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 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.
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.
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.
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 1st 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).
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).
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
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.
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.
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.
C