Is private consumption growth weak due to job
distress or weak real income growth? Official labor surveys show that jobs are not
a problem in urban India. Participation rates are stronger and unemployment
rates are lower than 2019 levels. Both jobs and real incomes were improving
over the past few quarters. But the latest bout of high food inflation is a
setback for real income and hence broad-basing in consumption.
India’s macro position is being hailed due to
its relatively robust GDP growth and well-contained risk parameters like core
inflation (within the headline target band) and current account deficit
(<2.5% of GDP). However, the soft underbelly of India’s otherwise
robust economic outlook is weak private consumption, with growth in real terms
near 3% YoY as of the Mar’23 quarter.
There is reason to be hopeful of stronger
private consumption over the medium term, since the current growth is primarily
led by investments and exports – meaning, stronger activity in these parts of
the economy will eventually spill over to a pronounced consumption growth down
the line. However, in the near term, we are still confronted with the question:
what is ailing private consumption – weak real income or lack of jobs?
The official labor market survey does not
indicate post-Covid stress except in a few regions. Over the medium term, labor
market conditions should continue to improve as India gains export market share
and businesses invest to prepare for a larger domestic economy. Meanwhile, as
per a private labor survey, there is job distress among women post-Covid,
especially in urban India.
The reason for urban women quitting the labor
force could be due to a lack of sufficient job opportunities. On the bright
side, the expansion of service exports and the jobs they are generating should
improve the pace of urbanization and create opportunities for self-employed
women and wage workers.
Plotting changes in urban labor force
participation by states against electricity
demand and vehicle registration show a modest positive
relationship between the official labor market survey results and hard economic
data. This means a sustained improvement in labor force participation should
tighten the labor markets, improve wage growth, and broaden the consumption
recovery.
Over the next few quarters though, high food
inflation trends will likely suppress the pace of broad-basing in private consumption.
NIFTY has given more than 14% return in FY24
YTD as India attracted more than USD16.5bn of net FII flows. India seems well
poised for growth in longer term, however coming months will be a real test for
the economy and markets given 1) EL Nino impact on crops and Inflation as food
inflation has spiked to more than 7.4% and rainfall outlook remains subdued and
2) dim possibility of further cut in interest rates with some possibility of an
increase in 2H. We expect markets to start factoring in political risks as
election related activity picks -up with state elections in November and Lok
Sabha elections in April 2024. Economy is getting a big push from Union Govt
induced capex even as rural India is showing faint signs of recovery and urban
discretionary demand remains tepid. Expected interest rate hike in US and its
impact on INR/USD with impending political and inflation risk can impact
capital flows. We believe high inflation can be a political hot potato in an
election year, forcing govt to slow down capex. We remain positive on Auto,
Banks, Capital Goods and Healthcare. We cut NIFTY target to 20,735 given cut in
earnings (impact of floods and late Diwali in 2Q) and expect markets to consolidate
ahead of 2024 elections. We advise stock specific approach and avoiding sectors
/ companies with weak fundamentals and lack of business moats.
NIFTY EEPS has seen a cut of 1/2.8% for FY24/25 with 14.7% EPS CAGR over
FY23-25 with FY24/25 EPS of Rs1013/1138 (1024/1171 earlier). PL EPSE are 3.9%
and 6.1% lower than Bloomberg consensus EPS estimates.
NIFTY is currently trading at 18.3x 1-year
forward EPS, which is at 11.6% discount to 10-year average of 20.7x.
Base Case: we value NIFTY at 12% discount to 10-year average PE (20.7x) with
March25 EPS of 1138 and arrive at 12-month target of 20735 (21430 based on
18.3x March 25 EPS of Rs1171 earlier).
Bull Case: we value NIFTY at 10-year average (20.7x) and arrive at bull case
target of 23563 (24353 at LPA PE).
Bear Case: Bear case Nifty can trade at 25% discount to LPA (25% earlier) with
a target of 17672 (18264 earlier).
The Microfinance industry (MFI) experienced a
growth spurt in FY23, expanding at a rate of 37% Y-o-Y due to a favourable
macroeconomic climate and renewed demand, which has led to a surge in
disbursements over the past few quarters. Consequently, NBFC-MFIs have
surpassed banks in the overall microfinancing landscape, constituting
approximately 40% of the total outstanding microfinance loans as of March 31,
2023, compared to 34% for banks.
CareEdge Ratings anticipates growth momentum to
continue, with the portfolio of NBFC-MFIs expected to grow at a rate of 28%
y-o-y in FY 2024. However, increasing customer indebtedness, rising average
ticket size and a gradual shift from the Joint Liability Group (JLG) model to
individual loans pose the risk of overleveraging for the industry. Also,
considering the inherent nature of its asset class, NBFC MFIs are highly prone
to event-based risks, such as political, geographical uncertainty and
susceptibility to natural calamities. Moreover, the evolving global
macroeconomic environment and the continuation of support from impact funds and
PE investors at the same pace will also be critical and needs to be closely
monitored.
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
FY 2021 but remain higher than pre-Covid levels, with a portion of the
restructured book slipping into NPA. CareEdge Ratings expect NIMs to continue
improving, resulting in RoTA rising to approximately 3.8% for FY 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 19% of the portfolio, as on
March 31, 2020, from FY21 to FY23 due to Covid-19. However, with an improving
collection efficiency trend, GNPA is expected to improve to 2.0% in FY24 from a
peak of 6.26% for FY22.
Carbon credits serve as a potent market-driven
incentive, effectively catalyzing the reduction of greenhouse gas (GHG)
emissions. These credits operate within the framework of international
agreements such as the Kyoto Protocol and the Paris Agreement, thriving within
carbon markets where projects designed to curtail emissions yield tradeable
credits. These credits, in turn, can be purchased by entities seeking to offset
their own emissions, thereby showcasing their unwavering commitment to
fostering sustainability. The proportion of global annual greenhouse gas
emissions covered by carbon credits has risen from 5% in 2005 to 22% in 2022.
However, the
attainment of carbon credits is a formidable achievement, as projects undergo
rigorous evaluation by impartial auditors to ensure strict adherence to
established standards. Upon successful verification, these credits are
introduced into various markets, effectively directing investments toward
emission reduction initiatives and sustainable undertakings, particularly
within developing nations.
Beyond their symbolic
significance, these credits carry tangible benefits, acting as a catalyst in
propelling the global transition towards a low-carbon future. By attaching
quantifiable value to emission reductions, they serve to invigorate international
collaboration in the ongoing battle against climate change. The adoption and
incorporation of carbon credits into our practices signify an inspiring journey
towards safeguarding our planet and embracing an eco-friendly, sustainable
tomorrow.
The popularity of the
credits could be estimated by the fact that India alone has a market share of
17% globally with 35.94 million USD currently (the global market stands at 2
billion). By some estimates, the global carbon credits market would reach 100
billion USD by the end of 2030 as per Confederation of Indian Industry. It has
also been estimated by MarketsAndMarkets that global market size would reach
1,602 billion $.
The Indian
Context Of Carbon Credits In India, the carbon credit system operates primarily under the Clean
Development Mechanism (CDM) of the United Nations Framework Convention on
Climate Change (UNFCCC). The process of carbon credit generation and trading
follows a structured flow, adhering to guidelines set by relevant regulatory
bodies. The journey begins with Project Identification and Development, where
projects contributing to GHG emission reduction are selected. These encompass
renewable energy projects, energy efficiency improvements, and waste management
schemes, aligning with CDM and regulatory criteria.
The Project Design
Document (PDD) is pivotal, outlining the project's objectives, methodologies,
baseline emissions, additionality assessment, and emissions reductions.
Validation and Verification are critical turning points, with designated
Operational Entities (DOEs) conducting independent assessments and rewarding
projects that meet criteria with validation reports. Implementation and
Monitoring are essential, with robust systems ensuring accurate emission
reduction reporting. Verification and Certification culminate in Certified
Emission Reductions (CERs) issuance based on verified emission reductions.
Carbon Credit Trading
showcases CERs' value, drawing entities to offset emissions or meet regulatory
commitments. Retirement or Surrender of CERs concludes the journey, ensuring
the integrity of emissions accounting. The effectiveness of the system is
amplified by the Types of Projects Allowed Under the Carbon Credits Scheme,
including Renewable Energy Projects, Energy Efficiency Projects, Waste
Management Projects, and Afforestation Projects.
The Current
Regulation & Way Forward The Carbon Credit Trading Scheme (CCTS), outlined in the draft by the
Ministry of Power, stands as a pivotal force shaping India's regulatory
framework concerning carbon credits. A significant stride in this direction was
taken through the introduction of the Energy Conservation (Amendment) Bill in
2022, which established the groundwork for the forthcoming Indian carbon credit
market. The draft blueprint envisions the establishment of the India Carbon Market
Governing Board (ICMGB) as the central entity responsible for the oversight and
regulation of the carbon credit market.
This board boasts
representation from critical ministries including Environment, Forest, and
Climate Change; Power; Finance; New and Renewable Energy; Steel; and Coal. The
multifaceted responsibilities of the ICMGB encompass policy formulation,
regulatory framework establishment, and trading criteria definition for carbon
credit certificates.
We see key investor debates in India IT
Services to be around growth trajectory and the impact of Generative AI, where
our demand trackers suggest that while revenue growth is likely to stay muted near-term
on the back of macro concerns (4% YoY revenue growth in FY24E for our
coverage), the market could be underappreciating the recovery and upside from
FY25. We forecast a 9-10% annual revenue growth for our India IT coverage from
FY25, which is a c.2x multiplier of the 5% revenue growth for GS covered global
companies in CY24 (a sharp pick-up vs 1% growth in CY23).
In our view, this growth will be aided by the
pent-up demand (order book has remained robust), initial tailwinds from
Generative AI (our differentiated analysis suggests IT Services companies
playing a meaningful role in enterprise integration), and continued shift to
cloud and managed services (cloud penetration is only c.30%.
Indian IT Services companies have doubled their
market share in the last 10 years (to 6.2% of the global IT spending in CY22),
and given the structural advantages of a large, skilled and low-cost workforce,
coupled with a diversified geographical footprint, we expect Indian IT firms to
continue gaining share.
We expect operating profit growth, at 12-15%
over FY25-26E, to be faster than revenue growth, as we see presence of multiple
margin levers and forecast an expansion in margins for all the companies within
our coverage. While India IT is trading at premium valuations vs its last 10Y
average (in line with last 5Y), we argue that higher multiples are warranted as
we view growth in IT/Tech spends as an industry perennial with a lower
susceptibility to disruptions, and shareholder payouts having meaningfully
improved over the decade.
In our view, what is different this time
vs previous downturns is that order book for most IT Services companies have
remained strong, as enterprises hold back on actual
spend (which translates into IT revenues) until more clarity emerges on the macro.
Our economists’ recently lowered the
probability of the US economy entering a recession in the next 12 months to
20%, with the team’s analysis of recent data suggesting that bringing inflation
down to an acceptable level would not result in a recession; the US geography
makes up c.60% of India IT Services revenues, and improving economic outlook in
the region should help drive higher technology spends in our view.
In addition, aggregate data from global GS
covered companies, which has a high correlation with IT revenue growth (c.2x
historical multiplier), shows revenue growth of global enterprises picking up
to 5%/6% in CY24/CY25, after a 1% growth in CY23.
We expect this acceleration in enterprise
revenue growth to translate into c.10% annual revenue growth for our India IT
Services coverage in FY25/FY26, after a 4% YoY growth in FY24.
However, we expect weakness in the
communication vertical to persist for longer given pressures on telco
opex/capex; we note that TechM has the highest exposure to this vertical at 38%
based on 1QFY24 revenues.
Our global analyst teams expect enterprise
clients to increase cloud computing spends in CY24, further aided by deployment
of Generative AI (link). Adoption of cloud, and the ensuing multitude of
applications created for the cloud, has a positive revenue implication for IT
services companies. We forecast a 9%-10% annual revenue growth for India IT
beyond FY24, and share of IT/technology in enterprises’ budgets continuing to
rise.
Electrical Consumer Durable (ECD) companies’
revenue grew by 16% YoY (+13% 4-year CAGR) in 1QFY24, largely on the back of
healthy growth in the B2B segment (particularly cables) while demand
environment in the B2C segment remained subdued due to soft summer/unseasonal
rains and consumption slowdown in general. Although gross margin improved on
the back of a benign RM envionrment, that improvement was not reflected in
operating margin due to a) high competitive intensity, and b) sustained spend
on long-term strategic initiatives (A&P, GTM, etc). We continue to be
positive on the space from the medium- to long-term perspective given macro
tailwinds (low penetration in some categories) and category expansion opportunities.
Our top picks - Bajaj Electricals, and Havells.
B2B drives revenue while B2C remains
subdued in 1QFY24: ECD companies’ aggregate
revenue witnessed healthy growth of 16% YoY (+13% 4-year CAGR; -4% QoQ). This
was largely on the back of healthy growth in the B2B segment while demand
environment in the B2C segment remained subdued due to consumption slowdown and
soft summer. ECD segment saw another quarter of modest revenue growth while
wires & cables continued to outperform, growing in double digits aided by
strong volume growth.
Unseasonal rains and consumption slowdown
impacted demand in ECD segment: ECD segment saw
another quarter of modest revenue growth of 3% YoY (+8% 4-year CAGR) impacted
by a) weak demand environment, and b) soft summer due to unseasonal rains.
Moreover, fans segment continued to witness volatility because of BEE energy
rating transition. Revenue grew 8%-16% YoY (excluding Havells/Symphony, which
saw 13%/17% decline). Low volume, high competitive intensity, high discounting
on non-rated fans inventory and liquidation of high-cost inventory kept margins
under pressure.
Cables & wires revenue outperformance
led by volume: Cables & wires segment
revenue grew 30% YoY (+18% on 4-year CAGR); copper prices fell 5% YoY, implying
strong volume growth in cables and wires. Within this, we believe industrial
cables is growing at significantly faster pace compared to consumer wires.
Healthy demand from government as well as infrastructure side aided volume
growth. With most of the high-cost inventory liquidated, EBIT margin improved
across companies
RM prices soften in 1QFY24: In 1QFY24, prices of key commodities fell by 5-36% over 1QFY23 but
remained high compared to pre-Covid levels. However, amidst a weak demand
environment, brands in an attempt to stimulate demand offered schemes/discounts
leading to heightened competitive intensity, which put pressure on margins.
Maintain positive outlook from
medium-term perspective: Notwithstanding
near-term pain (weak consumer demand; fans energy rating transition) the
industry remains optimistic of demand recovery given a) expectation of strong
H2, b) recovery in rural markets, and c) stability in the input cost
environment. We remain positive from the medium- to long-term perspective given
macro tailwinds, low penetration for some of the categories, and category
expansion opportunities for companies.
1QFY24 turned out to be a shakeout quarter for
Indian Chemical manufacturers, both for bulk chemicals and specialty basket.
Agrochemical companies had a slow start in 1Q, owing to delayed onset of
monsoon and uneven rainfall that impacted sowing pattern. Export growth got
impacted as well. The common trend across companies was a steep product-price decline
due to excess channel inventory — leading to demand slowdown. The management
across companies commented on the customers postponing purchases because of
extreme volatility in prices and continue to be in a wait-and-watch mode.
Downgrades by global agchem majors: Global crop protection majors have downgraded their revenue for
CY23 and expect 2H’23 to remain muted. Recovery is expected from CY24. In 1Q,
domestic crop protection revenues for PI, UPL, BASF and Rallis were under
pressure. With rainfall improving, sowing has picked up in 2Q and should
trigger agrochemical liquidation/consumption.
Washout quarter for Chemicals: In 1QFY24, bulk chemicals reported weak performance, on the back of
steep decline in key product prices. Soda ash was an exemption as global prices
stayed firm, while domestic prices were under pressure. Domestic prices of soda
ash, caustic soda, refrigerants and PVC continued to be under pressure, with
Chemplast Sanmar reporting Ebitda loss.
New capex announcements take a pause: Barring Deepak Fertilisers that announced Rs19.5bn capex for
setting up weak nitric acid & concentrated nitric acid plant, the new capex
announcements by chemical companies were muted during 1Q. However, the companies
remained committed on their ongoing capex and were optimistic about recovery
during 2H’24.
Immense scope for retail growth in India;
occupancy levels at 94% India has a per capita
retail space of <1 sq. ft, much lower than developed economies such as the
US (23.1 sq. ft) and Canada (16.4 sq. ft), as well as some of the developing
economies/cities such as Beijing (5.2 sq. ft), Jakarta (4 sq. ft) and Hanoi
(3.5 sq. ft). The undersupply, coupled with rising income levels, offer a long
runway of growth for retail spaces in India. The Indian retail sector has seen
healthy leasing momentum after Covid, with 4.2, 5 and 2.8 mn sq. ft of
(grade-A) gross leasing in CY2021, CY2022 and 1HCY23, respectively. The momentum
has partly been aided by the churn of existing tenants. The demand for smaller
spaces (<2,000 sq. ft) constituted 59% of overall demand, followed by
2,000-5,000 sq. ft spaces (28% share). With limited new supply additions of 4.4
mn sq. ft in the last 2.5 years, occupancy levels have risen to 94% as of 1HCY23
from 87-88% in CY2020.
Tier-1 cities lead the way, tier-2 cities
catching up Of the 51 mn sq. ft of Grade-A
stock in tier-1 cities in India, NCR has a 22% share, followed by Mumbai (21%)
and Bengaluru (19%). There is an additional 25 mn sq. ft of under-construction
retail assets, expected to be completed by 2027—North and West India should
lead the new mall supply in the next few years. Key malls in tier-1 cities have
seen a 12% yoy uptick in rentals in 2QCY23, which has been aided by an 18% yoy
consumption increase. Among the tier-2 cities, top-5 cities (Lucknow,
Ahmedabad, Chandigarh, Indore and Kochi) account for 57% of the total tier-2
stock, with another 5 mn sq. ft supply coming up in 4-5 years. These top cities
have seen a rental increase of 13-17% in 4QCY22.
Healthy demand outlook to aid rental
appreciation With rising income levels and
spending power, the demand for luxury retail is expected to remain strong
across tier-1/2 cities in India. Anarock expects a 17% CAGR in sales volumes,
reaching US$136 bn by 2028, and 10-20% annual rental appreciation for key malls
in India. The adoption of technology will enhance the customer experience,
while collaboration in the retail space will help in fortifying the business,
and also allow entry into newer markets, thereby increasing customer outreach.
Institutional investments in the retail space should rise going forward,
following US$1.5 bn of investments in 2019-22.