Mukesh agwl

21
1 CII Associations’ Council Outlook on Indian Economy and Industry Mukesh Agarwal President, CRISIL Research November 21, 2012 1
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Page 1: Mukesh agwl

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CII Associations’ Council

Outlook on Indian Economy and Industry

Mukesh Agarwal

President, CRISIL Research

November 21, 2012

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Economy Overview

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Current macroeconomic scenario

Global risks on the rise

– Eurozone officially in recession in 2012 with 40% probability of it continuing in 2013

– US faces a fiscal cliff – automatic tax increases and spending cuts, which, unless halted,

will drag it into recession in 2013 (25% probability)

– Reflected in weak exports and rupee volatility

Domestic macro environment weak

– 2012-13 GDP growth expected at 5.5%, inflation at 8.0%

– Investments and industrial output at standstill (0.1% growth in H1) and exports shrink

(-6.2% growth in April-October)

– Fiscal and monetary policies constrained to revive growth

– Inflation begins to ease but to stay way above RBI’s comfort-level of 5%

Recent reform measures lift mood and raise hopes

– Swift implementation/execution critical for material impact on growth

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India Outlook: 2012-13

Note: F- Forecast

Source: Central Statistical Organization

2010-11 2011-12 2012-13F

Real GDP factor cost (y-o-y % growth) 8.4 6.5 5.5

Agriculture 7.0 2.8 0.0

Industry 7.2 3.4 3.6

Services 9.3 8.9 7.6

WPI inflation (average) 9.5 8.8 8.0

Interest rate (10-year G-sec March end) 7.8 8.8 8.0-8.2

Exchange rate (Rs-$ March end) 44.8 51.2 53.0

Fiscal deficit (% of GDP) 5.1 5.8 6.2

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Industry Overview

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Profit margins stabilise in Q2 FY13

Overall revenue growth has been tepid at 9 per cent y-o-y in H1 of 2012-13

– Volume pressure in sectors such as automobiles, capital goods, metals and hotels

– Sharper increase in realisations has benefited FMCG and cement, while depreciation in the rupee

helped IT sector, despite slowdown in volumes

Declining trend in EBITDA margins arrested with margins improving 60 bps q-o-q in

Q2 2012-13; margins almost stable on a y-o-y basis

– Margins have stabilised either because of lower input costs or improvement in realisations (sectors

such as cement, sugar, and tea)

Source: CRISIL Research, Company reports, based on unaudited interim financials of 2748 companies excluding BFSI and PSU oil marketing companies

Slowdown in revenue growth in 2012-13 However, trend reversal seen for margins

0

2

4

6

8

10

12

14

16

18

0

5

10

15

20

25

FY 09 FY 10 FY 11 FY 12 H1 FY13

Per cent Per cent

Revenue growth (LHS) Operating margin (RHS)

Net margin (RHS)

15.7 15.3 14.3

13.4 14.0 13.5 14.1

9.1 8.1 7.7

6.1

7.8 6.6

8.0

0

2

4

6

8

10

12

14

16

18

Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13

Operating margin Net margin

Per cent

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Capital investments to dip for the second year in a row

Poll of 200 companies (together accounting for around 70 per cent of market cap of

S&P CNX 500 excluding BFSI cos.) indicates that investment sentiment is depressed

Aggregate capex expected to decline by 14 per cent in 2012-13, with investments by

private sector (170 companies) projected to decline by a steep 35 per cent

Corporate also seem to be less willing to commit investments into fresh projects

– Only about one-fourth of investments planned in 2012-13 is towards new projects

– 94 companies do not intend to invest in new projects

E: Estimated; P: Projected

Source: Company reports, CRISIL Research

0.92 1.48

1.14 1.07 1.35

1.83 1.19

2.12 2.07 1.35

20

08-0

9

20

09-1

0

2010-1

1

20

11-1

2E

20

12-1

3P

Public sector Private sector

27%

-35%

-6%

-2%

(Rs trillion)

2.7 2.7

3.3 3.1

2.7 26%

20% 21%

16%

12%

2008

-09

2009-1

0

2010

-11

2011

-12E

2012

-13P

Growth in fixed asset base

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Companies blame ‘policy inaction’ for slowdown in investments

Source: Company reports, CRISIL Research

Policy and administrative

reforms required in key

areas:

Land acquisition

Mining policy

Fuel linkages

Rollout of GST

Fiscal consolidation

Over 70 per cent of the companies have cited ‘policy inaction’ as one of the top 2

factors impacting slowdown in investments

Close to 60 per cent companies felt that unavailability of funds had the least

impact on slowdown of investments

4.1

3.2

2.9

2.6

1.8

Unavailability of funds

Demand slowdown

High interest rates

Global uncertainty

Policy inaction

Most influential

Least influential

11%

55%

20%

11% 3%

Policy inaction/ delay

in clearances

Global

uncertainty

High interest

rates

Demand

slowdown

Unavailability

of funds

Policy inaction gets a weighted average

score of 1.8, indicating that it’s by far the

most important factor impacting slowdown.

Over half the companies believe that

policy inaction is the biggest reason for the

slowdown.

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Hig

h

Low High Medium

Consequent financial distress

CRISIL’s Credit Quality Vulnerability Matrix

Petroleum Product Marketing

Tea

NBFC

Crude Oil

Natural Gas

Pharmaceuticals

Hospitals

FMCG

Transport Operators

Gems and Jewellery

Automobiles and Auto-ancillaries

Infrastructure (Roads,

Airports, Ports)

Power (excl. state discoms)

Consumer Durables

Telecom

Steel

Cement

Non-ferrous metals

Petroleum Refining

Petrochemicals

IT/ITeS

Airlines

Real estate

Power – State Distribution Utilities

Textiles

Shipping

Sponge iron

Construction

Capital Goods

Hotels

Lik

eli

ho

od

e

ffe

ct

of

dem

an

d s

low

do

wn

/ in

cre

as

ed

co

mp

eti

tio

n

Lo

w

Me

diu

m

Risk-wise distribution of industries

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Consequent financial distress

Ratings Overview

Sector No. of companies

rated*

Rated amount

(Rs. Crore) Median rating

Weighted

average rating

% negative

outlook

Power 47 127,608 BBB AA 15

Textiles 952 47,188 B BB 4

Real Estate 302 33,580 B BBB 3

Construction 701 154,444 BB A 4

Steel Products 534 22,405 BB BB 4

Steel

Intermediates 92 5,946 BB B 5

Cement 27 13,219 A AA 4

Roads 60 29,159 BBB BBB 8

Telecom 13 43,707 A A 8

Automobile 13 33,041 AA AA 8

Auto Ancillaries 320 16,659 BB BB 4

IT Services 29 752 BB B 7

All 10,001 983,277 BBB AA 4

* As of September 30, 2012

Source: CRISIL Rating

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Fuel availability

Financial Health of

SEBs

Approvals & project

implemen-tation

New generation projects face high risks -

domestic fuel linkage and inability to pass on

increase in cost of imported coal are key

challenges

Transmission and operational generation units

less vulnerable – based on fixed RoE model

Financial health of SEBs weak; outstanding short-

term liabilities stood at Rs. 1.9 trillion as on March

2012

Most banks hitting exposure limits

Key drivers/monitorables

P:Projected

Source: CRISIL Research

Power: Fuel availability a key challenge

Low High

Financial Stress

11%

14%

17%

20%

23% 24%

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

700

800

2010-11 2012-13P 2014-15P

(mn tonnes)

Demand Supply Imports Imports share (RHS)

Percentage of Negative Rating Outlooks = 15%

Source: CRISIL Ratings, No. of rated entities: 47, rated amount : Rs 127,608 Cr

Non-coking coal imports for power sector to rise

AAA AA A BBB BB B C D

Power 9% 23% 15% 13% 17% 13% 0% 11%

0%

5%

10%

15%

20%

25%

Dis

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rate

d e

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Median Wt

avg.

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Source: CRISIL Research

Key drivers/monitorables

Raw material

costs

Demand from EU and US

High leverage

Low High

Financial Stress

Garment exports are expected to decline by 9-10% in

2012 (vs 19.2% growth in 2011). Domestic demand

growth is also weak. Operating margins for RMG

players to remain constrained

Power outages in South India pushing up yarn prices

Margins for spinners are expected to improve in

2012-13 due to high yarn prices and lower cotton

prices

High leverage of spinners with gearing of over 2

times constrains the credit profile

Capex plans are being postponed due to the

slowdown in demand

Textiles: Credit profile likely to remain weak

0

50

100

150

200

250

300

Cotton Yarn Prices (Rs./kg) Cotton Prices (Rs./kg)

Percentage of Negative Rating Outlooks = 4%

Source: CRISIL Ratings, No. of rated entities: 952, rated amount : Rs 47,188 Cr

High yarn prices and low cotton prices improve the

margins

AAA AA A BBB BB B C D

Textiles 0% 1% 2% 13% 25% 45% 2% 13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Dis

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Median Wt avg.

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Key drivers/monitorables

Volume growth

Liquidity & funding

Asset prices

E: Estimated, P:Projected

Source: CRISIL Research

Developers (especially small and mid-sized

players) facing cash flow problems due to decline

in volumes

High mortgage rates exacerbating demand

slowdown

Oversupply putting pressure on commercial lease

rentals – of ~243 mn. sq ft space estimated by

2014, only 30% likely to be absorbed

Real Estate: Cash flow remains a concern

Low High

Financial Stress

* Absorption nos. correspond to Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad,

Kochi, Kolkata, Mumbai, NCR and Pune.

Percentage of Negative Rating Outlooks = 3%

Source: CRISIL Ratings, No. of rated entities: 302, rated amount : Rs 33,580 Cr

0

50,000

100,000

150,000

200,000

250,000

300,000

2007 2008 2009 2010 2011E 2012P 2013P 2014P

Absorption/Actual offtake (no. of houses)

AAA AA A BBB BB B C D

Real Estate 0% 3% 6% 7% 29% 43% 2% 9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Dis

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d e

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Median Wt avg.

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Raw material

cost

Demand growth

Domestic iron ore supply

Demand growth to slow down further to 3-5 per

cent in 2012-13 (5.5 per cent growth in 2011-12)

HRC prices expected to decline further by 5-7 per

cent in 2013 from around $590 per tonne in 2012

due to:

– Weak demand and decline in raw material prices

Operating margins for domestic players,

especially small and mid-sized players, expected

to remain under pressure due to:

– Limited availability and high prices of domestic iron

ore and non-coking coal

– Limited pricing flexibility owing to demand

moderation

Key drivers/monitorables

Steel: Weak demand to keep margins range bound

Low High

Financial Stress

Percentage of Negative Rating Outlooks = 4%

Source: CRISIL Ratings, No. of rated entities: 534, rated amount : Rs 22,405 Cr

Margin pressure to continue

E: Estimated; P: Projected

Source: CRISIL Research

Operating

margins (%) 2010-11 2011-12 2012-13E 2013-14P

With Mines 26 22 21-23 22-24

Without Mines 20 18 16-18 17-19

Small Integrated 15 10 7-9 7-9

Small Non-integrated 5 3-4 1-3 1-3

Re-rollers 4 3-4 1-3 1-3

AAA AA A BBB BB B C D

SteelProd 0% 0% 1% 16% 35% 29% 1% 17%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Dis

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of

rate

d e

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Median Wt avg.

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Input costs

Demand from end-

user segments

Sponge iron demand forecast to grow at 2-3 per

cent CAGR during 2011-12 to 2016-17

– Increased long steel production by large integrated

players using blast furnace route

Weak demand, intense competition and limited

domestic availability of key inputs – iron ore and

coal – will exert pressure on utilisation levels

– Forward integrated sponge iron manufacturers better

placed compared to standalone manufacturers

Profitability is likely to remain under pressure

Key drivers/monitorables

P: Projected

Source: CRISIL Research

Steel Intermediates: Rising input costs hitting margins

Low High

Financial Stress

Percentage of Negative Rating Outlooks = 5%

Source: CRISIL Ratings, No. of rated entities: 92, rated amount : Rs 5,946 Cr

1,667 2,383 ~2,500 ~2,400

4,800

6,500 ~6,900

~6,400

2,505

3,602 ~3,350 ~3,650

2010-11 2011-12 2012-13 P 2013-14P

Iron ore fines (62% Fe) Iron ore lumps

E-auction non-coking coal

Iron ore and coking coal prices to remain firm

(Rs. per tonne)

AAA AA A BBB BB B C D

SteelInt 0% 0% 1% 12% 39% 15% 1% 32%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Dis

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d e

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Median

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Capacity additions

Demand growth driven by

infrastructure and housing growth

Energy & freight costs

Cement demand to grow moderately at 7-8 per

cent in 2012-13 but operating rates to remain

under pressure at 73 per cent

Pan-India average cement price to register sharp

increase of 16-17 per cent y-o-y in 2012-13

Industry operating margins to improve by 400 bps

to 25 per cent in 2012-13 as steep price rise

offsets escalation in input costs

Key drivers/monitorables

E: Estimated

Source: CRISIL Research

Cement: Sharp price rise to offset escalation in input costs

Low High

Financial Stress

Percentage of Negative Rating Outlooks = 4%

Source: CRISIL Ratings, No. of rated entities: 27, rated amount : Rs 13,219 Cr

Incremental supply to continue to outpace demand

16 14 19

8 14

17

10

26

38 40

32

24

94% 88% 84%

76% 73% 73%

FY08 FY09 FY10 FY11 FY12 FY13E

Incremental demand … Incremental supply …

AAA AA A BBB BB B C D

Cement 15% 19% 22% 7% 4% 11% 0% 22%

0%

5%

10%

15%

20%

25%

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Govt. policy

Working capital

manage-ment

Input prices

In 2012-13, revenue growth to be sluggish due to

slow pace of order execution; profitability to

decline

Working capital requirements have shot up due to

increasing debtor days

Huge opportunity in the long term – construction

opportunity to nearly double over the next 5 years,

driven by infrastructure investments

– Roads, irrigation and urban infrastructure to be the

major drivers

Key drivers/monitorables

E: Estimated, P:Projected

Source: CRISIL Research

Construction: Growth to slow down in the near term

Low High

Financial Stress

Percentage of Negative Rating Outlooks = 4%

Source: CRISIL Ratings, No. of rated entities: 701, rated amount : Rs 154,444 Cr

2007-08E to 2011-12E 2012-13P to 2016-17P

Industrial Infrastructure

19%

81%

14%

86% Rs 10.9 tn

Rs 19.2 tn

1.8 x

Construction opportunity to double

AAA AA A BBB BB B C D

Construction 0% 1% 4% 19% 36% 28% 4% 8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

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Govt. policy

Land acquisition

Traffic growth

Speed bumps in national highway awarding in

2012-13

– Poor awarding in H1 2012-13 due to funding

constraints & relatively less attractive projects

– Project awarding to pick up in H2 2012-13; larger

share expected to be bid on EPC basis

Investment growth to be driven by national

highways

– We expect an investment of Rs. 7 trillion over next 5

years in roads

Key drivers/monitorables

Source: NHAI, CRISIL Research

Roads: Investment to double over next 5 years

Low High

Financial Stress

National highway awarding declines

3,214

5,143

7,406

6,417

2009-10 2010-11 2011-12 2012-13 CRISIL Research

estimate

(km)

Percentage of Negative Rating Outlooks = 8%

Source: CRISIL Ratings, No. of rated entities: 60, rated amount : Rs 29,159 Cr

AAA AA A BBB BB B C D

Roads 3% 3% 8% 42% 28% 8% 0% 7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Dis

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Sales growth to moderate further to 7-8 per cent in

2012-13 from ~13% in 2011-12

– Car sales to grow at a sedate pace due to high cost of

ownership and production disruptions; UVs to

continue high growth driven by new model launches

and higher availability of diesel models

– Scooters will continue to drive two-wheeler demand

– Sluggish MHCV sales due to economic slowdown to

be offset by continuing growth momentum in LCVs

Lower input cost in 2012-13 to be offset by lower

capacity utilisation and higher marketing expenses

Key Drivers/Monitorables

Automobiles: Margins to remain stable in 2012-13

P:Projected

Source: CRISIL Research

Extent of economic slowdown

Fuel Prices

Interest rates

Percentage of Negative Rating Outlooks = 8%

Source: CRISIL Ratings, No. of rated entities: 13, rated amount : Rs 33,041 Cr

Low High

Financial Stress

26 29

37

25

14

5 9

30

8-10 8-10

(12)-(15)

13-15

-20

-10

0

10

20

30

40

Two wheelers Passenger vehicles

MHCV goods LCV goods

(in per cent)

2010-11 2011-12 2012-13P

Auto growth rate to moderate further in 2012-13

AAA AA A BBB BB B C D

Auto 15% 38% 8% 15% 8% 15% 0% 0%

-5%

0%

5%

10%

15%

20%

25%

30%

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Growth to slow further to 9-11 per cent in 2012-13,

in line with deceleration in growth across all OEM

segments

Export growth to remain healthy with increasing

penetration of domestic players

Margins to remain stable in 2012-13

– Lower input costs will be offset by low OEM demand

and limited pricing flexibility in replacement market.

Key Drivers/Monitorables

Auto ancillaries: Growth to moderate in line with slowing OEM

demand

E: Estimated, P:Projected

Source: CRISIL Research

1,868 2,146

2,355

0

500

1000

1500

2000

2500

2010-11E 2011-12E 2012-13P

(Rs billion)

OEM Replacement Exports

Moderation in

automobile demand

Input costs

Low High

Financial Stress

Percentage of Negative Rating Outlooks = 4%

Source: CRISIL Ratings, No. of rated entities: 320, rated amount : Rs 16,659 Cr

OEMs to weigh down auto component growth

AAA AA A BBB BB B C D

AutoAnci 0% 3% 11% 31% 26% 19% 1% 9%

0%

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30%

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