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The combination of AUM growth and yield decline for asset management companies (AMCs) has led to moderate earnings growth for most AMCs over the last 5 years (aggregate EBITDA CAGR of 8.2% for listed AMCs between FY18-23). However, the current phase promises a better balance considering that stock AUM with upfront commissions may be much lower now in the system while better capital market may lead to an increase in equity mix (already seen in H1CY23).

Profitability across NBFCs-HFCs remained robust during the past five years despite covid as reflected in RoA for select HFCs witnessing steady improvement to 2.9% by FY23 vs 1.8% / 2.2% / 2.4% / 2.4% / 2.7% during FY18 / FY19 / FY20 /FY21 / FY22, respectively.

Indian exchanges have reported a strong Jul/Aug’23. This is evident from growth in equity derivatives (over INR 3trn ADTV in both the months at NSE), cash (INR 766/727bn ADTV in Aug/Jul’23) and robust commodity options in MCX (adjusted total volumes taking futures and 40% of options for revenue equivalence at INR 536/478bn for Aug/Jul’23 compared to INR 294bn/370bn in FY22/23).

The payments ecosystem remains strong in terms of credit card (count, spends, receivables per card), monthly Paytm data (GMV, merchant addition, credit distribution) and UPI data (more than 10bn transactions in Aug’23). SBI Cards (SBIC) added 0.21mn credit cards in Jul’23, while Paytm added 0.5mn subscription-paying merchants in Aug’23. Overall credit cards (CC) in force is closing on 90mn while credit/credit card on UPI is also gaining traction.

India’s derivatives’ volumes have been surprising on the upside for past many years. This is best captured by the fact that derivative to cash volumes in NSE as of Jul’23 is 421 times vs 36 times of Germany (closest in that metric) in Jul’23. This has been accomplished by a structural trend of increasing penetration in tier 2/3 cities with rising digital brokers along with increasing financialization and expanding retail penetration.

Collection efficiency across MFIs under our coverage remained robust during FY23, sustained in Q1FY24 and we believe it would remain robust going ahead despite 4 major state elections – Chhattisgarh & Madhya Pradesh (MP) in Nov’23, and Rajasthan & Telangana – in Dec’23.

With rising volumes in derivatives, exuberance about the related revenue prospects must be tempered with the evolving change in option premium rate as a percentage of notional turnover. With rise in derivative volumes, a large portion of the contracts are close to expiry, which means the premium yield is low.

MFI players witnessed sharp recovery in profitability during FY23 as reflected in average RoA at 3% vs <1% in FY22 for most players. Profitability was driven mainly by credit cost moderation and improved core business performance, while higher direct assignment income and fees & commission also boosted earnings.

Payments ecosystem remains strong in terms of credit card (count, spends, receivables per card), monthly Paytm data (GMV, merchant addition, credit disbursement) and UPI data (transactions/value up by 59%/46% YoY to 9.3bn/INR 14.8trn in Jun’23).

Indian exchanges reported a strong July 2023. This is evident from growth in equity derivatives (more than INR 3trn ADTV), cash (back to more than INR 700bn ADTV) and robust commodity options in MCX (adjusted total volumes taking futures and 40% of option for revenue equivalence at INR 478bn for Jul’23 vs INR 294bn/370bn in FY22/23).