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As a tumultuous 2019 grinds to a close, all hopes are now pinned on 2020. With gross domestic product (GDP) growth slowing to 4.5% during the July-September quarter for 2019-20, manufacturing activity contracting, private investment drying up and inflation slowly creeping up, Indians have been desperate for some signs of green shoots going into 2020.

On one side, there is now a groundswell of expectations that the government will initiate a fiscal stimulus programme. On the other hand, there are also some hopes that the economy will finally show some signs of responding to the government’s past spending. Credit rating agency Crisil Ltd agreed to decode, exclusively for Mint, some of the early sectoral portents. The Crisil study has shortlisted six sectors that have a salutary effect on economic growth.

Automobiles

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Graphics by Paras/Jain.

The automobile industry in 2019 was impacted by three critical factors—moderation in economic growth (lowering private consumption and freight demand), NBFC liquidity crunch (making financiers more risk-averse) and inventory liquidation before the implementation of BS-VI norms. Regulations like insurance and safety norms led to an increase in two-wheeler and passenger vehicle prices, while the revised axle norms lowered commercial vehicle sales.

In Q1CY20, OEMs are expected to focus on liquidating BS-IV inventory and at the same time, cater to expected advance purchases before the implementation of BS-VI norms from 1 April 2020. Moreover, with a modest pick up in the economy, benign fuel prices and an expected normal monsoon, automobile sales are expected to grow in mid-single digits in CY20 despite the BS-VI price hike.

Agriculture

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Graphics by Paras/Jain.

The agriculture industry in 2019 began with a 19% growth in rabi crop profit, led by a 9% increase in wheat minimum support price and higher mandi prices of gram. A delayed onset of south-west monsoon followed by excess rainfall and flood-like situations in certain parts is estimated to lead to a lower kharif crop output. However, kharif profitability is expected to increase by 7-8% year-on-year, driven by higher mandi prices for majority of crops.

In 2020, we expect rabi farm profitability to be driven by an increase in crop productivity amid higher water availability for crop growth. Moreover, better crop management practices amid higher hybridization, adoption of advanced agrochemicals and an expected normal monsoon is expected to push kharif crop productivity and profitability.

Metals (Steel)

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Graphics by Paras/Jain.

Global steel prices dropped 13% in January-November 2019 due to weak demand, unseasonal jump in global inventory levels and trade tensions despite a 34% run-up in global iron ore prices in the same period. Steel prices in India mirrored the trend, falling 12% from 42,000 per tonne in January to 35,000 per tonne in October 2019 with prices picking up in November. Not surprisingly, Indian steel manufacturers’ Ebitda spreads contracted 590 bps year-on-year in the first half of fiscal 2020. After a robust 7.5-8.5% growth in the last two fiscals, the domestic steel industry is expected to witness a mid-cycle slowdown at 2-3% this fiscal, given muted construction investments and weak automotive market. Recovery in global market, domestic demand growth, and upcoming iron ore auctions will be key determinants of the sector’s performance in the near term.

Aviation

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Graphics by Paras/Jain.

Crisil Research expects domestic air passenger traffic growth in India to slow to 3-4% in fiscal 2020 from 14% in fiscal 2019, considering the non-revival of Jet Airways and grounding of Boeing 737 Max aircraft. This was also reflected in H1 fiscal 2020 data where domestic passenger traffic growth was a mere 2%.

In fiscal 2020, EBITDAR (earnings before interest, taxes, depreciation, amortisation and lease rentals) margin of the industry is expected to improve by at least six percentage points compared with fiscal 2019 levels, led by firmer fares, soft crude oil prices and a cut in excise duty on aviation turbine fuel.

Telecom

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Graphics by Paras/Jain.

After witnessing aggressive price war over the last three years, telecom tariffs showed some signs of stabilization towards the end of fiscal 2019. Following a marginal improvement in profitability on the back of improving ARPU, the industry was dealt a severe blow post a Supreme Court order on adjusted gross revenue (AGR), resulting in incumbent telcos reporting highest-ever quarterly losses in the second quarter.

Recent steep tariff hikes (over 40% in December 2019) by the telecom operators comparatively brightens the outlook on operating metrics. In this scenario, we expect industry revenues to grow by 9-10% and 13-15% in fiscal 2020 and fiscal 2021, respectively. However, the pay-out to the telecom department poses a significant uncertainty risk and can impact the sustainability of incumbent telcos, especially ones who need to continue investing for 4G ramp-up.

Real Estate

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Graphics by Paras/Jain.

Residential real estate witnessed a muted performance in CY19. During the year, capital values remained under pressure on account of muted demand. Further, new project launches in key cities remained subdued as developers focused on project completions. On the funding side, the leveraged developers continued facing challenges in refinancing. In fact, outstanding debt of developers declined to 4.4 trillion as of September 2019 from 4.6 trillion in March 2019. It should be noted that in the past, developer loans have grown at robust annual average pace of 13% between fiscals 2015 and 2019. The alternative investment fund announced by the government recently has successfully completed fund-raising for its first tranche and is already considering potential investment opportunities. While the fund is a step in the right direction to sort supply-side issues, its success largely hinges on demand revival, which is likely to remain sluggish in CY20 as well. On the other hand, low to moderate vacancies in good quality commercial and retail assets has led to healthy growth of 3-7% in lease rentals in CY19. This has prompted both private equity funds as well as developers to increase their exposure to these assets. We believe an upward trend in lease rentals will continue in CY20 as well.

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