From Dy. CRO’s Desk

As expected, the Monetary Policy Committee (MPC) has maintained a status quo on the repo rate in the October 2021 review, given the conflicting signals on the inflation outlook amid a gradually strengthening economic recovery. Further, it paused the Government-securities acquisition programme (G-sap) and announced a calendar for 14-day variable rate reverse repo (VRRR) auctions. With risks broadly balanced, the inflation forecast for FY2022 has been paired to 5.3% from 5.7% done in August 2021 review. The MPC’s current accommodative stance will continue till demand-side recovery factors become the clear driver. Expectations of a 9.5% GDP expansion in FY2022 too have been unchanged. The trends during the festive season will influence the next review in December. On the interest rate outlook of ICRA, the 10-year yield rates are likely to range between 6.25-6.4% in the remainder of this quarter.

We also examine performance of the hotel industry, wherein demand has recovered at a sharper pace post Covid 2.0 compared to last year’s lockdown during Q2 FY2022. The revenues are expected to improve by 85- 90% sequentially in Q2 FY2022. Demand was supported by a faster-than-expected ramp up because of lower restrictions, high vaccination pace and pent-up demand, which resulted in revenge travel. Further, travel demand during the festive season will boost the industry in Q3 FY2022. Operating profits in FY2022 will be aided by improved operating leverage and sustenance of cost optimisation measures undertaken last fiscal. However, pre-Covid revenues and profits are likely only by FY2024.

The GST council, through a recent clarification has made 12% GST applicable on annuity payment for HAM projects, received during the operations period. So far, the GST was applicable on the grants received from the authority during construction period and the O&M payments received during the operations period. Further, as the NHAI would be reimbursing the net impact of additional GST on annuity (adjusted for ITC) to the concessionaire, there would be no impact on their cash flows, projected debt coverage and return metrics. But the estimated cash outflow of the NHAI would be between ~Rs. 2300- Rs. 2600 crore over a period of 15 years.

Lastly, we examine the affordable housing finance companies (AHFCs) segment, which has performed better than the overall housing finance industry, during the pandemic period. The AHFC segment is supported by the largely underpenetrated market, favourable demographic profile, Government thrust on housing and a favourable regulatory/tax regime.

Their loan book is expected to grow 12-15% for FY2022. However, players are grappling with asset quality pressures and lower collection efficiencies due to Covid 2.0; the 30+ days past due (dpd) for some select AHFCs increased to 7.2% as on June 30, 2021 compared to 5.1% as on March 31, 2021. In the immediate term, steady improvement in collection efficiencies since June 2021 will contain the forward bucket for most players. In the long term, improving operating efficiencies and controlling credit costs would matter.

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.

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