July 2021

From Dy. CRO’s Desk

With the lifting of lockdown restrictions by many states, some economic momentum in select sectors/areas was visible in June ’21, however, businesses remain cautious in the near term. The pace of Covid vaccinations will determine the turnaround in economic outlook. Much will also depend on the pace of Government spending/expenditure – by the Centre and states which has been lower in April-May 2021, compared to the previous fiscals. Another factor that could boost sentiments is a cut in excise duties on auto fuels.

We also examine the domestic covered bond issuances by the NBFCs which has increased almost five-and-a-half times, at Rs 2,220 crore in FY2021, compared to the previous fiscal. The market is still at a nascent stage compared to the western markets and some Asian countries. The protection available to an investor of covered bond improves when compared with the conventional securitisation of the pool of assets. Also, in issuances so far, the issuers have benefitted from lower coupon rates on covered bond issuances due to the higher rating. For bonds of this type to grow, participation from all categories of investors, particularly mutual funds and insurance companies, must increase.

The GoI’s production-linked incentive (PLI) scheme for the pharma sector, involving a total outlay of Rs 210 billion, will help the industry reduce import dependence, boost domestic production of high value products, and increase the value addition in exports. Further, the GoI has also announced the promotion of the bulk drug parks scheme with a financial outlay of Rs. 30 billion for three select states, which will provide infrastructure assistance to the API players. The PLI scheme covers R&D expenses incurred for product development as part of the eligible investments; this will provide the much-needed operational flexibility, given the risks associated with successful product commercialisation. Overall, ICRA expects the above measures to strengthen the business profile of R&D-based Indian pharmaceutical companies.

Lastly, we examine the increase in imported photovoltaic (PV) solar module price level by about 15-20% over the last 4-5 months, to around 22-23 cents/watt as on date which is likely to impact the returns of the solar power project developers with new capacities/projects amounting to 4.1 GW, won in the last six to nine months. As per ICRA, if the price rise sustains it will constitute a near-term headwind. Other than this, rising metal prices too are a negative from the capital cost perspective. There are also other near-term challenges for developers that may affect incremental bidding in the solar power sector. However, cumulative solar project awards remain strong at ~28 GW, hence the outlook remains healthy.

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.

Kinjal Shah

Vice President & Co Group Head, ICRA

Views on Indian Aviation Industry

Mukund Upadhyay

Assistant Vice President, ICRA

Views on collection Efficiencies for NBFCs

ICRA Research Updates
July 2021
India Microfinance Industry: RBI’s proposed regulatory changes to create level playing field and provide more flexibility to NBFC-MFIs
Government of India Finances: Rise in consumption of petrol and diesel in FY2022 can absorb cut in cesses by Rs. 4.5/litre, without revenue loss to GoI relative to FY2021
Iron Ore Pellet Industry: Weak Chinese demand and increasing Brazilian pellet supplies to reign in the rally in seaborne pellet prices in H2 CY2021; Indian pellet exports likely to taper in H2 CY2021
ICRA in News
July 2021
The Economic Times | July 9, 2021

Green energy capacity may touch 11GW in FY22 : ICRA

Business Standard, | July 9, 2021

Securitisation volumes more than double Q1 despite pandemic: Icra

Mint | July 9, 2021

The sentiment boost that India’s economy is in need of

Moneycontrol.com | July 13, 2021

Power demand in India expected to grow 6% in FY22: ICRA

Upcoming Events
Watch this space for upcoming events

Aditi Nayar

Chief Economist, ICRA

Improving sentiment can accentuate recovery

With many states having commenced a phased unlocking, a sequential improvement in the economic momentum set in during June 2021, as confirmed by high frequency indicators such as the GST e-way bills, vehicle registrations, electricity demand, rail freight and petrol consumption. At odds with this picture of an economy on the mend, the PMIs for manufacturing and services printed in the contraction zone in June 2021. This suggests that businesses remain cautious regarding the near-term outlook, after the bruising second wave of Covid-19.

Abhishek Dafria

Vice President & Group Head, ICRA

Emergence of covered bonds as an alternate fund-raising avenue; volumes expected to pick up with better stakeholder awareness

Domestic covered bond issuances have witnessed a sharp increase to about Rs. 2,220 crores in FY2021 from the issuances of Rs. 400 crore seen in the preceding fiscal. These bonds have been issued so far by NBFCs – nine in FY2021 compared to two in FY2020. The domestic market for covered bonds is still in the nascent stages with the first issuance seen in FY2019. This structured product, however, has been a well-accepted financing tool in the western markets, especially in Europe, for many decades and has also seen a growing popularity in some Asian countries such as Singapore and Japan.

Gaurav Jain

Vice President & Sector Head, ICRA

PLI scheme to help India become Aatmanirbhar in APIs; boost investments in high-value generics as well

The production-linked incentive (PLI) schemes announced by the GoI for key raw materials such as bulk drugs and formulations, with a total incentive outlay of Rs. 210 billion will help the country become Aatmanirbhar. It will reduce import dependence and boost domestic production of high-value products; and increase the value addition in exports. High value-added pharmaceutical products are generally R&D intensive and difficult to manufacture and these include products such as complex generics, patented products, and biologics among others. Further, the GoI has also announced the promotion of the bulk drug parks scheme with a financial outlay of Rs. 30 billion for three select states, which will provide infrastructure assistance to the active API players.

Girishkumar Kadam

Senior Vice President & Co-Group Head, ICRA

Hardening in the PV module price to moderate the returns for the projects awarded over the last six to nine-month period

The increase in imported photovoltaic (PV) solar module price level by about 15-20% over the last 4-5 months, to around 22-23 cents/watt as on date, is likely to impact returns of solar power project developers. This price rise has been mainly driven by a sharp increase in the price of polysilicon, a key input for cell & module manufacturers. As per an ICRA note, given the import dependency for PV modules for a majority of the solar power installations in India, such hardening in the price of PV modules, if sustained, remains a near-term headwind.

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