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The MPC, adopting an accommodative stance, has again cut the repo rate by 25 bps in the current financial year. The latest cut is more driven by an overall slowdown in investment activity and a moderation in private consumption. For FY2020, the GDP growth has been revised downward and inflation trajectory slightly upwards. The RBI will have to push banks to do the same. Among the regulatory policy measures, the proposal to move towards on-tap for small finance banks (SFBs) is positive and could provide the opportunity to the existing micro-finance institutions (MFI) and the non-banking finance companies (NBFCs) to revisit their business plans. Though the steps are positive, going forward, further rate cuts in repo would hinge on factors like crude prices, forthcoming budget announcements, fiscal and current account deficit and the monsoons.

We also take a look at the financial results released by 642 domestic companies in Q4 FY2018-19. The same indicates revenue growth at a six-quarter low due to a decline in consumer sentiments and softening of commodity prices. Both the consumer-linked and commodity-linked sectors have suffered in the rural as well as the urban segments. The EBITDA margins too have registered an overall decline, however, sector-wise it has been a mixed bag. The interest coverage ratio of ICRA’s sample, adjusted for sectors with low debt levels, has witnessed a decline as growth in absolute EBITDA was significantly lower than the increase in interest costs. Growth in the various sectors will be influenced by industry-specific and economy-wide factors going forward.

We also take a look at the recent Central Electricity Regulatory Commission (CERC)’s tariff relief to coal-based power projects, arising from the use of imported / e-auction coal in lieu of the shortfall in supply of domestic linkage coal, under the fuel supply agreement (FSA) signed with Coal India Limited. As per the ICRA analysis, this CERC order would help affected domestic coal-based IPPs aggregating to 14-15 GW, having long-term PPAs with the state distribution utilities and facing coal supply shortfall from the domestic linkage sources. While this development is a positive, the timely realisation of the tariff relief from the state distribution utilities would remain a challenge, given the weak financial position of the discoms in some of the key states.

Lastly, we examine the aviation sector, hit hard in FY2020 after six years of monthly YoY growth. The grounding of Jet Airways has resulted in the de-growth of domestic passengers in April 2019. The consequent increase in airfares due to the demand-supply imbalance has impacted the industry passenger load factors (PLFs). The discontinuation of operations by Jet Airways has impacted ~14% of the total industry capacity with airfares increasing by ~30-40%, over September 2018 to March 2019. While this may be good news for the industry players, profitability-wise, de-growth in the PLF is certainly not. Developments in the near-to-medium-term are likely to be monitored.

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

 
 
  From ICRA Research
   
  Monetary Policy panel chooses growth over inflation
 

Karthik Srinivasan, Group Head, Financial Sector Ratings With the current 25 bps cut in the repo rate, the Monetary Policy Committee (MPC) effected its third consecutive rate cut in the current calendar year. Unlike the previous rated actions, this time, the vote on the rate cut was unanimous with all the MPC members voting for it and also for a change in the policy stance from neutral to accommodative.

We believe the action is largely driven by the concern on the sharp slowdown in investment activity along with a continuing moderation in private consumption, apart from concerns on export growth. The GDP growth estimates have been revised downwards to 7.0% for FY2020 from 7.2% estimated in April 2019, while the inflation trajectory has been marginally revised upwards to 3.0-3.7% for FY2020 from 2.9-3.8% earlier. Accordingly, the accommodative stance highlights the shift in preference towards growth as inflation indicators are likely to remain well within the targeted band.

The markets had a mixed reaction to the Policy announcement with the equity markets falling, while the bond markets rallying and yields touching lows witnessed in November 2017. The benchmark 10-year G-Sec yield, which had rallied by 50 bps during the last one month, rallied further from 7% at the start of the day to 6.9% at close amidst high trading volumes. This was presumably driven by the change in policy stance as the rate cut was largely factored into the 10-year G-Sec yield. The statement on maintaining a comfortable liquidity status and creating a working group to review the liquidity management framework also augured well for the bond yields.

Liquidity improved in the ongoing months and has been supported by improved foreign capital flow and continued liquidity infusion measures by the RBI. We expect the RBI to continue to prod banks to improve the transmission of monetary actions, which have been rather modest so far. We also expect that the recent decline in bond yields will also trigger a reduction in small saving rates and improve the banks’ ability to cut their deposit rates; pending which the transmission of rate cuts in bank lending rates may be incomplete.

The CPI inflation stood at 2.9% in April 2019, similar to the print in March 2019, whereas the core CPI inflation recorded a broad-based easing to 4.6% in April 2019 from 5.0% in the previous month. With assumption of a normal monsoon, the MPC has revised its CPI inflation forecast upwards, but the same remains marginal. On the GDP growth front, the growth outlook was revised downwards and the MPC noted that the output gap had widened compared to the April 2019 Policy review. Further, driven by concerns highlighted earlier, the revision in growth estimates stood much higher for H1 FY2020, which is estimated at 6.4-6.7%, compared to 6.8-7.1%, estimated in April 2019.

Among the regulatory policy measures, the proposal to move towards on-tap for the small finance banks (SFBs) is positive and could help the existing MFIs and the NBFCs to revisit their business plans. In 2014, of the 72 applicants for the SFB licence, only 10 received them in 2015. This apart, the RBI also relaxed the leverage ratio guidelines for banks with a view towards harmonising the same with rules prescribed by the Basel committee on banking supervision. Though the revised norms are still tighter than the Basel III norms, we believe banks with capital adequacy can increase their scale of operations, subject to their risk appetite.

While we further await details on the various measures announced by the RBI on strengthening the regulation and supervision for the financial markets, no specific measure has been announced for the current challenges faced by the NBFC sector in the Policy statement.

Going ahead, a pick-up in the pace of monetary transmission could be one of the key drivers in supporting the growth estimates for the current year. With the change in policy stance, the possibility of more rate cuts during the year has improved, and we believe the MPC would continue to remain data dependent and, also factor in the likely announcements in the upcoming budget.

Though a significant part of the recent decline in G-sec yield was also driven by the recent decline in crude oil prices and its consequent positive impact on fiscal and current account deficit, we expect the 10-year G-sec yield to trade in a band of 6.8-7.3% during H1 FY2020. An upward movement in crude oil prices and fiscal slippage in the upcoming budget or weak monsoons will remain the key risks that could push up the G-sec yields, whereas continued liquidity enhancement measures, strong monsoons and a further decline in crude oil prices, which will keep inflation within the guided levels, may cool off the yields further.

  Weak consumer sentiments see revenue growth in Q4 FY2019 hit six-quarter low
 

Shamsher Dewan, Vice President & Sector Head, Corporate Ratings The financial results released by 642 companies in the Indian corporate sector show revenue growth in Q4 FY2018-19 hit a six-quarter low at 10.0%. The key reason for the decline in revenue growth has been weak consumer sentiments and softening of commodity prices. The revenue growth in consumer-linked sectors in ICRA’s sample was only 3.8% in Q4 FY2019 on a YoY basis, down from 27.9% in Q3 FY2019. Comparatively, the revenue growth in commodity-linked sectors was at 12.4% in Q4 FY2019 on a YoY basis, down from 51.4% in Q3 FY2019.

The weakness in the consumer-linked sectors was visible across most consumer-oriented sectors such as passenger vehicles, two-wheelers, consumer durables and FMCG since H2 FY2019. The decline in consumer sentiments was visible in both the urban and the rural segments. The commentary on rural growth from auto OEMs and FMCG companies indicates a slowdown, which can be attributed to the muted rabi harvest.

The EBITDA margin of ICRA’s sample declined by 44 bps on a YoY basis and 23 bps on a QoQ basis to 16.6%. However, several sectors such as airlines, cement, consumer food and consumer durables reported a sequential improvement in margins because of the price hikes initiated by companies in select sectors, lower cost of imports (benefits of improvement in INR vis-a-vis US$ in Q4 compared to Q3) and softening prices of key commodities like oil, steel and aluminium on a sequential basis, which supported an improvement in the EBITDA margins on a QoQ basis.

Although commodity prices were higher on a YoY basis for both FY2019 and Q4 FY2019, there was a softening in the prices of key commodities such as oil, steel and aluminium on a sequential basis, which supported an improvement in the EBITDA margins on a QoQ basis.

The interest coverage ratio of ICRA’s sample, adjusted for sectors with low debt levels (IT, FMCG and pharmaceuticals) witnessed a decline to 3.8x from 4.1x in Q4 FY2018. This was because the growth in absolute EBITDA (7.2% on a YoY basis) was significantly lower than the increase in interest costs (14.6% on a YoY basis), a result of the higher interest rates and the increase in debt levels, including working capital.

ICRA expects the demand in the automobile sector to remain subdued owing to weak consumer sentiments, because of rising ownership costs, subdued rural demand and tight financing environment, given the liquidity constraints in the financial markets. The growth in the sector will start stabilising most likely from H2 FY2020 because of pre-buying related to the impending implementation of the BS-6 norms from April 1, 2020, especially in the CV segment.

The auto component industry is also expected to grow between 10-11% in FY2020 supported by increasing content per vehicle owing to the transition. Mandatory introduction of ABS and BS-IV norms will result in a nearly 15% jump in two-wheeler prices and will also push prices of diesel PVs by 8-10%.

ICRA expects cement demand growth of around 8% in FY2020, which is likely to be driven by housing, primarily rural housing and affordable housing and an improved focus on the infrastructure segments, mainly road, railway and irrigation projects. The incremental cement demand of around 24-28 million MT is likely to be greater than the incremental supply of 17-18 million MT in FY2019-FY2020 resulting in an improvement in capacity utilisation to 69% in FY2019 and 71% in FY2020 from 65% in FY2018.

The domestic steel demand growth is likely to moderate to 7.0% in FY2020 from 7.5% in FY2019 because of the weakness in demand for flat products. Steel prices have moderated from the H1 FY2019 highs and the near-term price hike is likely to be low, given the subdued demand environment. Moderation in steel prices and elevated coking coal prices is likely to put pressure on the profitability indicators in FY2020.

ICRA expects nearly two-third of the capacity addition in the power sector to be driven by renewables over the next two years. The utilisation levels of thermal plants are expected to increase to 62-63%, aided by 5-6% energy demand and limited net capacity addition. DISCOM losses are expected to reduce gradually but the overall progress on tariff hikes and AT&C losses remains below expectations.

Despite the reduction in debt levels and planned de-leveraging plans along with some improvement in operating profits, the coverage indicators would continue to remain weak for telecom companies over the near-term.

ICRA’s Negative outlook for the residential real estate sector continues to reflect the liquidity crunch on the back of slow sales and reduced availability of credit. However, ICRA’s analysis suggests that the large players have continued to gain market share. For instance, the top ten listed entities registered a 44% YoY growth in the area sold during FY2019 with record sales achieved in the last two quarters of FY2019.

  CERC approval of tariff sop for IPPs a positive for power generation sector
 
Sabyasachi majumdar ,Sr. Vice President & Group Head, Corporate Ratings

The Central Electricity Regulatory Commission (CERC) vide its order dated May 16, 2019 has approved a tariff relief for the coal-based power project of GMR Warora Energy Limited, arising from the use of imported / e-auction coal in lieu of the shortfall in supply of domestic linkage coal under the fuel supply agreement (FSA) signed with Coal India Limited. This is with respect to the power purchase agreements (PPAs) signed by the company with the Maharashtra State Electricity Distribution Company Limited (MSEDCL) and the Electricity Department of the Union Territory of Daman and Nagar Haveli. According to an ICRA note, this order, issued by the CERC would help resolve the affected domestic coal-based IPPs aggregating to 14-15 GW, which have long-term PPAs with state distribution utilities and face a coal supply shortfall from domestic linkage sources.

The tariff relief approved by the CERC culminates in a long-drawn process for domestic coal-based IPPs seeking a pass-through of the higher cost of imported coal under the PPAs signed with the state distribution utilities, in lieu of the shortfall in the supply of domestic linkage coal. More importantly, this CERC order clarifies that the projects using coal under the SHAKTI scheme are also entitled for compensation for any shortfall in supply of the annual contracted quantities by CIL.

While the Government of India approved the use of imported coal because of the shortfall in supply of domestic coal and pass-through of the higher cost of the imported coal in tariffs in July 2013, the implementation of the tariff pass-through was marred by significant delays in issuing orders by the regulators as well as discoms contesting these orders at various forums. This order follows the favourable order issued by the Supreme Court of India in April 2017, allowing tariff relief for projects affected by domestic coal shortfall under the change in law.

The CERC has considered the modifications to the New Coal Distribution Policy (NCDP) approved by the Government of India in July 2013, reducing the supply rate of coal (from 100% at 85% PLF to 65% in FY2014 and FY2015, 67% in FY2016 and 75% in FY2017) from linkage sources as a change in law event. Further, the SHAKTI policy notified by the Government of India in May 2017, continued the supply rate at 75% of the annual contracted quantity (ACQ), thus continuing the dependence on imported coal. In its order, the CERC has also allowed the carrying cost on the tariff relief approved for the past years.

While the approval for the pass-through of the higher cost of imported coal is a positive development, the timely realisation of the tariff relief from the state distribution utilities would remain a challenge, given the weak financial position of the discoms in some of the key states and as the tariff relief component, including the carrying cost, is likely to remain significant. For a 1000-MW in-land coal-based power project operating at 50% PLF, the use of imported coal to meet 25% of its fuel requirement in lieu of domestic coal would increase the annual fuel cost of generation by about Rs. 130 crore, at the prevailing imported coal prices.

  FY2020 take-off of the Indian aviation industry hit hard
 
Kinjal Shah, Vice President & Sector Head, Corporate Ratings

After six years of monthly Y-o-Y growth After six years of monthly Y-o-Y growth, the domestic passenger traffic has witnessed the first Y-o-Y de-growth of 4.2% to 109.95 lakhs in April 2019. The last monthly Y-o-Y de-growth in the domestic passenger traffic was witnessed in June 2013. As per ICRA note, this is primarily attributable due to adverse impact on the industry capacity which has been hit hard due to grounding of aircraft of Jet Airways (India) Limited, starting February 2019 (due to liquidity constraints) and eventual discontinuation of its operations with effect from April 18, 2019. The consequent increase in airfares due to the demand-supply imbalance has impacted the industry passenger load factors (PLFs). During April 2019, all airlines, except GoAir, have reported a Y-o-Y decline in PLFs. Overall, the domestic passenger traffic growth for January 2019 to April 2019 has been a muted 2.5%, significantly lower than the 24.6% growth witnessed during January 2018 to April 2018 period.

The discontinuation of operations by Jet Airways has impacted ~14% of the total industry capacity. Overall, the moderation in capacity starting February 2019 has resulted in increased airfares – ~30-40% increase over September 2018 to March 2019 – and more inconvenience to the passengers. India, being a high price sensitive market, it has affected the passenger traffic growth from October 2018 onwards. While there has been redeployment of some of the aircraft of Jet Airways by the other airlines and thus some moderation in the airfares during April 2019 and May 2019, overall they continue to be high. While the increased air fares are likely to support the profitability of the airlines in an environment of high costs, the impact on the passenger growth does not bode well for the industry.

     
 
           
 
   
Rating Updates for the month of May 2019
   
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