Stock market analysis and stories by Shreesh Biradar

Shreesh Biradar

Articles

Shreesh Biradar was a Senior Research Analyst at Trendlyne, specializing in the IT, banking and auto sectors.

Articles by Shreesh Biradar

Banks

SECTOR | 07 Nov 2023

Margins fall for Indian banks, even as credit growth picks up

By Shreesh Biradar

Despite its sharp rise in recent months, the Indian banking sector is now tightening its seatbelt, as it flies into some turbulence. Concerns for the global economy are growing, with the rising death count in the Israel-Hamas conflict, the China slowdown and tight oil prices. India is a relatively bright prospect in the bleak global market, even as its banking …

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Private banks have ramped up their lending to offset falling margins – and so far, the rise in interest rates hasn’t put the brakes on credit growth. The Reserve Bank of India's (RBI) 250 bps rate hike since April 2022 has been met with a more gradual increase from banks for their customers. Increased competition and cleaner books have prompted these banks to chase credit growth more aggressively than in the past. Some private banks are also targeting higher-than-industry-average credit growth, and keeping rates lower to achieve that. Axis Bank CEO, Amitabh Chaudhry said that “ The bank anticipates outpacing the industry's credit growth average, and aims for a 400-600 basis point lead in the MSME segment this fiscal year”.

With the cost of funds rising, banks are facing margin pressures. Nifty Private Bank has underperformed the Nifty 50 by 1.7% over the past three months. A key factor in this underperformance has been the decline in HDFC Bank’s stock price following its merger.

The recent merger of HDFC and HDFC Bank has put pressure on the margins of the combined entity. While HDFC Bank has been facing the heat, other private banks like ICICI Bank and IndusInd Bank saw a rise in the cost of funds as Current Account Savings Account (CASA) ratios dropped.

On the brighter side, these banks have benefited from higher fee income and lower provisioning for the quarter. But as term deposits get reset (repricing of deposits) with higher interest rates, the cost of funds increases, leading to a further squeeze on margins.

Retail segment fuels credit growth as interest rates rise

Corporate credit growth has been muted in Q2FY24 – ICICI Bank’s corporate loan book, for instance, grew 3.1% QoQ, slower than its retail book which rose by 5.5%. Retail grew faster as higher interest rates prompted borrowers to shift from NBFCs to banks, leading to a rise in unsecured and personal loans. While deposits have increased, they are yet to catch up with credit growth.

Major banks see loans (advances) rising faster than deposits

Even with higher interest rates, the six large private banks in India — Axis Bank, ICICI Bank, IndusInd Bank, Yes Bank, Kotak Mahindra Bank and Federal Bank — saw a 19.1% surge in advances in Q2FY24, slightly outpacing deposit growth at 18.7%. Loan growth was driven by high demand for unsecured loans, rural banking, microfinance, personal loans and credit cards. Notably, Axis Bank reported a 72% YoY growth in credit card loans, while IndusInd Bank saw a 43% increase in loan disbursement in the microfinance segment. Following the merger, HDFC Bank posted a 29.5% YoY expansion in its commercial rural banking.

Slower deposit growth a worry for private banks

The rise in credit offtake has increased the credit-to-deposit (CD) ratio, with most banks hovering around 90% in their CD ratio, indicating the systemic risk looming over banks in case they start seeing higher NPAs. Ideally, banks gross NPAs below 2% and Net NPAs below 1% is considered good. Banks also face the risk of asset-liability mismatch (ALM), if not handled properly.

HDFC Bank leans on deposits to fuel advance growth after merger

Post-merger, HDFC Bank’s CD ratio has risen, prompting the bank to focus on increasing its deposit base to reduce funding costs. Conversely, Yes Bank has moderated its loan disbursement to lower its CD ratio.

Banks like Axis, ICICI and IndusInd are finding themselves in a tight spot, needing to boost deposits to enable further growth. However, any decrease in the CD ratio must be managed to prevent margin compression.

Net interest margins fall as the cost of funds rises

Private banks are struggling with escalating cost of funds as deposits undergo repricing. The rise in the cost of funds has been partially offset by an increase in lending rates. On average, private banks saw a margin contraction of 27 bps QoQ in Q2FY24.

Rising cost of funds squeeze private banks' NIM

HDFC Bank registered the biggest drop in interest margins, by 90 bps QoQ. Prior to its merger, HDFC primarily focused on housing loans, which typically yield lower returns, resulting in a significant NIM contraction post-merger and dragging its margins below the private banks' average. Intense competition has also limited these banks from raising their rates too high while responding to RBI’s increases.

Private banks, on average, saw only a 3 bps increase in yield on advances (lending rates), while the cost of funds (deposits) increased by 30 bps QoQ. This disparity between the yield on advances and the cost of funds is leading to margin contraction. HDFC Bank, Yes Bank and Axis Bank, which rely heavily on deposits for credit growth, are anticipated to be most affected moving forward.

The cost of funds is rising due to a decline in CASA, and an increase in term deposits. CASA is a low-cost fund for banks and was a major reason for margin improvements in the past year.

Private banks see a decline in CASA ratios in Q2FY24

Despite the uptrend in interest rates driving an increased inflow of deposits, most of these new deposits have been in the form of term deposits, which offer higher interest rates than CASA. The average CASA ratio for the five large private banks dropped by 183 bps QoQ and stood at 40.1%.

Fee income boosts revenue as interest income moderates

Private banks’ net interest income (NII) growth was tepid in Q2FY24, as the higher credit offtake from the previous year was offset by shrinking margins. HDFC Bank saw the highest YoY growth of 16%, though this surge stemmed from its merger with HDFC. The rest of the pack reported less than 5% YoY growth, indicating the pressure on NIMs.

Fee income emerges as major revenue driver for private banks in Q2FY24

For the quarter, non-interest income has been the major source of revenue, with fee income strengthening the earnings of these large private banks. In Q2FY24, non-interest income contributed nearly 28% of the total revenue. For instance, Axis Bank and ICICI Bank compensated for their comparatively lower NII growth with non-interest income growth rates of 12% and 13% respectively.

Margin of safety: Private banks' NPAs decline as provisions strengthen

In Q2FY24, most private banks have seen their NPAs decrease, thanks to higher recoveries and provisioning. ICICI Bank and Axis Bank saw the largest declines in Gross NPA %, with decreases of 28 and 23 bps QoQ, respectively. In absolute terms, both banks trimmed their Gross NPAs by Rs 1,985 crore and Rs 1,401 crore, respectively.

While HDFC Bank saw a jump in its Gross NPA% by 17 bps, heightened provisioning softened the impact, resulting in a modest 5 bps increase in Net NPAs.

HDFC Bank’s NPA shoots up post-merger

These banks have continued to hold contingency and covid-related provisions that are not factored into the capital adequacy ratio. Such reserves provide an additional safety net, ensuring that any new NPA additions don’t affect their profitability or liquidity.

HDFC Bank holds the highest contingency provision in Q2FY24

Private banks have also taken a substantial hit to their profitability in the past due to higher provisions towards NPA. This has driven the provision coverage ratio to over 70%, placing these banks in a comfortable position to absorb higher NPAs and increase provisioning as necessary. ICICI Bank and Axis Bank have the highest provision ratios of 83% and 79% respectively.

In Q2FY24, these banks have cautiously decreased provisioning to maintain profitability. The lower provisioning, coupled with recoveries and write-backs, has helped private banks book higher profits, despite lower NII growth.

Recoveries and write-backs aid lower provisioning

Banks have reaped the benefits of higher provisioning in the past. Now, with the increase in recoveries, the need for new provisions is low. Falling provisioning has improved banks’ profitability.

Private banks’ profitability increases on the back of lower provisioning

HDFC Bank has maintained its provisions at the same levels despite a spike of 17 bps in its gross NPA. However, ICICI Bank has almost halved its provisioning, helping it achieve a 6.4% QoQ net profit growth. Yes Bank has increased its provisioning to aid its provision coverage ratio, which stands at around 72%.

The banking industry is expected to see a credit growth of around 13% in FY24, with private banks poised to outperform the industry by 200-300 bps. The rising cost of funds presents a serious threat to margins, however. Also, the sector’s aggressive pursuit of unsecured loans could be risky if not monitored closely. Higher capital adequacy ratios and significant funds in contingency should provide a buffer against future NPAs

KRChoksey released a Sector Update report for Banks on 21 Mar, 2025.

Realty

SECTOR | 23 Oct 2023

Realty firms target Tier 1 cities amid rising property prices

By Shreesh Biradar

For most Indian families, real estate and gold have long been the de facto route for their savings and investments. While gold prices have moderated in the first half of FY24, realty stocks have skyrocketed. The Nifty Realty index has given returns of 36% in the past six months, outperforming the broader Nifty 50’s relatively modest 10.6%.

According to …

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According to Knight Frank, India’s realty sector is expected to grow at a 9.5% CAGR up to 2047. It is estimated to jump 12 times from the current size of $477 billion to $5.8 trillion as the Indian middle class expands and earnings grow. The report also notes that the growth in the Indian economy will largely come from the realty sector. The previous year’s trends back this up: the market grew by 68% in FY23 from its high in FY19. The drop in the affordability index, higher price realization, and a positive outlook is driving realty stocks.

Affordability index remains healthy despite a small uptick in 2023.

The affordability index - the number of years required (in terms of annual income) to afford a house, has moderated in the past couple of years. In 2023, it averaged at 3.3 years of annual income required to afford a home. This drop over the years, has been from rising income levels and availability of affordable housing. Any further drop or moderation in this metric will help the sector with higher real estate consumption.

FY24 affordability index holds steady despite slight uptick

However, 2023 saw a surge in property prices, which pushed up the affordability index. But, with a moderation in property prices in metro areas and an expected growth in annual incomes, the affordability index is projected to remain stable.

Sector consolidation helps listed players gain market share

Post-Covid, listed players in the realty sector have gained significant market share. With property prices climbing post-pandemic and a decline in consumption, many unorganized players have faced financial challenges. Listed players with stronger balance sheets, easier access to capital, and brand value found it easier to sell their units.

In FY23, a major part of industry volumes were from Tier 1 cities, which grew by 36% YoY. As these listed players foray into Tier-1 cities like Ahmedabad, Kochi, and Hyderabad, further market share gains are expected. This expansion taps into new geographies and a fresh customer base. Market share of listed players is expected to grow from 24% in FY23 to 27% in FY25.

FY24 set to eclipse FY21 highs in listed developers' market share

Most developers in the listed space have aggressive launch plans for FY23-25E, especially in Tier 1 cities. In line with this, they have launched multiple projects. The industry's sales value is predicted to rise at a CAGR of 12-15% over the next two years.

Developers expand into Hyderabad, Kolkata, Kochi as prices rise

Developers are increasingly exploring territories beyond their traditional strongholds. Tier 1 cities like Hyderabad, Ahmedabad, Kolkata, and Kochi are seeing higher investments. For instance, Brigade and Prestige Estates, traditionally based in Bangalore, are now marking their presence in Hyderabad and Kochi. Similarly, Godrej Properties has expanded into Kolkata and Ahmedabad with new residential project launches.

Hyderabad and Kolkata have seen a rerating in property prices. As of Q1FY24, these cities recorded a price surge of 12.2% and 13.4% respectively. This higher demand, coupled with buyers preferring premium branded housing, have been price drivers.

Noida, Hyderabad, Kolkata, and Bengaluru dominate in property price realisation in Q1FY24

Prices in Noida Central Region (NCR) shot up by 21.3% YoY in Q1FY24. Expanding software offices in this region have pushed incomes and real estate costs up. On the contrary, prices in Mumbai have dipped by 3% YoY due to lower demand and an oversupply in the market.

Unsold inventory builds up in FY24

Sales have been slowing down in the first quarter of Q1FY24. New additions were 92,564, while only 81,845 units were sold. As a result, the overall inventory pile-up at the end of Q1FY24 reached 10,50,992 units (a 13.5% YoY growth).

The biggest surges in unsold inventory were reported in Ahmedabad (25.9% YoY growth), Hyderabad (24.3%), and Mumbai (20.6%). The inventory build-up in Ahmedabad and Hyderabad was on account of massive expansion plans undertaken by realty firms in the past couple of years. In terms of selling off the current inventory, Ahmedabad and Hyderabad would take 37 and 30 months, respectively.

Chennai, Mumbai, and NCR have most months of unsold inventory

In contrast, Chennai and NCR saw fewer unit additions in Q1FY24 due to their pre-existing unsold inventory. Mumbai’s increasing inventory is on account of a regional slowdown. However, Bengaluru, Pune and Hyderabad are enjoying good traction with higher sales and lower unsold inventory. The upcoming festive season in Q3FY24 is expected to boost bookings, potentially reducing inventory levels.

Higher interest rates pressuring volume growth

The interest rates in the beginning of FY23 were attractive for home buyers. However, since April 2023, the RBI has increased the repo rate by 250 bps, with banks following suit by raising lending rates by around 300 bps. This rise in interest rates has discouraged many home-buyers, prompting them to delay purchases. For instance, a 20-year home loan of Rs 50 lakh had an EMI of Rs 38,765 (at a 7% interest rate) earlier. Now, at a 10% interest rate, it demands an EMI of Rs 48,251, an increase of 24%. Adding to this burden is escalating property prices, further pressuring potential buyers.

Rising interest rates dampen bookings in Q1FY24

In response, realty firms are applying unique strategies like interest subvention schemes for the first couple of years, waiving of registration charges, and even lower booking amounts, all in a bid to attract new home-buyers.

Realty firms navigate rising interest rates with streamlined debt management

Operating in this capital-intensive industry means that even subtle interest rate fluctuations can have a cascading effect. As interest rates climb, the cost of capital for firms goes up and home-buyers tend to postpone their plans, ultimately reducing consumption. The recent spike in interest rates has left smaller, unorganized players with ballooning debts. Yet, listed players have maintained their debt levels steady despite massive expansions.

Realty firms trim debt as interest rates rise in the past year

These listed players have reduced their debt in line with rising interest rates. By shifting to Tier 1 cities, they have reaped the benefits of lower capital commitments and enhanced margins. This lean approach to their balance sheet has provided much-needed liquidity, empowering them to offer incentives like free registration charges, interest subvention, and extended loan tenures. Companies such as Godrej Properties and Prestige have added significant debt in the past quarter owing to expansion plans at a pan-India level.

The festive season may reduce the inventory build-up, but a major boost might need lower interest rates. However, Tier-1 cities are expected to drive growth in FY24. With their leaner balance sheets, companies are well-positioned to develop new projects and attract buyers.

Automobiles & Auto Components

SECTOR | 19 Oct 2023

EVs and margin expansion to boost bottom-line amid slowing two-wheeler sales

By Shreesh Biradar

Is the auto sector revving back to life? A 20% YoY surge in September vehicle sales suggests that India’s auto market is shifting back into high gear. Climbing from 17 million to 21 million units within a year, the sector seems to be recovering from a prolonged slump, but it's not yet back to its 2020 peak of 26 million. …

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While the Nifty Auto index has outperformed the broader Nifty 50 over the past quarter and year, it is the two-wheeler industry that’s truly in the spotlight. Stocks like TVS Motors and Bajaj Auto have surged by more than 40%, making them standout performers in India, the world's fourth-largest automobile market. In contrast, Eicher Motors has had a modest run, underperforming the broader index in the past three months.

Nifty Auto outperforms Nifty 50 over the past quarter and year

Festive fervour expected to boost two-wheeler demand

Two-wheeler sales have had a challenging time in FY24, but festivals like Ganesh Chaturthi and Onam have given the sector a much-needed boost. The upcoming Diwali festival is also expected to further boost sales.

Festive demand fuels two-wheeler sales

The festival season has resulted in almost stagnant growth volumes, compared to 2022. A stable pricing environment across all segments and improving consumer sentiment in urban markets for premium two-wheelers will likely translate into higher demand, and the low base for some of the segments will help in increasing sales for FY24.

However, delayed monsoons have played spoilsport, and hit crop yields in rural areas. The impact on farmer incomes could lower the sales of entry-level two-wheelers (with engine capacities of 125 cc and below) in these regions.

Lower international demand hampers two-wheeler exports

The export of two-wheelers, which had been booming until a few years ago, have slowed down considerably. Exports from India reported an 18% decline, amounting to 3.65 million units from 2022-23. This downturn was influenced by a liquidity crunch, currency devaluations, and country-specific socio-political and economic weakness. The outlook for African markets in Q1FY24 is also fragile, and could negatively impact the volumes of Bajaj Auto and TVS.

Two-wheeler exports stall amid muted demand

However, falling freight rates and better container availability are silver linings for exporters. Two-wheeler exports from India are expected to see positive growth starting from Q2FY24. There is increasing demand for Indian-made motorcycles and scooters in new geographies like Mexico, Philippines, Latin America, and Turkey. Based on current monthly volumes, the share of the Philippines in India’s two-wheeler export market could rise to 8% in FY24 from 4% in FY22.

Cut in FAME subsidy impacts electric two-wheeler sales

The reduction in the FAME subsidy has posed challenges for electric two-wheeler players in maintaining volume growth. While it's understood that governmental support through subsidies cannot be indefinite, the immediate impact on sales has been noticeable.

EV sales decline following FAME subsidy cut

TVS Motors has, however, successfully established its electric product, iQube, in the market. In the first six months of the fiscal year, TVS Motors dispatched 96,190 iQube units, slightly below the 96,654 units in FY23, indicating a healthy customer response. The company has started exporting iQube to Nepal and plans to expand to other markets in FY24.

Big players expand market share in EV space, try to keep startups at bay

The established auto players are using their financial strength and ability to absorb short-term losses to fend off the new, younger competitors and gain a larger share of the electric vehicle market. Investments in expanding their dealer networks and building EV infrastructure are key to attracting more EV customers. Currently, EVs account for 3-4% of total sales volume.

Large EV players expand market share post-FAME subsidy cut

To strengthen their presence in the electric mobility sector, these companies are partnering with e-retailers in India for last-mile delivery solutions. However, the costs of launching new products, heightened competition, and R&D investments could put pressure on margin expansion in the near term.

Lower steel prices offer margin expansion opportunities

Rising commodity prices and a constrained supply of semiconductors have pressured automakers into raising their product prices. China's manufacturing slowdown has led to supply chain disruptions, from semiconductors to steel production, increasing raw material costs globally. However, the Chinese economy has not rebounded as expected, leading to lower steel prices over the past six months. In Q2FY24, steel prices reached their lowest point of the year, a trend that will likely benefit manufacturers with a delayed effect.

Steel prices show a declining trend

Improvements in the supply of various automotive chips have also contributed to cost reductions. Two-wheeler manufacturers, in particular, are expected to see lower input prices in H2FY24, which, when combined with higher price realisation, could expand margins.

While the auto industry navigates a range of challenges from supply chain disruptions to changing consumer demand, there are clear signs of resilience and avenues for growth. The sector’s adaptability to evolving market dynamics indicates a promising outlook

Axis Direct released a Sector Update report for Automobiles & Auto Components on 02 Apr, 2025.

Mutual Funds News

TREND | 18 Oct 2023

Smart money moves: Which stocks did mutual fund managers buy in September 2023?

By Shreesh Biradar

In September, the Nifty 50 and Nifty 500 indices rose by 2% and 2.2%, respectively, on the back of cooling inflation and an upbeat earnings outlook. However, a surge in oil prices due to ongoing OPEC+ production cuts halted the market rally temporarily that month.

Indian mutual funds recorded a net Systematic Investment Plan (SIP) inflow of Rs 16,043 crore during the same month. Large-cap stocks saw a net outflow of Rs 111 crore, while small and mid-cap stocks had net inflows of Rs 2,678 crore and Rs 2,001 crore, respectively.

The volatility in large-cap stocks has shifted the focus back to mid and small-cap growth stocks. This interest was evident as the Nifty Smallcap 100 and Nifty Midcap 100 indices shot up by 4.1% and 3.6% respectively in September.

Lemon Tree Hotels’ MF holdings increased to 965.8 lakh shares in September

Lemon Tree Hotels: Asset-light model key to margins

Lemon Tree Hotels (LEMONTREE) is engaged in the hotel business with various brands like Aurika Hotels, Lemon Tree Hotels, Red Fox and Keys. The firm currently has 96 hotels comprising 9,400 rooms across 61 locations. It plans to add 30 hotels with 2,840 rooms in the next two years.

The firm has been on an expansion spree and recently signed two new properties in Somnath and Dehradun. These properties are expected to be operational by FY25 and FY27, respectively. The firm’s asset-light model through franchised hotels will accelerate its growth with lower capex. The recent uptick in leisure travel, international events, corporate events, and exhibitions is also contributing to increased room occupancy.

Fund managers who bought shares of Lemon Tree Hotels

Fund managers who added shares of Lemon Tree Hotels to their portfolios include Samir Rachh and Kinjal Desai for Nippon India Small Cap Fund, Harsh Sethi for SBI Nifty Smallcap 250 Index Fund, Dhruv Bhatia for Bank of India Small Cap Fund, and Arun Agarwal and Nirman Morakhia for HDFC Nifty Smallcap 250 Index Fund. Fresh buys were done by Gautam Bhupal and Sonal Gupta for HSBC Consumption Fund.

RBL Bank: Unsecured loans sustain margins

RBL Bank Ltd (RBLBANK), headquartered in Mumbai, specialises in retail loans and credit cards. It is one of the largest credit card issuers in India with a 5% market share. It caters to 13.6 million customers through 520 branches. Around 58% of its branches are located in metro areas. The bank has a strong footprint in Maharashtra, Karnataka and Tamil Nadu, with a loan book size of Rs 73,087 crore.

Credit cards are the key revenue driver for RBL Bank, making up nearly 40% of its loan book. The bank has a credit-to-deposit ratio of 85%, which it plans to increase further. The majority of RBL Bank’s deposits are expected to be repriced in Q2FY24, leading to rising costs of funds and moderating yields. The pressure on margins has affected the bank's profitability, but the good news is that stable NPAs have led to lower provisioning requirements. The management has guided for a credit growth of 20% CAGR and net interest income growth of 23% in FY24-25 (currently at 4.8%).

Fund managers who bought shares of RBL Bank

Fund managers who added shares of RBL Bank to their portfolios include Sanjeev Sharma and Vasav Sahgal for Quant Flexi Cap Fund, Dhimant Shah and Rohan Korde for ITI Small Cap Fund, and Shiv Chanani and Miten Vora for Baroda BNP Paribas Mid Cap Fund. Fresh buys were done by Abhishek Bisen and Devender Singhal for Kotak Multi Asset Allocation Fund, and Krishna Sanghavi and Kush Sonigara for Mahindra Manulife Business Cycle Fund.

Aurobindo Pharma: Injectables and US market aids top-line growth

Aurobindo Pharma (AUROPHARMA) is a major manufacturer of active pharmaceutical ingredients (APIs), branded drugs, and generic pharmaceuticals. US and European markets account for nearly 75% of its revenue. The firm has received 466 Abbreviated New Drug Approvals (ANDAs) from the US Food and Drug Administration (USFDA) so far.

Aurobindo Pharma recently launched a greenfield facility for injectables at Visakapatnam and entered into a partnership with Singapore-based Hilleman Labs for pediatric vaccines. Amid drug shortages in the US, the company expects price stabilization as competition recedes in its segments. Its newly launched injectables are gaining traction, with five new injectables launched and 19 products approved in Q1FY24 alone, including 7 injectables. The firm is expected to grow at an 11% CAGR from FY24 to FY25, supported by healthy growth in the injectable business and biosimilars sector in the US, as well as new product launches in the US and Europe.

Fund managers who bought shares of Aurobindo Pharma

Fund managers who added shares of Aurobindo Pharma to their portfolios include Chirag Setalvad and Dhruv Muchhal for HDFC Mid-Cap Opportunities, Daylynn Pinto and Nishita Shah for Bandhan Sterling Value Fund, and Sanjeev Sharma and Vasav Sahgal for Quant Active Fund. Fresh buys were done by Ravi Gopalakrishnan and Ashish Aggarwal for Sundaram Large and Mid Cap Fund, and Sankaran Naren and Dharmesh Kakkad for ICICI Prudential Value Discovery Fund.

Shriram Finance: Merger and rising interest rates add to the woes

Specialising in vehicle and equipment financing, as well as serving micro, small and medium enterprises, Shriram Finance Ltd (SHRIRAMFIN) has an AUM of Rs 1.93 lakh crore and a customer base of 7.54 million. The NBFC also offers gold and personal loans.

The FY23 merger with Shriram Transport Finance and Shriram City Union Finance has expanded the company's geographical reach, facilitating growth in its MSME loan book. The merger also created a Rs 1,513 crore intangible asset, which will be amortized over the next four years. The margin pressure due to the merger and rising interest rates will weigh down the NBFC’s profitability. Adding to this is the stiff competition from nationalized banks in the vehicle loan space. However, the company expects credit growth to exceed 20%, which will positively impact its top line.

Fund managers who bought shares of Shriram Finance

Fund managers who added shares of Shriram Finance to their portfolios include Pankaj Tibrewal and Arjun Khanna for Kotak Emerging Equity Fund, and Shriram Ramanathan and Gautam Bhupal for HSBC Aggressive Hybrid Fund. Fresh buys were done by Mehul Dama for Nippon India ETF Nifty Next 50 Junior BeES, Kayzad Eghlim and Nishit Patel for ICICI Prudential Nifty Next 50 Index Fund, and Sharwan Kumar Goyal and Ayush Jain for UTI Nifty Next 50 Index Fund.

Minda Corporation: Electric vehicle parts and new product launches to drive growth

Minda Corporation, a manufacturer of automobile components like mechatronics, security systems, die casting, telematics, instrument clusters sensors, serves both the passenger and commercial vehicle sectors. With a manufacturing base in India, the company caters to clients in Germany, China, Japan, Poland, Mexico, etc.

Minda Corporation has a total order book of Rs 3,000 crore, of which nearly 50% is related to electric vehicles (EV), including Rs 750 crore for battery chargers. Its new product launches like smart key lock sets are gaining traction and aiding revenue growth. Acquiring new customers and adding new products are expected to help Minda Corporation’s export revenue. The management expects the firm’s revenue to grow by 23% in FY24-25, along with a 150 basis points expansion in EBITDA margins.

Fund managers who bought shares of Minda Corporation

Fund managers who added shares of Minda Corporation to their portfolios include Manish Lodha and Abhinav Khandelwal for Mahindra Manulife Small Cap Fund, and R Sivakumar and Hitesh Das for Axis Equity Saver Fund. Fresh buys were done by Mehul Dama for Nippon India Nifty Smallcap 250 Index Fund, Swapnil Mayekar for Motilal Oswal Nifty Smallcap 250 Index Fund, and Harsh Sethi for SBI Nifty Smallcap 250 Index Fund.

JK Lakshmi Cement's MF holdings stood at 272.3 lakh shares in September

JK Lakshmi Cement: Higher infra spends help volumes

JK Lakshmi Cement (JKLAKSHMI) is a cement manufacturer with plants in Rajasthan, Haryana, Chhattisgarh, Orissa and Gujarat. The company has a total production capacity of 13.9 million tonnes (MT) and also operates 117 MW power plants, supplying 70% of its energy requirements. It has integrated units at Udaipur and Durg, while grinding units are located at Jhajjar, Cuttack and Surat (Gujarat)

JK Lakshmi Cement has seen an uptick in production volume and capacity utilization due to higher spending on Infra projects and affordable housing. The firm's ongoing capacity expansion is expected to boost volume sales. Also, a decrease in the prices of pet coke and coal has led to margin expansion. The firm plans to further expand margins by selling value-added products, increasing its reliance on renewable energy, and improving logistics efficiency. It is currently adding a capacity of 2.5 MT at a cost of Rs 1,650 crore, which is expected to be completed by FY25. It also plans to take the total capacity to 30 MT by the end of FY30.

Fund managers who bought shares of JK Lakshmi Cement

Fund managers who added shares of JK Lakshmi Cement to their portfolios include Anand Radhakrishna and Rajasa Kakulavarapu for Templeton India Value Fund, Harshal Joshi and Daylynn Pinto for Bandhan Multi Cap Fund, and Harsh Sethi for SBI Nifty Smallcap 250 Index Fund. Fresh buys were done by Sachin Padwal-Desai and Umesh Sharma for Franklin India Balanced Advantage Fund, and Anish Tawakley and Sri Sharma for ICICI Prudential Smallcap Fund.

CSB Bank: Eyes branch expansion to increase market share

CSB Bank (CSBBANK), owned by Fairfax, is one of the oldest private sector banks in India. With roots in Kerala, the bank specializes in gold and small and medium enterprise (SME) lending. It caters to 2.2 million customers through 704 branches. Around 58% of its branches are located in semi-urban and rural areas. The bank has a major presence in South India and a loan book size of Rs 22,000 crore.

Facing stiff competition in gold loans from nationalized banks and slowing growth in SME lending due to rising interest rates, CSB Bank is trying to diversify itself into retail banking. CSB Bank is seeing healthy growth in retail segments on the back of strategic capex for new branches. The bank plans to double its branch count by FY30. CSB’s rise in the cost of funds has been offset by an increase in yields. Its interest margins have been stable at around 5.4%.

Fund managers who bought shares of CSB Bank

Fund managers who added shares of CSB Bank to their portfolios include R Srinivasan and Mohit Jain for SBI Magnum Global Fund, Jaiprakash Toshniwal for LIC MF Flexi Cap Fund, and Mehul Dama for Nippon India Nifty Smallcap 250 Index Fund. Fresh buys were done by Karthikraj Lakshmanan for UTI MNC Fund, and Roshan Chutkey and Sharmila D’mello for ICICI Prudential Banking and Financial Services Fund.

CDSL: Higher annuity income boosts top-line

Central Depository Services (India) (CDSL) facilitates the holding of securities in dematerialized form and enables securities transactions. It is an intermediary for exchanges, clearing corporations, depository participants and investors. CDSL has more than eight crore investor accounts.

In Q1FY24, CDSL saw a 20% YoY increase in revenue, driven by higher annuity income and equity delivery volumes. Annuity income is non-market linked and maintains revenue streams during market downturns. Although margins contracted by 183 bps to 53.9% in Q1FY24, the company’s revenue should expand by 17% in FY24 according to analysts, with a projected EBITDA margin of 56.5%. The firm is also venturing into the insurance repository sector, subject to regulatory approvals.

Fund managers who bought shares of CDSL

Fund managers who added shares of Dixon Technologies to their portfolios include Taher Badshah and Dhimant Kothari for Invesco India Contra Fund, Vishal Mishra and Shridatta Bhandwaldar for Canara Robeco Equity Taxsaver Fund, and Dhimant Shah and Rohan Korde for ITI Small Cap Fund. Fresh buys were done by Hardick Bora and Sanjay Bembalkar for Union Small Cap Fund, and Alok Singh for Bank of India Tax Advantage Fund.

Sobha: Robust launch pipeline and geographical expansion to aid top line

Sobha (SOBHA), based in Bangalore, is engaged in real estate construction, development, and sales. The company has developed townships, housing apartments and commercial real estate. It has also ventured into interior works, metal works and concrete products, providing backward integration.

Sobha’s Q2FY24 operational data indicated that it hit a lifetime high in pre-sales, of Rs 1,720 crore, with an average price realization of Rs 10,223 per square foot. The entire sales in Q2FY24 were dependent on inventory as they did not have any new launches in the quarter. Also, its 15-million-square-foot launch pipeline for the next two years provides revenue visibility. The escalating value of real estate in metro cities contributes to higher price realization. A case has been filed against Sobha however, for forging a no-objection certificate provided by the municipal corporation. Home buyers have accused the firm of misappropriation to the tune of Rs 1,040 crore.

The firm's expansion into cities like Kochi and Gurugram has broadened its geographical footprint and contributed to margin growth. This diversification comes even as demand in the premium luxury segment is seeing a notable uptick.

Fund managers who bought shares of Sobha

Fund managers who added shares of Sobha to their portfolios include Manish Gunwani and Kirthi Jain for Bandhan Emerging Businesses Fund, and Satish Mishra for Tata Mid Cap Growth Fund. Fresh buys were done by Venugopal Manghat and Gautam Bhupal for HSBC Value Growth Fund, Satish Ramanathan and Asit Bhandarkar for JM Value Fund, and Ravi Gopalakrishnan and Rohit Seksaria for Sundaram Small Cap Fund.

Kaynes Technology: New semiconductor plant to open better avenues

Kaynes Technology (KAYNES) is an IoT solution provider and an integrated electronics manufacturer. The firm has capabilities across the entire spectrum of electronics system design and manufacturing (ESDM) services. The firm operates eight manufacturing facilities across India (in Karnataka, Haryana, Himachal Pradesh, Tamil Nadu, and Uttarakhand). The automotive sector is a major segment that provides nearly 34% of its revenue.

As the company mostly caters to other industrial businesses, its primary exposure is to the business-to-business (B2B) segment. This segment has lower competition and higher margins. However, its top five customers contribute nearly 44% of its revenue, which poses a risk. Kaynes Technology plans to set up a Semiconductor Assembly and Testing (SAT) facility and a Printed Circuit Board (PCB) manufacturing plant at a cost of Rs 3,750 crore. The firm currently meets nearly 65% of its semiconductor requirements through imports.

Fund managers who bought shares of Kaynes

Fund managers who added shares of Kaynes Technology to their portfolios include Amit Nigam and Pranav Gokhale for Invesco India Multicap Fund, and Dhimant Shah and Rohan Korde for ITI Multi Cap Fund. Fresh buys were done by Sonam Udasi and Aditya Bagul for Tata India Consumer Fund, Sachin Relekar and Nishita Shah for Bandhan Flexi Cap Fund, and Piyush Baranwal and Ramesh Mantri for WhiteOak Capital Multi Cap Fund.

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Construction Materials

SECTOR | 28 Sep 2023

A fierce battle for market share drives pricing war in the cement industry

By Shreesh Biradar

India’s cement industry is increasingly becoming a battleground for firms with deep pockets. The Adani Group’s recent acquisition spree, including its purchase of Sanghi Cements for Rs 5,000 crore, has intensified competition, particularly in Western India.

Other players like Ultratech Cement on the other hand, are adopting a more traditional approach by expanding their capacities. Despite a boost in infrastructure …

Subscriber exclusive for you. Click here to read.This is a premium article. Click here to read.

Other players like Ultratech Cement on the other hand, are adopting a more traditional approach by expanding their capacities. Despite a boost in infrastructure spending from the government,a pricing war is eroding the profitability of cement manufacturers. After a big drop in fuel and freight costs in Q4FY23, variable costs are showing signs of an increase, adding pressure to margins.

The pre-election infra push is leading the cement industry’s growth in FY24. The industry typically witnesses a demand slowdown post-election.

Adani, Dalmia and Ultratech shift strategies in attempt to dominate

The Adani Group (ACC and Ambuja) is racing towards market leadership by acquiring strategic cement players. Its recent purchase of Sanghi Industries (SIL), a port-based manufacturing plant, is another important link. Leveraging its expertise in port logistics, the Adani Group can move the supply to the western coastal region (as far as Kerala and Tamil Nadu) in case of demand.

Dalmia Bharat acquired Jaiprakash Associates (JPA) Cements for Rs 5,666 crore at the start of 2023. While Ultratech is keen on acquiring JPA’s Uttar Pradesh plant, the deal has hit a roadblock and remains in arbitration. Ultratech Cements, which has traditionally grown through acquisitions (Century Cements, Binani Cements, Jaypee Cements), is now opting for organic growth instead of acquisition.

Ultratech’s pivot is due to increased bidding competition in asset sales. Smaller sellers, aware of favourable market conditions, are not willing to lose a good thing by selling while the cement industry is seeing volume demand. Adani's entry into the sector has also turned up the heat, pressuring smaller players as the pricing war escalates. This is a common strategy for a large player across sectors: offer heavy price cuts to drive smaller competitors out of the market. In an entirely different market - electric cars - Elon Musk has made deep price cuts to Teslas, in the hope of forcing electric car startups to exit.

Given the growing competition and additional capacities coming on stream in the cement sector, smaller manufacturers are likely to be forced to sell to large players in the coming years.

The price war continues

India's cement industry is highly sensitive to price shifts, often experiencing volume drops with even minor price increases. After a staggering drop from a high of Rs 370 per bag in April 2022, cement prices seem to have stabilized around the Rs 340 range in August 2023. The price drop in Q4FY23 can also be attributed to the pass-on effect of lower raw material costs. However, minor price increases have not been sustained over the past 10 months.

All-India cement prices have declined in the past quarter

Industry players are now prioritising volume growth over pricing discipline, a shift driven by the risks of volume shortfalls and a loss of market share. The intense competition to gain market share is softening prices. It's common for cement players to announce price hikes at the beginning of each quarter, only to later retract them through discounts to maintain volumes. Given the seasonal demand slumps in Q2 and Q3 due to monsoons, a potential price increase is expected in the second half of FY24. However, overall pricing will still be 3-5% lower than that of FY23.

Realisation per tonne declines due to intense competition

The ongoing price war has led to lower realisations for the industry. On average, there has been a decrease of Rs 50 per tonne in price realisation QoQ. Orient Cement is the only exception, with a 1.8% QoQ increase in price realisation.

Average realisation per tonne for cement manufacturers drops by Rs 50

Larger players are navigating the problem with volume increases, while smaller players face the heat.

Fuel and power costs to rise in Q2FY24

Fuel and power costs, which account for nearly 50% of manufacturing expenses, are showing signs of an increase. After plummeting by almost 40% from their Q3FY23 highs, the prices of coal and pet coke (key components of these costs) have risen by 16-20% in the past couple of months.

Fuel costs on the rise since July 2023

This price hike is expected to squeeze the margins of cement manufacturers in the next couple of quarters. The sector’s inability to raise prices in line with climbing manufacturing costs will affect profitability.

However, there's a silver lining: coal and pet coke prices are expected to remain range-bound in H2FY24 due to an anticipated decline in consumption, owing to lower imports from European nations. The warmer-than-usual winter and higher inventory in European nations have slowed down consumption.

Growing awareness of green energy solutions is also limiting coal usage in the longer term. For instance, Ultratech Cement aims to meet 30% of its fuel demand through renewable energy, while Ambuja Cements plans to manufacture nearly 21% of its cement using green energy in the coming years.

Freight costs inch up despite flat diesel rates

Despite fluctuating crude prices, diesel prices have stayed the same for five quarters due to government intervention. This stability has provided visibility in freight costs for cement manufacturers. Even with crude prices going over $90 per barrel, diesel prices are expected to remain stable, if not decrease, until the May 2024 elections.

Diesel prices hold steady despite increase in crude oil prices

Fuel prices and freight costs have a strong correlation, and freight costs are increasing for cement manufacturers. One of the reasons for the increase is the rise in transportation charges in Southern India. Cement makers in Tamil Nadu and Kerala are running at full capacity and have started importing cement from Andhra Pradesh, which has raised costs.

Average freight cost for cement manufacturers rises by Rs 12 per tonne in Q1FY24

Election spending to drive cement volumes

Cement manufacturers saw a volume growth of around 8-10% in Q1FY24, which is expected to rise after the monsoon season. The government has allotted Rs 10 lakh crore for infrastructure projects in the FY24 budget, a significant increase of 33% from FY23. With four big states (Telangana, Chhattisgarh, Madhya Pradesh and Rajasthan) going for elections in FY24, the infra push is going to see another boost. Cement manufacturers are expecting heightened demand in the run-up to the polls, with volumes expected to grow in the range of 10-12% in FY24.

While the price war by larger players is affecting the profitability of smaller manufacturers, the increase in volume provides a cushion against price compression. Post-elections, as additional capacity becomes operational and demand dries up, the industry is likely to see more consolidation and slowing profitability

KRChoksey released a Sector Update report for Construction Materials on 20 Mar, 2025.

The Baseline

28 Sep 2023

The West and Asia are approaching inflation differently

By Shreesh Biradar

In a world where inflation is rising during a growth slowdown, central banks face a challenge. The only tool they really have to beat rising prices? Interest rates.

As many countries face weak growth and recession risks, global central banks are pulling interest rates in different directions. In US, UK, India and the EU, inflation has fallen from its peak but is still above the target. Trade wars and surging oil prices haven’t helped: tensions with China, the world’s biggest exporter are high, while OPEC+ countries are driving oil prices up as they try to boost their revenues.

Rising inflation increases costs for people, and takes a big bite out of their savings.

In this environment, there are no easy answers. Central banks are divided: Western powerhouses like the US and Europe are raising interest rates to tame sticky inflation. In contrast, China and Japan are bringing down their interest rates to boost growth.

Countries like Pakistan (22% interest rate), Hungary (14%) and Brazil (12.8%) have kept interest rates high, while Japan (-0.1%), China (3.5%), and South Korea (3.5%) are at the lower end of the spectrum.

Japan sees the lowest interest rates among global peers

The Reserve Bank of India (RBI) is walking a tightrope, keeping interest rates high while trying to prioritize growth. Meanwhile, both the US and EU are hiking rates even as the possibility of a recession increases.

In this week’s Analyticks:

The global divide: Central banks differ on interest rates amid slowdown worries
Screener: Stocks with increasing debt levels as interest rates rise

Let’s get into it.

US Fed embraces "higher for longer" interest rate policy

The US Federal Reserve Bank has embraced a "higher for longer" approach to interest rates. In just 15 months, the Fed has hiked interest rates to a 22-year high of 5.5%, the fastest increase in a short time. But the hike has not led to the much-hoped-for drop in inflation, which stood at 3.7% in August. This is quite above the Fed’s target of 2%.

Interest rates rise at the fastest pace in 2022 than any other time in US history

The recent spike in inflation puts the Fed in a tricky position, giving it limited room to further increase interest rates. Still, the Fed has hinted at one more rate hike before the end of 2023.

US inflation spikes in the past three months, prompting Fed’s hawkish stance

The Fed has opted for higher interest rates rolled out over a longer period, rather than aggressive hikes at one go. It hopes to prevent a recession with this strategy, and achieve a soft landing for the US economy. Federal Reserve Chairman Jerome Powell said, “While some factors are beyond central banks’ control, the US economy has a good chance of a soft landing.”

Will things go as Powell planned, or is a crash landing on the horizon? So far at least, the US economy has been resilient, with higher-than-expected GDP growth (revised upward from 1% to 2.1% in 2023) and higher consumer spending despite rate hikes. But some analysts are predicting a recession in 2024, as unemployment rises.

European Central Bank sticks to high-interest rates, despite recession signals in its largest economy

With an inflation rate of approximately 5.2% in August, down from a peak of 10.6% in October 2022, the European Central Bank (ECB) is struggling to bring inflation down to its target of 2% in the Eurozone. The ECB foresees consumer inflation hitting 3.2% by the end of 2023, with the 2% target expected to be met only in 2025. The prices of natural gas and crude inching above $90 is contributing to sticky inflation.

Eurozone inflation remains stubbornly high

While the ECB has signalled one more rate hike in 2023, politicians, investors and industries are pushing for a pause. European countries, including Germany, the largest economy, are seeing a slowdown and a drop in industrial production.

European countries’ manufacturing PMI declines

Germany faces declining manufacturing output due to rising interest rates. Germany’s manufacturing PMI for August was at 39.8 (35 in Covid times), the lowest among developed economies.

Japan fuels growth through ultra-loose monetary policy

Japan’s prolonged deflation (with a 30-year historical average inflation of below zero) made growth difficult to sustain. So the recent spike in inflation is not such bad news here, and has provided an opportunity to boost the economy. The Bank of Japan is capitalizing on this trend and has maintained its interest rates at a low -0.1%.

Nikkei 225 hits a 30-year high amid high inflation and low interest rates

The ultra-loose policy has led to a rally in the country's stock markets, to a 30-year high. Although inflation peaked around 4.3% in January 2023, it has softened to around 3.2% over the past five months.

Facing slow growth, China opts for rate cuts

After decades of growth, China's post-Covid slowdown has its central bank scrambling to cut rates. The People’s Bank of China slashed its loan prime rate by 10 bps to 3.45% in August. China’s GDP is expected to grow at 4.8% in 2023, lower than initial estimates of 5.6%. Trade wars and rising fuel costs have put a damper on China's economic momentum.

China’s weak GDP growth has prompted lower interest rates

Adding to these challenges is the growing debt problem in China's real estate sector. Industry participants are asking for both financial stimulus and rate cuts to prevent the problem from worsening.

India stands out in balancing interest rates, inflation, and growth

India’s inflation shot up to 6.8% in August from 4.9% in June 2023, mainly due to a surge in vegetable prices. However, these rates are expected to decline in the coming quarters owing to a favorable monsoon.

India’s inflation stays within RBI's target range of 2%-6%

The Reserve Bank of India (RBI) projects inflation will settle around 5.4% in 2023. Since this would be within the RBI’s 2-6% target range, the bank is not hiking rates - yet. An expected GDP growth rate of 6.5% for the year has given the RBI some room to relax, for now.

Globally, rising crude prices, ongoing trade wars, and high government spending have led to sticky inflation.Central banks seem to be leaning towards maintaining high interest rates for longer periods, and hiking more slowly. It remains to be seen if a growth slowdown will force central bankers like the US Fed to be more cautious about hikes, or if they will keep going, as JP Morgan CEO Jamie Dimon suggests, all the way to 7%.

Screener: Stocks with increasing debt levels as interest rates rise

Rising interest rates tend to make debt a bigger burden for businesses.This screener shows stocks that have a total debt-to-equity ratio greater than 1, and increasing interest expenses YoY In FY23. It also highlights stocks where Forecaster expects growing interest expenses in FY24.

The list comprises 25 stocks from the Nifty 500 and three from the Nifty 50 indices, featuring sectors like electric utilities, refineries/petro-products, hotels and telecom services.

Major stocks in the screener are Adani Green Energy, Tata Telecommunications, Adani Energy Solutions, Hindustan Petroleum Corp, Lemon Tree Hotels and Bharti Airtel.

Adani Green Energy reported a revenue growth of 41.3% in Q1FY24. Its net profit also grew by 50.5% to Rs 322 crore, backed by lower operating expenses. However, Adani companies are known for their high debt levels, and this one is no exception. The firm’s interest expense tripled due to debt-backed expansion. Adani Green Energy plans to reach its installed capacity of 25,000 MW in 2025, up from 8,216 MW currently. Most of the new projects will be backed by debt, which can worsen interest expenses for the firm.

Hindustan Petroleum Corp’s revenue grew by 10.3% QoQ to Rs 1.2 lakh crore in Q1FY24. Its net profit also improved by 87.5% QoQ to Rs 6,765.5 crore, compared to a loss in Q1FY23. This oil & gas company achieved an operating profit margin of 8.1% during the quarter. This was aided by a decline in the cost of raw materials due to an 8.7% decrease in Brent crude oil prices to $72.7 per barrel.

Lemon Tree Hotels reported a 69.4% YoY increase in net profit to Rs 23.5 crore in Q1FY24. Its revenue also improved by 15.7% YoY to Rs 222.2 crore, aided by higher gross average room rate (ARR), more revenue per available room (RevPAR), and increased occupancy. The firm has been on an expansion spree and recently signed two new properties in Bhubaneshwar and Kasauli. These properties are expected to be operational by FY25 and FY26, respectively. The firm’s asset-light model through franchised hotels is expected to accelerate its growth with lower capex.

You can find more screeners here.

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Mutual Funds News

TREND | 15 Sep 2023

Smart money moves: Which stocks did mutual fund managers buy in August 2023?

By Shreesh Biradar

In August, the benchmark indices Nifty 50 and Nifty 500 had dropped by 2.5% and 0.8% respectively due to weak global environment, which especially affected large-cap stocks. Investor sentiment took an additional hit with Fitch’s downgrade of US long-term debt and weak economic data from Europe and China.

However, Indian mutual funds recorded a net inflow of Rs 202.4 billion during the same month. Large-cap stocks witnessed a net outflow of Rs 3.5 billion, while small and mid-cap stocks had net inflows of Rs 42.6 billion and Rs 34.2 billion, respectively. The inflow in midcap and smallcap stocks was aided by strong Q1 numbers.

The volatility in large-cap stocks has also shifted the focus back to mid-cap and small-cap growth stocks. Nifty Smallcap 100 and Nifty Midcap 100, which shot up by 4.6% and 3.7% respectively in August, saw the highest interest from fund managers.

Lemon Tree Hotels’ MF holdings increased to 906.4 lakh shares in August

Lemon Tree Hotels: Asset-light model key to margins

Lemon Tree Hotels (LEMONTREE) is engaged in the hotel business under various brands like Aurika Hotels, Lemon Tree Hotels, Red Fox and Keys. The firm currently has 92 hotels with 8,600 rooms spread across 58 locations. It plans to add 30 hotels with 2,640 rooms in the next two years.

The firm has been on an expansion spree and recently signed two new properties in Bhubaneshwar and Kasauli. These properties are expected to be operational by FY25 and FY26, respectively. The firm’s asset-light model through franchised hotels will accelerate its growth with lower capex. The recent uptick in leisure travel, international events, corporate events, and exhibitions is also contributing to increased room occupancy.

Fund managers who bought shares of Lemon Tree Hotels

Fund managers who added shares of Lemon Tree Hotels to their portfolios include Venugopal Manghat and Vihang Naik for HSBC Small Cap Fund, Samir Rachh and Kinjal Desai for Nippon India Small Cap Fund, Harsh Sethi for SBI Nifty Smallcap 250 Index Fund, and Swapnil Mayekar for Motilal Oswal Nifty Smcp 250 Idx Fund. Fresh buys were done by Nitin Gosar for Bank of India Manfactrg & Infra Fund.

Manappuram Finance: Non-Gold segment to drive growth

Manappuram Finance Ltd (MANAPPURAM) is a leading gold loan NBFC in India. It operates through a network of 5,000 outlets, managing a consolidated AUM of Rs 37,100 crore. . While gold loans have traditionally been the company's forte, accounting for 55.5% of its AUM, rising competition is forcing some changes.

Increased competition from nationalised banks in the gold loan space has pushed Manappuram towards non-gold loans. Consequently, the NBFC’s gold loan AUM has dropped from 67% in Q1FY23 to 55% in Q1FY24. Meanwhile, yields on gold loans have stabilised, and gross NPAs are moderating at 2.9%.

The company's subsidiary, Asirvad Finance, is making a turnaround with an expanding customer base and revenue growth. Asirvad Finance is expected to grow by 30% over the next couple of years. Its vehicle and housing finance divisions are projected to be the growth levers.

Fund managers who bought shares of Manappuram Finance

Fund managers who added shares of Manappuram Finance to their portfolios include Manish Gunwani and Kirthi Jain for Bandhan Emerging Businesses Fund, Harish Krishnan and Abhishek Bisen for Kotak Balanced Advantage Fund, and Mehul Dama for Nippon India Nifty Smallcap 250 Fund. Fresh buys were done by Atul Penkar and Dhaval Joshi for Aditya BSL Equity Advantage Fund, and Ashish Naik and Vinayak Jayanathfor Axis Quant Fund.

RBL Bank: Maintaining high yields through credit card loans

RBL Bank Ltd (RBLBANK), headquartered in Mumbai, specialises in retail loans and credit cards. It is one of the largest credit card issuers in India with a 5% market share, and caters to 13.6 million customers through 520 branches. Around 58% of its branches are located in metro areas. The bank has a major presence in Maharashtra, Karnataka and Tamil Nadu, with a loan book size of Rs 73,087 crore.

Credit cards have been the key revenue driver for RBL Bank. Constituting 24.2% of the loan book as of Q1FY24, credit card loans have risen by 26% YoY. While rising costs of funds and moderating yields have exerted pressure on the bank's profitability, stable NPAs have led to lower provisioning requirements. The management has guided for a credit growth of 20% CAGR and net interest margins of 5% (currently at 4.8%).

Fund managers who bought shares of RBL Bank

Fund managers who added shares of RBL Bank to their portfolios include Manish Gunwani and Kirthi Jain for Bandhan Emerging Businesses Fund, Dhimant Shah and Rohan Korde for ITI Small Cap Fund, and Kayzad Eghlim and Nishit Patel for ICICI Pru Nifty Private Banks ETF. Fresh buys were done by Sanjeev Sharma and Vasav Sahgal for Quant Small Cap Fund, and Dhaval Gala and Dhaval Joshi for Aditya BSL ESG Fund.

InterGlobe Aviation: Fleet expansion positions it at industry's forefront

InterGlobe Aviation (INDIGO) is in the air transportation business, including passenger and cargo services, and allied services such as in-flight sales. The firm has a domestic market share of 54% and mainly operates in domestic circuits, covering 78 domestic and 26 international destinations. It has a fleet size of 316 aircraft.

IndiGo reported a 30% increase in revenue in Q1FY24, led by higher volumes. The airline clocked 88.6% aircraft utilisation (79.6% in Q1FY23), coupled with margin expansion, led by higher ticket prices. The government push in aviation infrastructure and the rising number of airports have led to a jump in passenger traffic. Capitalising on its low-cost model and expansive network, IndiGo holds a 54% market share in domestic passenger traffic. The company plans to double its fleet size to 600 by 2030, aiming to boost connectivity and attract more passengers, and drive double-digit growth in the medium term.

Fund managers who bought shares of InterGlobe Aviation

Fund managers who added shares of InterGlobe Aviation to their portfolios include Niket Shah and Ankush Sood for Motilal Oswal Flexicap Fund, Neelesh Surana and Ankit Jain for Mirae Asset Emerging Bluechip Fund, and Shridatta Bhandwaldar and Amit Nadekar for Canara Robeco Emerging Fund. Fresh buys were done by Aditya Khemani and Rakesh Shetty for Motilal Oswal L/T Equity Fund, and Sankaran Naren and Manish Banthia for ICICI Pru Equity & Debt Fund.

Coforge: Growth momentum continues despite industry challenges

Coforge (COFORGE), formerly known as NIIT Technologies, is a global digital services and solutions provider. Operating across 21 countries and 25 delivery centres, nearly 50% of the firm’s revenue is from the US. Its BFSI vertical has a revenue share of 53%.

While many Indian software giants are facing a slowdown in BFSI spending, Coforge has been strengthening ties and winning new deals. It currently has an order book of $897 million, having added orders worth $531 million in Q1FY24. This is a significant uptick from its average order wins of $370 million over the past four quarters. The firm has also increased its utilization levels and lowered its attrition rate. The firm's promoter, Baring PE, divested its entire 26.6% stake in the company through block deals in August.

Fund managers who bought shares of Coforge

Fund managers who added shares of Coforge to their portfolios include Roshi Jain and Dhruv Muchhal for HDFC Flexi Cap Fund, Rohit Singhania and Charanjit Singh for DSP Tax Saver Fund, and Anil Shah and Dhaval Joshi for Aditya BSL Flexi Cap Fund. Fresh buys were done by

Saurabh Pant and Mohit Jain for SBI Large & Midcap Fund, and Ajay Argal and Varun Sharma Franklin India Focused Equity Fund.

Hero MotoCorp's MF holdings stand at 244.6 lakh shares in August

Hero MotoCorp: Premium vehicle launches and investment in EV key to sustenance

Hero MotoCorp Ltd (HEROMOTOCO), a Munjal family enterprise, commands a 27.8% market share in the domestic two-wheeler market. Headquartered in New Delhi, the firm has a major presence in the sub-150 cc motorcycle category. Hero MotoCorp has five manufacturing plants in India and one each in Colombia and Bangladesh. The firm sold 3,45,366 vehicles in August 2023.

Hero MotoCorp recently entered into a partnership with Harley Davidson to launch the new X440 bike in July. The bike will be manufactured in India with an introductory price of Rs 2.69 lakh. The recent uptick in demand for 125 cc and above vehicles has limited the sales of Hero MotoCorp. The rising popularity of EVs has also dented its market share. Hero is not only expanding its portfolio in the 125 cc and above category but is also investing in EV technology and collaborations to maintain its market relevance.

Fund managers who bought shares of Hero MotoCorp

Fund managers who added shares of Hero MotoCorp to their portfolios include Sankaran Naren and Dharmesh Kakkad for ICICI Pru Value Discovery Fund, Vinay Sharma and Kinjal Desai for Nippon India Focused Equity Fund, and Arun Agarwal and Harsha Upadhyaya and Arjun Khanna for Kotak Flexicap Fund. Fresh buys were done by Daylynn Pinto and Nishita Shah for Bandhan Tax Advantage (ELSS) Fund, and Akhil Mittal and Rahul Singh for Tata Balanced Advantage Fund.

Sobha: Robust launch pipeline and geographical expansion to aid top line

Its 15-million-square-foot launch pipeline for the next two years provides revenue visibility. The escalating value of real estate in metro cities contributes to higher price realization. Notably, Sobha holds a strong position in the international market, ranking among the top three developers in Dubai. It reported the highest-ever price realization of Rs 10,506 per square foot in Q1FY24. The firm's expansions into cities like Kochi and Gurugram have broadened its geographical footprint and contributed to margin growth. This diversification comes even as demand in the premium luxury segment is seeing a notable uptick.

Fund managers who bought shares of Sobha

Fund managers who added shares of Sobha to their portfolios include Mohit Jain and Bhavin Vithlani for SBI Infrastructure Fund, Alok Singh for Bank of India Flexi Cap Fund, and Mehul Dama for Nippon India Nifty Smallcap 250 Fund. Fresh buys were done by Abhinav Sharma and Satish Mishra for Tata Mid Cap Growth Fund, and Manish Gunwani and Kirthi Jain for Bandhan Emerging Businesses Fund.

JK Cement: Capacity addition to help increase market share

JK Cement (JKCEMENT) is a cement (grey and white) manufacturer with plants in Rajasthan, Gujarat, Karnataka, Haryana, Madhya Pradesh and Uttar Pradesh. The company has a production capacity of 20 million tonnes (MT) for grey cement and 1.2 MT for white cement. The firm also operates in the paints business.

Experiencing increased volume off-take and capacity utilisation owing to heightened infrastructure spending, JK Cement has seen its margins expand due to falling petcoke and coal prices. However, the pricing pressure due to increased competition is hurting margins. The firm is planning an additional grinding unit with a capacity of 3.5 MT by the end of FY25. It also aims to take the total capacity to 30 MT in the medium term. JK Cement is extending its distributor network and launching value-added products for margin expansion.

Fund managers who bought shares of JK Cement

Fund managers who added shares of JK Cement to their portfolios include Vinit Sambre and Jay Kothari for DSP Midcap Fund, Vinay Paharia and Puneet Pal for PGIM India Flexi Cap Fund, Trideep Bhattacharya and Sahil Shah for Edelweiss Mid Cap Fund, and Anand Sharma and Sharmila D’mello for ICICI Prudential Housing Opps Fund. Fresh buys were done by Vishal Mishra and Shridatta Bhandwaldar for Canara Robeco Multi Cap Fund.

Dixon Technologies: Make in India initiative opens up opportunities

Dixon Technologies (India) (DIXON) operates in the electronic manufacturing space and offers design solutions for consumer durables, home appliances, lighting, mobile phones, medical equipment, etc. Dixon has 18 manufacturing facilities in India, spread across Uttar Pradesh, Uttarakhand and Andhra Pradesh.

Dixon Technologies is expected to sign new contracts in the wake of government restrictions on importing laptops, tablets, and servers. It derives 65% of its revenue from the consumer electronics and mobile divisions. While Dixon has faced challenges such as compressed margins due to reduced prices of open cells for TVs and inflationary pressures impacting the sales of white goods, the government's 'Make in India' initiative has led Dixon to take centre-stage in mobile manufacturing.

Dixon has partnered with China-based mobile companies Xiaomi and Itel to manufacture smartphones in India. Production is expected to start in Q3FY24. It is also in talks with Google to produce Google Pixel Phones in India. Dixon started the production of 4G phones for Jio in May 2023.

Fund managers who bought shares of Dixon Technologies

Fund managers who added shares of Dixon Technologies to their portfolios include Trideep Bhattacharya and Sahil Shah for Edelweiss Mid Cap Fund, Niket Shah and Ankush Sood for Motilal Oswal Midcap Fund, and Kinjal Desai and Amar Kalkundrikar for Nippon India Vision Fund. Fresh buys were done by Sanjeev Sharma and Vasav Sahgal for Quant Mid Cap Fund, and Ajay Tyagi for UTI Flexi Cap Fund.

Ceat: Demand pick up in passenger and commercial vehicles awaited

Ceat Ltd (CEATLTD) is a prominent tyre manufacturer catering to cars, SUVs, two-wheelers, commercial vehicles and tractors. The company has OEM partnerships with 27 vehicle manufacturers and has presence in 110 countries. It is also in the replacement market and operates through its network of 4,500 dealers and 51,000 sub-dealers.

The company is currently navigating headwinds in the passenger vehicle and M&HCV segments due to lower offtake. However, the two-wheeler segment and the replacement market are showing healthy volume growth. The firm is slowly exiting from smaller tyres in favour of larger ones, to boost margins. Additionally, a decrease in raw material costs has further helped margin expansion. Ceat also plans to expand its Chennai plant’s capacity by 45,000 tires at a cost of Rs 700 crore.

Fund managers who bought shares of Ceat

Fund managers who added shares of Ceat to their portfolios include Mehul Dama for Nippon India Nifty Smallcap 250 Fund, Harsh Sethi for SBI Nifty Smallcap 250 Index Fund, Kayzad Eghlim and Nishit Patel ICICI Pru Nifty SmCp 250 Idx Fund, and Swapnil Mayekar for Motilal Oswal Nifty Smcp 250 Idx Fund. Fresh buys were done by Ankit Jain for Mirae Asset Multicap Fund.

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Banks

SECTOR | 13 Sep 2023

Margin contraction, slowing advances pose challenges for Indian banks

By Shreesh Biradar

Resilience is the name of the game in the world of Indian banking, far more than red-hot growth, especially in the face of economic shocks. Despite ups and downs both global and local, Indian banks have come through relatively unscathed.

But recently there has been a shift in momentum, and the banking industry is now grappling with margin pressures due …

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But recently there has been a shift in momentum, and the banking industry is now grappling with margin pressures due to sluggish advances growth and rising deposit costs. While the Nifty Bank had a 21% return in 2022, it's been quieter this year, with a modest 3% increase since January 2023. In comparison, the benchmark Nifty 50 has generated returns of 6.4% since the start of 2023.

Private banks have been the driving force behind the sector's growth, outpacing their PSU counterparts. Private banks’ advances reported a 40% growth in the past two years, compared to the 30% of PSU banks. However, the recent increase in interest rates has led to a slowdown in advances. As top lines see pressure, net profits are expected to benefit from higher recoveries and lower provisioning.

Slowing lending growth and rising deposits define the Indian banking sector

The pace of lending in the Indian banking sector has slowed down in Q1FY24. While the sector saw a CAGR of 4% in advances from Q1FY22 to Q4FY23, this growth dipped to 1.8% in Q1FY24.

With total advances reaching a staggering Rs 143 lakh crore, deposits amounted to Rs 184 lakh crore. The rise in interest rates has led to a decrease in lending growth while promoting an increase in the deposit base.

Rising deposits fuel lending growth for Indian banks

The growth in advances was possible due to a higher deposit base. The credit deposit (CD) ratio had been steadily increasing until Q4FY23. However, Q1FY24 saw a shift, with the CD ratio flatlining at 77.8%. Notably, PSU banks currently have a CD ratio below 75%, while most private banks are above the 80% mark. A higher CD ratio implies efficient use of the deposit base and an improved net interest income (NII).

However, the CD ratio is expected to decline due to rising deposits. Higher interest rates attract more term deposits, causing customers to shift funds from current accounts and savings accounts (CASA) to term deposits.

Margin pressure poses challenges amid rising costs

The declining CASA ratio has increased the banking sector’s cost of funds. Traditionally CASA has been the cheapest source of funds for banks. This drop in the CASA ratio is in line with interest rate hikes undertaken by the RBI since April 2022.

Indian banking sector’s CASA ratio hits nine-quarter low

From its peak of 43.4% in Q4FY22, the CASA ratio has dropped to 40.1% in Q1FY24. The total CASA deposits of Indian banks currently amount to Rs 73.7 lakh crore. This ratio is expected to drop further as interest rates are projected to peak in FY24. As the CASA ratio decreases, it will lead to higher borrowing costs, and put pressure on margins.

The drop in the CASA ratio has resulted in margins contracting by 14 bps over the past two quarters. The repricing of deposits and slowing advances will lead to a further decline in margins.

Net interest margins see moderation

The Indian banking sector has seen a CAGR of 20.3% in its NII over the past two years. This growth was led by margin expansion and an increase in advances. However, due to the rise in borrowing costs and the deceleration in advances, the NII is expected to grow at a slower pace moving forward.

NPAs decline due to higher provisions and better recovery

Non-performing assets (NPAs) have been a major concern for banks since 2014. However, recent trends have silenced critics. Over the past two years, gross NPAs of Indian banks have declined by 35%, while net NPAs have decreased by 51%. While the decline in gross NPA was led by higher recoveries and write-offs, lower Net NPA was from high provisioning.

Gross NPAs now account for 3.7% of advances in Q1FY24, while net NPAs stand at 0.9%. Major private banks report even lower figures, like HDFC Bank with a net NPA percentage of 0.3%.

PSU banks’ net NPAs decline with increased provisioning

Despite an impressive CAGR of 25% in advances over the past two years, the banking sector expects an uptick in NPAs once the growth in advances stops and interest rates start falling. This might trigger higher provisioning in the medium term.

However, most Indian banks maintain a Provision Coverage Ratio (PCR) greater than 70%, as prescribed by the RBI. This will provide a significant buffer against future NPAs. Banks have provisioned Rs 1,44,832 crore in the past four quarters, a decline of 11% YoY.

Indian banking sector’s provisions decline

While higher provisioning impacted profitability at the beginning of FY22, provisions as a percentage of net interest income was nearly 43%. However, it reduced to 17% by the end of Q1FY24. The Indian Banking sector aims to maintain a similar level of provisioning to buffer the balance sheet from future NPAs.

Lower provisions and recovery drive profitability

Increasing NII and lower provisioning are driving the Indian banking sector’s profitability. Over the past two years, profitability has surged by 2.33 times, and this trend is expected to continue, even surpassing revenue growth. The combination of lower provisioning and higher recoveries will help bottom-line growth for banks.

Banks’ profitability increases 2.3 times over eight quarters

While the recent moderation in banking sector margins and slowing advances have posed challenges for the Indian banking sector, they have also triggered a drop in Nifty Bank valuations. The P/B ratio of Nifty Bank dropped from a 52-week high of 3.2 in July 2023 to 2.8 in August 2023. However, this valuation remains higher than the historical averages of the past two years.

Going forward, banks are likely to see further margin contraction in the coming quarters, due to deposit repricing and lower loan demand. The growth in NII will also slow down, owing to lower growth in advances. Although there might be an increase in NPAs, it is expected to be partially offset by higher recoveries. Additionally, provisioning should remain at similar levels, boosting the bottom line. Indian banks are on solid footing right now - but investors should keep an eye on the segments that banks prioritize, as margin pressures rise.

KRChoksey released a Sector Update report for Banks on 21 Mar, 2025.

The Baseline

07 Sep 2023

Oil Marketing Companies stay undervalued despite record profits

By Shreesh Biradar

Oil, the lifeblood of modern economies, is especially closely watched in India, where its impact on consumers can make or break elections. The Indian government has strategically invested in three oil marketing companies (OMCs) - Indian Oil (51.5% stake), Hindustan Petroleum(54.9% via ONGC) and Bharat Petroleum (53% stake). Together, these Big Three control nearly 80% of the domestic retail market.

After the spike in oil prices in 2022, India began buying cheap crude from Russia, providing the OMCs with higher gross refining margins (GRMs). These impressive margins however have been limited by lower prices at the domestic retail level.

The government’s back-and-forth on prices at the pump has put a ceiling on how much profit OMCs can make. It has caused a tricky balance between happy Indian consumers and the financial viability of India's oil marketing companies.

Although the OMCs (Hindustan Petroleum, Indian Oil and Bharat Petroleum) reported record profits of Rs 30,500 crore in Q1FY24, their stock prices haven't moved much. With consumption slowing down in Europe and crude prices rising, the margins of these companies have fallen. With elections coming up and Saudi Arabia extending oil production cuts until December, government intervention can further impact the profitability of OMCs.

In this week’s Analyticks:

Oil Marketing Companies: OMCs stay undervalued despite record profits
Screener: Oil & Gas stocks trading at lower PE than their industry average

Let it flow: India gets ready for post-monsoon surge in oil demand

Oil consumption in India usually takes a dip during the monsoon season, as rain disrupts transportation and mining activities. Over the past three quarters, India’s fuel consumption has flatlined at 57 million tonnes. Although the consumption in July increased by 1.9% YoY, it was still a month on month decline of 6.6%. The highest drop was in diesel consumption, which decreased by 13% MoM.

India’s fuel consumption flatlines over three consecutivequarters

However, India’s fuel consumption should rise again after a weak start in Q1FY24. According to S&P, India’s oil demand in 2023 is expected to increase by 7% from 2019 levels. This figure surpasses earlier estimates, which pegged the demand growth at 6%.

Marketing margins improve, but it's a rocky road ahead

FY23 was a tough year for OMCs. The freeze in retail fuel prices since April 2022 compelled OMCs to bear a blended loss of Rs 3.4/litre (with a profit of Rs 2.3/litre on petrol and a loss of Rs 5.9/litre on diesel).

However, as crude prices dropped from $82/barrel to $72/barrel in Q4FY23, OMCs’ marketing margins turned positive. With crude prices consistently below $75 in Q1FY24, OMCs managed to make a blended profit of Rs 11.9/litre.

Diesel retail margins surge to nine-quarter high in Q1FY24

The upswing in crude oil prices during July and August 2023 has once again impacted marketing margins for OMCs. As of August 2023, their margins stand at a profit of Rs 5.5/litre for petrol, and a loss of Rs 0.7/litre for diesel. Considering the approaching election, OMCs may also face pricing pressures from the government in the coming months.

Brent crude prices rise in Q2FY24

If oil prices climb above the $85 mark and stay there, OMCs could find themselves back in the red. Even if oil prices hover around $80-85, the government may ask the OMCs to reduce fuel retailing prices, denting their profitability. As an initial step ahead of elections, the government is already planning to cut excise duty on retail fuel to ease inflation.

Gross refining margins go lower

The strategic move by OMCs to import cheaper Russian Ural and export refined oil at higher prices to Europe helped expand gross refining margins (GRMs). In Q1FY23, GRMs surged thanks to leftover low-cost inventory, as crude prices rose above $100 per barrel. However, GRMs of the three OMCs declined in Q1FY24 from their peak levels in Q4FY23. The average GRM, which stood at $16.6/barrel in Q4FY23, fell to $9.43/barrel in Q1FY24.

OMCs’ gross refining margins contract in Q1FY24

The decline in GRM was due to the increasing prices of Russian Ural and reduced demand from Europe. Considering the sharp recovery in Singapore GRMs post-July 2023 to around $12.1/barrel, Indian OMCs’ GRMs are expected to increase in Q2FY24. However, the government increased the windfall tax on diesel exports from Rs 1/litre to Rs 5.5/litre starting from August 2023.

Singapore's gross refining margins are lower than Indian refineries

Refining margins are projected to drop from their peak in Q1FY24. As oil prices stabilise, GRMs are predicted to decline to around $8-9 for FY24 overall.

Investors and government to bear the brunt

The daily revision of fuel prices has been frozen since April 2022. This policy shift has led to huge losses for fuel retailers. To compensate for the loss, the government announced a Rs 30,000 crore equity infusion in the 2023 budget.

In line with that, IOCL and BPCL have both announced rights issues, while HPCL is expected to issue preference shares to the government. The rights issue of IOCL and BPCL is expected to draw capital of Rs 11,330 crore and Rs 9,500 crore, respectively, from the government. A similar amount is expected to be subscribed by investors, as the government holds substantial stake in both firms.

Even though the money raised through rights/preferential issues is for the OMCs’ capex plans, it is also compensation for the losses these companies incurred in FY23.

Investors are, no surprise, sceptical despite OMC profits

In 2018, India’s then Minister for Petroleum and Natural Gas, Dharmendra Pradhan, said that “the government has no business in interfering in the pricing mechanism of petroleum products, which should be left to the oil companies to decide on a daily basis”.

Fast forward to 2022 - when oil prices surged above $85, the government abandoned that policy fast, and OMCs froze retail prices, taking a hit to their profitability. Interestingly, the government denied any intervention and put the blame on OMCs. India’s current Minister for Petroleum and Natural Gas, Hardeep Singh Puri, said that “OMCs acted as good corporate citizens and insulated the economy and citizens from increase in energy prices”.

The problem faced by government-owned OMCs is that these listed firms, while designed to make profits, have begun to resemble charitable institutions, incurring losses as needed to protect the general public.

While the general public and economy approve of this, investors have largely steered clear of these stocks. Increased scepticism around government intervention has led to these stocks making negative returns over the past three months, despite record profits. And for now, with Saudi Arabia hinting at more production cuts in the coming months, that is unlikely to change.

Screener: Oil & gas stocks trading at a lower PE than their Industry average

Oil & Gas Valuation Leaders: Refineries and petro-products industry takes lead in valuation

The oil refinery industry is currently seeing some of the highest valuations in the oil & gas sector. This advantage comes from the availability of cheap oil from Russia and higher price realizations on refined oil exports to Europe. However, domestic retail prices have been frozen, causing losses in marketing and distribution. This screener shows stocks from the oil & gas sector that have been trading below the industry average PE.

Significant stocks that appear in the screener are Petronet LNG, Indian Oil Corporation, Mangalore Refinery and Petrochemicals, Hindustan Petroleum Corporation, Oil India, Bharat Petroleum Corporation and Chennai Petroleum Corporation.

Petronet LNG’s revenue declined by 18.3% YoY to Rs 1.2 lakh crore in Q1FY24, while its net profit increased by 12.7% YoY to Rs 7,899 crore compared to Rs 6,142 crore in Q4FY23. This oil marketing and distribution company’s EBITDA margins expanded by Rs 4 per metric million British thermal units (mmbtu) YoY and by Rs 8 per mmbtu QoQ. The margin expansion was led by softer LNG prices.

Oil India’s revenue declined by 24% YoY to Rs 45,312 crore in Q1FY24, while its net profit increased by 3.7% YoY. This oil exploration and production company’s decrease in revenue was on account of lower price realizations for crude oil ($76.9/barrel in Q1FY24 vs. $112.7 in Q1FY23). However, its EBITDA margin expanded by 780 bps YoY on the back of a reduction in well write-offs, a decline in forex losses and a decrease in other provisions.

You can find more screeners here.

Signing off,

The Trendlyne Team

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Banks

SECTOR | 30 Aug 2023

Indian banking sector defies global trends amidst cost cuts and high interest rates

By Shreesh Biradar

In the midst of global banks trimming costs and battling high interest rates, the Indian banking sector has held steady. Morgan Stanley recently ranked India as ‘overweight’ among emerging economies, with the financial sector a key driver for growth. The overall banking sector has stayed resilient even in the post-Covid period. However, Nifty Private Banks have underperformed the Nifty PSU …

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Private banks like HDFC Bank and Axis Bank have shown a decline in QoQ profits, while IndusInd Bank and ICICI Bank saw profit margins moderate. These private banks are grappling with a lower CASA ratio and higher cost of funds. Their net interest margins have flattened out, and show signs of decline. In response, the banks have increased loan recoveries. However, a challenge lies ahead – if interest rates drop further, there's a risk of rising defaults from borrowers.

Credit growth declining amid rising interest rates

The robust credit growth witnessed in FY23 has begun to ease in Q1FY24. Credit expansion, which peaked in Q2FY23, is now showing signs of decline. One major reason for this decline is the rise in interest rates, resulting in a surging deposit base, and fewer loans being taken out.

According to an RBI report, the Indian banking sector’s credit grew by 15% in FY23, while deposits increased by 9.6%. Private banks have outpaced the industry with higher growth rates.

Private banks’ YoY deposit growth outpaces advances in Q1FY24

Even with higher interest rates, the seven large private banks saw advances rise (HDFC Bank, Axis Bank, ICICI Bank, IndusInd Bank, Yes Bank, Kotak Mahindra Bank and Federal Bank), growing by 17.7% in Q1FY24. This growth was primarily from micro, small and medium industries (MSME), personal loans, credit cards, and auto loans. Axis Bank and IndusInd Bank excelled with credit growth rates of 22.5% and 21.5% respectively in Q1FY24, beating the industry averages by huge margins.

The higher deposit base has resulted in a fall in the credit-to-deposit (CD) ratio for banks. Except for Axis Bank and IndusInd Bank, other major players saw their CD ratios decline.

Yes Bank relies heavily on deposits for advances growth

Maintaining a high CD ratio is risky as banks are dependent on the deposit base to fund credit expansion, rather than resorting to bonds, equity issuance, or accruals. Yes Bank and Axis Bank, with CD ratios of 91%, face the risk of asset-liability mismatch (ALM) if not handled properly.

This also leaves little room for growth unless these banks raise more deposits. It's worth noting that a part of Yes Bank's advances is funded by bond issuances. However, a decrease in the CD ratio leads to margin compression.

Q1 sees moderation in net interest margins for most private banks

Most private banks saw a moderation in net interest margins in Q1FY24, averaging a 10 bps point reduction. This trend breaks the margin expansion cycle we have seen till now

Private Bank’s NIM contracts due to increase in cost of funds

The higher interest rates have pushed the banks to choose between credit growth and margin expansion. If they increase lending rates in tandem with the increase in deposit rates, banks will see a drop in credit growth. The public sector banks have not increased their lending rates aggressively, which has forced private banks to keep their lending rates on the lower side.

Private banks, on average, saw only a 11 bps increase in yield on advances (lending rates), while the cost of funds (deposits) increased by 30 bps QoQ. The uneven increase between the yield on advances and the cost of funds is leading to margin contraction. Yes Bank and Axis Bank, which are highly dependent on deposits for credit growth will see the maximum impact.

Two major reasons for the increase in the cost of funds are the decline in current and savings accounts (CASA) and the increase in term deposits. CASA is a low-cost fund for banks and has been a major reason for margin improvement in the past year.

Private banks’ CASA ratio dropped in Q1FY24

However, the recent deposit growth was from higher retail deposits, which resulted in CASA deposit share falling by around 200 bps to 42% for private banks.

Banks like Kotak Mahindra Bank introduced products like ‘ActivMoney’, which acts as a mid-point offering between CASA and retail term deposits. Under this product, customers get 7% on a six-month FD and the corresponding savings account rate if they choose an early withdrawal. This increases customer affinity for savings accounts. For a bank with savings account costs averaging around 3.6% to 3.7% and a term deposit costs between 7% and 7.3%, ActivMoney brings this cost down to around 5%-5.3%.

Strong credit growth in FY23 boosts net interest income

Private banks reported higher net interest income (NII) owing to strong credit growth in FY23. Credit offtake surged by over 18% during this period, coupled with a margin expansion of 30 to 40 bps across private banks. ICICI Bank and Axis Bank saw their NIIs rise by 38% and 27% respectively.

ICICI Bank’s Q1FY24 NII increased by 38% YoY

Banks have also seen growth in fee and non-interest income. In Q1FY24, non-interest income contributed a 35%-45% increment on top of the NII. Fee income has been a stable source of revenue for most private banks. HDFC Bank and Yes Bank, for instance, compensated for their comparatively lower NII growth with non-interest income growth rates of 44% and 46% respectively.

NPAs rise as interest rates drop and credit growth slows

The continuous provisioning and lower credit growth (average below 10%) from FY16 to FY21 have resulted in banks taming their gross NPAs. Currently, net NPAs (Gross NPAs post provisioning) are at their lowest levels in a decade. HDFC Bank, for instance, has a net NPA of 0.3% If the agricultural segment is excluded, the net NPA drops to 0.23%. Agricultural loans, driven by seasonality, do not perfectly align with the NPA recognition criteria.

Also, private banks have cautiously increased provisioning while maintaining profitability. This has driven the provision coverage ratio beyond 75%, placing private banks in a comfortable position to absorb higher NPAs and increase provisioning as necessary.

HDFC Bank leads industry with lowest net NPA%

In most cases, lower interest rates trigger credit growth. As credit growth slows and interest rates start to drop, NPAs tend to increase. The reasoning behind it is that the lower interest rates take out the incentive for customers to pay older loans (which have higher interest rates).

As credit growth slows, the increase in NPAs will start looking significant. If credit growth slows down below 10% from the current 17%-18% levels, and interest rates decrease by around 200-250 bps, gross NPA levels might increase by 150-175 bps.

Recoveries and write-backs aid lower provisioning

Banks have benefited from higher provisioning in the past, as recoveries are reducing the need for new provisions. The decrease in provisioning has improved banks’ profitability. For instance, HDFC Bank saw a write-back of excess provisions totaling Rs 2,227 crore in Q1FY24. This has effectively countered the increase in provisioning, contributing to higher profitability. The trend of recoveries and write-backs is projected to persist throughout FY24. However, the RBI’s new framework around expected credit loss (ECL) will increase provisioning for banks.

Private banks’ profitability increases on the back of lower provisioning

The new ECL framework will add an additional provisioning of Rs 1,00,000 crore for banks, according to initial estimates. Once implemented, this might eat away the banking sector’s profitability for a few quarters.

With the threat of ECL, margin compression, and an expected increase in NPAs, banks are on the defensive. This could slow down banks’ profitability in the coming quarters, particularly as credit growth starts to taper. However, the strong capital buffers and high provision coverage ratios will act as an advantage. Despite this, banks are poised to progress with a more cautious approach, taking valuable lessons from the past.

KRChoksey released a Sector Update report for Banks on 21 Mar, 2025.

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