July 2022

From Chief Ratings Officer’s Desk

The recent Index of Industrial Production (IIP) and CPI data demonstrate uneven domestic demand and inflation. The IIP grew by 19.6% YoY in May 2022, matching ICRA's prediction of 19%, on the subdued base of the second wave of Covid-19. Manufacturing and electricity led the pick-up in industrial growth in May 2022, followed by mining. Except for consumer non-durables, the output of the other use-based categories expanded by double-digits in May 2022. The IIP growth will likely drop to 11–13% in June 2022, as the base normalises. At the same time, the CPI inflation stood at 7.01% in June 2022, marginally lower than 7.04% in May '22, yet still well above the Monetary Policy Committee’s (MPC's) 6% upper threshold. The recent declines in global commodity, food, edible oil, and vegetable prices are encouraging, portending that inflation may drop to 6.6-7% in the second quarter of FY2023. In the next two policy reviews, ICRA expects the MPC to raise the policy rate by 35 bps and 25 bps, respectively, followed by an extended pause to limit inflationary pressures without sacrificing growth.

We also examine the performance of ICRA-evaluated 583 listed enterprises (excluding finance companies) in Q4 FY2022. Sales increased 22.7% year on year and 10.7% sequentially. These trends appear in several domains. Healthy demand and price hikes across multiple industries led to increased realisation levels for corporate India, while operating margins were at a six-quarter low. In addition to rising commodity prices, energy inflation, supply chain disruptions and rural stagnation hurt demand, sales, and profits. ICRA forecasts that Q1 FY2023 performance from India Inc would be impacted by price increases, which could harm consumer morale and demand. While credit metrics improved sequentially in Q4 FY2022, the cumulative impact of these challenges on debt was negative.

Given the Government's push for infrastructure development, metro rail projects could offer Rs. 800 billion in construction opportunities over the next five years with civil construction costs accounting for 35%-45% of the total outlay. Construction companies are likely to benefit during the next five years. Due to a relatively smaller number of participants, competitive intensity is projected to stay moderate in the near to medium term, benefiting incumbents. Since most orders are funded by multilateral organisations and Central Government appropriations, industry participants' cash conversion cycles will be comfortable.

Lastly, we examine the cost of solar PV modules (Mono PERC) which has risen by over 40% due to delays in China's manufacturing value chain and rising polysilicon prices, a key module constituent. Solar power projects awarded in the last 12–18 months are facing cost pressures due to rising solar PV cell and module costs and the application of basic customs duty (BCD) on imported cells and modules. Other key concerns include interest rate risk and risk of INR depreciation against USD. Despite near-term headwinds, ICRA’s renewable energy outlook is Stable.

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
Chief Ratings Officer, ICRA Ltd.

Rahul Agrawal

Rahul Agrawal

Senior Economist, ICRA

Economic Activity in June 2022

Anil Gupta

Anil Gupta

Vice President & Co-Group Head, Financial Sector Ratings, ICRA

Outlook on the Banking Sector for FY2023

ICRA Research Updates
July 2022
Oil & Gas: Additional cess on crude production credit negative for incumbents
Airlines: Domestic air travel in June 2022 short by ~12% compared to pre-Covid levels; international traffic for Indian carriers surpasses pre-Covid levels by ~18%
Hospital: Introduction of GST on non-ICU hospital beds to be credit-neutral for hospital sector
State Government Finance: Weighted average cost of SDL rises to 7.96% from 7.89%, with more than 70% of issuance in longer tenors
ICRA in News
July 2022
The Economic Times | 16th July, 2022

Imports Eclipse Exports Growth, Fuel CAD Fears

Mint | 19th July, 2022

Road project may be completed six years later: ICRA

Fortune India | 20th July, 2022

Indian pharma majors to hit US growth bump in FY23

Upcoming Events
Moody's-ICRA Webinar on Global Pharmaceutical Industry
Aditi Nayar

Aditi Nayar

Chief Economist, ICRA

Industrial growth expectedly spikes on low base, inflation remains flat albeit softer than feared

The recent data prints for the Indian economy, namely the growth in the Index of Industrial Production (IIP) and the CPI inflation point to a continuing unevenness in domestic demand as well as inflationary pressures. The year-on-year (YoY) growth in the IIP spiked to a 12-month high 19.6% in May 2022, from the revised 6.7% in April 2022, led by the subdued base of the second wave of Covid-19, and printed in line with our forecast (+19.0%). The sharp sequential increase in industrial growth in May 2022 was led by that of manufacturing and electricity, with a more modest uptick reported from mining activity, relative to April 2022. In terms of the use-based categories, all the sub-indices, except consumer non-durables, which had witnessed a limited disruption owing to the second wave of Covid-19 in May 2021, displayed a high double-digit growth in May 2022.

Kinjal Shah

Kinjal Shah

Vice President & Co-Group Head – Corporate Ratings, ICRA

India Inc. pens a story of revenue growth even as it grapples with margin headwinds

The aggregate revenues of 583 listed companies evaluated by ICRA (excluding financial sector entities) grew by 22.7% Y-o-Y and 10.7% on Q-o-Q basis during Q4 FY2022. These trends were visible across sectors, although to a varying degree. The revenue growth of Corporate India was expectedly positive aided by economic growth due to healthy demand scenario and price hikes seen across several sectors, leading to higher realization levels. While sectors like airlines, construction, iron & steel, oil & gas, among others had significant Q-o-Q growth in Q4 FY2022, few other sectors like hotels, retail and FMCG witnessed sizeable sequential revenue decline during the quarter.

Abhishek Gupta

Abhishek Gupta

Assistant Vice President & Sector Head, Corporate Ratings, ICRA

Metro rail projects offer Rs. 80,000 crore business opportunities to construction firms over the next five years

ICRA in its recent research report estimates that metro rail projects will generate Rs. 800 billion of opportunities for construction companies over the next five years. In India, 15 cities have operational metro networks of about 746 km (many of which are undertaking network expansion), while another seven cities of about 640 km have under-implementation metro projects. This apart, 1,400 km of metro rail projects worth Rs. 2 trillion are in the approval/proposal stage; of which a 352-km of new metro network has been approved, with the balance being in the proposal stage.

Girishkumar Kadam

Girishkumar Kadam

Senior Vice President & Co-Group Head, Corporate Ratings, ICRA

Elevated PV cell & module prices and hardening interest rates pose cost pressures for solar power developers in the near term

The cost of solar PV modules (Mono PERC) has climbed-up by over 40% to 27-28 US$ cents per watt in the past 18 months. This was mainly driven by the disruption in operations across the value chain of the solar PV module manufacturing in China and the spike in the cost of polysilicon, a key input for module producers. According to a recently released ICRA note, the elevated cell & module prices are contributing to the cost constraints facing the solar power developers, even as the supply chain issues are beginning to ease.

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