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1
CII Associations’ Council
Outlook on Indian Economy and Industry
Mukesh Agarwal
President, CRISIL Research
November 21, 2012
1
2
Economy Overview
3
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
4
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
5
Industry Overview
6
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
7
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
8
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.
9
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
10 10
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
11
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
trib
uti
on
of
rate
d e
nti
ties
Median Wt
avg.
12
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
trib
uti
on
of
rate
d e
nti
ties
Median Wt avg.
13
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
trib
uti
on
of
rate
d e
nti
ties
Median Wt avg.
14
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
trib
uti
on
of
rate
d e
nti
ties
Median Wt avg.
15
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
trib
uti
on
of
rate
d e
nti
ties
Median
Wt avg.
16 16
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%
Dis
trib
uti
on
of
rate
d e
nti
ties
Median Wt avg.
17
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%
Dis
trib
uti
on
of
rate
d e
nti
ties
Median
Wt avg.
18
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
trib
uti
on
of
rate
d e
nti
tie
s
Median
Wt avg.
19
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%
35%
40%
45%
Dis
trib
uti
on
of
rate
d e
nti
tie
s
Median
Wt avg.
20
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%
5%
10%
15%
20%
25%
30%
35%
Dis
trib
uti
on
of
rate
d e
nti
ties
Median
Wt avg.
21
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