ICRA INSIGHT - Monthly Newsletter | May, 2023
February 2023 witnessed quite a few developments related to the state governments’ fiscal health. The GoI estimated a sharp drop in the off-budget debt of the states for FY2023 to Rs. 185 billion, driven by Telangana and Kerala. This was not subjected to strict oversight prior to the guidelines issued by the GoI in FY2022. The decline was a desired outcome of the steps taken by the GoI in FY2023 to curtail the off-budget debt of some of the states, which had risen sharply in recent years. This had posed concerns about the potential servicing of these debts by the state governments as it could materially widen their deficits and compress the fiscal space available for other priorities at the time of the servicing.
In another positive development, ICRA saw the GoI release a higher Rs. 812 billion to the state governments in FY2023 under the ‘Special Assistance as Loan to States for Capital Expenditure’ scheme (interest-free capex loans) relative to the Rs. 760 billion that it had indicated in the Revised Estimates (RE) for FY2023 at the time of presentation of the Union Budget in February 2023. Subsequently, there was a lull in state government borrowings in April 2023, which may have been linked to a delay in the receipt of the borrowing permission by some states. It would be interesting to see the borrowing trends in FY2024 as the net borrowing ceiling (NBC) is set to decline to 3.0% of the gross state domestic product (GSDP) from 3.5% of the GSDP in FY2023 and a higher 4.0% of GSDP each in FY2021 and FY2022.
Shifting attention to the corporate sector, the telecom tower industry continues to face headwinds in the form of elongated receivables, on account of delays in payments by some of the telecom service providers. ICRA has revised the industry outlook to Negative from Stable. As per ICRA, the gross receivable days are likely to remain above the ICRA’s outlook revision threshold of 80 days. The stretch in the working capital cycle resulted in a moderation in the liquidity profile of the telecom tower industry and increased the reliance on external debt, which, coupled with the provisions for doubtful receivables, is likely to weigh on the return metrics of the industry. ICRA expects the revenue growth of the tower companies to remain low at 3-4% with operating margins (adjusting for energy revenues) at around 60%, going forward (lower than 75-77% in the past).
Meanwhile, ICRA expects a substantial ramp-up in road execution activity in FY2024 by 16-21% to 12,000-12,500 km in the backdrop of a healthy pipeline of projects, increased capital outlay by the Government of India and focus on project completions, ahead of the General Elections. ICRA projects the toll collection growth to be around 6-9% in FY2024, primarily supported by a 4-5% growth in traffic. While the bid competitive intensity remained high for EPC projects, this trend caught up with the HAM projects as well in FY2023 with about 40% of the HAM bids at a discount to the authority bid price. The median premium declined from above 20% levels during FY2019 to FY2021 to 15% in FY2022 and 4% in FY2023.
ICRA expects the Indian commercial vehicle (CV) industry’s volumes to grow by 7-10% in FY2024, supported by replacement demand, pick-up in mining, infrastructure, and construction activities, and overall healthy fleet utilisation levels. This is despite the 5% YoY and 41% sequential contraction in volumes in April 2023 due to expected price increases with the transition to BS6 2.0 and the associated pre-buying in March 2023. The growth in FY2024 would follow a year of healthy demand in FY2023, wherein the industry volumes expanded by more than 33%, supported by a favourable base, as well as a healthy pick-up in macroeconomic activity. The mandatory scrapping of Government vehicles older than 15 years, with effect from April 1, 2023, is likely to provide some support to the industry volumes.
On the BFSI space, private insurers continue to gain market share as the solvency position of PSU insurers worsens. The private insurers’ combined ratio is likely to improve and the RoE is expected at 11.2-12.8% in FY2024 and 12.5-13.9% in FY2025. Most PSU insurers, however, are expected to witness a high combined ratio, resulting in net losses, though it will be lower compared to the last few years. The capital requirement of three PSU general insurers (excluding New India) is estimated at a sizeable Rs. 172-175 billion to meet a solvency of 1.50x as of March 2024.?While the solvency profile of private insurers remains comfortable in relation to the regulatory requirement of 1.50x, the high net losses incurred by PSU insurers led to a negative solvency ratio of 0.25x (excluding fair value changes on investments) as of December 2022. The solvency issue of PSU insurers has previously been supported by infusions by the Government of India, which provided Rs. 174.5 billion over a 3-year period till FY2022.
Economy
State government borrowings set to rise in FY2024.
There have been many developments in the recent months related to state government fiscal health, such as a moderation in their off-budget borrowing, a better-than-expected utilisation of the funds under the capex loan scheme in FY2023, and divergence in actual monthly borrowings vs. the indicative amount.
In February 2023, the GoI estimated a sharp drop in the off-budget debt of the states for FY2023 to Rs. 185 billion, driven by Telangana and Kerala. The off-budget debt was not subjected to strict oversight prior to the guidelines issued by the GoI in FY2022. As per the GoI’s guidelines issued in FY2022, the incremental off-budget debt of FY2022 would be adjusted over a four-year period of FY2023-26 and the off-budget borrowings made from FY2023 onwards shall be considered as borrowings made by the state itself for the purpose of issuing the consent under Article 293(3) of the Constitution of India.
Telecom Tower Sector
Outlook for telecom tower industry revised to Negative as elongated receivables weigh on return metrics.
ICRA has revised the outlook on the telecom tower industry to Negative from Stable. The industry has been facing headwinds in the form of elongated receivables, on account of delays in payments by some of the telecom service providers. As per ICRA, the gross receivable days are likely to remain above the ICRA’s outlook revision threshold of 80 days. The stretch in the working capital cycle resulted in moderation in the liquidity profile of the telecom tower industry and increased the reliance on external debt, which, coupled with the provisions for doubtful receivables, is likely to weigh down on the return metrics of the industry.
Roads & Highways Sector
Road construction to witness 16-21% jump in FY2024, ahead of General Elections.
ICRA expects a substantial ramp-up in road execution activity in FY2024 by 16-21% to 12,000-12,500 km, in the backdrop of a healthy pipeline of projects, increased capital outlay by the Government of India and focus on project completions, ahead of the General Elections. ICRA projects the toll collection growth to be 6-9% in FY2024, primarily supported by a 4%-5% growth in traffic.
Commercial Vehicle Sector
CV Industry hit a speed bump in April 2023; path ahead may be smoother.
ICRA expects the Indian commercial vehicle (CV) industry volumes to grow by 7-10% in FY2024, supported by replacement demand, pick-up in mining, infrastructure, and construction activities, and overall healthy fleet utilisation levels. This is despite the 5% YoY and 41% sequential contraction in volumes in April 2023 due to expected price increases with the transition to BS6 2.0 and associated pre-buying in March 2023. The growth in FY2024 would follow a year of healthy demand in FY2023, wherein the industry volumes expanded by more than 33%, supported by a favourable base, as well as a healthy pick-up in macroeconomic activity. The scrappage policy, which was announced in March 2021, has been implemented from April 1, 2023, and is likely to contribute to the growth of new CV sales. It is being implemented in phases, primarily with a view to reducing the carbon footprint. In the first phase, it has been proposed to mandatorily scrap Government vehicles older than 15 years from April 1, 2023, which has a potential to replace ~9 lakh vehicles. The second phase mandates scrapping based on vehicle fitness. Accordingly, heavy commercial vehicles (HCVs) older than 15 years and other vehicles older than 20 years need to undergo a mandatory fitness test from October 1, 2024.
General Insurance Sector
Private insurers continue to gain market share; solvency position of PSU insurers worsens.
ICRA expects the industry’s gross direct premium income (GDPI) to exceed Rs. 3.0 trillion by FY2025, up from Rs. 2.4 trillion in FY2023. Private insurers’ combined ratio is likely to improve and RoE is expected at 11.2-12.8% in FY2024 and 12.5-13.9% in FY2025. Most PSU insurers are expected to witness high combined ratio resulting in net losses, though it will be lower compared to last few years. Moreover, the capital requirement of three PSU general insurers (excluding New India) is estimated at a sizeable Rs. 172-175 billion to meet solvency of 1.50x as of March 2024, assuming 100% forbearance on FVCA.
Sugar Sector
Domestic sugar prices likely to remain elevated supported by global demand-supply situation.
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Power Sector
Thermal PLF uptrend to continue in FY2024, with demand growth of 5.0-5.5%.
Ferrous Metals Sector
Steel prices slide; but costs subside, cushioning margins from a rough ride
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