NBFCs Overtakes Bank Stocks in FY2024; Here’s Why!

The Non-Banking Financial Companies (NBFCs) are having a gala time in the current financial year. In the past three months all the leading NBFCs barring the giant HDFC have generated returns greater than 20%. NBFC Stocks which underperformed the Banks in the FY2023 have started to outperform them now.

So what has changed in this short span of time? What has led to this increased optimism in NBFC Stocks?

A significant reason has been the anticipation of interest rates peaking out and a potential cuts in near future. But how do we quantify the market’s expectations of interest rates peaking out? By looking at the Government Bond Yields. As can be seen from the below chart after a long rise, the government yields peaked out and are on a downward trend now. Simply speaking a falling yields indicates a market’s expectations of a Dovish stance by RBI and vice versa.

Okay so we now understand that the market does not expect the repo rates going higher but why is this good for the NBFCs?

A NBFC borrows money majorly from four sources ~ Banks, Non-Convertible debenture (NCDs), commercial papers and Deposits. Out of these four - Bank borrowings and NCDs are the two biggest sources.

Smaller sized NBFCs typically rely more on Bank borrowings and the bigger NBFCs with a better credit ratings diversify into NCDs. Mahindra and Mahindra Financial Services one of the biggest NBFCs borrows 40% from Banks and 32% from NCDs. Whereas Fusion Micro Finance a smaller NBFC borrows 94% from Banks and 7% from NCDs.

NBFCs borrow money from Banks either on a fixed rate or floating rate. A fixed rate as the name suggest will have a fixed interest payments till the end of the loan tenure. A floating rate on the other hand are typically linked to MCLR and Repo rates. Thus in changing rate environment the floating rates would also change. The RBI in order to tame the rising inflation have hiked the interest rates by 250 bps in a span of one year. This has resulted in the floating rates going up and thus increasing the cost of funds for NBFCs.

But now the expectations of repo rate peaking out and a possibility of cuts in the near future, the worst of the margin pressure are behind the NBFCs. All the NBFCs would benefit from this changing environment but what kind of NBFCs would benefit the most? The ones with a higher share of floating rates. This same lot has been the most impacted with rates moving higher and would also be the most relieved when the repo rates trimming would begin.

It is also important to note that under the floating rates - repo linked loans gets priced in immediately whereas the MCLR linked loans gets priced in with a lag of few months. Thus, the cumulative floating rates do not go up or down immediately with changing repo rates. But do follow its trajectory eventually.

This is how the changing repo rates impacts the borrowing costs of NBFCs. Also, post the big HDFC Bank and HDFC Ltd merger the competition in the wholesale borrowing market would ease out as HDFC Ltd wouldn’t be borrowing anymore. Further easing the pressure on borrowing costs.

However, It’s my humble request to understand that merely the cost of funds improving does not mean “All is well” for the sector – apart from the cost of funds, other criteria such as Credit growth, Asset quality, Prudent Management, Asset Liability management etc. are of equal importance to pick a good NBFC.

Technical Analysis:

Nifty took 100 days to break its previous all-time high of 18,887.60 made on 1st December, 2023. The fall from the high of 18,887.60 made on 1st December, 2022 to the low of 16,828.35 made on 20th March, 2023 took 109 days. The rise was faster than the fall and this is a sign that the overall bullish momentum is intact and chances of a major correction at this point is unlikely. Nifty ended the week with three consecutive higher close on the daily chart. The Foreign Portfolio Investors (FPIs) continued to build long positions in Index futures as indicated by the Long-Short Ratio. The India VIX, known as the fear indicator, fell 3.87% this week, giving major comfort to the bulls. The Future Open Interest (OI) indicated buildup of fresh positions as the price rose 3.55% and the open interest (OI) went up by 7.82% in the recently concluded June Series expiry. The results season is round the corner, which can drive the markets next few weeks. The Relative Strength Index (RSI) broke the lower swing high structure, which is a huge positive for the Index. The negative divergence in RSI since the 15th of May, kept the market participants on tenterhooks. The maximum put open interest for Nifty is placed at 19,000 Strike, which will act as a strong support for Nifty while 19,200 is likely to act as an immediate resistance. The option activity at 44,500 Strike will set the tone for the future movement in Bank Nifty.

Nifty50 has the Firepower to Skyrocket to New Highs!

At the beginning of the year, I told you that FIIs will make a solid comeback to D-Street.

After remaining net sellers in January and February’23, FIIs have made net investments of more than Rs. 90,000 crores in the last 4 months. Such was the buying spree that FIIs were not net sellers even for a single day in May’23. Despite the reopening of the Chinese economy, they have not seen a fruitful revival as anticipated. This led the FIIs to come back to India.

We had also mentioned that there were only 3 instances since the calendar year 2002 when FIIs withdrew their money and in the immediate next year, they invested aggressively and Nifty50 delivered a fantabulous double-digit return.

Year FII Net Investments (Rs. In Crore) Nifty Returns (%)
Till June 22, 2023

Source: Ace Equity

Well, as it turns out, FIIs have already net invested nearly half of what they withdrew last year. However, the returns are only 3% on a year-to-date (YTD) basis.

Now does the Nifty50 have the mojo to soar to new heights?

For FII’s to continue their buying spree in India, they would look at India’s investment attractiveness. Our country’s strong growth potential, commendable financial results and political and macro-economic stability already make it a wonderful opportunity for FIIs to sustain their inflows.

The growth potential of India can be seen in its Gross Domestic Product (GDP) growth rate which came in at 6.1% for the last quarter of the previous fiscal. In fact, even the Central Bank had predicted the Q4FY23 GDP growth rate to be 5.1%. This growth was also witnessed by Indian Inc in their financial results.

Furthermore, the Indian government has also played a crucial role in bolstering investor confidence. Its commitment to policy continuity, structural reforms, and a business-friendly environment has instilled trust among both domestic and international investors. The resulting stability and predictability have created an attractive investment climate, leading to heightened market participation.

Amidst all the recessionary trends coupled with high inflation across the world, India’s macro-economic stability has shown tremendous resilience. India’s Consumer-Price Index (CPI) based inflation hit a 25-month low of 4.25% in May’2023, which is now near RBI’s comfort zone.

Easing of inflation remains very crucial for the markets as central banks pause the rate hikes. Such a pause or cut in the rates might boost the market sentiment making investors turn to equity from the bond markets. It is one of the few reasons why FIIs have flown back again to the Indian markets.

Further, the government spends increase substantially towards capex and infrastructure development in the pre-election years. With 2023 being the pre-election year and the private and government capex already seeing an uptick, the topline and bottom line of Indian Inc’s are expected to witness a surge. Moreover, an easing of inflation and a cut in interest rates would reduce the raw materials and interest costs, further improving their financials.

As can be observed from the above chart, the Sensex has given positive returns in 7 out of the 10 pre-election years with the average return being nearly 11%. 2023 is also a pre-election year. With more than 6 months to go in 2023 and the indices already scaling new lifetime heights, there is a strong possibility of this pattern recurring in 2023. Investors can utilize dips in the markets to enter fundamentally strong stocks of their choice.

Technical Analysis:

The Nifty50 failed to cross the all-time high of 18,887.60 made on 1st December, 2023 after coming close to it in 5 out of previous 6 trading sessions.

It ended the week with consecutive lower close on the daily chart. The Relative Strength Index (RSI), a momentum indicator, has been moving in a lower high formation since 15th May, 2023. The India VIX, a fear indicator, gave major discomfort to the bulls as it rose 3.6% for the first time after 5 weeks and closed at 11.24. Foreign Portfolio Investors (FPIs) hold more long positions compared to short positions as indicated by the Long-Short Ratio. Once they start to unwind their positions, a minor correction from the current levels can’t be ruled out.

The maximum call open interest for the Nifty50 is placed at 18,800 Strike, which will act as a strong resistance in the upcoming week. The Nifty50 closed near the 20 DEMA support of 18,642 on Friday. A breakdown close below the 20 DEMA can take the index to 18,500 zones where its next visible support is placed.

High Priced Stocks are Hidden Gems

Investing in the stock market has been an avenue for individual investors and institutions to build wealth and achieve their financial objectives. However, numerous misconceptions have taken root, shaping investors’ perceptions, and ultimately affecting their stock market decision-making processes. These misconceptions often hinder investment opportunities which may lead to the loss of potential profits.

Some investors believe that investing in penny stocks is a surefire way to make quick profits and significant gains in a short period. They think these stocks could double or triple quite easily. On the other hand, they tend to avoid shares with a high price, thinking that the stock price is so high that it can’t go further up.

However, the reality is very different. Penny stocks generally lead to huge losses and high-priced stocks surge to astonishing heights.

Let us take an example here!

A share trading at Rs. 10,000 in the year 2012 has crossed Rs. 100,000 recently. An investor who refrained from entering the scrip due to its high price missed out on 23% CAGR. Meanwhile, during the same time period a popular penny stock of a telecom company went down from Rs. 57 to 7 per share, a decline of 18%.

If we consider all the listed companies with shares priced above Rs. 4,000, the average price stands at approximately Rs. 11,547, while their beta to Nifty 50 is around 0.67. This beta value indicates that these stocks are relatively less volatile compared to the broader market index.

The average shareholding of the promoter group in these stocks amounts to 57% while the average institutional holding is 25%. So together they hold 83%. Hence, on average the public shareholding represents merely 17%.This indicates very limited floating stock for such high-priced scrips.

Due to lower liquidity, even a single factor influencing these stocks can have a magnified impact on their price movements, within a short span of time.

Retail investors have limited funds and they prefer to invest these funds in stocks that fall within a more accessible price range thereby focusing on diversification. But, it is crucial for investors to recognize that a high-priced stock does not necessarily imply an equally high valuation.

In certain instances,the shares of a company may offer attractive valuations despite being outside an investor’s accessible range.

Identifying such opportunities requires diligent research, a comprehensive analysis of the underlying fundamentals, and maintaining a flexible mindset.Therefore, investors should strive to educate themselves continuously and adopt a long-term perspective when analyzing high-priced stocks and not reject them just because their prices are ‘too high’.

Technical Outlook

Nifty started the week with a doji candle on the daily chart, which signals indecision, after closing the previous week with a consecutive lower close. It rose sharply and closed above the previous week’s resistance of 18778. Overall, Nifty rose 262.60 points, gaining 1.41% this week.

Even though Nifty is moving in a higher high formation in the daily chart, the Relative Strength Index (RSI), a momentum indicator, is moving in a lower high formation since 15th May 2023, indicating negative divergence. Since the Nifty closed above the 20-Day Exponential Moving average (DEMA) on 31st March 2023, every dip has been bought into. Nifty fell 1.14% during the 17-21st April period and rose 4.40% until 15th May. Index again fell 1.46% during the 16-18th May period and has risen 3.84% until now. The India VIX, known as the fear indicator, closed in the red for the fifth consecutive week, giving major comfort to the bulls. The Foreign Portfolio Investor (FPI) Long-Short ratio crossed 50% during the week, indicating that they now hold more long positions relative to short positions. A close above the all-time high of 18887.60 is likely to drive a further uptrend in Nifty. The Index is now at a touching distance from its all-time high made on 1st December 2022. The uptrend is likely to continue as long as Nifty trades above the 20 DEMA, which is around the 18550 zones.

Bank Nifty faced still resistance around the 44200 zones. It is now consolidating around the 43400-44200 since 11th May and looks weaker compared to Nifty. The Put-Call Ratio (PCR) fell below 1 for the first time since 25th May and the price closed below the crucial 20 DEMA on Thursday before closing above again on Friday. 43400 will act as a support for Bank Nifty while a break below can take the Index to 42500 zones, where its next visible support is placed. A breakout above 44200 is needed for the fortunes to change in Bank Nifty.

Check-In the Hotels Sector for a Profitable Vacation!

The hotel industry pack has had a dream run on D-Street. Stock prices of major hotel companies have delivered over 50% returns in the past year. Clearly, the sector has checked in for a winning streak post-pandemic.

The wave of robust demand was led by the sugar rush in leisure and corporate travel, a boost from international travel, sports tournaments, and so on. The G20 summit taking place in India has also opened avenues as an international tourism place.

These have been the main factors that have attributed to the increased occupancy and the revenue per room. The occupancy rate has started to normalize over the quarters and there is still plenty of headroom for it to go up.

The demand outlook gives encouraging signs of further growth. Resultantly, the Average Revenue per Room (ARR), has seen a surge beyond the pandemic levels. This looks promising as it is all set to climb up the ladder. Meanwhile, the depressed financials of the hotels have turned already favourable. The cost-optimisation measures taken by the company managements have led to margin expansion and ratio favourable.

Foreign business remains subdued as the demand is not back in full force yet. However, the same has started to climb up the growth hill, pulling back from its down-cycle. The ARR is expected to inch up further as international business grows.

Back home, top hospitality companies have been aggressively adding more rooms to their kitty. The supply is being increased in order to match the demand. The new inventory pipeline remains packed as the companies aim to take a large bite of the market share and profitability. In order to keep up with the pipeline and the cost that comes with it, there will be an upward revision of the prices further pushing the revenues. The aviation sector too has reported brilliant results supporting the strong opportunities in this space.

The show has just begun, given the healthy growth potential ahead. Investors should keep a long-term horizon and seek out opportunities in quality names within the theme, where the multiples have room to expand and the risk-reward has turned favourable. The stock prices seem to have already factored in the fast recovery, so buying on dips should be the strategy.

Technical Outlook

Nifty rose by 29.30 points, gaining a meagre 0.16% this week. It has formed a shooting star candle on the weekly chart which is a bearish reversal signal. Nifty consolidated between the 18,530-18,730 zones during the week.

A triple top structure is visible on the daily chart with Nifty making swing highs on 19th Oct’21, 1st Dec’22 and 8th June’23 around the 18,600-18,900 zones. A strong close above the 18,700 level only will drive a further uptrend in Nifty.

The India VIX, known as the fear indicator, fell -0.04% during the week and closed at 11.12. However, the Put-Call Ratio (PCR), a sentiment indicator, reached its highest level of 1.429 in 2023 on 7th June. The FPIs, on the other hand, were seen steadily increasing their short positions in Index futures. Consecutive Short Buildup was observed in Future Open Interest Data as Nifty closed the week at 18,563.40.

The Index took resistance around the 88.6% retracement level of 18,665, drawn from the 1st December high of 18,887.60 to the 20th March low of 16,828, since the last three days. The Relative Strength Index (RSI), a momentum indicator, continued to move in a lower-high formation, keeping the negative divergence intact on the daily chart.

18,500, on the downside, will act as a strong support for Nifty. The move above 18,700 will come if call writers start to exit their positions. At the moment, the bears are having a firm grip on the 18,700 Strike. 44,000 will be the make-or-break level for Bank Nifty. A break will 44,000 can take Bank Nifty to 43,500 zones, where its next visible support is placed.

Indian Inc Premier League: Q4FY23 Highlights!

The earnings season for India Inc’s fourth quarter of FY23 concluded this week. The report card has been decent with some pockets reporting impressive numbers while others disappointed.

The quarter gone by also marked Nifty 50 companies reaching a revenue milestone of Rs 11.11 lakh crores. Many constituents of Nifty witnessed a record quarter in terms of Revenue/EBITDA/Profit.

Despite global headwinds, India's footprint has remained solid, and the future outlook appears to be brighter than ever. A slump in raw material prices and favorable high-frequency indicators are some of the factors that benefit our domestically oriented economy.

Let us deep dive into which sectors drove India Inc’s March’23 corporate quarter earnings!

Overall India Inc’s star performers of the quarter were financials and automobiles.

The cleansed balance sheets, strong credit uptick, improved asset quality of the banks, declining non-performing assets (NPAs), margin improvement, and steady slippages have aided the growth of the banks.

Auto earnings have been in a fast lane, thanks to healthy volume growth, softening of commodity prices, favorable product mix, price hikes, and better operating leverage. A gradual recovery in rural demand and export markets should augment well for the sector in the future.

The Pharma sector had a fruitful quarter as the firms saw a turnaround in their financials, primarily due to the moderation of inflation and supply constraints. Though the US market may not have been a jolly-go-ride, the companies have started to well-diversify into other geographies, which can be witnessed in the easing financials.

The street has been excited with the performance of infrastructure sector too. The sector performed reasonably well, emulating strong growths in their financials supported by the pick-up in execution. The outlook for the sector is also much touted which is testified by their strong order books and government support.

Being a seasonally weak quarter for IT companies, the players have seen a rollercoaster ride. The uncertainty in the macroeconomic environment has caused delayed decision-making and has softened the deal TCV for some large-cap companies. While certain mid-cap IT companies reported better numbers.

FMCG has witnessed a mixed bag of numbers. The profits and revenue have displayed good growth but the margins are yet to show a complete recovery. However, the price hikes and cost optimization measures taken in the previous quarters have started to work their magic for some companies’ margins. The volumes, nonetheless, continue to remain a concern despite the decline in inflation due to muted demand. The management commentaries suggest that the green shoots of improving rural demand are visible and the expectation of a normal monsoon will act as a catalyst for the overall growth.

Coming to consumer durables, growth was witnessed in the cables and wires segment owing to the infrastructure boost. The white goods performance was not so bright despite the peak season.

Considering India Inc’s March’23 quarter corporate earnings displayed a decent show, the commentary across sectors was largely optimistic. India is in a better position now and the pain point for many industries seems to be left behind. Domestically oriented themes are now dominating market dynamics. This coupled with rising DII participation and FIIs inflows has the ability to propel the markets to new heights once prevailing clouds of global uncertainty lift.

Technical Outlook

Nifty rose by 34.75 points, gaining a meagre 0.19% in this week. It has formed an inside candle on the daily chart. The Relative Strength Index (RSI), a momentum indicator, is showing negative divergence on the daily chart of both Nifty and Bank Nifty. A negative divergence is observed when the price moves in a higher high formation while the RSI moves in a lower high formation.

The FII Long-Short Ratio, a sentiment indicator, has fallen from 60.21% on Monday to 45.60% on Thursday, indicating that the FII’s now hold more short positions relative to long positions. The India VIX, also known as the fear index, fell by 6.51% during the week, from 11.90 to 11.12.

Nifty has filled the 18508-18581 gap which was created on Monday this week. It has taken resistance from the 88.6% retracement level of 18,648 on 30th May, drawn from 1st December high of 18887.60 to 20th March low of 16828. Nifty, however is still trading above the 13-day exponential moving average (DEMA). Bank Nifty, on the other hand, closed marginally above the 13 DEMA on Friday after closing below it a day earlier.

For the Nifty to resume uptrend, it needs to give a decisive close above 18600. The call writers were seen strengthening their position at 18600 during the week, which acted as a strong resistance. 18500 will act as an immediate support while a break below it can take Nifty to 18200 levels, where its next support is placed. For Bank Nifty, 44000 will act as a make-or-break level. The option activity at 44000 Strike will provide cues about the future direction of Bank Nifty in the coming week.