Skip to main content

Indian Macro Factors and Sectoral Analytics

- Vikram Kotak

Dear Investors,

Hope this letter finds you in good health and spirit.

The financial year 2023 has been a big year for the Indian economy. Like stocks, many economic indicators hit new highs. We witnessed several milestones such as highest auto sales, best asset quality of lenders in a decade, recorded highest ever annual home sales, highest power consumption, and highest Goods & Service Tax (GST) collections. To add more, India's capex cycle is well supported by government and private players. We believe capex will continue as a mega theme for the next few years with the government focusing on the PLI scheme and over 15 sectors having an estimated outlay of over $32 bn, of which 85% of outlay is towards import substitutions and sunrise opportunities e.g. value of mobile production in India stood at $35bn in 2023, up 14x in the last 8 years driven by government's policy push towards the manufacturing sector.

India's GDP is on a sustained growth path, up by ~7.2% in FY23 and likely to grow over ~6% in FY24.

Global slowdown and monetary tightening of the past can have some effect on economic growth going forward. We haven't seen such a sweet spot for the Indian economy where the corporate leverage is low, inflation has peaked out, banks are well capitalised, strong forex reserves and we can be a current account surplus country in FY24. The key risk to watch out for could be the global slowdown resulting from steep rate hikes over the last year. Markets are not very cheap and with the US money market and sovereign yields at ~4-5%, it could keep the world more tilted towards the US treasury.

In this letter, we provide insights on annual performance for a few important sectors for FY23. I would like to thank my team members Pankaj and Nimit for their contributions. Let me elaborate sector-wise as follows -

  1. Banks:

    Strong credit growth of ~16% YoY in FY23 led by retail and service segments. Deposit growth at ~10% YoY, lagged credit growth. Since Feb'22 Fed rate has risen by 500 bps and RBI in FY23 did six repo rate hikes which led to an increase in the repo rate by 250 bps aiding a natural tailwind for margins. With decadal low non-performing assets this year, credit cost was on the lower side for most of the banks and the worst of the asset quality looks behind now. With buoyancy in the economy and capex cycle revival, credit demand is expected to be higher and most banks are guiding for double-digit growth. To cater to this credit growth demand, higher deposits will be required which can be either through branch expansion or with technology advancement. These will keep the opex and cost of funds higher. Margins have largely peaked out for most banks; thus, the focus will now be on protecting them amid the expectations of a rate cut later during the year.


  2. Financial Services:

    Services: It was a strong year for Non-Banking Financial Companies (NBFCs) which recorded strong disbursements leading to healthy AUM growth across the board. Auto financiers recorded ~50% YoY disbursement growth backed by strong auto sector demand and an improving macro environment. Housing Finance Companies witnessed healthy retail disbursements resulting from sustained retail housing demand. The NBFCs have been able to maintain their NIMs despite rising cost of funds because of the hike in the lending rates. Across the NBFC space, there has been a reduction in overdue loans which was largely driven by a mix of write-offs and recoveries. Auto financiers saw the highest improvement in NPA ratio (more than 1% YoY) amongst various NBFCs led by strong collections. Few diversified NBFCs witnessed a marginal increase in GNPA due to faster run-down in their wholesale book, however, NPA continued to improve further. Going ahead, the sector is expected to witness continued improvement in asset quality, healthy loan growth driven by improving macroeconomic conditions, and rising NIMs resulting from the expected interest rate decline.


  3. Information Technology:

    IT sector witnessed a pendulum shift from attrition issues, good growth in the first half to a decline in net hiring, muted growth outlook, and demand softness in the Western world in the second half. The business environment remains challenging, and companies are witnessing delays in decision-making with some project cancellations. Hi-Tech, Communication, Consulting, BFSI, and Discretionary are amongst the most impacted verticals. However, the order book is still strong due to cost takeout/efficiency deals and vendor consolidation. Commentary from the management indicates growth moderation in FY24 with the majority of the growth expected to be back-ended. Lastly, margin movement will continue to be a key monitorable.


  4. Automobile:

    It has been a good year for auto, backed by pent-up demand and low base, despite several headwinds like chip shortages, commodity price inflation, inventory management due to changes in norms, low exports, etc. Volumes of tractors and passenger vehicles made new highs with the growth of ~10% & ~25%, respectively. Two-wheelers showed stable growth of ~8% but volumes are still ~20% away from its peak of FY19. Medium & heavy commercial vehicles registered a strong growth of ~40% and now volumes are just away ~13% from its peak of FY19. Most auto manufacturers recorded margin expansion, which was driven by operating leverage, decline in commodity prices in the second half of the year, and a change in product mix. Electric Vehicle sales in India surpassed one million in FY23 which grew 157% on a base of 458,767. Going forward with an expected rural recovery, two-wheeler companies' revenue will grow in double digits. Trucks and tractor volumes are expected to grow further given the boost from capex being a pre-election year. Declining commodity pricing can be a tailwind for margins of the auto sector along with operating leverage. Exports were subdued due to inflation, dollar shortage, and devaluation of local currency in a few countries. However, the same is expected to recover in the second half of FY24.


  5. Cement:

    It was an eventful year for the cement sector wherein the companies witnessed strong volume growth and margin pressure in the first half fuelled by high power & fuel cost, which started subsiding in the second half. Realizations in FY23 improved by a healthy 5% YoY backed by strong demand and improving capacity utilizations. Few companies delivered industry-leading volume growth driven by a ramp-up in new capacities coming online. Most managements have maintained the targeted timelines for earlier stated capacity expansions suggesting a strong demand outlook for the medium term. To sum it up, the cement industry is expected to witness its best year ever with healthy volume growth led by the government's infra push, strong underlying housing demand, and margin recovery resulting from lower fuel costs which will drive profitability.


  6. Real Estate:

    It was a strong year for the real estate sector with the majority of listed companies recording their highest-ever pre-sales on the back of sustained real estate demand and higher launches. Also, healthy project completions led to strong financial performance (average revenue growth of ~30% YoY). For the current year, companies are aiming at ~15-20% booking growth which will be


  7. Consumer and Retail:

    Consumer sector ended the year with moderate volume growth towards the second half impacted by unseasonal rains across the country, weak demand and sticky food/fuel inflation. Jewellery, paint and cigarettes were the outliers with strong volume growth during the year led by pent-up demand, extended marriage season and demand tilting towards organized players. Raw material costs are expected to decline which will aid margin recovery in the current year. Commentary from the companies indicates partially passing on the margin recovery benefit in the form of product price cuts and higher advertising & promotional spending to drive volume growth. The retail sector saw a difficult year driven by demand pressure in segments catering to low-income consumers, while premium and luxury segments witnessed high demand and recorded strong volume growth. Consumer demand is expected to bounce back strongly in the second half of the year with margins for consumer companies expected to improve on the back of subsiding inflation and operating leverage.

Amidst the global setup heading towards a recessionary environment, India is likely to thrive on domestic growth over the next few years, despite the global slowdown. India can outperform global markets by a wide gap. Lastly, a bigger thing to watch out for will be a stronger rupee which can be a game changer in the event of an expected current account surplus.

Best Wishes !!!