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India Sectoral Outlook : FY24-25

- Research Team

Dear Investors,

We have taken up this initiative to share our views on corporate performance and expectations. As a practice, we intend to carry this out twice a year.

Amidst an elevated interest rate and inflation scenario globally, India equities closed the financial year 2023-24 on a strong note with NIFTY 50 Index delivering 29% returns - MSCI India was up 38% in the year, significantly outperforming MSCI EM (5%) and MSCI DM (23%). A rare combination of stable regime, robust economy, supportive government spending and reform push, strong liquidity environment and healthy earnings delivery by Corporate India places the country in an enviable position when big part of the world grapples with multitude of structural and geo- political issues.

The end of the financial year also brings to close the 2nd term of the current government. Many of the reforms and initiatives seeded during the current as well as the previous term now seem to be bearing fruit - UPI ended FY24 on a high note with transactions worth 199 lakh crore processed in value terms; GST figures continue to log record collections; benefits of RERA are evident in a booming mortgage sector. Further a good majority of the fundamental goals outlined earlier - Power and Water for all, Sanitation, Roads and Housing - have seen remarkable and sustained progress. The narrative around growth and reforms hasn't diminished a bit, with the government intending to provide greater granularity on its long-term vision of 'Vikshit Bharat' through a 5-year action plan in the next term, if it gets elected. While the domestic macros remains favorable - healthy GDP growth combined with falling inflation - recovery in private capex and rural consumption has lagged the expectations. The growth skew has also been a cause of concern with demand for luxury and premium products and services continuing to outperform mass- categories, likely indicating rising income inequality.

Here's our take on few sectors' outlook:


  • Financials

    The healthy economic growth expectations for India - GDP growth of 6.8% in FY25 according to S&P - underpin a favorable outlook for the banking sector. Strong balance sheets of both the private and public sector banks, corporate leverage at 15-year low, historic low-NPAs and high capitalization levels support the attractive credit growth outlook. While over the last few years, the growth has largely been retail-led, there are expectations of gradual momentum in corporate credit growth with pick up in government capex post the elections and recovery in private sector capex (with improvement in capacity utilisations). Systemic liquidity, while having improved remains in deficit, is the key monitorable given sustained divergence in loan growth vis-à- vis deposit growth. This combined with RBI measures (increase in risk weights on unsecured personal loans and lending to NBFCs) and regulatory actions (to curb the excesses and tighten lending practices) is expected to tamper the credit growth to low-teens in FY25.

    The margin outlook is contingent on how the domestic liquidity scenario pans out, timing of US Fed rate cuts and domestic inflation. Expectations are building up for a rate cut by RBI in 2HFY25 (following cuts by US Federal Reserve), however there remains fair degree of uncertainty around the quantum of the cuts- in general rate cuts are expected to be negative for banks with higher share of repo-linked floating-rate assets. The overall asset quality environment remains benign, however select pockets - unsecured loans, MSME - could see some build-up of stress (some early signs visible in 3QFY24).

    While structurally, PSU banks are expected to continue to cede asset and deposit market shares to Private banks, better liquidity position allows PSU banks to deliver stronger credit growth than some of the private peers in the near term, without major dent to margins.

    Over the course of the year, regulatory scrutiny on banks and NBFCs has increased, with RBI imposing business restrictions on few entities following failure to follow the required processes, deficiencies in risk management practices and protection of customer interests. NBFCs, especially the smaller ones, are likely to face a bumpy road ahead with: 1) widening of spreads, 2) growth moderation due to slowdown in unsecured loans, need to reduce dependence on bank borrowings, and 3) rising Cost of Funds (partly on account of higher risk weights for banks). Large diversified NBFCs are expected to sustain credit growth outperformance versus the system led by product and distribution expansion. However, there is an expectation of growth divergence amongst the sub-segments- vehicle financiers likely to see slower loan growth, affordable housing sector likely to maintain stable growth, micro- LAP/SME segments should continue to exhibit robust loan expansion and regulatory actions could curtail loan expansion for Gold financiers.

    Post the stock and time corrections, broadly Bank and NBFC sector valuations appear attractive (assuming no sharp repo-rate cuts). We maintain our preference for bigger and high-quality franchises, with the balance sheet capacity to sustain growth and profitability.


  • IT

    The FY24 has been weak for Indian IT owing to macroeconomic pressures in the US & the EU leading to delays in client spending. This is particularly evident in slower growth within BFSI and Hi-tech segments. Retail, CPG, Telecom, and Energy sectors lagged while manufacturing and healthcare outperformed. Near-term growth guidance remains muted on account of delay in the discretionary demand revival. Industry eyeing for mid-single digit growth and mixed company-level performances as TCV outpacing incremental revenues. However, the mid-term outlook remains promising as large IT players witness early signs of new deals progressing well, normalizing attrition, improving utilizations, productivity gain led margin expansion and increased hiring of fresh talent. With Gen-AI projects gaining traction and businesses recognizing AI's transformative potential, investments in AI technologies will surge, leading to extensive training of fresh talent in new tech. Ahead, there is potential for pent-up growth acceleration from 2HFY25E. The growth prospects are well priced in the valuations with Nifty IT trading at premium to Nifty.

    AI, the Buzz word of the year - Shaping Tomorrow's Workforce Landscape!

    IMF analysis suggests around 40% of global jobs are AI-vulnerable, notably impacting high-skilled roles. Developed nations are poised to bear the brunt affecting up to 60% jobs impact, while emerging countries like India confront a relatively lower risk at around 40%. However, the transition towards AI is gradual, expected to unfold over half a century, allowing for evolving job roles. A quantitative survey from 1000+ Senior executive in US indicates tech giants are funnelling substantial investments into this transformative technology with cybersecurity, AI, and cloud set to receive the most funding in 2024.

    Majority of respondents plan to boost budgets for cybersecurity (71%), AI (70%), and generative AI (68%) with sectors like finance, insurance, and technology are leading the charge in embracing emerging technologies. This reflects a dual need for bolstering critical infrastructure alongside emerging tech investments.

    adoption expected across various sectors. From intelligent automation to predictive analytics, AI is reshaping operations, enabling data-driven decision- making, and boosting efficiency. Moreover, the democratization of AI tools is empowering businesses of all sizes to harness advanced capabilities, fuelling digital transformation and shaping the future of the IT sector.


  • Consumer Staples

    The consumer staples sector has been a key wealth creator for investors in the past decade, but recent high inflation has dampened mass segment consumption, particularly impacting FMCG products, which have the highest rural penetration. Slow income growth and heightened competition have led to softer growth in FY24.

    Short-term demand trends are expected to remain subdued, with marginal improvement in rural demand over two years and urban growth outpacing rural growth. However, gradual volume growth is anticipated due to steady inflation and favorable raw material prices, supported by consumer-oriented initiatives. FMCG players are increasingly embracing e-commerce and premiumization to reach urban consumers, a trend likely to persist. Strong balance sheets and free cash flow enable major FMCG players to invest in these trends, enhancing their competitiveness.

    While premium valuations has been the key concern for investors, gradual demand improvement, easing raw material prices, and positive rural income trajectory signal long-term sector optimism. We believe volume growth will bottom out soon and the segment will do well in the medium term backed by pent-up demand and rural recovery


  • Auto

    FY24 has been a mixed one for the auto sector with strong performance for PV, recovery in 2W and weak CV & tractor. PV sales registered a growth of ~8% which was driven by new launches and shifting toward SUVs which grew by 28% during the financial year. 2W industry showed stable growth of ~10% during FY24, witnessing a demand shift from sub-125cc motorcycles to scooters, e2W and premium 125cc+.The tractor segment remains under pressure during FY24 due to unseasonal rainfall impacting agriculture activities in the rural market and the high base of FY23. Commercial Vehicle sales were impacted due to lower government capex, election in 5 states, and pre-buying due to a change in emission norms. Most auto manufacturers recorded margin expansion, which was driven by operating leverage, the decline in commodity prices in the second half of the year, and a change in product mix.

    During FY25 the expectations are of moderation in growth in PV OEMs due to the high base of FY24 but new launches by OEMs will be key monitorable. We remain optimistic about the 2W sector which will be driven by premiumization, expected rural recovery, and e2W launches. We maintain a neutral view on Tractor sector recovery as this would depend on monsoon and government support to farmers. We maintain a positive view on the CV sector, strong volumes are expected to recover in 2HFY25 on the resumption of government spending on infra-activities. Interest rate cuts during FY25 will be positive for the sector. The auto index has rallied ~76% during FY24, and stocks are fairly valued, but we believe there is more growth potential in the sector in near term.


  • Capex

    India's macroeconomic transformation post-COVID is evident with an influx of Rs. 8 trillion in excess liquidity and worth of US$ 200 billion bolstered forex reserves, buoyant tax collections and driving a significant surge in government capex. The capex outlay is likely to soar to nearly Rs. 11 trillion by 2024-25, indicating a staggering 4.5x increase from the 2014-15 levels and constituting 3.4% of projected GDP, up from 2% nine years ago. This is fostering government-led infrastructure investments and import substitution-focused manufacturing along with the "China +1" strategy. The manufacturing sector likely to contribute 20% to GDP by FY31, growing faster than services.

    This is largely driven by PLI & emerging sector (renewables, batteries, solar, etc.), expected to contribute 27% of industrial capex and productivity gains by FY28 with average annual capex of ~Rs. 6.5lac cr. between FY24-28E vs ~Rs. 3.9lac cr. during FY19-23.

    In FY24, we witnessed slowdown in order inflows in cap-goods due to the impending election cycle, particularly in domestic markets, albeit key sectors such as renewable energy, power T&D, defense, railways, metro, and water have maintained steady order flows throughout FY24. Selective private investments have favoured areas like data centers, real estate, cement, metals & mining, industrial automation, and PLI-led capex, indicating positive momentum post-elections and increase in state/ private capex. EPC players expect gradual margin expansion, while product companies may witness varied margin impacts due to strong demand and lower raw material prices. The sector valuations have soared beyond its 2007 peak; however, the long- term growth potential remains very strong.


  • Metals

    Steel: During FY24 Indian steel companies witnessed a domestic demand cycle driven by a large public and private capex and continued growth in the underlying steel-consuming sectors. However, China's aggressive steel export impacted global steel prices thus creating pricing pressure on Indian players. Consequently, India became a net importer of steel in FY24 for the first time in three years.

    Indian Steel Association is expecting a growth of ~8% on average in CY24 and CY25 supported by the construction segment, capex, railways, etc. Although it is anticipated the 1HCY24 can witness slowdown in infrastructure spending this could be offset by renewed vigour to implement infrastructure projects post-election. And with capacity expansions, a domestic surplus is likely to emerge. Nonetheless, unless China's real estate shows some recovery Indian steel manufacturers will witness compressed margins due to the build-up of domestic inventories. Moreover, rising iron ore prices in the domestic markets remain a concern for some steel companies. Lastly, the recent increases in stock prices of steel stocks cap the potential upside. We believe the steel sector will see a healthy volume demand but remain subdued by global news flow.

    Non- ferrous: The consumption growth for non-ferrous metals remained healthy in FY24 supported by the Government's thrust on infrastructure development and

    favorable demand from the renewables/electric vehicle sectors. The industry's earnings are expected to remain stable in FY2025, considering steady movement in realisations and an easing of input cost pressure to an extent.

    The domestic demand growth is expected to remain healthy at ~10% (as per ICRA) in FY2025 and would significantly outpace the expected growth of ~2% in global demand. The operating margin of domestic players is also likely to remain stable at the current level in FY2025, like the levels estimated in FY2024. We remain optimistic about Non-ferrous players


  • Discretionary

    Retail: Retail sector experiencing subdued demand across product categories, with liquidation of old inventories and introduction of fresh collections to spur improvement. Retailers across value and premium guiding for flattish to lower single-digit Same-store sales growth, with slight uptick during wedding season and extended winter amid broader industry slowdown, mainly inflation-led. Despite near-term challenges, retailers aggressively adding stores by +10- 15%, along with faster closure of loss-making stores. There's scope for margin improvement with no major price cuts, stabilized raw material costs and introduction of fresh summer collections. This would support demand recovery in upcoming quarters.

    QSR: The slowness in demand in FY24 resulted in subdued performance as growth metrics (SSSG, Average Daily Sales) remained weak despite festive and sports events. While most of the QSR companies have guided for aggressive store expansion in FY25-26. Total number of stores for listed players has already crossed the mark of 5,900 so far and is expected to increase by 10%-12% in FY25 as per broad management guidance. Given sluggish unit economics across brands, it is anticipated that companies will tapper down their store openings. QSR companies are expected to sustain growth weakness in the near term & dining-in headwinds keeping operating margins under pressure and given the premium valuation of companies, the near-term outlook looks neutral.