August 2021

From Dy. CRO’s Desk

The Monetary Policy Committee (MPC) has rightly maintained a status quo and an accommodative stance in its August 2021 Policy review, given the prevailing pandemic situation, the threat of the Delta variant and slow economic revival. The CPI inflation is a concern, having breached the 6% threshold, nonetheless, the MPC views it as temporary, caused by supply shocks. The MPC has upped the CPI inflation forecast for FY2022 to 5.7% from 5.1%. The forecast for the real GDP expansion has been retained at 9.5%. Given the currently reviving economic growth, the stance is unchanged, however, it is anticipated that this may change around February 2022 and a lot depends on the crucial inflationary trends.

We also examine the NBFC’s (Retail) growth which was a modest 4% in FY2021 due to demand slowdown and risk aversion. Primarily, the vehicle and small business segments’ growth suffered while gold loans and microfinance comparatively did well. Growth in FY2022 is expected to be better at 8-10%, albeit on a low base. Headline asset quality numbers for June 2021 were elevated vis a vis March 2021, but the same is expected to subside over a couple of quarters if the improving trend in collection efficiencies sustains in the subsequent months Net increase (adjusting for writeoffs and recoveries) in the 90+dpd in the current fiscal is expected to be about 50-100 bps. Earnings to remain subdued in FY2022 as well, as ICRA expects the overall credit cost to remain similar to the last fiscal

The IT services industry is expected to post higher growth in FY2022, driven by an increase in digital deals outsourcing. Strong demand for digital technologies will lead to higher award of contracts and the US dollar revenue growth for ICRA sample of IT services companies is estimated at 9-12% in FY2022. The pandemic has accelerated core modernisation, usage of collaborative technologies and cloud migration as companies shift to digital business models to pursue work-from-home models. However, their profit margins will be moderated. The OPM, was higher in FY2021 on account of lower overheads and higher offshoring but will moderate in FY2022-FY2023, owing to wage inflation and gradual resumption of work.

Lastly, we examine the Indian auto component industry, which is expected to witness a 20-23% revenue growth in FY2022. Exports will drive growth, which will be on a low base of the last two fiscals. Domestic players have reported healthy improvement in export volumes to Europe and the US in Q1 FY2022, and this is at a time when domestic demand has plunged due to Covid-19. Industry margins in FY2022 will also be affected by a sharp increase in commodity prices, supply chain disruptions, partly arising from the global semi-conductor shortage, and premium freight rates.

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.

Anupama Arora

Vice President & Sector Head, ICRA

Views on Domestic Sugar Industry:

Mukund Upadhyay

Assistant Vice President, ICRA

Views on collection Efficiencies for NBFCs

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Aditi Nayar

Chief Economist, ICRA

Status quo policy with a hint of dissent

In its August 2021 Policy review, the Monetary Policy Committee (MPC) maintained a status quo on the policy rate and the accommodative stance. It reiterated its support towards the nascent economic recovery, which was expected in the light of the persisting uncertainty, growing concerns regarding the Delta variant and only gradual rise in the domestic vaccination levels. Nevertheless, the disquiet generated by the last two CPI inflation prints that had breached the 6% threshold, led to a sharp upward revision in the FY2022 inflation forecast.

A M Karthik

Vice President & Sector Head, ICRA

Risks for the NBFC sector remain elevated in the near term; revival likely in the next fiscal

The second wave of Covid-19 infection had a varied impact on the business and operations of non-bank finance companies and housing finance companies. While large HFCs saw relatively limited impact on their collection efficiency ,other NBFCs having exposure to several segments like vehicle finance, business loans and microfinance, witnessed their CEs decline by about 20-25% in May 2021 vis a vis the average Q4 FY2021, when the lockdown imposed by various states was more stringent and widespread. The CE improved marginally (up by 3-5%) in June 2021 vis a vis May 2021 levels, with states steadily relaxing restrictions.

Gaurav Jain

Vice President & Sector Head, ICRA

Growth for IT services industry to accelerate in FY2022 as digital deal outsourcing picks up; however, profit margins to moderate owing to wage inflation

The US$ revenue growth of ICRA’s sample of IT services companies is expected to be around 9-12% in FY2022, driven by robust demand for digital technologies resulting in higher awards of contracts. Further, the growth in FY2022 will be supported by pent up demand of FY2021, which was lower due to the initial impact of Covid-19. For FY2023, the ratings agency estimates the growth to be around 6-9%

Ashish Modani

Vice President & Sector Head, ICRA

Indian Auto Component Industry is expected to witness a 20-23% growth in FY2022

The Indian auto component industry is expected to report a 20-23% revenue growth in FY2022, supported by strong exports demand, and recovery in domestic OE and aftermarket segments. The growth would come in on the low base of last two fiscals and will look optically strong because of the exceptionally weak H1 FY2021. The industry has bounced back handsomely during the second half of last fiscal, with many auto component suppliers registering record revenue and profits during Q4 FY2021. Exports, which accounts for 29% of Industry’s turnover, also witnessed healthy recovery, supported by strong traction in key target markets i.e. USA and Europe.

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