Do it yourself

Key economic trends (Elara Capital)

·         Deflationary impulses seem entrenched in the global economy. We believe global inflation may surprise on the downside through rest of CY23E.

·         We see the Fed pausing even in July 2023 meet – Expect the first rate cut by the Fed in Dec-23.

·         Historically, equities perform better in a hike cycle than a cut cycle. Bonds are a better bet in run up to rate cut cycle. Gold is the preferred commodity asset through both hike and cut cycles. The USD-INR usually fails to capitalize on the overall EM FX risk on sentiment in the run-up to a rate cut by the Fed.

·         Deflationary producer prices in China suggest weakening growth in G4 – the US, the EU, the UK and Japan. We do not rule out a sub 5% GDP growth in China in 2023E. (base case 5.2%)

·         India remains in sweet spot compared with the global economy. FY24E GDP is likely at 6-6.2% YoY, CPI inflation to average 4.9% and CAD likely at 1.2-1.3% of GDP. Expect the first rate cut from the Monetary Policy Committee (MPC) in Q4FY24.

·         Expect India 10-year yield at 6.75% by March 2024E, led by low inflation, rate cut by the MPC and lower supply by the states. See US 10-year yield at sub 3% by March 2024E.

China outlook: Muddling through (Danske Bank)

After a strong start to 2023, economic data disappointed in Q2 and we have lowered our GDP forecast for this year to 5.8% from 6.2%. For the rest of 2023 our scenario implies muddling through with annualized quarterly growth around 41⁄2-5% underpinned by moderate stimulus. In 2024 our forecast is reduced to 4.8% from 5.0%.

•      The main engines of growth are set to be private service consumption and a gradual recovery in construction and private manufacturing investments. We expect export growth to remain weak as global goods demand stays soft.

•      While a leading role in many green technologies benefit China, a long list of medium term economic challenges are present, which creates uncertainty about China’s outlook. However, we still look for economic growth to be able to reach around 41⁄2% over the next 5-10 years due to a strong focus on investments in education and technology and continued support to the private sector.

•      Geopolitical tensions are set to continue with intense rivalry between US and China. However, we still see a low probability of war on Taiwan in the next 2-3 years as the costs of a war would be enormous for all involved parties. In the long term the risk is real, though. Look out for Taiwan election in early 2024.

New uncertainties: While China’s re-opening rebound in Q1 was stronger than expected, the recent economic data have slowed more than projected. In effect, we have lowered our forecast back below 6% for this year. Especially manufacturing and the housing market lost pace in April and May while the service sector has continued to grow at a more robust pace reflecting pent-up demand from the zero-covid lockdown years.

The bumpy road of the recovery leaves a high degree of un-certainty about the outlook. However, our baseline scenario is for policy makers to aim for growth around 41⁄2-5% rest of the year and that stimulus will be calibrated to hit this goal. The strong service sector activity is providing decent job growth and more support to wage growth, leaving a decent picture for household income gains. Hence we expect private consumption to continue to underpin a moderate recovery. The manufacturing sector is challenged by a weak external environment but moderate growth in investments and consumption is expected to underpin manufacturing growth at or slightly above potential growth. The construction sector is still struggling but we have witnessed a lift in home sales compared to the very low levels last year, and we should see this gradually feed through to a rise in housing starts.

In the medium term, there is little doubt that China’s potential growth rate has come down as China faces challenges on many fronts: high debt level in key sectors, falling labour supply, Western technology restrictions, geopolitical uncertainty and a difficult transition to consumption driven growth. Our baseline scenario is that China will be able to grow around 4% on average over the next 5-10 years. While clearly lower than in the past, it will still make Chinese economy significantly bigger and in our view lead to a rise in the middle class by 3-400 million people over the next decade.

Deficit monsoon and delay in kharif sowing, but not yet alarming (Nomura Securities)

First fortnight of June-23 witnessed monsoon deficit – 37% below the long period average (LPA). The onset of monsoon in 2023 was delayed by a week with Kerala receiving the first rain showers around 8 June-23. While the formation of cyclone Biparjoy resulted in surplus rainfall in the states of Gujarat and Rajasthan, it weakened westerly and south-westerly winds delaying the advancement of monsoon in Maharashtra (one of the key agrarian states in West India).

No impact in the north India region: North India agrarian states (such as Uttar Pradesh, Bihar, Punjab, Haryana, etc.) witnessed a large deficit to their LPAs; however, it is key to note that historically, the onset of monsoon in North India takes place in July and deficit monsoon conditions in June are a normal phenomenon in the region.

Pick-up in rains likely over next fortnight: India Meteorological Department (IMD) and Skymet weather team both have called for pick-up in rains over the second half of June-2023, with the advancement of monsoon in western and central parts of India; moreover, they have alluded normal monsoon conditions pan India during the first fortnight in July-2023.

Delay in kharif sowing, but not yet alarming: In 2023, the agriculture season witnessed some delay in rabi harvest in April; the delayed onset of monsoon has also resulted in some delay in the sowing of kharif crops. While the kharif sowing data for the first fortnight of June is much below 2022 levels, sowing activities are expected to pick up over the next 3-4 weeks with normalcy in monsoon conditions.

Strong reservoir levels to support irrigation: While over 65% of Indian agricultural lands are dependent on monsoon for cultivation of kharif crops (paddy, maize, soyabean, cotton, sugarcane, etc.), it is important to note that the reservoir levels are above the 10-year average and should play a crucial role if monsoon falters.

No signs of softness in consumer demand visible yet with delayed onset of

monsoon: While rural market demand has been showing signs of recovery over the past two quarters, the pace of improvement has been gradual due to the delay in agriculture activities. We note the full benefit of the harvest money is yet to be seen translating into product / consumer demand. Further, the stable / softening raw material prices have resulted in price cuts across all large FMCG categories; we believe this will likely act as a stimulus to drive volume growth in the rural markets. Hence, we do not expect any softness in consumer demand with no ebbing effect on sentiments due to monsoon conditions.

 

India Durables and Electricals (Jefferies India)

Softer offtake in Apr-May23, also impacted by unseasonal rains. But demand has improved in H1-Jun. Transition to new BEE norms is largely done for AC & Fans, and older inventory is liquidated.

Channel inventory is normal at ~3 weeks. No major price hikes in Q1, expect +1-2% in Cables & Wires (copper pass-through).

Changing Weather Patterns Influence Demand: We spoke to ~10 channel partners pan-India. Many cited weaker offtake in Apr-May23 due to softer consumer sentiment and unseasonal rains in many parts. But Jun'23 saw better demand for summer-centric products i.e. ACs, Coolers, Fans etc.

1) Fans market has now transitioned to new BEE norms. Sales have largely normalized, with higher shift to premium/BLDC models - increasing awareness for energy efficiency.

2) Cables & Wires demand stayed strong for most dealers, with minimal impact of pricing action. Offtake here is mainly driven by construction and capex / infra projects.

3) Washing Machines demand has not seen any material uptick in the last few months, with flattish sales YoY. Q1 (Summer) is seasonally weak qtr.

4) Appliances: Many dealers cited healthy demand trends, esp in Mixer Grinders, Chimneys and Hobs.

5) Water Heaters saw mixed trends with some dealers highlighting better offtake due to unseasonal rains. A few dealers cited higher inquiries, but unavailability of SKUs in summer season.

6) Weareables & Hearables demand good.

Inventory now Largely Normal: AC channel stocking commenced in Feb-Mar23. Muted traction in Mar (unseasonal rains) led to higher than normal inventory in Apr for most dealers, which subsequently declined in May-Jun as offtake improved. Now inventory is at normal levels (~3 weeks) for most dealers, as summer season ends. In Fans, inventory has normalized post BEE transition, wherein inventory of old models has largely liquidated.

Cables and wires inventory is currently normal level (~2 weeks), as supply is typically received

within a week for most dealers.

No Major Price Hikes in Q1: Post BEE transition, prices were hiked by avg 2-5% in new AC models and avg 5-8% in new Fan models in Q4FY23. Air Coolers have seen price hike of 3-5% at the start of summer season. But since then, there has been no material price hikes in Q1FY24, as many input costs have softened. With rise in LME copper prices (+5% from 10May'23), Cables & Wires category has hiked prices by avg 1-2% in May and more hikes could be seen in coming weeks.

Competitive Landscape: In ACs, post BEE transition, LG models are offering higher energy savings (technology) vs many peers. Lloyd (HAVL) sales have been good in price-conscious consumer segment. VOLT sales are healthy in the 1.0-1.5 ton category.

Retail fuel price cut an overhang for CGD stocks (Nirmal Bang Equities)

For the imminent cut in retail petrol/diesel prices. We believe this would reduce the tailwinds for OMCs. Such a cut also poses a risk to CGD companies as the latter would be forced to cut CNG pump prices to maintain CNG growth rate, which entails a sacrifice in EBITDA/scm. Such a cut and the steep YoY decline in GRMs could dent the potential upside to OMC earnings in FY24, implied at current juicy retail margins.

Impending cut in MS/HSD prices poses risk to CNG business outlook: The impending cut in MS/SHD pump prices is likely to eat into the cost savings offered by CNG over MS/HSD, currently at 40%/20%. This combined with the fact that the APM gas price is likely to remain fixed at the ceiling of US$6.5/mmbtu (GCV), as per the latest gas pricing formula, leaves no elbow room for CGD companies.

This leaves IGL and MGL vulnerable to either a hit on margins if they seek to maintain growth or cut in CNG volume growth assuming they aim to preserve margins. GGL is relatively less impacted as its share of CNG is under 30% vs more than 75% for IGL/MGL. If OMCs were to cut MS/HSD prices by Rs1-5/litre at current crude price levels, it implies 3.3-16.5%/2.3-11.3% hit on IGL’s/MGL’s FY24E EPS vs 1.3%-6.3% hit on GGL’s FY24E EPS – assuming the cut in CNG price from Aug’23 post 1QFY24 results of OMCs.

The steep correction in diesel spreads from muti-year highs by more than 50% to ~US$15/bbl combined with the decline in crude oil by 10.8% YTD and 34.5% YoY has resulted in average retail fuel margin surging to ~Rs7.2/litre in 1QFY24 vs ~Rs2.5-3/litre in 4QFY23 – petrol/diesel retail margin per litre is estimated at Rs5.2/Rs7.9. This is likely to support hefty growth in earnings for OMCs in 1QFY24, as per our first cut estimates, and perhaps in 2QFY24 as well, depending on when OMCs decide to cut pump prices of MS/HSD.

2HCY23 revival in China demand clouds retail margin outlook: IEA and other global oil watchdogs expect a revival in China’s economy to spur growth in oil demand ahead of supply in 2HCY23 and thereby boost oil prices. This is a concern cited by OMCs to go slow on the current demand for a cut in Indian retail pump prices, as a future rise in oil prices post such a cut could again put pressure on marketing margins and earnings for OMCs. NBIE Brent oil forecast for FY24E/FY25E is US$75/bbl and US$70/bbl. This compares with FY23/4QFY23 average of US$95.3/bbl and US$81/bbl. However, a recent Reuters report shows that diesel and petrol exports from China in May’23 were up 4x YoY to 0.6mn tonnes and by 67% YoY to 1.36mn tonnes, respectively. This is due to the persistent slowdown in China’s property/industrial sectors and refining throughput in May’23, nudging the record figure of 14.9mn bpd in March’23.

Volatile refining margins may find limited solace from Russian crude: The GRMs reported by OMCs are likely to see a significant decline YoY in FY24 due to the steep decline of 47.2% in diesel spreads to US$15//bbl in 1QFY24 from 4QFY23. Even with the share of Russian crude indicated at 15% in HPCL and more than 30% in BPCL/IOC, the implied savings of ~US$1.2/bbl to US$2.4/bbl is unlikely to reverse the YoY decline in GRMs. 1QFY24 petrol/diesel spread over crude is down 43%/60% YoY to US$15.5 per bbl/US$15.1 per bbl. The pressure on OMCs to cut prices overlooks the impact of declining oil and fuel spreads, which imply potential inventory losses that could eat into the gains in retail margins from the lower crude prices.

Textile: Global retailers underpin improved inventory position by EoY (JM Financial)

Global retailers continue to lighten their inventory position: Global retailers during their latest earnings have continued their efforts to reduce the excess inventory on books. GAP saw inventory decline of 27% YoY in the latest quarter and expects inventory to be down significantly more than sales as compared to FY22. TJX and Nike (apparel segment) given their sharp focus on liquidating excess inventory have been able to achieve lower inventory. Large retailers like Walmart, Target and Costco have also lowered their inventory given their cautious approach towards fresh procurement. The global demand outlook for CY23 continues to be soft.

Indian textile players expect demand revival from 2HFY24: Indian Home textile and apparel exporters expect demand to remain muted in 1HFY24 on account of excess inventory liquidation. Any normalisation of demand in CY24 amidst improved global retailers’ inventory position leaves headroom for export demand recovery by Indian exporters.

‘China + 1’ theme picking pace: China has been losing market share across the world (refer exhi. 3/4) apparel exports aided by rising labour costs and geopolitical tensions. This has led to a potential shift of exports from China towards other countries, creating new opportunities and growth in the other Asian countries for the apparel industry. Some of the biggest brands across the globe have already begun reducing their exposure to China over the past few years. We believe India’s competency across factor cost and a well-established textile ecosystem (across cotton segment) will allow it to benefit from the ‘China+1’ theme.

UK FTA offers additional growth opportunity: UK imports USD$24bn in apparel with India’s share a mere USD$1.4bn. In contrast, UK imports UD$4.5bn from Bangladesh and US$ 6.2bn from China. Indian players have lower market penetration in UK due to tariff disadvantages vs Pakistan, Turkey, and Bangladesh. However, FTA with UK will allow duty free exports to UK, improving India’s competitiveness. A ~20% market gain from China over the next 3-4 years is required to help India near double its exports to UK. Effective implementation of UK FTA could provide a clear runway for double digit revenue CAGR in case of Indian textile exporters over the coming decade.

Commodity deflation to aid margins: Decline in cotton / yarn prices over the last 12 months to the tune of ~40%/33% is likely to aid margins for Indian textile players. Lower demand and arrival of new crop are key reasons for the price correction. Further, improving scale in 2HFY24 will aid margin expansion for textile companies.

Stable duty regime and additional steps by Govt to aid the textile ecosystem: The scheme of RoSCTL that was effective from March 2019, has been extended till March 31, 2024 for exports of apparel/garments and made-ups in order to make the Indian textile sector competitive in the international market. The maximum rate of export rebate for apparel is 6.05%; while for made-ups it is 8.2 per cent. A stable duty regime is likely to benefit the sector. Further, additional initiatives like the PLI’s, Mega Integrated Textile Region and Apparel (MITRA) Parks Scheme and National Technical Textiles Mission will help in creating a conducive textile environment.

De-leveraged balance sheets offers room to chase growth: Indian textile companies have de-leveraged their balance sheet over the past few years offering room to chase growth expected from ‘China+1’ theme playing out and possible UK FTA.

Moderate valuation multiples leaves ample room for multiple re-rating: Textile companies currently trade at moderate valuation of leaving ample room for re-rating as when structural demand drivers (UK FTA/ ‘China+1’) kick-in.

Cement: Start of an upcycle (Antique Stock Broking)

FY24 volume growth could surprise—we now factor in 10% YoY growth Public capex (center, state, and PSUs) comprising 25% of total gross fixed capital formation (GFCF) is likely to grow at a healthy 23% YoY in FY24 (ahead of the upcoming Union Election), driving aggregate nominal GFCF growth by a robust ~14.8% YoY. Besides, housing demand recovery is likely in the midst of a multi-year upcycle. Accordingly, FY24 cement demand growth could surprise positively, in our view. With early cement demand trends suggesting near mid-teens YoY growth on a low base for 1QFY24 (5-yr. CAGR of 5.5%), most managements have likely extrapolated this trend and guided/ aspired for >15% YoY volume growth for FY24 during the 4QFY23 earnings call. We now factor higher 10% YoY (5-yr.

CAGR of 4.8%) demand growth for FY24 (vs. 8% earlier) to >440 mtpa leading to 3%-4% upgrade to our FY24-25E volume growth estimate mainly for large companies.

The third consecutive year of high demand (7%–10%), could drive utilization to a 14-year high Demand at 8.5% CAGR vs. 5% supply CAGR over FY22-24E would results in pan-India cement utilization inching up to a 14-year high of 77% and clinker utilization of 80% in FY24. South utilization could cross 65%, while ex-South utilization would inch closer to 84% after 14 years in FY24. Ex-South utilization (excluding 6 mtpa Sanghi and 9 mtpa JPA, which are non-operational/partially operational for FY24) is inching closer to 87%/ 88%. More importantly, our coverage universe as well as UTCEM's utilization increased from an average of 73%/74% during FY20-22 to 81%/83% in FY23 and is likely to inch up further to as high as 83%/88% in FY24-25.

Higher consolidation in the industry

The top 6 companies enjoy 80–85% capacity share across all regions except the South and with more capacity likely to be announced by large companies and with a couple of M&A transactions likely to consummate soon, capacity/market share of large companies is likely to increase further.

Costs side pressure to recede; cost efficiencies to further aid profitability

International petcoke and coal prices are down ~50%-60% from their respective highs and our recent interactions with a few coal traders/ experts suggest the possibility of a further downside. This could translate into cost savings of INR 250-300/ton in FY24. Besides, companies are focused on increasing the share of green energy, alternative fuels, logistic optimization, premiumization, etc. which could further aid profitability. We expect the average EBITDA/ton for our coverage universe to rise from <INR 800/ton in FY23 to ~INR 1,200 by FY25E and even higher beyond FY25E. Our FY24-25E EBITDAs are 5%-10% ahead of consensus. We factor <1% realization CAGR over FY24-25E and see an upside risk to our estimates.

Start of an upcycle; many stocks near life-time high: time to BUY or SELL?

In the past upcycle from FY03–10, industry average EBITDA/ton increased from INR 350/ ton to INR 1,050/ton. Even recently, average EBITDA/ton rose from <INR 900/ton in FY19 to INR 1,200/ton in FY21 aided by higher prices and lower costs. With improving demand, ex-South utilization now high at 84%, increasing capex costs (greenfield), receding cost pressure, higher consolidation and relative price inelastic demand, we remain positive on pricing and expect industry average EBITDA/ton to exceed INR 1,200 beyond FY25E. Long-term average price CAGR has been around 4% and we expect a similar trend to continue beyond FY25 driving increasing trend of EBITDA/ton.

Metals: Signs of revival fade; steel prices correct for the 9th consecutive week (MOFSL)

Long steel, which witnessed a pre-monsoon procurement last week, has come under pressure with prices correcting to Oct’21 levels. Ex-Mumbai benchmark primary long steel prices corrected INR900/t to settle at INR53,500/t.

Reduction in domestic demand from the project segment and a fall in global long steel prices due to weak global housing and infrastructure demand have dragged the domestic prices for long steel products.

Project segment customers are under ‘wait and watch’ mode and they are only undertaking ‘need-based buying’, which has plummeted the list prices further by INR1,000/t below the prevailing market prices.

Flat steel prices that had witnessed a slight uptick last week have been relatively flat WoW at INR55,400/t.

The domestic trade-level prices have inched up by INR300-400/t WoW; however, range-bound export prices have kept the overall prices under check. We had anticipated a price correction of INR1,500-2,000/t across the steel sector and the same is now fully priced in.

The arbitrary price gap in exports between India and China is currently around USD15-20/t (~USD100/t in May’23) and hence, we believe a majority of the downside has been factored in with no major price correction likely in the near term.

However, the near-term outlook remains volatile and highly monitorable with multiple mixed signals in the domestic and international markets.

Key definitions

The Worker Population Ratio (WPR-U): Percentage of potential workers, i.e., the population aged between 15-60yr of age, in urban areas.

The Worker Population Ratio (WPR-R): Percentage of potential workers, i.e., the population aged between 15-60yr of age, in rural areas.

Youth WPR-U: Worker Population Ratio for population aged between 15-29yr in urban areas.

Youth WPR-R: Worker Population Ratio for population aged between 15-29yr in rural areas.

The Labor Force Participation Rate (LFPR-U) is defined as the percentage of population offering or willing to work in urban areas, whether currently employed or unemployed.

The Labor Force Participation Rate (LFPR-R) is defined as the percentage of population offering or willing to work in rural areas, whether currently employed or unemployed.

The Worker-U: Person in the labor force currently employed in urban areas.

The Worker-R: Person in the labor force currently employed in rural areas.

The Good

·         The employment conditions have improved during FY23. The WPR-U improved by almost 150to 200bps for all ages and both genders. The Youth WPR-U improved from 30.5% (4QFY22) to 32.6% (4QFY23). For all workers, WPR-U improved 43.4% to 45.2% during this period.

·         The LFPR-U improved from 38.2% in (4QFY22) to 39.4% in (4QFY23) for youth and from 37.2% to 38.11% for all workers.

·         Self-employed female workers increased in urban areas from 35.3% to 38.5% while the number of self-employed male workers in urban areas reduced from 40.4% to 39.7%.

·         Unemployment rate in urban areas has reduced from 8.2% (4QFY22) to 6.8% (4QFY23).

The Bad

·         The percentage of “own account workers” in urban areas reduced by 40bps from 33.1% (4QFY22) to 32.7% (4QFy23).

·         The percentage of regular wage/salary workers increased marginally from 48.3% (4QFY22) to 48.9% (4QFY23); however, the female regular wage workers in urban areas reduced sharply from 56.7% to 54.2% during the same period. More females were employed as helpers in household enterprises 10.2% in 4QFY22 to 11.7% in 4QFY23.

·         The proportion of female workers increased from 8% to 9.3% in the agriculture sector while it declined both in secondary and tertiary sectors. While it was the opposite for male workers.

The Ugly

·         LFPR-U for female workers remains very low at 18% (4QFY23) vs 57.3% for males; even though it has shown improvement from 16.2% in 4QFY22. Even for Young females (15-29yr age) it remains materially lower at19.3% (vs 57.6% for males).

·         Youth unemployment in urban areas remains very high at 17.3% (22.9% for young females); even though it came down from 20.2% a year ago.

·         Assam (41.7%). Himachal (49%), Kerala (42.8%), Rajasthan (43%), and J&K (59.3%) had the worst urban unemployment rate amongst young female workers. Only Delhi (9.9%) and Gujarat (9.7%) had an urban unemployment rate less than 10% for young female workers.

Conclusion

The huge gender gap in the labor force is a cause of serious concern. Female workers, especially young (15-29yr) females, are getting much fewer employment opportunities. The gender gap in the workforce is alarming and does not augur well for the acceleration in the growth rate. If we juxtapose this data with the education statistics, we find that bridging the education gap between male and female population has not resulted in equal opportunity for females in employment.

Another cause of concern is that the unemployment remains materially higher amongst the young workers (17.3%) as compared to overall unemployment level in urban areas (6.8%). The reason could be multifold like unemployability (skill mismatch and/or sub-standard education), reducing employment intensity of GDP, and poor employment growth in manufacturing sector. Nonetheless, it substantially diminishes the demographic dividend for the Indian economy.

Persistently, high ratio of self-employed and casual labor, inter alia, indicates (i) lower employment elasticity in the organized sector and (ii) skill mismatch. 

Economic momentum further gained; Inflation and IIP at 4% (Phillips Capital)

CPI eased to a 25-month low: CPI for May slowed to 4.25% (PC/Consensus estimate: 4.26%/4.31%) vs. 4.7% in the previous month and 7% a year ago. Sequentially, CPI registered 51bps increase as in the last month. Core CPI stable at 5.2% yoy as in the last month with sequential pace lower at 40bps vs. 60bps in the last month. Food inflation (heavy-weight) up by 62 bps mom vs. 51bps hike in the last month led by higher price for vegetables (3%), condiments (2%) and egg (2%). Fuel prices up by 0.6% mom vs. -0.1% deflation in the last two months. Clothing inflation pace stable at 0.3% mom as in the last month while pan/tobacco and housing price increase pace slowed to 0.2%/0.2%. Services inflation pace eased to 0.3% vs. 0.5% in the last month with highest increase in price for personal care (0.6%), medical care (0.4%), education (0.3%), recreation (0.3%), household requisites (0.3%) and transport & communication (0.2%).

IIP well above expectation: April IIP saw 4.2% yoy growth (PC/Consensus estimate: 1.5%/1.4%) vs. 1.7% in the last month (revised up from 1.1%) and 7% a year ago. Mining/Manufacturing registered 5%/5% yoy growth; electricity fell by -1% vs. 8%/6%/12% growth in April’22. Among the use-based segments, 5/6 were stronger yoy. Infrastructure (13%) saw the strongest growth followed by consumer non-durables (11%), capital goods (6%), primary goods (2%) and intermediate goods (1%). Consumer durables (-4%) contracted yoy.

Sector wise: 12/23 sectors progressed yoy. Growth was noted in pharmaceuticals (25%), other transport equipment (12%), machinery (11%), basic metals (10%), electrical equipment (10%), motor vehicles (4%), chemicals (3%), food products (2%) and fabricated metals (1%). Production declined among tobacco products (-21%), computer & electronics (-11%), beverages (-10%), paper products (-8%) and textiles (-6%).

China data disappoints (CNBC)

China’s youth unemployment rose to a record in May, while major data missed expectations, according to data released Thursday by the National Bureau of Statistics.

The unemployment rate for young people ages 16 to 24 rose to 20.8% in May, a record and above the high set in April. The jobless rate for people of all ages in cities was 5.2% in May.

Retail sales for May rose by 12.7% in May from a year ago, below expectations for 13.6% growth forecast by a Reuters poll.

Industrial production rose by 3.5% in May from a year ago, slower than the 3.6% expected by the Reuters poll.

Fed pauses, no pivot yet (CNBC)

After a two-day meeting, the Federal Reserve decided to leave interest rates unchanged.

“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the central bank’s post-meeting statement said.

The surprising aspect of the decision came with the “dot plot” in which the individual members of the FOMC indicate their expectations for rates further out. The dots moved decidedly upward, pushing the median expectation to a funds rate of 5.6% by the end of 2023.

Equity Strategy: OWT Banks vs UWT IT — Still more room (Jefferies Equity Research)

The financials & IT sectors together account for c. 50% of Nifty & are key for any India portfolio. Past ~14 year data shows that both move in the opposite direction 70%+ of the time. We believe that there's still a lot of room in the OWT banks / UWT IT call, given the fundamental trends & relative valuation. Also, empirically, this type of trend usually lasts for 3 quarters. We are just half-way into it currently. We would be sellers into the recent IT rally.

IT and banks perform in an opposite direction usually. Put together, financials & IT account for c.40% of MSCI India and 50% of Nifty. Our analysis of performance of Nifty IT and Nifty Banks since 2010 shows that the two indices tend to generally perform in opposite directions. As compared to the Nifty, on a trailing 3m or 6m basis, the relative performance of IT index and Banks index has been in the opposite direction 76% & 70% of the time, respectively. Even if we consider longer periods say 1/2 yrs; the opposite performance sustains for >60% of the time. The fundamental reason is that the banks tend to OPF during the times of favourable macro like stable / strong INR, falling yields, strong growth etc. While IT tends to OPF during weaker macro, rising yields/inflation and weakening INR.

We view the banking sector positively. The banking sector has seen strong performance in FY23 as system wide loan growth at 16% was at a multi-year-high. Moreover, asset quality is benign and fast transmission of rate hikes has helped to widen NIMs. The outlook for the sector is strong with 12-14% sector loan growth (higher for pvt sector at 18-20%) likely in FY24 partly, as India starts seeing a new private capex cycle (both housing and private corporate capex in upturn).

Strong macro also suggests OWT Banks. India's 4QFY23 GDP data beat on higher capex and RBI with construction activity showing early signs of the cyclical upturn; GDP forecasts are being upgraded; with RBI projecting 6.5% for FY24. Inflation has also declined to 2-3 year lows with WPI -ve and CPI below 5%. The RBI has also brought its rate hike campaign to a pause. INR is seeing support from improving CAD; with the same trending near breakeven. Despite new highs, valuations are still reasonable for the banks. Our model portfolio is OWT lending financials by 2ppt; while IT is the largest UWT 4ppt.

Negative view on the IT services sector. IT outsourcing demand has weakened substantially in 2023 with several tech majors reporting flat to declining revenues in 4QFY23. The outlook is weak as well with mid-single digit growth guidance and no increase in employee headcounts planned in FY24. Despite weak outlook, IT cos valuations are still above the historical averages. March quarter was the first quarter with some disappointments for IT majors. We believe that more disappointments are likely, especially in the mid-caps. For large caps our EPS estimates are 1-6% lower than consensus.

Other technical factors. The average instance of Banks or IT OPFing the Nifty lasts for a duration of 12 months and generates an OPF of 24ppt vs. the Nifty. The current period of Banks OPF started Feb23 and at 4mths /16ppt OPF &, in our view, still has a way to go.

India consumer: Disruption of valuation models too (Kotak Securities)

In our view, investors may need to reevaluate the extant valuation framework for consumer companies, given increasing risks to growth, the bulwark of current valuation models. Traditional valuation models essentially assume steady growth at high profitability for extended periods of time. This may not hold given rising disruption risks, which may alter the growth and profitability profile of most consumer sectors and companies.

Traditional valuation framework may no longer be reliable: We believe the extant valuation framework for consumer stocks based on (1) historical P/E multiples and/or (2) long-term DCF models, which simply extrapolate recent history of growth and profitability may be redundant given swift changes to business models of companies and sectors. The conventional framework of according high valuations for ‘assured’ high growth and profitability for an extended period of time (in effect, some variant of GAAP—growth at any price) may no longer work given declining visibility on both growth and profitability in an increasingly disrupted future.

A different framework for a new era: Investors may want to reassess the four traditional pillars of ‘assured’ growth and profitability of consumer companies in order to appreciate the resilience of their business models—(1) brand power, which accords superior profitability and returns, (2) distribution strength, which reinforces brand, (3) market structure, which determines the extent of competition and profitability; brand and distribution feed into this key variable and (4) product relevance, which determines the period and rate of growth.

Business models will be tested: As argued in several reports over the past five years, we see disruption across all categories of the consumer sector. The traditional moats of consumer companies will likely get eroded and even breached over time. (1) Brands will likely become less important, (2) traditional general (B2C) distribution channels may lose salience, being gradually substituted by other distribution channels, (3) markets will become more competitive with the entry of new players using different routes and technologies and (4) products (some of them) will lose relevance given changing consumer lifestyles and preferences.

High valuations of companies would suggest no concerns around disruption: The high valuations of most consumer companies would suggest that investors expect (1) a ‘business-as-usual’ outlook for companies for an extended period of time or (2) the companies to successfully navigate the ‘uncertain’ future without any negative impact or to even benefit from the emerging environment. In our view, it would be imprudent to dismiss disruption risks and impractical to assume that all or most incumbents will manage disruption well.

Paper Industry: Set to See Margins Moderate in FY24 (CARE Ratings)

The paper industry, including paper, newsprint, and paper products, witnessed a significant improvement in operating margins of 926 basis points (bps) in FY23 compared to the previous year for the top 10 listed companies based on market capitalisation. This improvement was primarily driven by revenue growth of 45%. The industry experienced higher volumes and a notable surge of nearly 40% in net realization, which contributed to the sharp improvement in operating margins. In the first three quarters of FY23, the paper industry demonstrated robust financial performance, fueled by pent-up demand and price hikes implemented by market players to capitalize on the surge in demand. However, during Q4FY23, the industry began showing signs of stabilization after achieving double-digit growth for eight consecutive quarters until Q3FY23. Factors such as China’s ban on paper waste and supply disruptions resulting from the Russia-Ukraine war led to a significant increase in Net Price Realizations (NPR) worldwide, soaring from Rs. 70,000 per tonne to Rs. 100,000 per tonne. Looking ahead to FY24, CareEdge Ratings anticipates moderation in both topline and operating margins by 200 to 300 bps. This expectation is based on the stabilisation of demand and the cooling down of raw material prices, which is likely to result in a corresponding moderation of net price realisations.

Textile Sector: On the cusp of an upcycle (Sharekhan)

The Indian textiles sector is strategically consolidating its position in key export markets such as home textiles and readymade garments, capitalising on opportunities arising from the US-China trade war. India has witnessed a notable increase in its share of exports in these segments to the US. After challenging and subdued FY2023 affected by muted demand, higher retailer inventory, supply constraints, and rising cotton prices, the textile companies believe the worst is over and anticipate a demand revival by Q3FY2024 with reducing inventories on global retailers’ shelves.

Further, factors such as the “China + 1” strategy, geopolitical uncertainties in competitor countries, and potential free-trade agreements (FTAs) with the UK and Europe offer promising prospects for consistent earnings growth and improved cash flows. With material capex already completed, textile players are poised to leverage their expanded capacities. Moreover, falling cotton and crude prices are expected to bolster margins and enhance India’s competitiveness in export markets. The Indian textile sector is well positioned to overcome challenges and looks forward to ride the next upcycle.

Near-term drivers: Likely recovery in demand for home-textile products and improved demand for garment products in key export markets from H2FY2024.

·         India continues to gain market share in key export markets such as the US and Europe (with share gains in the past five years).

·         Improvement in the capacity utilisation with higher capacities would boost volumes.

·         A fall in cotton prices from its highs of Rs. 1,00,000+ per candy to ~Rs. 60,000 per candy will drive margins and will also provide competitive advantage in export markets.

Medium to long-term drivers

·         Rising labour costs and geopolitical tensions have the potential to shift the focus of exports from China towards other countries.

·         Some big global brands are reducing their exposure to China over time and continuing to develop alternate suppliers in other regions.

·         The FTA with UK/Europe will be beneficial to Indian apparel exports.

·         Government incentives and support from state governments for low-cost locations; PLI schemes to increase investments in man-made fibres and technical textile and FTAS with other countries.

…increase in Cotton MSP (Phillips Capital)

Indian Government has increased MSP for Cotton by c. 9% for medium staple from Rs 60.80 per kg to Rs 66.20 per kg and by c.10% from Rs 63.80 per kg to Rs 70.20 per kg for season 2023-24.

We believe cotton Minimum Support Price (MSP) increase is aggressive step to support cotton farmers to compensate for an increase in cultivation cost. India need to work on cotton yield improvement urgently to maintain cotton textile value chain globally competitive. The Government has continuously increased MSP without improvement in cotton yield, in fact Cotton yield has shown declining trend in past few years. We have highlighted this as serious issue and need to be addressed on priority basis.

Cotton prices has seen sharp correction from Peak of Rs 100,000 per candy in 2021-22 to Rs 57,500 per candy now which is close to MSP of 2022-23. MSP increase by c.10% will now structurally increase cotton price going ahead to c. Rs 63,500 per candy.

Steel: Healthy Domestic Demand; Sustainability to Take Centre-Stage (CARE Ratings)

During FY23, the domestic finished steel consumption grew by 13.3% y-o-y led by healthy demand from infrastructure, real estate and automobile industries.

•      Steel exports declined sharply by 50.2% y-o-y due to the imposition of export duty on steel products from May-November 2022 coupled with weak global demand due to continued geopolitical tensions and inflationary trends.

•      As the domestic industry looks to double the steel capacity and production by FY31 from current levels to cater to healthy domestic demand and export opportunities, sustainable availability of key raw materials – iron ore and coking coal, and enhancing export competitiveness will be critical.

•      Further, the industry is becoming increasingly conscious of the Environmental, Social and Governance (ESG) aspects and significant investments are expected towards reducing carbon emissions and developing of cleaner production technologies going forward.

The domestic steel consumption is expected to grow at 8-10% in FY24 led primarily by infrastructure push in the pre-election year. The demand uptick from China has been slower than expected which is expected to have a bearing on steel prices in the near term. As Indian players prepare to cater to future demand, accelerating domestic iron ore production and identifying sustainable and cost-effective sources of import-dependent coking coal will be the key. While the transition to cleaner technologies such as green steel is desirable, these technologies require high capital investment and their adoption will depend on the support provided by the government and industry participants.

Auto: Steady Growth on Low Base; UVs are Clear Winner (Reliance Securities)

Domestic auto sales volume (excluding CVs) grew ~18% YoY (up 9% MoM) to 18,08,686 units in May’23. Notably, all segments of the automobile industry witnessed a decent performance in domestic market, supported by healthy urban sales and steady recovery in rural, supported by healthy agri output at higher MSPs. However, exports continue to remain laggards. Industry witnessed strong YoY as well as MoM growth across segments. Marriage season helped industry’s retail performance to some extent, while low base led to YoY growth. In PV segment semiconductor supply impacted production to some extent.

On the other hand, 3W segments recorded healthy double-digit growth of >70% YoY. UV segment remained clear winner with highest growth of 33.5% YoY, contributing 54% to industry’s PV volume.

Despite improvement, overall demand level remained below pre Covid level for 2Ws during the month. The wholesale volume was broadly in line with the retail. We expect volume improvement to continue gradually as nearly normal monsoon and higher water reservoir would support Kharif cropping and rural recovery in coming months. Recent IMD forecasting of normal monsoon further improves rural sentiment and likely better rural economy ahead. Industry would witness steady improvement in FY24 with decent agri output and cool off in inflation, turning customer sentiment positive coupled with stable pricing environment. EV penetration should improve further in 2023.

However, near term challenges due to monsoon delay and heat wave may spoil the show and may put some challenge for automobile industry. Therefore, we would monitor the situation closely to gauge the FY24 performance for various segments of the automobile industry, which would depend on timing and distribution of 2023 monsoon.

Chemicals: The biggest fear – Is there a downcycle in global ag-chem? (Axis Capital)

Indian specialty chemical players are highly skewed to the global agri space, supplying intermediates to global innovators, who in turn sell branded/ patented products. Given elevated global channel inventory (for generics’ agri inputs), softening crop prices, and slower export growth in last few months, there are investor concerns of a possible downcycle in global ag-chem. In this note, we look at key global indicators like crop prices, inventory data etc. and try to connect the dots with industry feedback. Prima facie, we see near-term earnings risk to domestic ag-chem companies. However, risks to specialty chemical revenue growth appear limited given client commitments, contribution from new product launches etc.

Crop prices softening in sync with a decline in input prices...

After a sharp rally in CY22, crop prices have softened over the last few months across corn, wheat, soya etc. – down 15-25% from the peak, though still up ~60% vs. pre-Covid. We note that the earlier price rally as well as the current price decline is largely led by the price trend of key agri-inputs/ fertilizers, which in turn were driven by global gas prices (sharp rally earlier, decline now). Fertilizer prices have declined 50% from the peak (+20-40% vs. pre-Covid), while key raw materials for fertilizers have declined 40-70% from the peak (+15-30% vs. pre-Covid). Weather concerns have also kept crop prices elevated.

...but rising alternate usage, exports to China restrict price decline

Globally, land under acreage is on a steady decline, while improving crop productivity has been able to largely maintain the demand-supply balance overall. However, with an increased use of crops for alternatives like ethanol blending/ biodiesel etc. and a rise in agri exports to China, crop demand has accelerated, keeping agri commodities inflationary. This is also visible in rebasing for the FAO index globally – led by cereals and vegetable oils. India has also raised its ethanol blending target to ~20% by CY25 vs. 5% earlier. Such alternate uses may keep agri-commodity prices more in tandem with global oil prices structurally.

Generic agri input inventory elevated globally; India relatively better off

Commentary from global ag-chem majors suggests (a) high global channel inventory in LATAM on drought-led impact in South America and resultant slower demand, and (b) sharp decline in RM and intermediate prices in China, driving lower prices of end-products, putting pressure on distributor margin (high-cost inventory). While agri majors expect normalization in 1-2 quarters, higher probability of El Nino (70%, as per Australia's Bureau of Meteorology) may delay global demand recovery

·         India is facing higher inventory as well, especially in insecticides, but empirical data suggests absolute agri input sales declined only once in El Nino over the last 2 decades - possibly on improving irrigation and higher MSPs.

·         Global majors expect good demand from new product launches, but demand revival for existing products may be backended in CY23. There is weak outlook from Adama, FMC, but strong commentary from Bayer, Sumitomo, Corteva.

Indian players continue to eye market share gains – confident on growth

Being pull products, branded/ patented agri inputs may not see much demand pressure, unlike generics. Despite slower exports in initial months, most Indian specialty chemical players (supplies agri-intermediates to global innovators) remain confident of 18-20% revenue growth guidance given discussion/ commitments with global majors, with no delays or cut in capex as they aim to gain market share globally (China +1/ Europe +1).

Movies like Do Bigha Zamin (1953, Bimal Roy) have been raising the issue of migrant workers for a long time. Songs like Ae mere pyare watan (Movie Kabuliwala, 1961) Chithi aayi hai (Movie Naam, 1986) have been favorites with all generations.

Political parties in the states like Maharashtra, Goa, Delhi, Tamil Nadu, Karnataka etc. have been consistently raising the issue of migrants straining the local economy. During Covid-19 induced lockdown, the issue of mismanagement of reverse migration had become one of the top controversies; and still continues to haunt the incumbent government.

In fact, Covid-19 appears to have added a significantly new dimension to the intra country migration, i.e., migration of white-collar workers away from metro cities to smaller towns.

The following two news items relating to migrants have drawn significant attention this week.

1.    As per Henley Private Wealth Migration Report (see here), most large emerging economies continued to witness migration of high networth citizens to developed economies. BRICs and the UK were the top sources of wealthy immigration; while Australia, UAE (mostly Dubai), Singapore and USA were the top destinations. China (13500) and India (6500), two top emerging economies, lost the most HNIs, followed closely by Russia and the UK.

There are multiple ways to look at this datapoint. For example—

·         Economies like China, India and Brazil are witnessing strong growth in their middle and upper class population. The number of HNIs immigrating should therefore be seen in the context of new families entering the HNI bracket every year. In the case of the UK and Russia, it could perhaps be more of a function of the political situation (Brexit, economic sanctions, etc.).

·         The wealth inequality may be rising faster than the economic growth in many emerging economies. This on hand pressurizes the governments to be more socialistic in their policy making (e.g., higher taxes and subsidies); and on the other hand, hinders the development of social and physical infrastructure commensurate with the incidence of taxes and desired lifestyle of the wealthy. HNIs thus look to immigrate to countries that offer much better lifestyle and growth opportunities.

·         After reaching a certain threshold, the entrepreneurs and professionals in emerging markets begin to feel constricted by the limitations imposed by the society, policy, technology, markets etc. and decide to venture out to broaden their horizon. They shift their physical base to convenient locations while maintaining their social and culture roots in their native countries.

2.    Communal clashes were reported in Uttarakhand where some organization(s) reportedly demanded that people from one particular community shall leave the state forthwith. There have been reports of widespread damage to the businesses and property of Muslim community people settled in the state.

Many observers have termed it an attempt at ethnic cleansing, similar to what happened with Kashmiri Pandits in Kashmir Valley in early 1990s. Whereas, some experts have attributed economic motives to these developments. The poor employment conditions; reckless development in the name of tourism promotion that has severely impacted the lives of locals in terms of strain on local resources especially water and overall cost of living; and rise in crime in the state due allegedly due to increased population of immigrant workers, etc. are cited as some of the reasons for locals’ resentment and aggression against immigrants’ even though present manifestation is against Muslim community only.

I feel that as the federal structure becomes more dynamic and regional aspirations become even more dominant, the issue of labor migration from mostly agrarian states to industrialized states will remain a key political issue.

As the Economic Survey for FY17 had noted, “Historically, migration of people for work and education has been a phenomenon that accompanies the structural transformation of economies, and has paved the way for the release of “surplus labour” from relatively low-productive agricultural activities to sectors enjoying higher productivity. The resulting remittance flows increase household spending in the receiving regions and further the economic development of less-developed regions.”

The survey admitted that the acceleration in migration has occurred in spite of discouraging incentives such as domicile provisions for working in different states, lack of portability of benefits, legal and other entitlements upon relocation.

Whereas there has been much debate about the slow urbanization rate in India, inequality in regional growth and concentration of economic activity in few areas, the debate about the state of migrant laborers is mostly confined to NGO academics. Unfortunately, we do not hear much debate or discussion about the undesirability of the accelerating trends in migration. In my view-

(a)   The urban development and town planning policies are mostly ineffective, without a comprehensive policy on workers' migration.

(b)   The women security strategies and plans without adequate attention to the fact of large-scale women worker migration are least likely to succeed.

(c)    Cooperative federalism is bound to fail, until and unless the States are empowered and encouraged to make bi-lateral treaties, especially in respect of the flow of workers. It is critical even for realizing the full benefits of GST.

(d)   In the Indian context, large scale worker migration may not be desirable. It is therefore important to make the Village as the primary unit of development, rather than State or Country.

In the words of Mahatma Gandhi, “Independence begins at the bottom. A society must be built in which every village has to be self-sustained and capable of managing its own affairs. It will be trained and prepared to perish in the attempt to defend itself against any onslaught from without. This does not exclude dependence on and willing help from neighbours or from the world. It will be a free and voluntary play of mutual forces. In this structure composed of innumerable villages, there will be ever widening, never ascending circles.

Growth will not be a pyramid with the apex sustained by the bottom. But it will be an oceanic circle whose center will be the individual. Therefore, the outermost circumference will not wield power to crush the inner circle but will give strength to all within and derive its own strength from it.”

Taking factories to the farms is the only sustainable development model for India. Everything else is bound to fail in due course.