IN THIS EDITION

 
     
 

 

 
     
 

 

 
     
 

 
 

In this edition of ICRA Insight we look at our forecast for economic growth for the current year. If the temporal and spatial distribution of the monsoons is normal, we expect the agricultural GVA to grow by 3-3.5% during the year. While this, along with the extent to which the farmers benefit from the increased MSP, will spur rural demand, urban consumption would possibly continue to be boosted because of the benefits of pay revision for state government employees. The benefits of the Goods and Services Tax (GST) are also likely to become broad-based in FY2019. On the negatives, apart from issues with public sector banks, we will have to contend with rising bond yields and the possibility of further monetary tightening, which could impact the investment recovery in the capital-intensive sectors. Similarly, the benefits of rupee depreciation on export growth may be offset by increased trade protectionism. On the balance, we expect the GDP to recover modestly to 7.1% this year from 6.7% in the previous year.

We also examine the banking sector where public sector banks (PSBs) are expected to continue showing large losses, the magnitude of which would be critically dependent on the haircuts required on stressed assets undergoing resolution. Driven by record losses of Rs 948 billion in Q4 FY2018, the early recall of ATI bonds and adjusted for deferred provisions and losses, the Tier I capital of 11 PSBs stood at 7.5%, indicating their limited ability to absorb further losses. ICRA estimates the PSBs are likely to require a capital of Rs 1.2-1.8 trillion during FY2019 if they were to meet regulatory capital ratios, including capital conservation buffers (CCBs). On the positive side, with a revised framework for resolution of stressed assets, the quantum of unrecognised stressed assets has reduced with Special Mention Accounts (SMA)- 2 accounting for 1% of gross advances as on March 2018 as compared to 2% as on September 2017.

Finally, ICRA Insight examines the impact of the Goods & Services Tax on the roads logistics sector, a year after its implementation. As per ICRA’s survey of 50 transport companies and 15 consumer-oriented companies, the findings are encouraging, in terms of improvement in turnaround time and efficiencies. The trends in warehouse consolidation have been mixed, while logistics efficiency is a key factor, other sector-specific nuances have also been influencing the extent and pace of consolidation in each sector. However, the full cost savings, due to reduced transportation, warehousing costs and associated efficiencies can only be expected to be realised over the longer term.

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 informative.

Best Regards

Anjan Ghosh
Chief Rating Officer, ICRA Ltd

 
 
 
 
     
  Shallow recovery in economic growth likely in FY2019  
 

Although the monsoons have covered the country ahead of schedule, the rainfall deficit stood at 7% of the LPA as on July 2, 2018, contributing to a YoY decline in the pace of sowing. The outcome of the monsoons will be vital for replenishing reservoir and ground water levels, and supporting timely sowing and eventual yields. If the temporal and spatial distribution of the monsoon is normal, agricultural GVA is expected to grow by 3-3.5% in FY2019. The extent of revision in the minimum support prices (MSPs) and whether there is a rise in the proportion of farmers that are able to realise a market price for their crops that is closer to the announced MSPs, would critically influence farmer incomes and demand in the year ahead.

The benefits of the pay revision for state government employees are likely to continue in FY2019, boosting urban consumption demand. Such trends are likely to bolster capacity utilisation in various sectors, and a broad-based capacity addition by the private sector may emerge in H2 FY2019. However, higher average prices of crude oil and various fuels, as well as the risks posed by the revised MSPs, could dampen the purchasing power of the consumers as well as earnings across the various sectors.

The benefits of the Goods and Services Tax (GST) are likely to become more broad-based in FY2019. An improvement in compliance, post the introduction of the e-way Bill, is likely to boost Government revenues. Moreover, a rise in Government spending at the Central and state level is expected to support economic activity. However, there is a risk of pre-election announcements from the state and the Central Governments, that may enhance consumption growth at the cost of much-needed capital and infrastructure spending.

The adequate recapitalisation of public sector banks would be critical to support lending growth and investment revival in the economy. Assuming a deposit growth of 6.5-7.5% for FY2019 and a credit-to-deposit ratio of 75-76%, ICRA estimates the credit growth of the banking system to be moderate at 7-8%, lower than the expected nominal GDP growth of 11.5%. If the availability of capital constrains the credit growth of the PSU banks, particularly those under the PCA framework, it may hamper the ability of lower rated firms and SMEs to access financing. Higher rated corporates are likely to tap the domestic bond market (despite elevated domestic bond yields) and external commercial borrowings (despite higher global rates) for their financing needs. While domestic retail bond issuances may regain flavour, as a possible means to mobilise resources for investment purposes, their size may be limited, relative to the financing needs of the economy.

Bond yields have already hardened, and the possibility of further monetary tightening may push up bank lending rates in H2 FY2019. Accordingly, interest costs may rise in the current fiscal, weighing upon margins and the strength of the investment recovery expected in H2 FY2019.

The rupee depreciation would support export growth, although there has been a heightened risk of trade wars in the recent weeks. On balance, ICRA expects the GDP and GVA growth to record a shallow recovery to 7.1% and 7.0%, respectively, in FY2019, from 6.7% and 6.5%, respectively, in FY2018.

 
     
  PSBs to continue report losses in FY2019; haircuts upon resolution key to their capital requirements  
 

Tough times for the Indian banking sector are set to continue with the Public sector banks (PSBs) estimated to report loss before tax of Rs 419-1016 billion during FY2019 depending on the haircuts they may have to undertake on stressed assets undergoing resolution. This is compared to a loss before tax of Rs 1.30 trillion that PSBs reported in FY2018. Cumulatively, the losses will surpass the budgeted capital infusion of Rs 1.55 trillion for PSBs by Government of India (GoI) during FY2018 and 2019.

Driven by record losses of Rs 948 billion during Q4FY2018 and early recall of additional tier 1 bonds, the capital ratios of PSBs stands severely impacted despite capital infusion of Rs 900 billion by GoI during FY2018. Adjusted for deferred provisions and losses, the Tier 1 capital ratio of 11 PSBs stood weak at ~7.5% as against minimum regulatory requirements of 7.0% indicating limited ability of weak PSBs to absorb further losses. ICRA estimates the PSBs to require capital of Rs 1.2-1.8 trillion during FY2019, if the banks were to meet regulatory capital ratios including capital conservation buffers (CCBs). With budgeted capital much lower at Rs 550 billion for FY2019 and impaired ability of banks to raise capital from markets, ICRA expects many PSBs to not maintain CCBs thereby constraining their ability to grow.

On the positive side, with revised framework for resolution of stressed assets, the quantum of un-recognised stressed assets in the banking system has reduced with Special Mention Accounts (SMA) – 2, i.e. accounts overdue by 61 days now accounting for ~1.0% of gross advances as on March 2018 as compared to ~2.0% as on September 2017. Further with the ongoing resolution of stressed assets, ICRA mentions in its report that the Gross NPAs and Net NPAs for banking sector are likely to reduce to ~10% and 4.3% respectively by March 2019, which otherwise could have been higher at 12.2% and 5.6% respectively. This is as compared to GNPA and NNPA of 11.6% and 6.2% respectively for the sector as on March 2018.

With strong capital position, the ability of PVBs to pursue credit growth will continue to be driven by their abilities to mobilise deposits given their high credit/deposit (CD) ratio of 89% as on March 2018 and incremental CD ratio of 99% during FY2018. With steady growth of 15-17% in advances for PVBs during FY2019 and expected decline in credit provisions, the profitability and return on equity is expected to improve during FY2019 from last year levels. In our view, the net profits of PVBs can grow at 30-40% during FY2019 resulting in ROEs of 11.3-12.5% during FY2019 as against 10.2% during FY2018.

 
     
  Full impact of GST on road logistics sector, may prove beneficial in the long term  
 

The Goods and Services Tax (GST) impact, implemented in July 2017, has been a positive for the roads logistics sector. As per ICRA’s comprehensive survey of 50 transport companies pan-India and 15 consumer-oriented companies across various sectors, the findings have been encouraging, though a lot remains to be achieved.

As was expected, the removal of inter-state checks has resulted in a significant reduction in waiting/idle time for trucks, thereby improving their turnaround time and efficiencies, as confirmed by 60% of the transporters. So far there has been about 18-20% improvement in turnaround time because of the GST- mostly in states such as Kerala, West Bengal, Maharashtra, Madhya Pradesh and Bihar, which were earlier infamous for the long waiting time spent at their inter-state borders.

TThe trends in warehouse consolidation, have been mixed. While logistics efficiency is certainly a key factor influencing the location of warehouses, other sector-specific nuances have also influenced the extent and pace of consolidation in each sector. Sectors like FMCG and consumer durables have reported limited consolidation, as maintenance of de-centralised warehouses remains necessary to ensure product availability and timely customer servicing. On the other hand, sectors like tile manufacturing, which have a more predictable demand and can be served from a centralised location, have already consolidated their warehouses. Close to 50% of the consumer-oriented companies indicated that consolidation has either happened or is in the pipeline. Further, many companies are utilising supply chain management companies in redesigning and revamping their networks.

The E-way Bill, implemented from April 2018, too has had a positive feedback from the transporter community with two-thirds of the transport companies agreeing on more systematic operations with significant time savings and paperwork reduction, due to the digitisation.

Though the initial feedback is positive it ought to be noted that the full benefit of the GST on the road logistics sector and the costs savings due to reduced transportation, warehousing costs and the associated efficiencies can only be expected to be realised over the longer term. About 10% of the transporters have indicated that their overall costs have reduced post GST implementation, while others suggested that costs were increasing. In spite of these short-term pains, in the long term a reduction in logistics costs is a certainty.

 
     
 
           
 
   
m Rating Updates for the month of June 2018
   
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