Stock market analysis and stories by Ketan Sonalkar

Articles by Ketan Sonalkar

TREND | 23 Jan 2023

Which ELSS tax-saving mutual funds have delivered consistent returns?

Its that inconvenient time of the year again - when everyone is figuring out how to put money in tax saving investments before the end of the financial year. For decades, this meant investing in insurance policies or PPF accounts. However, there are now many more investment options eligible for tax exemption, and one that has become especially popular is ELSS (Equity Linked Savings Schemes).

ELSS are covered under Section 80C of the Income Tax Act and can claim a tax rebate of up to Rs 1.5 lakh. These are essentially a category of mutual funds that are commonly known as tax-saving mutual funds. These mutual funds primarily invest in stocks.

A key condition attached to these funds is a three-year lock-in period. investors cannot redeem them under any circumstances during that time. The logic is that this helps ensure better returns while saving investors tax.

Do the funds actually deliver? Let us consider the past three years of investing in ELSS funds and check whether they have given investors above-average returns, or simply met the goal of tax saving.

Very few clear winners in the ELSS category of mutual funds

Our analysis has identified ELSS schemes that have given positive returns in the past year and higher than 16% annualised returns over the past three years, with 16% being the average three-year return CAGR for this category. Leading the three-year return are Quant Tax Plan Gr (37.0%), Parag Parikh Tax Saver Reg Gr (21.9%), IDFC Tax Advantage (ELSS) Reg Gr (21.4%), PGIM India ELSS Tax Saver Reg Gr (18.3%) and HDFC TaxSaver Gr (16.1%), which can be considered the top schemes in this category.

The past three years have been an unusual period for ELSS investments. The investment would have been done in January 2020, just before the Covid pandemic shut down businesses and mobility worldwide. . Investors saw their ELSS investment value drop drastically with the onset of the pandemic, with no option of an exit till the lock-in period ended. With the lock-in period ending this January, they are now free to redeem non-performing ELSS funds or continue their investment in better-performing ones.

The standout performance in this category comes from Quant AMC’s Quant Tax Plan Gr managed by Vasav Sahgal and Ankit Pande, with a three-year CAGR of a staggering 37%. On a one-year basis, this fund delivered 7.0% returns, in a year when only 10 out of 61 funds in this category delivered returns above 4%.

Around 50% of the schemes delivered negative returns over the past year. This disparity in returns has fuelled the debate on passive vs active funds. Statistically, well-managed active funds will always perform better than passive funds, but these outperformers would be limited to the top 10% of funds in each category.

Each fund manager has a distinct strategy to generate alpha

Comparing the composition of top-performing schemes, each fund manager has a different approach to fund allocation according to market capitalisation. While IDFC Tax Advantage (ELSS) Reg Gr, managed by Daylynn Pinto, has close to 20% exposure to small-cap funds, HDFC TaxSaver Gr, managed by Roshi Jain and Priya Ranjan, limited small-cap exposure to 3.8%.

As distinct as the approach to market capitalization is, the number of stocks in each scheme also varies. Parag Parikh Tax Saver Reg Gr managed by Rajeev Thakkar and Raj Mehta has only 30 stocks in the portfolio, while Quant Tax Plan Gr has 51.

One pattern seen among the top-performing funds is that most of them have relatively lower AUMs (Assets Under Management) compared to peers. PGIM India ELSS Tax Saver Reg Gr managed by Srinivas Rao Ravuri and Utkarsh Katkoria has an AUM of only Rs 448.3 crore, while Parag Parikh Tax Saver Reg Gr has Rs 941.6 crore.

Funds with larger AUMs underperform in this category

HDFC TaxSaver Gr is the only scheme with an AUM close to Rs 10,000 crore that has delivered positive returns over the past year. Schemes with the largest AUMs in this category, Axis Long Term Equity Gr, Mirae Asset Tax Saver Reg Gr and Aditya BSL Tax Relief 96 Gr LSP, have delivered negative returns, and only Mirae Asset Tax Saver Reg Gr delivered above 15% CAGR over the three-year period.

Another metric that sees wide variation among these schemes is the portfolio turnover ratio. This ratio defines the number of times the portfolio is churned or, in simple terms, how frequently are shares being added and sold in this scheme.

Quant Tax Plan Gr has an extremely high ratio of 142%, indicating that the approach is driven by the churning of stocks and lesser holding period for each stock. On the other hand, Parag Parikh Tax Saver Reg Gr has a ratio of 5.3%, indicating that they are following a conservative approach and are buying stocks with a holding period of more than a few years.

Lastly, the ranks of these ELSS funds make all the difference when comparing their performance. There are a total of 61 schemes in this category. As long as a scheme is within the top 30 over different time periods, it is likely to deliver better returns to investors. Quant Tax Plan Gr maintains a high rank across time periods and Parag Parikh Tax Saver Reg Gr comes close.

To sum up, ELSS as a tax-saving instrument is certainly growing popular with every passing year. However, the performance of a fund is more important as it is locked in for at least three years. While the category average of three-year returns is 16.3% CAGR, only half of the schemes have managed to surpass that benchmark. While choosing an ELSS fund, an investor should consider many factors and make an informed decision rather than invest with a lone objective of tax saving.

Mutual Funds News

TREND | 17 Jan 2023

MF Buys: Where did the smart money move in December 2022?

By Ketan Sonalkar

December 2022 saw the Nifty 50 index fall by 3.5%. Throughout the month, stock prices across many sectors saw a correction and mutual fund managers seized this opportunity to buy stocks with upside potential. These include many small- and mid-cap companies that are likely to post a good set of numbers in the coming quarters. The sectors in focus range from IT services and healthcare to logistics and NBFCs.

The stocks in this article are screened from the Nifty 500 and have seen at least four schemes buy more than one lakh shares each this month.

M&M Financial Services - Rising sales of tractors aid loan growth in Q3FY23

M&M Financial Services is a Non-Banking Financial Company (NBFC) engaged in providing asset finance through its pan-India branch network. It is instrumental in financing its group company M&M’s vehicles, including tractors.

The rising sales of M&M’s tractors and HCVs (Heavy Commercial Vehicles) in the last quarter have seen a rise in the M&MFS loan book. The company, in a press release, said that it has recorded a disbursement of approximately Rs 4,650 crore in December 2022, delivering a 67% YoY growth.

It added that the growth in disbursement was helped by a positive macro environment. Q3FY23 disbursements stands at approximately Rs 14,450 crore, recording a growth of 80% YoY. Year-to-date (YTD) disbursements are approximately Rs 35,750 crore, registering a YoY growth of 95%.

Fund managers who bought shares of M&M Financial Services

M&M Financial Services was added by Shreyash Devalkar and Hitesh Das to Axis Midcap Fund Growth, Mohit Jain and Dinesh Balachandran toSBI Contra Fund Regular Payout Inc Dist cum Cap Wdrl, Hiten Shah to Kotak Equity Arbitrage Fund Growth, and R Janakiraman and Sandeep Manam to Franklin India Prima Fund Growth.

Nykaa - Stakes of early stage investors get distributed among institutional investors

Nykaa (FSN Ecommerce Ventures) is engaged in the business of manufacturing, selling and distributing beauty, wellness, fitness, and allied beauty products on their own online platform Nykaa.com, or through e-commerce websites, m-commerce apps, as well as physical stores, stalls, general trade and modern trade. Nykaa has been in the limelight ever since its listing about a year ago for being one of the profitable online businesses listed on the exchanges. However, it has disappointed investors with a fall of more than 50% since listing.

Many early stage investors and PE funds are exiting this stock and it is being picked up by institutional investors via block deals. Last month, private equity firm Lighthouse India sold 18.44 million equity shares worth Rs 336 crore through a block deal. Domestic mutual funds, including Aditya Birla Sun Life Mutual Fund, Axis Mutual Fund and ICICI Prudential Mutual Fund, and foreign portfolio investors like BofA Securities, BNP Paribas Arbitrage and Society Generale were the block deal buyers, according to available data.

Fund managers who bought shares of Nykaa

Gaurav Misra and Gaurav Khandelwal for Mirae Asset Large Cap Fund Regular Growth, Rajat Chandak and Sharmila D’mello for ICICI Prudential Flexicap Fund Regular Growth, Kayzad Eghlim and Nishit Patel for ICICI Prudential Nifty Next 50 Index Fund Growth and Atul Penkar and Dhaval Gala forAditya Birla Sun Life Tax Relief 96 Pyt of Inc Dis cum Cap Wdrl added this stock to their schemes.

NLC India

NLC India is engaged in the business of mining lignite, and generation of power using lignite, as well as renewable energy sources. Key triggers for long-term prospects include higher capacities in power as well as mining to boost profitability and capitalize on the country’s strong power demand.

NLC is adding a 3200 MW coal-based thermal plant (3x800MW phase-I and 1x800MW phase-II) in Talabira, Odisha. Management expects the plant to be commissioned by 2027-28. NLC’s renewable energy capacity is at 1.4GW, out of its total capacity of 5GW. About 4.5GW is in the planning and tendering stage, and the company aims to reach 6GW in renewable capacity by 2030 to achieve a healthy balance with its thermal plants.

Fund managers who bought shares of NLC India

Additions to schemes were made by Sanjay Chawla and Miten Vora to Baroda BNP Paribas Flexi Cap Fund Regular Growth, Sanjay Chawla and Pratish Krishnan toBaroda BNP Paribas ELSS Fund Regular Plan Growth, Abhinav Khandelwal and Manish Lodha to Mahindra Manulife Small Cap Fund Regular Growth, and Dhimant Shah and Tanay Gabhawala to ITI Multi Cap Fund Regular Growth.

Maruti Suzuki - Change in strategy expected to help retain market share

Maruti Suzuki India is a subsidiary of Suzuki Motor Corporation, Japan. It is the leader in the passenger cars segment with over 40% market share of the total PV sales in India.

The company is now focused on larger cars (SUV segment) with the launch of ‘Grand Vitara’, the new ‘Brezza’ and upgrades to ‘XL6’ and ‘Ertiga’. The management expects the contribution from the small/mini segment to reduce and that of SUVs and compact SUVs to increase in tune with changing customer preferences.

It is planning a capacity expansion to 2.5 mn units, which includes 0.1 mn units of brownfield capacity in Manesar (Haryana) by FY24. A new facility at Kharkhoda in Haryana will contribute from FY25 onwards (0.25mn units).

Fund managers who bought shares of Maruti Suzuki

Anish Tawakley and Vaibhav Dusad forICICI Prudential Bluechip Fund Growth, Rajat Chandak and Sharmila D’mello forICICI Prudential Flexicap Fund Regular Growth, Rajeev Thakkar and Raunak Onkar forParag Parikh Flexi Cap Regular Growth and Gaurav Misra and Gaurav Khandelwal for Mirae Asset Large Cap Fund Regular Growth added this stock to the schemes.

Jindal Stainless - Removal of export duty to aid stainless steel industry

Jindal Stainless is engaged in the business of manufacturing stainless steel flat products in Austenitic, Ferritic, Martensitic and Duplex grades. The product range includes ferro alloys, stainless steel slabs, hot rolled coils, plates and sheets, and cold rolled coils and sheets.

Two recent developments are expected to be beneficial for the stainless steel sector– withdrawal of export duty to aid value-added exports, and imposition of anti-dumping duty on stainless steel seamless tubes and pipe imports from China for five years.

Fund managers who bought shares of Jindal Stainless

Additions to schemes were made by Sanjeev Sharma and Vasav Sahgal toQuant Small Cap Fund Growth, Samir Rachh and Kinjal Desai to Nippon India Small Cap Fund - Growth, Vasav Sahgal and Ankit Pande toQuant Tax Plan Growth and Fatema Pacha and Manish Lodha to Mahindra Manulife Multi Cap Badhat Yojana Regular Plan Growth.

LTI Mindtree - Smooth completion of merger makes it India’s fifth-largest IT company

LTI Mindtree is an IT services company created from the merger of L&T Infotech and MindTree. It offers clients a range of IT services like application development, maintenance and outsourcing, enterprise solutions and platform-based solutions.

The merger was completed last month and witnessed a smooth transition of key management personnel. Vinit Teradesai (formerly CFO at Mindtree) has been designated as CFO of the combined entity. Sales leadership has been split between Sudhir Chaturvedi (formerly President Sales at LTI) and Venugopal Lambhu (formerly President Global Markets at Mindtree). Nachiket Deshpande (formerly COO at LTI) is now COO of LTIM.

It has emerged as the fifth-largest IT Services player in India, in terms of market capitalization post-merger. This should improve its ability to tap larger deals (of over USD100m) as compared to limited contracts of this scale at present.

Fund managers who bought shares of LTI Mindtree

Neelesh Surana and Ankit Jain forMirae Asset Emerging Bluechip Fund Growth, Ankit Jain for Mirae Asset Midcap Fund Regular Growth, Karthikraj Lakshmanan for UTI Mastershare Unit Regular Plan Payout Inc Dist cum Cap Wdrl and Shriram Ramnathan and Cheenu Gupta forHSBC Aggressive Hybrid Fund Growthadded the stock to the schemes.

Ajanta Pharma - Management upbeat about closing FY23 on a high note

Ajanta Pharma is a pharmaceutical company primarily involved in developing, manufacturing and marketing specialty finished dosages. It produces a comprehensive range of specialty products targeting different therapeutic segments.

After last quarter’s results were announced, the management guided for an EBITDA margin of 26% in H2FY23. It intends to file 10-12 ANDAs in FY23 and launch 1-2 in the US market. The management expects its Asia business to grow over 20% and India business to improve in high-teens on a YoY basis in FY23.

Fund managers who bought shares of Ajanta Pharma

Additions to schemes were made by Sankaran Naren and Dharmesh Kakkad forICICI Prudential Value Discovery Fund Growth, Sailesh Raj Bhan and Kinjal Desai for Nippon India Multi Cap Fund - Growth as well asNippon India Pharma Fund - Growth, and Mahesh Patil and Dhaval Shah for Aditya Birla Sun Life Multi-Cap Fund Regular Growth.

VRL Logistics - Price hikes and hiving off bus business key positives

VRL Logistics is one of India’s leading logistics service providers, operating in goods transport, passenger transport and courier services, apart from the air and wind power generation business.

VRL recently implemented a price hike of 5% in its goods freight business after nearly two years. The last hike was done in April 2021. The price hike has been implemented for categories and products that form nearly 60% of total volumes.

It has also received shareholder approval for the sale of its bus business. This would allow the company to focus on the high-growth goods business. The proceeds from the sale should help the company fund capex in the goods transport segment.

Fund managers who bought shares of VRL Logistics

Harish Bihani and Sharmila D’mello forICICI Prudential Transportation and Logistics Fund Regular Growth, Sanjeev Sharma and Vasav Sahgal forQuant Small Cap Fund Growth, Shriram Ramanathan and Cheenu Gupta forHSBC Aggressive Hybrid Fund Growth and Harish Bihani and Sharmila D’mello forICICI Prudential Smallcap Fund Growth added the stock to the schemes.

Sapphire Foods - A good festive season will reflect in Q3FY23 results

Sapphire Foods India is principally engaged in the franchise business of KFC, Pizza Hut and Taco Bell.

With good festive season sales, Q3FY23 results are expected to beat street expectations. The company’s decision to take price hikes lower than material cost increases is resulting in good operating leverage. With its Sri Lanka business getting better from September 2022 onwards, the impact on EBITDA margin is likely to reduce in the coming quarters.

Fund managers who bought shares of Sapphire Foods

Additions to schemes were made by Gaurav Misra for Mirae Asset Focused Fund Regular Growth, Neelesh Surana and Ankit Jain forMirae Asset Emerging Bluechip Fund Growth, Harish Bihani and Sharmila D’mello forICICI Prudential Smallcap Fund Growth and Sailesh Raj Bhan and Kinjal Desai for Nippon India Multi Cap Fund - Growth

Rainbow Children’s Medicare - Rising interest from Superstar investors

Rainbow Children’s Medicare is a leading chain of multi-specialty pediatric, and obstetrics & gynecology hospitals in India. It operates 14 hospitals and three clinics in six cities, with a total bed capacity of 1,500 beds.

It was listed on the exchanges in May 2022 and has delivered positive returns to investors since its listing. There is a growing interest in this stock from some of the superstar investors. According to the shareholding pattern filed by the company for the September quarter, Ashish Kacholia held 10,44,211 equity shares, (a 1.03% stake). This was the first quarter that this investor raised his stake in this hospital chain.

Fund managers who bought shares of Rainbow Children’s Medicare

Sankaran Naren and Dharmesh Kakkad forICICI Prudential Value Discovery Fund Growth, Vinit Sambre and Jay Kothari forDSP Small Cap Fund Regular Plan Growth, Dharmesh Kakkad and Sharmila D’mello forICICI Prudential Pharma Healthcare and Diagnostics (P.H.D) Fund Growth and Meenakshi Dawar and Akshay Sharma for Nippon India Value Fund - Growth added this stock to the schemes.

Mutual Funds News

TREND | 04 Jan 2023

Winners and losers: the biggest outperformer and underperfomer mutual funds of 2022

By Ketan Sonalkar

The year 2022 was nit by volatility from new Covid-19 variants, the Russia-Ukraine war and supply disruptions. These factors worsened inflationary pressures and threatened economic recovery across the world. But it was not all bad news for India. Even though the benchmark Nifty 50 gained only about 5% this year, it was the best-performing index in the global market, which speaks volumes about the resilience of the Indian economy in the post-Covid era.

In a volatile market, many retail investors showed interest in mutual funds, and equity-oriented mutual funds formed a major part of their portfolios. Let's look at how equity mutual funds performed in 2022 and which of them delivered above-average returns.

The question of one year versus longer-term performance

While a fund’s one year's performance is not solely enough to base a decision on, it gives an insight into the fund's potential. Another matter of debate within the investor community is active vs passive investments. This year’s data proves that some funds do generate alpha, but with the number of schemes and AMCs growing, the ratio of alpha generators is shrinking.

Flexi-Cap Funds

Flexi-cap equity mutual funds have gained traction in the past few years with many AMCs launching new schemes. They allow flexibility in the selection of stocks across the market capitalisation spectrum and even include investments in international markets.

Outperformers of this category include HDFC Flexi Cap Dir Gr managed by Priya Ranjan and Roshi Jain, Quant Active Dir Gr by Sanjeev Sharma and Vasav Sahgal, and ICICI Pru Flexicap Reg Gr by Rajat Chandak and Sharmila D’mello.

Schemes that underperformed are Rajeev Thakkar and Raunak Onkar’s Parag Parikh Flexi Cap Reg Gr, Shreyash Devalkar and Hitesh Das’Axis Flexi Cap Reg Gr, and Ajay Tyagi’sUTI Flexi Cap Reg Gr.

Large-Cap Funds

This popular category has the majority of investments in the Nifty 50 universe and delivers stable returns without too many risks. It has only a handful of schemes that beat the benchmark.

Sailesh Raj Bhan and Kinjal Desai’s Nippon India Large Cap Gr, Priya Ranjan and Rahul Baijal’sHDFC Top 100 Gr, and Anish Tawakley and Vaibhav Dusad’sICICI Pru Bluechip Gr has the best returns in this category.

The lowest returns are from Sumit Agrawal and Sachin Relekar for IDFC Large Cap Gr, Amit Nigam and Dhimant Kothari for Invesco India largecap Gr, and Shreyash Devalkar and Hitesh Das forAxis Bluechip Fund Gr.

Mid-Cap Funds

These funds have been the investors' choice due to a set of mid-cap stocks generating higher returns than benchmark indices. Nearly 30% of the schemes in this category generated higher returns than the benchmark.

The top performing schemes are Sanjeev Sharma and Vasav Sahgal’sQuant Mid Cap Gr, Chirag Setalvad and Priya Ranjan’sHDFC Mid-Cap Opportunities Gr, and Niket Shah and Ankush Sood’sMotilal Oswal Midcap 30 Reg Gr.

Underperformers in this category include Axis Midcap Gr managed by Shreyash Devalkar and Hitesh Das, DSP Midcap Reg Gr by Vinit Sambre and Resham Jain, and Aditya BSL Mid Cap Gr by Anil Shah.

Small-Cap Funds

This high-risk category invests in small-cap companies which are nimble and able to grow quickly. Investors bet on fund managers identifying winners at an early stage and ride out the journey. Only six funds in this category could beat the benchmark last year.

Outperforming fund managers include Sanjeev Sharma and Vasav Sahgal for Quant Small Cap Gr, R Srinivasan and Mohit Jain for SBI Small Cap Fund Reg Gr, and Chandraprakash Padiyar and Satish Mishra for Tata Small Cap Fund Reg Gr.

Fund managers Aniruddha Naha and Ravi Adukia for PGIM India Small Cap Reg Gr, Anoop Bhaskar forIDFC Emerging Businesses Reg Gr and Vishal Gajwani for Aditya BSL Small Cap Gr underperformed.

Multi-Cap Funds

Multi-cap funds invest in a mix of stocks from companies of different sizes. These funds tend to give higher returns in trending markets. In 2022, only five funds could beat the benchmark index.

Sailesh Raj Bhan and Kinjal Desai forNippon India Multi Cap Gr, Sanjeev Sharma and Vasav Sahgal for Quant Active Gr, and Harsha Upadhyaya and Abhishek Bisen for Kotak Multicap Reg Gr outperformed the benchmark, while Sanjay Chawla and Sandeep Jain for Baroda BNP P Multi Cap Reg Gr, Anupam Tiwari and Sachin Jain for Axis Multicap Reg Gr, and Pranav Gokhale and Amit Nigam forInvesco India Multicap Gr underperformed.

Large- and Mid-Cap Funds

Another popular category among equity mutual funds, these schemes invest in large- and mid-cap companies only. From these, only seven funds beat the benchmark last year.

While Sanjeev Sharma and Vasav Sahgal for Quant Large and Mid Cap Gr, Ihab Dalwai and Sharmila D’mello forICICI Pru Large & Mid Cap Gr, and Chandraprakash Padiyar and Meeta Shetty for Tata Large & Mid Cap Reg Gr outperformed, Satyabrata Mohanty for Aditya BSL Equity Advantage Gr, Jinesh Gopani and Hitesh Das for Axis Growth Opportunities Reg Gr, and Neelotpal Sahai for HSBC Large & Mid Cap Reg Gr were the weakest performers.

ELSS (Equity Linked Savings Scheme)

Tax-saving benefits make ELSS a crowd favourite, and the three-year lock-in period gives fund managers flexibility. But only two schemes stood out last year, while nearly 60% of ELSS schemes underperformed.

Outperformers include Vasav Sahgal and Ankit Pande’sQuant Tax Plan Gr, Roshi Jain and Priya Ranjan’sHDFC TaxSaver Gr, and George Thomas and Christy Mathai’sQuantum Tax Saving Reg Gr.

Vishal Chopda for UTI Long Term Equity Reg Gr, Dhimant Kothari and Amit Nigam for Invesco India Tax Plan Gr, and Jinesh Gopani for Axis Long Term Equity Gr fail to do well..

Quant AMC stands out with at least one outperforming scheme in almost every category of equity mutual funds. Another highlight is that the AMCs which have been around for almost two decades, HDFC AMC, Nippon India and ICICI Prudential, have alpha-generators in some categories. Many of the newer AMCs do not seem to be delivering alpha to investors just yet.

Agriculture

SECTOR | 28 Dec 2022

Fertilizer stocks deliver outsize gains for investors this year

By Ketan Sonalkar

Many of us live in cities and towns, and don’t fully recognize how much our modernizing Indian economy depends on agriculture. Even today, an estimated 58% of India’s workforce works in this sector.

As one of the most populous countries in the world, ensuring food security is a priority in India. The agri and agrochemicalssectors are consequently a …

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As one of the most populous countries in the world, ensuring food security is a priority in India. The agri and agrochemicalssectors are consequently a major focus in Indian government policy.

There are many large and small players in the Indian fertilizer industry, and over the past year, most of them delivered stellar results to investors. In the past month, we witnessed significant volatility in some of these stocks.

Anticipating a favourable performance, fertilizer stocks surge

FACT jumped over 80% and Madras Fertilizers by 36.1% over the past month. Among the larger fertilizer companies, FACT has gained more than 100% over a year. Except for Chambal Fertilizers, all other stocks delivered healthy returns this year, including RCF and GNFC, which grew more than 20%.

The recent run up in fertilizer stocks can be attributed to a few factors. Many analysts believe that the market is anticipating that the Centre will announce subsidies on fertilizers in the forthcoming Union Budget. In addition to this, there will be an export ban or increased duty on fertilizers from Russia, impacting global prices. . Russia’s imposition of an export tax on fertilizers is likely to come into effect from January 1, 2023. It plans to set the export tax on all types of fertilizers at 23.5%, with a cut-off price of $450 per tonne.

The Indian government has also proposed a change in the policy of gas supply to fertilizer companies. It requires fertilizer companies to pay for at least 40% of gas under spot buying. Gas is the primary fuel used in fertilizer production. The Oil Ministry estimates spot gas prices to come down by up to 15% under the new mechanism. GAIL will act as the nodal agency to supply pooled gas to the fertilizer sector.

Some of the smaller fertilizer stocks have done much better than their larger counterparts. Madhya Bharat Agro, Madras Fertilizers and Krishna Phoschem gained more than 100% this year, with a standout performance of 500% gains by Madhya Bharat Agro. National Fertilizers and GSFC were the laggards of the sector.

For the past three quarters, the fertilizer industry faced margin pressure due to rise in input costs. But thanks to a normal monsoon in India this year, fertilizer stocks have recently boomed. Rising Covid cases in China, while a distress to the global supply situation, could also prove to be a boon to Indian fertilizer companies.

Another supporting factor is the correction of raw material prices in the international markets, which is expected to aid the performance of these companies in the coming quarters. The prices have corrected for key input raw materials and fertilizers such as Phosphoric acid (30%), Sulphur (49%), Di-ammonium Phosphate [DAP] (39%) and Urea (34%).

Strong Q2FY23 builds investor confidence

The impressive rise in stock prices is supported by improving financial metrics. The market has proportionately rewarded stocks with higher quarterly YoY growth in revenues and net profits. The Q2FY23 results saw improving financial metrics in the majority of the companies.

Not surprisingly, among the larger players, FACT saw the highest quarterly YoY revenue growth of 147% and net profit growth of 296.7%. Consequently, its stock price also rose the highest. Chambal Fertilizers saw quarterly YoY revenue growth of 91.7%. But with net profit down by 45.8%, it is the only stock that has delivered negative returns over the year.

As a sector, the combined net profit increased by around 11% for Q2FY23, along with 62% growth in gross sales.

Fertilizers have played a key role in the success of India's green revolution and self-reliance in food-grain production. The increase in fertilizer consumption has contributed significantly to sustainable production of food grains in the country. As a result, demand for fertilizers saw double-digit growth rates over the past several years. Despite strong growth in recent years, the average intensity of fertilizer use in India remains much lower than in most of the developed and emerging countries around the world.

Fertilizer usage is also highly skewed, with wide inter-regional, inter-state and inter-district variations. This offers a lot of scope for this industry to widen its reach, and help the country ensure food security for its population. A lot of this is dependent on the upcoming Union budget and how favourable it is for the fertilizer industry. A positive trigger, supported by a normal monsoon, could help these stocks perform well next year as well.

Mutual Funds News

TREND | 19 Dec 2022

MF Buys: Where did the smart money move in November 2022?

By Ketan Sonalkar

November saw the benchmark indicesNifty 50 andNifty Bank rise 4.4% and 4.66% respectively. Both of these indices are currently trading close to their all-time highs, although there was a correction over the past week. During this month, mutual fund managers spotted opportunities in private and PSU banks along with some of the new-age tech companies, which may hold future potential.

The stocks in this article are screened from the Nifty 500 and have seen at least four schemes buy more than one lakh shares each this month.

Zomato - Food delivery business showing signs of profitability

Zomato is an app-based food delivery company operating across major cities and towns in India. On a standalone basis, Zomato posted a profit of Rs 11.8 crore in Q2FY23 for the first time. This has encouraged fund managers and they expect these numbers to improve in the future. The company’s newer initiatives like Intercity Legends, where one can order from select cities in India for next-day delivery, are likely to add to the bottom line.

Though the food delivery business is showing signs of profitability, its other businesses like grocery delivery are in the red and unlikely to be profitable for the next few quarters.

Fund Managers who bought shares of Zomato

Fund managers who added shares of Zomato to their portfolios include Manish Gunwani and Kinjal Desai forNippon India Growth Fund - Growth, Jinesh Gopani for Axis Long Term Equity Fund Growth, Jinesh Gopani and Hitesh Das for Axis Growth Opportunities Fund Regular Growth, and Vaibhav Dusad and Sharmila D’mello forICICI Prudential Technology Fund Growth.

Union Bank of India - Strong performance on key metrics piques investors’ interest

Union Bank of India is an Indian PSU (public sector undertaking) in the banking sector. This year, PSU banks have shown a remarkable recovery in their NPAs and have also been able to expand their footprint in loan growth.

Union Bank of India posted its highest-ever revenue and net profits in Q2FY23 with revenues at Rs 23,475 crore and net profit of Rs 1,853 crore. Its NPA ratio was down to 2.64% in Q2FY23 from 4.61% in Q2FY22. All these factors contributed to a sharp rise in its share price, which almost doubled in one year.

Fund Managers who bought shares of Union Bank of India

Fund managers who added shares of Union Bank of India include Chirag Setalvad and Priya Ranjan toHDFC Mid-Cap Opportunities Fund Growth scheme, Sanjeev Sharma and Vasav Sahgal for two schemes, Quant Mid Cap Fund Growth as well asQuant Active Fund Growth and Vasav Sahgal toQuant Tax Plan Growth scheme.

SAIL (Steel Authority of India) - PLI scheme expected to boost production

SAIL is a public sector undertaking based in New Delhi. It is owned by the Ministry of Steel.

SAIL enhanced production capacity with the commissioning of Bhilai plant’s largest Blast Furnace – Blast Furnace 8 (BF 8), christened Mahamaya. It is the fastest to have crossed 11 million tonnes (MT) cumulative production this month. SAIL has also been selected for the central government’s PLI scheme for speciality steels. The proposed investments are anticipated to increase the nation's capacity for speciality steel by 26 MT .

Fund Managers who bought shares of SAIL

Buying interest in SAIL came from Sailesh Jain forTata Arbitrage Fund Regular Growth, Hiten Shah for Kotak Equity Arbitrage Fund Growth, Kayzad Eghlim and Nikhil Kabra forICICI Prudential Equity Arbitrage Fund Regular Growth, and Kinjal Desai and Anand Gupta for Nippon India Arbitrage Fund Growth.

Delhivery - New logistics policy likely to benefit entire logistics chain

Delhivery, the largest fully-integrated logistics player in India in terms of revenues, provides services including express parcel, e-commerce delivery and heavy goods delivery. Its network includes 122 gateways, 21 automated sort centres and 93 fulfilment centres.

In Q2FY23, its revenue was Rs 1,796 crore from services, up 22% YoY from Rs 1,474. Losses after tax in the same period narrowed to Rs 254 crore from Rs 643 crore in Q2FY22. As chances of profitability improve, there is growing interest in the stock from domestic institutions. Delhivery is also expected to be a beneficiary of the National Logistics Policy, which aims to expedite the process of approvals as well as improve warehousing capacity and a faster turnaround time for goods movement.

Fund Managers who bought shares of Delhivery

Shares of Delhivery were added to schemes by Neelesh Surana and Ankit Jain forMirae Asset Emerging Bluechip Fund Growth, Manish Banthia and Sanakaran Naren for ICICI Prudential Equity & Debt Fund Growth, Neelesh Surana forMirae Asset Tax Saver Fund -Regular Plan-Growth, and Sankaran Naren and Dharmesh Kakkad forICICI Prudential Value Discovery Fund Growth.

RBL Bank - Post-pandemic economic recovery drives profit growth

RBL Bank, a private sector bank with a nationwide network of 435 branches, offers various services including corporate and institutional banking, commercial banking, retail banking, agricultural development banking and financial market access. It reported a 5.5X YoY jump in net profit to Rs 200 crore in Q2FY23, aided by a 63% decline in provisions. There was a pick-up in loan growth, up 12% YoY and 4% QoQ to Rs 62,900 crore. Credit cards grew at a steady pace of 4% QoQ. The share of credit cards stands at 23% of total loans. RBL Bank has plans to launch its loan products for two-wheelers, used cars and gold in Q3FY23. Overall, the bank is targeting loan growth of 15% in FY23.

Fund Managers who bought shares of RBL Bank

Fund managers adding RBL to schemes include Manish Gunwani and Kinjal Desai for Nippon India Growth Fund - Growth, Samir Rachh and Kinjal Desai forNippon India Small Cap Fund - Growth, and Sanjeev Sharma and Vasav Sahgal for Quant Small Cap Fund Growth as well as Quant Active Fund Growth.

Exide Industries - Expansion into EV battery space charges up the stock

Exide Industries is a market leader in storage batteries in India with 60% market share. Its segment includes automotive & industrial batteries, and it has a market share of 86% of the 2W market.

Exide Industries through its subsidiary Exide Energy Solutions Ltd (EESL) has executed a sales agreement in Bengaluru to set up a lithium-ion battery cell manufacturing facility. The plant will be used to set up a multi-gigawatt Li-ion battery cell manufacturing facility for the new-age electric mobility and stationary application business in India. The company expects that the first phase of Li-ion cell manufacturing will commence by H2FY25.

Fund Managers who bought shares of Exide Industries

Shares of Exide Industries were added by Pankaj Tibrewal and Arjun Khanna toKotak Small Cap Growth, Harsha Upadhyaya toKotak Tax Saver-Scheme- Growth, Harsha Upadhyaya and Arjun Khanna to Kotak Equity Opportunities Fund Growth, and Deepak Gupta and Kuber Mannadi to Invesco India Arbitrage Fund Growth schemes respectively.

Biocon - Global expansion will be instrumental in improving company’s health

Biocon is a biopharmaceutical company which develops therapy for chronic diseases such as autoimmune disease, diabetes and cancer. It has developed and introduced novel biologics, biosimilars, differentiated small molecules and affordable recombinant human insulin, and analogues into the market.

Biocon via its subsidiary, Biocon Biologics, will acquire the global biosimilars portfolio of Viatris. It expects the deal with Viatris to close in the second half of the current financial year. With this deal, Biocon will gain Viatris’ global biosimilars business, whose revenues are estimated to be $1 billion next year, along with its portfolio of in-licensed biosimilar assets. It also announced the signing of a strategic out-license agreement with a Japanese pharmaceutical company, Yoshindo Inc., for the commercialisation of two of its pipeline biosimilar assets in the Japanese market.

Fund Managers who bought shares of Biocon

Shares of Biocon were added by Neelesh Surana and Ankit Jain toMirae Asset Emerging Bluechip Fund Growth, Ankit Jain to Mirae Asset Midcap Fund Regular Growth, Neelesh Surana toMirae Asset Tax Saver Fund -Regular Plan-Growth, and Hiten Shah toKotak Equity Arbitrage Fund Growth.

Bank of India - Another PSU bank that is on track to good performance

Bank of India is one of the largest Indian PSU banks with a strong domestic presence spanning 5,107 branches. The bank also has an international presence with a network of 23 branches across 18 countries.

Along with a host of other PSU banks, Bank of India also saw a turnaround in its performance in the past few quarters. In Q2FY23, it posted all-time high revenues of Rs 13,001 crore. It also reduced its net NPAs to 1.92% in Q2FY23, which is the lowest ever recorded.

Fund Managers who bought shares of Bank of India

Bank of India saw buying interest from Kunal Sangoi for Aditya Birla Sun Life Pure Value Fund Growth, Dhaval Gala and Mahesh Patil for Aditya Birla Sun Life PSU Equity Fund Regular Growth, Sanjeev Sharma and Vasav Sahgal forQuant Mid Cap Fund Growth, and Sandeep Tandon and Ankit Pande forQuant Value Fund Regular Growth.

PB Fintech - Rising revenues and narrowing losses build up investor confidence

PB Fintech is India’s largest online platform for lending and insurance, which go by the names of their websites, paisabazaar.com and policybazaar.com respectively.

In Q2FY23, the company’s consolidated loss narrowed to Rs 186.63 crore compared to Rs 204.44 crore in Q2FY22. Its revenue from operations for the period jumped 105.11% YoY to Rs 573.47 crore, led by strong growth in insurance premiums, credit disbursal and operating revenue.

Foreign brokerages have also raised their targets on this stock. Morgan Stanley has an overweight rating with a target price of Rs 620 per share. Initiating coverage on the stock, CLSA has a buy rating with a target price of Rs 600 per share, with the reasoning that the online distribution of insurance will grow at 10% CAGR and PB Fintech is one of the largest online platforms.

Fund Managers who bought shares of PB Fintech

Fund managers who added shares of PB Fintech to their schemes include Sailesh Raj Bhan and Kinjal Desai for Nippon India Multi Cap Fund - Growth, Atul Penkar and Dhaval Gala for Aditya Birla Sun Life Tax Relief 96 Pyt of Inc Dis cum Cap Wdrl, R Janakiraman and Sandeep Manam forFranklin India Prima Fund Growth, and Vinay Sharma and Kinjal Desai forNippon India Banking & Financial Services Fund Growth.

PCBL (Philips Carbon Black) - Additional capacity coming onstream in the next few quarters

PCBL is a leading manufacturer of carbon black, which is used as a reinforcing material in tyres. It also derives about 10% of sales volume from speciality carbon black, a high-margin product and finds application in paints and plastics, among others.

The company is expanding its production lines with a greenfield project of 150 ktpa (kilo tonnes per annum) in Tamil Nadu. It is progressing well with major equipment orders placed and commissioning expected by Q3FY23. It has also initiated work on the brownfield expansion of 40 ktpa of speciality lines at Mundra, expected to be completed by Q4FY23.

Fund Managers who bought shares of PCBL

PCBL saw buying in respective schemes from Sankaran Naren and Anand Sharma for ICICI Prudential Multicap Fund Growth, Rajat Chandak and D’mello forICICI Prudential Flexicap Fund Regular Growth, Pratibh Agarwal and Dhimant Shah forITI Small Cap Fund Regular Growth, and Mittul Kalawadia and Sharmila D’mello forICICI Prudential Dividend Yield Equity Fund Growth.

Banks

SECTOR | 15 Dec 2022

2022 Review: India's banking and finance sector delivers surprising winners and losers

By Ketan Sonalkar

As 2022 draws to a close, the BFSI (Banking, Financial Services and Insurance) sector has thrown quite a few surprises – outperformance from unexpected players, and underperformance by a few sector leaders. The sector comprises a wide range of government-owned banks, private banks, NBFCs as well as life and general insurance companies.

The surprise of the year was the clear …

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The surprise of the year was the clear outperformance by PSU (Public Sector Undertaking) banks. From the beginning of the year, this was one of the best-performing sectors with the Nifty PSU Bank index generating 70% returns.

PSU banks have historically been known for their indiscriminate lending patterns, taking the hit for welfare schemes by central and state governments, which led to significant non-performance and losses for several years. All this changed when the central government took the decision to launch Asset Quality Review (AQR) in April 2015 to unearth hidden non-performing assets (NPAs).

While the NPAs of PSBs were Rs 2.17 lakh crore on March 31, 2014, it surged to Rs 8.96 lakh crore on March 31, 2018, mainly due to indiscriminate lending. This was the first major step to clean up and strengthen the PSB segment of the Indian banking sector. The result of this cleansing exercise has been visible for the past few quarters.

Even during the pandemic (FY21 and FY22), these banks took measures to ensure that their NPAs were under control. As normalcy returned in Q1FY23, the lending of these banks also saw a jump. The combined effect of lower NPAs and growth in credit affected the bottom lines of these banks, with many of them posting their highest-ever profits in Q2FY23. As a result, the stock prices of seven PSU banks soared more than 50% since January this year.

Following the Q2FY23 results, Union Finance Minister Nirmala Sitharaman tweeted, “The continuous efforts of our govt for reducing the NPAs & further strengthening the health of PSBs are now showing tangible results. All 12 PSBs declared a net profit of Rs 25,685 crore in Q2FY23 and Rs 40,991 cr in H1FY23, up by 50% and 31.6% respectively (YoY).”

In Q2FY23, the largest PSU bank, SBI, saw a 74% jump in its net profit, while it was 89% for Canara Bank at Rs 2,525 crore, 145% for UCO Bank at Rs 504 crore, 58.7% for Bank of Baroda at Rs 3,312.42 crore and 12% for Indian Bank at Rs 1,225 crore.

The graph above shows that the net NPAs of PSU banks have fallen sharply in Q2FY23 from their respective levels in Q2FY22. In fact the NPA ratios for most of these banks are at their lowest ever. Whether they continue to maintain these levels has to be seen in the future.

SBI’s net NPA fell below 1% at 0.80% in Q2FY23, which was 5.73% in FY19. In Q2FY23, the net NPA of Canara Bank was down to 2.19%, as compared to 7.48% in FY19. Other banks also saw a sharp decline in NPAs. Net NPA of Indian Bank reduced by 176 bps to 1.50% in Q2FY23 from 3.26% in the same period previous year.

While PSU banks have been around for a few decades now, Indian banking has seen remarkable changes with rising competition from private sector banks. During the past two decades, private banks led the banking sector in technology adoption, introduction of customer-oriented products and digital initiatives. Most PSU banks have now caught up on tech – another reason why they have given returns much ahead of the private banks this year.

The Banknifty, an index comprising PSU as well as private banks, delivered returns of 22% this year, as compared to 70% by the PSU bank index. The outperformance of PSU banks helped the Banknifty index reach its all-time high, where it is currently trading in December 2022.

Considering the top five private banks by market capitalization, ICICI Bank, IndusInd Bank and Axis Bank have delivered returns above 25% since the beginning of the year. The returns for HDFC Bank and Kotak Mahindra Bank in the same time frame are way below the average performance of the entire banking sector.

Apart from private banks, another key component in the BFSI space, the life insurance industry, also disappointed investors this year. This year was particularly memorable for the life insurance industry as the government launched India’s biggest IPO for LIC of India in May 2022. While this drove lots of investors into the life insurance sector via the LIC IPO, the returns since the listing have only disappointed investors. It is down around 30% from its listing price in December 2022. Except for SBI Life, no other life insurer delivered positive returns this year.

Post-listing, LIC has been aggressively making up for lost market share to private insurers. LIC gained almost 4.5% market share in H1FY23 in new business premium (NBP) from private players, mainly on account of robust growth in its group business segment. NBP is the premium acquired from new policies for a particular year. It is the sum of the first-year’s premium and a single premium, reflecting total premiums received from the new business written.

According to data released by the insurance regulator, IRDAI (Insurance Regulatory and Development Authority of India), LIC improved its market share to 67.72% as of October 2022, a gain of 447 basis points (bps), while private sector insurance companies’ market share dropped to 32.28%. Among top private players, SBI Life shed 82 bps in market share in H1FY23, HDFC Life’s market share dropped 157 bps, and ICICI Prudential Life’s market share dropped 64 bps during this period.

At the end of FY22, private players had 36.75% share of the life insurance market, while LIC had 63.25%. By the end of FY21, LIC’s market share was 66.18%, and private players took up 33.82%.

This year PSU banks made a comeback, with private banks clearly losing out their investment potential and the life insurance industry disappointing investors. As we head into a new year, the BFSI sector shows potential and may hold more surprises next year.

IDBI Capital released a Sector Update report for Banks on 03 Mar, 2025.

Automobiles & Auto Components

SECTOR | 05 Dec 2022

Top gear: Auto ancillary companies ride wave of rising auto sales

By Ketan Sonalkar

The Indian automobile industry is on track to becoming the third largest in the world by 2026. It is the world’s biggest two-wheeler manufacturer and among the top-three manufacturers of buses and heavy commercial vehicles (HCVs) worldwide. However, any automaker is only as good as the support it gets from auto ancillary suppliers. In India, the success of the automobile …

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The components manufactured by this industry include springs, engine parts, suspension, shock absorbers, gears, headlights, axles, wiring systems, chassis, tyres, lights, batteries, pistons, brakes, bearings, wheels and air conditioning parts.

Some of India’s auto ancillary companies are making an impact both domestically, and on a global scale. These are companies that supply critical components, and new technology-related components like mechatronics, which are playing an increasingly key role in automobiles.

Sourcing of components drives up revenue of auto ancillary players

The chart above shows the movement of the Nifty Auto Index over the past year. From its lows in May 2022, it has surged more than 30% and is trading close to its all-time high. A natural consequence of the rise in the auto index has been the increase in sales of auto ancillary makers. Cars and two-wheelers that are sold in the market today have sophisticated electronic or digital features. Thousands of components or parts need to be sourced from different manufacturers across the world.

Automakers are thus heavily dependent on firms that produce essential auto ancillary components. Correspondingly, the revenues of auto ancillary players have seen a YoY growth, with most of them improving sequentially as well.

Even the latest data on wholesale numbers for November 2022 confirm the trend of higher YoY sales continuing for almost every automaker. Two reasons for this are the easing of chip shortages as well as the low base of last year. Still, the numbers for November sales are impressive with M&M showing a YoY sales growth of 56% at 30,528 units and Maruti logging 14.3% at 18,251 units. Meanwhile, Tata Motors had a 55% YoY jump in PV sales at 46,425 units.

Samvardhana Motherson International is one of the largest players in the auto ancillary space. Formerly known as Motherson Sumi, it is a leading player in wiring harnesses along with other systems like lighting, electronics, etc. In Q2FY23 the share of components in EVs increased to 37%, a sequential increase of 10%.

Tube Investments, a leading manufacturer of bicycles in India, and also makes components for the automotive and power industry. The acquisition of CG Power and Industrial Solutions Limited, a major manufacturer of motors, transformers, switch gears and railway parts, marked a major step up for Tube Investments, amplifying its scale and scope of operations. In the past year, it forayed into the electric vehicle segment with its new subsidiary, TI Clean Mobility Private Limited, and the acquisition of Cellestial E-Mobility Private Limited, a manufacturer of electric tractors.

Pandemic-induced slump ends, profits rise in Q2FY23

As the auto industry recovered demand after a few quarters of a pandemic-induced slump, Q2FY23 saw rising profits for most players. This was aided by the cooling of raw material prices, which added to the margins, as well as the easing of semiconductor chip supplies, leading to more wholesales for the auto industry this quarter.

Sundram Fasteners is an auto ancillary company that has maintained relationships with original equipment manufacturers (OEMs) in components like high-tension fasteners, forged components, radiator caps, etc. It exports to a host of countries, including major orders from countries like China, Brazil, USA, UK and France.

Another auto ancillary player that has been gaining prominence is Uno Minda. It has focused on components like switches, lighting, acoustics (horns), seating systems and castings. It has been expanding its offerings in the EV space with products like telematics, traction motors, battery packs, etc. It has emerged as one of the preferred suppliers for many electric two-wheelers.

The auto ancillary industry in India mainly supplies to OEMs in the automotive industry and their tier-I suppliers in large external markets. For the Indian auto component industry, Europe and North America account for nearly two-thirds of exports. These markets witnessed a swift recovery in industrial production on the back of government support in the aftermath of Covid-19. This led to a spike in demand for auto components across segments as customer demand rebounded and companies ramped up production. Exports in FY22 grew 42.9% to $19 billion.

Exports to touch $80 billion by 2026

The future prospects of this industry are promising. In FY22, for the first time, exports of auto components from India were higher than imports. This trend is likely to continue in FY23. Leading the change are companies that dominate in at least one of their product segments and companies that are expanding their offerings to gain market share in the EV segments.

The auto ancillary industry in India has witnessed healthy growth over the past few years, expanding by a CAGR of 3.28% from FY16 to FY20 to touch US$45.90 billion in FY21. It is estimated that the industry will reach US$200 billion by FY26. According to the Automobile Component Manufacturers Association (ACMA), the export of auto components from India is expected to hit US$80 billion by 2026.

Manufacturers globally are moving to diversify their sourcing and suppliers outside China to ensure continuity in business operations and reduce dependence on a single country. India has witnessed the benefits of this diversification strategy, as a favourable low-cost alternative for large manufacturers’ sourcing needs. “The China+1 policy may not have resulted in an outpouring of investments into India, but we have seen the benefits in terms of order book growth," Vinnie Mehta, Director General of ACMA, said

According to ACMA, the trade surplus continued in Q2FY23. Fears that exports could be hit due to geopolitical disruptions have not materialised as shipments to European markets continued at a healthy pace. With continued ?emphasis? on localisation, a government push to add more domestic capacity and healthy demand for automobiles, the industry expects the trade surplus to remain in FY23 as well. Exports are expected to grow 23.9% annually to reach $80 billion by 2026. The Indian auto ancillary industry is hoping to zoom ahead as the auto sector shifts into top gear post pandemic.

KRChoksey released a Sector Update report for Automobiles & Auto Components on 04 Mar, 2025.

Metal and Mining

SECTOR | 29 Nov 2022

Will the rollback of export duties help the Indian steel industry?

By Ketan Sonalkar

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The steel industry's performance in Q2FY23 was weaker than expected due to the imposition of export duty on steel in May this year. A global decline in steel prices and higher input costs only added to its woes. In a bid to boost the sector, the government revoked the export duty on steel on November 19, 2022. According to the new notification, iron ore lumps with grades lower than 58% will have no export duty, while grades higher than 58% will attract 30%. The rate of duty for these was 50% earlier.

Seshagiri Rao, Joint MD, JSW Steel and Group CFO, hailed this move, saying, “This will revive domestic steel demand, particularly at a time global demand is in decline." The Indian government imposed the export duty in May to rein in the price surge precipitated by supply disruptions with the Russia-Ukraine war. Even though the prices were falling in the past few months, rising interest rates raised concerns of an impending global recession. Demand from China, the world’s largest consumer of steel, also fell following a crisis in the realty sector and Covid-led lockdowns across regions.

Steel sector struggles after a strong run for two years

The performance of steel companies has been lacklustre in Q2FY23. The top-performing sector of the pandemic period is now struggling to maintain its margins even after economic activities have recovered from the lockdown-induced slump.

Data indicate that companies with higher domestic sales as compared to exports saw their revenues rise both YoY and sequentially. JSW Steel and APL Apollo Tubes are cases in point. JSW Steel's exports ratio, which was 32% in Q2FY22, decreased to 10% in Q2FY23.

Meanwhile, domestic demand remains strong for a number of reasons. The government continues to focus on infrastructure on the back of rising tax collections. Gati Shakti, the National Logistics Policy, is further expected to increase spending on infrastructure. Growing production in defence under Aatmanirbhar Bharat, PLI schemes for the manufacturing sector, record sales and booking in the real estate sector, including affordable housing – all these make a strong case for the sustenance of demand in the steel sector.

Sharp drop in profitability in Q2FY23

The concern really is the falling profits of steel companies. After a stellar run for two years, JSW Steel posted negative numbers in Q2FY23, as against a net profit of Rs 7,170 crore in Q2FY22. Even on a sequential basis, profits have fallen sharply for Tata Steel, Jindal Steel and Power and SAIL.

The only steel company that was able to gain profits both YoY and sequentially was APL Apollo Tubes. This was due to the differentiated business model that the company follows. Its focus has been on value-added products as they offer much higher margins compared to traditional steel products like longs and flats. APL Apollo’s entry into the pre-fabricated building segment is also paying dividends with an ongoing order for multiple hospital projects from the Delhi government.

Tata group proposes to merge all steel entities into Tata Steel

On 22 September 2022, Tata Steel announced that its board approved its merger with six subsidiaries and one associate using share swaps instead of cash. The proposed merger aims to enhance management efficiency and centralise procurement, optimise inventory and combine marketing efforts.

Tata Steel estimates the annual cost savings after the merger to be over Rs 8 billion, with a large contribution from lower royalty payments. Its listed subsidiaries like Tata Steel Long Products, Tata Metaliks, The Tinplate Company of India and TRF Limited, and unlisted companies like Indian Steel & Wire Products, Tata Steel Mining and S&T Mining will be amalgamated into Tata Steel.

“India should be making steel for domestic purposes and also for the world. Unlike other big steel exporters who have to import iron ores, we have our own and, thus, a great advantage in steel export. It is an opportunity to add value to our iron ores, create jobs in economically weaker parts of the country and build a large-scale globally competitive industry,” says TV Narendran, MD, Tata Steel.

Twofold setback of export duty and falling prices

Even though steel prices were on an upward trend at the beginning of the year, they dipped by about 40% to Rs 57,000 a tonne in the domestic market over the past six months. Its impact can be seen in the drastic fall in operating margins for steel companies. The prices in the domestic market peaked at Rs 78,800 per tonne in April.

At its peak, steel price became a matter of concern as it had a direct impact on industries like real estate and housing, infrastructure and construction, automobile and consumer goods.

Additionally, the drop in exports also contributed significantly to the lower margins. India’s steel exports dipped by nearly 54% to 3.6 million tonne in H1FY23. Exports in H1FY22 was 7.8 million tonne. The decline was caused by global recessionary trends affecting demand and the continued imposition of export duty by the Centre, making offerings pricier compared with competing countries.

Steel exports in September, at 0.6 million tonne, were down by over 57% YoY. India’s steel exports have been on the decline since April this year, with July being the worst with imports higher than exports.

The steel industry had extraordinary returns in the past three years with a minimum of 2X returns over the time period for each steel stock. APL Apollo Tubes stands out with 6X returns during this period. However, the dream run seems to have ended this year with negative YTD returns for Tata Steel and SAIL and slightly better performance by Jindal Steel and Power with 35.6% and APL Apollo tubes with 19.5% returns.

Expansion plans across the industry remain unchanged

Almost all the companies in the industry have expansion plans in progress. JSW Steel has an under-construction 5 mtpa (million tonnes per annum) brownfield project in Vijayawada. Construction activities are underway and equipment erection has commenced. The project is expected to be completed by FY24. In addition, it is expanding production capacity at Vasind, Tarapur, Punjab and Jammu & Kashmir.

Tata Steel is adding 5 mtpa capacity at Kalinganagar, which is under construction and is expected to be commissioned by FY24. APL Apollo is setting up a greenfield plant in New Raipur, which will be its largest facility spread over 400 acres. The project will commence in phases starting H2FY23, with 100% value-added products. The total capex for the project is Rs 8-10 billion, of which 80% is already incurred.

The outlook for the steel industry is bright in the long run. However, short-term issues may persist for a while. The impact of revoking the export duty on steel will play out over the next two quarters. While it is difficult to say whether the worst is over for the industry, favourable prices and improvement in global demand could help the sector bounce back from the lows that it hit in this quarter.

IDBI Capital released a Sector Update report for Metal and Mining on 07 Mar, 2025.

Software & Services

SECTOR | 23 Nov 2022

Tier-2 IT companies beat bigger players in key growth metrics

By Ketan Sonalkar

The IT industry has been one of the biggest wealth creators for investors over the last decade and helped generate a significant number of jobs, directly and indirectly. It is becoming a major sector in driving the services economy forward. While the focus is mostly on TCS, Infosys and HCL Technologies, the largest IT service companies in India, …

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The recent Q2FY23 results showed tier-2 IT companies like L&T Infotech, Mphasis, Mindtree, Persistent Systems and Coforge delivering robust results, with healthy growth in revenues as well as profits. Persistent Systems particularly stands out for its YoY growth of 51.6% in revenues and 36.0% in net profits this quarter.

Higher valuations driven by sharper growth

According to analysts who track the IT sector, tier-2 IT companies tend to get higher valuations because they behave like growth stocks and are not just necessarily defensive. If larger IT companies can grow 10-13%, a lot of tier-2 IT companies have the potential for 15-20%. The majority of these companies have a revenue growth of 17-18%, margins higher than 20%, ROE at 25%, even as some of them are hitting the billion-dollar revenue mark. The management of these companies are optimistic about achieving higher targets in future.

Talking about the Q2FY23 results, CEO of Persistent Systems, Sandeep Kalra, said, “We aim to be a $2-billion revenue company in four years." He made the statement a day after the company achieved $1 billion in annualised revenue in Q2FY23. Kalra said the company's quarterly revenues stood at $125 million three years ago. As the target is higher now, the rate of doubling will take longer, he added.

Indian technology companies were growing at a rate of 15-20% in FY22, but there was a shift-down to 10-15% in FY23. Analysts believe that these numbers are sustainable as the demand for India’s IT services is non-discretionary. It is focused on application development and maintenance of technology platforms, digitisation, etc. Demand for these services is usually not very volatile.

“We are now focused on carving an accelerated growth path to achieve a revenue of $2 billion,” said Sudhir Singh, CEO and ED, Coforge. But he declined to specify a time by which they would achieve this milestone.

Singh added that the company has plans to increase its net headcount by around 20% or 4,500 people in line with net revenue growth numbers. The company also expects the attrition rate to remain unchanged at 16.4% for the next one or two quarters.

While there has been a significant rise in employee costs of the company, Singh insisted it was a conscious choice. “The rise in employee costs has been offset and margin has been maintained because offshoring revenue increase was significant too,” he added.

Without exception, all these companies have delivered higher revenue and profit growth on YoY and QoQ basis in Q2FY23. Analysts had expected a muted quarter owing to global issues like the slowdown of the US and European economies, as these companies have client bases there. But the results proved otherwise, and there is still room for growth and adoption of newer technologies under these circumstances.

High attrition rates continue to bite

One issue that has affected the IT industry over the past few years is the attrition rate. While it has been higher in the top-tier companies at an average of 22-25%, tier-2 companies logged 17-20%.

As interest rates rise, movement to cloud services may slow

Money became costlier as central banks around the world raised interest rates to tame inflation. The global economic slowdown took hold and the expectation was that the accelerated shift to cloud services would continue at the same pace. But it looks like the rate at which businesses around the world moves to the cloud is likely to be slower than earlier expectations.

Mphasis CEO Nitin Rakesh said that the entire value chain of IT consumption is moving away from an onsite model to a off-site model, with more services being remotely managed. ''This migration is seen in every aspect of technology–on-premise-as-a-service, software-as-a-service, infrastructure-as-a-service, security-as-a-service and network & data,” he added. This shift was possible as almost everything is available on demand now. You don't need to own those assets, but can be rented, Rakesh explained.

Correction time: Mid tier and top tier tech deliver weak returns in past year

Evaluating returns of the top-tier IT companies, only Infosys and HCL Technologies have been able to deliver superior returns over a three-year period. This year, all top-tier IT companies delivered negative returns.

Margins of IT companies have come down from the highs in FY21, causing the valuations to come off quite significantly. Stock prices have corrected but the likelihood of seeing a correction of more than 10-12% in IT stocks is slim.

When we compare the year-to-date and three-year performances of tier-2 IT companies, they outshine their larger counterparts significantly. Stock prices of all the companies under consideration have more than doubled over the past three years, with Mindtree and Persistent Systems giving almost 5X returns. Year-to-date returns have been negative, but this can be considered a corrective phase after such a strong run over the previous two years.

These companies are expected to have a strong run on the exchanges over the next three to five years. The rationale is that while IT spending may be deferred by a few quarters, it would have to be done sooner or later. Given that the speed of change in technology is rapid, delay in implementing IT upgrades can have consequences. Therefore, it can be assumed that these companies will probably outperform the top-tier companies again in the next few years, even though there was a decline this year.

In Q3FY23, L&T Infotech and Mindtree will have completed their merger and will be among the top-tier IT companies in India. Whether it grows at the same pace as a merged entity will be closely tracked by investors. This also leaves room for many smaller IT companies to join the club with Mphasis, Persistent Systems and Coforge and get higher returns.

The Baseline

16 Nov 2022

What did mutual fund managers buy in October 2022?

By Ketan Sonalkar

October of 2022 saw the benchmark indices Nifty 50 rise 5.37% and Nifty Bank 6.93%. Both of these indices are now trading close to their all-time highs. With such massive gains, it was not surprising that mutual fund managers chose to add up on banking stocks with potential returns. Some other sectors that saw buying were logistics, auto ancillary and speciality chemicals.

Samvardhana Motherson - Gets boost from revival in the auto sector

Samvardhana Motherson, formerly known as Motherson Sumi, is an auto component manufacturer which supplies the global PV (passenger vehicle) industry with wiring harnesses, vision systems (mirrors) and plastic body parts.

Q2FY23 results were encouraging for the company with it registering its highest-ever quarterly revenues at Rs 18,354.8 crore. Considering the expanding market for EV components, the company has also taken steps to expand its production capacity.

In September 2022, it acquired 100% stakes in Japanese company Ichikoh Industries at an enterprise value of Japanese Yen (JPY) 5.2 billion. The transaction includes Ichikoh’s mirror business (development and manufacturing of automotive mirrors and associated products) in Japan and China, catering largely to Japanese original equipment manufacturers (OEMs)

Fund managers who bought shares of Samvardhana Motherson

Fund managers who added shares of Samvardhana Motherson to their portfolios include Hiten Shah forKotak Equity Arbitrage Fund Growth, Sailesh Raj Bhan and Kinjal Desai for Nippon India Multi Cap Fund - Growth, Kinjal Desai and Ashutosh Bhargava for Nippon India Tax Saver (ELSS) Fund - Growth, and Sailesh Raj Bhan and Kinjal Desai for Nippon India Large Cap Fund - Growth.

Zee Entertainment - Growing market share and impending merger pique interest

Zee Entertainment is one of the largest listed media companies in India. It owns and operates 49 TV channels across 11 languages and also an OTT app Zee5.

In Q2FY23, the TV network’s viewership share was 16.4%, improving from 16.1% in Q1FY23, with a revised content strategy driving viewership in Hindi and Tamil. It also continues to gain viewership in Marathi among regional channels.

Future growth triggers include higher adoption of OTT subscriptions under Zee5 and unlocking synergies with the proposed merger with Sony, for which the company has received conditional approval from the CCI. It expects the merger to be completed by Q4FY23.

Fund managers who bought shares of Zee Entertainment

Additional shares of Zee Entertainment were added by Sankaran Naren and Dharmesh Kakkad to ICICI Prudential Value Discovery Fund Growth, Mahesh Patil toAditya Birla Sun Life Frontline Equity Fund Growth, Sankaran Naren and Sharmila D’mello toICICI Prudential Focused Equity Fund Growth and Neelesh Surana and Ankit Jain to Mirae Asset Emerging Bluechip Fund Growth.

BHEL - Strength in order visibility over the next few years

BHEL, a public sector entity, is India’s largest engineering company and dominates the supply of equipment for power plants in India. The company’s products include gas turbines, generators, thermal sets, diesel shunters and other power plant equipment.

Its order inflow in Q2FY23 was robust at Rs 12,000 crore, with the announcement of the 2x660 NTPC Talcher win. Management expects revival of the thermal order pipeline with ~5 GW of expected annual order for the next five years. Order intake for the industrial segment was up 78% YoY to Rs 22,800 crore in Q2FY23, which included supply of locomotives and propulsion equipment in the transportation segment and transmission equipment among others.

Fund managers who bought shares of BHEL

Fund managers who added shares of BHEL to their schemes include Vinay Sharma and Kinjal Desai for Nippon India Focused Equity Fund - Growth, Krishan Kumar Daga and Arun Agarwal for HDFC Arbitrage Fund Wholesale Plan Growth, Atul Bhole and Laukik Bagwe for DSP Dynamic Asset Allocation Fund Regular Growth, and Venugopla Manghat and Praveen Ayathan for L&T Arbitrage Opportunities Fund Regular Growth.

IndusInd Bank - Improving performance this quarter aided by continual expansion

IndusInd Bank is part of the Hinduja Group. Its consumer finance division provides loans for vehicles, property and so on, while its corporate banking division offers a wide range of products to small and medium enterprises (SMEs) and large firms.

The bank posted a good set of numbers in Q2FY23. Its quarterly revenues were the highest ever at Rs 10,719.2 crore and net profits rose to Rs 1805.2 crore, a YoY increase of 57.4%. Gross NPAs also reduced significantly to 2.11% in Q2FY23.

IndusInd Bank continues to invest in physical and digital resources and has added 55 branches, 2,700 employees in banking and 3,650 employees in vehicles and microfinance and distribution this year.

Fund managers who bought shares of IndusInd Bank

Addition of shares of IndusInd Bank was done by Hiten Shah for Kotak Equity Arbitrage Fund Growth, Priya Ranjan and Rahul Baijal for HDFC Top 100 Fund Growth, Priya Ranjan and Anil Bamnboli for HDFC Balanced Advantage Fund Growth, and Atul Penkar and Dhaval Gala for Aditya Birla Sun Life Tax Relief.

Canara Bank - Part of the PSU banks revival and growth story

Canara Bank is the third largest public sector bank in India. Among PSU banks, it has had a stellar run on the stock exchanges with its price nearly doubling in the past five months from the lows it made in June 2022.

Like many other PSU banks, Canara Bank also saw a significant improvement in its business over the past few quarters. In the latest quarter, Q2FY23, its revenues grew to an all-time quarterly high of Rs 27,358 crore, a YoY increase of 14.5%. Its net profit was also the highest in the past 10 quarters at Rs 2,705.6 crore, a YoY increase of 151.8%. Meanwhile, gross NPAs fell to 2.19% in Q2FY23 from 3.21% in Q2FY22.

Fund managers who bought shares of Canara Bank

Buying interest for Canara Bank came from Aniruddha Naha and Vivek Sharma forPGIM India Midcap Opportunities Fund Regular Growth, Sailesh Raj Bhan and Kinjal Desai Nippon India Multi Cap Fund - Growth, Mitul Kalawadia and Anand SharmaICICI Prudential PSU Equity Fund Regular Growth, and Vinay Sharma and Kinjal Desai Nippon India Banking & Financial Services Fund Growth.

RBL Bank - Bouncing back after a few lackluster quarters

RBL Bank, a private sector bank with a nationwide network of 435 branches, offers various services, including corporate and institutional banking, commercial banking, retail banking, agricultural development banking and financial market access.

It reported a 5.5x YoY jump in net profit to Rs 200 crore in Q2FY23, aided by a 63% decline in provisions. There was a pick-up in loan growth, up 12% YoY and 4% QoQ to Rs 62,900 crore. Within the retail lending segment, housing loans improved 35% QoQ and the MFI portfolio rose 22%. Credit cards grew at a steady pace of 4% QoQ. The share of credit cards stands at 23% of total loans.

RBL Bank has plans to launch its loan products for two-wheelers, used cars and Gold in Q3FY23. Overall, the bank is targeting a loan growth of 15% in FY23.

Fund managers who bought shares of RBL Bank

Fund managers who added shares of RBL include Kinjal Desai and Ashutosh Bhargava toNippon India Small Cap Fund - Growth, Kinjal Desai and Anand Gupta to Nippon India Arbitrage Fund Growth, Sonam Udasi and Abhinav Sharma to Tata Flexi Cap Fund Regular Growth, and Sanjeev Sharma and Vasav Sahgal to Quant Small Cap Fund Growth.

Delhivery - Path to profitability on the horizon

Delhivery, the largest fully-integrated logistics player in India by revenues, provides logistics services, including express parcel, e-commerce delivery and heavy goods delivery. Its network includes 122 gateways, 21 automated sort centres and 93 fulfilment centres.

In Q2FY23, its revenue from services was Rs 1,796 crore, up 22% YoY from Rs 1,474 in Q2FY22. Loss after tax in the same period narrowed down to Rs 254 crore from Rs 643 crore in Q2FY22. Overall, the company’s adjusted EBITDA loss reduced to Rs 125 crore in Q2FY23 on a sequential basis from Rs 217 crore in Q1FY23. As chances of profitability improve, there is growing interest in the stock from domestic institutions.

Fund managers who bought shares of Delhivery

Shares of Delhivery were added to respective portfolios by R Srinivasan and Mohit Jain for SBI Flexicap Fund Regular Growth, Priya Ranjan and Roshi Jain for HDFC Flexi Cap Fund Growth as well asHDFC Focused 30 Fund Growth, and Harish Bihani and Sharmila D’mello for ICICI Prudential Transportation and Logistics Fund Regular Growth.

Biocon - Acquisitions and international deals could improve company’s health

Biocon is a biopharmaceutical company. It develops therapy for chronic diseases such as autoimmune disease, diabetes and cancer. It has developed and introduced novel biologics, biosimilars, differentiated small molecules and affordable recombinant human insulin and analogues into the market.

Biocon via its subsidiary, Biocon Biologics, will acquire the global biosimilars portfolio of Viatris. It expects the deal with Viatris to close in the second half of the current financial year. Through this deal, Biocon will gain Viatris’ global biosimilars business, whose revenues are estimated to be $1 billion next year, along with its portfolio of in-licensed biosimilar assets. This is an important deal for Biocon because it gives the Bengaluru-based company access to Semglee, an insulin brand.

The company also announced signing a strategic out-licensing agreement with Japanese pharmaceutical company Yoshindo Inc. for commercialising two of its pipeline biosimilar assets in the Japanese market. The company is in talks with Japanese regulators for data on two clinical assets and looks to commercialise the same across different markets.

Fund managers who bought shares of Biocon

Buying interest in Biocon was seen from Hiten Shah for Kotak Equity Arbitrage Fund Growth, Neelesh Surana for Mirae Asset Tax Saver Fund -Regular Plan-Growth, Sailesh Jain for Tata Arbitrage Fund Regular Growth, and Neeraj Kumar and Arun R for SBI Arbitrage Opportunities Fund Regular Growth.

Prestige Estates - Expanding footprint across the country

Prestige Estates is India’s largest developer in terms of booking value for FY22. Most of their projects are executed in Bengaluru and Hyderabad. The company has entered into Mumbai and NCR as well and is targeting aggressive growth in these geographies.

Prestige Estates has reported pre-sales in value terms at Rs 3,511 crore in Q2FY23, up 66% YoY. In volume terms, bookings increased to 4.55 million square feet (msf). Collections rose 68% YoY to Rs 2,603 crore in Q2FY23 and it launched five projects spanning 7.39 msf this quarter.

Fund managers who bought shares of Prestige Estates

Additions to respective schemes were made by Neelesh Surana and Ankit Jain to Mirae Asset Emerging Bluechip Fund Growth, Ankit Jain to Mirae Asset Midcap Fund Regular Growth, Neelesh Surana to Mirae Asset Tax Saver Fund -Regular Plan-Growth and Roshi Jain and Priya Ranjan toHDFC TaxSaver Growth.

Anupam Rasayan - Chemical company benefiting from China+1 factor

Anupam Rasayan is engaged in custom synthesis and manufacture of life science-related speciality chemicals in India.

In Q2FY23, its operating revenue was Rs 31.07 crore, a YoY growth of 25%, while EBITDA was Rs 89.8 crore, a YoY growth of 29%. It also raised around Rs 500 crore through Qualified Institutional Placement (QIP) for growth capex in Q2FY23. Proceeds will be utilised for building multipurpose plants in existing units at Sachin and Jhagadia. A cash balance of Rs 192.1 crore in H1FY23 would be sufficient for the planned capex.

Fund managers who bought shares of Anupam Rasayan

Fund managers who added shares of Anupam Rasayan include Sanjeev Sharma and Vasav Sahgalfor Quant Active Fund Growth, Mahesh Patil and Dhaval Shah for Aditya Birla Sun Life Multi-Cap Fund Regular Growth, Satyabrata Mohanty for Aditya Birla Sun Life Equity Advantage Fund Growth, and Sandeep Manam and Akhil Kalluri for Franklin India Smaller Companies Fund Growth.