ICRA INSIGHT - Monthly Newsletter | April, 2023
The Monetary Policy Committee (MPC) unanimously voted to keep the policy repo rate unchanged at 6.5% in its first Bi-monthly Monetary Policy Review for FY2024. While it retained the stance of ‘withdrawal of accommodation’ (5:1), it revised the wordings to “ensure inflation progressively aligns with the target, while supporting growth”. ICRA believes that the changed wording of the policy stance is intended to sharpen the focus on the 4% target for inflation, from the range of 2-6%, with inflation expected to print between 5% and 6% for most months of FY2024. India’s GDP growth was already projected to moderate in FY2024 relative to FY2023 on account of an expected slackening in external demand and its impact on the country’s exports, as well as a normalising base. Now, fresh, albeit familiar, challenges have emerged, with the spectre of a potential El Nino returning, after three consecutive La Nina years.
Trends over the last two decades suggest that El Nino conditions typically do have a negative impact on monsoons, irrespective of the intensity. Even if weak El Nino conditions develop in the second half of the season, the likelihood of a sub-par South-west Monsoon in 2023 appears high, which could weigh on the eventual crop yield and output. ICRA projects the downside from a sub-par monsoon to its FY2024 real GDP growth forecast of 6.0% at up to 50 bps.
The room air conditioner (RAC) industry is set to post a 15-20% expansion in volumes in FY2024, following the robust growth of 26-28% in FY2023. Moreover, the Government’s Production-Linked Incentive (PLI) scheme, with a committed capital outlay of Rs. 4,806 crore, received a strong response from both global and domestic RAC companies, which will help reduce imports and support the industry margins through backward integration. ICRA estimates the domestic RAC market at 6.4-6.8 million units in terms of volume and Rs. 17,000-18,000 crore by value in FY2022, having recovered from the pandemic-induced low of FY2021. In FY2023, the industry witnessed a significant improvement in sales volume owing to an elongated and intense summer season along with pent-up demand.
We also examine the pharmaceutical companies. ICRA expects the revenues for its sample set (16 companies) to grow by 6-8% in FY2024 (against the earlier expectation of 4-6%), closer to the ~7.7% growth in FY2022. primarily driven by steady performance across key markets (the US and India) and some recovery in growth in the European market. The operating profit margin (OPM) is expected to be steady at 21-22% in FY2024, supported by stabilisation of raw material prices and increased focus on complex generics/specialty molecule launches in the US market. While India and the US remain the key focus markets for Indian pharmaceutical companies, most companies have also enhanced their presence in the emerging markets to fuel their growth. Growth in the emerging markets has been driven by product launches, strong demand and depreciation of the INR against certain currencies. The same will be supported by 10-12% growth in the US market (driven by robust performance of product launches, including first-to-file molecule, Lenalidomide) in addition to the depreciation of the INR by ~8% against the USD during the fiscal, while the revenues from the European market are expected to contract marginally.
Lastly, ICRA pegs domestic tyre demand to grow by 6-8% in FY2024, supported by stable growth in the replacement segment and sustained demand momentum from the OEMs. ICRA expects the demand momentum in the OEM segment to continue in FY2024 with an estimated growth of 8-10%. The replacement segment, which forms around two-thirds of the tyre demand, is likely to witness mid-single digit growth in FY2024. While the El Nino occurrence and its potential impact on rural demand is monitorable, factors like improving economic activities, increasing freight movement, higher spend on infrastructure, absence of material price hikes, etc., shall support the growth in the replacement segment in FY2024. As export demand is expected to be subdued for the next one to two quarters, the long-term outlook remains favourable, given the strong acceptance of Indian tyres in the overseas markets.
Economy
Pivot to rate cuts appears distant.
The Monetary Policy Committee (MPC) unanimously voted to keep the policy repo rate unchanged at 6.5% in its first Bi-monthly Monetary Policy Review for FY2024. While it retained the stance of ‘withdrawal of accommodation’ (5:1), it revised the wordings to “ensure inflation progressively aligns with the target, while supporting growth”. We believe that the changed wording of the policy stance is intended to sharpen the focus on the 4% target for inflation, from the range of 2-6%, with inflation expected to print between 5-6% for most months of FY2024.
India’s GDP growth was already projected to moderate in FY2024 relative to FY2023, owing to headwinds on account of an expected slackening in external demand and its impact on the country’s exports, as well as a normalising base. Now, fresh, albeit familiar, challenges have emerged, with the spectre of a potential El Nino returning, after three consecutive La Nina years.
Air Conditioner Sector
AC industry volumes to grow 10-15% in FY2024.
In its research publication, ICRA has estimated Room Air Conditioner (RAC) industry volumes to post a further 15-20% expansion in FY2024 following the robust growth of 26-28% in FY2023. Moreover, the government’s Production Linked Incentive (PLI) scheme has received a strong response with a committed capital outlay of Rs. 4,806 crore from both global as well as domestic RAC companies, which will help reduce imports and support industry margins through backward integration.
Pharmaceutical Sector
Stability of input costs and specialty product launches to support performance of Indian pharmaceutical companies in FY2024.
ICRA expects the revenues of its sample set of 16 Indian pharmaceutical companies1 to grow by 6-8% in FY2024, primarily driven by steady performance across key markets (the US and India) and some recovery in growth in the European market. The operating profit margin (OPM) is expected to be steady at 21-22% in FY2024, supported by stabilisation of raw material prices and increased focus on complex generics/specialty molecule launches in the US market.
Tyre Sector
Revenues to grow by 7-9% for tyre sector in FY2024 with better tyre replacement demand amidst stable realisations.
ICRA pegs domestic tyre demand growth at 6-8% for FY2024, supported by stable growth in the replacement segment and sustained demand momentum in the OEM segment. ICRA expects the demand momentum in the OEM segment to continue in FY2024 with an estimated growth of 8-10%. Replacement demand, which forms around two-thirds of tyre demand, is likely to witness mid-single digit growth in FY2024. While the El Nino occurrence and its potential impact on rural demand is monitorable, factors like improving economic activities, increasing freight movement, higher spend on infrastructure, absence of material price hikes, etc., shall support the growth in the replacement segment in FY2024. ICRA expects export demand to be subdued for the next one to two quarters, although the long-term outlook remains favourable, given the strong acceptance of Indian tyres in the overseas markets.
Oil & Gas Sector
Change in domestic gas pricing formula balances the interest of consumers and producers.
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Financial Market & Banking Sector
Tight liquidity conditions may warrant a CRR cut in H2 CY2023.
Cement Sector
Easing of input costs to improve operating margins by 200 – 240 bps in FY2024.