gain market share in the competitive premium segment. After the recent announcement of reducing e2W subsidy cap to 15% (from 40% earlier), the actual cost impact for the vehicles should range between INR25k-40k. This, as a result, is expected to increase the payback period by 1.5-2.0 years for e2Ws. Inventory across most of the 2W stands at a healthy level of 5-6 weeks. Within 2Ws, HMCL has the highest inventory (7-8 weeks) and HMSI has the lowest as there was unavailability of key models due to production shutdown for six days. We expect dispatches for HMCL to decline 14% YoY while the same should grow for TVSL (including 3W)/BJAUT (including 3W)/RE by ~3%/18%/17% YoY.

CVs: MHCV retails are expected to decline by 4-6% YoY due to the pre-buying effect before OBD-2 transition in Mar’23 and impact of seasonality. However, fleet availability remains healthy led by demand from infra-led activities, auto carriers and FMCG. This has consequently resulted in healthy fleet utilization level between 75% and 78%. On the other hand, bus demand continues to improve as the retails are expected to grow by mid-single sequentially. This has also been supported by healthy demand from education institutions. Led by lower retails, inventory levels have improved to 25-30 days (vs ~20 until last month). We expect dispatches for TTMT CV/AL to decline ~7%/3% YoY, while the same should grow by ~10% YoY for VECV.

Tractors: Our channel checks suggest May’23 retails to grow marginally by 1-3% YoY. States such as MP, UP, Rajasthan and Haryana have been benefitted due to better realization for crops such as wheat (15-20% higher than the average), barley and mustard. Demand from non-agri segment has improved as sales declined just 8-10% YoY (v/s 15-20% YoY decline in 2HFY23). While the enquiry levels are slowing down in agri segment, we expect marginal growth should continue to be led by subsidies announced by several states before elections such as – Chhattisgarh (40-50% subsidy on tractors/implements), MP (interest waiver scheme), Rajasthan (free tractors and implements to limited farmers), etc. We expect dispatches for MM tractors/Escorts to fall ~6%/4% YoY in May’23.

Global Strategy: What are we buying (CLSA)

What’s hot and what’s not. North Asian frenzy versus Asean indifference.

Year-to-date foreign investor appetite for EM equities has undergone a volte-face versus 2022 both in terms of the stronger aggregate (albeit selective) commitment to the region and the country composition of net purchases. Semi-annualised non-resident net equity buying of EM for 1H23 at US$52bn is the joint highest with 1H19. Ex-China, 1H23 net EM purchases are US$21bn, the highest since 2H20. The focus of enthusiasm has shifted to Taiwan, Korea and India and away from Brazil, Saudi Arabia, Thailand and Indonesia which were the 2022 favourites.

Foreign investors are buying EM again at the strongest pace since 1H19 There has been a reassuring sea change in non-resident investor interest in EM equities since our early November note (Throwing in the towel) highlighting what then appeared to us as a cyclical trough in sentiment. The year-to-date run rate of non-resident purchases of EM (with China) equities is the strongest since 2019. In developed Asia, the pace of accumulation by foreign investors of Japanese equities has also quickened through 2Q23 to the swiftest since 2021.

But foreign buying of EM is selective: Taiwan, Korea, and more recently India The favourites of 2022—Brazil, Saudi Arabia, Thailand and Indonesia—have given way to Taiwan and Korea, which as a proportion of total market capitalisation are the largest EM year-to-date recipients of net foreign flows at 0.6% and 0.5%, respectively. This represents a stark reversal in fortunes versus the sustained episode of foreign net selling endured by Taiwan and Korea over the previous two years for a cumulative 3.2% and 1.3% of market cap, respectively.

Collectively this amounts to Asia ex China being in vogue versus LatAm in 2022 Regionally, Asia ex China has recorded the strongest semi-annualised 1H23 foreign net purchases at US$23bn since 1H19 while Latin America (essentially Brazil) has seen net inflows dry up this year after receiving US$16bn in 2022.

Foreign ownership of EM remains depressed and there’s scope for accumulation The c.1ppt—uplift in the EM ex-China equity non-resident ownership level from the December 2022 low represents regaining less than a quarter of the two-year 4.2ppt decline in EM foreign ownership post the recent January 2021 peak. Indeed, Taiwan (-6.8ppt), Korea (-5.0ppt), have much lower foreign exposure than two years ago.

Thursday, June 1, 2023

Greed and Fear

In the first two months of FY24, Indian markets have done well. The market breadth has been strong and; volatility very low. The latest market rally could be described in at least three different ways, viz,

1. The benchmark Nifty50 has gained ~6.5% from the end of FY23; and the broader market indices like Nifty Midcap100 (~12%) and Nifty Smallcap 100 (~13%) have done significantly well during this period, indicating much improved sentiments. This view would imply that presently the sentiment of greed is dominating the sentiment of fear.

2. At the current level, Nifty50, Nifty Midcap100 are close to their all time high levels recorded in the 4Q2021 and again in 4Q2022. Whereas Nifty Smallcap100 is still about 20% lower from it’s all time high level seen in early 2022. So effectively the markets have been oscillating in a wider range after the sharp rally post March 2020 Covid panic lows. This view would imply that since the market is now close to the upper bound of its trading range, traders would be looking to pare their long positions; especially because most of the good news (rate and inflation peaking; earnings upgrades; financial stability; etc.) is already well known & exploited; while the fragility in global economy and markets has increased and hence the present risk-reward ratio for traders may be adverse.

3. From a historical relative valuation perspective – Nifty is currently trading at ~3% premium to its 10yr average one year forward PE ratio. The same premium for Nifty Midcap100 is 14%; while Nifty Smallcap100 is trading at ~2% discount to its 10yr average one year forward PE ratio. The discount of smallcap PE ratio to Nifty PE ratio is presently close to 22%, larger than the 10yr average of 16.5%. The sharp outperformance of smallcap may be a consequence of value hunting rather than greed; and the traders may soon return to Nifty as the valuation gap is filled.

Whatever view one takes, in my opinion, it would make sense to take some money off the table, especially from broader markets and high beta.

Wednesday, May 31, 2023

India: An economy under transformation

Last week I had written (see here) about how the fourth letter of the English Alphabet “D” has gained prominence in the financial market jargon. In particular, I find three “Ds”, viz., Digitalization, Deflation and Demographics most relevant for the economy and therefore markets.

A recent speech of Dr. Michael Patra, Deputy Governor of RBI, as published in the latest monthly bulletin of RBI (May 2023), highlighted some more ‘D” factors that are ushering India into a new age. Besides demographics & Digitalization, Mr. Patra emphasized on Diaspora, Diversification, Diplomacy, Dynamic Federalism, and Decarbonization as key factors in transformation of the Indian economy. The following are some excerpts from his speech:

Diaspora: An outward reflection of India’s demographic bonus is the vibrant expansion of Indian communities across the world. Over the years, our perceptions about the diaspora have also transformed from ‘brain drain’ to ‘brain gain’, spurred by the contributions that Indians have made in various fields in the global arena, including information technology, entrepreneurship, international politics, medicine, arts and culture, with some of them becoming Nobel laureates. It is estimated that over 90 out of 1078 founders of about 500 unicorns in the US are persons of Indian origin.

The Indian economy has been a beneficiary of this dynamic and industrious diaspora. India currently receives the highest flow of remittances in the world at US $ 108 billion in 2022, up by 24.6 per cent from a year ago, and accounting for 3 per cent of India’s GDP. Additionally, Indians residing abroad hold deposits in Indian banks cumulating to US $ 136 billion at the end of February 2023.

Diversification: The Indian economy is undergoing a quiet but fundamental transformation encompassing all its sectors. Perhaps the most striking transformation is occurring in India’s exports of services which have demonstrated pandemic-proofing, rising by above 25 per cent per annum since 2020, and providing valuable support to the viability of the external sector. While software and business services are the main drivers of this robust performance, advances in IT have not only made services more tradable but also increasingly unbundled: a single service activity in the global supply chain can now be fragmented and undertaken separately at different geographical locations. Jurisdictions have accordingly been decentralising and diversifying their supply chains to ensure business continuity. These factors have led to a new channel of IT-enabled services - large multinational corporations (MNCs) are setting up Global Capability Centres (GCCs), which are offshore offices, delivering a wide array of services across IT sector verticals.

India is also becoming a hub for engineering R&D (ER&D) centers as leading multinationals develop their centers of excellence (CoEs) across different business domains. The National Association of Software and Service Companies (NASSCOM) estimates that India will add 500 GCCs by 2026. They are going to be hiring. India’s citizens of the future should prepare for this revolution. The world is coming to our doorstep to fill world-class jobs.

Diplomacy: India is prioritising a reformed multilateralism that creates a more accountable, inclusive, just, equitable and representative multipolar international system for the 21st century. Our priorities include addressing the macroeconomic implications of food and energy insecurity; climate change; strengthening Multilateral Development Banks (MBDs); debt sustainability; strengthening financial resilience through sustainable capital flows; financing inclusive, equitable and sustainable growth; leveraging digital public infrastructure; climate financing; and opportunities and risks from technological change.

Dynamic Federalism: Increasingly, the quality of life and the business environment in India is going to be defined by shifts in the focus of public policy that foster competitive federalism among India’s states in achieving the aspirational goals of sustainable economic development. The freedom to compete allows each state to design, experiment, innovate and reform, given its unique features and challenges, while emulating best practices achieved by peers. An example of the power of competitive federalism is the drive among states to attract private investment, both domestic as well as foreign, by showcasing investment opportunities in each state. The spirit of competitiveness is being promoted at the highest policy levels.

As our states compete for a place in the sun, they will nurture business growth, put in place the best physical and social infrastructure and provide us with improved basic amenities, clean energy, and better health and societal outcomes. Along with foreign investment bringing in new technologies and ideas, we are moving into a national ethos of wider consumer choices and a better standard of living.

Decarbonisation: India and other developing economies are highly vulnerable to climate change due to their limited capabilities in climate science and technology and insufficient funding for adaptation and mitigation. The relative costs of transitioning to a greener path are higher for them than for the advanced economies; undertaking the transition can even push them several places down the development ladder. From the developing world, India has emerged as a leading voice on global climate action that is mindful of climate equity and justice considerations.

India has co-founded the International Solar Alliance (ISA) with France in 2016 and announced a National Hydrogen Mission to increase the dependency on green energy. The Mission LiFE, i.e., Lifestyle for the Environment, launched in 2022, is now a global movement to connect the powers of the people for the protection of the earth.

Dr. Patra ended his speech by invoking Victor Huge’s words- ““Nothing else in the world…not all the armies…is so powerful as an idea whose time has come.” He, like millions of us, too believes that India’s time has come and we must seize it. There are formidable trials and challenges ahead, but they can be overcome if we exploit the comparative advantages.

Tuesday, May 30, 2023

Beyond the US debt deal

The US administration has reportedly reached a deal with the Congress majority leader to enhance the debt ceiling on the treasury and mitigate yet another default threat. This, like all previous episodes of default threats and debt ceiling hikes, would inevitably result in more debt, insolent fiscal profligacy and further distortions in capital allocation and unsustainable asset price inflation. At the other end of the spectrum, it could shift a couple of ounces from the weight of global confidence in USD (and hence UST) towards the still nascent movement to de-dollarize global trade.

In this context, the following trends may be pertinent to note, especially for the equity investors.

Negative divergence in OECD debt and yield

The elementary principle of economics is that the price of anything is a function of demand and supply equilibrium. Higher demand pushes the equilibrium to a higher price point and vice versa. However, the bond markets in developed economies have been defying this principle for the past 25yrs. The debt of OECD countries rose sharply post the global financial crisis (GFC) in 2008-09; but the yield on government bonds fell till 2022, creating a negative divergence in bond supply and bond prices.

The situation has shown some signs of reversal in the past one year, but this may not last if the US Federal Reserve decides to begin easing rates sometime in the next 12months, while the latest debt ceiling deal results in a massive rise in bond supplies.

This trend is relevant for equity investors, since this could keep the cost of capital lower, affording much higher price earnings multiples to various businesses.

Deflationary pressures to persist

Post the GFC, the developed economies in particular have struggled with persistent deflationary pressures. Despite unprecedented new money printing and near zero (and negative) rates, major economies faced strong deflationary forces. Consequently, the prices of financial assets and real estate witnessed strong bull markets. The reported debt deal would result in further strengthening of deflationary forces which are structurally aided by the adverse demographic changes and changing consumption patterns.

Indian debt no longer lucrative to USD investors

The spread between US and India benchmark 10yr G-Sec yields (318bps) is presently at its lowest level, at least since the GFC. Given the hedging cost and just 2 notch above junk rating for India G-Sec, presently the Indian bonds may not be very attractive for the USD investors. Though there is not much empirical evidence available to substantiate this, there is a probability of rise in flows to Indian equity, which has been witnessing strong FPI selling for the past couple of years.

Friday, May 26, 2023

Some notable research snippets of the week

Credit-Deposit ratio to moderate after withdrawal of large currency (CARE Ratngs)

RBI announced to withdraw Rs. 2,000 denomination banknotes on May 19, 2023. The total value of these banknotes in circulation constitutes Rs. 3.62 lakh crore as on March 31, 2023.

The addition to the banking deposits due to withdrawal of Rs 2,000 banknotes is not anticipated to be material even under various scenarios which assume that 25%-50% of the currency remains as deposits with the banks. In percentage terms, the additions are expected to be 0.5%-1% of overall deposits in the banking sector. The banking system liquidity was already in surplus at the end of April 2023. The addition of Rs 1.0 lakh crore to 1.8 lakh crore over a period of four months (June 2023 to September 2023) will inject significant short-term liquidity into the banking sector over the next 2 quarters and is likely to reduce the banking sector’s dependence on short term CDs in the near term to some extent and the short-term deposit rates may ease a bit thereby muting the impact of rising deposit rates on NIMs. Even though the time frame of four months is given, CareEdge expects this to be front loaded due to the behavioural pattern of the masses. The banks may use incremental deposits to increase credit growth. Liquidity increase may impact RBI’s OMO during Q1FY24 and Q2FY24.

Credit offtake rose by 15.5% y-o-y for the fortnight ended May 5, 2023, compared to 11.8% from the same period in the last year (reported May 6, 2022). Sequentially, it increased by 0.3% for the fortnight. In absolute terms, credit outstanding stood at Rs.139 lakh crore as of May 5, 2023, rising by Rs.18.6 lakh crore from May 6, 2022, vs 12.7 lakh crore in the same period from the last year. The credit growth continued to be driven by a lower base of the last year (which will likely abate in FY24), unsecured personal loans, housing loans, auto loans, higher demand from NBFCs, and higher working capital requirements.

Credit offtake 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.

Personal Loans and NBFCs have been the key growth drivers, while other manufacturing-oriented segments could also drive growth. Meanwhile, credit growth is expected to be in sync with the GDP growth in FY24. A slowdown in global growth due to elevated interest rates, and geopolitical issues could impact credit growth, however, the Indian financial system is on more robust footing, vis-a-vis its global peers.

Rural checks: Q1FY24 starts on a weak note (Elara Capital)

Decline in crop prices drags realization: Our rural channel checks show rural demand remains sluggish in April and in the early parts of May as delayed harvest and a decline in the price of key Rabi crops have dragged farmer realization. While the impact of unseasonal rains is not found to be significant, the quality of output has been hampered. Relaxation of quality norms for crop procurement domestically and the decline in global prices have had an impact with prices of key crops declining.

Fall in key input prices yet to be reflected on the ground: The sharp decline in input prices of key agrochemicals is yet to be felt on the ground except in South India, as there was high-cost inventory in the system. We expect the impact of lower agrochemicals prices to be felt from the Kharif season.

Sluggish FMCG demand; Summer portfolio hit in the early days: Delayed harvest and weak realization have dragged FMCG sales. Our distributor checks show volume offtake was weak in April. Further, unseasonal rains and lower-than-usual mercury levels have led to a sharp demand contraction for a usual Summer portfolio for FMCG brands, such as beverages, which saw a huge reduction. Demand sensitivity to prices was found to be high for entry-level stock keeping units (SKU), especially for INR 5-10. Price hikes were passed on in higher SKU, suggesting entry-level demand remains weak. We expect FMCG companies to report sluggish volume in Q1FY24. Moreover, our checks suggest price cuts of inputs have yet to be passed on fully to end-consumers even as grammage hikes have been reported in soaps, detergents, biscuits, and processed food. Unless there is a sharp rise in spend on ads, promotions and freebies, FMCG should be able to report healthy margin in Q1FY24 as well.

Milk prices near their peak; expect a decline from CY24: Our checks show milk output is catching up gradually, with the deficit likely to reduce materially by end-CY23, resulting in lower prices. The impact of COVID-19 and lumpy skin disease on milk supply is beginning to wane and supply is set to rise materially during November-December 2023. This should provide a respite to companies, such as Jubilant FoodWorks, which have seen significant raw materials inflation due to rise in cheese prices.

Good start to the marriage season gives fillip to 2W demand: Our checks show the marriage season has seen a good recovery in demand; hence, entry-level demand for bikes should see improvement on sequential basis. The traction also was good in the two-wheeler category this marriage season as there was preponement of marriages, owing to Adhikmas (additional month in the Hindu calendar), which has reduced the number of auspicious dates in the later part of the year. Supply chain issues for brands, such as Honda, seem to be having a positive impact on demand for Hero MotoCorp bikes.

Currency outlook (Bank of Baroda)

INR under pressure: After remaining stable for most part of the last few months, INR has come under pressure in the last few sessions. In May’23, INR has depreciated by 0.9%. However, bulk of the weakness in INR can be traced back to the last couple of sessions. In fact, since 12 May 2023 (when INR was last below the 82/$ mark), INR has depreciated by 0.6%. Prior to this, INR was fairly steady in a narrow range of 81.5-82/$. This was underpinned by robust macro fundamentals, improvement in external position, lower oil prices and buoyancy in FPI inflows.

So what are the reason behind INR’s rather abrupt and sharp fall?: The most compelling reason for the rupee depreciation is a strength in dollar. In the last few sessions, dollar has once again strengthened amidst strong macro data from the US and hawkish Fed-speak.

This has resulted in markets repricing the trajectory of Fed rate path. While markets widely anticipated that the Fed was done with its rate hike cycle after a final 25bps rate hike last week, macro data since then has dimmed those expectations. Strong labour market, rebound in housing sector, more than expected uptick in households’ inflation expectations as well as positive developments surrounding US debt ceiling have all contributed to the belief that the Fed rate may still be behind its peak.

Reinforcing this view, several Fed members have gone on record to say that inflation still remains a big challenge, warranting even higher rates. As a result, DXY has strengthened by 1.1% in the last 3 trading sessions alone. Most global currencies have seen depreciation.

Another reason, though not as significant, is a moderation in FPI inflows. FPI inflows which were showing some traction since the beginning of the month have lost momentum amidst a weakness in domestic equity markets and safe haven flows.

Will the trend continue?: With the changing narrative around US Fed rate path, some short-term pain for the INR cannot be ruled out. However, the extent of INR deprecation is likely to be mild, aided by effective intervention by the RBI. Fed Chair’s testimony, due later today, will be key in determining the future trajectory of rates and dollar. While the dollar may strengthen in the short-term, as investors await more clarity on the Fed rate trajectory, it is likely to be temporary. Hence, we continue to remain bearish on the domestic currency over the long-term. This will be reinforced by improvement in external outlook, range-bound oil prices, foreign inflows and buoyancy in remittances and services receipts.

Copper price slides as global demand drops sharply (Financial Times)

The price of copper has widened to the biggest discount against its futures equivalent in almost two decades, in a warning sign of a sudden weakening in global demand as China’s economic rebound stalls.

Copper for settlement in two days was $66 cheaper on Monday than buying a contract to deliver the metal in three months’ time, a difference that traders said reflected concerns that China’s industrial rebound was not materialising. The gap between the two prices is the largest since 2006, according to the London Metal Exchange.

The sharp fall in spot price reflects a rapid rise in stockpiles of the metal outside China in LME warehouses, as US and European industrial activity begins to slow after a year of rapid interest rate rises.

Known as Dr Copper for its ability to gauge the health of the global market, the metal is widely used in buildings, infrastructure and household appliances.

Natalie Scott-Gray, base metals analyst at broker StoneX, said that copper prices were starting to be driven by real world signs of weak demand rather than big macroeconomic factors, such as the US dollar and sentiment towards China’s reopening.

“It’s the first physical evidence we’re seeing that demand is being impacted worse than expected in the west,” she said. “It’s the pace of change that has caused the gap”.

The price of copper has fallen 11 per cent in a month to almost $8,000 per tonne, its lowest level since November, in part because China has not grown as fast as expected since it lifted its tough coronavirus restrictions near the end of the last year.

Positive sentiment around the reopening of Asia’s biggest economy helped leading industrial metals to rally more than a quarter between November and January.

“It hasn’t been as dire as this for many a year,” said Al Munro, metals strategist at Marex, a London-based broker. “The bullish scenario was all based on a China rebound which hasn’t materialised as we in the west suffer from an economic slowdown.” (Read more)

India steel index remains in negative zone; near-term outlook bleak (SteelMint)

SteelMint's flagship India Steel Composite Index, a barometer of the domestic steel market, edged lower by 0.8% w-o-w to 150.4 points on 19 May, 2023 compared with 151.6 points, as assessed last on 12 May.

Notably, the Flat Steel Composite Index slipped sharply by 1.2% while the longs composite index witnessed a drop of 0.3% w-o-w.

Amid the general weakness in the domestic steel market, prices have been on a decline; however, flat steel prices seem to be more influenced by global trends, partly due to export market exposure. Long steel prices, on the other hand, are also battling weak demand but the upside comes from low availability of ferrous scrap.

· Domestic steel prices subdued amid global downturn

· Coking coal prices drop sharply, bottom not in sight

· Scrap shortage likely to keep IF/EAF steel market supported

Agri input: NPK producers better placed than DAP (Elara Capital)

The Ministry of fertilisers has reduced H1FY24 Nutrient Based subsidy (NBS) on nitrogen (N), phosphates (P), Potash (K) and sulphur (S) by 22% to INR 76.5/kg, 39% for INR 41.0 per kg, 33% for INR 15.9/kg and 54% to INR 2.8/kg, respectively, vs Q3FY23 subsidy. Based on existing DAP inventory, our channel checks show manufacturers stand to make hardly any profit. NPK remains profitable for the industry.

DAP manufacturers to have a hard time: DAP manufacturers that have an inventory of existing finished goods or raw materials may not incur any material profit. If they are producing through new raw material stock, especially ammonia, then profitability may sustain, given ammonia prices have fallen by more than 50% since March to ~USD 250/tonne. Increased competition from importers is putting pressure on liquidation of domestic stocks.

Imported DAP more profitable than domestically manufactured: At the current subsidy rates, DAP imports below USD 600/tonne are more profitable than domestically manufactured ones. In the past week, DAP prices fell to USD 500/tonne from USD 550/tonne. With declining ammonia prices globally, DAP prices may fall further, implying imports are likely to continue to rise in India in FY24.

NPK manufacturers to make good profit, but lower than H2FY23: NPK manufacturers continue to make good profit even on existing stocks as the phosphate component is lower in other grades except in DAP (18:46:0:0). Profitability would increase further based on newer stocks of ammonia.