August Newsletter
August 2022

From Chief Ratings Officer’s Desk

ICRA anticipates the tightening in the monetary policy to continue till inflation appears set to fall below 6% after the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) hiked the repo rate by 50 basis points (bps) recently. The policy rate has touched the pre-pandemic level while the Consumer Price Index (CPI) inflation and the Gross Domestic Product (GDP) growth predictions for FY2023 remained unchanged from the June 2022 policy review. According to the MPC, inflation is expected to remain above the upper tolerance limit of 6% in the first three quarters of FY2023, albeit an anticipated decline. Policy action is required to limit inflationary pressure and get headline inflation closer to the 4% target. The MPC expressed concerns arising from global factors like geopolitical tensions, which may affect domestic growth prospects.

We also look at revenue growth and margins for Indian IT service providers, which are likely to slow down in the near term. Revenue growth for the sample set is likely to slow to 12-14% in FY2023 due to the base impact, weak macroeconomic conditions and inflationary pressure in key regions. The operating profit margins have been estimated to be strong at 22% in the current fiscal, despite a 100-150 basis point decrease due to sustained wage cost inflation and the impact of fluctuation in the foreign exchange rates on the rupee, particularly with respect to the dollar. Despite these challenges, ICRA has maintained its Stable outlook for the Indian IT services industry, supported by the strong order book and healthy demand outlook, particularly for digital services.

Domestic pharma firms have disclosed significant provisioning and settlement payouts for some of the ongoing litigations with pricing pressure in the US generics business and regulatory scrutiny still present in the US pharmaceutical market. This had an adverse effect on their earnings and balance sheets. Some large Indian pharmaceutical businesses disclosed significant impairment losses and termination of some products or sectors due to poor earnings potential. ICRA anticipates that price erosion of mid-to-high single digit in the generic products business will continue to exert pressure in the near future.

Rising securitisation volumes of microfinance loans indicate a resurgence of investor confidence in this sector. Micro loan securitisation volumes in FY2022 stood at Rs. 14,540 crore, up from Rs. 7,100 crore in FY2021. Volumes in Q1 FY2023 were over Rs. 3,500 crore, up from Rs. 1,460 crore in Q1 FY2022. In FY2022, the contribution of securitisation volumes to total securitisation climbed to 12%. The number of NBFC-MFIs entering the securitisation market grew in Q4 FY2022, with rated pools performing well. Investors are reconsidering micro loan securitisation, particularly to support banks’ priority sector lending targets owing to increased collection efforts, regulatory support in the form of restructuring and moratorium, and waning concerns over the impact of the pandemic.

Lastly, we look at the retail sector's performance. ICRA has improved the sector’s outlook to Stable from Negative, with sales in FY2023 likely to outperform FY2020 pre-Covid level by 5-6%. In FY2023, the sector is expected to grow by 12-13% on a YoY basis, with the operating profit margin increasing by 150 basis points to 8.2%. The retail sector reported a solid recovery in sales following the second wave of the pandemic owing to pent-up demand, improved vaccination coverage, and a pick-up in economic activity.

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.

Kinjal Shah

Kinjal Shah

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

Indian Pharmaceutical industry in reference to the price pressure and regulatory scrutiny in the US

Rahul Agarwal

Rahul Agarwal

Senior Economist, ICRA

Recovery in investment demand in the Indian Economy

ICRA Research Updates
August 2022
Jewellery: Indian gold jewellery retail industry: Post the strong growth in Q1 FY2023, industry likely to contract over the next two quarters; consumption to record moderate growth of around 10% YoY in FY2023
Airlines: Headwinds from elevated ATF cost, INR depreciation and expectation of rising competition to maintain turbulence in the Indian aviation industry
Financial Markets & Banking: Corporate bond spreads to widen further with reducing liquidity surpluses
ICRA in News
August 2022
Mint | 6th August, 2022

Road, Rail ministries lead Q1 capex push as housing lags

Business Standard | 11th August, 2022

Interim wage hike likely to hit margins of West Bengal tea estates: ICRA

MoneyControl | 10th August, 2022

ICRA expects second and third quarter FY23 inflation prints to undershoot RBI estimates: Group CEO Ramnath Krishnan

Upcoming Events
Thermal Power Sector - Trends & Outlook
Aditi Nayar

Aditi Nayar

Chief Economist, ICRA

Rate hikes to continue till inflation recedes below 6%

With a repo rate hike of 50 bps in the August 2022 Policy review, the Monetary Policy Committee (MPC) took the Policy rate well into the pre-pandemic territory, to levels last seen in August-September 2019. Alongside, it maintained its stance and the CPI inflation and GDP growth projections for FY2023 unchanged from the June 2022 Policy review. The MPC acknowledged that inflation has flattened, and the supply outlook is improving, aided by the easing of global supply constraints. Regardless, it underscored the fact that inflation is projected to remain above the upper tolerance level of 6% through the first three quarters of FY2023, with the attendant risks of inflation expectations becoming unanchored, which could trigger a second round of effects.

Deepak Jotwani

Deepak Jotwani

Assistant Vice President & Sector Head - Corporate Ratings, ICRA

Revenue growth and margins for Indian IT services companies likely to moderate in the near term

ICRA maintains its Stable outlook for the Indian IT services industry supported by strong order book and healthy demand outlook, especially for digital services, whilst projecting a moderation in the revenue growth and operating profit margins (OPM) for its sample set of 13 major listed companies. The IT services companies remain focused on enhancing the share of fixed price contracts as it assures better revenue visibility and also allows for higher deployment of offshore resources where the salaries are considerably lower coupled with better utilisation of manpower across such projects and deployment of automation. The benefits are shared with the client, leading to mutual advantage.

Kinjal Shah

Kinjal Shah

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

Pricing pressures and regulatory scrutiny persist in the US generics pharmaceutical industry

The US has always been a key market for Indian pharmaceutical companies, accounting for ~29% of FY2022 revenues of ICRA’s sample set of eight leading pharmaceutical companies. However, over the past few years, the revenues from the US market have grown at a relatively modest pace, reflecting a confluence of challenges being faced by companies in the form of consistent pricing pressure, lack of major generic product launches and increased regulatory scrutiny.

Abhishek Dafria

Abhishek Dafria

Vice President and Group Head - Structured Finance Ratings, ICRA

Rising securitisation volumes of microfinance loans signal return of investor confidence in this segment

The securitisation of loans given by microfinance entities (MFIs) has seen a healthy bounce back during the second half of FY2022 and the trend has continued in Q1 FY2023. Micro loan securitisation was the worst hit due to the COVID-19 pandemic, with a steep drop in volumes to Rs. 7,100 crore in FY2021. However, the micro loan securitisation volumes doubled to Rs. 14,540 crore in FY2022, albeit on a lower base; it still remains about half of the volumes seen in FY2019 and FY2020. Almost 57% of the year’s volumes, though, came in Q4 FY2022. The momentum has been strong in Q1 FY2023, with micro loan securitisation of about Rs. 3,500 crore seen as against Rs. 1,460 crore in Q1 FY2022. While the impact of the second wave was witnessed on the asset quality of originators, no major impact was seen during the third wave that improved the confidence of the investors. Securitisation remains a key funding tool for NBFC-MFIs, with the share of securitisation in the funding mix increasing to 27% in Q4 FY2022; however, this remains below pre-pandemic levels.

Sakshi Suneja

Sakshi Suneja

Vice President & Sector Head – Corporate R

ICRA Upgrades Retail Sector Outlook to Stable from Negative; revenues expected to surpass FY2020 pre-Covid levels by 5-6% in FY2023

The retail sector is coming out of the woods and is expected to surpass its pre-pandemic levels of revenues and earnings in FY2023, following two years of sub-par financial performance. According to ICRA's most recent analysis on the industry, retail firms in its sample set will see an increase in sales of 12–13% year over year in FY2023, which is a 5–6% increase above pre-pandemic levels. Their operational profit margins (OPMs), driven by the advantages of operating leverage, are anticipated to increase YoY by 150 bps to 8.2% (comparable to FY2020). As a result, the rating agency has revised the sector's outlook to Stable from Negative.

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