ICRA INSIGHT - Monthly Newsletter | February, 2023
The Monetary Policy Committee (MPC) recently raised policy rates by 25 basis points, raising the repo rate to 6.5%, the highest level since January 2019. The decision, which was not unanimous, was driven by continued vigilance on inflation. Assuming a normal monsoon year, the MPC expects average CPI inflation to moderate by 120 basis points to 5.3% in FY2024 after 250 basis points of repo rate hikes. It warned that geopolitical tensions, global financial market volatility, rising nonoil commodity prices, and volatile crude oil prices will keep core inflation high. The MPC is optimistic about growth based on domestic factors such as agriculture's strong prospects, the rebound in contact-intensive services and discretionary spending, business and consumer confidence optimism, healthy credit growth, and the government's capex push. ICRA expects future policy action to be data-driven, focusing on whether the CPI inflation evolves around the projected trajectory.
The Indian automobile industry is witnessing major technological transitions, with respect to emissions and safety. CNG vehicles have become more popular in recent years, and the demand for electric vehicles (EVs) has skyrocketed in the last two years due to the government's push, increased awareness, and new launches. In the next five years, ICRA expects CNG, EVs, and hybrids to make up 20–30% of new vehicle sales, but gasoline-powered vehicles will still dominate PV sales. Ethanol blending can help achieve carbon neutrality and reduce emissions from gasoline-powered vehicles. ICRA expects the auto industry and OEMs to meet E20 blending standards without much difficulty. However, all stakeholders working together will speed up the E20 transition.
We also examine the Indian IT services industry, where despite a strong order book, macroeconomic headwinds will reduce discretionary IT spending, slowing growth in the Indian IT services industry. Wage cost inflation and operational overhead normalisation will moderate operating profit margins by 150–200 bps, partially offset by currency gains. It will remain healthy (20–22%) and improve over the medium term due to wage cost stabilisation. ICRA expects 9–11% USD revenue growth for its sample set in the near to medium term.
The 5G rollout has begun in select areas after the August 2022 auctions. It will take 4-5 years and Rs 3 lac crore to build a strong infrastructure. Increased data usage and 4G subscriber upgrades are helping the telcos improve operating metrics despite high debt levels. In FY2023, the average revenue per user (ARPU) is expected to reach Rs. 180. Operating income is expected to grow 13–15% in FY2023, resulting in 18–20% OPBDITA growth.
Lastly, we take a look at the domestic alcohol industry, which, after the pandemic, is booming again. ICRA's sample set should grow 18-20% and surpass pre-pandemic revenues in FY2023. Due to input cost pressures in recent quarters, operating profit margins are expected to moderate by 100–150 bps. Because their peak summer season coincided with the first and second waves of COVID-19, beer players lost volume, while Indian-made foreign liquor (IMFL) players were not much impacted. In H1 FY2023, ICRA's sample set saw a 40% YoY revenue growth due to rising demand and premiumization. While COVID-related uncertainty forced organic capex to the backburner in the previous two years, it is estimated to reach 7-9% of revenues in FY2023. The industry’s debt coverage metrics will remain strong.
Economy
Continued vigilance on inflation outcomes
In its last scheduled bi-monthly monetary policy meeting for FY2023, the Monetary Policy Committee (MPC) hiked the policy rates by 25bps, taking the repo rate to 6.5%, the highest level since January 2019. While we had expected a close call between a pause and a rate hike of 25 bps, the MPC’s optimistic growth projections for FY2024, amid continued vigilance on inflation outcomes, are likely to have tilted the decision in favour of a hike. The decision was expectedly non-unanimous, with two of the six MPC members voting against the rate hike. The Committee has reiterated that “further calibrated monetary policy action is warranted to keep inflation expectations anchored, breakcore inflation persistence, and thereby strengthen medium-term growth prospects” in the policy document. The decision on the stance was also non-unanimous, taken by a vote of 4-2.
Automobile Industry
Auto OEMs unlikely to face major challenges to comply with proposed ethanol blending norms
The Indian automobile industry is witnessing major technological transitions, especially with respect to emissions and safety. Petrol remains a fuel of choice in the domestic passenger vehicle market, as stricter emission norms and the narrowing price gap between petrol and diesel has reduced the viability of diesel vehicles. CNG vehicles have also gained prominence in recent years, aided by favourable running costs, improving penetration of CNG dispensing stations across the country, and enhanced product offerings by original equipment manufacturers (OEMs). Lower emissions in CNG vehicles would also help OEMs comply with the impending Corporate Average Fuel Economy (CAFÉ) norms. Demand for Electric Vehicles (EVs) has increased exponentially in the last two years with the Government’s push, increasing awareness, and new launches. However, the share of EVs in the overall PV industry remains low, at 1% currently.
IT Services Sector
Growth momentum for the Indian IT services industry likely to slow down in the near to medium term
Indian IT services companies have witnessed a moderation in growth momentum in the last two quarters in constant currency terms owing to the base effect and evolving macroeconomic headwinds in key markets of the US and Europe. Due to these headwinds, the decision-making towards discretionary IT spending has seen a slight deferment, while the cost optimisation deals continue to generate stable demand. ICRA’s sample set of leading IT services companies reported a YoY revenue growth of 18.4% in INR terms and 9.9% in USD terms in 9M FY2023, against ~17-18% YoY growth in USD terms in FY2022.The sample set also recorded a moderation of ~180-200 bps in OPM in 9M FY2023, compared to FY2022 levels, due to continued wage cost inflation (~80-100 bps) and normalisation of operational overheads. However, the same was partially offset by currency gains due to the depreciation of the INR against the USD and operational efficiencies.
Telecom Sector
5G signals start to ring, telcos operating metrics continue to improve amid elevated debt levels:
The rollout of 5G services in select pockets in India has kick-started as estimated by ICRA, post the latest round of auctions, which took place in August 2022. The full scale 5G deployment across the country will entail densification of the network and thereby sizeable investments in fiberisation. India currently has around 35% of its towers fiberised and the rating agency expects that the capex required to fiberise the adequate number of towers to provide a sturdy network base would be close to Rs. 3 lakh crore over the next 4-5 years. Further, the telecom industry has continued to report healthy improvement in its operating metrics as reflected by improvement in ARPU levels and consistent growth in telephony usage. ARPU has already crossed Rs. 170 mark in H1 and is likely to touch Rs. 180 by the end of the fiscal. This has translated into healthy growth in industry AGR over the last few quarters. However, the debt levels continue to remain high and the same further increased post the conclusion of the last round of auctions. The industry is expected to close the year with a debt of around Rs. 6.3 lakh crore as on March 31, 2023.
Alcoholic Beverage Sector
Alcobev industry in high spirits, but elevated input costs playing a spoilsport
Following the end of the pandemic, the Indian alcohol beverage (alcobev) industry seems to be in good spirits, with substantial revenue growth expected in FY2023. Despite the divestiture of several brands by one of the companies in the sample set, ICRA expects its sample set to show healthy growth of 18-20% in revenues in FY2023 and 5-10% in FY2024. However, the operating profit margin (OPM) for the sample set is expected to moderate by 100-150 basis points (bps) in FY2023 due to substantially higher input prices in recent quarters combined with limited pricing power. That said, the OPM will continue to remain healthy at 13–14%. In FY2024, the OPM for the sample set is expected to improve to 14-15% largely on the back of operating leverage benefits.
Jewellery Sector
Sparkling rise of lab-grown diamonds.
NBFC – Retail & Commercial Finance Sector
Growth revival, amidst asset quality improvement, to drive NBFC profitability.
Airport Infrastructure Sector
Despite Covid scare, domestic passenger traffic crossed pre-Covid levels for second consecutive month in Jan 2023.
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1yYour survey on Indian economy that is on the Indian automobile industry is witnessing major technological transitions, with respect to emissions and safety. CNG vehicles have become more popular in recent years, and the demand for electric vehicles (EVs) has skyrocketed in the last two years due to the government's push, increased awareness, and new launches. In the next five years, ICRA expects CNG, EVs, and hybrids to make up 20–30% of new vehicle sales, but gasoline-powered vehicles will still dominate PV sales. Ethanol blending can help achieve carbon neutrality and reduce emissions from gasoline-powered vehicles. ICRA expects the auto industry and OEMs to meet E20 blending standards without much difficulty. However, all stakeholders working together will speed up the E20 transition. You have covered Automobile Industry IT Services Sector Telecom Sector Alcoholic Beverage Sector But please do extend the topic to other sector of the economy 1. Energy 2. Civil Construction like Real estate 3. Industrials Clothing 4. Consumer discretionary 5. Consumer staples 6. Health care 7. Financials 8. Information technology 9. Communication services 10. Utilities 11. Hotels This is indeed a great study Best wishes