FORESIGHTS - Nov

This month, we will discuss two key developments and their impact on the Indian economy and the corporate world: Trump’s successful election and corporate India’s Quarterly performance. Unfortunately, both present a not-so-sanguine outlook.

Trump’s election is undoubtedly the biggest news of the year so far, especially considering it was expected to be a close contest. In addition, to winning the presidential race, the Republicans have secured a majority in both the houses, hence making the Trump administration even more powerful. Based on campaign promises, we can anticipate significant actions and their impact on financial markets:

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The softening of several high-frequency economic indicators during the second quarter of the current fiscal year is worrisome. Corporate performance was also muted in this period, raising concerns about the overall growth outlook. Adding to the grim data points, the latest CPI inflation reading surged to 6.2%, much higher than market expectations. However, some of the latest economic data points, such as PMIs, IIP, and GST collections indicate an uptick. Consequently, we have marginally lowered our GDP growth projection for Q2 FY25 to 6.8%.

High-frequency economic indicators are giving a mixed picture. The manufacturing and services PMI improved in Oct following a temporary dip in Sep. IIP for September staged a comeback with 3.1% growth after contracting by 0.1% in Aug. Core sector growth also improved in September. Growth in GST collections has moderated to an average of 8% in September-October, compared to an average monthly growth of 11% recorded in January-August. Passenger vehicle sales showed a meager growth of 0.5% (Y-o-Y) in H1 FY25, while two-wheeler sales growth was healthy at 16%. This could reflect an improvement in rural demand. FMCG sales volume growth data for H1 FY25 also indicates an improvement in rural demand.

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To analyse the future capex growth of the economy, the report has analysed the order books of the infrastructure and capital goods sectors. The infrastructure sector, being the backbone of the economy, and the capital goods sector, which produces essential tools and machinery for goods and services production are key leading indicators of future capital expenditure by both the public and private sector. The increasing order book trend of the capital goods sector and the recovering trend of the infrastructure sector suggest optimism about further capital spending by businesses in other sectors as well, creating a positive feedback loop.

Public & CPSE Capex Remains Subdued in H1 FY25

In the past few years, public capital spending has shown strong growth, primarily driven by the central government’s capital expenditure. According to budget estimates, the central allocation for capex has more than doubled, increasing from 1.6% of GDP in FY19 to a budgeted 3.4% of GDP in FY25.

In the first quarter of FY25, public capital expenditure slowed due to the restrictions imposed during the general elections. The Central capex contracted by 35% YoY in Q1 to Rs 1.8 trillion, while the state capex decreased by 21% YoY to Rs 0.8 trillion. A marginal recovery in the public capex expenditure was witnessed in Q2, led by central capex, which grew by 10.3% YoY in the second quarter. However, state capex stayed in the contractionary zone, falling by 3.8% YoY in Q2. Some states like Punjab, Assam, Karnataka, Maharashtra, and Rajasthan, witnessed double-digit growth in capex in H1. Central and aggregate state capex contracted by 15.4% and 10.5% (YoY), respectively, in H1. With this, the centre has achieved 37% of its budgeted capex target in H1, while 20 major states, at an aggregate level, have achieved only 28% of their budgeted target. It is crucial to monitor the trajectory of the public capex going forward. Any further slowdown in subsequent quarters could result in a shortfall relative to budget estimates. Hence, the possibility of a downward revision in the capex target remains.

India Inc’s Capex Marginally Lower in FY24

To assess the directional trends in capex within India's corporate sector, a detailed analysis was conducted on the annual financial statements of 1,074 listed non-financial companies. The data reveals that the aggregate private capex for our sample set stood at Rs 9.4 trillion in FY24, marginally lower than Rs 9.5 trillion for FY23. However, this is higher than the last five-year annual capex average of Rs 7.7 trillion for our sample set.

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The securitisation market has gained significant momentum in the second quarter of the current fiscal with a total volume of around Rs 72,000 crore, positioning itself to achieve the highest-ever volume in FY25, despite a moderate start in the Q1FY25. According to CareEdge Ratings, the cumulative volume for H1FY25 is estimated at around Rs 1,20,000 crore, encompassing both pass-through certificate (PTC) issuances and direct assignment (DA) transactions.

This growth was primarily driven by significant contributions from HDFC Bank and other large originators and continued demand for loans that meet Priority Sector Lending (PSL) norms. The quarter also saw the consummation of the largest PTC transaction backed by retail loans with participation from mutual funds as investors.

In H1FY25, the market witnessed a total volume of approximately Rs 1,20,000 crore (CareEdge Ratings estimate), reflecting a 19% increase compared to around Rs 1,01,000 crore in H1FY24. The distribution between DA and PTC transactions remained almost equal, like the previous fiscal year.

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The microfinance industry is currently grappling with a significant rise in customer indebtedness, as showed by a 27% increase in the average incremental ticket size over the past three years. This trend, along with borrowers taking on multiple loans, has elevated overall debt levels. Data shows a consistent rise in the number of accounts per unique borrower across various states, highlighting the extent of this issue within the microfinance sector. It is important to note that if other personal loan data were included (gold loan, unsecured personal loans, kisan cards, etc.), the increase in indebtedness would be even more pronounced, especially at the overall family level for the borrower families. While the growth in ticket size and multiple lending has boosted disbursements in recent years, it has also strained borrowers' repayment abilities, leading to increased stress within the sector.

In response to these challenges, the MFI Network INDIA (MFIN) has recommended that its members implement specific measures, including capping the number of microfinance lenders per borrower at four and limiting total indebtedness to Rs 2 lakh, aiming to mitigate further risks and enhance financial stability.

Contributing Factors

The increasing borrower indebtedness is compounded by a range of factors, such as heatwaves, general elections, and political movements like the “Karja Mukti Abhiyan.” This challenge is further aggravated by the weakening of the Joint Liability Group model, characterised by a notable decrease in center attendance and diminished peer pressure and collective accountability, which have historically helped keep low default rates.

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CareEdge Ratings anticipates 8-10% revenue growth for the Indian poultry industry in FY2025, driven by rising demand for protein-rich foods, supported by urbanization and a shift towards healthier diets. Poultry, being an affordable protein source, is increasingly consumed across households and food services. Stabilising input costs, improved feed management, and government support further enhance growth prospects.

Revenue and Profitability Set for Recovery After Two-Year Decline

The poultry industry’s revenue trend has shown significant fluctuations over the years, reflecting changes in market dynamics and input costs. – Post covid disruption in FY20, which impacted scale and profitability, the industry saw a strong demand recovery with better realisations. However, this moderated in 2023 and 2024 due to oversupply and increased input costs. Meat and egg prices are volatile due to the commodity and perishable nature of these products, and they are influenced by local supply-demand dynamics, which limit pricing flexibility. The poultry industry experienced volatility in broiler meat prices during FY2024. Strong demand boosted prices in H1 (April-October), but an oversupply from November 2023 led to a decline.

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For FY24, CARE Ratings had envisaged a 5-7% volume growth and a 100-150 bps recovery in PBILDT margin, supported by restocking of inventory by textile channel partners, softening cotton & crude oil prices, and the onset of the festive season.

As expected, the industry experienced a revival in sales volume, ranging from 5-10%, and an expansion of ~100 bps in operating profitability. While volume growth was across dyes & pigments (in the second half of the fiscal year), margin improvement was seen in pigments. Dye & dye intermediate players continued to report muted margins owing to a sharp correction in raw material prices, impacting inventory valuation.

Recovery to continue in FY25; Exports Revival Visible

As reflected in the chart below, the exports volume of D&P from India significantly moderated in FY23 and 4MFY24. Post this period, an uptick was witnessed in demand, resulting in a 9% y-o-y volume growth for full year FY24 (despite moderation in 4MFY24). This momentum continued in 4MFY25, resulting in a 15% y-o-y volume growth. Despite volume growth, exports registered a degrowth of 8% in value in FY24, owing to moderation in prices.

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The RRE segment, which faced nearly a decade of sluggishness, has shown remarkable resilience in the post-COVID era. Before the pandemic, it struggled with challenges such as demonetisation, RERA, the NBFC crisis, and negative consumer sentiment. Although the pandemic initially posed a setback, it ultimately became a catalyst for resurgence, fostering a more positive outlook on home ownership. This increased demand was supported by low interest rates, rising incomes, increased household savings, and favourable policies like stamp duty cuts from various State Governments. As a result, the demand scenario led to multi-year high sales in CY 2022 and CY 2023.

The growth momentum in CY 2024 is set to mark the third consecutive year of high bookings. Key long-term growth drivers such as urbanisation, nuclearisation, and increased offshoring in tier-I cities remain strong, bolstering the job market. Additionally, government-backed infrastructure projects are enhancing connectivity, and creating new real estate development zones. Initiatives like RERA, PMAY, and the SWAMIH Fund have improved transparency, supply, and affordability, driving demand. Furthermore, robust institutional investments in CY 2023 and H1 2024 indicate sufficient capital for the RRE sector.

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