Articles by Maitreyi Karn

SECTOR | 25 Nov 2022
Private sector banks deliver strong results, analysts expect good news to continue
By Maitreyi Karn

The banking sector has been the talk of the town after it posted better-than-expected results in Q2FY23 amid the Reserve Bank of India’s rate hikes and increasing inflation. While the rate hikes have been a cause of worry for most companies as they increase finance costs, and affect consumer demand, banks are not complaining. Bank stocks are up as higher …

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ICICI Securities Limited released a Sector Update report for Banks on 24 Nov, 2022.
Telecom Services    
SECTOR | 02 Nov 2022
Analysts wave a green flag as Airtel, Jio gear up for 5G
By Maitreyi Karn

All of us increasingly depend on a digital world where a flood of information is available at our fingertips. In multiple surveys, people even rate phone connectivity and the internet as “as important as food, water and shelter”. Telecom players Bharti Airtel, Jio and Vodafone Idea have played a major role in India in building the underlying infrastructure. Now, the …

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Trendlyne Analysis released a Sector Update report for Telecom Services on 28 Nov, 2022.
Deepak Nitrite Ltd.    
13 Oct 2022
Deepak Nitrite pulls through Q1 despite high costs, but capacity expansion is key going forward
By Maitreyi Karn

The Indian chemicals sector has been doing fairly well. The sector is up 12% in the past 90 days. Since the China+1 strategy (companies diversifying their business in countries other than China) and the shift of Indian companies focus on reducing import dependency on chemicals, this sector is seeing interesting changes. The chemicals sector is likely to clock a 9.3% …

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Deepak Nitrite Ltd. has an average target of 2092.67 from 3 brokers.
TVS Motor Company Ltd.    
27 Sep 2022
TVS Motor Company expects a sparkling festive season, but exports need time to bounce back
By Maitreyi Karn

The auto sector has been reeling under many pressures. First, it was hit by a semiconductor shortage, followed by geopolitical tensions that intensified supply issues. Although pandemic restrictions waned out after February, inflationary pressures and low demand affected the retail sales of the auto sector. This affected earnings and revenue for the companies in Q3FY22 and Q4FY22, before recent green …

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TVS Motor Company Ltd. is trading above it's 200 day SMA of 838.8
Tata Chemicals Ltd.    
12 Sep 2022
Tata Chemicals' growth steadies as soda ash demand turns favourable
By Maitreyi Karn

This chemicals stock has been rising on the bourses after reporting a 45% YoY increase in net profit to Rs 381 crore in Q1FY23. The company’s revenue increased 49% YoY in the quarter. Profits beat Trendlyne’s Forecaster estimates by 44%. Despite high commodity prices since the start of the year, Tata Chemicals has managed to navigate around it and report …

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Number of FII/FPI investors increased from 363 to 369 in Sep 2022 qtr.
Hero MotoCorp Ltd.    
25 Aug 2022
Despite headwinds, Hero MotoCorp management is bullish on growth
By Maitreyi Karn

Although Hero MotoCorp saw a recovery in its numbers from September 2021, its earnings are on a downtrend. Its Q1FY23 net profit rose 71% YoY to Rs 624.5 crore but fell marginally (0.4%) QoQ. The profit is down since December 2021 but this hasn’t dampened the enthusiasm of the management. Despite headwinds, cost inflation, and supply-chain issues, the company has …

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Number of FII/FPI investors increased from 825 to 849 in Sep 2022 qtr.
SBI Life Insurance exceeds expectations in a seasonally weak quarter
By Maitreyi Karn

Investors were pleasantly surprised by  SBI Life Insurance’s  Q1FY23 numbers, especially because the first half of the financial year is seasonally weak for the company’s business. Customers usually buy insurance products either when the calendar year ends in December, or in time for tax planning when the financial year ends in March. According to the management, SBI Life’s partnership with Indian Bank, UCO Bank, South Indian Bank, Punjab & Sindh Bank and YES Bank contributed 3% to the total individual new business premium growth. Individual new business premium growth is from new premiums from products sold to individual customers. 

SBI Life’s  Q1FY23 net profit rose 17.8% YoY to Rs 262.9 crore. The company’s gross written premium (new business premium + renewal premium) rose 35% YoY to Rs 11,350 crore with the value of new business premiums (VNB) increasing by 130% YoY to Rs 880 crore. Its persistency ratios improved across the 25th month (78.7%), 49th month (70.3%) and 61st month (50.3%) time periods in Q1FY23. 

Better product mix drives margin and earnings, says management 

SBI Life’s management attributes the growth in value of new business margin (VoNB) to a better product mix. 

New products are paying off

According to the management, the launch of its new products (Smart Annuity Plus, Platina Assure and Smart Platina Assure) in the ‘non-participating’ segment in March is bearing results in Q1FY23. “This is a product that we found customers preferred and wanted,” said SBI Life’s Managing Director and CEO Mahesh Kumar Sharma. “Our Smart Platina Assure (product), which we launched earlier, was also doing very well.” 

This segment is important as it adds to margin growth in life insurance companies. Non-participating products do not require life insurance companies to share any profits or pay dividends to policyholders. This makes them more lucrative products to sell to life insurers.

The shift in product mix towards non-participating products is bearing good results. SBI Life’s VNB margin improved in Q1FY23. In terms of annual premium equivalent (total value of regular or recurring premiums + 10% of new single premiums), new products in the non-participating segment add up to 30% of the mix. 

Although the management does not have a specifically targeted product mix, there is a clear shift towards protection (insurance cover on the loss of income) and non-participating products. 

One of the reasons to continue with this product mix is that it can safeguard against interest rate risk effectively in case of frequent changes in interest rates. This helps in maintaining the cash flow without denting the operations of the company. 

In its recent earnings call in Q1FY23, the management says that the contribution of non-participating products should rise to 25-30% as there is a growing trend among other segments as well. “But then the value that I deliver will continue to grow because we are looking at good growth going forward, upwards of 25% growth in premiums,” Sharma said.

With the volatility in the stock markets, the demand for unit-linked insurance products (ULIP) is on the lower side. Yet, SBI Life managed to grow its new business premium in ULIPs by 42% YoY. Since the sale of this product is mostly through its ‘bancassurance’ channel - one of its largest networks of selling insurance through the State Bank of India, the sale of ULIPs is likely to remain high. The management also said in the Q1FY23 earnings call that the sale of ULIP products through the agency channel is robust. 

SBI Life performed better than its peers in ULIP sales, according to a report from Yes Securities. However, the management is not sure how sustainable this will be in the coming quarters given the market conditions. 

Despite robust growth, uncertainty on reserves loom

High claims due to the pandemic meant life insurers need to maintain high reserves. Despite getting out of Covid waves at the beginning of 2023, SBI Life continues to maintain high reserves for contingencies. Its reserves in Q1FY23 increased 11.2% YoY to Rs 11,760 crore. The management admits that hospitalization and mortality rates are down but they are unsure about writing back the reserves. The Managing Director & CEO of SBI Life Mahesh Kumar Sharma says that the vaccination programs have helped. But he didn’t give a timeline for rolling back the reserves and using these funds for other operational purposes.

SBI Life’s solvency ratio is at 221%, much higher than the Insurance Regulatory and Development Authority of India (IRDAI)  mandate of 150%. The solvency ratio is a measure of a life insurer's ability to fulfil its short and long-term liabilities. 

With impressive results brokerages like YES Securities, Motilal Oswal, and BOB Caps, recommend a ‘Buy’ rating on the stock. They believe a shift in product mix towards non-participating products will drive margins and sustain growth given the constant shift in interest rates. Motilal Oswal expects VNB margins to go up by 340 bps in FY23. It also expects the return on embedded value to increase to 20.4% in FY23 and over 18.7% in FY22. Trendlyne’s Forecaster shows a consensus recommendation from 28 analysts recommending a ‘Buy’ on the stock.

Number of FII/FPI investors increased from 729 to 802 in Sep 2022 qtr.
State Bank of India    
22 Feb 2022
State Bank of India shines, eyes growth in corporate loans
By Maitreyi Karn

State Bank of India has outperformed in Q3FY22 with growth in profits and stabilized asset quality. The largest public sector bank braved through the second wave of pandemic and seems to have emerged stronger after this quarter. With economic activity picking up and ‘Omicron’ less deadly than previous waves, the bank is set on executing its plans of improving asset quality, increasing loan disbursements and maintaining its double-digit RoE growth of 12% in FY22. 

The bank’s profit surged 62% YoY to Rs 8,431 crore while operating profit rose 7% to Rs 18,522 crore. This was aided by an increase in fee income to Rs 5,747 crore (up 7% YoY). The bank’s advances grew 8% to Rs 25.6 lakh crore, while deposits rose 9% YoY to 38.4 lakh crore. Asset quality improved as gross NPAs fell to 4.5% (vs 4.7% in Q3FY21). Retail loans continue to dominate the AUM mix with personal loans having maximum growth (29% YoY) in Q3FY22.

SBI’s net profits rise, though NII and NIMs fall

The rise in the bank’s net profit was helped by a 6% YoY increase in net interest income (NII) to Rs 30,687 crore. A 17% YoY fall in provisions to Rs 10,090 crore, also aided net profit growth.

The YoY rise in NII is because of a rise in fee income (7% YoY) to Rs 5,747 crore. Compared to peers, growth in fee income is healthy, but looking at the trend since Q3FY21, the bank has enough scope to grow considering its peers are clocking double-digit growth. ICICI Bank’s fee income grew 19% YoY, HDFC Bank grew 17% and Axis Bank’s fee income grew 15%.

A rise in interest expenses (3% YoY) to Rs 38,991 crore led to a sequential fall in NII. Net interest margin improved marginally by 3 bps YoY to 3.15%, but fell 9 bps sequentially. The QoQ decline is because of a decline in domestic NIMs by 10 bps to 3.4% and a fall in interest earnings on tax refund.

The company’s Q2FY22 NIMs included interest on tax refund as an additional benefit leading to NIMs rising 32 bps to 3.24%. The management was prepared for the drop in the percentage this quarter and hence does not count it as a hurdle in the growth.

SME loans grow, but retail continues to dominate the loan mix

According to a report by Kotak Securities, retail and SME loans will be the driving factors in loan growth as these loans are of small ticket size. For now, corporate loans are yet to see a rebound in terms of growth. However, SBI is planning to shift its focus to corporate loans to utilize its large reserves worth around Rs 2 lakh crore.

Looking at SBI’s AUM mix, maximum loans lie with the retail (42%) and corporate sectors (35%). Corporate loan AUM saw a marginal fall in growth by 1% YoY to Rs 7.83 lakh crore from Rs 7.88 lakh crore in Q3FY21. The management is also focused on growing the retail and SME segments as it sees robust demand, going into FY23. In Q3FY22, retail AUM grew 15% YoY to Rs 9.5 lakh crore while the SME segment grew 5% YoY to Rs 3.1 lakh crore.

In terms of loan mix, there was a slight increase in SME loans to 14% in Q3FY22 from 13% in Q2FY22 On a year-on-year basis though, the SME loan mix stayed the same. SME loans grew because of increased lending through ECLGS (Emergency Credit Line Guarantee Scheme) line. 

Home loans constitute 57% of the total retail mix. Home loan AUM stands at Rs 5.4 lakh crore in Q3FY22 with a growth of 11% YoY. According to a report by ICICI Securities, retail loan growth is mainly because of growth in home loans. Also with construction picking up, rising demand for new homes will lead to demand increasing for home loans. 

Xpress credit (personal loans for salaried employees) grew the highest by 29% YoY to Rs 2.28 lakh crore followed by personal gold loans growing by 26% YoY (Rs 22,063 crore). Xpress credit also saw an increase in the AUM mix to 24% in Q3FY22 from 21% in Q3FY21. An improvement in retail loans will help the bank improve its NII. 

Like its peers, even SBI saw a fall in auto loan disbursements. AUM for auto loans grew marginally by 2% YoY to Rs 77,437 crore. Auto loans in the AUM mix are also seeing a marginal decline from 9% in Q3FY21 to 8% in Q3FY22.

Asset quality improves but a mixed trend follows on a QoQ comparison

The asset quality of the bank is improving steadily as gross NPAs fell 27 bps YoY to 4.5%. This is because of adjusting bad loans write-offs worth Rs 4,200 crore. However, net NPAs increased 11 bps YoY to 1.34%. When compared sequentially gross and net NPAs fell 40 bps and 18 bps, respectively. The management needs to pay more attention on improving its asset quality on both YoY and QoQ trends.

When we look at segment-wise breakup for gross NPAs, the reason for total gross NPAs to fall becomes clearer. NPAs fell across all loan segments like corporate, retail, and SME for SBI. This is a positive trend indicating that the bank’s asset quality not just stabilized in Q3FY22 but also strengthened.

Operating profit increased 7% YoY to Rs 18,522 crore because of an increase in operating income by 3% to Rs 39,361 crore and a marginal increase in operating expense by 1% to Rs 20,839 crore. This is because of flat growth of operating income sequentially and a 2% QoQ fall in operating expenses to Rs 20,839 crore.

Overall, SBI’s loan growth looks robust. The management stays committed to delivering 15% RoE on a sustainable basis. Credit costs have subsequently reduced 11 bps YoY to 0.49% in Q3FY22. Analysts from Axis Direct and Motilal Oswal expect the bank’s credit cost to remain at these levels. Analysts from Axis Direct suggest that if credit costs remain at these levels, the bank’s commitment to delivering on double-digit RoE will sustain for longer periods.

The bank’s loan book is healthy. Its market share in home loans and auto loans is over 20%, indicating good consumer sentiment in these sectors for the bank to tap into. Retail loans will continue to grow and corporate loans might see an increase in demand as the bank plans to target demand in this segment as well.

State Bank of India has an average target of 696.85 from 14 brokers.
HDFC’s growth steadies, looks to meet upcoming demand for loans
By Maitreyi Karn

Housing Development Finance Corporation or HDFC defied expectations and posted better than expected results in Q3FY22. Q3 results marked a recovery after the business hit a slump in Q1FY22 following the second wave of Covid. Gross NPAs fell 65 bps YoY to 2.32% while interest income improved 3% YoY to Rs 11,055 crore. HDFC’s operating expenses also fell marginally by …

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Housing Development Finance Corporation Ltd. is trading above all available SMAs
Axis Bank catches up with peers in Q3
By Maitreyi Karn

After lagging behind its peers in the last couple of quarters, Axis Bank reported better than expected numbers in Q3FY22. The numbers surpassed expectations of most brokerages like Motilal Oswal, Morgan Stanley, ICICI Direct, among others. The management had a sharp focus on certain segments like farm loans, microfinance, credit cards, and this focused growth has driven Axis Bank’s robust numbers for this quarter.

Axis Bank’s net profit rose 224% YoY to Rs 3,614 crore in Q3FY22. This is because the bank worked hard to restructure its asset books. With this, the loan loss provisions reduced to Rs 790 crore in Q3FY22 from Rs 927 crore in Q2FY22. Lowering provisions is also one of the major reasons for growth in net profit. Provisions fell 64% YoY to Rs 1,335 crore.

A rise in net interest income (NII) is another major reason for Axis Bank’s net profit rising during Q3. NII grew 17% YoY to Rs 8,653 crore and NIM improved to 3.53% in Q3FY22. Growth in loan assets under management (AUM) led by mortgage loans, small business banking (SBB), and rural loans also led to rise in NII. NIMs still have a scope of improvement as Q3FY21 numbers were higher than the current quarter. The bank’s improvement in NIM from Q2FY22 indicates it will build on in FY22-23.

The management gives two major reasons citing NIM growth. One, they believe a change in the loan mix caused advances to increase, recalibrating the growth of interest income. Second, the fall in cost of deposits to 3.60% in Q3FY22 from 4.09% in Q3FY21 also led to an expansion in NIMs.

Fee income also contributed to the growth in profit and interest. Fee income grew 15% YoY to Rs 3,344 crore in Q3FY22. A major contribution came in by growth in retail fees by 19% YoY. Retail fees constituted 63% of total fee income in Q3FY22. The management said fee income was subdued in Q3 as the bank reduced fees on retail liability products like credit cards, debit cards, etc. impacting its overall fee income. This is however a one-time impact and the next quarter is probably going to see higher growth in fee income.

Operating profit sees muted growth on both YoY and QoQ basis. The bank saw a 1% YoY rise and a 4% QoQ increase of operating profit, at Rs 6,162 crore. This muted growth is because of a rise in operating expenses, specifically, employee costs, by 10% QoQ to Rs 19.4 crore in Q3FY22. This rounded up for a muted total income growth of 15% YoY to Rs 21 crore.

Operating expenses might continue to rise in FY23 as well, as the management has well-rounded plans for future expenses. The management plans to spend 41% on digital and technological innovations. 21% is for improving collection expenses so that the bank can further reduce credit costs.

Loan segmental growth was focused, retail loans contributed the maximum

Axis Bank’s total AUM grew 17% YoY to Rs 6,649 crore in Q3FY22. The bank is focused on growing its SME segment AUM as it believes that as the Indian economic growth picks up, this segment will also grow, and demand for the loans will increase. Right now, the SME segment’s AUM is small at Rs 670 crore, but it grew at a fair clip at 20% YoY. Growth in corporate disbursements by 13% YoY to Rs 2,295 crore led to AUM growth. This was because the bank was focused on lending to better-rated corporates with 93% of the increase in sanctions of corporate loans to those rated A- and above.

The bank’s advances and deposits rose because of the rise in credit in retail and SME segments by 18% and 20% YoY. Total advances for Q3FY22 increased by 14% YoY to Rs 6.6 lakh crore and deposits increased by 18% YoY to Rs 7.7 lakh crore. The share of secured retail loans advances was nearly 80%. The management is now focused on growing the unsecured retail loans segment to generate better yields in FY22.

Out of the total AUM, retail loans dominate the mix being the highest contributor along with the highest growth. Retail loans grew by 18% YoY to Rs 3,675 crore. Home loans, loans against property, small business banking (SBB), and rural loans have seen good growth in Q3FY22.

The bank’s management said that rural loans growth was driven by an increase in demand in farmer finance, gold loans, farm equipment finance, rural enterprise, and rural MSME lending in Q3FY22. Rural opportunity is large and the bank’s rural loan segment’s AUM currently stands at 13% of its retail AUM. Rural loans grew 6% YoY to Rs 46,728 crore. This number is higher than the Q3FY21 number of Rs 44,099 crore. 

Axis Bank saw a rise in demand for home loans in Q3FY22 as demand for quality infrastructure projects rose in the real estate sector. With increased spending on buying new houses, demand for home loans is likely to increase. In the earnings call with the management, they said home loans disbursements went up 86% YoY. The bank plans on leveraging this opportunity in the coming quarters. Loan against property (LAP) grew by 18% YoY to Rs 39,080 crore.

Credit card AUM fell 16% YoY to Rs 15,483 crore. However, the management says that credit card disbursements increased by 40% QoQ in Q3FY22. In Q3FY22 credit cards, AUM stands at Rs 15,483 crore compared to Rs 14,086 crore in Q2FY22. The bank is trying to gain market share in this segment by entering into various partnerships to tap unreached markets.

Falling NPAs stabilize the asset quality of the bank in FY22

Axis Bank started FY22  with a higher NPA of 3.85% (gross NPA) and 1.2% (net NPA) because of a rise in slippages. Over the next few quarters, the bank worked hard to shore up its asset quality as gross and net NPAs fell moderately. Gross NPAs declined 27 bps YoY to 3.17% and net NPAs declined 17 bps YoY. Analysts from Geojit Paribas, LKP Securities, HDFC Securities, understand that this is because of higher recoveries and lower slippages. Gross slippages reduced to Rs 4,100 crore in Q3FY22. Total slippages were reduced to Rs 812 crore, a fall of 2.6% YoY. Reducing slippages and upgrade of loans from NPAs to bounce back (BB) category helped in reduction of NPAs for the bank. 

The write-offs were reduced to Rs 1,700 crore in Q3FY22 from Rs 4,257 crore in Q3FY21. The restructured pool was sequentially higher at Rs 4,640 crore from Rs 4,342 crore in Q2FY22. 

The bank has come a long way in its growth in terms of asset quality and credit aspects. Analysts are positive on future growth parameters, given the asset quality of the bank remains stabilized. The path for the bank is clear according to management as they are focusing on not only operating metrics but also planning segmental loan growth in a sequenced manner. The management says they are keen to grow their retail loans and business banking loan segment to improve their NIM and also reduce credit costs in FY22-23. 

Edelweiss expects a strong push in digitization will lead to a lowering of operational expenses in FY23. This is in line with the management’s plans of infusing 41% into digital and technological spending.

The bank’s improving margins and strong asset quality are because of reduced slippages and NPAs. This gives an overall positive outlook on the performance. This reflects well on the RoE (return on equity) as this has improved 9 bps YoY to 14.2% and RoA (return on assets) with 82 bps YoY growth to 1.3%. The bank’s long-term RoE is targeted at 18%. With committed and well-planned strategies in place, the bank currently has a competitive edge with respect to its peers.

Axis Bank Ltd. is trading above all available SMAs