Stock market analysis and stories by Bhavani Eswar

Articles by Bhavani Eswar

13 Dec 2023

Chart of The Week: RBI pumps the brakes on rising unsecured loans

The Indian financial sector has been on the rise in the past two years, with high loan growth amid soaring domestic consumption. As a developing economy, the demand for credit growth in India is on a sustained rise. This has boosted the health of the banking sector, which has seen a turnaround in the past two years, thanks to healthy balance sheets and decade low gross non-performing assets (NPA) ratios. However, one aspect of high loan growth has worried the Reserve Bank of India (RBI) - unsecured loans significantly outpacing overall loan growth.

In this edition of Chart of the Week, we analyze the RBI’s recent directive on unsecured loans, the first major regulation since 2014-15 that is aimed at reducing risks in unsecured lending.

Bad loans can have spillover effects across economies. The unprecedented rise in India’s unsecured loans – loans which lack collateral – is a major risk. While credit growth in unsecured lending stood at 23% in the past year, the overall credit growth in the banking system was just 13%.

On November 16, the RBI directed banks to increase risk weights for unsecured consumer loans like personal loans (below Rs 50,000) and credit card receivables from 100% to 125%. This means that banks must now show Rs 125 in risk-weighted assets for every Rs 100 lent as an unsecured loan. This will prompt banks to increase the capital set aside for these loans. The RBI has set 9% as the minimum capital adequacy ratio to be maintained on total risk weighted assets.

Risk weights for home loans, for example, range from 50% to 70% depending on the size of the loan. Meanwhile, it is 75% for gold loans. Segments with higher risk, like business loans, have 100% risk weightage.

Cost of funds likely to increase for top private and public sector banks

High exposure to unsecured lending leads to a marginal decrease in capital ratios

An analysis of the RBI’s increased risk weights on capital requirements finds that banks with substantial exposure to unsecured loans will see an increase in capital requirements. Banks like SBI, ICICI Bank, HDFC Bank, and Axis Bank, which have allocated over 15% of their total lending to unsecured loans, may see their capital ratios decline. These four banks may see a decrease of more than 50 bps in their CET 1 (Core Equity Tier 1 (CET 1) is an important metric as it includes only equity and reserves, which form the core capital for banks).

On the other hand, banks like Bank of Baroda, IndusInd Bank, and Canara Bank, with less than 10% exposure towards unsecured loans, could see their capital ratios fall by just 30-40 bps.

The new regulation will affect banks with higher exposure to unsecured loans in three ways. Firstly, banks have to maintain certain ratios like CET 1, which is calculated as a percentage of total risk weighted assets. Due to the increase in risk-weighted assets, banks now have to keep more capital while lending, which could result in higher lending rates.

Secondly, due to an increase in capital requirements, banks may have to raise capital from bond markets at higher rates. Finally, this could moderate growth in consumer credit, which is traditionally a high-margin segment for banks.

Regulations that make changes in risk weights, provisions, exposure limits or loan-to-value ratios aim to manage risk at a broader level rather than focusing on individual institutions. RBI’s latest regulatory move is aimed at controlling risks in vulnerable segments without constraining credit to other sectors of the economy.

The Baseline

29 Nov 2023

COTW: Global index rebalances open the gates to foreign inflows into domestic markets

By Bhavani Eswar

Foreign capital is vital for emerging markets like India as it provides essential funds for companies, and helps boost shareholder value. The scale and timing of this foreign money are key for domestic investors.

But while foreign investors can help the economy, they also bring market volatility, since such money is ‘easy come, easy go’, and affects inflation and local currency demand.

Recent rebalancing in major global indices, like the MSCI and FTSE, creates opportunities for increased foreign inflows. This edition of Chart of the Week focuses on changes in the Morgan Stanley Capital International (MSCI) indices, a global index provider traded on the NYSE.

India's increased weight in the MSCI Global Index could lead to inflows of up to $1.5 billion

MSCI's indices are critical benchmarks for global fund allocation, guiding investments in stock markets worldwide. These indices are closely monitored by global entities such as asset managers, hedge funds, banks, companies, and insurance firms. Foreign portfolio investors (FPIs) typically use MSCI indices to guide their allocation of passive funds and have already invested$14.64 billion in Indian equities this year.

Notable among the MSCI indices are the All Country World Index, Frontier Markets Index, and Emerging Markets (EM) Index (launched in 1988, India included in 1994). India's weight in MSCI indices is set to double to 16.3%, second only to China's 29.8%, in three years, after the latest rebalancing, which will take effect from November 30.

India’s benchmark indices have outperformed the EM index, yielding 4.7% returns in the year till October, compared to MSCI EM's -2.1% over the same period. Over 10 years, India's annualized returns stand at 8.3%, against MSCI EM's 1.1%.

Record number of Indian stocks in MSCI after latest rebalancing

Indian stocks’ weightage in MSCI indices set to rise with nine additions

The MSCI EM index determines stock weights based on free-float market capitalization, which are shares that foreign investors can trade. Greater market capitalization means more weight and allocation from investors. Reliance Industries (with a weight of 1.34%), ICICI Bank (0.91%), and Infosys at (0.87%) are among the top 10 stocks in the MSCI EM index.

In its latest quarterly update, MSCI added nine Indian stocks to the index. Key entries include Tata Motors, Polycab India, Macrotech Developers, IndusInd Bank, and One 97 Communications, the parent company of Paytm. Following this, IndusInd Bank, Suzlon Energy, Persistent Systems, and APL Apollo Tubes are expected to get large investments of $290 million, $264 million, $258 million, and $227 million, respectively, according to Nuvama Research. This brings the total Indian stocks in the index to 131. Notably, no existing Indian stocks were removed to include these new ones.

The latest positive review by MSCI EM comes almost a month after foreign brokerage Morgan Stanley upgraded India to the status of ‘most preferred’ emerging market.

Recent changes in FTSE set to bring additional inflows into Indian equities

Recently, FTSE, another global index provider, implemented adjustments in its semiannual index review on September 18, 2023. It added stocks like Reliance Industries, Wipro, and Bajaj Finance to the India index and expects to attract $120 million from just these three stocks. However, Infosys and HCL Tech might see outflows of $35 million and $15 million, respectively, as reported by IIFL Research.

The addition or removal of a stock from an index can influence its share price. When a stock is added, demand may increase, leading to a possible price hike. If removed, it could face selling pressure, decreasing its price. These changes, therefore, can impact individual investors' portfolio values.

The rise in inflows is expected to come from passive trackers like index-based exchange-traded funds (ETFs) and mutual funds, not necessarily from active fund managers. While this does not guarantee a rise in overall foreign funds, it boosts market sentiment.

The Baseline

16 Nov 2023

Chart of the week: Superstar investors’ net worth recovers over the past two quarters after a volatile FY23

By Bhavani Eswar

Retail investors often look to superstar investors for insights on which stocks and sectors are worth investing in. Some even invest in shadow portfolios to follow the strategies of these investors. In this edition of Chart of the Week, we analyse top superstar investors’ net worth over the past four quarters using data from Trendlyne’s Superstar investor dashboard.

Despite the Indian equity market’s high volatility, the net worth of most superstar investors rose over the past year.

The Indian Volatility Index, Nifty VIX, saw significant fluctuations and increased by 7.6% and 13.5% in December 2022 and January 2023, respectively. This heightened volatility and the muted performance by the Nifty 50 led to many superstars registering negative returns in Q3 and Q4FY23. The Nifty 50 fell by almost 2% in each quarter during this period.

Superstar investors’ winning formula: low-debt stocks with high returns

Top holdings drive superstar investors' net worth growth in the past year

Despite the high volatility in Q3 and Q4FY23, the one-year change in most superstar investors’ net worth has increased significantly overall. Their strategy of staying invested and adding investments when markets fell, has helped most superstar investors’ net worth grow in the past year.

Rekha Jhunjhunwala leads the pack with a 209% surge in her net worth. This steep growth is largely due to inheriting her late husband Rakesh Jhunjhunwala’s portfolio and consistently increasing her stake in Titan. In addition, Titan and Tata Motors, her top two holdings, have risen by 24% and 57% over the past year.

An interesting trend among these investors is their preference for companies with low or no debt. For instance, Vijay Kedia’s top three holdings, Atul Auto, Tejas Network, and Elecon Engineering Company, which form half of his portfolio, either have minimal debt or are debt-free. This strategy of combining low debt with high revenue growth has yielded results for him.

Mid and small-cap stocks, known for their higher risk-reward ratio, have delivered high returns to investors like Kedia. Two of his top three holdings have risen by almost 100% over the last year. Kedia’s net worth increased by 65% and 40% in Q1 and Q2FY24, respectively. Overall, his portfolio has grown by 88% over the past year, making him the second-best performer after Rekha Jhunjhunwala.

The portfolios of many superstar investors are dominated by stocks from sectors like retailing, banking and finance, and textile apparel. More than 70% of these portfolios have exposure to these sectors. The average revenue growth for the top holdings of Ashish Kacholia, and Anil Kumar Goel over the past three years has exceeded 100%. Consequently, their net worth has increased significantly, by 38% and 35%, respectively, in the past year.

Monish Parbai and Nemish Shah have seen moderate growth in their net worth due to the subdued performance of their top holdings like Sunteck Realty and Lakshmi Machine Works.

Sunil Singhania’s portfolio has 28 stocks spread across sectors like software and services, metals and mining, and consumer durables. Two of his top three holdings have risen by over 100%, contributing to his net worth rising by more than 30% in the past year.

In contrast, two superstar investors, Dolly Khanna and Radhakishan Damani, have reported a decline in net worth over the past year. More than 95% of Radhakishan Damani’s portfolio was invested in Avenue Supermarts which fell by 8% last year. Dolly Khanna, on the other hand, cut her stake in several holdings in Q3 and Q4FY23, leading to a fall in her net worth.

Superstar investors are not immune to market volatility. But while their portfolios fell in Q3 and Q4FY23, in line with the broader market, have bounced back strongly since then.