Early data for March’23 indicate that 78.1%
indicators were in the positive territory on YoY basis, up from 68.8% in
Feb’23. Final data for Feb’23 indicate that 71.4% indicators were in the
positive territory on YoY basis.
On a sequential basis, there was a sharp
rebound in March’23, led by seasonality. Around 75% indicators were in the
positive territory in March’23, up from 50% in Feb’23. Final data for Feb’23
indicate that 34.7% indicators were in the positive territory.
Urban unemployment edged up to 8.5% in March’23
from 7.9% in Feb’23. Rural unemployment rose to 7.5% in March’23 from 7.2% in
Feb’23.
Rural wages have sustained their rebound since
mid-FY23 and rose by 8.1% YoY in Jan’23 vs. 7.6% YoY jump in Dec’22. In other
rural indicators, tractor sales continued to hold up, growing by 13.7% YoY in March’23
vs. 20% YoY growth in Feb’23 (up by 32.9% MoM). Two wheeler (2W) sales grew by
9% YoY in March’23 (up 8.8% YoY in Feb’23) and were up by 14.2% MoM.
Motor Vehicle sales grew by an estimated 12.8%
YoY in March’23 and were up by 12.2% MoM. Commercial Vehicle (CV) sales grew by
12.8% YoY in March’23 (up 3.2% YoY in Feb’23) and were up by 27.8% MoM.
Passenger Vehicle (PV) sales grew by 4.5% YoY in March’23 (up 11% in Feb’23)
and were flat MoM.
The S&P Global Manufacturing PMI improved
to 56.4 in March’23 from 55.3 in Feb’23. Manufacturing as measured by the Index
of Industrial Production (IIP) grew by 5.3% YoY in Feb’23.
The S&P Global Services PMI moderated to
57.8 in March’23 from a 12-year high of 59.4 in Feb’23. Traffic indicators
moderated from peak levels or were largely flat. Diesel consumption was up by
1.1% YoY in March’23 (up 7.4% YoY in Feb’23) and petrol consumption was up by
6.8% YoY in March’23 (up 8.8% YoY in Feb’23).
Banks’ credit-to-deposit ratio continued to
inch up and stood at 75.8% in March’23. Bank’s non-food credit growth continued
to moderate gradually and stood at 15.4% YoY in March’23 (up 15.9% YoY in Feb’23),
although it was up 1.8% MoM. Deposit growth continued to remain under pressure
at 9.6% YoY in March’23 but it was up 1% MoM.
External demand is expected to be cautious
following the ongoing geopolitical tensions and continuing Monetary Policy
tightening by major Central Banks of some advanced economies, which could weigh
on merchandise and services exports.
The GoI has enhanced high-multiplier capital
spending in the Union Budget for FY2024. The large pipeline of infra projects,
scheduled to be completed in FY2024, will aid in pushing project commissioning
and thereby support investment demand. Timely execution remains the key.
Private sector capex is likely to pick up in
FY2024 amid the rise in value of new project announcements, improving capacity
utilisation levels, PLI schemes and GoI initiatives pertaining to clean energy.
Besides, the GoI’s capex push has the potential to ‘crowd-in’ private capex.
Consumption of services remains quite robust
while demand for goods is somewhat uneven. A sustained moderation in inflation
would be the key to support consumption of low- and middle-income households.
India’s ranking moves up amid optimistic
projections, while ROW factors in a
recessionary scenario: Following the relief rally post the recent global
banking debacle, our global ranking for Nifty has moved up from 13 to 6 since
the end Feb’23 on the back of only a modest downgrade F1 EPS by 0.5% compared
to the pervasive cuts in expected earnings and ROEs for major global benchmark
indices reflecting the deepening worries about a global recession. Notably,
European benchmarks, China, and the US have seen sharper declines. India’s
upgrade is despite rich valuations- Nifty (49% higher than the global average
F1 PE of 14.4x) and Sensex (57% higher). India’s growth optimism embodies a
decoupling thesis of sorts, which is unsustainable.
India earnings outlook: Further earnings downgrade potential remains: We expect further
downside surprises to earnings due to a) lower than expected margins (as also
demonstrated by initial 4Q results), b) deceleration in bank credit growth, c)
slowing urban demand, and d) weak real GDP growth (4.4% in 3QFY23) amid global
spillovers. Rural demand is on a moderate revival path. Hence, the forward
consensus projection for NIFTY EPS growth of 14.3% CAGR (FY22-FY25E) is significantly
optimistic; we continue to expect downgrades.
Episodic bounties for Indian banks
dissipating now: Extending our earlier UW view
on banks and BFSI sectors in general, our latest analysis and evidence fortify
prospects of deceleration in lending growth and re-emergence of NPA cycle.
Sectoral allocation of bank lending for Feb’23 reinforces the evidence that
there is a broad-based deceleration in industrial lending even as lending to
retail and NBFC remains robust. We believe with a lag the latter will also see
a moderation. The slowdown in mortgage lending could be a precursor. In a
scenario of credit growth decelerating to 10% from the current 15% and retail
inflation falling from 6.7% to 5%, the GNPA ratio could rise by 200bps!!
Rising probability of rural wage-price; OW on consumption remains: The structural rise in dependence on the
Agri sector, trend rise in cereal consumption, and the weather anomalies point
towards the sustenance of rising wage-price spiral and higher terms of trade
for the Agri sector. The expected drags on non-agri rural from lower
remittances from urban areas and cutback in rural allocation in the Union
Budget are juxtaposed against the imperative of the upcoming state and general
elections. These will eventually force populism favoring the rural sector,
Hence, our OW views on staples and agri sector remain supported.
The cost of India’s steel exports to the
European Union (EU) could rise as much as 17% following full implementation of
the Carbon Border Adjustment Tax Mechanism (CBAM), which mandates stringent
disclosures and purchase of carbon credits to offset the impact of emissions.
Accounting for greenflation, which will drive overall steel prices higher, the
total impact could be as high as 40%.
Under the mechanism, which the Council of the
EU and European Parliament have agreed to implement from October 1, 2023,
importing EU nations will seek quarterly disclosures across seven
emission-intensive sectors from April 2024, and to gradually penalise emission
differentials between 2026 to 2034 through purchase of carbon credits to bridge
the cost differential with steel produced in the EU.
The seven sectors – iron and steel, aluminium,
cement, fertilisers, electricity, as well as chemicals and polymers — account
for ~35% of India’s exports to the EU in the merchandise space.
The EU move is a part of a long series of
global emission-reduction measures implemented in recent years — such as COP26,
under which India committed to Net Zero by 2070, and COP27, under which the milestone
targets have been made more aggressive.
To be sure, the “common but differentiated responsibilities”
formalised under United Nations Framework Convention on Climate Change have
placed enhanced flexibilities on developing economies, providing them an
opportunity to choose differentiated timelines for meeting Net Zero goals.
However, regulations such as CBAM, through
which the EU wants to prevent an increase in outsourcing of product
manufacturing to countries where implementation linked to carbon emission
reduction is slower than in the EU — plugging carbon leakage as it were — may
go a step beyond and force specific industries to expediate implementation or
face heightened risk for business loss or cost-competitiveness.
Under CBAM, exporters will need to make
quarterly reporting of emissions starting October 1, 2023, and from December
31, 2025, buy Emissions Trading System (ETS) certificates for their greenhouse
gas emissions.
In the absence of a carbon-neutral technology, industries
have been allocated free allowance starting at 100% in 2025 and ending at 0% by
2034. The ETS tax would be gradually applicable to the portion that does not
enjoy the allowance.
The week has started with the market leaning
again in favour of European currencies and the dollar losing some ground. The
price action in short-dated bonds showed a reinforcement of European hawkish
bets while the whole US Treasury yield curve inched lower.
While a 25bp hike next week by the Fed does not
look under discussion, Fed rate expectations have remained rather un-anchored
and volatile when it comes to future policy moves. This continues to leave
ample room for speculation about Fed Chair Jerome Powell’s tone in terms of
future guidance. While data will clearly play a role, recent developments in
the US banking sphere are creeping back onto investors' radars. First Republic
Bank reported a larger-than-expected drop in deposits in its quarterly results,
sparking a new round of heavy selling in the stock after a prolonged period of
calm.
Should there be fresh instability in US banking
stocks, dovish Fed bets may gather more momentum, and despite its safe-haven
status, the dollar could stay on the back foot to the benefit of European currencies
backed by hawkish central banks and without an excessively high-beta to
sentiment.
India’s capex landscape has been growing
energetically since FY19, evident in governmentspending data and nominal GDP
growth (Exhibit 1). This begs the question– where is the money being spent? Our
study of India’s capex data notes a definite uptick in ordering across ‘three
key legs’ of capex growth – Railways, Renewables and Power T&D coupled with
conventional industrial/infra capex. We also observe a strong degree of
conviction in opportunities in new age frontiers such as EV ecosystem, data
centres and defence. This brings to the surface multi-year growth opportunities
in transmission and railways – each potentially bagging meaty orders
(INR120–150bn annually for HVDC transmission; INR250–350bn annually for locos
plus trainsets product value for railways).
Transmission: The power demand-supply dynamic in India (link) clearly spells out that,
if India is to avoid a power deficit by FY28–30, its plan of adding 30–40GW/year
of renewable energy (RE) comes to stand as more of ‘a need’ than ‘a choice’.
The natural deduction is that this will need to be connected, and to connect RE
at this scale an equally large transmission capex is imperative (INR2.4tn as
per CEA estimates; Exhibit 6). Given the backdrop, we estimate PGCIL’s capex (a
barometer for India’s transmission capex) will likely double over the next
two–three years. Hence, a fresh capex cycle in power transmission has already
begun after a gap of ~4–5 years. Capex is expected across high voltage (rising
CAGR) and medium/low voltage range (bulk of volumes), at the ISTS level. CEA
estimates INR2.4tn to be spent in this area over FY24–30. India plans to add
transmission lines/substations in the 400–800KV range, along with four large
HVDC projects (worth approx. INR1tn).
Railways/new age capex: The mega push in rail capex will benefit the entire industrials
value chain over this decade. Cyclically strong industrial capex (conventional
segment) along with new-age areas such as EV ecosystem, data centres,
RRTS/metros, wastewater management, warehouse and logistics, defence, smart
infra etc. will continue to drive order inflows especially in low/medium
voltage T&D products and relevant equipment suppliers through the next
decade.
The growth story continues with > 1,100 loco
orders expected annually for the next 2–3 years (vs. 700 till FY21). Of ~1,000
VB train sets, ~302 have been ordered and 600–700 more VB train orders are
expected in future. Siemens is present across locos and trainsets (partner
required) and we factor at least one more large loco/train set order by FY25E
(INR100bn).
Industrial equities across our coverage
universe have significantly re-rated over the past ~12–24 months, led by high
industrial capex/infra momentum, which is evident in order inflows growth
(across sector) and margin expansion (not yet broad-based). Most MNC equities are currently trading above their long-term
medians.
For FMCG to grow well, good income growth in
the low-income consumers is required. These consumers have two main sources of
income viz Farm income and wages. Previously, when Farm income and wage growth
is robust, FMCG companies tend to post strong sales growth and vice versa.
Past 20 years can be divided into 3 periods:
FY00-06 when sales growth was weak, FY07-14 when it was strong and FY15-20 when
it was weak again. The strong/weak periods of FMCG growth coincided with
strong/weak periods of Farm inflation and Wage inflation.
Wage growth improving: While writing our CY23 outlook, the real rural wage growth (for Sep
’22) was -2.7%. It has now improved to -0.5% (for Jan ’23), but is still not
healthy enough to boost growth. Moreover, Non-agri real wage growth is even
poorer at -1.4%, denoting slow pickup in economic activity outside of
agriculture. The improvement over past few months is led by both nominal wage growth
improving and inflation moderating. While currently still lacklustre, the trend
if continued will be positive for FMCG players. We need real wage growth at ~2%
or higher to sustain good volume growth.
Farm inflation moderating: While real wage growth has shown some small improvement, our
proprietary IIFL Farm index has been lacklustre since past few months, and is
showing a 3% YoY inflation in Feb’23. Vegetable prices, down ~20% is the main
reason, despite cereals and milk prices witnessing double-digit inflation. Moreover,
assuming that prices remain stable at current levels, YoY inflation will trend
lower than the current 3% for each of the next 12 months.
We need further sequential inflation to pick up
for the YoY growth to continue meaningfully. Over the past 3-5 months, the
index has been largely flat. For FMCG growth to be strong, we need Farm inflation
equal to or higher than CPI.
How to play the sector: Visibility of a good growth is better for Food companies in near
term. Investors with short-term horizon can invest in Food companies, whereas
HPC investors may require a slightly longer horizon. We recommend that
investors start off with large companies currently in absence of visibility on
the time and extent of recovery, and then shift into smaller companies in
inverse proportion to the strength of the expected recovery as and when macro
indicators suggest it. This is because large companies are better suited to
weather the storm on account of their strong brands, better management talent,
systems and processes. Smaller players tend to have a leverage to recovery as
consumers as well as wholesalers increase the repertoire of categories and
brands when demand conditions are robust.
The Microfinance industry (MFI) experienced a
growth spurt in 9M FY23, expanding at a rate of 12% Y-o-Y due to a favourable
macroeconomic climate and renewed demand from tier-III cities, which has led to
a surge in disbursements over the past few months. NBFC-MFIs have surpassed
banks in the overall microfinancing landscape, constituting approximately 38%
of the total outstanding microfinance loans as of December 31, 2022, compared to
36% for banks.
CareEdge Ratings anticipates growth momentum to
continue, with the NBFC-MFI portfolio growing at a rate of 20%-25% over the
next 12-18 months. However, an increase in interest rates, high inflation, or
another wave of Covid-19 could potentially impede economic growth and, as a
result, impact the Microfinance sector adversely.
The removal of the lending rate cap by the
Reserve Bank of India (RBI) has enabled MFIs to engage in risk-based pricing,
which has boosted net interest margins (NIMs) and, in turn, increased returns
on total assets (RoTA).
Credit costs have declined from their peak in
fiscal year 2021 but still remain higher than pre-Covid levels, with a portion
of the restructured book slipping into NPA. We expect NIMs to continue
improving, resulting in RoTA rising to approximately 3.25% for fiscal year
2024, aided by controlled credit costs of approximately 2.5% for the same year.
Asset quality, although on an improving trend,
still remains moderate as compared to the pre-Covid level owing to additional
slippages arising from the restructured portfolio. The MFI sector has taken the
cumulative impact on the credit cost of around 13% of average assets from FY21
to H1FY23 due to Covid-19. However, with an improving collection efficiency
trend, GNPA is expected to improve to 3.5% and 3% in FY23 and FY24 respectively
from a peak of 6.26% for FY22.
In terms of capital structure, NBFC-MFIs have
managed to raise ₹3,010 crore of equity in 9MFY23, compared to ₹1,506 crore and ₹1,431 crore in FY2021 and FY2022, respectively, indicating a renewed
interest from investors.
Nevertheless, due to the current global
turbulence, investors are likely to exercise greater caution and selectivity in
the future. Additionally, with increased support from investors and rising
disbursement levels, the gearing level was 3.7x and 3.6x as of March 31, 2022,
and December 31, 2022, respectively. We anticipate that the gearing level for
the MFI sector will moderately increase to around 3.9x by March 31, 2024.
NBFC-MFIs Outpace Banks
The microfinance industry has experienced a
shift in market share, with NBFC-MFIs overtaking banks for the first time in
four years. While banks held a dominant position during the Covid-19 period,
the growth rate of NBFC-MFIs has now surpassed that of banks, resulting in
NBFC-MFIs commanding a higher market share in the overall microfinance sector.
As of 31st December 2022, NBFC-MFIs contributed around 38% to the outstanding
overall microfinance loans, compared to banks' 36%. With a growth rate of
around 20% till 9MFY23, NBFC-MFIs are currently leading the industry.
