ICRA INSIGHT - Monthly Newsletter | October, 2023

ICRA

Published Dec 15, 2023

ICRA has projected the combined capital spending of a sample of 13 major state governments to display an impressive ~29% expansion on a year-on-year (YoY) basis to Rs. 6.2 trillion in FY2024 from Rs. 4.8 trillion in FY2023 (according to the provisional actuals or PA), while modestly missing the FY2024 Budget Estimate (BE) of Rs. 6.7 trillion. This is in spite of a likely miss in sales tax collections and grants from the Centre, relative to the states’ FY2024 targets, adjustments related to off-budget borrowings, and the planned step-down in the base borrowing limit of the state governments to 3.0% of the GSDP in FY2024 from 3.5% of the GSDP in FY2023.

The anticipated YoY surge in capex benefits from the support extended by the Government of India (GoI) to the state governments through the increase in the allocation for the Scheme for Special Assistance to States for Capital Investments to Rs. 1.3 trillion in FY2024 BE from the Rs. 0.8 trillion loans disbursed to them in FY2023. ICRA projects several of the sample states to have adequate funds for completing 90-100% of their budgeted capex in FY2024, while a few states may have to compress their spending by a sizeable extent, such as Punjab.

ICRA notes that the international prices of the three non-ferrous metals viz. aluminium, copper and zinc, have been trading near their two-year lows for the last two quarters, owing to global macroeconomic uncertainties. Further, prices are likely to remain range-bound in the remainder of FY2024 with no immediate relief in sight. While metal prices experienced a slight upturn at the beginning of the calendar year, this positive momentum was brief, as the prices have steadily declined since April 2023. In recent months, the regional premia across markets also remained subdued owing to bearish macroeconomic sentiments. However, domestic demand growth rate is expected to remain healthy at ~9% in the next two fiscals and would sharply outpace the expected rate of global demand growth. Thus, ICRA has maintained Stable outlook on the sector.

ICRA anticipates a favourable demand scenario for the road logistics sector in FY2024, aided by stable domestic consumption and investment demand. The industry1 revenue growth is pegged at 6-9% in FY2024 on an elevated base of FY2023, driven primarily by demand from varied segments like e-commerce, FMCG, retail, chemicals, pharmaceuticals, and industrial goods, coupled with the industry’s paradigm shift towards organised logistics players, post-GST and e-way bill implementation. ICRA expects the outlook for the sector to remain Stable.

Downside risks to the estimates remain from any material tapering of demand due to elevated inflation and interest rates and global supply-demand shifts impacting the Indian economic scenario. The industry debt coverage metrics are expected to ease marginally in FY2024 compared to the FY2023 levels with a likely contraction in operating margins because of inflationary input cost pressures, primarily elevated crude oil prices and debt-funded capital expenditure for vehicle replacement, required prior to the introduction of the Scrappage Policy along with a high-interest rate regime.

ICRA estimates that securitisation volumes slowed to ~Rs 47,000 crore in Q2 FY2024 from ~Rs 56,000 crore in Q1 FY2024, largely due to the exit of one key originator (viz. HDFC Limited) from the securitisation space following its merger with HDFC Bank. Nevertheless, the estimated securitisation volumes of Rs. 1.03 lakh crore for H1 FY2024 translate into a strong expansion of ~39% over the Rs. 74,000 crore recorded in H1 FY2023. Further, securitisation undertaken by the originators, excluding HDFC Limited witnessed an even higher spike of ~69% YoY to Rs. 90,000 crore in H1 FY2024 from Rs. 54,000 crore in H1 FY2023. The continued growth in the volumes is driven by the consistent rise in credit demand in the financial lending space reported by all lenders resulting in higher funding needs.

The issue concludes with regular features, monthly rating updates, upcoming ICRA events, and news features related to the company.

I hope you will find this newsletter useful and interesting.