FORESIGHTS-DEC,22

The financial performance of the corporates in Q2 FY23 was a mixed bag. While net sales grew in double digits, profitability suffered due to higher expenditure. Operating profits contracted for the first time in the past nine quarters as companies were not able to pass on the increased cost to their final consumers. While sectors such as automobiles, telecom, IT and logistics put up a good show, oil & gas, metals and cement dragged the overall corporate performance during the quarter.?Further, the debt servicing capability of corporates fell to a multi-quarter low in Q2 due to rising borrowing costs and lower profitability.?

Aggregate Analysis – Q2 FY23

Net sales in the second quarter grew at 26% (y-o-y), moderating from 44% growth in the previous quarter. The higher growth in Q1 FY23 was supported by a low base. On a sequential basis, net sales were almost flat at the previous quarters’ level. Operating profit was hit during the second quarter as it contracted both on a sequential and annual basis. The contraction of about 7% (y-o-y) in Q2 FY23 has come after a gap of nine quarters.

The total expenditure of companies has shown a rising trend since Q2 FY22, though the pace of increase has moderated significantly in the second quarter. The total expenditure in Q2 FY23 was still 32.5% higher compared to the level a year ago. Both raw material and labour costs posted a double-digit growth adding to the expenses of companies. On a sequential basis, there was only a marginal fall in the raw materials costs as many companies had raw material inventory bought at higher prices.?

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Economy grew by 6.3% in the second quarter of FY23 following a double-digit growth of 13.5% in the first quarter of this fiscal. The slowdown in growth compared with the first quarter was on account of the normalisation of the base and a contraction in the manufacturing sector’s output. However, both sequential improvement and good growth over the pre-pandemic level (Q2 FY20) signal the economy’s resilience despite global growth and financial uncertainties. The GDP growth in Q2 was only marginally higher than our expectation (6.2%) mainly because of higher-than-expected growth in trade, hotels, transport and communication-related sectors.

On a sequential basis, domestic economic output expanded by 3.6% reversing the contraction seen in the previous quarter with services gaining momentum. When compared with the pre-pandemic period, GDP has recorded a growth of 7.6% with a broad-based recovery across sectors. Increasing discretionary spending and higher mobility have boded well for the services sector. The industrial sector’s performance was led down by the manufacturing sector which contracted by 4.3% (y-o-y).

Both private consumption and investment rate edged up in Q2 FY23 compared with the corresponding quarter of previous year supported by higher economic activity. However, the global growth slowdown has weighed on the net exports.?

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Container cargo transported through railways grew by a healthy year-over-year rate of 17.63% to 74.38 million metric tonne (MMT) during FY22 as compared to 12.51% growth in overall container cargo volumes. The rail co-efficient also expanded by 115 bps to 26.70% during FY22, mainly supported by partial connectivity of the dedicated freight corridor (DFC) with Mundra and Pipavav ports on the western coast. This marks the beginning of the modal shift from roads to rail. Slated completion of the prestigious DFC project by June 2023, a growing movement of cost-effective double-stack container trains and incremental volumes of cement cargo through railways are prominent factors for the switch from roads to rail.

CareEdge Ratings believes that transit assurance under DFC with a reduction in transit period by 40-50% for some of the routes shall accelerate this transition. Based on estimates, inventory carrying cost constitutes 43% of the overall cost of logistics. Thus, a significant reduction in transit duration is expected to help in achieving Just-In-Time based inventory management thereby boosting the cost competitiveness of domestic goods. Nevertheless, establishing end-to-end connectivity through the electrification of feeder routes, container freight terminal and warehousing capacities are crucial for achieving the envisaged modal shift.?

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The retail asset securitisation market in India has bounced back from lows seen during the pandemic-led credit slowdown and risk aversion. The market has registered a growth of 66% in H1FY23 compared to the same period last year.

“The rated securitisation market has shown resilience in terms of rating stability and is attracting new investors to the market. We expect the market to continue this momentum and see yearly volumes in excess of INR 1.6 lakh crore aided by relatively stable domestic macros amidst global uncertainty around growth and inflation while global rates are inching up,” said Vineet Jain, Senior Director, CareEdge Ratings.

The securitisation market showed no signs of stopping with overall volume growth continuing into Q2FY23. The overall H1FY23 market volume grew by 66%. The securitisation market kept up the momentum gained in Q1FY23, with the over- all volume of around INR 39,000 crore (CareEdge estimate) in the second quarter of the fiscal (39% growth over Q2FY22). Direct assignment (DA) transactions accounted for the bulk of the volume at INR 16,500 crore with securitisation (pass-through certificate [PTC]) transactions making up the rest.

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