FORESIGHTS- August

The past few days and weeks have been eventful, marked by the crisis in Bangladesh, the increasingly competitive US presidential race, and the resurgence of the Hindenburg report. However, three other critical issues deserve our attention: Q1 revenue and profit trends, the slowdown in credit growth, and the potential long-term impact of the reversal of the ‘Yen carry trade’ on global financial markets and the Indian economy.

Firstly, the Q1 results have revealed a concerning trend: revenue growth has remained in the single digits, while profit growth has been even more subdued. This performance contrasts sharply with the high trading price-to-earnings (PE) multiples in the Indian stock markets. The disparity between these low growth figures and high market valuations suggests increasing pressure on corporations to deliver significantly higher growth rates to meet investors' elevated expectations. The current market optimism may be misplaced if companies cannot demonstrate substantial improvements in financial performance in the coming quarters.

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The Monetary Policy Committee (MPC) of RBI left the policy rate and stance unchanged in the August meeting. This was very much on expected lines and the RBI governor highlighted in his speech that there is good convergence between market expectations and MPC policy. However, what is lacking is convergence in the market view on the future course of action by the MPC. The RBI has highlighted concerns around high food inflation, while core inflation (excluding food and fuel) remains muted. Food inflation is influenced by climatic factors and is beyond the control of the Central Bank. However, the Central Bank cannot ignore food inflation as it has a strong bearing on household inflationary expectations, which in turn can feed into actual inflation. This is what makes RBI’s future policy decisions uncertain and complex.

CPI inflation has been hovering around 5% for the last six months, higher than RBI’s target of 4%. The high CPI inflation is mainly because of the spike in prices of food items, which has a high weight of 46% in the CPI basket. High inflation in cereals (8.8%), pulses (16%) and vegetables (29%) have been keeping food inflation elevated at around 8%. The Central Bank is concerned about the strong bearing that food inflation has on household inflationary expectations, which is currently at a high of 8% (as per RBI Household Survey). So far, the high food inflation has not become broad-based and core inflation has been below RBI’s target of 4% for the last six months. Interestingly, the latest Economic Survey suggested that the MPC should consider targeting CPI inflation excluding food prices. This is because food prices are volatile and influenced by weather conditions, making it challenging for the Central Bank to have monetary policy targeted around CPI inflation (including food). Monetary policy generally affects demand-side factors and is somewhat ineffective in controlling supply-driven food inflation.

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The sustained emphasis on fiscal consolidation in the Union budget is a welcome move. This will help reduce the debt-to-GDP ratio and interest outlays over the medium term, thereby increasing investor confidence and the country’s economic resilience. This holds significance as the government seeks a sovereign rating upgrade and with rating agencies closely monitoring India's debt trajectory.

Bumper RBI dividend Supported Government Revenues

The growth in gross tax revenue is budgeted to moderate to 10.8% in FY25 from 13.4% in FY24. The direct taxes are budgeted to grow by 12.8% in FY25, outpacing the growth of indirect taxes at 8.2%. With an assumed nominal GDP growth of 10.5%, the overall tax collection is expected to have a healthy buoyancy of 1.03. The government has benefitted from the record dividend transfer from RBI which has supported the non-tax revenues. The RBI has announced its highest-ever dividend payout, amounting to 2.1 trillion. In the interim budget, the government had initially budgeted approximately 1 trillion in dividends from the RBI and Public Sector Banks (PSBs).

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India’s economy is on a robust growth trajectory, with GDP growth rates remaining healthy despite challenges like COVID-19. The Non-Banking Financial Companies (NBFCs) sector has shown significant resilience, with credit growth picking up post-pandemic. NBFCs continue to play a crucial role in the financial ecosystem, growing at a Compound Annual Growth Rate (CAGR) of 14% and accounting for 21-24% of overall credit from FY17 to FY24 (with the remaining share accounted by banks ~70% and AIFIs ~5-7%). As India aims to become a USD 5 trillion economy in the next few years, the demand for financing will increase, further highlighting the importance of NBFCs in supporting economic growth and development. The sector’s ability to adapt and innovate will be key to meeting the evolving needs of the growing economy.

Strengthened Financial Metrics

Over the past decade, NBFCs have demonstrated remarkable resilience, even in the face of systemic shocks such as the pandemic. Regulatory support and government initiatives have played a crucial role in this resilience. Currently, NBFC balance sheets are stronger, with leverage ratios reduced to 3.1x from a peak of 4.5x. Asset quality has also improved significantly, with the net non-performing asset (NPA) ratio at an all-time low of 1.1%, despite the implementation of stricter Income Recognition, Asset Classification, and Provisioning (IRAC) norms post-November 2021. Furthermore, the reliance on short-term funding, and commercial papers, has also reduced from ~9% in FY17 to ~3% in FY24 of overall borrowings. A similar trend is visible in Credit cost also as Credit cost (computed as provisioning & write-off charged to P&L divided by average assets, is near the bottom. However, we expect an uptick in the cost over the medium term.

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In FY23, the Indian two-wheeler industry recorded sales of 19.51 million units, an 8% growth compared to the previous fiscal year’s 18.01 million units. In FY24, the industry continued its upward trajectory, achieving 9.8% growth with a total sales volume of 21.43 million units. However, this was still short of the peak sales volume recorded in FY19 when annual sales volume had reached 24.46 million units.

During FY24, the domestic two-wheeler industry witnessed a total sales volume of 17.97 million units, reflecting a growth rate of 13%, while the export volume experienced a decline of 5% though recovered from FY23. The decline in exports was primarily due to challenges in the African markets, which traditionally accounted for a significant portion of India’s two-wheeler exports. Despite these headwinds, there are signs of revival. For instance, in each of the last 5 months (January 2024 to May 2024) two-wheeler exports reported robust double-digit volume growth and in February 2024, two-wheeler exports reached a 19-month high with sales volumes of 0.33 million units. The recent improvement in export volumes is on account of marginal recovery and stabilization in some key export markets after they were impacted by inflation, high interest rates and currency issues in some of these markets. This positive trajectory in exports is likely to continue into the rest of FY25. While the road ahead is promising, challenges persist as the industry aims to regain pre-pandemic levels of FY19.

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The CV industry in India witnessed remarkable year-on-year volume growth during FY22 and FY23 of around 30.7% and 28.7% respectively. This surge was fuelled by pent-up demand as the economy recovered from the Covid-19 pandemic. MHCVs and LCVs played pivotal roles in driving overall sales volume within the commercial vehicle sector. Improved industrial and infrastructure demand drove MHCV growth while LCV was boosted by sustained growth in e-commerce.

During FY24, the CV industry faced unexpected challenges, resulting in muted volume growth of (0.7%). This was on account of a fading pent-up demand in the domestic market, sluggish overseas demand and higher vehicle costs due to the transition to BS VI emission norms. The industry had witnessed pre-buying in the March 2023 quarter ahead of the implementation of the BS-VI emission norms, which increased vehicle prices by up to five per cent from April 2023, leading to lower demand in H1FY24. Further, sales in H2FY24 were partially restricted on account of a slowdown in the pace of execution of infrastructure projects due to general elections.

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India’s agrochemical industry achieved remarkable growth in FY22 and FY23. In FY22, exports surged by an impressive 28%, followed by relatively moderate growth in FY23. This positive trend can be attributed to consistent capacity expansion, robust exports, and steady domestic demand post-pandemic. Over the period from FY21 to FY24, the industry maintained a robust compound annual growth rate (CAGR) of 16%. However, in FY24, exports faced a significant year-on-year decline of 20.36%, dropping from 13,788 crore in FY23 to 11,456 crore. This decline was primarily influenced by channel destocking and pricing pressure resulting from China’s re-entry into the market. A similar decline of around 19.34% was noticed at a domestic level mainly due to cheaper prices offered to the farmers by the Chinese products and the impact of EL Nino.

After recording impressive double-digit quarter-on-quarter (Q-o-Q) growth up to Q2FY23, revenues have experienced a significant downward trend. This shift began in Q3FY23 with just 3% Q-o-Q de-growth, followed by a steeper decline of 27% in Q1FY24 on a Q-o-Q basis. While Q2FY24 showed some signs of recovery, this was short-lived as Q3FY24 brought another setback with a 15% revenue decrease. Headwinds, both, in the domestic and the international markets, dragged down the industry’s revenues over the past few quarters. However, with recovery in Q4FY24, led by an improvement in volumes, the industry’s revenues are expected to gradually recover in FY25, largely from H2FY25.

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India is the world’s second-largest aquaculture producer after China and one of the largest exporters of seafood in the world. In the last 10 years ending 31 March 2023, total marine exports from India have increased by around 76% in volume (MT) and by around 62% in value (USD) terms. During the same period, shrimp exports from India, which constitute around 70% of marine exports, have also witnessed remarkable growth, with an increase of 136% in volume (MT) terms to over 700,000 tonnes and a 122% increase in value terms (INR) to around `43,000 crores.

Major export destinations from India

Geographically, frozen shrimp exports from India are spread over North America, Asia, and Europe. However, the United States of America (USA) and China contributed around 60% of the total shrimp export value in FY23. The global shrimp export market grew at a compounded annual growth rate (CAGR) of 4.90% in the last 10 years to US$24,600 million in CY22 from US$15,262 million in CY13 mainly driven by an increase in volumes from 1.88 million tonnes to 2.37 million tonnes. The global shrimp demand has been affected over the years by a lot of factors including the COVID-19 pandemic. However, the growing preference for shrimp against other marine food products led to the fast fading of COVID-19 led to weakness in demand.

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