From Chief Ratings Officer’s Desk

The state budgets provide a wealth of data on the sources of revenues of the state government, their spending priorities, indebtedness levels etc. The audited data of a fiscal year, available after a relatively long gap of nearly two years from the time of initial publication, often reveals that the original budget numbers were aspirational rather than realistic.

However, the data on fiscal indicators of states, released by the Comptroller and Auditor General (CAG) of India, several months ahead of the audited data, provides useful information on the achievement of the budgeted targets. Our study of the provisional actuals released by the CAG for 24 states reveals that their combined revenue deficit in FY2023 was limited to just Rs. 0.5 trillion, a substantial 58% lower than the amount included in the Budget estimates (BE) for FY2023. This benefitted from better-than-budgeted revenue balances reported by Karnataka, Maharashtra, Gujarat, Kerala, Tamil Nadu, and a few other states. As per the provisional data for FY2023, the 24 states together incurred Rs. 6.1 trillion of capital expenditure. This amount was 0.9 trillion lower than the capex budgeted by these states for FY2023.

However, the gap was smaller than the Rs. 1.1-1.4 trillion seen during FY2020-22. Moreover, the combined capital expenditure of the 24 states increased by 19.2% to an all-time high Rs. 6.1 trillion in FY2023 from Rs. 5.1 trillion in FY2022. This may have benefited from the thrust on capital spending by the GoI through its interest-free capex loan scheme, which saw a five-fold increase to Rs. 812 billion in FY2023.

On the other hand, despite the rise in interest rates over the past year, retail credit demand in the country has remained strong, resulting in increased financing requirements for the NBFCs and the HFCs. Lenders continue to depend on securitisation to raise funds as it helps in diversifying their fund-raising avenues.

ICRA estimates securitisation volumes, originated primarily by non-banking financial companies (NBFCs) and housing finance companies (HFCs), to be at ~Rs. 53,000 crore in Q1 FY2024, reflecting a strong growth of ~60% over the ~Rs. 33,000 crore securitised in Q1 FY2023. The securitisation volumes, combining both direct assignments and pass-through certificates, have been witnessing a healthy recovery after the impact of the Covid-19 waned and had registered full-year volumes of ~Rs. 1,80,000 crore in FY2023, close to the pre-pandemic numbers.

Meanwhile, ICRA maintains its domestic tyre demand growth forecast for FY2024 at 6-8% YoY on the back of favourable demand from the original equipment manufacturer (OEM) segment and expected revival in replacements. An improved product mix and range-bound input costs are expected to enhance the margins by 200-300 bps in FY2024.

The OEM segment is expected to grow by 7-9% YoY in FY2024 on the back of favourable prospects for most of the product categories. Easing of supply-related headwinds, preference for personal mobility, and rising disposable income of consumers are likely to support passenger vehicle (PV) demand. Commercial Vehicles (CV) demand also continues to be supported by infrastructure and construction activities, although some sluggishness was seen in Q1 with pre-buying ahead of BS-6 2.0 emission norms transition. Demand recovery in the two-wheelers segment has been gradual, and the momentum in the next few quarters will depend on the monsoon performance.

ICRA’s recently published research note on the domestic cotton spinning industry foresees demand for the industry to improve by close to 10% in volume terms in FY2024 on a yearly basis, primarily gaining through a shift in preference away from Chinese cotton, and the expectations of demand improving for the spring/summer season in the US and the EU regions. However, an expected moderation in cotton prices will lead to lower realisations, which is likely to translate to a 7% year-on-year (YoY) decline in revenues to ~Rs. 34,000 crore in FY2024.

While the cash accruals of players are expected to decline marginally, ICRA expects the spinners’ borrowings to come down too, in FY2024. Lack of any major capital expenditure plan along with lower working capital requirements, because of the softening in cotton prices, are likely to lower the debt levels and improve the capital structure for companies. ICRA expects the debt coverage ratios for the sector to improve in FY2024 with debt/OPBITDA forecast to ease to ~2.2X from 2.4X in FY2023.

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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