Vijay Kumar Gaba

(i)    The management commentary for FY23 would be important to understand the impact of global growth, inflation and geopolitical conditions on Indian businesses. BY now most of the corporate management would have assessed the impact on their respective businesses and their assessment would be reflected in their guidance for FY23.

(ii)   The present earnings estimates of analysts for FY23-FY24 may not be factoring the latest developments, especially with regard to monetary policy, inflation, and demand outlook. Since the previous result season most agencies have downgraded India’s growth forecast; increased inflation (wage of raw material cost inflation); rates (cost of capital); and currency (import inflation) forecast. The latest results may see analysts rationalizing their forecasts to factor in latest management guidance; macroeconomic forecasts and market (demand) conditions. This shall give a more realistic picture of the current market valuations.

(iii)  Past one year has seen a massive secctoral shift in momentum. The focus has shifted overwhelmingly towards commodity producers (especially metal and energy) from commodity users (FMCG, consumer durable); deleveraging (financials suffered); asset inflation (real estate) and exports (Textile, IT Services, Food etc.). Recently we have witnessed momentum moving away from IT Services (due to margin concerns) and Realty (demand concern as cost of funds rise). The latest quarter results and management commentary would either strengthen the current sectoral preferences of the market or cause a sectoral shift. I shall be closely watching the IT, Financials and Metal sectors for a change in preference. A positive commentary on rural demand may trigger a positive move in FMCG and Auto also.

I have noted the following forecasts of brokers for the current result season. The market participants mostly appear positioned in consonance with these forecasts. I shall be watching the results for any significant deviation that may trigger repositioning in the market, and hence create some trading opportunities.

Overall Results

Q4 FY22 and Q1 FY23 are likely to be challenging quarters for Corporate Inc as they try to strike a balance between rising input costs and demand.  Hike in prices has so far been well absorbed, with demand remaining intact. This can be reflected in revenue projections for our coverage universe, which is likely to grow by 25% y/y despite a higher base effect. In fact, Q1 FY23 revenue growth is also likely to remain robust given the depressed activity in the first quarter of the preceding fiscal year.

Things are not rosy on the operating margins front, which is expected to contract by 27bps sequentially and 97bps y/y basis. As commodity prices continue their surge, companies endeavor to further pass on the costs but remain cautious on the impact on demand. This will likely translate into margin pressure in the quarters ahead. However, we see that the price hikes could be a blessing in disguise in the medium term, especially when sales realisation remains intact even after commodity induced cost escalation subsides.

Adjusted PAT is likely to grow by 32% y/y, largely driven by strong performance from Banks. Automobiles to see steep contraction of 50%, hampered by both supply side issues and rising input costs. (Yes Securities)

IT Services

Margin pressure bites in a seasonally weak quarter. Sequential growth for Indian IT will be moderate in March 2022 quarter and in line with historical seasonal trends. Margins will remain under pressure resulting from elevated wage increases, onsite as well as offshore. Net result is a moderate EPS growth on yoy and moderate growth to decline on sequential basis. Rupee depreciation is essential to bridge the gap between cost increases and moderate price increases in FY2023. Demand trends continue to be robust. While we are constructive on the space, we are surprised with resilient stock prices against the backdrop of increasing risks. (Kotak Securities)

We expect the demand outlook to remain strong in FY23, although the initial guidance may bake in a potential impact on demand from elevated inflation in the US and Europe. Companies will continue to post strong growth numbers on the back of tailwinds for the industry on account of Digital and Cloud transformation initiatives with enterprise clients. Hiring trends in recent quarters indicate continued strength in demand with good visibility. (MOFSL)

IT Services sector is expected to report strong growth in Q4FY22 primarily on account of the new large deal wins and a ramp-up of deals won in the previous quarter despite seasonality furloughs. IT spending in North America and Europe has gained momentum and demand for digital transformation has increased exponentially. Furthermore, improved macro-economic opportunities across the globe are expected to provide further growth impetus to the sector moving forward. However, supply-side constraints are likely to impact revenue growth momentum in the short term. (AXIS Securities)

Financials

We expect a strong quarter on earnings growth for banks in 4QFY22, but driven solely by lower provisions. Operating profit growth for banks would continue to remain weak. We expect further improvement in asset quality ratios. Weak loan growth remains a key concern. We expect strong performance from NBFCs across growth, margins and asset quality. (Kotak Securities)

Our estimates indicate continued traction in earnings over FY22/FY23 even as we expect treasury income to remain modest and near-term opex to remain elevated. Further, this momentum is likely to continue over FY23E as well, as we project Private and PSU banks to report earnings growth of 30% and 36% in FY23, respectively. Overall, our Banking coverage universe is anticipated to report earnings growth of 33% in FY23, after posting strong growth of 46% over FY22E.

Asset quality outlook robust; core credit cost undershooting across banks: We estimate slippages to remain modest, which along with healthy recoveries and upgrades would result in an overall improvement in asset quality – barring the mid-sized banks that could see stable trends. The Retail and SME segments could experience some slippages; however, the Corporate segment is likely to remain resilient. While the performance of restructured book would be important to assess the credit cost trajectory, we nevertheless estimate credit cost to undershoot across banks, thereby enabling further shore up of contingent/restructured / SR provisions. (MOFSL)

Consumers

The 19 Consumer companies under our coverage universe are likely to report muted cumulative growth numbers – revenue/EBITDA/PAT of 8%/7%/5% – in 4QFY22. This is on a cumulative sales/EBITDA base of 26.7%/26% in 4QFY21. Two year average sales/EBITDA growth is expected to be 17.2%/16.3%. Sales growth will largely be led by price hikes as Staples volumes hover in the negative to slightly positive range, impacted by spiraling inflation and a slowdown in rural demand. Inflation has been the theme in 4QFY22, with already elevated commodity costs pushed further upwards owing to the Russia-Ukraine war, which broke out in Feb’22. With most companies having taken steep price hikes in 3QFY22, managements were already apprehensive of raising prices further as it risked affecting demand.

However, spiraling input costs compelled most managements to raise prices further in an effort to protect margins. The recent correction in stock prices has resulted in pockets of opportunities, especially in companies with a lower exposure to commodity cost pressures and strong structural growth visibility. In the case of distribution channels, e-commerce continues to strengthen its salience for most Consumer companies, while general  trade (GT) remains resilient. Recovery in the MT channel, while still not back to pre-COVID levels, is certainly well on its way. However, the recovery in certain categories may not be as strong as consumers tighten their purse strings when looking at discretionary purchases. A few key developments to monitor include: a) a fresh COVID wave engulfing the country, b) further escalation in the ongoing conflict in Ukraine continuing to affect commodity costs, and c) extended slowdown in rural demand. On the positive side, a good Rabi harvest may help boost rural demand. (MOFSL)

Consumer discretionary

We expect the consumer discretionary to report slower revenue growth of ~8% YoY in Q4FY22 mainly due to high base (+41% in Q4FY21) and lower volume offtakes. Volume offtake of coverage companies is likely to decline in the range of 7-12% on account of pre price hikes inventory built by dealers in Q3 and lower demand amid pandemic led restrictions.

Sector wise, paint companies are likely to report revenue growth in the range of 7-9% YoY led by price hikes of ~21% taken during 9MFY22. On the fast moving electrical goods (FMEG) front, the coverage companies are likely to see revenue growth in the range of 5-9% driven by price hikes of about 15-17% in 9MFY22. We believe extended winter and pandemic led restrictions have restricted volume offtake of cooling products.

Key raw materials such as titanium dioxide (TiO2), vinyl acetate monomer (VAM), aluminium, high density polyethylene (HDPE), low density polyethylene (LDPE) witnessed upward movement in the range of 9-60% YoY. We believe limited price hike against the steep rise in raw material prices is likely to weigh on gross margins. (ICICI Direct)

Cement

Our dealer checks suggest that cement off-take improved significantly in the last two weeks of March 2022, resulting in flat yoy (+19% qoq) volumes in 4QFY22 despite a subdued start. We estimate 1% qoq higher realization and costs to remain flat qoq as operating leverage benefits offset commodity cost inflation. We estimate EBITDA to improve by ~Rs100/ton qoq for our coverage universe in 4QFY22. Costs inflation would further accelerate in 1QFY23 and would require 7-8% price hike to pass costs, suggesting significant downside risks to earnings estimates. (Kotak Securities)

In 4QFY22, a sharp divergence in earnings can be expected depending on the ability of the companies to source coal or petcoke at relatively competitive rates. For 4QFY22, we are building in 9.3% YoY revenue growth for the sector, driven by ~9.7% YoY growth in realization whereas volume is expected to remain flat (marginal decline of 0.3% YoY). Average realization on QoQ basis is expected to rise by 2.3% only. On the other hand, operating costs are likely to increase by 21% YoY, largely driven by higher power & fuel costs. As a result, we expect the industry to deliver EBITDA decline of 26% YoY. EBITDA/mt for the industry is likely to increase marginally from Rs900 in 3QFY22 to Rs920 whereas EBITDA margin is expected to remain flat QoQ at 16.5% (down 785bps YoY). PAT is likely to decline by 31% YoY. FY23 appears to be a tough year for the industry as coal prices are expected to remain elevated for a prolonged period given the global tightness in supply and geopolitical tensions. (Nirmal Bang)

Speciality Chemicals

We see the likely hit on demand as well as margins from the supply disruption across energy, fertilizers and chemicals sectors, aggravated by the Russia-Ukraine conflict, cast a shadow on 4QFY22E for NBIE Chemical stocks. The buoyancy in freight rates (up more than 100% YoY) is an added worry. On the brighter side, we see pricing power supporting margins. (Nirmal Bang)

Oil and Gas

We estimate the oil & gas sector’s aggregate EBITDA would increase by 11.2% YoY/3.1% QoQ, given OMCs’/ONGC’s high GRMs and higher realisations. We anticipate CGDs’ EBITDA would dip by 20.5% YoY owing to high input spot prices (~3.5x YoY) and lower margins. (Edelweiss)

Auto

We forecast revenues for the auto stocks under our coverage to remain flat yoy in 4QFY22 led by (1) chip shortage impacting PV production volumes and (2) weak 2W segment demand, offset by (1) recovery in CV segment volumes and (2) higher ASPs. We expect EBITDA for companies under our coverage (excluding Tata Motors) to decline by 10% yoy due to multiple cost pressures. Suppliers will also have a weak quarter with 18% yoy decline in EBITDA in 4QFY22. (Kotak Securities)

For example, the following are some of the red flags I have recently noted from the research reports of brokerages:

BoP almost zero, as foreign flows dry up: 3QFY22 saw a marginal net foreign investment outflow of US$1bn compared with the past five-quarter average of ~US$20bn. This is mainly due to: 1) FPI turning negative with outflow of US$6bn, and 2) FDI dropping to US$5bn compared with the recent quarterly average of US$13bn. FII selling has worsened in 4Q, with our latest estimate putting it at US$15bn vs US$7bn for the whole of 2021. As the US Fed continues tightening, FIIs may not be major buyers for the rest of the year, though they may not sell too much either, after a concentrated burst in 4QFY22.

The Balance of Payment (BoP) was close to zero for 3QFY22, as compared with the average of US$23bn, as CAD widened and foreign-flows investments dried up.

We estimate CAD at 1.6% of GDP for FY22, and believe it will widen to 3% of GDP if crude stays at around US$100/bbl. On the face of it, this could worsen as agri input prices have also spiked. But including India’s non-fertiliser agri exports, we could see a broad CAD impact from agri owing to high commodity inflation turning out to be modest, leaving direct crude imports as the main reason for CAD worsening. (IIFL Securities)

External sector headwinds will continue well into FY2023E: The external sector remains subject to major volatility amid differential monetary policy stance with the Fed and the unrelenting commodity price surge. Adjusting for the FY2022 export and import data, we estimate FY2022E CAD/GDP at 1.5%. If oil prices were to average around US$100/bbl in FY2023E, we expect the CAD/GDP to widen to 2.8% (Exhibit 6). The BOP is expected to remain hugely in deficit given (1) widening trade deficit, (2) the continued flight of capital to safe havens and high yielders due to narrowing interest rate differentials, and (3) persistence of geopolitical risks. Overall, as markets continue to assess the growth-inflation impact from the rapid global policy normalization and geopolitical risks, we expect the INR to remain under pressure. However, India’s FX buffer of US$620 bn should be sufficient to shield the economy against any major external shock. We also note that the direction and magnitude of INR moves will be in sync with the rest of the EM pack. If the risk premia of geopolitical tensions fade quickly, they can provide brief respite to the INR. We see USD-INR trade in the range of 75-77.5 in the months ahead. (Kotak Securities)

21% contraction in P/E valuation versus 14% dip in NIFTY50 index from CY21 high to CY22TD low - NIFTY50 forward P/E ratio hit a high of 22.8x during Oct’21 before reverting back sharply to 18x during the low hit in Mar’22 which is a contraction of 21% in terms of forward P/E valuation. The sharp decline is the net result of a 14% decline in NIFTY50 index price and 8.5% growth in rolled forward EPS. Post the upswing in stock prices from Mar’22 lows, the latest NIFTY50 forward P/E stands at 20x or (~5% earnings yield) which is a drop of 12% from the Oct’21 highs. (ICICI Securities)

Two-thirds of the sectors are trading at a premium to their historical averages: The Nifty trades at a 12-month forward P/E of 19.8x, near to its long period average (LPA) of 19.3x (at 3% premium). P/B, at 3.2x, is at a 21% premium to its historical average. India’s market capitalization-to-GDP ratio has been volatile, reaching 56% (of FY20 GDP) in Mar’20 from 80% in FY19. It has rebounded to 115% at present (of FY22E GDP), above its long-term average of 79%. Healthcare and Oil & Gas now trade in a reasonable range to their LPA valuations, while Technology, after the sharp run, trades at a 52% premium to its LPA. Financials are trading at near to its LPA on a P/B basis.

As we step into FY23, we believe, the next two quarters are going to see a sharp margin impact and corporate commentaries will worsen before it gets better. Secondly, while the Nifty has not seen much earnings downgrade so far (thanks to upgrades in Metals/O&G and neutral to no impact in IT/BFSI), the broader universe is clearly bearing the brunt of commodity cost inflation – a trend we saw even in 3QFY22 corporate earnings season. That said, if the input cost situations do not improve and price increases become inevitable, we are not too far away from some demand dislocation in an already weak economy. And this, at some point in time, will lead to earnings downgrade even for the Nifty, in our view. (MOFSL)

Consumption to remain subdued in FY23: Consumption demand as measured by private final consumption expenditure (PFCE) has been subdued in FY22, despite sales of select consumer durables showing some signs of revival during the festive season. Although the January 2022 round of Reserve Bank of India’s (RBI) Consumer Confidence Survey shows that Current Situation Index increased marginally on the back of better sentiments with respect to the general economic situation, it continues to be in the pessimistic zone. The Expectations Index, which captures one year ahead outlook, moderated due to the surge in COVID-19 infection cases in January 2022. Household sentiments on non-essential/ discretionary spending continue to be subdued. As the consumer sentiment is likely to witness a further dent due to the Russia-Ukraine conflict leading to rising commodity prices/consumer inflation, Ind-Ra expects PFCE to grow at ~8% in FY23, as against its earlier projection of 9.4%. (India Ratings)

Growth moderation in SME and auto to delay credit revival: The recent revival in credit demand (loan growth moving to 8-9% YoY) is likely to be tempered by the expected macro slowdown. CS sees a potential hit to GDP of up to 3%. We believe certain segments such as autos, SMEs and mortgages are more likely to see a dampening in demand and lower our overall bank loan growth estimates by 2-4%. We still expect relatively benign asset-quality outcomes and risks primarily limited to certain pockets, such as autos (particularly CVs if fuel prices increase substantially and sustain) and SMEs, particularly on the restructured and ECLGS books. Asset quality on home loans is unlikely to be materially impacted, as even after a 100bp rate hike, if banks were to increase the tenure by two years, EMIs would be flat. Corporate profitability is likely to get crimped from rising commodity prices but, given the deleveraging, we believe the risks are contained. (Credit Suisse)

Bigger risks loom on top-line, earnings: Earnings recovery has narrowed in FY22, after a broad-based rebound in FY21. While FY23 bottom-up EPS estimates reflect recovery, from top-down basis broad-based slowdown risks have increased as: i) Banks’ earnings will pivot from credit costs (now normalised) to asset growth (yet to pick up). BoP shock and weak demand could delay its recovery; ii) Domestic earnings challenges will broaden from margins to encompass demand, as tailwinds from market share gains, strong formal sector wage bill growth fade. Although, higher food prices may lift rural demand; iii) Strong exports earnings (IT, chemicals) could slow down as oil shock and tightening global liquidity weigh on demand; iv) Commodity earnings could remain stronger for longer, but hawkish Fed will eventually lower it as the war ebbs. (Edelweiss Research)

Some respondents have taken the discussion further and raised some issues. I find it pertinent to address these issues and offer some more random thoughts in this context.

Some have asked for more examples of arch rivals burying their hatchet and coming together for a common good. There are numerous examples of such deals in corporate history. Some notable ones include BHP Billiton and Rio Tinto; Kraft Heinz, Glaxo Smithkline, Unilever; Pfizer, Allergen, Astra Zeneca and Gilead Sciences; Altria and Phillip Morris; Broadcom and Qualcom; Barclays and ABN Amro; Merril Lynch and Bank of America; Shenhua and China Guodian Corp; AB InBev and SABMiller; Holcim and Lafarge; Bayer and Monsanto; BAT and RTC; AOL and Time Warner; Vodafone and Mannesmann; Exxon and Mobil, etc.

Going beyond these specific instances of corporate alliances, on a broader level I would like to highlight three instances.

1.    The global financial crisis in 2008-09 froze the global markets and threatened the worst ever depression in recorded history of world economics. Sensing the disastrous consequences, all the global rivals came together and pursued a common monetary and fiscal policy, pulling the global economy from the brink of disaster in no time.

2.    In Hindu mythology, after exhausting all their resources, power and vigor in a protracted battle, the forces of good (Sura) and evil (Asura) came together to explore the Ocean (Sagar Manthan) to find new resources, elixir for revitalization. The exploration was a highly successful endeavor, immensely enriching and strengthening the forces of good.

3.    The Covid-19 pandemic locked the entire humanity inside their home. Scientists from all over the world collaborated and multiple vaccines were developed in less than two years. Within two years, most of the world is now open for travel, trade and commerce. Never in human history has a vaccine been developed in such a short span of time.

The point therefore is that when a crisis brings the archrivals together on the same side, the results are mostly brilliant. This brings up a follow up inquisition. The Russia-Ukraine war is reviving the specters of World War and Cold War. This is happening at a time when the global economy is facing headwinds of supply chain disruption; tightening money and dwindling demand. The world is polarizing on geopolitical issues. Non-Cooperation, rather than alignment is a more likely scenario.

I am not sure about this non-cooperation thing. Notwithstanding the weapon and money being supplied to Ukraine by western countries, there is no indication of any willingness to escalate the conflict through direct involvement of more countries. This shows a good understanding of the current tough conditions and strong promise to promote global cooperation.

I believe that this conflict will bring BRIC closure and create a powerful growth engine for the world. The complementing economies and strengths of BRIC countries offer a viable solution to most of the crises the global economy is facing presently. Certainly, the next 5years will break many myths.

It is pertinent to note in this context that India has committed to the global community that by the year 2030, the share of electric vehicles in the total vehicles sold in India would be 30% (EV30@30).

The key highlights of the NITI Aayog’s reports are as follows:

Facilitating easy and adequate credit for EVs

·         Cumulative investment in India’s electric vehicle (EV) transition could be as large as INR 19.7 lakh crore ($US266 billion) between 2020 and 2030. There is a need for higher liquidity and lower cost of capital for EV assets and infrastructure.

·         Given the nascency of EV technology and adoption, FIs such as banks and non-banking finance companies (NBFCs) are not lending to EVs due to associated asset and business model risks (see Exhibit 3). These risks are both real (e.g., uncertainty of resale value) and perceived (e.g., product quality). As a result, if financing is available, EV buyers are unable to obtain terms (i.e., interest rates and tenures) that are comparable to ICE vehicles. Governments across the world are recognising this challenge and are introducing supportive measures to facilitate easier financing of EVs.

·         Off-grid solar and off-grid renewable energy solutions for households were included within PSL guidelines in 2012.21 In 2015, renewable energy was included as a priority sector. This widened the scope of lending to larger installations and renewable energy-based public utilities.

·         Including EVs in the Reserve Bank of India’s priority sector lending (PSL) guidelines can complement the $US300 million facility and encourage the financial sector to mobilise necessary capital. It can ensure a swift and equitable transition to EVs.

·         The economic case for promoting the adoption of Electric two- and three-wheelers, as well as four wheelers in commercial use cases is compelling. Easy and cheaper formal credit is desirable for higher rate of adoption in rural areas, especially due to high employment creation potential.

·         While inclusion of EV credit in priority sector lending mandate is promising, additional policy and market measures would be required to address other challenges, which include state level fiscal incentives, open data on vehicle performance, industry-led buyback programmes, and loan guarantee facilities.

·         NBFCs will be important to expanding financing for EVs due to several factors. First, the vehicle finance market share of NBFCs has been increasing over the past five years. However, NBFCs have been facing a liquidity crunch since 2017 that has been worsened by the effects of COVID-19. This may translate to EV-first NBFCs struggling to access low-cost finance from banks. The PSL guidelines allow for co-origination of loans to the priority sector between banks and NBFCs. Both entities thus share risks and rewards.

Developing an advanced energy storage ecosystem

·         At the COP26 summit, India committed an ambitious target of 500 GW of non-fossil fuel-based energy generation in India by 2030 and reduction in the total projected carbon emissions by 1 billion tonnes by 2030. Obviously, to meet these targets India needs a significant amount of grid storage and a large increase in the number of electric vehicles (EVs). This requires stepping up local manufacturing, exploring new avenues, and allowing global competition in the energy storage business.

·         A matured domestic battery manufacturing ecosystem is expected to create competitive advantages and contribute to India’s energy security. This will require a combination of demand and supply-side measures.

·         The annual market for stationary and mobile batteries in India could surpass US$15 billion by 2030, with almost US$12 billion from cells and US$3 billion from pack assembly and integration, under the accelerated case scenario. Even under a more conservative case it amounts to an annual market of US$ 6 billion.

·         Currently, India has a negligible presence in the global supply chain for manufacturing of advanced cell technologies. Advanced batteries are a cornerstone technology, and their manufacturing within India could allow domestically sourced batteries to cater to the demand generated from EVs, grid storage applications, consumer electronics, and other uses. It is an opportune time for India to step forward and support the development of a domestic battery manufacturing ecosystem that meets its future energy storage market needs and helps reduce its dependence on imports to meet the future advanced energy economy demands.

·         In the accelerated scenario, battery demand is expected to rise to 260 GWh by 2030. This would require nearly 26 gigafactories with an average advanced battery production capacity of 10 GWh per year. The conservative scenario battery demand would require 10 gigafactories by 2030. Since India has no manufacturing plants at this scale now, developing and rapidly scaling its advanced battery manufacturing industry is expected to require focused and coordinated public-private actions.

·         Batteries currently account for 25%–50% of the total cost of an EV depending on range and performance. While battery costs are declining rapidly, the battery will remain a critical component of the EV supply chain.

·         For grid operators, energy storage systems can provide a suite of ancillary services that supports the reliable and efficient operation of the electricity grid. Renewable resources such as wind and solar can fluctuate in output both at the daily scale and the seasonal temporal scale. Seasonal storage is required at very high levels of renewable penetration to store large amounts of energy for weeks to months to bridge the gap between seasonally variable renewable energy output.

·         The mobile and electronics industry in India is fast growing and diverse with a significant reliance on high-performance batteries across a wide range of applications. Mobile phones, power banks, IT hardware, telecom devices, smart agriculture, defence electronics, and other portable devices all require high density and safe integrated batteries.

In this context, I consider it pertinent to note what the industry and markets are saying about the current state of affairs of the Indian economy, particularly the inflation and demand outlook.

The rating agency CRISIL notes that “Inflation based on the Consumer Price Index (CPI), or retail inflation, rose to 6.1% on-year in February compared with 6.0% in January and 5.0% a year ago. This marks the fifth consecutive month of rising inflation, and the second month of it staying above the Reserve Bank of India’s (RBI) upper target of 6%. Food has been driving the rise, as the benefit from a favourable base is wearing off. Core retail inflation remains sticky around the 6% mark, while fuel inflation softened as domestic fuel prices did not change.”

(Note: Beginning 21 March 2022, the oil marketing companies have started to raise the fuel and cooking gas prices, after a gap of almost five months.)

The brokerage firm Motilal Oswal Financial Services (MOFSL), highlighted a business update released by the FMCG major Hindustan Unilever (HUVR). Speaking about the demand environment, the management reportedly emphasized that “Sharp inflation is affecting consumption. Cumulative growth, for categories in which HUVR is present, was flat with a high single-digit volume decline in Jan-Feb '21. High inflation is affecting volume growth. Down trading is being witnessed towards lower unit packs (LUPs), but not yet towards lower-end brands. The mix is deteriorating both YoY and QoQ in a quarter where relatively higher mobility should have brought back demand for high margin beauty products. Instead, the customer is tightening their purse strings on premium purchases.” The management had warned about persisting pressure on margins due to raw material inflation. It now believes that “The Ukraine crisis has further exacerbated cost inflation, particularly in palm oil and crude-related RMs like LAB, soda ash, and packaging costs, all of which have seen a sharp sequential inflation. A greater impact of the Ukraine crisis will result in higher inflation in coming months.”

Kotak Securities, highlighted the challenges being faced by the steel industry. In a recent note, it noted that “Prices of coking coal, iron ore and steel have surged sharply amid the ongoing war, as Russia and Ukraine are large exporters of these commodities. Domestic steel price hikes, so far, are insufficient to cover cost inflation, however, the consumption lag suggests higher margins in 4QFY22E. We expect steel prices to rise further, leading to demand destruction partly offset by higher export opportunities.” In the meantime, the European Union has increased duties on stainless steel imported from India.

JM Financial note also warned about likely demand destruction for steel. In a recent note the brokerage emphasized that “Rising raw material cost pressures driven by geopolitical factors – NMDC iron ore price hike (INR900/t CYTD for fines) and US$303/ton CYTD increase in coking coal price to US$660/ton spot, has driven a sharp steel price increase in Indian domestic markets. Dealer price for HRC and Rebar recorded a jump of INR10.2k/19.3k per ton respectively CYTD – some of it driven in anticipation of impending mill price hike. Gross margins for flat products are likely to witness a drop of INR8.1k/t QoQ despite the steep steel price hike. While, on the one hand Ukraine-Russia (~10% of global steel exports) situation has thrown open the European steel market to India, the record high domestic steel price may dampen domestic demand in rural/construction sectors in our view.”

In a separate note, Kotak Securities highlighted the downside risks to the growth forecasts. It said, “With the ongoing Russia-Ukraine conflict’s impact on commodity prices, especially crude prices, we see downside risks to our growth estimates of 8.1% (with crude at US$80/bbl). Under various scenarios of average crude prices (US$120-80/bbl), we estimate FY2023E real GDP growth between 7.0-8.1%. Given the volatility in commodity prices and probable outcomes of the geopolitical tensions, the adverse risks to India’s inflation and growth outturns remain high.”

In a sector note, Edelweiss Securities highlighted the sluggishness creeping in the road construction sector. The note reads, “Overall road award from NHAI and the Ministry of Road Transport and Highways (MoRTH) remained sluggish in Feb-22, with only ~735km of road projects awarded during the month. YTD project award stands at ~7,618km (with NHAI’s share at 2,988 km), down 10% YoY. Road construction in Feb-22 stood at ~1,361km. YTD road construction stands at ~8,045km, down 28% YoY. The 2022 Union Budget (refer to, Union Budget – A mixed bag) witnessed a mere 1% YoY increase in outlay for roads space. This has raised concerns about the trajectory of road capex going ahead.”

Edelweiss also noted, in a separate note, that “The paint industry has never seen such sharp cost inflation in at least the past four decades. Price hikes for the end-consumer has been at record levels too. Hence, we do not have a precedent to see how demand behaves with such sharp price hikes. But, we do expect some adverse impact on demand in the near-term (especially at the lower-end)”

The higher oil prices shall also reflect on current account deficit and INR exchange rates. As MOFSL notes, “Due to higher commodity prices (including fuel), we have almost doubled our FY23 CAD forecasts to 1.5% of GDP, with slight downward revision in FY22E. Further, while India’s inflation is likely to remain broadly intact, higher US inflation could lead to some appreciation bias in INR against USD, which is reflected in our INR forecasts. We have revised our USD:INR expectations to average 75.6/76.8 in FY23/FY24 vis-à-vis earlier forecasts of 76.4/78.3, respectively.”

Notwithstanding the assurance of Governor Das to maintain adequate liquidity in the system to support growth, the banking system liquidity surplus has been narrowing. For the week ended 17 March 2022, the average banking system liquidity surplus at Rs 5.78 lakh crore was Rs 1.46 lakh crore less than that in the previous week (Rs 7.24 lakh crore). Some of this liquidity outflow could be attributed to advance tax payments. But the present net surplus liquidity is more than 40% lower than the peak surplus in 2021.