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

The Baseline

20 Mar 2023

Sovereign Gold Bonds shine brighter than other gold investments

By Shreesh Biradar

Most Indians are familiar with the box of gold jewellery, carefully stored in the Godrej almirah or bank locker. Buying gold is not new for Indian investors – it is a traditional way to save and provide inheritance. And it is easy to resell - as the writer Ken Alstad noted, “Second hand gold is as good as new.”

Over the past 10 years, gold prices increased by a CAGR of 6.49., In just the past six months, it jumped by 9.54%. The recent uncertainty in the financial world and stock markets have increased investments in gold.

Gold also acts as an effective hedge against inflation. Central banks tend to buy gold as a protection against high inflation. In CY22, central banks across the globe purchased 673 tonnes of gold – the highest in thepast 55 years. Besides central banks, broader investors are also buying gold, which pushed gold prices to an all-time high in Feb-2023.

Gold has not disappointed retail investors in terms of returns as its prices have gone up by a CAGR of 12.56% in the past 15 years.

Five-year rolling returns of physical gold have declined between 2014 and 2019. As investors move towards paper gold like Gold Bees (Started by Reliance Nippon in 2007) and Sovereign Gold Bonds (SGB), the demand for physical gold has decreased over the years.

Physical gold performs better than Gold Bees

Gold Bees are similar to physical gold and are exchange-traded funds. It was first launched in India by Reliance Nippon in April 2007. Gold Bees are backed by physical gold. For every investment made in Gold Bees, ETFs buy a proportionate amount of gold.

If we compare the price changes of physical gold to net asset value (NAV) of Gold Bees, the former fares better in the longer run. Since the launch of Gold Bees in April 2007, it has given returns of 11.51% CAGR, while physical gold gave 12.56% in the same time period.

The differential of 1.05% is on account of the expense ratio of ETFs. The churn coupled with storage charges eats away at the returns. Currently, Nippon India ETF Gold Bees have an expense ratio of 0.82%. Their lower returns and inability to be used as collateral limit the value proposition. Hence, Gold Bees are preferred for short-term investments only.

Indian retail investors are the driving force behind gold prices – India consumes 25% of the world’s gold production, coming in second after China. India’s gold consumption in CY22 stood at 774 tonnes and it was 1,002 tonnes in China. While lower than the previous year, rising gold prices have limited retail consumption.

Higher consumption of gold is an economic concern for India. India is a net importer of gold, India has a greater trade deficit, which shoots up dollar prices. To fill the fiscal deficit caused by the stronger dollar, the government has to borrow more. To combat this problem and limit gold imports, the government introduced a 12% import duty on gold in 2013. The government also introduced sovereign gold bonds (SGBs) to lure away retail investors from physical gold.

What are Sovereign Gold Bonds?

Sovereign Gold Bonds are designed to imitate actual gold in terms of monetary benefits. It moves in accordance with price changes in physical gold. On top of this, the government pays a coupon interest rate of 2.5% per annum (paid semi-annually) on the nominal value of the bond. SGB has a lock-in period of five years and a redemption tenure of eight years. After the lock-in period, investors can sell the bond in the secondary market. SGB is as good as gold but in paper form. It’s like buying gold and earning an extra 2.5% interest on top of it.

SGBs aim to wean investors off physical gold and reduce the import burden on the Indian economy. It also lets the government borrow at a cheaper rate of 2.5%, which is much lower than the standard rate of 5%-6%. It’s a win-win situation for retail investors and the government.

Features of Sovereign Gold Bonds over physical gold.

·SGBs pay a coupon interest rate of 2.5% (paid semi-annually) per annum on the nominal value.

·There are no safety/storage concerns associated with SGBs as it is available in demat and paper forms.

·Its redemption price is based on the average closing price of 999 gold over the previous three business days. The prices published by the India Bullion & Jewellers Association (IBJA) are considered for this. This system ensures the purity of gold and eliminates worries over wastage.

·Chances of default are minimal as the bond is backed by the government.

·The bond is issued in multiples of 1 gram and can be traded on the NSE.

·The minimum investment prescribed for individuals and Hindu undivided families (HUF) is 1 gram and the maximum is 4 kg. For trusts and charitable institutions, the limit is 20 kg.

·Even though the maturity period is eight years, SGBs are redeemable after five years, on every interest payment date.

·Capital gains from redemptions are tax-exempted. Gains from the sale of bonds are considered long/short-term capital gains and interest earned is considered under income tax laws.

·SGBs can be used as collateral for loans. The loan-to-value will be in line with a normal gold loan. You are not required to pay valuation charges for SGB-backed loans.

SGBs give better returns than Gold Bees and physical gold

Indian retail investors find comfort in owning physical gold but SGBs beat it in value proportion. Returns from SGBs have been superior to physical gold and Gold Bees. This is besides the added advantage of zero storage/safety costs and 2.5% interest rate from the government.

The chart below compares five-year rolling returns from physical gold, Nippon Gold Bees and SGBs over the past 10 years. Since SGB was only introduced in 2015, we have taken SGB at the same price as gold since April 2007 and added a CAGR of 2.5% YoY. Based on this calculation, the 5-year returns of SGB would have been always higher by 13.14%.

SGBs have outperformed other gold products over the years and are suitable for long-term investments. Even though Gold Bees have underperformed consistently since its launch, it does not take away its short-term benefits.

SGBs, even with their superior returns, have not been able to tame India’s gold consumption. If an investor is looking to ride gold prices along with bank-like interest rates, SGBs clearly stand out. Even parents planning for their children’s marriage could opt for SGBs in the long term as it could be redeemed and bought in physical gold. Or the SGBs can be retained for future growth.

Mutual Funds News

TREND | 15 Mar 2023

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

By Shreesh Biradar

February 2023 saw benchmark indices Nifty 50 and Nifty 500 fall by 2.03% and 2.79% respectively. Both these indices are now trading significantly lower than their February levels. Indian markets were dealing with by the aftermath of the Hindenburg report alleging malpractices by Adani Group. Following this, fund Managers have become very selective and moved money into segments like utilities, retail and IT with more stable cash flows.

GAIL (India) – Supply disruptions and lower price realisation impact profitability in the near term

GAIL (India) is the largest state-owned natural gas processing and distribution company in India. It has interests in sourcing and trading natural gas, production of LPG, liquid hydrocarbons and petrochemicals, the transmission of natural gas and LPG through pipelines, etc.

In Q3FY23, GAIL saw its margins decline on account of inventory loss to the tune of Rs 1,100 crore. This was due to a sudden drop in LNG prices. Lower price realisations in petrochemicals and liquid hydrocarbons were a major setback to its top line, besides supply disruptions from Russia-backed Gazprom. However, robust gas demand and increased usage of piped gas, coupled with higher capex remain key positives for the stock.

Fund managers who bought shares of GAIL

Fund managers who added shares of GAIL to their portfolios include Sankaran Naren and Roshan Chutkey for ICICI Prudential India Opportunities Regular Growth, Roshi Jain and Priya Ranjan for HDFC Flexi Cap Growth, Rohit Singhania and Kaushal Maroofor DSP Tax Saver Regular Growth, Amit Nigam and Pranav Gokhale for Invesco India Multicap Growth, and Sanjay Chawla and Sandeep Jain for Baroda BNP Paribas Multi Cap Regular Growth.

Tech Mahindra – Organic growth led by past acquisitions to aid bottom line

Tech Mahindra (TECHM) is a leading provider of consulting-led integrated portfolio services to customers across a wide range of industries including insurance, banking and financial services, manufacturing, telecommunications, transportation and engineering services. The communication segment of the company contributes nearly 40% of its revenue.

Tech Mahindra has changed its strategy from acquisition-led growth to organic growth. In line with that, it is planning to cut down on acquisitions and concentrate more on gaining benefits from older acquisitions. Tech Mahindra spent nearly USD 1.2 billion in the past two years on acquisitions and 30% of its revenue growth was contributed by them. The company has also diversified its talent pool in 10 tier-2 cities.

Fund managers who bought shares of Tech Mahindra

Fund managers who added additional shares of Tech Mahindra to their schemes include Vaibhav Dusad and Sharmila D’mello for ICICI Pru Technology Growth, Meeta Shetty and Venkat Samala for Tata Digital India Regular Growth, Anish Tawakley and Vaibhav Dusad for ICICI Pru Bluechip Growth, and Roshi Jain and Priya Ranjan for HDFC Flexi Cap Growth. New buys were made by Sonam Udasi and Amey Sathe for Tata Equity P/E Reg Growth.

Gujarat Pipavav Port Ltd – Higher spending on infra and connectivity to boost volumes

Gujarat Pipavav Port (GPPL), a Maersk Group-led firm, is engaged in handling bulk, container & liquid cargo and RORO, and provides port services such as marine services, material handling and storage operations. The container segment contributes nearly 70% of its revenue.

In Q3FY23, GPPL’s revenue grew 50% YoY, led by higher volumes of dry bulk cargo. GPPL is planning to build warehouses, while its parent firm Maersk is building end-end logistic infra in the country. This will provide a significant advantage to GPPL in the longer run. The addition of three extra service lines will also aid revenue growth.

Fund managers who bought shares of GPPL

Additional shares of GPPL were bought by Chirag Setalvad and Priya Ranjan for HDFC Small Cap Growth, and Chandraprakash Padiyar and Satish Mishra for Tata Small Cap Fund Regular Growth, Sankaran Naren and Anuj Tagra for ICICI Pru Multi-Asset Growth and Mehul Dama for Nippon India Nifty Smallcap 250. New buys were done by Prasanna Pathak and Anuj Kapilfor Taurus Ethical Growth.

Kalpataru Power Transmission – Merger synergies yet to be realised

Kalpataru Power Transmission (KALPATPOWR) is a global EPC player with diversified interests in power transmission and distribution, oil and gas pipelines, railways, and biomass-based power generation.

Kalpataru Power merged with JMC Projects on January 11, 2023, and savings in terms of finance cost due to the merger is Rs 50-70 crore, which is to be realised in FY24. Kalpataru’s order book currently stands at Rs 4,100 crore. A stronger export market coupled with government’s higher spends on energy transition and civil infrastructure will aid future revenue growth.

Fund managers who bought shares of Kalpataru Power

Additional shares were bought by Ihab Dalwai and Sharmila D’mello for ICICI Pru Large & Mid Cap Growth,Kunal Sangoi for Aditya BSL Pure Value Growth, Pankaj Tibrewal and Arjun Khanna for Kotak Small Cap Regular Growth, Mahesh Patil and Jonas Bhutta for Aditya BSL Infrastructure Plan A Growth, and Harish Krishnan and Arjun Khanna for Kotak Infra & Econ Reform Regular Growth.

Narayana Hrudayalaya – Higher footfall and revenue per bed drive top line

Narayana Hrudayalaya (NH) is engaged in medical and healthcare services. It has a network of 23 multi-specialty and super-specialty hospitals with 7 heart centres spread across 18 locations in India, and 1 multi-specialty hospital in the Cayman Islands.

NH recently acquired Sparsh group of hospitals, whichcontributed 30% of EBITDA for Q3FY23. NH has also seen an increase in average revenue per operating bed (ARPOB) over the quarters. An aggressive capex plan with increased footfall drove its top line in FY23. The unit in the Cayman Islands reported a revenue of USD 80 million for 9MFY23 and the commissioning of an Oncology unit there will further boost it.

Fund managers who bought shares of Narayana Hrudayalaya

Fresh buys were done by RoshiJainandPriyaRanjanfor HDFC TaxSaver Growth. Additional shares were bought by Sunil Patil and Sharwan Kumar Goyal for UTI Multi Asset Regular Growth.

Suprajit Engineering – Margins expansion from LDC and European business

Suprajit Engineering (SUPRAJIT) is in the business of manufacturing auto components–mainly control cables, speedo cables, auto lamps. It caters to both domestic and international markets.

Suprajit Engineering’s light-duty cable (LDC) has turned EBITDA positive in Q3FY23. Demand in its Sfour-wheeler segment has improved but two-wheeler is yet to see growth. The European Phoenix lamp division (PLD) also saw expansion in EBITDA on account of higher price realisation and reduction in operational cost. Its management is further consolidating its European segment to improve profitability.

Fund managers who bought shares of Suprajit Engineering

Additional shares were bought by Ihab Dalwai and Sharmila D’mello for ICICI Pru Large & Mid Cap Growth, Dhimant Shah and Rohan Korde for ITI Small Cap Reg Growth, Vinit Sambre and Jay Kothari for DSP Midcap Reg Growth, Aditya Mulki for Navi Flexi Cap Reg Growth, and Aditya Mulki for Navi Large & Mid Cap Reg Growth.

Kirloskar Oil Engines – Sale of loss-making bus business to aid profitability

Kirloskar Oil Engines (KIRLOSENG) is in the business of manufacturing engines, generating sets, pump sets and power tillers, and spares thereof. The oil engines division of the company contributes 40% of its revenue.

Kirloskar’s revenue has grown by 28% and net profit by 145% in 9MFY23. Exports were the driving force behind the firm’s revenue growth. Its B2B segment is seeing an uptick, while demand in B2C is muted. Its promoter group sold a 17.7% stake in the company in a bulk deal for Rs 825 crore on March 8, 2023. The stock reacted positively to the news and was up by 18%.

Fund managers who bought shares of Kirloskar Engines

Additional shares were bought by Dhimant Shah and Rohan Korde for ITI Small Cap Reg Growth, R Janakiraman and Sandeep Manam for Franklin India Smaller Comp Growth and Anand Radhakrishnan and Rajasa Kakulavarapu for Templeton India Value Growth.

Linde India – A market leader and consistent performer

Linde India (LINDEIND) is part of the global Linde Group and is owned by Praxair. It mainly operates in industrial gases with more than 20 production facilities. The parent company had earlier tried to delist Linde India but dropped the plan at a later stage.

Linde India caters to Healthcare, steel and chemical industries. An uptick in demand from steel and healthcare industries is expected to boost its top line. In Q4CY22, the firm’s revenue grew by 9% and net profit by 20% YoY. The margin expansion was on account of higher price reliasation and lower cost of raw materials.

Fund managers who bought shares of Linde India

Additional buys were made by Sanjeev Sharma and Vasav Sahgal for Quant Mid Cap Growth, Sanjay Chawla and Sandeep Jain for Baroda BNP P Multi Cap Reg Growth, Sanjeev Sharma and Vasav Sahgal for Quant Active Growth and Chanchal Khandelwal for Aditya BSL MNC IDCW-P. Fresh buys were made by Sanjeev Sharma and Vasav Sahgal for Quant Large and Mid Cap Growth.

Mahanagar Gas Limited – Acquisitions and growing LNG consumption to boost growth

Mahanagar Gas (MGL) is a city gas distribution company operating in Mumbai, its adjoining areas and Raigad district of Maharashtra. Nearly 70% of the company’s revenue is from CNG sales.

Mahanagar Gas has announced the acquisition of Unison Enviro Private Ltd (UEPL) for Rs 531 crores. UEPL has gas distribution rights across Ratnagiri, Chitradurga & Devangere, and Latur & Osmanabad districts. Decline in LNG prices and long-term contracts would help the company reduce its costs. The government’s plan to raise the share of natural gas in the energy mix to 15% in 2030 from about 6% now will boost MGL’s prospects.

Fund managers who bought shares of Mahanagar Gas

Additional shares of Mahanagar Gas were added by Mehul Dama for Nippon India Nifty Smallcap 250.

Jindal Stainless (Hisar) Ltd – Merged entity to perform better

Jindal Stainless (Hisar) Ltd (JSHL) is the largest stainless steel producer in India. It has a production facility in Hisar, Haryana, with a melting capacity of 0.8 million tonnes per annum.

JSHL’s revenue has increased by 9% and net profit by 36% QoQ. Higher price realisations for value-added products have helped the company expand its margin QoQ. JSHL merged with Jindal United Steel Ltd (JUSL) on March 9, 2023, and the management expects the combined entity’s volume to grow 20%.

Fund managers who bought shares of Jindal Steel (Hisar) Ltd.

Additional buys were made by Manish Lodha and Abhinav Khandelwal for Mahindra Manulife Small Cap Reg Growth, and Rahul Pal and Manish Lodha for Mahindra Manulife Bal Advtg Reg Growth

Mutual Funds News

TREND | 16 Feb 2023

Smart money moves: what did mutual fund managers buy in January 2023?

By Shreesh Biradar

January 2023 saw the benchmark indices Nifty 50 and Nifty Midcap 100 fall by 2.44% and 2.64% respectively. Both these indices are now trading significantly higher than January lows. With such gains, it was not surprising that mutual fund managers chose to add up on mid-cap stocks in sectors like auto, e-commerce and logistics, consumer durables and specialty chemicals.

Samvardhana Motherson International Ltd – Gets boost from revival in auto sector

Samvardhana Motherson International (SMIL), formerly known as Motherson Sumi, is an original equipment manufacturer of auto components. With a major presence in Europe and Asia Pacific, SMIL’s products include wiring harnesses, vision systems, modules, polymer products and other emerging auto components.

In Q3FY23, SMIL saw its best-ever revenues, rising for three consecutive quarters in a row. As car production is picking up after improvement in chip supply, SMIL is increasing its production and catering to more value-added products. With energy prices cooling off in Europe and freight charges coming down, SMIL is seeing an EBITDA expansion.

The growth in revenue will be further led by markets opening up in China. Electric vehicle (EV)-related components made up 6% of the revenue in Q3FY23, driving the value-added product mix. Nearly 30% of new orders are coming from EV manufacturers. SMIL is expected to be net cash positive on the balance sheet in FY25, outweighing the debt concerns of the firm.

Fund managers who bought shares of SMIL

Fund managers who added shares of SMIL to their portfolios include Anish Tawakley and Vaibhav Dusad forICICI Prudential Bluechip Growth, Shridatta Bhandwaldar forCanara Robeco Flexi Cap Fund Growth, Sachin Relekar and Manish Gunwani forIDFC Flexi Cap Fund Growth. Additional shares were bought by Rupesh Patel and Ashutosh Bhargava forNippon India Tax Saver Fund Growth, and Rohit Singhania and Kaushal Maroo forDSP Tax Saver Fund Regular Plan Growth.

Ashok Leyland – Demand uptick and higher price realization lead to sequentially high margins

Ashok Leyland is a Hinduja Group-owned entity based out of India. It manufactures a wide range of commercial vehicles and engines for industrial and marine applications. It is the second-largest commercial vehicle manufacturer in India and the fourth-largest manufacturer of buses in the world.

Its volume growth in Q3FY23 has been robust at 39.6% YoY and revenues grew by 63.1%. Higher price realization and an uptick in demand have led to sequentially higher margins of the company. Its volume growth was supported by a pick up in infrastructure and mining activity, demand from e-commerce, agriculture and allied activities.

Ashok Leyland’s market share in M&HCV (Medium and Heavy Commercial Vehicles) increased to 32.6% in Q3FY23 from 25.3% in Q3FY22. Softening of raw material prices and better product mix is driving the margin expansion. Lowering industry discount rates and higher demand for buses will help in higher price realizations for the vehicles.

Fund managers who bought shares of Ashok Leyland

Fund managers who added additional shares of Ashok Leyland to their schemes include Aniruddha Naha and Puneet Pal forPGIM India Midcap Opportunities Fund Regular Growth, Shridatta Bhandwaldar forCanara Robeco Emerging Equities Growth, Ihab Dalwai and Sharmila D’mello for ICICI Prudential Large & Midcap Fund Growth, and Sankaran Naren and Anuj Tagra for ICICI Prudential Multi Asset Fund Growth. Fresh buys were done by Bhupesh Kalyani and Aniruddha Naha forPGIM India Small Cap Fund Regular Growth.

FSN E-Commerce Ventures Ltd (Nykaa) – Cutback in marketing and advertising costs helps EBITDA expansion

FSN E-Commerce Ventures, more commonly known as Nykaa, is an e-commerce site involved in selling and distributing personal care, health care and fitness products.

Nykaa reported 33% growth in revenue for Q3FY23. Gross margins have been lower due to an inferior product mix. However, the cutback in marketing and advertising expense led to overall EBITDA expansion.

Fund managers who bought shares of Nykaa

Additional shares of Nykaa were bought by Gaurav Khandelwal and Gaurav Misra forMirae Asset Large Cap Fund Regular Growth, and Sankaran Naren and Anuj Tagra for ICICI Prudential Multi-Asset Fund Growth. Fresh buys were done by Saurabh Pant and Mohit Jain forSBI Large & Midcap Fund Regular Payout Income Distributable cum Capital Withdrawal, Gaurav Misra forMirae Asset Focused Fund Regular Growth, and Samir Rachh and Kinjal Desai for Nippon India Small Cap Fund - Growth.

Delhivery – Network optimization to increase bottom line

Delhiveryprovides supply chain, freight and logistics services to e-commerce segments across the board. It is India’s largest e-commerce logistics provider with 2,751 delivery centres across the country.

Delhivery reported negative revenue growth for Q3FY23 due to network optimization and lower demand. Improved capacity utilization backed by network optimization helped in EBITDA expansion. Management is repricing low-paying contracts of the clients. Delhivery has increased its market share and expects shipments to grow 15-20%.

Fund managers who bought shares of Delhivery Ltd

Fresh buys were done by Saurabh Pant and Mohit Jain for SBI Technology Opportunities Fund Regular Payout of Income Dist cum cap wdrl, and Saurabh Pant and Mohit Jain for SBI Large & Midcap Fund Regular Payout Inc Dist cum Cap Wdrl. Additional shares were bought by Roshi Jain and Priya Ranjan for HDFC Flexi Cap Fund Growth, Neelesh Surana for Mirae Asset Tax Saver Fund -Regular Plan-Growth, and Ankit Jain for Mirae Asset Midcap Fund Regular Growth.

South Indian Bank Ltd – Net profit declines in Q3, NIM expands

South Indian Bank provides retail and corporate banking, para-banking activities like debit cards, and third-party financial product distribution, besides their treasury and foreign banking business. The bank has a network of 904 branches in India.

South Indian Bank reported a decline in its Q3FY23 net profit, impaired by a one-off provision towards security receipts. Net interest margin (NIM) expanded on the back of a high share of floating rate book and excess liquidity on the balance sheet.

Fund managers who bought shares of South Indian Bank Ltd

Additional shares were bought by Harsha Upadhyaya, Abhishek Bisen, Devender Singhal and Arjun Khanna for Kotak Multicap Fund Regular Growth.

Voltas Ltd – Margins under pressure due to steep competition

Voltas is engaged in the business of household and electromechanical projects as an EPC contractor in domestic and international geographies. It has various products like air conditioners, refrigerators, air coolers, washing machines, etc.

Voltas reported revenue growth of 11.8% in Q3FY23. EBITDA and adjusted PAT have declined 50.9% and 79.4% respectively YoY. Voltas faces steep competition in white goods from Indian and as global players. While Voltas has protected market leadership in air conditioners with a market share of 22.5%, high tonnage and better star-rated air conditioners did well during Q3FY23. Air coolers also reported healthy growth.

Fund managers who bought shares of Voltas Ltd.

Additional shares were bought by Rupesh Patel and Dhrumil Shah for Nippon India Growth Fund - Growth, Saurabh Pant and Mohit Jain for SBI Large & Midcap Fund Regular Payout Inc Dist cum Cap Wdrl, Neelesh Surana and Ankit Jain for Mirae Asset Emerging Bluechip Fund Growth, Ankit Jain for Mirae Asset Midcap Fund Regular Growth, and Ravi Gopalakrishnan and Ashish Aggarwal for Sundaram large and Mid Cap Fund Growth.

VRL Logistics Ltd – Sale of loss-making bus business to aid profitability

VRL Logistics, based out of Karnataka, is involved in the domestic transportation of goods. VRL also has bus operations for passenger transport, and power generation units.

VRL has taken a price increase of 5% on more than 60% of its goods business. It is looking at the sale of its loss-making bus business for roughly Rs 190 crore. VRL is undertaking rapid branch expansion in under-penetrated areas to aid >20% volume growth. Its management expects to be debt-free by the end of FY24, even with a capex outlay of Rs 560 crore.

Fund managers who bought shares of VRL Logistics Ltd

Additional shares of VRL Logistics were bought by Chirag Setalvad and Priya Ranjan forHDFC Small Cap Fund Growth, Shridatta Bhandwaldar and Ajay Khandelwal for Canara Robeco Small Cap Fund Regular Growth, Manish Lodha and Abhinav Khandelwal for Mahindra Manulife Small Cap Fund Regular Growth, Harshal Joshi and Daylynn Pinto for IDFC Multi Cap Fund Regular Growth, and Pranav Gokhale and Taher Badshah for Invesco India Smallcap Fund Regular Growth.

Neogen Chemical Ltd – Higher demand and increased capacity to drive future growth

Neogen Chemicals specialises in manufacturing bromine-based compounds, grignard reagents and inorganic lithium salts. Neogen has manufacturing facilities at Mahape, Navi Mumbai, Maharashtra, Karakhadi in Vadodara and Dahej SEZ. Neogen’s major markets are Europe, USA and Japan.

The company’s revenue grew 40% YoY in Q3FY23 and saw higher capacity utilization, aided by robust demand. Neogen is doing a planned capex of Rs 450 crore to increase electrolyte capacity and Specialty Lithium Salts. It is expected to become fully operational by FY25 end.

Fund managers who bought shares of Neogen Chemicals Ltd

Fresh buys were done by Hardick Bora and Sanjay Bembalkar for Union Flexi Cap Fund Growth. Additional shares were bought by Anupam Tiwari and Vinayak Jayanath for Axis Small Cap Fund Regular Growth, Shreyash Devalkar and Vinayak Jayanath for Axis Flexi Cap Fund Regular Growth, Ashish Naik and Vinayak Jayanath for Axis Special Situations Fund Regular Growth, and Ratish Varier and Sudhir Kedia for Sundaram Multi Cap Fund Growth.

Kolte Patil Developers Limited – Growing presales market with a huge land bank for development

Kolte Patil Developers is in the business of constructing residential and commercial buildings, and IT Parks, along with renting of immovable properties and providing project management services for managing and developing real estate projects.

In Q3FY23, Kolte Patil Developers reported the highest-ever quarterly sales of 1.13 million square feet, generating a revenue of Rs 700 crore. The presales were backed by six new launches contributing 57% to the sales. Its management expects sales of around Rs 800 crore in Q4FY23.

Future growth triggers include a development pipeline of Rs 7,000 crore across Mumbai and Pune. Kolte Patil has signed an inventory sale agreement with Marubeni Corp for its Pimple Nilakh project for a consideration of Rs 200 crore. The deal is expected to close by April 2023. Kolte Patil has a land bank for development worth Rs 15,000 crore, giving clear visibility for the next 3-4 years.

Fund managers who bought shares of Kolte Patil Developers

Additional shares of Kolte Patil Developers were added by Aniruddha Naha and Puneet Pal toPGIM India Midcap Opportunities Fund Regular Growth.

Banks

SECTOR | 13 Feb 2023

Mid-sized banks may take margin hit with pricing pressures and increased cost of funds

By Shreesh Biradar

Mid-sized private banks are known to throw up some surprises by defying general industry trends. In the past six months, these private banks have seen a Price to Book (P/B) rerating. Stocks like Karnataka Bank and Karur Vysya have given returns of 116% and 87% respectively in the past 52 weeks, while it was negative returns of 24% for Bandhan …

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The Nifty Bank index constituting larger public and private banks have seen a more modest growth of 7.64%. Mid-sized private banks are a different ball game altogether. Their size gives them the agility to manage changing interest rate cycles with little to no impact on profitability. Recently announced Q3FY23 results provide insights into the changing playing field for these banks.

Deposit growth for Bandhan Bank, RBL Bank outpaces advances growth

A recent report from the RBI suggests that Indian banking credit growth has outpaced deposit growth. But newer banks are bucking the trend. Banks like IDFC First Bank and Bandhan Bank have seen their deposit franchise grow at a much faster pace than advances. They are more dependent on fresh deposits for loan growth than traditional banks with a higher deposit base. If the growth in deposits slows down, credit growth takes a backseat.

The current trend in the banking industry is increasing the credit-to-deposit ratio (CD). Banks have increasingly used their deposit base to fund credit growth. The same is true for established mid-sized private banks like Karnataka Bank and Federal Bank .

But for newer banks like Bandhan Bank, IDFC First,RBL Bank and Karur Vysya, the trend has either flatlined or dropped.

Traditionally, newer banks have depended on bond issuance and inter-bank borrowing to fund their advances. As savings accounts are the cheapest source of funding for banks, they have increased their savings and deposit rates to attract more customers. For instance, IDFC First Bank provides6.25% interest on savings accounts, while SBI provides amaximum of 3%.

Even with higher rates, the newer banks are struggling to increase their savings account base. Customers are moving out of savings accounts and locking in higher interest rates in term deposits. The same is reflected in the CASA ratio of private banks.

Cost of deposit increases as CASA falls for private banks

IDFC First Bank has the highest CASA ratio in the banking industry. The rising trend in interest rates has impacted the CASA ratios of all the banks. The impact has been higher for banks like Bandhan Bank and IDFC First Bank, which are dependent on CASA for lower costs of funding.

RBL is the only bank that has been able to maintain the increasing trend of CASA accounts. It is also one of the highest interest rate providers forsavings accounts at 6.50%. Federal Bank and Karnataka Bank have also seen a drop in CASA accounts but at a slower pace.

The sudden drop in CASA accounts has shot up the cost of deposits for newer banks. Karnataka Bank is the only exception with a steady 4.49% cost of deposits for the past three quarters. Bandhan Bank and RBL Bank’s cost of deposits have shot up by 70 bps and 74 bps respectively since the start of FY23.

Private banks face stiff margin pressure

An increase in cost of funds has limited the net interest margin (NIM) for Bandhan Bank and RBL Bank. Private mid-sized banks thrive in a low-interest scenario. When interest rates go up, the flexibility of private banks to price their loans wane. As a result, larger banks with lower interest rates will see an increased influx of customers. The increase in the cost of funds coupled with an inability to price loans leads to margin pressure on mid-sized private banks.

IDFC First Bank saw the maximum NIM expansion of nearly 50 bps in the past two quarters, while Bandhan Bank’s contracted by 150 bps. Other banks have seen only small changes in NIMs. Going forward, high NIMs will be difficult to maintain as the deposit pricing starts to catch up. This will put pressure on NIMs once the interest rate starts seeing a downtrend.

NIMs of Bandhan Bank and IDFC First Bank are highly elevated. Most larger banks’ NIMs cannot go beyond 5% because of size and asset quality limitations. Banks like Bandhan are able to have such high NIMs on account of higher yields on advances. Higher yields can be achieved when the end borrower’s credit score is at a lower level. This brings back the question of asset quality. It can be seen that banks like Bandhan have a high level of non-performing assets (NPAs).

Improved asset quality needs more provisioning

Most mid-sized private banks had a higher level of NPA compared to larger private banks like HDFC Bank or Axis Bank at the start of FY22. Post that, smaller banks reduced their gross NPA levels. Karur Vysya Bank has reduced its gross NPA at a rapid pace over the past eight quarters. At the end of Q3FY21, its gross NPA stood at Rs 3,842 crore and then dropped to Rs 1,674 crore by the end of Q3FY23.

For other banks, the fall in gross NPA percentage is on account of higher credit growth. Credit growth outpaced NPA slippages by a very high margin, resulting in a lower gross NPA percentage. Bandhan Bank's NPA is still at a higher level compared to its peers.

Bandhan Bank is proactively provisioning for its NPA. It has one of the highest Provision Coverage Ratios (PCR) in the industry. Karur Vysya tops the list with a PCR of 90.87%.

According to RBI guidelines, the recommended provision coverage ratio for banks is 70% or above, but it is not mandatory. RBI wants banks to proactively provision for NPAs rather than depending on recoveries. Higher provisioning impacts the profitability of banks.

Federal Bank and RBL Bank have the lowest PCR. IDFC First Bank has maintained itself at an optimal level, balancing profitability and provisioning.

Mid-sizes private banks well equipped to absorb losses

Higher provisioning eats away the Capital Adequacy Ratio (CAR) buffers of a bank. RBI mandates banks to maintain the CAR above 11.70% and CAR above 14% is considered to be safer. Higher CAR helps banks absorb provisioning/losses.

Most mid-sized banks have CAR above 15%, except for Federal Bank. Federal Bank needs to raise more funds to be in a safer zone. Most other banks are well protected even in case of higher NPA slippages.

RBI has been very vocal about the Expected Credit Loss (ECL) framework. A recently releaseddiscussion paper on ECL framework for provisioning by the RBI proposes to change that and book provisions before the loan defaults. Accordingly, riskier loans may start seeing provisioning even before the actual default. The current provisioning methodology will completely shift to the ECL framework in the next five years. However, banks are allowed to design systems to determine stress in loan books before the actual default.

Federal Bank, with low PCR and lower CAR, will face profitability pressure once the ECL framework comes into effect. Karur Vysya and Bandhan Bank will be in a comfortable position with PCR above 90% and CAR buffer above 17%.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.

IDBI Capital released a Sector Update report for Banks on 01 Jul, 2025.

ICICI Bank Ltd.

02 Feb 2023

1442.80

1.19%

ICICI Bank's Q3 results are better than expected, but may be difficult to sustain

By Shreesh Biradar

With no ‘Sell’ rating on the stock, ICICI Bank is an analysts’ darling. The recent Q3FY23 results have reaffirmed brokerages’ belief in the bank. The results ticked all the boxes in terms of advance growth, margin expansion, net interest income (NII) growth, asset quality and profitability. ICICI Bank's share price has remained flat during the unfolding of the Adani group …

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The highlight of Q3FY23 results is its provisioning of Rs 2,257 crore, which is the highest in the past five quarters. This is despite the NPAs remaining stable. Commenting on the provisioning, ICICI Bank CEO Sandeep Bakshi says that it aims to be proactive in provisioning, with a key objective of strengthening the balance sheet. During the quarter, the bank changed provisioning norms on non-performing assets to make them more conservative for corporate, SME and business banking.

Given the current benign credit cycle, HDFC Securities believes that the bank is witnessing a profitability overshoot, which is difficult to sustain. However, the stock remains a ‘Buy’ for analysts. Trendlyne’s consensus target price is estimated at Rs 1,084, an upside of 26.8% from the current share price of Rs 855.30

Credit growth driven by business banking and retail loans

ICICI Bank’s credit growth has beaten the industry average of 18% and currently stands at 20% YoY. Credit growth has outpaced the more modest deposit growth of 10.28% YoY, while business banking grew 37.9% and retail loan books by 23.4% YoY. In retail loans, personal and credit card loans increased 42.1% and 51.5% respectively. The domestic loan book grew 21.4% YoY.

The high credit growth was achieved on the back of lower credit-to-deposit ratio (CD). The CD ratio improved by 681 bps in the past four quarters. A higher CD ratio implies better utilization of deposits in high-yielding loan instruments. The current CD ratio has been the highest-ever for ICICI Bank. A higher CD ratio and advances growth have increased net interest income and margin expansion.

ICICI Bank’s net interest income and profit after tax at a high point

ICICI Bank’s Net Interest Income (NII) has grown 34.56% YoY to Rs 16,465 crore, beating the street estimates by a good margin. The NII growth was backed by a higher loan book, coupled with better net interest margins (NIM).

The bank’s net profit has increased 34.19% YoY to Rs 8,312 crore but if we look at the net profit as a percentage of NII, it dropped by 63 bps QoQ. The drop is mainly on account of higher provisioning undertaken in Q3FY23.

It is proactively building buffers when margins are high and NPA additions are low. Even though net slippages for Q3FY23 are at 0.5%, ICICI Bank undertook provision at 0.93% of the loan portfolio.

The higher provisioning has resulted in a better Provision Coverage Ratio (PCR) of 82%. The RBI benchmark for PCR is set at 70%. A higher PCR means a bank has recognized all the losses on NPAs, and gets to start with a clean slate. Any recovery from such accounts will be added back as profits.

Under the current regulations, a bank books a provision after an account defaults. But a recently released discussion paper on the Expected Credit Loss framework (ECL) for provisioning by the RBI, proposes to change that and book provisions before the loan defaults. Accordingly, riskier loans may start seeing provisioning even before the actual default. The current provisioning methodology will completely shift to the ECL framework in the next five years. However, banks are allowed to design systems to determine stress in loan books before the actual default.

ICICI Bank is shoring up contingent provisions, which might help once the ECL framework comes into play. Q3FY23 provisions also include a contingency fund of Rs 1,500 crore. Contingency provision stands at Rs 11,500 crore at the end of Q3FY23.

All-time high net interest margins are difficult to sustain

ICICI Bank has reported an all-time high Net Interest Margin (NIM) of 4.65%. NIM increased 34 bps QoQ and 69 bps YoY and is expanding in line with an increase in yield on advances.

The credit-to-deposit ratio is at an all-time high, providing the full impact of loan linkages to repo rate on margins. Of the total domestic loans, interest rates of 45% of loans are linked to the repo rate, 4% to other external benchmarks, and 21% to MCLR and other older benchmarks. The rest (30%) of the loans are linked to fixed interest rates. With a major portion of loans linked to the repo rate, ICICI Bank has been witnessing NIM expansion in the past three quarters.

ICICI Bank is expected to witness pressure on its margins on account of repricing of deposits. Changes in deposit rates are reflected in the cost of funds, with a lag effect. CASA deposits and the cost of funds are inversely linked. With the increase in deposit rates, term deposits are also going up.

Term deposits have grown 14.2% YoY vs Current Account and Savings Account (CASA) growth of 5.9% in Q3FY23. With CASA ratio on a declining trend, the cost of funds is seeing an uptick. NIMs will start compressing in FY24. CASA has dropped by 335 bps since the start of CY23 and RBI raised the repo rate by 225 bps in the same period.

Gross NPA unchanged, Net NPA on a declining trend

Hovering in the range of Rs 33,000 crore, ICICI Bank’s gross NPA remains unchanged for the past four quarters. NPA slippages are offset by recoveries, and thus NPAs are maintained at the same level for the past three quarters. Usually, new NPAs are reported by the ‘Kisan credit card’ portfolio in the first and third quarters of the fiscal year. However, if we look at the gross NPA percentage, the number has dropped by 106 bps YoY. The accelerated drop in gross NPA percentage is on account of higher loan growth, which has overshadowed the slight drop in gross NPA numbers.

The bank’s net NPA and net NPA percentage are dropping in tandem on account of higher provisioning. Its net NPA percentage is well below the industry average. ICICI Bank is provisioning more towards ad-hoc contingency, compared to its NPA. Going forward, we can expect lower provisioning towards NPA and more toward the new ECL framework.

BB and below book is the major source of guidance for future NPAs. They are the lowest-rated accounts in the loan portfolio and give visibility on future NPA slippages. While Rs 1,564 crore of corporate and SME loans slipped into NPA for Q3FY23, Rs 1,121 crore of it was from BB and below book.

The lower percentage of BB and below book is a sign of management's inclination towards going for high-rated and less risky corporate and SME loans. BB and below numbers are expected to drop further as more accounts from this book are recognized into NPA or are upgraded in the rating system.

What happens if ICICI Bank undertakes full provisioning for its BB book and Net NPA?

Assuming that ICICI Bank takes a one-time hit on BB and below book, along with its net NPA, the total capital required would be roughly Rs 11,232 crore (Rs 5,651 cr net NPA and Rs 5,581 cr BB and below book). This capital would be derived from its reserves or capital funds. Currently, ICICI Bank has Rs 1,81,123 crore as capital funds, which includes revaluation reserves, retained earnings and other funds. Capital funds account for 16.02% (capital adequacy ratio) of its total risk-weighted assets.

If the bank takes a hit of Rs 11,232 crore, its capital funds decline to Rs 1,68,891 crore. The new capital adequacy ratio (CAR) post-provisioning would be 14.93%, which would be way higher than the RBI mandate of 11.70%. This implies that ICICI Bank is well protected from capital adequacy buffers in case of a major setback in terms of NPA.

However, a better approach in provisioning would be to reduce the Net NPA and BB below book by increasing provisioning quarter by quarter. Periodic provisioning gives the bank more headroom and balances the profitability and asset quality of the bank.

Q3FY23 results have shown the strength of ICICI Bank in terms of its operating metrics. Most of the metrics like NIM, advance growth, gross NPA and PCR have been superior to the industry averages.

With asset quality under control, ICICI Bank will see lower provisioning in FY24. However, the advantage will be offset by a contraction in margins on the back of repricing of deposits. Growth in advances will also slow down in FY24 owing to the higher CD ratio at the current juncture. ICICI Bank has sufficient contingent provisions in case the RBI implements the ECL framework.

ICICI Bank Ltd. is trading above all available SMAs

Adani Enterprises Ltd.

31 Jan 2023

2599.10

-0.46%

Adani stocks in MFs: Index Funds and Quant Equity Funds have the maximum exposure

By Shreesh Biradar

A recent research report by Hindenburg, a US-based research firm, has cast the spotlight back on India’s regulatory environment, through allegations of stock manipulation and questionable accounting practices by the Adani Group. Adani group shares have since lost nearly $40 billion market cap. While the group has rejected the allegations it has yet to address several of the points raised in the Hindenburg report, Investors are consequently wary. Most of the Adani stocks have lost more than a quarter of their value since the allegations came forth.

Note: Adani Group consists of the above set of stocks

The impact of the allegations on Adani stocks has been at varied degrees across investor segments. It affected mutual funds, Exchange Traded Funds (ETF) and banking stocks.

Higher passive mutual fund exposure to Adani shares

Equity mutual funds are exposed to the tune of Rs 26,285 crore towards Adani Group shares.The highest exposure has been to Ambuja Cements, ACC and Adani Ports, which constitute nearly 60% of the total exposure of mutual funds. Actively managed funds have stayed away from the Adani group as a whole, Fund managers are skeptical of its valuations and debt overhang.

Index funds which are passive in nature constitute nearly 28% of the exposure. As long as Adani stocks are part of Nifty Indices, ETFs cannot get into selling these stocks. Adani Ports and Adani Enterprises are part of Nifty 50, while Adani Green and Adani Transmission find their place in Nifty Next 50. Index funds are followed by arbitrage funds, which constitute nearly 23% of total mutual fund exposure towards the Adani group. These are mostly algorithm-driven with minimal human intervention.

Note: All values in Rs crore

Among fund houses, Quant Fund (11.07%) and Taurus Asset Management (10.90%) will have the biggest impact on NAV due to the Adani group fallout. While SEBI does not allow mutual funds to invest more than 10% of their portfolio in a single issuer, the guidelines are not clear when it comes to group entities.

Most big fund houses like HDFC, Axis, ICICI and SBI have stayed away from Adani group stocks, limiting their exposure below 4%.

Motilal Oswal and Kotak Mahindra have been the exception with 5.31% and 4.54% exposure respectively. Equity Mutual Funds have an exposure of 2.39%.

Note: All values in Rs crore

Nifty 50 index ETFs are having exposure of 2.09%, whereas Nifty Next 50 ETFs have 14%. The recent run-up of Adani group stocks has led to higher exposure of ETFs.

Funds with greater than 10%+ exposure have see a bigger drop in Net Asset Value

Among actively managed funds, Quant schemes feature in funds with greater than 10% exposure to Adani group. Mutual funds are designed to diversify investments, so even a concentrated 15-stock portfolio will not have more than 6-8% exposure to a single group.

Schemes with 10%+ exposure have seen NAV drop by 3-4%, considering the recent rout in Adani stocks. Even savings schemes, which are considered to be conservative and risk-averse, have seen a high degree of exposure to a single group.

Note: All values in Rs crore

The recent sell-off in the market was dominated by the retail segment, while FPIs and mutual funds did not fully participate. Fitch group had cited concerns over Adani group’s leverage levels earlier. This was in August 2022, before the recent allegations broke out. Adani group, in response, had stated that they were in a sound financial position and reducing their debt levels. The recent allegations by Hindenburg are different as it’s not about the group’s financial condition but more about governance and misappropriation. Even though the group has denied the allegations, its stocks are still tumbling on the bourses.

Adani Enterprises Ltd. has an average target of 3801.00 from 1 broker.

The Baseline

19 Jan 2023

Banks to see a boost in margins from credit growth

By Shreesh Biradar

The Indian banking sector is in the spotlight for investors, with the highest credit growth in a decade. Credit growth is expected to rise in tandem with rising corporate demand. PSU banks valuation has risen in the last two quarters. The Nifty Bank index has risen more than 20% in the last six months with Nifty PSU Bank rising 60%. …

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Private banks have historically beaten PSU banks in terms of profitability, asset quality, liquidity, and credit growth. PSU banks are now catching up, but with a delayed effect.

The one underlying change affecting all major banks is the uptick in repo rates. The Reserve Bank of India (RBI) has been taking an aggressive stance since the start of FY23 to control inflation. RBI has increased the repo rate by 225 bps since the start of FY23. Repo rate changes have a profound impact on banking fundamentals.

In an ideal scenario, a higher repo rate means an increase in cash coming in (deposits, savings) and a decrease in cash outgo (advances) for the banking system. Current Accounts and Savings Accounts (CASA) deposits trend in a downward direction. Also, in such a situation, deposit growth will outpace credit growth and higher deposits will increase the cost of funding for banks. But the current state of Indian banks tells a different story. Banks are seeing credit growth exceeding deposit growth.

Credit growth exceeds deposit growth for banks

PSU Banks have seen average YoY credit growth of 18.40% in Q2FY23, outpacing the deposit growth of 9.40%. The same has been true with private banks. Private banks achieved YoY credit growth of 21% in Q2FY23, beating the more modest deposit growth of 13.90%.

The credit growth of the Indian banking industry for H1FY23 touched a decadal high of 17.4%. One of the major reasons for banks’ aggressive lending is increased liquidity in the system. Since the beginning of COVID-19, banks have been wary of lending, citing the economic slowdown. This, in turn, has led to a lower Credit Deposit ratio (CD ratio). As the economy picked up, banks increased their lending to take advantage of a lower CD base. A higher CD ratio means better utilization of deposits, and better interest margins and profitability.

State Bank of India (SBI) and Canara Bank reported YoY credit growth of 19.93% and 20% in Q2FY23 respectively. SBI’s CD ratio increased from 76.50% in Q2FY22 to 80.12% in Q2FY23. Canara Bank’s CD ratio improved from 68.34% in Q2FY22 to 76.26% in Q2FY23.

ICICI Bank and Axis Bank reported YoY credit growth of 22.70% and 17.56% respectively. The improvement was backed by a change in CD ratios of 7.85% and 5.70% respectively. The largest private lender HDFC Bank saw a credit growth of 19% YoY.

Credit growth was also supported by the liquidation of High-Quality Liquid Assets (HQLA). Banks ideally need to maintain a Liquidity Coverage Ratio (LCR) above 100%. The overall LCR of banks dropped from 173% in Q2FY21 to 136% in Q2FY23.

Corporate lending to drive further credit growth

Corporate lending was taboo post-NPA unwinding. Banks increasingly concentrated on retail lending, which is considered much safer. Housing loans in particular, have been the go-to segment for banks for the last couple of years. Post Covid, banks relied more on auto and personal loans, which remained the major drivers for credit growth in the past four quarters.

Q1FY23 saw a change in lending patterns. Banks are back to wooing corporations for borrowings. The share of corporate lending in the overall banking portfolio has seen an uptick.

Canara Bank has seen a QoQ increase of 75 bps in its corporate lending share in Q2FY23. Bank of India saw an increase of 100 bps in the same period. SBI’s corporate loan book has grown over 21% YoY in Q1FY23 compared to its retail loan book growth of 18%. Axis Bank and IndusInd Bank reported a QoQ increase of 65 bps and 100 bps in Q2FY23 respectively.

The bigger banks are going after corporate lending to aid credit growth. Smaller banks are still cautious in their approach and playing safe by lending mainly to retail portfolios.

Pressure on margins due to lower CASA deposits offset by credit growth

Traditionally, CASA has been the cheaper source of funds for banks. This doesn’t mean higher CASA ratios are good for banks. A very high CASA ratio might lead to liquidation problems if a bank goes bust. Thus, most banks maintain the CASA ratio in the range of 30-50%.

The recent increase in interest rates has enticed customers to lock in higher interest rates by opting for term deposits. This has led to a decrease in CASA shares in bank deposits. The fall in CASA share has been more visible since the end of Q4FY22.

Bank of Baroda saw its CASA share drop from 44.24% in Q4FY22 to 37.62% in Q2FY23. SBI, on the other hand, saw its share of CASA deposits fall to 42.90% in the same period.

Private banks are fairly better due to their high interest rates on savings accounts. ICICI bank and HDFC Bank saw a drop of 211 bps and 142 bps in CASA for H1FY23 respectively. Federal Bank has been more stable with a 53 bps change in the same period.

The decrease in CASA has led to an increase in the cost of deposits for the banks. The numbers reported for Q2FY23 make it more evident.

However, the increase in the cost of deposits has been offset by the higher credit growth banks are seeing. Banks were parking their deposits with RBI instead of lending, constricting margins. With higher lending offtake, margins have remained stable for banks over the last four quarters. In turn, the margins have improved slightly in the past two quarters.

Further margin expansion is expected due to the higher linkage of loans to floating rates

The Marginal Cost of Lending Rate (MCLR) was introduced in April 2016. Earlier, banks were not transferring the benefits of the change in repo rate to customers across segments. The retail segment and MSMEs were not able to get the complete benefit of MCLR. Hence, RBI introduced the External Benchmark Lending Rate (EBLR) which is directly linked to its repo rate for the benefit of retail and MSME loans.

RBI has taken a keen interest in loan linkages to MCLR and EBLR which has resulted in more advances linked to these floating rates. SBI has linked 34% of its loan to EBLR and another 45% to MCLR. The only hiccup is that these loans reflect the changes in interest rate with a delayed effect of 3-6 months.

RBI has increased the repo rate by 225 bps since May 2022. The pass-on effect has not been evident in the banks. Banks, on average, have increased lending rates by 105-130 bps. The yield on advances is expected to rise further considering EBLR/MCLR-linked loans will start incorporating the upward repricing of interest rate changes in the past six months. Repricing of lending books will provide a higher yield on advances. The effectiveness of transmission under the EBR regime was reflected in the better-than-expected NIM trajectory in Q2FY23.

The margin expansion cycle is expected to slow down in FY24.

RBI is expected to raise its repo rate by another 50 bps in CY2023. As the deposit rates start catching up, banks can expect more money to come into the system. With higher interest rates, credit growth might slow down going forward. The current phase of NIM expansion will continue to be aided by growth in advances, albeit at a slower pace. Currently, net interest margins are at a two-year high.

This is in line with the performance as the Nifty PSU Bank has risen 44.06% in the past three months. All PSU banks outperformed the Nifty 50 index. Reports suggest that Nifty PSU is outperforming the Nifty 50 index by a considerable margin. Nifty PSU Bank has risen 60% in the past year, while Nifty 50 rose 8%.