ICRA INSIGHT - Monthly Newsletter | January, 2023
The Union Budget for FY2024 will be presented at a time when domestic growth is uneven and a decline in global economic growth is impending. Therefore, the task is to offer a strong push for domestic growth while simultaneously undertaking enough fiscal consolidation measures and maintaining a manageable level of net borrowing. In ICRA’s assessment, a reduction in subsidies will enable the Government to increase growth-supportive capital investment, while aiming for a budget deficit of 5.8% of GDP to continue the fiscal glide path. The Government of India is likely to aim for a double-digit increase in capital expenditure. Its fiscal deficit is anticipated to decline below 6% for the first time since FY2020. The same is likely to fall to 5.8% of GDP in FY2024 from 6.4% in FY2023.
The Indian hospital industry is expected to post robust performance in FY2023 and the aggregate occupancy for ICRA’s sample set is likely to remain healthy at 62-64% in FY2023 and FY2024. Elective surgery demand, recovery of medical tourism to the pre-Covid level and gain of market share by the organised players will support this. The sample set is likely to record a healthy growth of 8-10% in the average revenue per occupied bed (ARPOB) in FY2023 while the overall revenue growth is estimated at 15-17% on a YoY basis in FY2023. Despite a substantial input cost inflation, increased operating leverage, supported by scale and cost optimisation, is likely to aid the industry record a robust OPM of 20-22% in FY2023. The industry outlook has remained Stable.
ICRA also examines the hybrid annuity model (HAM) road projects segment, where higher merger and acquisition (M&A) and refinancing activities are expected in the coming quarters. About 105 HAM projects involving bid project costs worth Rs. 1.22 lakh crore are expected to become operational in the next two years of which about Rs 0.90 lakh crore of debt, linked with these projects, could be refinanced.
Lastly, we examine domestic steel firms as they face a difficult external environment. The industry’s absolute earnings fell to a nine-quarter low in Q2 FY2023 due to decreased realisations and rising coal/energy costs. As input cost constraints ease, Q3 FY2023 earnings are likely to recover, but they will still be much lower than FY2022. In FY2023, the industry's full-year operational earnings are likely to fall by 45-50% YoY, resulting in negative free cash flow after two years. In H1 FY2023, external financing for expansion plans increased by 20-25%. Low industry earnings and high leverage will delay the capex programmes of the incumbents.
Economy
FY2024 Budget to target moderate fiscal consolidation
The Union Budget for FY2024 will be presented at a time when domestic growth is uneven and moderate, while a global growth slowdown appears imminent. Therefore, the challenge is to provide a strong impetus to domestic growth, while simultaneously demonstrating adequate fiscal consolidation and keeping the net borrowing figure in check. In ICRA’s assessment, a fortuitous decline in subsidies will allow the Government of India (GoI) to augment growth-supportive capital expenditure, while targeting a fiscal deficit of 5.8% of GDP in order to remain on the fiscal glide path.
Roads & Highways Sector
M&A activity as well as refinancing in HAM space to gain strong traction
Ratings agency expects higher M & A (Merger & Acquisition) and refinancing activity in HAM projects to gain traction in the coming quarters. About 105 HAM projects involving bid project cost of Rs. 1.22 lakh crore are expected to become operational in the next two years of which about Rs 0.90 lakh crore of debt linked with these projects could be refinanced. Around 280 projects with a total bid project cost (BPC) of Rs. 3.21 lakh crore were awarded under HAM model till September 2022 since its introduction in January 2016. HAM accounted for around 40% of the total projects awards by the NHAI during FY2016 and H1 FY2023. Further, HAM is expected to account for around 45-50% of the NHAI awards in FY2023 and FY2024. Of the HAM projects awarded since January 2016, a total of 71 projects with cumulative BPC of Rs. 80,818 crore became operational during FY2019-H1FY2023. Of this, 23 projects with a cumulative BPC of Rs. 27,446 crore (34%) were sold to InvITs and PE players in the last two years.
Ferrous Metals Sector
Steel industry facing challenges as borrowing levels rise and earnings moderate
Domestic steel companies face a bumpier road ahead as the external environment becomes more challenging due to elevated inflation/ energy prices and rising interest rates. In Q2 FY2023, the industry’s absolute earnings plummeted to a nine-quarter low due to combination factors which included falling realisations and elevated coal/ energy costs. While earnings are directionally expected to rise from Q3 FY2023 as input cost pressures alleviate somewhat, they would still remain significantly lower than the levels seen in FY2022. According to ICRA Research, the industry’s1 full-year operating profits are expected to contract by 45-50% year-on-year (YoY) in FY2023, leading to the free cash flows slipping into negative territory after a gap of two years.
Hospital Industry
Indian hospital industry to post robust performance in FY2023
Rating agency ICRA expects the aggregate occupancy for its hospital industry sample set to remain healthy at 62-64% in FY2023 and FY2024, backed by continued healthy demand for elective surgeries, recovery in medical tourism to preCovid levels; and continued market share gains for organised players. Improving payor mix, growth in surgery volumes, price revisions by companies to offset cost inflation and faster throughput in discharges are expected to aid healthy growth of ~8-10% in average revenue per occupied bed (ARPOB) for the sample set in FY2023. Given the high base, ARPOB growth in FY2024 is estimated to moderate to ~2-4%.
State Government Finance
SGS issuance continues to trail the indicated amount; weighted average cut-off unchanged at 7.59%
Renewable Energy
RE capacity addition likely to rebound in FY2024; recovery of dues under LPS scheme a near positive for RE IPPs
Micro Finance Institutions
NBFC-MFIs: Improved pricing power and lower credit costs to boost profitability