March Newsletter

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Research Updates- February 2021

Rating Updates- February 2021

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The performance of nine out of the 15 lead economic indicators worsened in February 2021 compared to January 2021, while the remaining six indicators witnessed an improved performance, on a YoY basis. At the same time, the CPI inflation recorded a sharper-than-expected uptick in February 2021. Nonetheless the double-digit growth of GST e-way bills and early trends for March 2021 are encouraging, and suggest a steady momentum of activity in the wider economy. However, the resurgence of Covid-19 infections and associated restrictions may slacken the recovery to some extent. Moreover, the CPI inflation is likely to rise further in March 2021. On the Monetary Policy front, the Monetary Policy Committee (MPC) is likely to maintain a status quo on the repo rate through 2021, and continue with its accommodative stance at least in the next two policy reviews.

We also take a look at the recent SEBI circular on investment norms by debt mutual funds in Basel III debt instruments issued by banks. Also, valuation norms of perpetual bonds issued by banks, NBFCs and corporate have been revised. The proposals to limit the composition of the Basel III bonds in the overall AUMs could affect the incremental investment appetite of the AMCs which in turn could possibly make it challenging for the banks to raise their desired quantum of debt capital through the AT-1 and the Tier- II route. ICRA estimates this can increase the recapitalisation burden on the GoI or banks will have to curtail credit growth next year. On the valuation of Perpetual Debt Instruments (PDIs), 15 public sector banks (PSBs), apart from some private sector banks (PVBs), are the largest issuers of perpetual bonds (or AT-I bonds). Therefore, though the issue of thinly-traded PDIs and consequent valuation based on 100-year maturity is limited to a few issuers, a longer duration could impart volatility on the bonds’ value and the NAVs of MF schemes.

The residential realty sector is witnessing a K-shaped recovery, with large listed players recovering at a much better pace than smaller, unorganised players, even as the broader market remained below pre-Covid levels on a YoY basis in Q3 FY2021 and in 9M FY2021. The top 10 listed realty players witnessed a 61% YoY growth in Q3 FY2021 and 13% growth in 9M FY2021. The growth disparity has led to accelerated consolidation in the aftermath of Covid-19 and the market share of the top 10 listed realty players has nearly doubled in the current year. There are other favourable factors as well which are benefitting large players. The larger players are financially strong with low leverage, which has provided significant support in managing uncertainties as well.

Lastly, we examine the discoms whose credit profiles continue to remain stressed due to higher level of AT&C losses, inadequate tariffs in relation to their cost of supply and inadequate subsidy support from the respective state governments. Their debts have thus increased, post the UDAY scheme and are now estimated at close to Rs. 6 trillion in FY2022. This apart, there has been a build-up in dues to the power generators too. ICRA thus maintains a negative outlook on the power distribution segment. This makes the implementation of reforms in the distribution segment all the more essential, Further, the recent budget announcement of the reforms-based result-oriented scheme is directionally positive. Overall, improvement in operating efficiency, the timely tariff determination process and implementation of fuel & power purchase cost adjustment framework remain critical for the discoms.

The issue concludes with the 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.

Best Regards

K. Ravichandran
Executive Vice President & Deputy Chief Rating Officer, ICRA Ltd.

Aditi Nayar

Principal Economist, ICRA

Karthik Srinivasan

Senior Vice President & Group Head, ICRA

Shubham Jain

Senior Vice President & Group Head, ICRA

Sabyasachi Majumdar

Senior Vice President & Group Head, ICRA

Performance of majority of lead indicators slackens, CPI inflation hardens in February 2021

Dislocation of Additional Tier I market could increase the bank recapitalisation burden for the Government of India

Residential real estate witnessing a K-shaped recovery on account of accelerated consolidation

Reforms implementation critical for state-owned discoms amid rising debt levels and dues towards Gencos/IPPs

The performance of a majority of the lead indicators slackened in February 2021, even as the CPI inflation recorded a sharper-than-expected uptick.
The year-on-year (YoY) performance of nine of the 15 early economic indicators worsened in February 2021 relative to the previous month. This sub-set includes the output of scooters and Coal India Limited (CIL), vehicle registrations, non-oil merchandise exports, consumption of petrol and diesel, ports cargo traffic, rail freight traffic, as well as electricity generation. The deterioration in the performance of these sectors may be linked to a number of factors. For instance, the sequential worsening in the YoY performance of the output of scooters and CIL, electricity generation and non-oil exports in February 2021 can be attributed to a high base, and therefore may not be a cause for alarm. Moreover, the moderation in the growth of merchandise exports may be linked to renewed restrictions in various trading partners. Additionally, the dip in fuel consumption is likely to be partly linked to rising retail fuel prices.
In contrast, six indicators witnessed an improved YoY performance in February 2021, relative to January 2021, namely output of passenger vehicles (PVs) and motorcycles, generation of GST e-way bills, domestic airlines’ passenger traffic, bank deposits, and non-food bank credit. In particular, the double-digit growth of GST e-way bills at 11.6% in February 2021 and the trends in early March 2021, suggest a steady momentum of the activity in the wider economy.

The capital market regulator, the Securities and Exchange Board of India (SEBI) issued a circular revising the norms for investment by debt mutual funds in Basel III debt instruments issued by banks. The circular also revised valuation norms for the valuation of perpetual bonds issued by various class of issuers (banks, non-banking finance companies – NBFCs and corporates). As per the revised norms, mutual funds across all its schemes to own not more than 10% of the all the Basel III instruments issued by any bank. The norms also mention that no more than 10% of Net Asset Value (NAV) of the debt component of the scheme shall be issued in Basel III instruments and no more than 5% of the NAV of the debt component of the scheme shall be issued in Basel III instruments of a single issuer. In addition, the valuation of perpetual debt instruments (PDIs) henceforth shall be based on a maturity of 100 years from date of issuance instead of current practice of valuing them on time left for next call-option date.

The residential realty sector is witnessing a K-shaped recovery as per an ICRA analysis, with large listed players recovering at a much better pace than smaller, unorganized players. While the broader market remained 24% below pre-Covid levels on a Yo-Y basis in Q3 FY2021 and 39% below pre-Covid levels in 9M FY2021, the top 10 listed realty players witnessed a 61% Y-o-Y growth in Q3 FY2021 and 13% growth in 9M FY2021. This disparity in sales growth rates led to accelerated consolidation in the aftermath of Covid-19 and the market share of the top 10 listed realty players has nearly doubled in the current year, increasing from 11% of sales in FY2020 to 19% in 9M FY2021. Larger developers have been benefitting from demand consolidation and better credit availability. In terms of launches as well, their market share has increased from 11% in FY2020 to 22% in 9M FY2021.

The credit profile of the state-owned distribution utilities (discoms) continues to remain stressed due to higher level of technical & commercial (AT&C) losses compared to regulatory norms, inadequate tariffs in relation to their cost of supply and inadequate subsidy support from the respective state governments. As a result, discoms’ debt levels have again gone up post the implementation of UDAY scheme by Government of India in FY2016 and are now estimated at close to Rs. 6 trillion in FY2022. This apart there has been a build-up in dues to power generators by 30% to Rs. 1.27 trillion as of December 2020 on a year-on-year (Y-o-Y) basis.
ICRA thus maintains a negative outlook on the power distribution segment. Nonetheless, the credit profile of several privately-owned discoms remains healthy supported by superior operating efficiencies, favourable demographic profile and timely pass-through of cost variations to consumers.