Articles by Suhani Adilabadkar

Divi's Laboratories Ltd.    
01 Dec 2021
Despite near term pressures, Divi’s Labs’ long term growth story is intact

By Suhani Adilabadkar

Divi’s Laboratories is the second-largest Indian pharmaceutical company in terms of market capitalisation. The company’s Q2FY22 results, however, were below street estimates. This was due to a poor show by the generics business, rising raw material costs and supply chain disruptions. Operating margins were weak and net profit growth was helped by lower taxation, but sequential performance in the September 2021 quarter was muted overall. Investor sentiment was also dented by the dimming prospects of Divi’s key customer, Merck’s star anti- Covid-19 oral drug Molnupiravir. Pfizer’s competitor drug Paxlovid was shown to have higher efficacy, and these results came out on November 5, a day before Divi’s Labs announced its Q2FY22 results. Divi’s Labs stock slipped 8% intraday post results. 

Quick Takes:

  • The Hyderabad High Court dismissed all cases against Divi’s Labs’ Kakinada Plant, construction will start soon

  • Divi’s Labs plans capital expenditure (capex) of Rs 300 crore in H2FY22 and another Rs 1,000-2,000 crore for its upcoming Kakinada and Krishnapatnam plants in the next 2-3 years

  • Operating margins in the near term could be impacted by volatile raw material prices and logistic issues

  • According to management, the oral anti-Covid pill opportunity is around $70 billion

Muted September 2021 quarter results 

Divi’s Labs manufactures generic active pharmaceutical ingredients (APIs), nutraceuticals, and custom synthesis (CS) of active ingredients for innovator companies. Operating revenues for Q2FY22 came in at Rs 1,988 crore compared to Rs 1,749 crore, a rise of 13.6% YoY. 

Revenue growth was mainly driven by the CS segment (Rs 1,073 crore) which grew 53% YoY and 9% sequentially in Q2FY22. APIs revenues (Rs 746 crore) fell 15% YoY and 11% QoQ in September 2021 quarter. 

Nutraceutical revenues were flat at Rs 168 crore in Q2FY22. The segment revenues increased by 22% QoQ. The nutraceutical segment includes vitamins and carotenoids and in the present Covid times, the company expects this immunity booster product portfolio to perform better in the coming quarters. 

Operating margins were reported at 41.2% contracting 120 basis points (bps) YoY and 230 bps sequentially. The company had to bear the brunt of rising raw material prices and high logistics expenses due to soaring shipping costs and the unavailability of containers during the quarter. Net Profit was at Rs 606 crore in the September 2021 quarter, a rise of 17% YoY and 9% sequentially aided by a fall in taxes. Exports accounted for 88% of revenues in H1FY22 for Divi’s Labs, with Europe and the US regions contributing 72% of total revenues. This growth was driven by the CS segment.

Molnupiravir vs Paxlovid – efficacy battle gives Divi’s investors the jitters

Merck announced positive results of its phase 3, clinical trials for Molnupiravir, an oral antiviral medicine on October 1, 2021.  According to the company, Molnupiravir reduced the risk of hospitalization or death by approximately 50% for patients suffering from mild to moderate Covid-19. Merck filed an emergency use authorization (EUA) application to the US FDA for Molnupiravir on October 11. Earlier in June 2021, Merck inked a deal with the US government to supply roughly 1.7 million courses of Molnupiravir. Divi’s Labs’ is the authorized manufacturer for Molnupiravir API in India.  Driven by the strong prospects of Molnupiravir, Divi’s Labs' stock price surged 11% in the first fortnight of October 2021. 

Apart from Merck, there are a few more companies in the race for orally administered antiviral COVID-19 drugs, namely Shionogi Pharma, RedHill Biopharma, Atea Pharmaceuticals, and Pfizer. Shionogi Pharma’s anti-Covid19 pill is still undergoing Phase 2 and 3 clinical trials. Atea Pharmaceuticals and RedHill Biopharma failed to meet the primary goal of the Phase 2/3 clinical trials. While Phase 1 trials test safety, Phase 2 and 3 test effectiveness and potential side effects of the drug before approval is given by regulatory authorities. 

On November 5, Pfizer announced that its Phase 2 and 3 trial results of the antiviral pill for Covid-19 treatment among adults reduced the risk of hospitalisation or death by 89%. Pfizer's anti-Covid pill, Paxlovid, might get US FDA approval by the end of the year. 

As per the recent US FDA update released on November 26, by Merck, Molnupiravir reduced the risk of hospitalisation or death by just 30%, lower than the earlier 50% estimate. Pfizer’s management on the other hand is confident that the Paxlovid pill will be effective even against the latest Covid-19 variant, omicron. Compared to vaccinations, oral antiviral Covid-19 pills would be able to treat a larger number of people at a faster rate, especially those in the early stages of infection. Covid-19 cases are surging again in the EU, Australia, and many other countries, and with the widespread underlying risk of Covid-19 mutations, oral Covid-19 medication assumes significance. 

Divis Labs stock is again down 3.5% since last Friday.  Divi’s Labs’ investors are disappointed with the recent results of Merck’s anti-Covid-19 pill efficacy levels and the company’s ability to drive near-term growth through the Molnupiravir opportunity is now unclear. While Paxlovid’s higher efficacy levels dented investor sentiment, rising raw material costs have also restrained the company’s stock’s upward trajectory. In addition, power outages in China are impacting raw material supply, and higher shipping costs due to crude inflation are weighing on operating margins. This is what makes the weak performance of the API generic business concerning. 

Near-term pressure on margins, API segment’s long term growth intact

While analysts expect near term pressure on operating margins, Divi’s Labs’ management is optimistic about maintaining its margins in the coming quarters. Murli K Divi, Managing Director at Divi’s Laboratories, said the company exports 88% of what it produces to large customers in the US and Europe. The company’s long-term contracts with these customers have inbuilt cost enhancement clauses which help in passing on short-term cost escalations. 

Compared to its peers, Divis Labs is on a better footing in terms of cost savings due to its backward integration initiatives over the past 2-3 years. But the higher cost of coal, and basic solvent costs rising significantly over the past few quarters, might play truant. Coal cost has more than doubled YoY and the spike in solvents (5-10% of total expenditure for Divi’s Labs) is around 300% YoY in Q2FY22. 

Driven by high inventory stocking as customers diversified API supplies due to Covid uncertainty, Indian players witnessed robust growth in FY21. API revenue growth moderated for most of the Indian companies due to a higher FY21 base and the return of Chinese supplies.  Divi’s Labs reported negative API revenue growth on a YoY basis over the past two quarters. 

But for the management, the generic API segment is a significant growth engine and the company intends to revive the segment by adding new products going off patent between FY23-24, which is a $20 billion opportunity. Divi’s Labs, a world leader in Naproxen (anti-inflammatory drug), Gabapentin (preventing seizures), and Dextromethorphan (cough suppressant) with 65-85% market share is also growing at 10% YoY. The company achieved complete backward integration in all these large volume generic APIs and is free from China dependence in terms of raw materials. 

Divis is also expanding capacities for its next line of generic API products such as Levodopa (Parkinson) and Valsartan (high blood pressure) where it has a 20-30% market share which will add to the topline in the near future. The company aims to achieve strong backward integration, once it achieves 60-70% market share in these products in the next few years. 

Divi’s Labs is also getting into sartans in a big way. All sartans require the key starting material, Ortho Tolyl Benzonitrile (OTBN) which is made in-house by Divi’s Labs. The company’s ability to control nitrosamine and azido impurity ( which causes cancer) in the production of sartans API, a major US FDA concern is another advantage for Divi’s. With a strong position in Valsartan, the company aims to enter sartan manufacturing on a large scale. The global sartan market is around $20-25 billion and Divis aims to capture a large pie of the sartan market in the next few years. Speaking on sartan opportunity, Dr Divi said that the company is quite strong in backward integration in basic raw materials for all sartans which gives a huge cost advantage and helps in controlling impurities. 

The company also ventured into contrast media APIs on a large scale in Q3FY21. According to the management, Divi’s Labs is currently one of the large players in the industry and has signed on several big companies and innovators, the results of which will be visible in the next two-three years.  Contrast media are substances administered orally or are injected to highlight internal organs or structure of the body for x-rays (such as angiography), MRI scans and CT scans. Driven by Covid-19 complexities, contrast media opportunity is around $4-6 billion growing currently at 15% to 25%.  

‘Sky is the limit’ for custom synthesis business, Kakinada plant construction on track

On the custom synthesis (contract research and manufacturing services) side of its business, the company received fast-track projects from big US and European pharma companies in Q2FY21. Divi’s Labs spent Rs 400 crore capex on these fast-track projects, of which the Molnupiravir-Merck project was one. According to the management, the company is bound by confidentiality agreements with Merck and cannot disclose Molnupiravir sales. However, the management indicated that the Molnupiravir project reported sales for the first time in Q2FY22. The custom synthesis segment is on a strong footing over the past six quarters. The company recently received two big long-term fast-track custom synthesis projects, benefits of which will be visible in the next few years. Divis Labs has a long-standing relationship with 12 out of the top 20 big pharma companies across the US, EU, and Japan for more than 10 years. 

And while Molnupiravir prospects are currently unclear, Murli Divi said the oral anti Covid19 pill opportunity is around $70 billion. He also said that all cases filed against the company’s 500-acre land for its Kakinada plant were dismissed by the  High Court. The land will be soon handed over to the company by the Andhra Pradesh Industrial Infrastructure Corporation (APIIC). Construction is expected to start soon on the Kakinada plant and the company plans a capex of Rs 1000-2000 crore for its upcoming Kakinada and Krishnapatnam plants in the next 2-3 years.

Number of FII/FPI investors increased from 812 to 870 in Sep 2021 qtr.
Bajaj Finance Ltd.    
16 Nov 2021
Bajaj Finance puts up a strong show, street awaits digital success

By Suhani Adilabadkar

After a muted June 2021 quarter, Bajaj Finance (BAF) saw the pace pick up in Q2FY22. Higher net interest income growth, robust net profit, lower provisions, and improved asset quality have cheered investors. The BAF stock price, which gained 32% over the past three months, fell 4% on profit booking after September 2021 quarter results were announced.

As the pandemic subsides and the Indian economy continues to heal, BAF stock price is on an upswing. But it’s the company’s accelerated digital transformation drive that has widely captured investors’ interest. Analysts and investors alike are keenly watching BAF’s 3-in-1 business transformation and how the largest lender for the purchase of consumer durables braces itself to take competition head on from banking giants and fintech players like Amazon, Paytm, and Phone Pe.

Quick Takes:

  • Opex/Net Interest Income ratio is expected to normalize to 33-34% by the end of FY22 from 38% in Q2FY22 as operating costs stabilize and collections increase

  • In the absence of a third wave, Bajaj Finance expects a gross NPA ratio at 1.7-1.8% and Net NPA ratio at 0.7-0.8% by the end of FY22 

  • According to the management, high-risk stage 2 and stage 3 assets should be back to pre-Covid levels of Rs 7,800-8,000 crore in the near future, from the current Rs 10,450 crore in Q2FY22

  • Cross-sell franchise constituted 58% of total customer franchise of 52.8 million as of September 30, 2021, a growth of 20% YoY

  • Bajaj Finance is evaluating reducing its two-wheeler segment dependence on Bajaj Finance as the latter sets up its captive NBFC 

Strong recovery in September 2021 quarter

It was a strong Q2FY22 for the non-banking finance company (NBFC) as net interest income (NII), net profit, and assets under management (AUM) reported robust double-digit growth. NII came in at Rs 5,335 crore in September 2021 quarter compared to Rs 4,162 crore, a year ago, rising 28% YoY. NII growth was supported by strong growth in advances as economic activity picked up. Interest reversals which came in at Rs 322 crore vs Rs 216 crore in Q2FY21 also aided NII double-digit growth. 

AUM at Rs 1.67 lakh crore reported 22% YoY growth in Q2FY22 driven by consumer B2C, rural B2C, and SME segments. Barring auto finance, all business segments delivered strong double-digit growth in Q2FY22. Loan losses and provisions for the quarter were at Rs 1,300 crore. Provisions declined 24% YoY and 26% sequentially in Q2FY22. In the absence of a third wave, loan losses and provisions are expected to normalize to pre-Covid levels of Rs 700-800 crore in H2FY22. With lower provisions and higher NII growth, net profit surged 53% YoY reported at Rs 1,481 crore vs Rs 965 crore, a year ago. 

To protect itself from a potential third wave, BAF increased its management overlay provision from Rs 483 crore in Q1FY22 to 832 crore in the September 2021 quarter. Management overlay provisions are adjustments made to expected credit loss (ECL) models to capture risks caused by uncertainties such as Covid-19. Deposit book grew by 33% YoY to Rs 28,720 crore as on September 30, 2021 with the retail and corporate mix at 77:23 contributing 20% of total borrowings. 

Customer acquisition and AUM revert back to growth, asset quality improves

As the economy unlocked after the second wave, the street expected a healthy set of numbers from Bajaj Finance. Investors were not disappointed: the NBFC reported strong customer acquisition numbers and robust AUM growth in Q2FY22. With higher upgrades and recoveries, strong sequential improvement in asset quality also relieved investors.

BAF booked 6.6 million loans in Q2FY22, the highest over the past six quarters. Rajiv Jain, Managing Director at Bajaj Finance, said that though new loan acquisition is not near the Q3FY20 levels of 7.67 million loans, the management aims to cover up the gap over the next few quarters. With a total customer franchise of 52.8 million as on September 30, 2021, the company acquired 2.4 million new customers in Q2 FY22 as compared to 1.2 million, a year ago. Speaking on new customer acquisition, Jain said that the NBFC is on track to add seven to eight million customers in FY22. 

Bajaj Finance reported core AUM (excluding IPO financing and losses due to COVID-19 pandemic) of Rs 11,150 crore, the highest ever in a quarter. This indicates strong AUM growth momentum.

Core AUM declined 56% YoY in Q1FY22 due to slowing down of B2B business (16% of total AUM). Auto finance (40% of B2B AUM) declined 11% YoY in the June 2021 quarter and continued its consistent decline in Q2FY22 with a 15% YoY fall and contributed  6% to overall AUM mix down from 9% in Q2FY21. Speaking on AUM growth, Jain said that while auto finance business is not going up, all other businesses rose strongly in Q2FY22 and the management expects quarterly AUM growth for the rest of the year to be quite strong in absence of a third wave.  

Gross NPA ratio (percentage of gross NPAs to gross advances) and net NPA ratio (percentage of net NPAs to net advances) at 2.45% and 1.1% moderated 51 and 36 basis points (bps) respectively sequentially as auto finance NPA ratios moderated significantly in Q2FY22.

Auto Finance gross NPA ratio and Net NPA ratio declined 315 bps and 290 bps respectively in the September 2021 quarter. Auto finance will take the longest time to recover compared to other segments, said Jain. He further added that within auto finance, two-wheeler and three wheelers have gone through a reasonable stress for Bajaj Finance. 

Other changes are afoot in the auto market for Bajaj Finance. The NBFC is largely dependent on Bajaj Auto for its two-wheeler and three-wheeler segment. Bajaj Auto recently announced setting up its own captive finance subsidiary. Bajaj Finance management is thus evaluating diversifying towards other original equipment manufacturers (OEMs). This would reduce concentration risk which played a significant role in increasing stress levels in the two-wheeler segment and control NPA levels. But in three-wheelers, the NBFC intends to do business only with its sister concern, Bajaj Auto.

Bajaj Finance accelerates digital transformation journey

Banking behemoths ICICI Bank, HDFC Bank, Axis Bank, and Kotak Mahindra Bank are all feeling the heat from fintech companies such as Paytm and Phone Pe as mobile wallets, digital lending, mobile banking is now widely adopted and mechanisms such as Unified Payments Interface (UPI) and Bharat Interface for Money (BHIM) have created a paradigm shift in payment infrastructure In India. 

Pushed by the pandemic, the banking and NBFC sectors are both accelerating their digital evolution, and are ready to partner with the fintech players to maintain their profitability metrics. Initiating its digital journey in 2019, BAF is currently on an accelerated digital transformation trajectory, hastened by the pandemic. BAF launched its wallet business (Bajaj Pay) on July 1, 2021. The management expects to onboard 20-25 million wallet customers by March 2023. 

Speaking on the wallet business (3.1 million customers in Q2FY22), Jain said that the company is onboarding 8 lakh to a million new wallets every month. To become a full-service payments player, Bajaj Finance applied to the RBI for Payment Aggregator (PA) & Bharat Bill Pay Operating Unit (BBPOU) licenses. The company is also upgrading its consumer app in phases by developing five proprietary marketplaces, EMI store, insurance, investment, health and the broking app. The consumer app is currently functional for 10% customers and will be fully rolled out by April-May 2022. 

The EMI store strategy is starting to yield results as store visits increased from 10 million in Q4FY21 to 30 million in Q2FY22. Jain said that the company started to stimulate the entire customer franchise through the EMI store resulting in 250,000 new loans in Q2FY22. Similar to Bajaj Pay for consumers, BAF is also launching its merchant app with four stack payments, prepaid payment instruments (PPI), UPI, EMI card and credit card. Merchant app is expected to be launched in January 2022 subsequent to PA license approval.

The company intends to revive its retail EMI business (impacted by the pandemic) by weaving it into the merchant app.

BAF capped its retail EMI (REMI) business to 50,000 accounts a month and increased ticket size from Rs 10,000 to Rs 15,000 a month. REMI is nothing but a ‘Buy Now Pay Later’ product, like those introduced by many of BAF’s competitors such as Amazon, Flipkart, and Paytm. Even ICICI Bank and Axis Bank are offering pay later options. Private sector banks offering zero EMI options for consumer loans and home loans at low-interest rates are all intensifying competition in the financial services sector. 

For providing merchant payment services, it's going to be a crowded place as Amazon, Phone Pe, Pine Labs, Paytm, Bharat Pe, Zomato and many other players have also applied for a PA license. With this backdrop, it would be interesting to see how Bajaj Finance strategizes to achieve its target of 100 million customers.

Bajaj Finance Ltd. has an average target of 7301.83 from 7 brokers.
ICICI Bank Ltd.    
08 Nov 2021
ICICI Bank outpaces the competition, peers prepare festive bonanza

By Suhani Adilabadkar

ICICI Bank outperformed its top banking quartile peers in Q2FY22 yet again on almost all significant parameters. While the retail loan book continues to push the growth wagon, improved asset quality and lower provisions enthused the street. Analysts maintained their ‘buy’ ratings and increased target prices, retaining ICICI Bank as their top pick from the Indian banking sector. 

ICICI Bank’s stock price jumped 11.5% after its September 2021 quarter results were announced. The upsurge was driven by its highest ever quarterly profit, robust retail loan growth, highest ever net interest margin (NIM), strong CASA and robust asset quality in Q2FY22. The second-largest private sector lender touched its new 52-week high of Rs 853 on October 25, 2021.

The bank maintained its top position throughout the pandemic, but in the absence of the third wave and return of competitive intensity, will the motive force smother down or further fire up the growth engine?

Quick Takes:

  • Decline in cost of funds and lower interest reversals aided net interest margin (NIM) expansion in Q2FY22

  • About 32% of mortgage sanctions and 40% of personal loan disbursements, by volume, were end-to-end through the digital channel in H1FY22

  • According to the management, there is low capital expenditure (capex) demand from the private sector, while PSU/government companies are seeing strong capex traction

  • ICICI Bank management also expects credit costs to improve to 1.25% from the present 1.4% levels in Q2FY22 in the absence of a third wave

  • The management will take the decision to unwind Covid-19 provisions of Rs 6,425 crore by the end of FY22 

ICICI Bank’s strong show continues in September 2021 quarter

ICICI Bank reported a net interest income (NII) of Rs 11,690 crore in Q2FY22 compared to Rs 9,366 crore in Q2FY21, a rise of 25% YoY. Robust NII growth was driven by strong loan book growth (up 17.2% YoY) and healthy net interest margin (NIM) expansion. NIM was at 4% in the September 2021 quarter, expanding 43 basis points (bps) YoY and 11 bps sequentially. Sequential NIM expansion was aided by a decline in cost of funds and lower interest reversals. Cost of funds fell 12 bps QoQ in Q2FY22. 

Provisions & contingencies at Rs 2,713 crore fell 9% YoY (and 5% sequentially) in Q2FY22. Aided by lower provisions and higher NII growth, ICICI Bank reported its highest ever quarterly net profit of Rs 5,511 crore, rising 30% YoY. Growth in deposits (Rs 9.8 lakh crore) continued to be strong at 17.3% YoY as on September 30, 2021, driven by 12.5% YoY growth in term deposits. Average CASA ratio was at 44.1% in Q2FY22 vs 40.3% YoY, a year ago. Loan book growth also moved in tandem with deposit growth of 17.2% YoY at Rs 7.6 lakh crore in the September 2021 quarter supported by retail, SME and business banking portfolios.

ICICI Bank outpaces peers with its strong operational performance

ICICI Bank’s stock price doubled over the past one year. The bank took the pandemic on,  gaining market share by spearheading its retail loan book growth through competitive pricing, a simplified credit delivery process, and leveraging its robust digital platforms. Close peers, HDFC Bank and Kotak Mahindra Bank, implemented a cautious strategy, and reined-in retail loan book growth to tackle the uncertainty due to the pandemic. Both banking heavyweights did not impress the street with their asset quality parameters in FY21. Axis Bank surprisingly put up a better show. Of course, it didn’t outpace HDFC bank and ICICI Bank, but Axis Bank’s loan book growth was on better footing compared to Kotak Mahindra Bank in FY21. Axis Bank’s stock is up 50% over the past 12 months. HDFC Bank and Kotak Mahindra Bank’s stocks gained roughly 30% over the past year. 

Analysts are gung-ho on ICICI Bank and it's their favourite pick from the Indian banking sector. The second-largest private sector lender surprised the street with its strong operational performance in Q2FY22, setting itself apart from its peer group. The bank reported NII growth of 25% YoY, a seven-quarter high in Q2FY22 - this was the highest among the top banking quartile, driven mainly by a high yield retail loan book which constitutes 61.2% of the total loan book. In addition to retail loans, loans earning a higher yield also include business banking and SME segments, which together constitute 10% of the total loan book and grew by more than 40% YoY in Q2FY22.

The bank reported its highest ever quarterly NIMs in the September 2021 quarter at 4%. High yield retail, business banking and SME business and low cost of funds at 3.53%, the lowest among the private sector peers, supported NIM expansion in Q2FY22. Speaking on NIM growth, Rakesh Jha, CFO at ICICI Bank said that in addition to lower cost of funds, lower NPL additions also helped NIM growth in the September 2021 quarter. Going forward, there would be many moving parts linked to the NIM equation, namely competitive intensity, repo rate movement and external benchmark linked loan book, said Jha.

Another significant operational parameter, the cost to income ratio at 39.9% improved 50 bps sequentially in Q2FY22. Cost to income ratio (operating expenses/operating income) indicates the efficiency at which the bank is run and the lower the ratio, the higher is the profitability for the bank. The cost to income ratio is trending lower for the past two quarters. According to the management, as economic activity picks up, the cost to income ratio might go up in the near term as the main focus is on increasing core operating profit.  

While Kotak Mahindra Bank and Axis Bank reported negative YoY growth in pre-provision operating profit in Q2FY22, HDFC bank grew by 17% YoY. ICICI Bank topped the table with a 20% growth in pre-provision operating profit at Rs 9,915 crore in September 2021 quarter despite a 28% rise in operating expenses (employee and non-employee expenses).

While employee expenses jumped 21% YoY, non-employee expenses increased by 32% YoY. As the economy picks up, the bank is moving aggressively with increased spending on non-employee expenses related to retail business, technology, distribution and brand building. Speaking on non-employee costs, Jha said, “All of these costs, we believe are productive good costs undertaken to improve and increase our core operating profit.” He further added that the bank sees these expenses moving at the current run-rate of 20% in the near term.

Will retail loan growth momentum be sustainable?

ICICI Bank’s retail loan growth came in at 20% YoY driven by home loans, credit cards, personal and rural loans in Q2FY22. With the increase in economic activity, disbursements across all retail products increased sequentially in the September 2021 quarter.

According to the management, mortgage disbursements grew on the back of pre-approved offers, digitisation, and seamless customer onboarding experience. Disbursements of personal loans and auto loans were also close to Q4FY21 levels. Credit cards in force increased by 6% sequentially and credit card spends grew by 47% sequentially. 

ICICI Bank maintained a retail loan growth run rate of 20% over the past three quarters. In H2FY22, retail loan book momentum might taper off with a rising base and stiff competition from peers.

With a low probability of a third wave, banks are all out on the retail loan track. Market leader HDFC Bank is back with a vengeance to recover its lost market share in credit cards. HDFC bank issued more than 4 lakh credit cards in the last five weeks of Q2FY22 after the RBI ban was lifted in August 2021. ICICI Bank added 7 lakh in the three months of the September 2021 quarter. 

HDFC Bank through its festive campaign, announced over 10,000 offers on credit cards, personal loans, car loans and EMIs. ICICI Bank’s mortgage segment, which constitutes 34.4% of total loan book, will also face tough competition as competitors are offering lucrative loan packages. Kotak Mahindra Bank slashed its home loan rates to a decade low at 6.5%, lowest in the industry while Axis Bank offers a waiver of 12 EMIs on select home loan products heating up the home loan competition. ICICI Bank offers home loans at 6.7%. 

Asset quality surprise leaves the street enthused

The markets expected the retail loan growth to continue its double-digit growth in Q2FY22, but improvement in asset quality both sequentially and YoY came as a positive surprise. Gross NPA ratio (percentage of gross NPAs to gross advances) and Net NPA ratio (percentage of net NPAs to net advances) came in at 4.82% and 0.99% and improved 54 and 13 basis points (bps) QoQ respectively in Q2FY22 mainly due to higher upgrades, recoveries and lower slippages. And also improved 33 bps and 17 bps respectively YoY. ICICI bank NPA ratios improved considerably in the September 2021 quarter compared to other top three banks and the management expects NPA ratios to improve further in H2FY22.

ICICI bank’s provision coverage ratio (PCR) at 80.1% is also the best in the industry. In addition to high PCR, the bank holds Rs 6,425 crore Covid -19 provisions, which is about 0.8% of loans. Slippages or fresh accretion of NPAs declined sequentially from Rs 7,231 crore in Q1FY22 to Rs 5,578 crore in Q2FY22. The management expects slippages to moderate further in H2FY22. 

While all parameters seem to be improving, analysts are keenly watching the restructured loan portfolio, which rose to 1.3% of total loans (Rs 9,684 crore) in the September 2021 quarter compared to 0.7% (Rs 4,864 crore) in Q1FY22. The bank maintains 20% provision on these restructured loans. According to the management, there might be further additions to the restructured loan portfolio in Q3FY22, but lower than Rs 1,000 crore.

ICICI Bank Ltd.'s price crossed below SMA100 today
HDFC Bank Ltd.    
25 Oct 2021
HDFC Bank finds firmer ground in September quarter

By Suhani Adilabadkar

HDFC Bank stock price gained more than 2% ahead of its September 2021 quarter results on October 14, 2021. After a muted Q1FY22, investors were relieved as the bank reported higher retail loan growth, consistent commercial & rural banking growth momentum, robust CASA ratio, and stable deposit base growth in Q2FY22. Post the result announcement, the stock price touched its 52-week high of Rs 1,725. 

After the June 2021 quarter scare when NPA ratios deteriorated both YoY and sequentially, the September 2021 quarter numbers were reassuring in terms of asset quality, pleasing investors and analysts alike. The management’s commentary indicating growth pick-up across retail, rural and commercial business segments also enthused the street. With the festive season now in full swing, HDFC Bank is back with familiar aggression, and energised by the removal of the RBI ban on the issuance of its credit cards. 

Quick Takes

  • HDFC Bank issued 4.16 lakh credit cards in Q2FY22 after the RBI ban was lifted in August 2021 vs ICICI Bank’s 7 lakh credit card addition 

  • The bank aims to grow its rural banking and wholesale small and medium enterprise (SME) business by 20-25% and 50% YoY respectively in FY22

  • Higher retail push and revival of credit card business is expected to increase net interest income growth and expand net interest margin in the near future

  • Core annualized slippage ratio improved to 1.8% in September 2021 quarter on a quarterly basis compared to 2.54% in the June 2021 quarter 

  • HDFC Bank plans to open 400 branches in the coming quarters

HDFC Bank returns to  growth in September 2021 Quarter

After reporting its lowest ever YoY net interest income (NII) growth of 8.6% YoY in Q1FY22, HDFC Bank is back to double-digit growth. Net interest income (interest earned less interest expended) grew by 12% YoY to Rs 17,684 crore in Q2FY22 from Rs 15,776 crore, a year ago. Higher NII was aided by strong retail book growth (up 13% YoY) and stable net interest margin (NIM). 

NIM remained stable at 4.1% in the September 2021 quarter. Net profit came in at Rs 8,834 crore for quarter ended September 30, 2021, rising 18% YoY and 14% sequentially.  Higher profitability was reported despite additional contingent provision of Rs 1,200 crore in Q2FY22 for de-risking the balance sheet.

Overall provisions and contingencies rose 6% YoY to Rs 3,925 crore in September 2021 quarter (down 23% QoQ.) Higher provision coverage ratio of 71% and aggregate contingent provision of Rs 7,760 crore provides robust support to asset quality.  Improved collections and lower slippages led to sequential improvement in asset quality in Q2FY22. Gross NPA ratio (percentage of gross NPAs to gross advances) and Net NPA ratio (percentage of net NPAs to net advances) came in at 1.35% and 0.40% and improved 12 and 8 basis points (bps) QoQ respectively in Q2FY22. 

Current account and savings accounts (CASA) ratio surged to 46.8% in the September 2021 quarter compared to 41.6%, a year ago. CASA deposits at Rs 6,58,232 crore rose 28% YoY driven by savings account deposits and current account deposits growth by 30% and 26% YoY respectively in September 2021 quarter. Total deposits (up 14.4% YoY) and advances (up 15.5% YoY) were at Rs 14.06 lakh crore and Rs 11.99 crore as on September 30, 2021. 


Improved asset quality, restructured book a key monitorable

As the second wave subsided, lower slippages, higher collections and recoveries improved HDFC Bank’s asset quality in the September 2021 quarter. According to the management, recoveries for Q2FY22  were 10% higher than pre-Covid levels and were 20% higher YoY for the month of September 2021. 

Core annualized slippage ratio (fresh NPAs) also improved to 1.8% for the September 2021 quarter on a quarterly basis compared to 2.54% in the June 2021 quarter. Provisions rose 6% YoY and declined 23% QoQ, and consequently credit cost fell 37 bps sequentially, reported at 1.30% in Q2FY22, compared to 1.41% in Q2FY21 (Credit cost is the percentage of provisioning against total advances. A fall in credit costs enhances the lending capacity of banks). 

Though all these parameters are encouraging, analysts are keenly watching HDFC Bank’s restructured book which was around Rs 18,000 crore for the quarter ended September 30, 2021. Restructured loan book rose to 1.5% of advances in the September 2021 quarter, compared to 0.8% in the previous June 2021 quarter. Speaking on the bank’s restructured book, Jimmy Tata, Chief Risk Officer at HDFC Bank said, “Our restructured portfolio is under heightened monitoring at all points in time.” He added that the impact of the restructured book will not be more than 10-20 basis points on the bank’s NPAs at any given point in time. 

Retail loan book growth re-invigorated, commercial & rural banking maintains momentum

According to the recent CRISIL report, the retail segment of the Indian banking industry is expected to report growth in its mid-teens in FY22, after a muted FY21. For HDFC Bank as well, the retail segment has turned a corner. Retail loan segment is back to double-digit growth after five quarters. Retail loan book at Rs 4,82,942 crore grew 13% YoY in September 2021 quarter.

The retail loan book mix fell to 40% of the total loan book in the September 2021 quarter, from 50% in Q4FY20. As the pandemic induced a cautious stance among customers, leading to slow consumption and high savings, HDFC Bank shifted its focus towards its low-yield wholesale/corporate loan book. But in the present scenario, as the economy picks up, the bank has also got back on the retail track. 

Speaking on retail book growth, Srinivasan Vaidyanathan, CFO at HDFC Bank said that after a transition period of 6-8 quarters from retail to wholesale, the retail book is now at an inflection point. He further added that, “The retail segment is now starting to pick up and at least the momentum on the retail is more than wholesale.” All retail product segments reported positive growth in Q2FY22. Personal loans, where the bank is in a market leadership position, grew 12% YoY. The bank’s personal loan portfolio entirely constitutes salaried individuals and belong to high-rated government and private enterprises. The bank is confident of maintaining its double-digit growth momentum for personal loans in the coming quarters.

Auto loans are also witnessing strong traction and growing at a healthy pace. Arvind Kapil, Country Head-Retail Assets said, “The domestic vehicle sales units witnessed a drop at an industry level of 37% for September 2021 over September 2020. However, our incremental auto loan disbursal in value terms increased by 36% during the same period.” In the auto loan segment (up 6.3% YoY), which includes both 2 & 4 wheelers, HDFC bank’s market share is around 25-30% in the OEM category. In the retail commercial vehicle category, vehicles financed in Q2FY22 grew 4.5x YoY compared to 1.2x of industry growth. Home loan segment and loans against property (LAP) grew 20% and 12% YoY respectively in Q2FY22. Home loans constitute roughly half of the aggregate banking sector loan book. Lower home loan rates, lower real estate prices and work from home trend is expected to drive the home loan segment for banks in the near future.  

RBI lifted restrictions on HDFC Bank for issuance of new credit cards in August 2021, a key positive development before the festive season. According to the management, 4,16,000 cards were issued over the past five weeks and the bank aims to sustain this momentum. Credit card spend grew 36% YoY and 27% sequentially in the September 2021 quarter. For the first 10 days of October 2021, growth in card spends is around 42% compared to the similar period last year driven by festive spend. The bank recently re-launched its Millenia, Infinia Metal, Freedom credit card offerings and tied up with Paytm. Partnership with Paytm will augment HDFC Bank’s credit card acquisition by utilizing the former’s merchant base. 

On an overall basis, incremental retail disbursements grew 50% QoQ and 71% YoY in the September 2021 quarter. As the high yielding retail loan segment gathers pace, net interest income and net interest margin will witness expansion, driving higher profitability for HDFC Bank in the coming quarters.  

HDFC Bank carved out a commercial and rural banking segment in July 2021 to focus on rural India and consolidate its position in micro, small and medium enterprises (MSME) businesses. Commercial and rural banking (Rs 3,59,020 crore) which constituted 30% of total loan book grew 29% YoY and 7% sequentially in Q2FY22. Rahul Shukla, Group Head, Commercial Banking & Rural Business said that rural banking opportunity space is around Rs 15 lakh crore. He further added, “We are a small proportion of that. If you split that between secured and unsecured lending, we would be about 10-11% of the secured lending.” 

With a strong government focus on the rural ecosystem, there is a long runway for growth for HDFC Bank. On the same lines, the bank also aims to enhance its MSME business which currently constitutes 1.5 crore MSMEs out of a total 6.5 crore MSMEs in India. This opportunity in this space is around Rs 20 lakh crores, said Shukla. 

On the wholesale segment, the HDFC Bank management expects government spending on infrastructure and pick-up in capacity utilisation, currently lower than 70%, to drive growth in the near future. The corporate & other wholesale segment (Rs 3,12,423 crore) grew 6% YoY but was flat sequentially in the September 2021 quarter.

HDFC Bank Ltd. is trading below all available SMAs
PNB Housing Finance Ltd.    
18 Oct 2021
PNB Housing is focused on retail, but, Carlyle deal termination a growth dampener 

By Suhani Adilabadkar

Thinking of buying a home? Low interest rates, sops offered by developers, home loan subsidies by the central government, and reduced stamp duty, make this an alluring proposition for Indian buyers right now. The real estate sector is expected to report strong numbers. Positive momentum is already in motion as Sunteck Realty’s operational update declared pre-sales and collections growth of 36% and 47% YoY, respectively, for Q2FY22. With a lower likelihood of a third pandemic wave, the Reserve Bank of India maintaining low repo rates and realty developers gearing up with new project launches, the real estate sector is hoping for a good festive season. 

Quick Takes:

  • PNB Housing’s board of directors terminated the Rs 4,000 crore Carlyle share sale deal on October 14, 2021, citing regulatory delays 

  •  PNB Housing Finance expects 40-50% YoY growth in disbursements in FY22 

  • The company is opening 13 new branches in Tier 2 & 3 cities especially, catering to the Unnati-affordable housing segment in FY22

  • PNB Housing Finance expects corporate loans to decline to 12-13% of the total AUM mix by the end of FY22

  • The company expects to maintain net interest margins between 300-350 basis points in FY22

PNB Housing Finance stock price below its IPO issue price

Real estate developers are experiencing high demand from home buyers and banks and housing finance companies (HFC) are disbursing home loans as the Indian real estate industry is seeing a surge in demand after the pandemic, following years of muted growth. In the housing finance industry, PNB Housing Finance evinced significant interest among the investing community over the past year mainly because of its fund-raising exercise. The management recently conducted an analyst call outlining its future growth strategy and apprising the analyst and investor community with respect to the Securities Exchange Board of India (SEBI) appeal in the Supreme Court against the Securities Appellate Tribunal’s (SAT)’s split verdict in the Carlyle-PNB Housing fundraising deal.

PNB Housing Finance’s stock is nowhere near its 2017 levels of Rs 1,700. At current levels, the company’s stock is trading below its IPO issue (2016) price of Rs 750. High exposure to stressed developers impacted its balance sheet strength. The pandemic made things worse, leading to the asset under management (AUM) declined at a compound annual growth rate (CAGR) of 6% over the past three years. 

Revenues and net profit at Rs 1,693 crore and Rs 243 crore fell 10% and 5% respectively in the June 2021 quarter. Disbursements at Rs 1,759 crore doubled YoY but declined 57% sequentially in Q1FY22. Now post-reopening, PNB Housing is geared for growth. The management, through an analyst call, explained the operational modalities of its medium and long-term strategy set in motion to bring PNB housing back to robust growth. 

Retail in the driver’s seat, corporate book to be downsized

Higher focus on the retail segment, reduction in corporate loans, and improving asset quality is the three-pronged agenda of PNB Housing Finance management. Along with Covid-19 driven moratoriums and loan restructuring programs directed by the Central Bank, high corporate exposure (18-20% of total AUM as of March 2020) impacted PNB Housing’s asset quality over the past three years. Cognizant of this fact, the management is focussing on retail loans which currently comprise 85% of total AUM in the June 2021 quarter. 

The company is positioning itself as a retail focussed housing finance company, said Deepika Padhi, Head Investor Relations at PNB Housing Finance. Retail disbursements grew by 145% YoY in Q1FY22 due to the lower base of the June 2020 quarter. Even then, it was nearly half of Q4FY21 retail disbursements.

Speaking on the management’s retail growth strategy, Padhi said that the company aims to increase the retail mix to 88% of total AUM by the end of FY22 with a strong focus on the housing loan portfolio. Housing sales doubled YoY in July-September 2021 period aided by low-interest rates, pick up in hiring across various sectors of the economy, and pent-up demand spill-over of Q1FY22. The strong performance of the real estate sector, especially the retail home loan segment is also due to risk weightage rationalization by RBI for housing loans (from October 2020) making it attractive for both borrowers and lenders.

Padhi said that the company is also working on the granularity of the retail book which mainly constitutes individual housing and loan against property and increasing its presence in Tier 2&3 cities. PNB Housing’s disbursements increased 37% over the past two years from Tier 2&3 cities, said Padhi.

Individual Housing constituted 59% of the total AUM while retail loan against property was at 22% in the June 2021 quarter. The company, through individual housing, is mainly focussed on its Unnati-affordable housing segment. This segment contributed 9% of the total individual housing loan disbursements in Q1FY22 and has an AUM of Rs 2,986 crore. The high yield Unnati segment has a ticket size of Rs 18 lakh. Padhi said that in the Unnati segment, the company is focussing on salaried as well as small businesses such as kirana stores. She further added that the company is opening 13 new branches in Tier 2 & 3 cities especially catering to the Unnati segment in FY22. 


PNB Housing’s Unnati segment lies between the lower income group (LIG) and middle-income group (MIG) category. In spite of second wave lockdowns, the Unnati segment registered 163% YoY growth in disbursement in Q1FY22. The company aims for double-digit growth from the Unnati-affordable housing segment in FY22. The overall retail segment will not be able to log in double-digit growth in the medium term, said Deepika Padhi. After declining over the past two years, retail loan book growth in FY22 is expected to be flat.

Corporate loans are expected to decline to 12-13% of the total AUM mix by the end of FY22. While the corporate loans give higher yield, the company aims to focus on stable retail loans which are more resilient during economic uncertainty. Padhi said that in the long-term, the retail and corporate mix is expected to be in the proportion of 90:10. The company plans to reduce its corporate loan book through sell downs and accelerated repayments. PNB HFC received accelerated repayments of Rs 479 crore in the June 2021 quarter and reduced its corporate loan book by 39% YoY in absolute terms as of June 30, 2021, from March 31, 2019 levels.

PNB Housing Finance shows cautious optimism

Till December 31, 2019, gross and net non-performing assets (NPAs) stood at 1.75% and 1.44% for PNB HFC. As on June 30, 2021, gross and net NPAs surged to 6% and 3.6%, respectively. High corporate book exposure in terms of construction finance and corporate term loans to stressed real estate developers and Covid-19 impact worsened PNB Housing’s asset quality over the past three years. Retail GNPAs stood at 3.8% and corporate GNPAs came in at 15.9% as on June 30, 2021. 

According to the management, while corporate loan book gross NPAs were mainly due to a few significant increases in credit risk (SICR) accounts slipping into NPAs, retail book gross NPA increase primarily emanated from the self-employed moratorium book. Though the management did not give specific guidance for asset quality performance, gross NPAs are expected to decline in absolute terms YoY by the end of FY22.

Speaking on real estate demand revival, Padhi said, “There is a lot of exuberance in the real estate sector post-second wave, but how much has flown into the housing finance sector needs to be seen in the next few months.”  

Housing prices have firmed up by 2-3% in the top seven Indian cities and as input costs increase, real estate developers might be forced to pass on costs to home buyers. Hopefully, the CPI inflation rate should remain at September 2021 levels. In case economic activity continues to revive at a higher pace, CPI inflation might increase to high single digits in the next few quarters. RBI might roll back its accommodative stance and start raising rates by next year. So, the best time to buy, the house of your dreams is now.

Uncertainty returns with the termination of Carlyle deal 

SEBI filed an appeal in the Supreme Court against Securities Appellate Tribunal’s (SAT)’s split verdict in the Rs 4,000 crore PNB Housing-Carlyle share sale deal. According to SEBI, PNB Housing’s issue price of shares and warrants at Rs 390 apiece was much lower than the existing market price and undermines the rights of minority shareholders. If the deal had gone through, there would have been a change in ownership in PNB HFC, triggering an open offer. SEBI contends that PNB Housing Finance violated provisions of its Articles of Association. But even before the Supreme Court verdict, PNB Housing’s board terminated the Carlyle-led deal on October 14, 2021, due to regulatory delays. 

Deal termination is a growth dampener for PNB Housing Finance looking for funds to spur housing sales amid low-interest rates and economic recovery. It will be interesting to see the next moves by PNB Housing and how it restarts its fundraising exercise all over again.

PNB Housing Finance .. has an average target of 522.50 from 3 brokers.
Britannia Industries Ltd.    
07 Oct 2021
‘Good Days’ Are Making a Comeback For Britannia

By Suhani Adilabadkar

Higher home consumption of packaged food, a shift towards well-known brands and a rising focus on health aided Britannia Industries' robustgrowth in FY21. Britannia reported its highest revenue and net profit YoY growth over the past seven years in FY21 aided by a superlative performance in the June and September 2020 quarters thanks to Covid-19 tailwinds. While Covid-19 turbulence significantly transformed consumer behavior, 18 months into the pandemic consumer sentiment is now cautiously optimistic.  With India’s vaccination drive picking up and the opening up of the economy, various economic indicators signal a stable recovery ahead. 

With this backdrop, the FMCG pack is getting ready for the festive splurge. Britannia is also back with its aggressive marketing campaigns. Milk Bikis' campaign of ‘Dood Roti Ki Shakti’ targeting close rival Parle G has caught the attention of consumers and investors. The biscuits battle is going to be very interesting in FY22 amid new product launches, high rivalry, and commodity price rise. 

Quick Takes:

  • Britannia forayed into salty snacks category and recently launched 50-50 Potazos in the North East

  • The company is undertaking an expansion of Khurda plant in Orissa which is expected to be operational by Q2FY23

  • An ‘ultra-mega' plant in Ranjangaon with Rs 1,500 crore earmarked capital expenditure (capex) is expected to be completed by 2024

  • Britannia intends to gradually pass on commodity and fuel price costs increases to consumers to improve its operating margins

  • High raw material cost, rising crude prices and increasing advertising expenses might impact operating margins in the coming quarters 

Britannia maintains growth momentum amid Covid-19 second wave 

Britannia reported flat revenue growth (Rs 3,403 crore) in the June 2021 quarter despite a high base of corresponding Q1FY21, the previous year. The company had reported revenue and volume growth of 27% YoY and 21% YoY respectively in the June quarter last year. In-home consumption, pantry loading, and lower competitive intensity aided Britannia’s spectacular June 2020 quarter performance. The company matched up to Q1FY21 volume and revenue growth in the absence of any major pantry loading during the Covid-19 second wave lockdowns in Q1FY22.

Speaking on consumer demand trends seen during Covid-19 second wave, Varun Berry, Managing Director at Britannia Industries said, “The world has got used to living through a pandemic. Producers are better prepared to manage their workforce, and factories have not been under lockdown like they were last year.” He further added that while there was some amount of pantry loading during the second wave, it was nowhere near last year's levels.   

The company’s superlative growth slowed  from the September 2020 quarter onwards as the first pandemic wave ebbed and lockdown restrictions eased. After surmounting the Q1FY21 peak base quarter, Britannia is expected to be on a stronger footing in terms of revenue and volume growth in the upcoming quarters of FY22 due to the lower FY21 base.   

Britannia maintains market share, raw material inflation and rising crude may bite into margins

Britannia’s domestic business resilience lies in its robust biscuit portfolio, which constitutes roughly 80% of total revenues. Britannia is the market leader in the Indian biscuit segment with nearly 35% market share followed by Parle products with roughly 30%. Parle Products' stronghold lies in northern India while south India is Britannia’s forte. 

The company has a market share of more than 90% in Tamil Nadu and is also the market leader in Kerala. Britannia has maintained higher market share compared to its close peers, Parle Products and ITC since 2016-17 (as shared in Britannia Industries' investor presentation). Though Parle gained market share from smaller regional players in FY21 driven by its value segment Parle G brand, Britannia maintains the lead in the overall biscuit segment. 

A small player in the value segment, Britannia is seeing a strong resurgence in its premium biscuit portfolio, mainly Marie Gold, NutriChoice, Good Day, and Milk Bikis. Britannia’s Tiger brand competes with Parle G in the value segment. Sharing his views on the value segment, Berry said, “We don't plan to make a very big pitch for the value portfolio, because the margins there with the current inflation are single digit.”  The company is facing high inflation in refined palm oil and milk prices. Refined palm oil and milk prices rose 49% and 13% YoY respectively in Q1FY22. 

Along with high raw material costs, high crude prices (Brent crude price doubled YoY in October 2021) directly hits its supply chain, and increasing advertising expenses to hold off competition are also expected to impact operating margins in the upcoming quarters. The company is back on air, advertising all its biscuit brands and adjacent products such as cake, rusk and milkshakes.

Hindi hinterland strategy to drive long term growth

To maintain its lead over its competitors in terms of market share, Britannia needs to further invest in its direct reach network and continue with its focused Hindi hinterland strategy. Britannia’s direct reach stands at 2 million outlets compared to Nestle’s 1.4 million. Higher direct reach reduces the dependence on wholesalers and aids wider product distribution, which helps in triggering impulse purchases among consumers especially for snacking products.

Britannia is under-penetrated in north India especially in Uttar Pradesh, Bihar, Madhya Pradesh and Chhattisgarh. Targeting rural consumers in Hindi belt states, the company has created affordable price points across the Rs 5-20 range for its premium products. 

According to a recent Nielsen survey, rural resilience supported by good monsoon and various government schemes contributed significantly to consumption rebound for the FMCG sector post-Covid-19 second wave.  Britannia garners roughly 35% of its total revenues from rural India. To increase its rural revenue share and capture a larger pie of the vast Hindi speaking region, Britannia recently relaunched Milk Bikis Atta - ‘Dood Rooti Ki Shakti’, roping in the actor Pankaj Tripathi.  Britannia positioned Milk Bikis as a superior product compared to glucose biscuit market leader Parle G. The Milk Bikis campaign aims to upgrade consumers from the glucose segment to milk biscuit category where Britannia has more than 25% market share.

According to the management, sequential growth reported by Milk Bikis is higher than any other Britannia brand in Q1FY22. Initiated in April 2021, Milk Bikis campaign completed its third round of advertising in the July-September 2021 period. Speaking on consumer upgradation from glucose to milk biscuit category, Berry said that this is a small shift in the entire glucose pyramid. He further added, “The objective really is not to grow at 60%-70%, but at some stage take this to a 150%-200% kind of growth in these states. So, that really is what we are looking at.”

Price hikes, innovations and capex ahead

While the company is very aggressive in increasing its cost efficiencies, Britannia is currently following a cautious approach with respect to price hikes. Berry said that in view of the pandemic and the hardship caused to consumers, the company is calibrating price hikes.  Britannia intends to gradually pass on commodity and fuel price increases to consumers and improve its operating margins. Apart from the price hike rollout by the company, analysts are also keenly watching how fast Britannia goes back to its innovation agenda. The pandemic slowed down Britannia’s innovation engine. While close peer Parle Products recently forayed into the packaged wheat flour market, Britannia prefers to focus on its biscuit & snack basket for new product launches. 

With respect to new products, wafers are growing in double digits, but croissants are still in the test marketing phase. According to the management, the company is the second largest player, and the largest distributor in the wafers category in India. Britannia recently launched 50-50 Potazos in the North East. Potato biscuits are popular in this region, and Britannia’s launch may prove successful here. The potato-based biscuits technology is currently available only in the northeastern plant. 

The company plans to set up the requisite technology in another three plants across India and introduce Potazos pan India in the next 3-4 months. Britannia is also planning to launch wafer sticks and other NutriChoice products in the next few months.  

The capex for the year stands at Rs 130 crore. The company is undertaking expansion of the Khurda plant in Orissa to strengthen its core brand capacities and presence in northeastern India. Khurda plant expansion is expected to be completed by the September 2022 quarter. 

Britannia is also setting up another plant in Tamil Nadu, its largest market, currently facing a capacity shortage and a new plant in Uttar Pradesh to meet demand resurgence in the Hindi Belt. In addition to all of this, a mega plant in Ranjangaon with Rs 1,500 crore earmarked capex is expected to be completed by 2024. Despite Covid-19 disruption, Britannia’s long-term ambition of becoming a ‘Total Foods Company’ is still a work in progress. Hopefully, a third wave should not delay it further.

Number of FII/FPI investors increased from 659 to 687 in Sep 2021 qtr.
Hero MotoCorp Ltd.    
15 Sep 2021
Hero MotoCorp plans to focus on exports to de-risk its business

By Suhani Adilabadkar

Hero MotoCorp's (HMCL) stock price is down 6% in the past one year, while in the same period Bajaj Auto and TVS Motors’ shares gained 28% and 20%, respectively. Analysts expected Covid-19 driven-downtrading and strong presence in the entry motorcycle segment to spur Hero MotoCorp’s volumes. But the pandemic exposed Hero MotoCorp’s weak presence in key growth segments - premium motorcycles and exports. 

Although Hero MotoCorp management is expecting a stable Q2FY22, July and August two-wheeler wholesale and retail volumes tell a different story. The company reported the slowest YoY two-wheeler retail volume growth among the top three manufacturers in July-August 2021. Investors are hoping for a strong festive season to boost two-wheeler volumes, but Hero MotoCorp will have to catch up with Bajaj Auto and TVS Motors. Apart from the highly competitive motorcycle market, the company also needs to shore up its defences in a highly dynamic and charged e-scooter market.

Quick Takes

  • Hero MotoCorp’s July and August 2021 domestic wholesale volumes declined 16% YoY and 24% YoY respectively

  • Hero MotoCorp’s domestic retail volumes grew 12% YoY in July 2021 but fell 6% YoY in August 2021

  • According to management, commodity inflation might be around 4% in FY22

  • Hero MotoCorp implemented a price increase of Rs 1,800 per vehicle in the June 2021 quarter

  • Hero MotoCorp plans to launch its first electric vehicle, an e-scooter based on fixed charging technology in Q4FY22

  • Around 50% of Hero MotoCorp’s annual capital expenditure (capex) every year will be allocated to electric vehicle development

High dependence on commuter bikes and meagre exports takes its toll

Hero MotoCorp reported a mixed June 2021 quarter with total volume growth of 82% YoY. Revenues, operating profit and net profit all came in with strong numbers supported by a lower base of Q1FY21 (truncated quarter due to national lockdown). Consolidated revenues grew 85% YoY while operating profit and net profit quadrupled YoY. 

HMCL’s domestic motorcycle volumes were nearly double that of TVS Motors and 3x higher than Bajaj Auto (BAL) in the June 2021 quarter. But as YoY volume growth was lower compared to its close peers, Hero MotoCorp lagged on the revenue growth front. 

HMCL reported the slowest revenue growth YoY and highest sequential decline in Q1FY22 among the top three two-wheeler manufacturers. 

In Q1FY22, HMCL’s revenues were 34% lower than Bajaj Auto's (BAL). BAL is the market leader in the highly revenue accretive premium motorcycles (150 cc+) segment. Prices of some of the premium motorcycles are nearly double or even higher than that of commuter (entry-level) bikes. The Bajaj Pulsar currently holds 10% of the entire domestic motorcycle market. Hero MotoCorp’s market share in the premium segment is a mere 4%. 

In addition to this, BAL’s higher export growth (volumes doubled YoY) boosted its overall volumes (64% of total volume mix) in the June 2021 quarter leading to higher revenue growth.   

Hero MotoCorp is highly dependent on the domestic motorcycle market, accounting for about 90% of its total revenues. As the Covid-19 second wave filtered into Hero MotoCorp’s stronghold, the rural hinterland, the company was pushed to the back foot compared to its peers in the domestic two-wheeler market. Impacted by the Covid-19 second wave’s penetration into rural India, consumer sentiment is low and discretionary purchases are not at the top of the priority list for rural customers. 

HMCL’s domestic wholesale volumes declined in double digits YoY in both July (down 16% YoY) and August 2021 (down 24% YoY). After pent-up demand fulfillment in June and July 2021 as various regions across India unlocked, two-wheeler retail sales also slowed in August 2021. 

For Hero MotoCorp, lower volume growth was mainly due to higher dependence on rural sales, colleges, and educational institutions still not running at full capacity, and higher cost of ownership, especially for entry segment customers. The company’s 70% revenue mix is garnered from the entry segment (100-110cc) with Splendor, Passion, Glamour, and HF Deluxe as its major brands. HMCL has a 68% market share in the entry-level motorcycle segment in India. Price hikes in two-wheelers by 20-25% over the past two years impacted demand in the high price-sensitive entry level segment. Price hikes implemented by two-wheeler manufacturers post BSVI, rising commodity prices, and rise in fuel prices also impacted two-wheeler demand amid Covid-19 uncertainty.

Apart from higher dependence on the entry-level segment, lower exports composition (8% in Q1FY22) in the overall volume mix is also taking its toll on HMCL’s revenue growth. BAL overtook Hero MotoCorp in terms of worldwide motorcycle volumes in April and May 2021 backed by its robust export growth. Hero MotoCorp is striving hard to augment its export revenue base. Export volumes tripled YoY in July, and August volumes increased 44% YoY. But exports constituted just 5% of total volumes in July-August 2021. Exports were a significant growth booster for BAL (64% of volumes) and TVS motors (50% of volumes) in the June 2021 quarter and the trend continued in July and August 2021.

While peers BAL and TVS Motors were forging ahead on the global front, Hero MotoCorp reworked its global business strategy. The management laid down an ambitious target of achieving 15% of revenues from exports by 2025. 

Moving on to the premium motorcycle segment, competitive intensity is on the rise with the recent new launches, Triumph Trident 660, Honda’s Africa Twin Adventure and CBR650R, Kawasaki Ninja ZX-10RR, and BMW S 1000 R. Hero MotoCorp’s premium line-up includes XPulse 200T, Xtreme 200S, and Xtreme 160R. The company entered into a licensing agreement with Harley Davidson last year to jointly develop bikes for the premium segment under the Hero-Harley brand. Investors are awaiting the launch of Harley Davidson-Hero motorcycles in the premium segment to battle these foreign heavyweights and homegrown competitors such as Bajaj’s Pulsar, Eicher’s Royal Enfield, and TVS Apache.   

E-Scooter market – gearing up for a long drawn battle

To drive up EV adoption, the central government extended the Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme till 2024. Various state governments also exempted EVs from registration fees and road tax. And all top two-wheeler manufacturers, already on the electrification path, have further revved up their EV plans. Bajaj Auto launched its e-scooter Chetak in January 2021 and is setting up a separate wholly-owned electric vehicles subsidiary. TVS Motors increased its capex by more than 30% for EVs in FY22. Ola Electric launched its e-scooter in August 2021 and earmarked a capex plan of Rs 2,400 crore. The Indian e-scooter market has four major players and is currently dominated by Hero Electric (Vijay Munjal Group) with more than 35% market share. 


Hero MotoCorp is not too far behind, with plans to launch its first electric vehicle, an e-scooter in Q4FY22. The e-scooter, based on fixed charging technology is being developed by its Jaipur and Germany R&D centres. Speaking on the company’s future electric vehicle (EV) strategy, Pawan Munjal said that HMCL has a full pipeline of EV products under development. This includes an electric 3-wheeler and Hero-Gogoro JV product, another electric scooter based on a battery swapping platform. 

Taiwan’s Gogoro manufactures electric scooters based on a swappable battery system. Munjal said that fixed charging and battery swappable stations will be created simultaneously along with the launch of their respective e-scooters. Munjal further added that charging stations will be developed by HMCL in partnership with Gogoro and Ather Energy. Hero MotoCorp is the largest shareholder in Ather Energy (an EV start-up) with a 38% stake. The company recently announced that 50% of its annual capex every year will be allocated to electric vehicle development. The capex for FY22 is expected to be in the range of Rs 750-1,000 crore. Speaking on the initial phase of vehicle electrification in India, Niranjan Gupta, CFO at Hero MotoCorp said that the company’s 10% market share in the scooter segment (6% of total volume mix in Q1FY22) will be further augmented as 'scooterization' of EVs takes a lead over motorcycles. HMCL’s scooter portfolio includes Destini 125, Pleasure+ 110, and Maestro Edge 125.

Apart from the EV growth agenda, Hero MotoCorp has set an ambitious target of achieving the next 100 million sales of motorcycles and scooters within this decade. The company achieved cumulative sales of 100 million motorcycles and scooters in FY21. And Hero MotoCorp’s 200 millionth vehicle may not be a two-wheeler!  Maybe the largest two-wheeler manufacturer in the world will unfold this new development in the next few quarters.

Hero MotoCorp Ltd. is trading below all available SMAs
Sun Pharma makes a sharp recovery, as US and India business rebounds

By Suhani Adilabadkar

Sun Pharmaceutical Industries (Sun Pharma) lagged behind its peers throughout FY21, in the absence of a strong Covid-19 drug portfolio, muted US business growth and subsidiary Taro’s consistent underperformance. But FY22 started on a stellar note, and Sun Pharma reported its highest ever quarterly revenues in the June 2021 quarter. Robust revenue growth was driven by a recovery in both domestic and US formulation business in Q1FY22. Traction in the specialty portfolio and Taro Pharma’s positive revenue YoY growth enthused the street. After the company announced its results, Sun Pharma’s stock price jumped 10%.  

Quick Takes

  • Sun Pharma repaid debt of about $185 million in Q1FY22 and $765 million over the last five quarters

  • The management expects its global specialty portfolio to start earning it operating profits in the next two years

  • The management guided research & development (R&D) expenditure to be around 7-8% of turnover in FY22

  • Sun Pharma’s generic drugs pipeline for the US market includes 86 abbreviated new drug applications (ANDAs) and 13 new drug applications (NDAs) awaiting the US FDA approval

  • US FDA clearance for its Halol facility is still pending which has impacted the flow of new generic product launches in the US

All-round performance in Q1FY22

Sun Pharma reported consolidated revenues of Rs 9,719 crore in Q1FY22 compared to Rs 7,585 crore, a year ago. Robust revenue growth of 28% YoY was driven by double-digit growth in formulations business (94% of revenue mix) across all geographies. Sun Pharma’s formulation business rose 31% YoY to Rs 9,082 crore aided by India business (up 39% YoY), US formulation business (up 31% YoY), emerging markets (up 22% YoY) and rest of world formulations (up 31% YoY) in June 2021 quarter. The only revenue segment that witnessed decline was active pharmaceutical ingredients (APIs) (down 7% YoY). Sequential revenue growth for Sun Pharma was 14% in the June 2021 quarter.

Operating margins expanded 470 basis points (bps) YoY supported by lower cost of material and stagnant employee-related costs. Cost of material as a percentage of sales declined to 16% in Q1FY22 compared to 20% a year ago due to product mix and other efficiency initiatives. 

Higher revenues and strong operational performance led to strong sequential net profit growth of 57% in the June 2021 quarter. Net profit came in at Rs 1,404 crore in Q1FY22 compared to a net loss of Rs 1,656 crore a year ago. Sun Pharma’s net loss in Q1FY21 was due to an exceptional item of Rs 3,633 crore on account of subsidiary Taro’s settlement with the US Department of Justice for multi-jurisdiction antitrust matters. Research & development (R&D) expenditure stood at Rs 593 crore at 6% of sales in June 2021 quarter. 

Sun Pharma outperforms peers as India business revenue growth at 24-quarter high

Sun Pharma’s India business revenues came in at Rs 3,308 crore, a rise of 39% YoY in June 2021 quarter. Growth rate was much lower than Dr Reddy’s Labs (DRL) 69% YoY, Cipla’s 68% YoY followed by Cadila Healthcare’s 47% YoY domestic revenue increase driven by strong Covid-19 drug portfolio and low base of Q1FY22 last year. Speaking on Q1FY22 numbers, Kirti Ganorkar, CEO India Business at Sun Pharma, said that domestic growth was supported by a combination of core business, low base of last year and Covid-19 related products. Covid drugs accounted for about 8-10% of India sales in Q1FY22.

Sun Pharma is on softer footing in terms of Covid-19 portfolio compared to DRL, Cipla and Cadila Healthcare. But stock prices of all these companies fell after their respective Q1FY22 results were announced. Sun Pharma’s stock on the other hand surged 10% post its June 2021 quarter results. 

India business accounts for about 20-35% of total revenues of these top pharma companies. Rest of the revenue mix is diversified across the US, Europe and emerging markets (Latin America, Africa and Asia). While its peers reported robust growth mainly on the home front, Sun Pharma delivered stellar performance with above 20% YoY revenue growth across all geographies in Q1FY22. This comes after a lacklustre FY21.

Emerging market revenues (Rs 1,605 crore) constituted 18% of total formulation business in Q1FY22 and reported 22% YoY growth. In dollar terms YoY quarterly revenue growth is the highest over the past 17 quarters. Emerging market business is spread across Africa, Americas, Asia and Eastern & Central Europe. Emerging markets are characterised by volatile currencies and high dependence on crude price movement. Strong recovery in 2021 from Covid-19 pandemic has stabilized revenues for most pharma companies in emerging markets. 

Sun Pharma entered emerging markets in 2011, and the company has slowly and steadily achieved critical mass across key geographies such as Russia, Romania, South Africa, Brazil and Mexico by introducing new products specifically targeted for emerging markets, launching complex generics and augmenting its market specific branded product portfolio. The company presently has 100 drug master files filed across various geographies in emerging markets.   

Rest of the world (ROW) revenues accounted for about 15% of total formulation revenues and reported at Rs 1,368 crore, grew 31% YoY. In dollar terms, ROW YoY revenue growth was at a 8-quarter high in Q1FY22. The ROW region includes countries from Western Europe, Canada, Australia and New Zealand. ROW growth is mainly driven by ageing population and high incidence of chronic ailments. Sun Pharma’s ROW business includes differentiated offerings for hospitals, injectables and generics for the retail market. To bolster its global specialty growth, the company is launching its specialty products in ROW countries such as Japan, Australia and New Zealand. 

In the India business, the company reported 39% YoY growth in June 2021 quarter, at a 24-quarter high. Sun Pharma launched more than 100 new products and expanded its field force by 10% over the past five quarters in the domestic market. Market leader Sun Pharma with 8% market share in the Indian pharmaceutical market is one of the strongest players in the chronic therapy segment. The chronic segment reported healthy growth, acute segment stabilized and sub-chronic segment did exceptionally well for Sun Pharma in Q1FY22. But what enthused investors the most was the US business recovery driven by Taro’s double digit revenue growth after 10 quarters and strong earnings visibility of Sun Pharma’s global speciality portfolio. 

Specialty segment drives growth, Taro recovers

US business revenues rose by 31% YoY to Rs 2,800 crore in Q1FY22. In dollar terms, revenues at $ 380 million grew 35% YoY, a 32-quarter high. US business comprises generics which includes Taro and specialty segment. The management said US generic business (excluding Taro) continues to be competitive and delivered strong YoY revenue growth driven by new launches and better supply chain management. After going through severe price erosion post FY20, Taro Pharma (mainly dermatology) reported strong double-digit revenue growth after 10 quarters. Taro revenues rose 25% YoY to $ 147 million in the June 2021 quarter. 

Abhay Gandhi, CEO of the North America Business at Sun Pharma said, “While all our businesses in the US have grown, the main driver of growth was the specialty business.” The management said specialty revenues were mainly driven by Ilumya (plaque psoriasis), Cequa (dry eye disease), Levulan (actinic keratosis) and Absorica LD (severe nodular acne). Specialty revenues nearly doubled YoY to $148 million in Q1FY22. On sequential basis also growth was healthy at 6.5% despite Teva’s Absorica generic launch in April 2021.


The company till date has commercialized 12 specialty products. Sun Pharma diversified into specialty products to counter high pricing pressure and vendor consolidation in its core US generic business. Specialty medicines are the latest generation products treating chronic, complex, and rare diseases. The company recently expanded its specialty business to Japan and Australia by launching Ilumya. 

Sun Pharma is also conducting multiple clinical trials for four key molecules to augment its specialty product portfolio. SCD-044 is undergoing Phase-2 trials for atopic dermatitis and moderate to severe plaque psoriasis. MM-II is undergoing Phase 2 trials for the treatment of knee pain for patients with symptomatic knee osteoarthritis. GLP-1R agonist is in Phase-1 trials for diabetes and Ilumya is undergoing Phase-3 trials for psoriatic arthritis as second indication. Specialty R&D accounted for about 26% of Sun Pharma’s total R&D spend in the June 2021 quarter. 

Sun Pharma also recently signed an exclusive in-licensing deal with Cassiopea SpA to commercialize Winlevi in the US and Canada. Winlevi, a new class of topical medication in dermatology complements Sun Pharma’s existing anti-acne segment led by Absorica. While Absorica is present in the niche severe nodular acne segment, Winlevi’s appeal is more broad-based and is expected to increase Sun Pharma’s anti-acne addressable market in the near future. The company is planning to launch Winlevi in Q3FY22.

Specialty business revenues in the June 2021 quarter accounted for roughly 40% of total US revenues. The management guided that its specialty segment will be EBITDA positive in the next two years. With the revival of its India business, specialty segment’s strong earnings visibility and Taro also moving into the recovery fold, all growth levers are now moving in sync for Sun Pharma.

Sun Pharmaceutical Industries Ltd. has gained 37.13% in the last 1 Year
ICICI Bank Ltd.    
26 Aug 2021
ICICI Bank comes out ahead of the competition

By Suhani Adilabadkar

ICICI Bank reported a strong and impressive June 2021 quarter. The second largest private sector bank soothed investor concerns after HDFC Bank’s lackluster performance in Q1FY22. ICICI Bank reported the highest YoY growth in net interest income, net interest margin and loan book among the top private sector banking quartile in the June 2021 quarter. 

The bank changed tack in 2018, adopting a three-pronged strategy focused on retail loan franchise, deposit base and asset quality improvement. Bearing fruit after a hard toil of 3 years, ICICI Bank is one of the best performing banks amid Covid-19 turbulence. 

Quick Takes

  • Adverse impact of Reserve Bank of India ban on Master Card is negligible for ICICI Bank as its flagship Amazon card runs on Visa

  •  ICICI Bank’s cost of funds at 3.65% is one of the lowest in the industry

  •  Absence of moratorium and lower collections due to Covid-19 second wave disruption led to higher slippages of Rs 7,231 crore in Q1FY22

  • The management expects decline in slippages in H2FY22 in the absence of a Covid-19 third wave

  • BB and Below loan book is constant around 1.5% of total loan book over the past nine quarters

Stellar June 2021 quarter performance, helped by high interest income growth

ICICI Bank’s June 2021 quarter performance was driven by strong net interest income (NII) growth and lower provisions. NII (interest earned less interest expended) came in at Rs 10,936 crore in Q1FY22 compared to Rs 9,280 crore, a year ago, a rise of 18% YoY. NII growth was supported by robust growth in loan book (up 17.2% YoY) in Q1FY22. Net interest margin (NIM) stood at 3.89% in the June 2021 quarter, a rise of 20 basis points (bps) YoY and 5 bps sequentially. Excess liquidity deployed in foreign swaps and lower cost of funds (down 15 bps QoQ) aided NIM expansion in Q1FY22. 

Net provisions reported at Rs 2,852 crore for the quarter fell 62% YoY and 1.1% sequentially. The bank wrote back Rs 1,050 crore of Covid-19 related provisions in Q1FY22 created in earlier periods. Lower provisions and higher NII growth led to 78% YoY increase in net profit in June 2021 quarter. Net profit came in at Rs 4,616 crore in Q1FY22 compared to Rs 2,599 crore, a year ago.

Provision coverage ratio (PCR) was at 78.2% in the June 2021 quarter. PCR indicates funds kept aside by a bank for its loan losses. Deposits at Rs 9,26,224 crore grew 15.5% YoY in Q1FY22. Average current account and savings account (CASA) ratio stood at 43.7% expanding 270 bps YoY in Q1FY22. As per the management, increasing adoption of the bank's digital platforms and growth in volume and value of transactions supported higher growth in CASA deposits. 

ICICI Bank outperforms HDFC Bank amid Covid turbulence

HDFC Bank had edged out ICICI Bank as the largest private sector lender in 2017 in terms of asset base. After a change in management in 2018, ICICI Bank spent time on improving its earnings over the past three years, and is slowly and steadily, on a comeback trail. ICICI Bank’s stock price nearly doubled over the past one year spurred by strong and consistent performance throughout FY21. ICICI Bank is the analysts’ top pick in the banking sector on account of stable asset quality, sturdy deposit base and strong earnings performance.

In the June 2021 quarter, ICICI Bank’s NIM was at a 26-quarter high at 3.89%. Three years ago, NIM was at 3.19% (Q1FY19). Operating amid Covid-19 second wave, NII growth (up 18% YoY) is well maintained and loan book growth (up 17.2% YoY) is healthy. This is completely in contrast to HDFC Bank’s June 2021 quarter performance. HDFC Bank, reported its lowest ever NII growth (8.6% YoY) in Q1FY22. NIMs at 4.1% and loan book growth of 14.4% YoY also did not enthuse investors. 


But what is driving ICICI Bank’s superlative growth?

The answer lies in its loan portfolio mix. Moving away from its troubled past of asset quality issues mainly due to lending to low rated corporates, ICICI Bank increased its retail loan exposure from FY16. Retail loans as a percentage of total loan mix increased to 65% in FY21 from 46% in FY16. Instead of lending large ticket risky corporate loans, ICICI Bank preferred advancing low ticket retail loans largely to its existing customer base. Retail loans provide better margins than corporate loans aiding NII and NIM growth. Banks with higher retail loan growth are also better placed to pass on the rise in cost of funds to customers. 

ICICI Bank’s retail portfolio (61.4% of total loan mix in Q1FY22) reported double-digit growth throughout FY21 and a robust 20.2% YoY growth in Q1FY22. In comparison HDFC Bank’s retail loan growth was in single digits throughout FY21 and came in at 9.3% in Q1FY22. Loan mix shift towards low margin wholesale book (60% of total loan book in Q1FY22) driven by PSU entities impacted NIMs for the largest private sector lender. Though ICICI Bank’s retail loan book growth looks fiery, management’s cautious approach soothed investors wary of a Covid-19 third wave.

Robust credit growth driven by digital offerings

While HDFC Bank pivoted its loan book towards the wholesale segment to navigate Covid turbulence, ICICI Bank continued with its pre-pandemic strong retail focus. The bank’s retail loan book mix includes mortgages, auto finance, rural loans, commercial vehicles and personal loans. Mortgages form the largest constituent with 33.6% of total loan book. 

Speaking on mortgages, Anup Bagchi, Executive Director at ICICI Bank said, “Our stance is to do more and more secured loans given what is happening in the environment, so we would want to go towards mortgages and fully collateralized loans”. High margin and low risk mortgages which include home loans, office premises loans, loans against property etc are currently a major growth driver for the banking sector, especially when corporate loan demand is low. ICICI Bank has the highest share of mortgage loans in its loan book compared to its peer group. Mortgage loans grew 24% YoY in Q1FY22. 

ICICI Bank’s personal loan and credit card portfolio together constitutes 9% of total loan mix while HDFC Bank’s personal loan or unsecured lending stands at 15%. According to ICICI Bank’s management, 70% of personal loans are advanced to existing customer base which provides strong liability information for credit assessment. And around 85% of personal loan customers are salaried individuals. Personal loan and credit card portfolio grew 12.5% YoY and 16.5% YoY respectively in Q1FY22. 

The bank reported stellar growth of 53.4% YoY and 42.8% YoY for business banking (5.4% of loan mix) and SME (4% of loan mix) respectively in the June 2021 quarter. Speaking on robust growth in the business banking segment, Rakesh Jha, CFO at ICICI Bank said that the ticket size of loans is low and the portfolio has adequate collateral. 

He further added that though small & medium enterprises (SME) loans’ collateral levels are not at 100% as in the case of business banking, the bank is comfortable with the SME portfolio risk levels. The bank expects the SME and business banking segment to continue with its robust growth trend in the near future. 

And lastly, the corporate loan segment has maintained its double-digit growth momentum and grew 11.4% YoY in Q1FY22. While private sector loan demand was lukewarm, PSU’s robust capital expenditure (capex) plans led to strong corporate loan demand in Q1FY22. The central government’s strong capex push by allocating Rs 5.5 lakh crore in FY22 augurs well for the banking sector as a whole. The government incurred Rs 1 lakh crore capex spend in Q1FY22.

ICICI Bank’s robust loan book growth is driven by its comprehensive digital offerings spread across various segments. The bank launched ICICI Stack for retail customers and corporates, merchant stack for retailers, iMobile, InstaBIZ and Trade Online digital platforms to provide frictionless experience and holistic solutions to customers. This strong and seamless digital way of delivery augments business volumes, top-line growth, cost reduction and operating profit expansion. 

Speaking on ICICI Bank’s strong digital play, Sandeep Bakshi, Managing Director and CEO at ICICI Bank said, that end-to-end digital sanctions and disbursements across various products increased steadily over the past few quarters. About 34% of mortgage sanctions and 46% of personal loan disbursements by volume were end-to-end digital in Q1FY22. The bank onboarded 95,000 customers using video KYC in the June 2021 quarter.

Stable asset quality, slippages to decline in FY22

Asset quality was stable for ICICI Bank even as the bank witnessed higher slippages in the June 2021 quarter. Gross NPA ratio (gross NPAs as a percentage of gross advances) and net NPAs (net NPAs as a percentage of net advances) came in at 5.15% and 1.16% respectively in Q1FY22. Gross NPAs and Net NPAs increased marginally by 19 bps and 2 bps QoQ respectively in the June 2021 quarter. Slippages or gross NPA additions in Q1FY22 were reported at Rs 7,231 crore of which Rs 6,773 crore was from the retail and business banking portfolio. 

The jewelry portfolio with Rs 1,130 crore slippages, which is part of the retail segment is fully secured and the management expects full recovery in the coming quarters. Speaking on slippages, Bakshi said that in the absence of regulatory measures such as moratorium and lower collections due to Covid-19 second wave disruption, slippages would be higher in the first half of the current fiscal for the whole banking system, including ICICI Bank. He further added that Covid-19 induced uncertainty led to higher anxiety levels among customers leading to higher bounce rates in April and May. 

While slippages in mortgages were similar to the same period last year, commercial vehicles slippages were higher and personal loans were in better shape compared to Q1FY21. From the second week of June, recoveries improved and though slippages might be elevated in Q2FY22, management expects meaningful reduction in H2FY22 in the absence of a Covid-19 third wave. 

Provisions are also expected to decline for the rest of FY22. The bank tightened its provision policy making it more conservative by adding Rs 1,127 crore to provisions buffer during the quarter. The provision coverage ratio (PCR) on NPAs is the highest in the industry at 78.2% as on June 30, 2021. The restructured loan book was also in control at Rs 4,860 crore for ICICI Bank compared to Rs 9,181 crore for HDFC Bank. And lastly the contentious BB and Below loan book is also constant around 1.5% of total loan book over the past nine quarters.

The Indian economy’s recovery from the Covid-19 second wave has been swifter and stronger. Most of the high frequency indicators are showing economic growth moving back to pre-Covid levels in August 2021. This augurs well for the banking sector as a whole. ICICI Bank stock price is near its 52-week high and gained 32% over the past eight months, while it’s a 9% rise for HDFC Bank stock price.

ICICI Bank Ltd. is trading below it's 30 day SMA of 769.6