Vijay Kumar Gaba

Wednesday, June 21, 2023

Employment- Gender gap and skill mismatch alarming

The latest Periodic Labor Force Survey (PLFS), released three weeks ago by the National Statistical office (NSO), provides some very useful insights into the current employment conditions in the country. The following are some of the key observations from the Survey report.

Key definitions

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

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

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

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

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

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

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

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

The Good

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

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

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

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

The Bad

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

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

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

The Ugly

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

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

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

Conclusion

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

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

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

Tuesday, June 20, 2023

Path to progress

‘Climate Change’, ‘Clean Energy’, ‘Renewable Energy’ and ‘Sustainability’ have been the primary topics of discussions in most global summits, symposiums, bilateral and multilateral talks & agreements, political discourses, academic projects and even election campaigns for over a decade now.

“The 2030 Agenda for Sustainable Development”, adopted by all United Nations Member States in 2015, also lays significant emphasis on “Affordable and Clean Energy”, “Sustainable Cities and Communities”, and “Climate Action”. Most countries have made significant progress in increasing the share of renewable/clean energy in their respective energy mix. Reportedly, in 2022 alone 268 GW of new solar energy capacity will be added worldwide. As per various estimates, globally, solar installations are expected to cross 300 GW in 2023. IEA expects global solar PV capacity to rise by nearly 1500 GW in the 2022-27 period, surpassing natural gas by 2026 and coal by 2027. (see here)

As per the International Energy Agency (IEA) estimates, the worldwide sales of electric cars exceeded 10 million in 2022 and over 2.3million electric cars were sold in the first quarter of 2023. Agency expects “to see 14 million in sales by the end of 2023, representing a 35% year-on-year increase”. As per the latest projections of IEA, “the global outlook for the share of electric car sales based on existing policies and firm objectives has increased to 35% in 2030, up from less than 25% in the previous outlook. This implies a displacement of oil demand from the road transport sector by 5mbpd by 2030.

There are however some strong arguments against assuming a direct correlation between generation of renewable energy & use of electric vehicles and cut in emission of greenhouse gases; even though it is not denied that efforts to increase the share of renewable energy in total energy mix and greater adoption of electric vehicles may be material drivers of emission control.

The most popular argument is that running electric vehicles on energy produced by power plants using fossil fuels as feedstocks may not be the ideal solution for climate change.

However, a more logical line of argument is from a section of experts, which includes Vaclav Smil et. al. In a 2022 article in the Time Magazine, Smil opined that notwithstanding greater adoption of electric vehicles, solar energy etc., it would be impossible for the modern society to survive without man made materials, especially cement, steel, plastics and ammonia. Smil referred to these four materials as “the four pillars of modern civilization”.

To feed the global population, especially the fastest rising and most poor African population, ammonia synthesis is essential. In the words of Smil – “without the synthesis of ammonia, we could not ensure the very survival of billions of people alive today and yet to be born.” Imagining a modern life without plastic is also impossible. Building of modern infrastructure, sustainable cities with clean water, sanitation transportation would require ever rising quantities of steel and cement. For context, “the world now consumes in one year more cement than it did during the entire first half of the 20th century” and “an average car contains about 900 kilograms of steel”.

The decaying infrastructure in the developed countries needs urgent attention. For example, as Smil highlights, “in the US all sectors where concrete dominates, including dams, roads, and aviation get a D grade in nationwide engineering assessments”. Obviously, it would need to be renovated/reconstructed. Of course, the need to expand cities, transportation, sewerage, water supplies, telecommunication and power infrastructure remains unsatiated in the developing and underdeveloped economies.

For the aging global population, “plastics are now most indispensable in health care in general and in hospitals in particular. Life now begins (in maternity wards) and ends (in intensive care units) surrounded by plastic items made above all from different kinds of PVC: flexible tubes (for feeding patients, delivering oxygen, and monitoring blood pressure), catheters, intravenous containers, blood bags, sterile packaging, trays and basins, bedpans and bed rails, thermal blankets.”

Production of these four pillars of modern society shall not be possible without fossil fuels, in the foreseeable future. “global production of these four indispensable materials claims about 17 percent of the world's annul energy supply, and it generates about 25 percent of all CO2 emissions originating in the combustion of fossil fuels.

In conclusion, while the importance of emission control cannot be emphasized more, it is the sustainable lifestyle that may be the prerequisite for any workable climate change plan. Technology will definitely help to progress, but Gandhi would guide the path to progress.

Friday, June 16, 2023

Some notable research snippets of the week

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

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

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

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

China data disappoints (CNBC)

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

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

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

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

Fed pauses, no pivot yet (CNBC)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Medium to long-term drivers

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

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

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

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

…increase in Cotton MSP (Phillips Capital)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Generic agri input inventory elevated globally; India relatively better off

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

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

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

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

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

Thursday, June 15, 2023

Demographic reset needed

In India, the issue of labor migration has always been on the top of socio-economic and political agenda. The remittances from Indian workers in the foreign countries has been one of the primary sources of our current account financing. The issue of VISA for Indian students and workers (and their families) has remained one of the key contentions in our strategic diplomatic discussion with developed countries.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, June 14, 2023

Staying put on the straight road

“No one was ever lost on a straight road.”

Last time I wrote this was about 13 months ago when the Nifty was around 16000. The benchmark has gained over 17% since then. PSU Banks, FMCG, and Automobile sectors, which were not exactly favorites of market participants at that point in time, have been the top performers since then. The favorites of that time, e.g., Metals, Infrastructure, manufacturing, and digital have mostly performed in line with the benchmark or underperformed. I find it appropriate to reiterate and reemphasize it, to motivate me to stay true to my investment strategy and not get distracted by the market noise, buoyant arguments and gravity defying moves in a number of stocks.

The conventional wisdom guides that roads are meant for moving forward and trampolines are meant to get momentary high without going anywhere. Usually, the chances of reaching the planned destination are highest if the traveler takes a straight road. The chances are the least if they ride a trampoline. Walking on ropes may sometimes give you limited success.

Investors who jump up and down with every bit of news are only likely to lose their vital energy and time without moving an inch forward. Reacting instantaneously to every monthly or quarterly data, every policy proposal, corporate announcement, market rumor are some examples of circuitous roads or short cuts that usually lead us nowhere.

Interacting with numerous market participants, I discovered that presently very few people are interested in taking the straight road; which is an unfortunate situation.

Taking the straight road means investing in businesses that are likely to do well (sustainable revenue growth and profitability); generating strong cash flows; maintaining sustainable gearing; timely adapting to the emerging technology and market trends; and most important consistently enhancing the shareholders’ value. These businesses need necessarily not be fashionable or be in the “hot sectors”.

In the Indian context, finding a straight road is rather easy for investors. Of course, there are different viewpoints and strategies; having their own merits and inadequacies. It is possible that the outcome is different for various investors who adopt different strategies or take a different approach to invest in India.

For example, consider the case of investment in the infrastructure sector in India. Prima facie, it looks like a rather simple strategy. In an infrastructure deficient country like India, the case for investment in this sector should be rather simple and straightforward. But it has not been the case in the past 20 years. In fact, Infrastructure has made money only for few in the past couple of decades; excluding of course the unscrupulous politicians.

Infrastructure inadequacy of India has been one of the most common investment themes for the past few decades. However, more people may have destroyed their wealth by investing in infrastructure businesses or stocks of infrastructure companies than anything else. Especially in the past two decades, that have seen phenomenal development in infrastructure capacity building, the value destruction for investors in this sector has been equally remarkable.

There is no dearth of infrastructure builders who have become bankrupt with near total erosion of investors’ wealth who invested in their businesses. JPA Group, ADAG Group, Lanco, IL&FS, GVK, IVRCL, Gammon etc. are just a few examples. Their lenders, and the investors in their lenders, have also seen colossal collateral damage too.

The fallacy in this case lies in the fact that while everyone focused on the “need” for infrastructure, few cared about the “demand”.

Indubitably, the “need” for infrastructure, both social and physical, in India is tremendous. However, despite significant growth effort in the past two decades, and manifold rise in government support for the society, especially poor and farmers who happen to constitute over two third of India’s population, the “demand” for infrastructure may not have grown at equal pace.

The affordability and accessibility to basic amenities like roads, power, sanitation, education, health, transportation, housing etc., has improved a lot, but it still remains low. Frequent crisis in state electricity boards and other power utilities is a classic example of “need” and “demand” mismatch. As per a recent government admission almost one half of the population cannot afford to buy basic cereals at market price and therefore need to be subsidized. Less than one third of the adult population has access to some formal source of financing. Ever rising losses of state electricity boards and free electricity as one of the primary election promises, highlight incapacity or unwillingness of the people to pay for their power bills. The losses incurred by some of the most famous highway projects, e.g., Yamuna Expressway, highlights the low affordability to pay toll tax for using roads.

The optimism on the infrastructure sector in the decade of 2001-2010 might have been a consequence of overconfidence and indulgence of administration and corporates who sought to advance the demand for civic amenities to make abnormal profits. This was not only a classic case of capital misallocation, but also misgovernance by allowing a select few to take advantage of policy arbitrage. This had resulted in huge losses for investors, lenders, local bodies and eventually the central government also.

The investment in infrastructure companies’ stocks for a small investor is therefore a tight rope walk. They may achieve some success after a stressful balancing act to normalize the forces of greed and fear.

With over two third of the population struggling to meet two ends, all those statistics claiming “low per capita consumption or ownership” of metals, power, housing, personal vehicles, air travel etc. is nothing but a blind man holding the tail of the elephant. If we find per capita consumption of electricity of the population that has access to 24X7 electricity and can afford to pay full bill for this at the market rates, we may be in the top quartile of per capita electricity consumption. Similarly, if we take the income tax paying population as the denominator for air travel, India might figure in the top quartile of air travelers’ density globally.

The politics of “competitive majoritism” has also led to irrevocable government commitments towards profligate welfare spending. This has certainly provided some sustainable spending capability to the expansive bottom of the Indian population pyramid. This clearly indicates that the government finances are likely to remain under pressure for a protracted period. Therefore, in my view, capex and infrastructure themes may work sustainably in Indian markets only when necessary, corrections are carried out. Till then it is the trampoline ride that will continue to give investors momentary highs, without taking them much distance over the next decade.

The investors and traders, who jumped on this trampoline after listening to the enthusiastic budget speeches in 2022 and 2023 and read some really colorful presentations and research reports published by the government agencies and some private brokerages promising trillions of rupees in infrastructure spending, would understand the best, what I am trying to suggest here.

I am not planning any detour or adventure in my investment journey, enthused by the barrage of commentaries and reports about infrastructure spending and manufacturing boom (PLI, China+1 etc.). I shall stay put on the straight road that I took years ago.

Also read

Stay calm, avoid FOMO

Tuesday, June 13, 2023

Stay calm, avoid FOMO

All three major global credit rating agencies have assigned the lowest possible investment grade rating to India’s sovereign credit, placing India just one notch above the junk grade. For example, Moody’s Investors Services has assigned Baa3 (stable) rating to India’s sovereign credit, just one notch above the junk rating - C.

The Government of India is making a strong pitch to the rating agencies for upgrade of sovereign credit, arguing that India’s economy is the fastest growing major economy in the world, with strong macroeconomic fundamentals. Many government officials, politicians and market participants have challenged the assessment of these ratings agencies often terming it as unfair.

On the other hand, Moody’s Investors Services has recently flagged high public debt and risks of fiscal slippages ahead of general elections in 2024 to support their rating stance.

Moody’s reportedly said, “As the government balances the commitment to longer-term fiscal sustainability against its more immediate priority of supporting the economy amid high inflation and weak global demand, and ahead of general elections due by May, we expect some risks of fiscal slippage arising from possibly weaker-than expected government revenues”.

Moody’s argued that “India had a relatively high level of general government debt—estimated at around 81.8% of GDP for 2022-23, compared with the Baa-rated median of around 56%—and low debt affordability. India’s debt affordability, in terms of general government interest payments as a percentage of revenues, is estimated at 26% for fiscal 2022-23, compared with the Baa median of around 8.4%.

In social interactions, it is common to hear that many advanced economies with GDP growth of 1-3%, are running public debt much in excess of 100% of GDP. Most notably, Japan’s sovereign credit is rated AAA despite having public debt in excess of 220% of GDP. USA with its economy on the verge of a recession and public debt over 115% of GDP has AAA rating for its sovereign credit.

Recently, a report by the brokerage Morgan Stanley’s India unit, titled “How India has Transformed in Less than a Decade”, was also viral on social media. Thousands of enthusiastic market participants and political campaigners forwarded this 37-page report containing some selective charts & statistics and random hypothetical projections, without actually bothering to read it; leave alone verifying the data with alternative sources, correlating it with related socio-economic parameters or making any comparative analysis with peer groups.

My point is simple, at present the market participants, especially non institutional investors, are extremely positive about the markets. As I had mentioned a couple of weeks ago also, “sentiment of greed is dominating the sentiment of fear” (see here). In their fear of missing out (FOMO), small investors and traders are latching on anything that would support their positioning. Obviously, all bad news is getting ignored while good news is getting amplified.

If you feel that I am being unduly cautious and taking a risk to miss out on the structural bull market in India; you might be wrong. What I am suggesting here is to stay calm and not get carried away by the gravity defying moves in the market. I am religiously abiding by my asset allocation and return targets, disregarding the noise in the market. I shall review my asset allocation at the scheduled date, i.e., end of 1HCY2023 and decide if any changes are required. More on this tomorrow…

Friday, June 9, 2023

Some notable research snippets of the week

RBI monetary policy statement highlights

· Status quo on policy rates and monetary policy stance (withdrawal of accommodation).

· The MPC resolved to continue keeping a close vigil on the evolving inflation and growth outlook. It will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

· Domestic economic activity remains resilient in Q1:2023-24 as reflected in high frequency indicators. Purchasing managers’ indices (PMI) for manufacturing and services indicated sustained expansion, with the manufacturing PMI at a 31-month high in May and services PMI at a 13-year high in April-May. In the services sector, domestic air passenger traffic, e-way bills, toll collections and diesel consumption exhibited buoyancy in April-May, while railway freight and port traffic registered modest growth.

· On the demand side, urban spending remains robust as reflected in indicators such as passenger vehicle sales and domestic air passenger traffic which recorded double digit growth in April. Rural demand is gradually improving though unevenly.

· Money supply (M3) expanded by 10.1 per cent y-o-y and non-food bank credit by 15.6 per cent as on May 19, 2023. India’s foreign exchange reserves were placed at US$ 595.1 billion as on June 2, 2023.

· Going forward, the headline inflation trajectory is likely to be shaped by food price dynamics. Assuming a normal monsoon, CPI inflation is projected at 5.1 per cent for 2023-24, with Q1 at 4.6 per cent, Q2 at 5.2 per cent, Q3 at 5.4 per cent and Q4 at 5.2 per cent. The risks are evenly balanced.

· The government’s thrust on capital expenditure, moderation in commodity prices and robust credit growth are expected to nurture investment activity. Weak external demand, geoeconomic fragmentation, and protracted geopolitical tensions, however, pose risks to the outlook. Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.5 per cent with Q1 at 8.0 per cent, Q2 at 6.5 per cent, Q3 at 6.0 per cent, and Q4 at 5.7 per cent, with risks evenly balanced.

· The next meeting of the MPC is scheduled during August 8-10, 2023.

Credit Growth Remains Strong in April 2023, Industry Subdued (CARE Ratings)

Gross bank credit offtake rose by a robust 15.9% year on year (y-o-y) in April 2023 due to continued strong growth in services and personal loans especially driven by growth in lending to Non-Banking Financial Companies (NBFCs), vehicle loans, and unsecured personal loans1 segments.

· Credit growth for the services segment was robust at 21.8% y-o-y in April 2023 as compared with 11.2% a year-ago period due to growth in NBFCs, retail trade and other services.

· Personal loan growth accelerated by 19.4% y-o-y in April 2023 from 14.4% a year-ago period, driven by credit cards, housing, vehicle loans and other loans.

· Industry credit offtake growth moderated at 7.0% (y-o-y) from 8.0% over a year ago, registering a lower growth compared to personal loans and services. Infrastructure witnessed a marginal rise of 1.7% due to growth in roads and others, however, power, ports, airports, and telecom dropped in the month.

· Agriculture and allied activities rose by 16.7% in April 2023 vs. 10.6% in April 2022.

FY23 Corporate performance insights (Bank of Baroda)

FY23 Growth in sales was steady though lower than last year. Growth in net profits has slowed down for both the aggregate sample as well as the one which excludes BFSI companies. The difference from the past is that growth in net profit margin is positive indicating some recovery.

Table 1 reveals that growth in sales has slowed down from 21% in Q4-FY22 to 12% in Q4-FY23 for the sample of 2096 companies while that in net profits has moved from 26.1% to 17.3% during this period. There has been improvement in net profit margin in both the years.

Table 2 excludes BFSI companies. Here the performance is relatively muted with sales growth of 8.8% and net profit of 7.5%. The higher base effect as well as dilution of pent up demand in some sectors contributed to this slower growth. The net profit margin however has been falling over the last two years of this quarter though the dip in Q4-FY23 has been very marginal.

A significant observation here is that the interest cover ratio for the sample of 1797 companies came down to 5.82 from 6.45 last year after witnessing an improvement in FY22. This was a result of both lower growth in PBIT as well as higher interest costs due to the lending rates increasing in the banking system. PBIT had grown by just 4.8% this quarter compared with 9.4% last year. However, interest costs increased sharply by 16.3% compared with 4.7% in Q4-FY22.

- The industries which grew at a higher rate than the average were: banks, insurance and Finance in the BFSI sector. Services received a boost from the pent up demand which got reflected in hospitality, diamonds and jewellery, logistics, IT, retail, and trading. Within manufacturing auto did well on the consumer oriented front while construction material, power and industrial gases performed positively on the industrial front.

- Low growth was witnessed in case of textiles, alcohol, plastic products, mining, gas transmission and iron and steel.

- Food based products and health care had maintained their sales growth at the average level which was also the case with paper.

- Industries like electricals, FMCG, chemicals, infra, capital goods, media, telecom, realty, consumer durables registered single digit growth. Price pressures did come in the way of demand; and rural demand was less robust than expected across some of these industries.

Real estate (Kotak Securities)

Cautious road, treading between vacancies and occupancies: Commercial real estate in top Indian cities is facing headwinds despite improved quarterly leasing. Existing vacancies are primarily in SEZ areas, which may be hard to fill up until the regulatory amendment comes through, while current occupancies have a large presence of IT companies, among which Cognizant is taking the lead to rationalize the need for office space among key Indian cities. In that backdrop, FY2024E may not be able to repeat the strong showing of FY2023, which saw leased area increase to 524 mn sq. ft, with record absorption (78 mn sq. ft/39 mn sq. ft of gross/net leasing). Yields have improved due to price correction, but visibility on FY2024E remains lackluster.

Healthy gross and net absorption, new supply falls further: All-India commercial real estate (aggregate of top 7 cities) had an outstanding stock of 615 mn sq. ft (+7% yoy, +1% qoq) as of March 2023, with gross absorption a tad lower on a sequential basis but still healthy at 18.4 mn sq. ft (+1% yoy, -8% qoq). Net absorption during the quarter stood at 9.4 mn sq. ft (+14% yoy, -1% qoq), while new supply in 4QFY23 slowed further to 7.6 mn sq. ft (-38% yoy, -11% qoq). Consequently, vacancy declined 2% qoq to 90.6 mn sq. ft, with vacancy improving to 14.7% (15.4% in 4QFY22 and 15.2% in 3QFY23).

Among cities, Gurgaon led the improvement in occupancy, with gross and net absorption of 2.3 mn sq. ft and 1.1 mn sq. ft, respectively, and nil new supply during the quarter. Accordingly, vacancy declined to 26.1% in 4QFY23 (27.4% in 4QFY22 and 27.3% in 3QFY23). Mumbai also saw an improvement, with net absorption and new supply at 1.3 mn sq. ft and 1.2 mn sq. ft, respectively, and vacancy at 15% (17.7% in 4QFY22 and 15.3% in 3QFY23). Bengaluru saw a slight increase in vacancy to 6.9% (from 6.8% in 3QFY23, 4QFY22 at 7.5%), as net absorption of 2.2 mn sq. ft lagged new supply of 2.6 mn sq. ft. Hyderabad, Pune, Noida and Chennai saw net absorption of 1.7 mn sq. ft, 1.8 mn sq. ft, 0.7 mn sq. ft and 0.6 mn sq. ft, against new supply of 1.1 mn sq. ft, 1.2 mn sq. ft, 1.5 mn sq. ft and nil, respectively. Blended rentals saw sequential moderation (+4% yoy, -6% qoq)—most large cities saw a correction. Total leased area rose 8% yoy and 2% qoq to 524 mn sq. ft as of March 2023.

SEZ clarification key for further occupancy improvement: Commercial asset owners suggest that the demand scenario is robust, with rising occupancy across geographies. Clarity on the DESH bill and allowing floor-by-floor de-notification are key, although any occupancy improvement would take at least 2-3 quarters post the amendment as the non-SEZ occupancy is already at 93-94% levels for most asset owners. Accordingly, an improvement in overall occupancy should only be very gradual hereon. Exhibit 4 highlights the break-up of vacancy between SEZ and non-SEZ areas. In our view, even if the regulatory amendment comes through in 1HFY24, the process of de-notification and leasing of vacant spaces will only close by end-FY2024.

Leasing trends: GCC expansion to offset some weakness in IT but overall improvement may take time Cognizant has announced its plans to vacate 11 mn sq. ft of space in tier-1 and metro cities (with subsequent plan to acquire space in smaller cities), we would watch out for commentary from other large employers (tech, BFSI) for cues. For now, asset owners see the Cognizant announcement as a part of regular business, stating that the vacancy should happen only gradually, while also offering asset owners the opportunity to mark-to-market the rents in some of their old contracts. Data on non-software service exports corroborates the strength in GCC growth in India—assets owners remain optimistic that GCC strength will help absorb any release of office spaces by technology companies, and also help improve overall rent rates for their portfolios. IT companies have seen a slowdown in hiring over the past few quarters, with 4QFY23 seeing a decline in headcount across tier-1 IT companies in comparison to expansion in every quarter since the beginning of the pandemic. Global Capability Centers (GCCs) continue to expand in India, especially in Bengaluru.

Electrodes: Demand Headwinds Likely to Impact Near-Term Pricing (Jefferies)

Weak demand (global & domestic) impacted Electrode pricing and utilization in Q4FY23. Exports are ~70%/50% of HEG/GRIL's sales. We foresee demand headwinds to persist in FY24e, and lower our est for electrode ASPs and utilizations (now to ~65%) for both cos. We cut

FY25-26e EBITDA by 8-16%, but expect higher impact in FY24e. Beyond the near-term headwinds, decarbonization stays a medium-term tailwind; 7mnMT EAF capacity has commissioned in US in last 12M. Buy.

Demand Headwinds Persist: In FY23, global crude steel production dipped by 4-5%YoY amid weaker offtake across many regions. But Indian production grew by 5-6%YoY. Domestic demand accounts for ~50% of GRIL's sales mix, but is lower at ~30% for HEG. Weak global offtake impacted HEG's capacity utilization to 75% in FY23 (-1,200bps YoY). Electrode pricing has also declined by ~3%QoQ in Q4. Industry channel inventory is est to be higher-than-normal currently. We foresee demand headwinds to continue in FY24e as well, and hence cut our estimates for electrode ASPs and utilizations for both companies. HEG's 20K MT extra capacity is likely to commission in Jun'23. While we expect HEG's FY24e utilization to decline to 65% (75% in FY23), absolute volumes could grow by +10%YoY due to its higher total capacity now at 100K MT. We cut GRIL/HEG's capacity utilization by -10%/-14% resp in FY24e to 65-66%, but pencil in revival to 75-80% in FY25e led by a recovery in demand.

EBITDA Pressure: Softer demand offtake (lower volumes) and weaker pricing are likely to impact EBITDA margins of both GRIL & HEG. Resultant impact on EBITDA is est to be higher in FY24e than in FY25-26e. Needle Coke (NC) prices are also softening, but the drop in electrode pricing is likely to be higher than NC in FY24e. We cut electrode cos' FY25-26e EBITDA by 8-16%, while FY24e cut is est to be sharper owing to steeper cut in utilizations and pricing. We est FY24e EBITDA margin at +12%/16% for GRIL/HEG resp.

Decarbonization - A Medium-Term Tailwind: Exports account for ~70% of HEG's sales mix, and ~50% for GRIL. While global EAF steel production is 45-50% ex-China, China is still lower at low-double-digit (2x since 2016). US is ~70% EAF production now, and now accounts for ~10% of HEG's sales mix, having risen 2-3x in the last 4 years. New EAF capacity of ~7mnMT has already commissioned in last 12M, and incremental ~17mn MT of EAF is expected to commission in the USA in the medium-term.

India Pharma: Moats intact, volume recovery key (Axis Capital)

Promising trends: strong pricing, growth in chronic/ new-age drugs IPM grew a steady 9% YoY in FY23 (3-year CAGR at ~9%) after 2% /15% Covid-affected growth in FY21/22. Despite various disruptions (GST, NLEM*, Covid, etc.), IPM has seen steady ~10% growth over the past 10 years led by volume (despite the impact of trade generics, Jan Aushadhi, etc.), price hikes (higher inflation) and new launches (following the expiry of patent exclusivities). Key trends:

Price growth is likely to remain high, at 5-6%, due to the 12.1% hike taken in NLEM products (~14% of IPM) and ~5% hike on the rest in the wake of inflation.

Volume growth in Chronic has started to improve after a dip in demand due to Covid fatalities in the co-morbid cohort. Within Acute, a strong flu season saw the recent recovery in anti-Infectives/ Respiratory, which had moderated post the Covid spike.

Growth in Respiratory is led by price and volume, while growth in Cardiac is largely led by price hikes with tepid volume growth.

Prescription growth in traditional anti-Diabetes is slowing, while new-age molecules like DPP4, SGLT2 and combinations are picking up, increasingly prescribed by general practitioners (GPs) in addition to conventional prescriptions by specialists.

India formulations– superior business model: India sales (20-100% of company sales) remain the key earnings contributor for most pharma companies due to steady growth visibility, higher return ratios, and superior FCF. Notably, branded generic models allow for price increases (to help offset rising costs). We expect domestic-focused companies to outperform IPM growth given:

Focus on building mega brands (sales of Rs 500 mn to Rs 2+ bn)

Expanding field force – to increase coverage in newer markets (tier 2/3 cities)

M&As (strong balance sheet) that can fill gaps and augment existing therapies

Risk from pricing control/ generics – limited impact: NPPA’s price control list, last revised in Dec’22, has partially impacted Q4FY23 growth –which pharma companies expect to counter with increased volumes (given strong brands) and price hikes (from Apr’23). Pricing policies are unlikely to impact sales beyond a point given competitive pricing by most. Trade generics, private label and Jan Aushadhi are seeing a brisk ramp-up in sales, however, this model faces challenges in supply, SKU shortages and concerns regarding quality from patients and doctors. More inside: market shares, companies (not covered, not listed as well)

Market share across therapies, companies, brands, bonus contribution, NLEM, Jan Aushadhi, trade generic coverage, etc.

Snapshots on major pharma companies highlighting (a) 5-year trends in volume, price and new introductions, (b) market share/other trends across key therapies/brands, (c) trends in Chronic vs. Acute mix, etc.

Specialty chemicals: Growth continues to moderate (nuvama institutional equities)

Overall, sales for the sector grew a mere 6% YoY/3% QoQ, driving EBITDA growth also at 6% while maintaining EBITDA margins at 22%. Demand for specialty chemicals catering to agrochem innovators such as PI and SRF remains strong while players catering to generic molecules witness weakness as supplies from China increases. Fluorpolymers demand remained strong; however, refrigerant gas prices have started softening. Overall, trends in specialty chemical demand remains weak as softening RM prices are leading to inventory liquidation across the channel.

Multiple headwinds hamper FY24 growth: Refrigerant gas players such as SRF, Gujarat Fluoro gave cautious commentary on softening refrigerant gas prices; however, specialty chemicals catering to agrochem (PI, SRF, Anupam Rasayan) remains confident of ~20%-plus growth. Players with higher share of commodity – Aarti, Deepak Nitrate and Jubilant Ingrevia continue to maintain weak commentary as demand from end-user industry remains sluggish.

However, they expect a pickup in H2FY24. FMCG-led players like Galaxy and Fine Organics are seeing strong demand in domestic market; however, facing challenges in Europe and US given the inflationary scenario and inventory liquidation.

Outlook and valuation: Growth moderation factored in: Most players set a cautious tone on the back of: i) inventory liquidation impacting demand; ii) slowdown in markets like Europe and US; and iii) price correction in categories like refrigerant gases. However, the industry is witnessing strong domestic demand and growing enquiries in exports as global players continue to look for alternatives to China and increasing outsourcing to reduce cost.

We acknowledge headwinds in FY24 – factored in to our estimates. We expect growth driven by sustained capex, FY25 to witness growth revival while current valuations (sector average at 23x Y25E P/E) limit downside.