December 2021

From Chief Ratings Officer’s Desk

The Monetary Policy Committee (MPC) has maintained a status quo on the repo rate and the policy stance in its December 2021 review of the Monetary Policy, following the fresh uncertainty generated by the Omicron variant. Moreover, the reverse repo rate has been kept unchanged by the Central Bank. While the MPC kept its GDP and inflation forecasts for FY2022 unchanged at 9.5% and 5.3% respectively, there was some recalibration of the quarterly forecasts. In ICRA’s view, the MPC is likely to continue the accommodative stance until the economic recovery becomes strong and sustainable, as long as the CPI inflation remains below the 6% upper threshold of the medium-term target of 2-6%.

We also examine the steel sector, which is expected to post lower earnings from Q3 FY2022 on the back of higher input costs, notably that of coking coal. Further, softening domestic steel prices since the last quarter will also affect the profitability. However, the industry’s absolute profitability metrics are likely to stay healthy, prompting ICRA to maintain a “Positive’ outlook. Demand-wise, recovery seems strong both globally (ex-China) and domestically, however threat of the Omicron variant derailing recovery looms large. Overall, the financial leverage is at its lowest and the industry has also resumed its capex cycle after a long gap.

The total New Business Premium (NBP) growth for the domestic life insurance industry has continued to remain subdued at 4% in 7M FY2022 or Rs. 1.53 trillion due to the localised lockdown in Q1 FY2022. The trend has continued from FY2021. However, ICRA estimates NBP to grow 14% in FY2022 to Rs. 3.18 trillion, with the growth picking up in H2. The outlook on the sector continues to remain stable. The profitability of private players is expected to remain subdued in FY20022 due to higher claims in Q1. LIC’s profit, however, has improved supported by both higher premiums and an improvement in investment income.

Lastly, we examine the prospects of the domestic two-wheeler (2W) industry. Volumes have shrunk by 1-4% YoY in FY2022, following a weak festive season performance. Also, volumes in 7M FY2022 remain flattish on a YoY basis. Multiple factors like continuous price increases, rise in petrol prices coupled with rural and urban-specific reasons have impacted industry volumes. Financiers too are cautious due to the rise in delinquency levels. The exception to this has been the demand for premium 2W. The OEMs have faced supply constraints due to semi-conductor chip shortages. Major expansion and capex plans are expected to be deferred till a meaningful demand recovery.

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.

A M Karthik

Vice President & Sector Head - Financial Sector Ratings, ICRA

Views on PCA Framework for NBFCs

Sainath Chandrasekaran

Assistant Vice President, Financial Sector Ratings, ICRA

Views on Bank Based Brokerage

ICRA Research Updates
December 2021
Non-Bank Finance Companies and Housing Finance Companies: Reported NPAs to spike in the near term in view of the RBI’s revised NPA recognition and upgradation norms
Indian Sugar Sector: Firm sugar prices to allow absorption of sharp increase in state advised price; Government support still critical
Index of Industrial Production: IIP rose by tepid 3.2% in October 2021, dampened by YoY contraction in capital goods, consumer durables
Comments on RBI’s Fifth Bi-Monthly Monetary Policy Statement: Omicron uncertainty extends status quo on rates and monetary policy stance
ICRA in News
December 2021
Mint | December 15, 2021

RBI will rein in fragile NBFCs to avert busts

Mint | December 15, 2021

WPI inflation hits 5-month high due to rise in oil prices

Times of India | December 14, 2021

Retail inflation up by 4.9% in Nov on oil, fuel prices

Bloomberg Quint | November 12, 2021

States To Face Revenue Loss Of Rs 44,000 Crore After Fuel Tax Cuts

The Economic Times | November 11, 2021

Evergrande saga may shorten the length of the ongoing steel upcycle: ICRA

Upcoming Events
Watch this space for upcoming events

Aditi Nayar

Chief Economist, ICRA

Subtle shift in growth-inflation balance

With the fresh uncertainty engendered by the Omicron variant, the Monetary Policy Committee (MPC) expectedly maintained a status quo on the rates and stance in the December 2021 review of the Monetary Policy. Moreover, the number of dissents to maintaining the stance as accommodative remained stable at one vote out of the six MPC members. While keeping the reverse repo rate unchanged, the Reserve Bank of India (RBI) emphasised the objective to re-establish the 14-day variable rate reverse repo auction as the chief liquidity management operation.

Jayanta Roy

Senior Vice President & Group Head, Corporate Sector, ICRA

Higher input costs and softening steel prices to sequentially impact profitability of steel companies from Q3 FY2022

The industry earnings are expected to trend downwards from the current quarter, Q3 FY2022, with higher input costs, especially for coking coal, creeping into the P&L of steel companies following spot prices skyrocketing to record levels. Further domestic steel prices have started to soften from the second quarter highs, which will also adversely impact the industry’s profitability. Nonetheless, the industry’s absolute profitability metrics will still remain at healthy levels in the next twelve months, leading the ratings agency to maintain a ‘Positive’ outlook for the sector. During the last quarter, Q2 FY2022, despite a sequential moderation in steel spreads due to cost pressures, the domestic steel industry was able to record another all-time high quarterly profit, largely supported by higher deliveries following the recovery in economic activity post the second wave.

Sahil Udani

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

Profitability of life insurance players impacted in Q1 FY2022 due to pandemic; NBP growth to resume in H2 FY2022

The total New Business Premium (NBP) growth for the domestic life insurance industry has continued to remain subdued at 4% in 7M FY2022 or Rs. 1.53 trillion due to the localised lockdown in Q1 FY2022. The growth had tapered down to 7% (Rs. 2.78 trillion) in FY2021, compared to a 21% growth in FY2020. A closer look between the growth rates indicates a sharp decline in the NBP growth for LIC in FY2021. Private sector NBP had slowed down in FY2021, but yet showed a positive growth (8% in FY2021 vs. 9% in FY2020), which accelerated in 7M FY2022 (25%) due to strong growth in the individual business.

Rohan Kanwar Gupta

Vice President & Sector Head, Corporate Sector Ratings, ICRA

Festive season fails to bring cheer to the two-wheeler industry; domestic volumes estimated to contract 1-4% in FY2022

The domestic two-wheel (2W) volumes are expected to contract by 1-4% Y-o-Y in FY2022, following a weak festive season performance for the industry. This is further confirmed by the fact that the domestic volumes of 8.05 million in 7M FY2022 are flattish on a Y-o-Y basis despite a severely contracted base. The relentless increase in 2W prices during the year and record-high petrol rates have kept consumers away from dealerships. The rural offtake has lagged urban, possibly due to moderated agri-sentiments caused by uneven monsoons and delayed harvesting across regions. In the urban markets, the delay in reopening of schools and colleges, weak income sentiments due to job losses or salary cuts (in the aftermath of the pandemic) and extended work-from-home policies by corporates, have impacted sales. Additionally, the financiers have remained cautious, after witnessing an increase in delinquency levels.

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