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The double-digit growth in merchandise exports in the last two months was driven by the recovery in global commodity prices rather than higher volumes, says India Ratings and Research (Ind-Ra). The agency expects the inflationary impact of higher commodity prices to result in better demand conditions for manufacturing exporters. The broad based increase in commodity prices will also benefit the nominal EBITDA generation and consequently the credit profiles of exporting corporates in commodity-linked sectors. Better demand conditions in western economies and the knock-on effect of higher commodity prices on emerging economies will result in higher export volumes over FY18 for sectors such as textiles, auto and auto components, chemicals and gems and jewellery.
Indian merchandise exports (in USD terms) rose for the seventh consecutive month in March (27.6% yoy), resulting in a cumulative growth of 4.7% in FY17 (FY16: -15.5%). The growth in March 2017 was led by both oil (69.1% yoy) as well as non-oil (23.2% yoy) exports and reflected the second consecutive month of double digit growth (February: 17.5% yoy). While, merchandise exports have grown substantially over the last couple of months, a closer look at manufacturing data suggests that volume growth across exporting corporates may not have been broad-based. In February 2017, the manufacturing component of Index of Industrial Production (IIP) contracted by 2% (April 2016- February 2017: negative 0.3%). Similarly, cargo shipment volumes at major ports in the month of February 2017 grew by a mere 0.3% yoy (April 2016- February 2017: 6.5%). The growth in Indian merchandise exports also coincides with export growth demonstrated by other Asian peers, which have also benefitted from rising commodity prices. At the end of March 2017, the World Banks' non-energy price index, energy price index and base metal price index were up 9.3% yoy, 38% yoy and 22.4% yoy respectively.
As per the Ministry of Commerce' data, merchandise exports (in USD) to the United States and the EU in March 2017 increased 8.99% yoy and 9.27% yoy respectively, reflecting the improving consumption scenario in both regions. Indian passenger vehicle and MHCV exports which are largely shipped to the US and EU registered a volume growth of 16.2% and 24.2% respectively (Source: SIAM) in FY17, reflecting the supportive demand conditions. Furthermore, retail sales in western economies continue to grow at a healthy pace which bodes well for corporates exporting textile products. However, Ind-Ra believes that textile exporters' credit profile will not benefit significantly due to their limited ability to control prices, owing to stiff competition from other Asian exporters. Gems and jewellery companies will benefit from the sustained improvement in demand conditions which is expected to lead to higher discretionary spending.
Globally, demand from developed economies remained healthy over FY17, however merchandise exports to Asian countries (about 50% share in exports) continued to be modest over FY17. Deliveries to Africa and Latin America remained muted, as was reflected in de-growth in the value of shipments. Reflecting the subdued demand conditions, two wheeler exports de-grew by 5.8% in FY17 (Source: SIAM). Nonetheless, Ind-Ra believes that continued growth in developed markets, coupled with the recovery in commodity prices will translate to moderate improvement in export volumes to Asia and Africa as well over FY18.
While, the agency expects the gradual recovery in demand conditions to continue, Indian exporters will continue to face down-side risks from protectionist policies in the US, a further slowdown in Chinese growth and will remain exposed to the effects of changes in commodity prices. Protectionist policies are expected to have a varied impact on exporting corporates with the service sector expected to be impacted to a greater degree. Software service export growth remained muted recently (3QFY17: -1.2%, 2QFY17: -0.1%, 1QFY17: 0.3%), as incremental IT spending by global corporates have remained muted. Lower revenue growth of Indian IT exporters will get exacerbated by declining margins due to adverse immigration policies which will lead to higher employee costs.
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