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Pondering over the recent sectoral performances!!!

- Vikram Kotak

The first half of the year has been quite meaningful for the country which was led by government expenditures, capex push and GDP growth which was fastest amongst the major global economies. Headline data has been quite robust with strong growth in direct tax and GST collections, high volumes of e-way bill generation, power demand, amongst others. However, we also witnessed contrasting trends with urban economy doing relatively well and resilient, while the rural economy continues to face delayed recovery because of erratic monsoons and skewed wealth creation which is more towards capital markets, real estate sector, etc. The demand for expensive cars, luxurious apartments, jewellery has been strong while affordable housing, low-ticket discretionary demand continues to struggle.

In this note, we provide important trends emerging from the current quarterly performance for a few important sectors. I would like to thank Ace Investment & Research Team for their contribution.


  1. Financial Services (Banks & NBFCs):

    The financial sector witnessed strong credit growth amongst the banks and NBFCs which was led by government and private sector capex push. The sector witnessed strong disbursement growth in auto segment and micro-finance helped by strong underlying demand and macro-environment; however, consumer finance has been relatively weak resulting from a tepid demand environment. Most of the banks/NBFCs reported robust Net Interest Income (NII) growth, however, the Net Interest Margins (NIMs) moderated for most of them on expected lines. The management commentary suggests another quarter of margin compression in the coming quarter driven by rising cost of funds and increasing competitive intensity. With decadal low non-performing assets, credit cost has been on the lower side and the asset quality continues to improve. The managements in their commentaries have cautioned about possible stress emerging in the low-ticket size unsecured loan segment. With buoyancy in the economy and a pickup in capex cycle, credit demand is expected to be healthy and most banks/NBFCs are guiding towards a healthy annual growth.


  2. Information Technology:

    IT sector witnessed a pendulum shift from attrition issues, good growth during FY22-23 to a decline in net hiring, muted growth outlook, and demand softness in the Western world. The business environment remains challenging, and companies are witnessing delays in decision-making with some project cancellations. Major IT companies recorded weak constant currency growth in Q2, which is usually a seasonally strong quarter. With a slowdown in global economies and delayed ordering, IT companies could witness a muted H2FY24. Margin movement will continue to be a key monitorable.


  3. Automobile:

    It has been a good H1FY24 for the auto sector resulting from easing of chip shortages, softening commodity prices and improving inventory management, etc. Premiumization as a trend is driving the Indian 2W and PV industry. Domestic 2W sales increased 4% during H1FY24 mainly supported by the 125cc+ segment. 2W industry is expected to grow by ~9% YoY but volumes are still ~20% away from its peak of FY19. The PV industry is expected to grow at ~6% YoY during FY24, supported by the SUV segment which has a 50% share in PV sales. Premium segment volumes are expected to improve further ahead with an improvement in semiconductor supplies. EV sales in India have been strong in the current year. While the penetration of e2W (~5%) and e4W (~1%) is in low single digits, major OEMs are planning for aggressive launches in FY25 / FY26. Tractor sales are expected to face pressure during FY24 because of El Niño, weak rural cash flows, and the high base of the previous year. Declining commodity prices and better product mix are the major tailwinds for margins of the auto sector along with operating leverage. Exports were subdued due to inflation and devaluation of local currency in a few countries. However, the same is expected to recover in the H2FY24.


  4. Building Materials:

    1. Cement:It has been another healthy quarter for the cement sector with encouraging volume growth across the board led by the capex push and housing demand, higher capacity utilizations and a positive surprise on the pricing front during the quarter, which is generally weak due to the monsoon period. The industry volume growth is now expected to be around ~9-10% for the year (vs ~7-8% at the start of the year). Aggressive capacity expansions by the larger players reflects a strong demand outlook and consolidation in the industry. To sum it up, the cement industry is expected to witness its highest ever sales volumes, steady margins supported by firm realizations which will drive profitability.


    2. Real Estate:The sector continues to witness strong sales momentum (Q3CY23 recorded a six-year high in quarterly sales volumes) along with new project additions to the portfolio. The project completions have been healthy so far leading to strong financial performance. With a slew of project launches lined up for the upcoming festive season, H2FY24 could be relatively stronger than H1FY24.


    3. Tiles:The tiles sector continues to witness stable volume growth with margin expansion aided by raw material tailwinds. While the tiles demand from the domestic real estate sector has been subdued so far, exports have been strong and management commentary suggests a stronger H2FY24 led by recovery in domestic volume growth.


  5. Industrials:

    The companies have reported stable revenue growth so far on the back of robust execution, new order booking and the order backlog. The outlook for the capital goods sector remains strong against the backdrop of a strong capex scenario, government’s focus on domestic manufacturing through PLI schemes and rising export orders from the gulf countries.


  6. FMCG:

    Consumer staples witnessed low single digit volume growth which was partly due to increasing competition from the unorganized sector and recorded tepid revenue growth due to the price cuts taken by the FMCG companies to pass on the margin benefits of declining raw material prices. The companies with higher contribution from urban region fared relatively better, while others continued to be impacted by a weak consumer demand in the rural region. While the selling prices have been rationalised, given the drop in commodity costs, there has not been a commensurate increase in the volumes yet. Going ahead with the upcoming festive season, discretionary consumer demand is expected to pick-up and H2FY24 could witness a healthy recovery.


  7. Capital Markets:

    The combined average daily turnover (ADTV) for NSE and BSE reached an all-time high of Rs 91.7 thousand crore in September 2023, up 10.3% from the previous month. Meanwhile, combined future and option average daily turnover for both exchanges hit a fresh all-time high of Rs 326 lakh crore during the month. On the other hand, AMC witnessed a mixed quarter. Strong inflows, especially in equity-oriented categories has aided in the topline growth for listed AMCs. However, net inflows in equity remains subdued, due to elevated redemptions. Gross debt inflows reduced during the quarter; debt momentum remains weak as large institutional investors are waiting on the sidelines given the geopolitical tensions across the world. Companies with strong performance in equity schemes have witnessed better SIP flows and gained market share.


  8. Few Things Which Stood Out:

    1. Telecom:India added the highest number of mobile subscribers (seven million) in Q2CY23 followed by China and U.S., according to the Ericsson Mobility Report.


    2. Hospitality:According to HVS Anarock, hotel chains are expected to add more than 14,000 rooms in CY23 - the highest in the past seven years


    3. Power Demand:India recorded highest ever power demand of ~240GW in September 2023.


    4. Digital Transactions:According to National Payments Corporation of India (NPCI), UPI transactions recorded their highest-ever value in October, touching Rs 17.2 trillion, while in volume terms, the no. of transactions touched a new high at 11.4 billion.


    5. Aviation:According to data released by DGCA, domestic passenger traffic up 18.3% YoY during September month. Air traffic has now surpassed pre-Covid levels in India.


    6. Media:Total viewership of ICC World Cup 2023 crossed 400 million for first 26 matches on TV.

So far, the overall revenue growth has been weak, however margin improvement resulting from softening raw material prices has led to stable profitability. Going ahead, any government measures ahead of the upcoming elections along with the ongoing geopolitical crisis will be the key things to watch out for. While we are bullish on the India growth story in the long term, we remain slightly cautious for the second half of the year.