Vijay Kumar Gaba

FY24-25 Macro and Strategy Outlook (Phillips Capital)

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

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

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

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

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

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

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

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

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

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

Momentum in Industrial Output Continues (CARE Ratings)

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

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

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

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

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

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

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

Decoding deposit growth (Nirmal Bang Institutional Equities)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

They have six bank accounts for their family members, mostly used to receive various benefits from the government and other institutions. They have 2-3 small pieces of gold ornaments each for all three women of the house; two bicycles for the men and one basic mobile phone. They collectively have less than twenty five thousand rupees in cash and bank deposits. They hire tractor for tilling their land; and they borrowed money from an MFI to buy a diesel pump for watering their crops.

The most striking part of the discussion was the effort made by these farmers to convince me that they are not “poor” people. They repeatedly alluded that they are amongst the better off families in their community in the village. Obviously their concept of poverty is very different from what is commonly understood by academicians, economists, analysts and policy makers.

Ompal, elder of the brother, mostly defined poverty philosophically. He believes that anyone who does not take what belongs to others and does not beg cannot be termed as poor. Shivpal, the younger brothers, adding a materialistic dimension, said that they have a roof on their heads, their children never go to sleep hungry, and they are able to take care of their elders – how could they be termed poor. Insofar as availing the benefits of the government schemes meant for the poor is concerned; both appeared convinced that being citizens of this country it is their right to enjoy these benefits. "The government does not oblige us by giving 5kg of cereals and basic education to our kids”, Ompal said, rejecting any suggestion of living on government alms.

To give this discussion a context, the policy makers and agencies use a variety of definitions to identify the poor that need to be helped. The Suresh Tendulkar Committee (2009) pegged the poverty level at consumption per person per day at Rs29 in urban areas and Rs22 in rural areas. Rangrajan Committee (2014) revised the limits higher to Rs1407/person month in urban areas and Rs972/person month in rural areas. This criteria is primarily based on the recommended nutritional requirements of 2,400 calories per person per day for rural areas and 2,100 calories for urban areas.

NITI Aayog uses multidimensional definition of poverty which considers health, education, and standard of living. As per NITI Aayog about 25% of the Indian population is poor. The World Bank counts poverty by measuring headcounts living below US$6.85/day in 2017 purchasing power parity (PPP). By this definition it is estimated that ~84% of the population in India lives in poverty.

Even if we ignore the data presented by private agencies like Oxfam, due to the allegations of political bias, there is no doubt that there exists massive inequality in terms of income, wealth, access to good education & healthcare and growth opportunities in India. For example, as per the latest NITI Aayog data, in Bihar 52% of the state’s population is poor; while Tamil Nadu has just 5% of its population below poverty line. MP has 37% of its population living below the poverty line. In fact the most populated four states – Bihar, UP and MP have the largest number of poor living in poverty.

What I concluded from my discussion with the farmer brothers is as follows:

1.    Given the level of poverty, number of poor, and massive inequalities, India should ideally have a strong Communist movement. However, to the contrary, the communist movement has either got constricted to some elite educational institutions or has degenerated into an exploitative and violent Naxal movement in some pockets of central India. Most socialist parties have degenerated into feudal fiefdoms of the leaders.

2.    The political system in India does not conform to any popular classification, i.e., socialist, communist, capitalist, monarchy, autocracy etc. We have a unique political system that incorporates some characteristics of socialism, capitalism, feudalism and monarchy. The elected leaders are considered Kings, and the public treasury is considered their personal wealth. They are thanked for cleaning drains, repairing roads and running schools.

3.    Awareness about good life, constitutional rights and disguised exploitation amongst people is very low.

I shall be travelling extensively through the country for next one year; would be glad to share more such anecdotes and learnings. Readers’ views and opinions are welcome.

I made a rudimentary assessment of the potential impact on the financial market, assuming the monsoon rains are inadequate and/or prolonged heat wave conditions persist over a large part of north and central India, as anticipated by the weather experts. In my view, investment strategy needs a tweak to make it ready for a hotter and drier summer.

Asset allocation

An inadequate monsoon would essentially mean (i) persisting higher food inflation; (ii) higher fiscal support to the rural sector; (iii) high food credit demand; and (iv) higher short term yields.

Raise some tactical cash

I shall therefore like to raise some tactical cash from my equity allocation and deploy it in short term or liquid funds. I however do not see any case for changing the strategic allocation at this point in time. A sharper than presently anticipated correction in equity prices will motivate me to increase my equity allocation to “overweight” from the present “standard”.

Sectoral impact

I am no expert in equity research or economics. I mostly manage my investment strategy by applying learnings from my travels; observation of behavioral patterns and public information about economic trends. From my experience of working with rural communities and traveling to hinterlands, I have observed some broad sectoral impact of a deficient monsoon. Few examples are listed below.

It is pertinent to note that inadequate monsoon usually does not mean a pan India drought. Hence, it is more likely that different regions (and regional players) experience a divergent impact of a deficient monsoon.

Farmers’ economic behaviour

In case of a deficient monsoon, farmers quickly adapt to “drought mode” – deferring discretionary spend, e.g., on marriages, jewelry, vehicle, pilgrimage etc. and changing to shorter cycle crops. In the past two decades a tendency is growing amongst farmers (especially the young ones) to defer paying their dues to government and lenders etc.

It is pertinent to note that as per the latest NSSO statistics over 50% agriculture households are indebted with an average outstanding debt of Rs74121. More critically, only 57.5% of loans taken by agriculture households are for agricultural purposes, the rest are for personal purposes.

Given that most of the rural population is now assured of free/highly subsidized food under various government schemes, the sustenance farming (growing for self-consumption) is gradually reducing. A substantial number of small and marginal farmers is moving to cash crops that have usually higher input cost. A crop failure thus causes more stress to small and marginal farmers as compared to a decade ago. The insurance coverage to these farmers is highly ineffective due to a variety of reasons; unclear land title being one of the major reasons.

Energy intensity of water

In case of deficient monsoon, the energy intensity of water rises materially, as farmers rely on exploitation of ground water. Though the use of solar power for ground water extraction has increased materially in the past few years; the reliance on the grid is still very high. If we add to this the increased household (mostly urban) demand for cooling, the demand for power usually rises significantly. The demand for diesel (and diesel genset) could also be higher to meet the additional load of water extraction.

Livestock

Livestock is worst affected due to rain deficiency. Poor winter rains have already created severe fodder shortages and rise in milk prices. The dairy and meat production could be further impacted by deficient rains – impacting the income of farmers and food inflation adversely.

Important to note that about 25% of agriculture GDP is contributed by livestock.

Labor migration

The demand supply equilibrium for farm labor usually shifts down during deficient monsoon seasons. The real wages could see a sharp decline. The labor migration towards non-agriculture jobs is also higher. The availability of unskilled labor for construction in particular rises materially.

Food transportation

Traditionally, deficient monsoon years used to witness significant rise in the quantity of food transported across the country as part of the drought relief work. However, given the fact that the public food distribution system is now adjusted to free food for almost 800 million people, the incremental food transportation may not be as significant as it used to be a decade ago. Nonetheless, there could be some additional food movement in case of a material divergence in spatial distribution of monsoon.

I would therefore consider the following in my overall investment plan:

Negative List

Farm input – agri chemical, fertilizers, seeds.

Rural consumption – jewelry, gold, footwear, alcohol, home upgrade, personal vehicles, etc.

Dairy, poultry and edible oil production

Cotton yarn

Close watch

Rural lending, especially microfinance

Farm equipment, especially tractors

Crop insurance

Construction

Water intensive industries like paper, alcohol

Sugar

Positive List

Short term bonds

Diesel genset

Air cooling appliances like Fans, Coolers, Air conditioners

Agriculture: Tight supplies from Australia (ING Bank)

In its first estimates for 2023/24, ABARES estimates Australia’s agriculture supply to drop significantly next year due to dry weather as a result of El Nino.

Among major crops, the department expects total wheat output to drop from 39.2mt in 2022/23 to just 28.2mt in 2023/24 whilst exports will also decline from 28mt to 22.5mt. Among other crops, sugar exports could fall 6% YoY to 3.5mt whilst canola exports could fall from 6.9mt in 2022/23 to 4.9mt in 2023/24.

The latest trade numbers from Chinese Customs show that cumulative imports of soybean in China rose 16.1% YoY to 16.17mt over the first two months of the year, a record high for this time of the season. Healthy demand for soybean and concerns over a delayed harvest in Brazil pushed up imports of soybeans in the country.

Meanwhile, the latest data from Ukraine’s Agriculture Ministry shows that the nation exported around 33mt of grains as of 6 March so far in the 2022/23 season, a decline of 27% compared to the 44.8mt of grain exported during the same period last year. Total corn shipments stood at 19.1mt (-6% YoY), while wheat exports fell 38% YoY to 11.4mt as of Monday this week.

Aluminium outlook healthy but limited price upside in FY24E (BoB Capital)

Aluminium price has fallen 9% since Jan’23, with industry experts attributing the correction to the need for a more aggressive US Fed and the possibility of higher interest rates for longer.

H1CY23 pricing to be range-bound...: Our channel checks suggest global aluminium prices will remain in a tight range of US$ 2,300-2,500/t amid a continued surplus in China which is facing a sluggish demand recovery and the risk of below-mandated supply cuts. Outside China as well, demand is likely to be under pressure in H1CY23 even as exports from China are likely to fill any supply gaps. The levy of higher import duty on Russian aluminium by the US will not affect market flows much.

...with similar trends through CY23 as markets regain balance: Key drivers for potentially flattish aluminium pricing through CY23 include (a) the return of modest demand growth across both China and the rest of the world, (b) adequate Chinese supply with the likelihood of lower production cuts, (c) slower return of curtailed European production, and (d) easing of energy inflation.

Long-term price expectations softer but still healthy: With demand in China maturing, the need for new primary aluminium capacity beyond the government’s mandated production cap of 45mt decreases. The focus is likely to shift to more scrap generation to increase secondary production of aluminium. Outside China as well, new smelters with coal-based power generation sources are unable to arrange financing. Hence, the probability of pricing breakeven for a new smelter from a high-cost existing producer is reducing, lowering the potential price range in the long run.

Implications for Indian aluminium players: With aluminium price movement likely to be limited in the near-to-medium term, we believe margins for Indian aluminium players will be dependent upon domestic coal availability and international coal prices. Given Coal India’s concerted efforts to raise coal production and the allocation of coal blocks to producers, the competitive position of Indian aluminium players is likely to improve over the medium term, in our view.

IT Services: Cuts to Client Estimates Suggest Further Risks 9Jefferies Equity Research)

Top-clients an important indicator for growth in IT services firms: The top-10 clients constitute 19-36% of revenues for Indian IT firms, and have been an important growth driver for Indian IT firms during 9MFY23. IT services firms with lower growth in Top-clients have also lagged in-terms of overall growth. The aggregate revenue growth of top clients we have identified have a strong 84% correlation with aggregate revenue growth of our covered IT firms.

Stabilizing growth expectation but profitability pressures for CY23: At an aggregate level, CY23 revenue estimates for top clients of IT firms have not seen any meaningful changes YTD, with only a 20bps moderation to CY23 revenue growth. However, concerns around profitability have persisted and aggregate margin/PAT estimates for CY23 have been downgraded by 50bps/4%. At a company level, CY23 revenue estimates for top clients of TechM, Wipro & LTIM have been downgraded by 1-2%. However, CY23 revenue estimates for top clients of Infosys, Coforge & HCLTech has been revised upwards by 2% each.

Concerns seem to be shifting towards CY24: At an aggregate level, CY24 revenue estimates of top clients have been cut by 1% YTD with CY24 growth forecast witnessing a cut of 45bps. Among companies, consensus revenue growth estimates for CY24 have been lowered for top clients of all IT firms, barring Wipro, with the highest cuts of 80-180bps for HCLT & TechM. Additionally, profitability pressures are visible in CY24 as well, with aggregate margin/PAT estimates for top clients being revised downwards by 30bps/3%. Downward revisions in CY24 estimates suggests that concerns are now shifting towards CY24.

Client weakness despite improving macro trends: While macro expectations for CY23 seem to have improved YTD, evident from upward revision in GDP estimates of US/EU/UK, the corresponding impact does not seem to have reflected into the CY23 outlook of top clients of Indian IT firms. Unless the improvement in macro expectations flows into improvement in expectations of revenues of top-clients, IT firms could see pressures on growth in FY24.

Consumers: RM softens; searing summer; early days for rain deficit (Nomura Securities)

After four years of normal monsoons, there could be a possibility of El Nino in 2023. Various meteorological agencies have increased the probability of El Nino to over 50% for 2023 which can potentially lead to a deficit monsoon.

However, it is also highlighted that apart from El Nino conditions and its timing, India’s monsoon also depends on other factors like: (1) Indian Ocean dipole; (2) Eurasian snow cover; and (3) local weather given India is a tropical country. Further, experts suggest it is still early days to call out an El Nino, a deficit monsoon and impact on FMCG volumes / rural demand. A more accurate forecast will be made available by April.

Over the past 20 years (2002-2022), there have been six instances of El Nino, of which only in three instances there were below normal rainfall in India. Indeed, despite El Nino occurrence in 2007 and 2019, rainfall in these years was above the Long Period Average (LPA) levels.

Over the past 70 years, there have been only 16 instances of El Nino, of which only in nine instances there has been a case of deficient monsoon, as per IMD.

1.    The correlation between deficient monsoons and high food inflation has been weakening over time with the rise in irrigation.

2.    The correlation of El Nino leading to low FMCG volumes (HUL as a proxy) is not so strong. FMCG industry volumes still grew in low single-digit in two out of three severe El Nino years over the past 20 years (2002-2022).

3.    There is a strong correlation between high food inflation and low FMCG volume growth.

4.    Nonetheless, what is more certain, experts suggest, is a searing summer in 2023 with heat waves / elevated temperatures likely from March to May which could potentially have an impact on rabi crop output.

RGO: Government’s supply side boost to renewables (JM Financial)

The government continues to take policy and regulatory measures to incentivise both demand and supply of renewable power; this has been a key driver of rapid growth of the sector.

The latest incentive that it has announced for RE is on the supply side, in the form of mandatory Renewable Generation Obligation (RGO). This notification makes it compulsory for coal/lignite-based power plants with COD on or after 1^st Apr’23 to establish/procure 40% RE capacity within a certain timeframe or procure and supply RE power equivalent to such capacity within the specified period. Around 28GW of thermal capacity is currently under construction and is expected to be progressively commissioned over the next 2-4 years. As per the terms of the RGO, this translates into around 12GW of addition/procurement of equivalent renewable capacity. The RGO is thus a shot in the arm for India’s energy transition to renewables.

A captive coal/lignite-based thermal generating station will be exempt from the requirement of RGO subject to its fulfilling Renewable Purchase Obligations (RPO).

Cement: Price hikes not supported; 4Q prices flat QoQ (IIFL Securities)

All-India average cement price was flat MoM in Feb’23, despite price-increase attempt by companies during mid Feb’23. Regionally, except for the Central region (+2.6% MoM), prices were largely flattish elsewhere.

Compared to 3Q average prices – highest decline is seen in southern markets (down 5.6% QoQ) followed by Eastern markets (down 2.1% QoQ). We note that these two regions also saw the highest in 3Q, based on our dealer checks; and to that extent there is some price normalisation. Price increase in other regions varies from 1-2% QoQ.

Per channel checks, commentary on pricing remains underwhelming for Mar’23, as dealers expect temporary weakness due to Holi festivity (especially in North and Central India) and focus on pushing volumes in second half of March, to meet year-end targets. Dealers suggest prices to increase from April’23 onwards.

On demand, although dealers commentary was mixed, the overall bias was positive (we note that monthly cement production run-rate in Jan’23 is up 5% YoY and 10% vs 3Q23). In fact, dealers are optimistic on the near-term demand outlook and are confident to achieve their annual targets in March’23. Robust housing and large infrastructure project — aided by increased government spending —is driving overall volumes in a seasonally strong construction period.

In periods of such robust demand, we believe that companies are targeting higher volumes rather than price hikes. As such, we believe profitability would be supported by operating leverage benefits and falling fuel prices (petcoke and international coal prices are down 1% and 5% QoQ; – benefits would accrue based on inventory levels).

Power: Growth Endures (Emkay Equity Research)

Strong power generation pre-summer: Power generation in the past two months (Jan-Feb ’23) has seen double-digit growth (10.6% YoY), though some moderation has happened in Feb ’23 (8.3% YoY). On a three-year CAGR basis, it stands at ~5% CAGR. Demand continues to grow from January to June of the year, owing to summer demand.

Generation from thermal units for the months (Jan-Feb ’23) was up 8.7% YoY, while RE generation was up 31.3% YoY, leading to overall generation growth of 10.6%. On a three year CAGR basis, generation increased by 5.1%, with thermal/RE growth at 4.5%/15%, respectively. No major growth is seen in hydro generation during the three-year period.

On 11M basis, power-generation growth stood at 10.3% YoY, supported by 9.1%/22% growth from thermal/RE sources.

Data for several years suggest that H2 is usually favorable for thermal units because of a typically-strong Q4. Thermal generation in any H2 in the past has been 106% of the H1, while RE/Hydro H2 generation has been 77%/58% of the H1. We believe that as demand sees traction, companies with large under-utilized capacity (such as NTPC) would benefit

Manufacturing Growth at 4 Months Low (Centrum Economic Research)

India’s manufacturing PMI data released on Wednesday showed a slowdown in the index from 55.4 in January to 55.3 in February. This pointed to the 20th straight month of expansion in the manufacturing activities in the economy. This was largely attributed to significant increases in new orders and output, reflecting resilience in demand, though the input costs seem to be on the higher side.

The new orders and output rose sharply, which indicates that the underlying domestic demand still strong. The index for the month of February continues to remain above 55 for the 7th consecutive month. Firms continued to hire people for the 12th month in a row, as production levels ramped up in the month of February.

On the other hand, China’s manufacturing PMI expanded at the fastest pace in more than a decade for the month of February. The country’s Manufacturing PMI rose to 52.6% from 50.1 in the month of January. India’s PMI continues to be on an expansion track and outshines compared to ASEAN economies.

On the other hand, recently released GST collections for the month of February remains robust and continues to be above 1.4 lakhs crore for the 12th straight month on the back of increase in I‐T filings and high inflation.

Hope floats for Sweltering Summer (Elara Capital)

Ceiling fans in a wait-n-watch mode; cables & wires on high We recently met representative of consumer electricals companies, including Polycab India, RR Kabel, Finolex Cables, KEI Industries, Cords Cables, Symphony, and KWW electricals at ELECRAMA 2023 exhibition.

The following are key takeaways:

Demand stagnates in the FMEG space (ex-cables & wires) Post strong pent-up demand over April-May 2022, fast-moving electrical goods space (ex-cables & wires [C&W]) remains soft to date, due to 1) inflationary environment, 2) lower spend on discretionary goods, and 3) consumer spending in travel & healthcare. Currently, FMEG companies (ex-C&W) are cautiously optimistic on demand recovery. The only variable which can drive demand is a good Summer while price hikes are largely ruled out. It implies continued margin pressure in Q4FY23. In terms of differentiation, Polycab India (POLYCAB IN, CMP: INR 2,996, Not Rated) showcased a green portfolio of electrical goods, in fans, water heaters, wires, switchgears, lights, and home EV chargers, which consumes less energy.

Capex bazooka in the works by states (Antique Stock Brokers)

FY24 state capex likely to grow at 17% YoY: Eleven states (comprising ~57% of state GDP) have announced their budgets so far. Key takeaways are: a) Expect state fiscal deficit to consolidate from 3.3% to 3.1% of GDP driven by Uttar Pradesh, Telangana, and Bihar; b) Tax revenue is expected to grow at 15.4% YoY, looks aggressive, especially for Uttar Pradesh, Rajasthan, Telangana, Kerala; c) 17.4% YoY growth in capital expenditure driven by Gujarat, Haryana, Telangana, Jharkhand, and West Bengal; and d) 10.1% growth in revenue expenditure mainly driven by Telangana, Uttar Pradesh, and Bihar.

Macros favor rural revival, barring...: We believe that rural recovery is likely in near term given a) Improvement in farm income due to rise in food grain production on a high base and higher price growth (namely wheat and rice); b) Higher agriculture exports; c) Uptick in rural wages; d) Accelerated government capital spending; e) Pick-up in remittance as Covid-19 related disruptions are behind us; f) Easing inflationary pressures; g) Receding rural stress as is evident from declining MGNREGA employment; h) Resilient tractor demand; and i) Low base as is evident from two-wheeler registration.

...rising risk of El Nino: Australian metrological department’s latest climate update suggests weakening of La Nina with estimate of being near El Nino by July with neutral Indian Ocean Dipole. Our analysis suggests that the past four events of El Nino has resulted in deficient rainfall in India (thus impacting agriculture income with no conclusive evidence on prices). Also, the current heat wave (especially in North and Central India) may impact yields of wheat crop.

All eyes on the upcoming US macro data before Fed’s March meeting: Recent US growth parameters remain strong along with higher than expected inflation, which resulted in the narrative of interest rate being “higher for longer”. Current market expectation in terms of rate hike is equally divided between another 75 bps and 100 bps. All focus will be on upcoming US macro data points namely CPI, retail sales, payroll addition, and consumer sentiment before the next US policy meet (21–22 March) in which economic forecast will also be shared.

It is pertinent to note that La Nina conditions are known to cause normal to above normal rains in India, while El Nino conditions are known to cause rain deficiency in India. Neutral ENSO conditions help a normal (+ 10% of long term average) monsoon.

In India La Nina conditions have prevailed during the past three monsoon seasons (2020-2022), resulting in good overall rains; though spatial (regional) and temporal (time wise) distribution of the rains was erratic causing floods in some regions and drought in some other regions. The most populated Gangetic plains are suffering from severe drought conditions since last summer.

Kharif (monsoon) crop sowing suffered due to delayed or deficient rains in many parts of the country. Besides, the 2022-23 Rabi season has witnessed deficient rainfall in most parts of the country (see here).

Even though so far El Nino conditions have not developed for India, some professional forecasters have predicted development of these conditions as early as June 2023, resulting in deficient monsoon rains in India. For example, the US government weather agency, National Oceanic and Atmospheric Administration (NOAA), has said that El Niño is expected to begin within the next couple of months and persist through the Northern Hemisphere spring and early summer.

Skymet Weather has said that “El Nino threat during the Indian monsoon 2023 is growing big.” It further said, “El Nino projection based on initial conditions of Feb 2023 is finding semblance with Feb 2018. Both are evolving El Nino, albeit 2023 appears to be stronger than 2018.  El Nino share starts with 30% in June, reaches 50% by July and climbs to >/= 60% during 2^nd half of the season.”

Admittedly, it may still be early to conclude about a deficient monsoon this year. Nonetheless, the erratic weather pattern and early onset of summers across north, central and western India is indicating prevalence of unusual weather conditions over the next few months. Obviously, this will have implications for the economy and therefore financial markets.

Economy and monsoon

Over the past seven decades the share of agriculture and allied activities in the overall GDP of India has consistently declined. Agriculture and allied services accounted for almost two third of India’s GDP at the time of independence; and now it accounts for less than one sixth. The proportion of population relying on agriculture and allied activities for their livelihood has also declined from about three fourth to two fifth. The declining importance of the agriculture sector in the overall economy has resulted in under investment in the sector over the past 3 decades in particular.

The importance of monsoon for the Indian agriculture sector has seen a steady decline. Self-sufficiency in the area of food grains broadly means that impact of a deficient monsoon is mostly limited to (i) temporary food inflation; (ii) financial stress for small and marginal farmers’; (iii) additional burden on fiscal condition (loan waiver and food subsidy); and (iv) consumption demand of the affected population. Adequate food grain stock and an effective public distribution system minimises the cases of starvation in case of drought.

Besides, in the past seven decades the crop area fully dependent on rains for irrigation has fallen from ~80% to 50%. Out of a total of 141 million hectare net sown area, only about 70million hectare is rain fed; the rest of the area uses water supplied by irrigation channels. (see Under the Shadow of Development: Rainfed Agriculture and Droughts in Agricultural Development of India, R. S. Deshpande, NABARD)

Regardless, drought can hurt some areas and some crops disproportionately. For example, in the state of Maharashtra still over 81% agriculture area is rain fed. Besides, rain-fed areas produce nearly 90% of millets, 80% of oilseeds and pulses, 60% of cotton and support 60% of our livestock.

Adequate water in reservoirs

As per the latest bulletin of the Central Water Commission (CWC) as on 02 March 2023, , the live storage available in 143 reservoirs is 93% of the live storage of corresponding period of last year and 116% of storage of average of last ten years. States of Odisha (-20%), Bihar (-38%), UP (-21%) and West Bengal (-44%) have water availability in reservoirs which is below normal range; while most other states have large surplus.

Regardless, the current storage is significantly lower than the total reservoir capacity in all the regions. Thus in case of a severe drought the hydro power generation as well as area irrigated through channels could also suffer.

I would like to review my investment strategy in light of the probability of a poor monsoon. I shall share my thoughts on this coming Tuesday.