From Chief Ratings Officer’s Desk

Although a supportive base boosted India’s year-on-year (YoY) GDP growth to a four-quarter high of 7.8% in Q1 FY2024, it nonetheless trailed ICRA’s (+8.5%) as well as Monetary Policy Committee (MPC’s: +8.0%) expectations for the quarter. The lower-than-projected GVA growth of 7.8% in Q1 FY2024 was led by the manufacturing sector, with the broad-based contraction in merchandise exports outweighing the uptick in manufacturing volume growth and the positive impact of commodity price deflation on margins of such companies. Besides, the trade, hotels, transport, communication and services related to broadcasting component saw a weaker-than-expected growth and trailed pre-Covid levels.

Subsequently, the YoY growth in economic activity, as measured by the ICRA Business Activity Monitor - an index of high frequency indicators, rose to a six-month high of 10.6% in August 2023 from 8.1% in July 2023. This reflects the impact of deficient rainfall on non-agri sectors like construction and electricity, healthy domestic demand and an improvement in non-oil exports. The uptick was broad-based with as many as 12 of the 16 constituent indicators recording an improved YoY performance in August 2023 vis-à-vis July 2023, and half of the indicators witnessing a double-digit growth.

ICRA estimates the net absorption of office leasing across the top six cities1 in India to decline by 10% YoY in FY2024. This along with an influx of huge supply in FY2024, would result in marginal rise in vacancy levels by 60 bps to 15.5% by the end of FY2024. The office developers are expected to witness a revenue growth of 11-13% in FY2024 for ICRA’s sample2 set of non-REIT companies, supported by scheduled rent escalation and improvement in occupancy levels of reputed office players. Further, the rental rates are estimated to rise by 3-5% YoY in FY2024, driven by contracted escalations/lease renewals at higher rates. ICRA’s outlook on commercial office sector is Stable.

The net absorption of office leasing stood healthy at ~57 million square feet (msf) in FY2023 similar to FY2020 levels (22 msf in FY2021 and 33 msf in FY2022) as corporates continued to focus on returning to office, and additional space was required for existing tenants. Physical occupancy increased to around 65% as of June 2023 from 25% in June 2022.

ICRA has revised the outlook on the petrochemicals and basic chemicals industries to Negative from Stable, while maintaining its outlook on Specialty chemicals at Stable. The petrochemicals and basic chemicals industries have been facing headwinds on account of weak demand amid a global supply glut, owing to capacity expansions in several chemicals. This is likely to exert pressure on the operating rates as well as profitability of the petrochemical and basic chemical players. As for the specialty chemicals segment, while profitability is expected to moderate in FY2024, the extent is expected to be mild enough to not trigger an outlook change at this stage.

ICRA continues to maintain a Positive outlook on the banking sector on the expectation that credit growth would remain meaningfully strong, thereby driving earnings growth. While the upward repricing of the deposit base is likely to lead to a moderation in the interest margin, benign asset quality pressures would support lower credit costs and earnings. Accordingly, in ICRA’s view, the banking sector is expected to continue generating sufficient internal capital to largely meet its growth needs while improving the capital cushions. The retail segment is likely to remain the key contributor to credit growth although the sustainability of asset quality hinges on macroeconomic conditions remaining favourable.

The issue concludes with regular features, monthly rating updates, upcoming ICRA events, and news features related to the company.

I hope you will find this newsletter useful and interesting.

Best Regards

K. Ravichandran
Chief Ratings Officer, ICRA Ltd.

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