October 2021

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.

Vinutaa S

Assistant Vice President & Sector Head, Corporate Sector Ratings, ICRA

Views on Hospitality Industry

Deep Inder Singh

Vice President, ICRA

Views on Infrastructure Finance

ICRA Research Updates
October 2021
 
 
Comments on RBI’s Fourth Bi-Monthly Monetary Policy: Liquidity normalisation signalled amidst status quo on rates and stance
Indian Chemical Industry: Building Resilience in MSMEs to Strengthen the Indian Chemical Industry
Role of Financial Markets: Building India for a new world
Indian Retail Industry: Fashion retail witnesses early trends of recovery, post reopening; sector likely to recover to pre-Covid level of sales in FY2023
Rating
Updates
 
 
ICRA in News
October 2021
 
 
Mint | October 18, 2021

Has Domestic air traffic demand recovered?

Business Standard | October 13, 2021

Cement demand to remain strong in FY22 on rural, infra requirement: ICRA

The Economic Times | September 19, 2021

Relaxed norms for residential mortgage backed assets to aid securitisation : ICRA’s Dafria

Upcoming Events
 
Improving economic scenario augurs well for the road logistics sector
 

Aditi Nayar

Chief Economist, ICRA

Step towards liquidity normalisation amidst status quo on rates and stance

Given the conflicting signals on the inflation outlook amid a gradually strengthening economic recovery, the October 2021 review of the Monetary Policy Committee, as well as the accompanying announcements of the Reserve Bank of India were on expected lines. The MPC unanimously maintained a status quo on the repo rate and kept the Monetary Policy stance accommodative with a vote of 5:1, in line with the split seen in the August 2021 meeting.
As expected, the RBI refrained from hiking the reverse repo rate without having adequately prepared the markets for the same.

Vinay Kumar G

Assistant Vice President & Sector Head, Corporate Sector Ratings, ICRA

GST levy on annuity payments of BOT HAM projects to have limited impact on project cash flows; NHAI to reimburse additional tax burden, impact on NHAI estimated at ~Rs. 2300-2600 crore

The GST council through its clarification dated June 17, 2021 and vide subsequent policy circular issued by National Highways Authority of India (NHAI) on September 01, 2021, has made 12% GST applicable on annuity payment for HAM projects, received during the operations period. The concessionaires can use the accumulated input tax credit (ITC) during the construction period to set off the GST liability on annuity payments received during the operations period. with NHAI reimbursing the net impact of additional GST on annuity (adjusted for ITC) to the concessionaire under change in law, there would be no impact on the cashflows, project debt coverage and return metrics of the concessionaire.

Manushree Saggar

Vice President & Sector Head, Financial Sector Ratings, ICRA

Resilient earnings in FY2021; Covid 2.0 impacts asset quality in Q1 FY2022

ICRA notes that Covid 2.0 has exerted further pressure on the asset quality indicators for these players. With stricter lockdowns across various states in Q1 FY2022, the collections for these AHFCs were impacted and unlike the moratorium and restrictions on bucket movement which were available in Q1 FY2021, there were no such dispensations this time. Hence delinquencies, especially, in the softer buckets shot up significantly.

Vinutaa S

Assistant Vice President & Sector Head, Corporate Sector Ratings, ICRA

Hotel industry recovers faster than expected post Covid 2.0

While the first few months of FY2022 were impacted because of Covid 2.0, the industry witnessed faster-than-expected ramp up, starting from July 2021 with occupancy of 46-48% as against 18-20% in Q2 FY2021. This was because of easing restrictions, high pace of vaccination and pent-up demand, which resulted in leisure travel within the country. The recovery has been at a sharper pace post Covid 2.0 compared to last year’s lockdown. Further, travel during the festive season will act as a key demand booster for the industry in Q3 FY2022.
ICRA continues to have a negative outlook on the Indian hotel industry, as the sustenance of the demand pickup in the recent months remains to be seen.

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