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NATO Eases Defence Spending Demand Following Spain's Objection to 5% GDP Commitment
Business, Equities, Expert Views, Investor Forum, Market News, Markets - October 10, 2024

India's GDP Growth to Slow in FY25, Manufacturing and Financial Sectors Pose a Drag

India’s GDP Growth to Slow in FY25, Manufacturing and Financial Sectors Pose a Drag

India’s gross domestic product (GDP) is set to experience slower growth in FY2025, according to Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services. Gupta predicts a deceleration in growth from the exceptional 8.2% recorded in FY2024 to approximately 6.1%, a figure notably below the Reserve Bank of India’s (RBI) projection of 7.2%. The economist attributes this expected slowdown primarily to challenges in the manufacturing and financial sectors, along with an unusual base effect from the previous fiscal year.

“The high growth in net indirect taxes, which was a key driver of the 8.2% GDP growth last year, is unlikely to sustain,” Gupta explains. In FY2024, the Gross Value Added (GVA) was 7.2%, significantly lower than GDP growth, indicating that the high GDP number was largely tax-driven. Gupta anticipates this gap will narrow in FY2025, with GVA growth expected to come in at around 6.3%, while GDP will likely trend closer to 6.1%.

The manufacturing and construction sectors, which benefitted from a deflator effect in FY2024 due to negative wholesale price index (WPI) inflation, are unlikely to see the same favorable conditions in FY2025. “The WPI deflator that boosted real growth last year will not be favorable this time around, especially for manufacturing,” Gupta notes. Additionally, services sector growth is expected to slow, as credit expansion may not be as robust as it was previously. However, agriculture could provide a buffer with better performance this fiscal year, following a weak showing in FY2024.

Consumption Patterns and the K-Shaped Recovery
Despite the overall slowdown in GDP growth, there is a positive trend in consumption. Gupta observes that real consumption growth, which was just 4% in FY2024—the slowest barring the COVID years—could pick up slightly to 5-5.5% this year. This growth, while modest, is still lower than historical levels, where aggregate consumption often expanded by 7-8%. However, Gupta believes that the direction of consumption growth is more important than the absolute number.

“The K-shaped recovery in consumption, where the wealthier segments of society benefitted disproportionately, might be narrowing,” he says. This recovery pattern was evident during the pandemic, where luxury goods and high-ticket items continued to perform well, while low-income groups struggled. Now, there are signs that this gap is closing, particularly in rural areas. Gupta anticipates that rural consumption, which has lagged behind urban consumption for the past two years, could outpace it in FY2025, driven by better agricultural output and improved income levels.

However, Gupta cautions that this narrowing of the K-shaped recovery is based on anecdotal evidence rather than concrete data. While it is clear that urban consumption has been strong, the real test will be whether rural consumption can sustain its momentum throughout the year.

Capital Expenditure and Long-Term Investment Growth
When it comes to capital expenditure (capex), Gupta offers a cautiously optimistic view. “Investment growth was significantly higher in FY2024, and we expect it to expand again in FY2025, albeit at a slower pace,” he says. Total investments as a percentage of GDP reached 33% last year, the highest in a decade, and this ratio is expected to remain flat over the next two years.

Capex, Gupta argues, is influenced by consumption trends but on a longer-term horizon. While consumption drives manufacturing investments, the effect is not immediate. “You cannot link capex to consumption on an annual basis,” he explains. Despite the expected slowdown in consumption and manufacturing growth, the overall investment environment remains positive, with infrastructure and public investments likely to support capex growth.

External Headwinds and Global Risks
One of the key risks to India’s economic outlook comes from external factors. Gupta highlights the uncertainty surrounding the global economy, particularly in the United States. “Everyone has been fearing a recession in the US, but so far, it hasn’t materialized,” he says. However, he remains cautious, noting that the prolonged period of high interest rates in the US has yet to fully impact consumer spending, capex, and employment trends.

While the US economy continues to defy expectations, Gupta warns that the effects of high borrowing costs could still materialize with a lag. “Higher mortgage costs should, in theory, reduce consumer spending and eventually impact investments, labor demand, and wage growth,” he explains. If this transmission mechanism begins to take hold, it could dampen global growth and, by extension, India’s export-driven sectors.

Geopolitical risks, particularly in the Middle East, add another layer of uncertainty. Rising oil prices, driven by geopolitical tensions, could increase inflationary pressures in India, which remains heavily dependent on oil imports. “If commodity prices, especially oil, start to rise sharply, it could create headwinds for both growth and equity markets,” Gupta warns.

Inflation and Rate Cut Trajectory
On the domestic front, inflation remains a concern. While inflation was below the RBI’s target of 4% in recent months, Gupta expects it to rise to around 4.5% by the end of FY2025. “This is still a manageable level, but it raises questions about whether growth can continue at the RBI’s projected rate of 7% with inflation hovering at these levels,” he says.

Regarding interest rates, Gupta forecasts a gradual easing by the RBI, with the first rate cut likely in early 2025, though a December cut cannot be ruled out. “Much will depend on the Q2 GDP data and global developments,” he adds. Gupta expects a cumulative rate cut of 100 basis points (bps) by the end of FY2026, with the first 25 bps cut potentially coming in FY2025.

Foreign fund flows into India are likely to remain strong, provided that India’s growth and corporate earnings continue to outpace other major economies. However, Gupta cautions that rising geopolitical risks and inflationary pressures could create volatility in equity markets, particularly if commodity prices surge.

In conclusion, while India’s growth prospects for FY2025 are expected to slow compared to the previous year, the economy remains resilient. Consumption trends are improving, particularly in rural areas, and investments are likely to remain stable. However, external risks, inflation, and the global economic outlook will continue to pose challenges in the months ahead.

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Walmart’s Indian Bet: E-commerce and Sourcing Power Next Wave of Global Growth
Business, Equities, Expert Views, Investor Forum, Market News, Markets - October 9, 2024

Consumer Durables Set for 11% CAGR, to Hit ₹3 Lakh Cr by 2029

Consumer Durables Set for 11% CAGR, to Hit ₹3 Lakh Cr by 2029

India’s consumer durables sector is poised for substantial growth, with a projected compound annual growth rate (CAGR) of 11%, expected to reach ₹3 lakh crore by 2029, according to a report by EY Parthenon and the Confederation of Indian Industry (CII). Currently contributing 0.6% to India’s GDP, the sector is anticipated to significantly increase its contribution as it benefits from rising domestic consumption, a shift towards indigenization, and a growing focus on sustainability.

Growth Trajectory and Key Drivers
EY Parthenon’s report highlights the sector’s ambitious target to become the fourth-largest global market for consumer durables by 2027. By 2030, India could emerge as a global leader in the sector, creating an estimated 5 lakh new jobs. The expanding domestic market, particularly driven by urbanization, rising incomes, and changing lifestyles, presents a unique opportunity for manufacturers to ramp up production and innovation.

Angshuman Bhattacharya, partner and national leader for consumer products and retail at EY Parthenon, emphasized that India’s growing consumer base and favorable government policies are laying the foundation for this transformation. “Progressive government initiatives like Atmanirbhar Bharat, Make in India, and the Production Linked Incentive (PLI) scheme are creating a favorable environment for the sector’s growth,” Bhattacharya noted. He stressed that leveraging emerging opportunities, enhancing value chain integration, and addressing current challenges will be key for the sector to become a cornerstone of India’s economic growth.

Premiumization and Technology Adoption
One of the core trends driving growth in India’s consumer durables market is the shift towards premium and value-added products. Consumers are increasingly spending on discretionary items, prioritizing household upgrades and adopting smart, energy-efficient products that offer greater convenience and sustainability. Notably, air conditioners (ACs), once considered a luxury, have become a necessity for a broader segment of the population, reflecting a shift in consumer priorities.

Technological advancements are also accelerating demand for smart appliances, further shortening product replacement cycles. With the increased penetration of high-speed internet and improved connectivity, consumers are now more inclined to invest in devices that are not only energy-efficient but also smart and interconnected. The growing middle class, in particular, is driving this shift, with a clear preference for appliances that integrate sustainability and technology.

The report highlighted the increased adoption of televisions, which saw household penetration rise to 60% in 2023. This is indicative of a broader trend of rising consumer aspiration, where technology-driven products such as smart TVs, refrigerators, and washing machines are becoming more commonplace in Indian households.

E-commerce and Supply Chain Expansion
Despite the growing demand for smart and premium products, India currently lags behind many other countries in terms of online sales, with e-commerce accounting for only 14% of overall consumer durable sales. However, online channels are expected to grow rapidly, driven by greater brand choice, home delivery options, and a widening consumer base.

The government’s Open Network for Digital Commerce (ONDC) initiative is expected to play a pivotal role in boosting e-commerce adoption, especially in smaller cities and rural areas. By democratizing access to a wide range of products and enhancing consumer choice, ONDC aims to broaden the market base and accelerate the penetration of consumer durables across tier-2 and tier-3 cities and rural regions.

This rural expansion, coupled with the growth of online retail, is likely to be a significant driver of growth in the coming years. The report forecasts that the supply chain will deepen its reach into these markets, offering consumers access to a wider array of products, including premium and value-added items.

Policy Support and Industry Recommendations
The EY Parthenon report underscored the importance of collaboration between government and industry stakeholders to further boost domestic demand for consumer durables. Recommendations include increasing incentives for the PLI schemes, particularly for critical components such as controllers, compressors, and motors, which are key to the manufacturing process. Additionally, harmonizing the GST slabs across different product categories could enhance affordability, making consumer durables accessible to a broader audience across various income groups.

Another significant recommendation involves incentivizing the ownership of energy-efficient products. Providing tax breaks or on-bill financing to consumers purchasing energy-efficient appliances can help reduce the energy burden while promoting sustainability. These incentives could drive a multi-fold circular benefit for both the industry and consumers by lowering energy consumption and contributing to environmental goals.

Conclusion
With strong policy backing, increasing consumer demand, and technological advancements, India’s consumer durables sector is on track to become a global powerhouse. As manufacturers capitalize on these growth opportunities and adapt to the evolving market dynamics, the sector is set to play a pivotal role in driving India’s economic growth and job creation over the next decade. By 2029, with continued investment and strategic collaboration, India’s consumer durables market will likely cement itself as a critical player in the global arena.

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RBI's Surprise Rate Cut Sends Realty Stocks Tumbling: Is It Time to Reassess?
Business, Equities, Expert Views, Investor Forum, Market News, Markets - October 9, 2024

RBI Signals Shift to Neutral Stance, Market Anticipates Rate Cut

RBI Signals Shift to Neutral Stance, Market Anticipates Rate Cut

The Reserve Bank of India (RBI) has taken a pivotal step in monetary policy by shifting its stance from “withdrawal of accommodation” to a more neutral position. This move, announced following the latest meeting of the Monetary Policy Committee (MPC), opens the door for potential rate cuts if inflation remains within a favorable trajectory. For months, the central bank had been in tightening mode, focused on reining in inflation. With the latest inflation print of 3.7% in August, comfortably below the 4% target, markets are already anticipating a rate cut in December. But as the RBI takes this cautious approach, a deeper examination reveals that several risks still loom large.

Stance Shift: A Prelude to Rate Cuts?
The change in stance signals the central bank’s readiness to shift gears in response to evolving macroeconomic conditions. By adopting a neutral stance, the RBI is essentially indicating that it is no longer in a mode of withdrawing liquidity but stands prepared to act as necessary to sustain growth and keep inflation in check. This is a marked change from its previous focus, where containing inflation at any cost was the top priority.

The markets have taken this as a strong signal, with expectations now leaning toward a rate cut as early as the December meeting. Bond yields have eased, and equity markets have welcomed the news, buoyed by the prospect of cheaper capital and a more accommodative monetary policy.

However, the key question is not just whether the RBI will cut rates, but how aggressive it will be in doing so. Some market participants are already wondering if this could lead to a series of rate reductions, or whether the central bank will adopt a more cautious approach. The decision will likely depend on a host of factors, both domestic and global.

Governor Das Flags Key Risks
Despite the markets’ optimism, RBI Governor Shaktikanta Das was quick to temper expectations. In his policy statement, he highlighted significant risks that could derail the inflation trajectory. “Even as there is greater confidence in navigating the last mile of disinflation, significant risks – I repeat, significant risks – to inflation from adverse weather events, accentuating geopolitical conflicts, and the very recent increase in certain commodity prices continue to stare at us,” Das warned.

The governor’s caution stems from a series of unpredictable factors that could easily upset the RBI’s inflation outlook. Geopolitical tensions, particularly in the Middle East, pose a major concern. The conflict between Israel and Iran has caused a surge in crude oil prices, which recently crossed $80 per barrel. For a net importer like India, rising crude prices could stoke domestic inflation, making it more difficult for the RBI to ease monetary policy without jeopardizing price stability.

Additionally, adverse weather events, such as prolonged heat waves and erratic monsoon rainfall, have impacted agricultural output. While the RBI expects a robust kharif and rabi harvest, there is always the possibility that unpredictable weather conditions could disrupt supply chains and drive up food prices, a key component of headline inflation in India.

Balancing Growth and Inflation
The RBI’s decision to keep its inflation and growth projections unchanged reflects its delicate balancing act. The central bank expects GDP growth for FY25 to hold steady at 7.2%, driven largely by strong investment activity. Governor Das noted that both consumer confidence and business sentiment are on the rise, with private investments playing a pivotal role in boosting the country’s economic prospects.

While the outlook for growth remains positive, the RBI is aware that risks to inflation could quickly derail progress. Das’s analogy of inflation being akin to a “horse brought to the stable” illustrates the central bank’s cautious stance. “We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under tight leash, so that we do not lose control,” Das said, emphasizing the need for vigilance.

Rate Cut Expectations: Cautious Optimism
While one of the MPC’s external members voted for an immediate rate cut, the overall tone of the committee remains cautious. Many analysts believe that even if the RBI does initiate a rate-cutting cycle, it will likely be shallow and gradual, with the first cut possibly in December or early next year. Much will depend on how global commodity prices and domestic inflation evolve in the coming months.

Upside risks, such as crude oil price shocks, geopolitical tensions, and weather disruptions, remain largely outside the control of the RBI. As a result, any rate cut is likely to be reactionary rather than preemptive, with the central bank taking a wait-and-see approach before committing to deeper monetary easing.

Conclusion
The RBI’s shift to a neutral stance has generated excitement in the markets, with expectations of an upcoming rate cut in December. However, the central bank is navigating a complex landscape of inflationary risks and external uncertainties. While growth prospects remain solid, the RBI is unlikely to aggressively cut rates, opting instead for a more measured approach to ensure that inflation remains under control. Governor Das’s message is clear: while the door to rate cuts is now open, the central bank will tread carefully to avoid upsetting the balance between growth and inflation.

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Shriram Finance Q3FY25: Strong Loan Book Growth, PAT Boosted by Exceptional Gain, NIMs Contract
Business, Equities, Expert Views, Investor Forum, Market News, Markets - October 8, 2024

Private Banks See Deposit Revival but Face Margin Pressures Amid Rising Costs

Private Banks See Deposit Revival but Face Margin Pressures Amid Rising Costs

The Indian banking sector is witnessing significant changes, particularly in the dynamics of deposits and credit growth. With private banks showing signs of a catch-up in deposit growth, there’s cautious optimism. However, this comes with a stark warning: interest margins are likely to compress further. While banks are striving to regain lost ground, especially in the private sector, challenges such as elevated credit-to-deposit (C/D) ratios and a shift in retail investment preferences are weighing heavily on their profitability.

The War on Deposits
Indian banks, especially private sector players, have been caught in a fierce competition to attract deposits. The deposit war has intensified as retail investors increasingly prefer capital markets over traditional banking products. This shift has created a dual challenge for banks: not only are they losing their core deposit base, but they also need to pay higher interest rates to secure incremental deposits. The result is a hit on their net interest margins (NIMs) and, consequently, their profitability.

The decline in the core deposit base is particularly concerning as it forms the backbone of a bank’s funding structure. The shift of surplus liquidity away from banks toward capital markets has forced banks to revise interest rates upward to stay competitive. This trend has led to a squeeze in margins, especially for those banks that rely heavily on term deposits. With lower-cost CASA (current and savings account) deposits stagnating or declining, many banks are finding it increasingly difficult to maintain healthy interest margins.

Deposit Catch-Up in Q2
The quarterly business updates of several banks provide insights into how they are navigating these challenges. A closer look at 11 commercial and small finance banks reveals that eight of them reported a higher growth rate in deposits compared to advances on a quarter-over-quarter basis. This trend is particularly evident among private sector banks that were previously operating with very high C/D ratios.

At the system level, deposit growth has seen a slight recovery. By the end of Q2 FY25, overall deposit growth stood at 11.5 percent year-on-year (YoY), compared to 10.6 percent at the end of Q1. On the other hand, advances registered a 13 percent YoY growth, a moderation from the 13.9 percent growth seen in the previous quarter. The gradual moderation in the C/D ratio is a positive sign, as it suggests that banks are becoming more cautious in managing their lending portfolios in the face of deposit challenges.

Despite this improvement in deposit growth, the bigger issue remains: declining CASA deposits. With the rising cost of term deposits and stiff competition in the lending market, many banks are seeing stagnation or a decline in their share of low-cost deposits, leading to margin compression.

Impact on Interest Margins and Profitability
The resurgence in deposit growth is not without its challenges. For many banks, the increased cost of term deposits has already started to weigh on their interest margins. This is a trend that is expected to continue as competition for deposits intensifies and the overall cost of funds rises.

The moderation in interest margins is compounded by a rise in operational costs. Banks are spending more on technology upgrades, branch expansions, and hiring, all of which are necessary to attract deposits in a more competitive environment. As these expenses rise, banks are also facing pressure on their return on assets (RoA). The bottoming out of credit costs has provided some relief, but it is not enough to offset the rising cost-to-income ratio that banks are grappling with.

Outliers and Opportunities
Amid these challenges, a few banks have managed to outperform. Bank of Baroda, a large public sector player, reported robust growth in advances, outpacing deposit growth, thanks to a relatively better C/D ratio. This trend positions the bank well to capture a larger share of the lending market, even as others struggle to balance the deposit and credit equation.

Federal Bank also stands out, with an improving CASA share that signals some stability in its interest margins. Despite a tepid deposit performance in Q2, the bank’s strong growth in advances and its efforts to maintain a healthy CASA ratio are encouraging signs. CSB Bank is another exception, benefiting from the buoyant gold loan market, which forms nearly 45 percent of its loan book. The bank managed to achieve strong growth in both deposits and advances, setting it apart from its peers.

Outlook
Looking ahead, the gradual weakening of bank RoAs seems inevitable as interest margins compress, costs rise, and credit costs stabilize. However, there remains value in many frontline private sector banks. The upcoming earnings season will be closely watched to see how banks navigate this challenging environment and whether they can continue to offer value to investors despite these headwinds.

In conclusion, while private sector banks are seeing some revival in deposits, they face significant challenges in maintaining profitability. With rising costs, stagnant CASA growth, and increasing competition, the road ahead may be tough, but there are still opportunities for well-managed banks to thrive.

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Expansion of capex to tackle global issues and decline in economic growth
Business, Equities, Expert Views, Investor Forum, Market News, Markets - October 8, 2024

India Set for Capex Boost as Domestic Demand Grows: CII

India Set for Capex Boost as Domestic Demand Grows: CII

Private capital expenditure (capex) by Indian companies is likely to see a notable rise in the near term, driven by strong domestic demand despite facing external challenges like a weak global environment and rising shipping costs. This optimistic outlook comes from a recent survey conducted by the Confederation of Indian Industry (CII) among over 200 firms of varying sizes, offering insights into the business confidence and investment plans of India Inc.

Business Confidence on the Rise
CII’s Business Confidence Index for the second quarter of FY25 (July-September) reached a robust 68.2, marking its highest point since March 2024. This is a notable uptick from the previous quarter’s 67.3 and a further improvement from the 67.1 recorded in the same quarter last year (Q2 FY24). The index reflects the sentiment of businesses across sectors, underlining the growing optimism despite ongoing concerns in the global economy, including geopolitical risks and slower-than-expected recovery in some international markets.

According to the survey, improving domestic demand is seen as the primary driver of this optimistic environment, with companies expressing renewed confidence in expanding their investments. “Improvement in domestic demand has created a more optimistic business environment, encouraging companies to invest and expand,” the survey noted.

Private Capex Expected to Rise
One of the standout findings from the survey is that 59% of the respondents anticipate an increase in private capital expenditure during April to September 2024 compared to the previous six months. This rise in capex is a positive indicator for future economic growth, as it reflects businesses’ willingness to invest in expanding their capacity, innovating, and responding to the heightened demand in the market.

Moreover, the survey revealed that a significant portion of respondents expect the trajectory of private capex to remain unchanged for the first half of the fiscal year, with only 6% anticipating a decline in their investment levels compared to the second half of FY24. This indicates that while the global outlook may remain subdued, domestic factors like strong consumer demand and sectoral growth are pushing companies to continue investing.

Inflation and Interest Rates Outlook
Inflation expectations are another critical factor shaping business sentiment. The survey shows that 78% of respondents believe inflation this year will remain below 5%, reflecting optimism about price stability, which is crucial for sustaining demand. Within this group, 33% of firms expect inflation to hover between 4.5% and 5%, while 35% see it slightly lower, in the range of 4% to 4.5%. These expectations are aligned with the Reserve Bank of India’s (RBI) inflation projection of 4.5% for the year.

In addition, more than 60% of the survey respondents anticipate that the RBI will begin a rate-cutting cycle within this fiscal year. Of these, 34% expect the central bank to initiate rate cuts in the October-December quarter, while another 31% foresee it happening during the January-March quarter of 2025. With banking liquidity in surplus, some companies believe that the central bank may ease interest rates or at least signal a policy shift in the upcoming monetary policy review.

Capacity Utilization on the Upswing
Driven by improving domestic demand, especially from rural India, companies have reported stronger capacity utilization levels. According to the survey, 46% of the respondents stated that their capacity utilization levels ranged between 75% and 100% during the April-June period, with an additional 6% operating above 100%. This marks an improvement from the previous quarter, when only 45% of companies reported capacity utilization in the same range.

As businesses operate closer to full capacity, it further reinforces the need for increased private capex to enhance production capabilities and meet rising demand, particularly in sectors experiencing higher consumption from rural markets and infrastructure development.

Profitability and Employment Prospects
The survey also highlights a favorable outlook on profitability, with 45% of companies expecting their profits to improve in the July-September quarter, slightly up from 42% in the previous quarter. This optimistic profitability forecast ties in with the expectations for increased capex and capacity expansion, as companies look to leverage favorable market conditions to improve margins.

On the employment front, the survey indicates a marginal improvement. Around 49% of companies reported an improvement in their employment situation during the quarter, while 41% said there was no change. This suggests that while employment opportunities may rise, the gains are expected to be moderate.

International Investment Plans Remain Cautious
Despite the encouraging domestic scenario, companies remain cautious about international investments, reflecting concerns over global uncertainties. The survey revealed that 40% of firms expect their international investment plans to remain unchanged, underscoring the cautious approach of businesses amid rising geopolitical tensions, trade disruptions, and slowing demand in key export markets.

Conclusion
The CII survey paints a promising picture for India Inc.’s private capital expenditure, with strong domestic demand driving business confidence and capacity expansion. While external challenges persist, Indian companies are betting on a favorable domestic environment, bolstered by stable inflation expectations, potential rate cuts, and rising profitability. However, international expansion plans remain muted as firms navigate the complexities of the global economic landscape.

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RBI's Surprise Rate Cut Sends Realty Stocks Tumbling: Is It Time to Reassess?
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - October 7, 2024

RBI’s October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks

RBI’s October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks

India’s Monetary Policy Committee (MPC) is set to reconvene this week, marking the first meeting for its three new external members: Ram Singh (Director, Delhi School of Economics), Saugata Bhattacharya (veteran economist), and Nagesh Kumar (Director, Institute for Studies in Industrial Development). Given their fresh appointments, all three are expected to follow the Reserve Bank of India’s (RBI) house view on rates, at least initially, as noted in a recent Bank of America report. While the new members lack any known rate biases, newcomers traditionally adopt the majority stance in their early days.

This is significant because it suggests that the RBI is likely to maintain the status quo on rates for the tenth consecutive policy meeting. This pattern aligns with Governor Shaktikanta Das’ cautious stance, particularly on inflation, which remains a key concern for the central bank’s policymakers.

Despite headline inflation falling below the RBI’s medium-term target of 4%—with CPI inflation at 3.65% in August, slightly up from July’s 3.6%—the central bank continues to exercise caution. The RBI’s reluctance to declare victory over inflation stems largely from persistent food price pressures. Governor Das, in the minutes of the August MPC meeting, underscored that while the base effect has helped lower headline inflation, food prices continue to pose challenges, and inflation expectations among households are rising. Therefore, monetary policy needs to remain vigilant to the risk of food price pressures spilling over into core inflation.

Adding to these inflationary concerns are risks posed by the geopolitical tensions in the Middle East. India is one of the world’s largest importers of crude oil, and escalating conflict in the region, particularly between Israel and Iran, could disrupt oil supplies and send prices skyrocketing. This could increase India’s oil import bill, which would, in turn, fuel inflation. Although crude oil is currently trading below the RBI’s assumed $85 per barrel average for FY25, any significant upward movement could complicate the inflation outlook. The central bank will undoubtedly factor this geopolitical risk into its deliberations.

Inflation is not the only concern for the MPC, however. Economic growth, while improving, remains below potential. Although India’s economy has shown some signs of recovery, unemployment continues to rise, and small businesses are grappling with high borrowing costs. Small and medium-sized enterprises (SMEs), in particular, are struggling with rising interest payments, and there are growing concerns about asset quality in the SME sector. In light of these challenges, there is a strong case for the RBI to begin cutting interest rates to stimulate growth.

The RBI, however, faces a dilemma. On the one hand, inflation pressures, especially in food and core inflation, suggest the need for a cautious approach to rate cuts. On the other hand, the economic reality on the ground—rising unemployment, underwhelming growth, and financial strain among small businesses—argues for the central bank to shift its focus toward supporting growth.

The recent 50 basis point (bps) rate cut by the US Federal Reserve will also be a topic of discussion at the upcoming meeting. While the RBI Governor has consistently maintained that the Fed’s actions do not dictate India’s rate policy, the reality is that central banks around the world, including India’s, cannot fully ignore rate moves in major economies like the US. The Fed’s rate cut may influence the MPC’s thinking, particularly if global economic conditions continue to weaken.

In summary, while the October meeting is likely to result in a rate status quo, the groundwork is being laid for a potential rate cut in the next few months. With inflation pressures still present but stabilizing, and economic growth faltering, the RBI will likely need to pivot toward growth support soon. However, much will depend on how inflation, particularly food prices, evolves in the coming months, and how global risks, such as the Middle East conflict and US monetary policy, unfold. If inflationary pressures subside, a rate cut could be on the horizon by the end of the year.

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Sensex Jumps 450 Points Amid Renewed US-China Trade Hopes and Strong Sectoral Buying
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - October 7, 2024

Kaynes Technology Acquires Iskraemeco India to Strengthen Presence in Smart Meters

Kaynes Technology Acquires Iskraemeco India to Strengthen Presence in Smart Meters

Kaynes Technology, a leading player in India’s Electronics Manufacturing Services (EMS) market, is positioning itself for rapid growth across several high-potential segments, including smart meters, semiconductors, and printed circuit board (PCB) manufacturing. The company has recently acquired a 100 percent stake in Iskraemeco India, a subsidiary of a Slovenian company, which is a strategic move aimed at strengthening its foothold in the smart meter market.

The acquisition deal, valued at Rs 43 crore, gives Kaynes full control of Iskraemeco India, a company that generated Rs 65 crore in turnover in FY24. While Iskraemeco India is still operating below break-even levels, the enterprise value (EV)/sales ratio of 0.7 times makes the deal attractive, especially given the long-term potential of the smart meter market in India. This acquisition aligns with Kaynes’ broader strategy of leveraging new growth opportunities in the evolving smart meter ecosystem, driven by the Indian government’s ambitious Smart Meter National Program (SMNP).

Tapping into the Smart Meter Opportunity
The Smart Meter National Program, part of the government’s larger power sector reform, seeks to replace 25 crore traditional electricity meters with prepaid smart meters over the next five years. The initiative includes modernizing infrastructure such as feeders and transformers, with an estimated total capital expenditure of Rs 1.5 lakh crore. With smart meter penetration currently standing at just 2-3 percent, there is substantial room for growth. The goal is to bring more transparency and efficiency to India’s power sector, and Kaynes sees this as a major area of opportunity.

To capitalize on this demand, Kaynes has set up a dedicated manufacturing plant for smart meters in Hyderabad. The facility has a current production capacity of 1 million units, but the company plans to scale this up to 4 million units in the near future by adding additional assembly lines. This move will allow Kaynes to ramp up its production capabilities to meet the growing demand from government projects and utilities across India.

The acquisition of Iskraemeco India further solidifies Kaynes’ position in this market. Iskraemeco India has secured a significant order from Power Grid Corporation of Gujarat to install 3.5 million smart meters over the next 12-18 months. This deal provides a strong revenue stream in the near term and reflects the high demand for smart meters, driven by government mandates and infrastructure upgrades. Kaynes is also expecting additional orders from the central government as well as from various state governments, which could provide further tailwinds for its smart meter segment.

The smart meter business currently contributes 2-3 percent of Kaynes’ total turnover, but management expects this to increase to 10 percent by FY25, bolstered by its strong order book and recent acquisitions. Over the medium term, the company also plans to expand its portfolio to include gas and water meters, thereby broadening its market presence in utilities.

Deploying Capital for Expansion
Kaynes Technology has been actively deploying capital to fuel its expansion plans. In 2023, the company raised Rs 1,400 crore through a qualified institutional placement (QIP). These funds have been allocated toward expanding its presence in both domestic and international markets. In January 2024, Kaynes acquired Digicom Electronics, a California-based EMS company, for $2.5 million. This acquisition marks Kaynes’ entry into the U.S. market, a key growth area for the company as it seeks to diversify its revenue streams.

Additionally, Kaynes acquired a minority stake in Mixx Technologies, an electronics manufacturing and PCB assembling services company, for $3 million. This acquisition is in line with its strategy to enhance its capabilities in PCB manufacturing, a key area of growth for the company.

In September 2024, Kaynes received cabinet approval to set up a semiconductor manufacturing plant in Gujarat, another significant step toward building a diversified electronics manufacturing portfolio. This new facility will allow Kaynes to tap into the growing demand for semiconductors, both in India and globally.

Strong Order Book and Growth Outlook
Kaynes Technology currently boasts an order book of over Rs 5,000 crore, with a book-to-bill ratio of 2.5x, offering strong growth visibility over the medium term. The management has reiterated its revenue guidance of Rs 3,400 crore for FY25, with an operating margin target of 15 percent. Over the longer term, Kaynes has set a revenue target of Rs 8,000 crore by FY28, of which 75 percent is expected to come from its core EMS business. The remaining 25 percent will be driven by growth in semiconductors, PCBs, smart meters, and the Kavach project (an indigenous safety system for railways).

The acquisition of Iskraemeco India is expected to be margin accretive over the medium term as Kaynes ramps up smart meter production and secures new orders. The company’s strategy of acquiring complementary businesses, deploying capital for capacity expansion, and entering new markets is poised to fuel its growth trajectory in the coming years.

Valuation and Investor Outlook
At its current market price, Kaynes Technology trades at an FY26 price-to-earnings (PE) multiple of 71 times, with a price/earnings-to-growth (PEG) ratio of 1.4x. While the company’s robust growth outlook is priced into the stock, investors may want to wait for better entry points given the elevated valuations. However, for long-term investors, Kaynes’ strong order book, aggressive expansion strategy, and growing presence in high-potential markets like smart meters and semiconductors make it a compelling play on India’s rapidly growing electronics manufacturing sector.

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NBFC Loan Sanctions Q1 FY2024: Gold Loans Dominate Amid Slowdown in Unsecured Personal Loans

NBFC Loan Sanctions Q1 FY2024: Gold Loans Dominate Amid Slowdown in Unsecured Personal Loans

The latest data from the Finance Industry Development Council (FIDC) reveals a significant shift in the lending practices of Non-Banking Financial Companies (NBFCs) for the first quarter of FY2024. Gold loans have emerged as the dominant loan category, growing by 26% year-on-year to ₹79,218 crore. This rise in gold loan sanctions comes as NBFCs slowed their lending towards unsecured personal loans, which declined by 4% year-on-year due to the Reserve Bank of India’s (RBI) tightening regulations on unsecured credit.

Key Highlights:
Surge in Gold Loans: Gold loans accounted for the largest share of loan sanctions by NBFCs, reflecting their increasing preference for secured lending amid a changing regulatory landscape. The 26% growth from ₹63,495 crore last year to ₹79,218 crore in Q1 FY2024 underscores the sector’s focus on gold-backed financing.

Decline in Personal Loans: Unsecured personal loans, previously a dominant segment, witnessed a decline of 4% during the same period. This drop can be attributed to the RBI’s November 2023 decision to increase the risk weight on unsecured consumer credit from 100% to 125%, effectively raising the cost of capital for NBFCs extending such loans. The higher risk weight led to a shift in strategy as NBFCs redirected their focus toward secured lending products like gold loans, which offer better risk-adjusted returns.

RBI’s Regulatory Scrutiny: The RBI has increased its vigilance on NBFCs, particularly regarding gold lending practices. During its onsite examinations, the central bank observed several irregularities, including the use of third-party agents for loan sourcing, valuation practices without customer presence, insufficient monitoring of loan end-use, and lack of transparency in gold auctions during defaults. In response, the RBI issued a stern warning, mandating corrective measures within three months to avoid potential regulatory action.

Rising Property and Housing Loans: Property loans experienced a healthy growth of 21% YoY, now ranking as the fourth-largest loan category sanctioned by NBFCs. Housing loans also continue to hold a significant share of the total NBFC loan portfolio. However, unsecured business loans, like personal loans, have seen a deceleration, influenced by the same risk weight increases implemented by the RBI.

Shift Towards Secured Lending: The regulatory changes have made unsecured lending more expensive for NBFCs, prompting them to reallocate capital towards safer, secured lending options such as gold loans. The RBI’s sectoral deployment data supports this trend, showing that the gold loan portfolio of banks surged by 41% in August 2023, becoming the second-fastest-growing loan segment after renewable energy projects.

Implications for NBFCs:
Focus on High-Yield Secured Loans: The sharp rise in gold loans highlights a strategic pivot by NBFCs toward high-yielding but secured assets. Gold loans, backed by collateral, provide a safer lending avenue with attractive yields, making them a preferred choice in the current regulatory environment.

Cost of Capital and Credit Risk: With increased risk weights on unsecured loans, NBFCs face a higher cost of capital in those segments, reducing their appetite for such products. Consequently, gold loans have emerged as a favorable alternative, offering a secured product with relatively lower credit risk.

Potential Regulatory Risks: While gold loans present a lucrative opportunity, NBFCs must address the regulatory concerns raised by the RBI. Non-compliance with corrective measures could lead to stricter regulatory oversight, higher penalties, or restrictions on lending, impacting overall business operations.

Sectoral Diversification: NBFCs are likely to continue diversifying their loan portfolios, focusing on secured lending products such as gold and property loans, while cautiously navigating the unsecured credit landscape.

Conclusion:
The gold loan segment is expected to remain a growth driver for NBFCs in the near term, as the regulatory environment continues to favor secured lending. However, NBFCs will need to remain vigilant in complying with RBI’s guidelines to avoid regulatory backlash, while also exploring opportunities in other secured lending sectors such as housing and property loans to balance their portfolios effectively.

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Equity Right Research: Kaynes Technology: Elevated Earnings Projections and Strategic Entry into OSAT Sector Enhance Value , Re-iterate BUY

Equity Right Research: Kaynes Technology: Elevated Earnings Projections and Strategic Entry into OSAT Sector Enhance Value , Re-iterate BUY

MCap: Rs 35,618 Cr; CMP: Rs5,564; TP: Rs7,963; Upside: 43%; Rating: BUY

Stock Data (as on 30 June,2024)
NIFTY :25,377
52 Week H/L (INR) :5,742/1,986
Market Cap (INR Cr) :35,046
Outstanding Shares (Crs) :6.40
Dividend Yield (%) :0.00%
NSE Code :KAYNES
BSE Code :543664
Absolute Returns (%)
3 Months :38.03%
6 Months :106.53%
1 year :157.61%
Shareholding Pattern (as on June 30,2024)
Promoters :57.83%
FIIs :14.27%
DIIs :17.88%
Public :10.03%
Financial Summary
Key Metrics FY24 FY25E FY26E
Net Revenue 1,805 2,996 4,195
YoY Growth % 60% 66% 40%
EBITDA 254 479 671
EBITDA Margin (%) 14.07% 16% 16%
PAT 183 298 433
YoY Growth % 92% 62.88% 45.24%
EPS (in INR) 28.68 46.57 67.64
ROE 7% 13% 18.50%

Valuation

We estimate revenue/ EBITDA /PAT growth of 66%/ 89%/ 63% in FY25E. PAT growth driven by healthy order book growth trend and high EBITDA margin profile guided by management(15-16%) in FY25. Factoring all the growth factors, we give buy rating on the stock with TP of 7,963 (171 TTM PE x FY25E 46 EPS).

About the stock

Kaynes Technology is engaged in the business of electronic manufacturing, offer end to end and IoT enabled solution, expertise in electronics system design and manufacturing (ESDM) services. It has three decades of experience in providing conceptual design, process engineering, integrated manufacturing and life cycle support. It serves various industries such as automotive, industrial, aerospace, defence, outer-space, nuclear, medical, railways, internet of things (IoT) and Information technology. Kaynes business vertical can be classified as follow:

OEM – Box Build: Kaynes specialize in delivering “Build to Print’ or ‘Build to specifications’ of complex box build, sub-systems and products across various industry verticals.

OEM – Turnkey Solution – Printed Circuit Board Assemblies (PCBA): Kaynes encompass electronic manufacturing of PCBA, cable harnesses, magnetics and plastics ranging from prototyping to product realization including mass manufacturing.

Original Design Manufacturing (ODM): Kaynes offers ODM services in smart metering technology, smart street lighting, BLDC technology, inverter technology, gallium nitride-based charging technology and IoT solutions for smart consumer appliances and devices.

Product engineering and IoT Solutions: Kaynes offer product engineering services include embedded design, firmware and software development, mechanical design. They also provide IoT solution such as cloud based services, IoT data analytics platform.

Growth Fuel Factors

  • Strong order book.
  • New business doors open coming soon –OSAT/PCB.
  • Government initiatives encourage foreign companies to enter in India.
  • Indian EMS industry represent growth of 41% CAGR by FY26.
  • Capacity expansion in existing business.
  • Highly outsourced by OEMs to EMS vendors.

Global economic outlook

The global economy achieved moderate growth rate of at 3.1% in 2023 compared to 3.2% in 2022. The various challenges such as geopolitical tension like conflict in Ukraine, higher inflation, monetary tightening by central banks, sluggish recovery in china and volatility in energy prices and food markets are contributed to slowdown in global economic growth. While advanced economy saw mixed results with US growing by 2.5% due to robust consumer spending but Eurozone lagging at 0.4% growth led by high energy price. Emerging market outperformed both the market at 4.3% growth rate driven by china’s reopening and India’s domestic demand.

According to the world economic outlook April 2024, the global economy is expected to grow at same run-rate of 3.2% during 2024 and 2025, mirroring to 2023. This forecast is supported by the expectation of continued disinflation and recovery for global economy. For developed economies, growth is projected to rise from 1.6% in 2023 to 1.7% and to 1.8% in 2025. While emerging markets and developing economies are expected to undergo a modest slowdown from 4.3% growth in 2023 to 4.2% growth in 2024 and 2025. Global inflation is forecasted to decline steadily from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025 as supply condition improve.

Source: Company’s MDA

Indian Economy Outlook

According to the National Statistical Office (NSO), India’s GDP growth stood at 8.2% in FY24 compared to 7.0% in FY23. The overall economic growth supported by strong domestic demand, push in capital expenditure from government, moderate inflation and stable interest rate. India’s index of industrial production report 5.8% growth rate in FY24 compared to 5.2% in previous year. This strong growth momentum is evident by the growth observed in industrial production data, robust GST collection, per capita income and increasing private capital expenditure.

India’s economy continues to expand in CY24 as GDP growth is forecasted at 7% according to the IMF’s July World Economic Outlook. This growth supported by robust domestic demand, government’s push for capital expenditure and favorable policy environment. The recent interim budget for FY2024-25 increase capex by 16.9% reflecting the strong commitment of the union government to boost economic growth from significant investment in infrastructure development. Various government initiatives like ‘Make in India’,’Aatmanirbhar Bharat’ and the Production Linked Incentive (PLI) schemes supporting manufacturing sector and increasing domestic manufacturing.

India’s economic growth outlook appear strong despite challenges such as food inflation and cost pressures. This optimistic outlook supported by robust domestic demand, digital transformation and entrepreneurship. India aims to become 3rd largest economy reach GDP to US$ 5 Tn by CY27.

Source: Company MDA

Global Electronics Manufacturing Services (EMS) Industry

The global electronics manufacturing services (EMS) market was valued at US$ 539 bn in 2023 and is expected to reach around US$ 1,064 bn by 20233 with CAGR of 7.03% during 2024 to 2033. This growth is driven by the shift in in-house manufacturing to EMS vendor and rising demand for consumer electronics, industrial automation.

The future outlook for global EMS market is robust, with significant growth expected across various regions and industry segments. Asia-Pacific region such as china, Taiwan and Vietnam, dominates the EMS market because of lower maintenance costs, material availability, faster production, skilled labor. while Europe and North America are also expected to show substantial growth driven by advancement in automotive electronics, healthcare and industrial automation. Key trend for shaping the future of the EMS market include the integration of industry 4.0 technologies such as IoT, AI and automation.

Source: Syrma SGS MDA

Indian Electronic Manufacturing services (EMS) Industry

India’s EMS market is expanding rapidly from being a major importer of electronics to become key player in the global EMS market. As of 2023, India’s EMS market was valued at US$ 36 bn within that mobile phone and consumer electronics are highly weighted sector.

The outlook for India’s EMS industry is highly optimistic forecasted to reach US$ 135 bn by 2026 with a CAGR of 41.1%. This growth is anticipated to fueled by the increasing in outsourcing by original equipment manufactures (OEMs), decline in imported finished goods, growing demand of consumer electronics and rapidly growing EV sector particularly 2W,3W and 4W.

Indian government also aimed to expand electronic market and implemented some policies includes schemes like Promotion of Manufacturing of Electronics Components and Semiconductors (SPECS), Modified Electronic Manufacturing Clusters (EMC 2.0), Production Linked Incentives (PLI) and Phased Manufacturing Programme (PMP). Government incentivizing 20-25% of the capital expenditure through its M-SIPS schemes for electronic manufacturers. Additionally government allocate INR 76,000 crores for development of semiconductor and display manufacturing in India.

Indian EMS market is set for robust growth in the next decade. Aim to become leading manufacturing hub for electronic manufacturing as OEMs look to diversify their production bases away from china. Government initiatives like ‘Make in India’ and ‘PLI schemes’ will encourage both domestic and foreign companies to manufacture in India.

Key drivers for growth of the Indian EMS Industry

  • High Outsourcing by OEMs
  • Growing Demand of Electronics
  • Large Domestic Market
  • ‘China +1’ Strategy
  • Government Initiatives

Source: Avalon and Syrma SGS MDA

Global PCB Market Outlook

The printed circuit board assembly (PCBA) market is expected to grew at CAGR of 5% to reach valuation of US$ 145 Bn by the CY2032. This growth is attributed to factor such as rising demand for consumer electronics, automotive electronics and industrial automation and due to the rising expansion of Internet of Things (IoT). The key growth driver for PCBA and PCB is growing need for electronic devices in industries such as consumer electronics, automotive, healthcare and telecommunications.

Source: Kaynes MDA
https://exactitudeconsultancy.com/reports/38060/pcb-pcba-market/

Indian PCB Market Outlook

Indian PCB or PCBA market reached a valuation of US$ 5.4% Bn in CY2023. According to the IMARC group, the market is expected to reach US$ 21.3% Bn representing a CAGR of 16.4% during the period from 2023 to 2032. The rising demand for consumer electronics products, increasing application in electric vehicles and favorable government policy and schemes are the key factor driving the Indian PCB market.

Source: Kaynes MDA and
https://www.imarcgroup.com/indian-pcb-market

Company Overview

Kaynes Technology is engaged in the business of electronic manufacturing, offer end to end and IoT enabled solution, expertise in electronics system design and manufacturing (ESDM) services. It has three decades of experience in providing conceptual design, process engineering, integrated manufacturing and life cycle support. It serves various industries such as automotive, industrial, aerospace, defence, outer-space, nuclear, medical, railways, internet of things (IoT) and Information technology. Kaynes business vertical can be classified as follow:

OEM – Box Build: Kaynes specialize in delivering “Build to Print’ or ‘Build to specifications’ of complex box build, sub-systems and products across various industry verticals.

OEM – Turnkey Solution – Printed Circuit Board Assemblies (PCBA): Kaynes encompass electronic manufacturing of PCBA, cable harnesses, magnetics and plastics ranging from prototyping to product realization including mass manufacturing.

Original Design Manufacturing (ODM): Kaynes offers ODM services in smart metering technology, smart street lighting, BLDC technology, inverter technology, gallium nitride-based charging technology and IoT solutions for smart consumer appliances and devices.

Product engineering and IoT Solutions: Kaynes offer product engineering services include embedded design, firmware and software development, mechanical design. They also provide IoT solution such as cloud based services, IoT data analytics platform.

Diversified Product Portfolio

Kaynes offers a wide-ranging product portfolio having applications across industry verticals such as automotive, telecom, aerospace and defence, space, medical, IoT and industrial, each of which is individually growing. This in turn limits exposure to downturns associated with a particular vertical. It also ensures consistency of revenues across periods on account of customers serving different industry verticals with different business or industry cycles.

Long standing relationship with marquee customer base

Over the past three decades, Kaynes has established long-term relationships with well known customers across the industries it caters to. Kaynes has a diversified customer base and has served 350+ customers in 26 countries. Their continued success is, in part, due to customer-centric practices such as open book costing, internal and external audits, and direct shipments to end customers.

Manufacturing Facility

Kaynes currently operates through its nine advanced manufacturing facilities to undertake high mix and high-value products with variable or flexible volumes. Kaynes’ operations are complying with global standards with 12 global accreditations—most for an ESDM company in India. It has a dedicated research facility at Mysore, Bengaluru and Ahmedabad with a 75+ member R&D team

Share holding pattern

Company’s majority holding held by promoter (57.83%) followed by FIIs 14.27%, DIIs 17.88% and public 10.03% as of June 2024. Promoter holding has declined from 63.57% in Sep 2023 to 57.83% in Dec 2023 due to the dilution of fresh issue. whereas FIIs and DIIs has increased their holding. Public holding has been continuously decreasing from high of 16.48% in Dec 2022 to 10% in June 2024 represent high interest of big hand in the company.

Shareholding pattern Mar-23 Mar-24 Jun-24
Promoters 63.57% 57.83% 57.83%
FIIs 8.16% 14.19% 14.27%
DIIs 12.96% 18.36% 17.88%
Public 15.31% 9.61% 10.03%

Since the company listed ( Nov-2022) big spike seen in big shark holding such as FIIs and DIIs. FIIs holding has jump 67% from 8.53% holding in Dec 2022 to 14.27% holding in June 2024 and DIIs holding spike 56% from 11.43% holding to 17.88% holding during the same period. While public holding has declined 39% from 16.48% holding to 10% holding during the same period. This robust growth seen in big shark holding represent strong confidence and high growth potential in the business.

Shareholding pattern Dec-22 Mar-23 Jun-23 45170 Dec-23 Mar-24 Jun-24
Promoters 63.57% 63.57% 63.57% 63.57% 57.83% 57.83% 57.83%
FIIs 8.53% 8.16% 7.96% 9.90% 12.71% 14.19% 14.27%
DIIs 11.43% 12.96% 13.12% 15.58% 19.04% 18.36% 17.88%
Public 16.48% 15.31% 15.35% 10.94% 10.41% 9.61% 10.03%

Q1FY25 Results Update

Strong order book promise to fuel revenue growth ahead

Company’s order book jumped 68% YoY and 22% sequentially to reached 5,039 Cr in Q1FY25. Sequentially 22% growth in order book driven by increase in average order inflow per month by 48% QoQ to 476 Cr. This robust growth in order book led by strong demand across verticals specially industrial and EV, Aerospace, outer space and strategic electronics along includes railway segment.

Company has achieved sizable customer in aerospace, outer space and strategic medical electronic vertical will secured revenue growth in upcoming years.

New Business Updates

OSAT business door open soon; government approval in final stage

Company’s new investment in OSAT business is in the final stage of obtaining government approval. Company had already acquired land in the Gujarat where construction will start soon. Company expecting positive response in the OSAT business by FY26. Along with this HDI printed circuit board project going as per plan, in the final stage of land acquisition. Management expecting to post revenue in HDI printed circuit business by FY26.

Robust topline growth but margin slight down

Strong growth post in topline/bottom line due to industrial vertical but margin remain slight lower

During the quarter, revenue grew 70% YoY but QoQ tank by 21% to 504 Cr. strong growth in topline on YoY basis led by strong demand in industrial (includes EV), aerospace & strategic electronics verticals. Segment wise growth driven by Box build (up 145% YoY) and PCBA (up 46% YoY) while ODM and product engineering segment post negative growth by 66% and 58% YoY respectively.

Q1FY25 Q1FY24 YoY% Q4FY24 QoQ%
Net Revenue  504 297 70% 637 -21%
COGS 366 205.8 78% 479 -24%
Gross Profit 138 91.2 51% 158 -13%
Gross Margin% 27% 31% -11% 25% 10%
Employee Cost 33.5 24 40% 32 5%
Other expenses 37.2 28 33% 31 20%
EBITDA 67.3 39.2 72% 95 -29%
EBITDA Margin% 13.35% 13.20% 1% 14.91% -10%
Depreciation 8.4 5 68% 7 20%
EBIT 58.9 34.2 72% 88 -33%
EBIT Margin% 12% 12% 1% 14% -15%
Interest expense 28 11 155% 15 87%
Other Income 28.3 8 254% 29 -2%
PBT 59.2 31.2 90% 102 -42%
Total Tax 13.4 7.6 76% 21 -36%
PAT 45.8 23.6 94% 81 -43%
PAT Margin% 9% 8% 14% 13% -29%
EPS (Diluted) 7.2 4.1 76% 12.7 -43%
No. of shares 6.4 5.8 10% 6.4 0%

Business Mix

Revenue break up: Kaynes report a revenue of 1,805 Cr in FY24 with 37% CAGR during FY20-FY24. Industrial includes EV was key contributor with 48% mix followed by automotive at 29%, railways at 11%, IoI/IT at 7%, aerospace at 3% and medical at 3%. The Industrial vertical was key driver in the last 5 years and its mix has improved to 48% in FY24 vs 20% in FY19.

Segment wise revenue mix: Segment wise, OEM-PCBA contribute 55% of the revenue mix, followed by OEM-Box Build at 42%, IoT/IT at 2% and ODM at 1% in FY24. OEM-PCBA was key driver in the last five years, and its mix has improved to 55% in FY24 vs 52% in FY19.

Order book up 3.3x in last three years: Kaynes’ order book has grown by 3.3x from 1,517 in FY22 to 5,039 Cr in Q1FY25 during the last three years. This strong order book fuel the revenue visibility in the upcoming years. Automotive orders get 6-9 months in execution, and aerospace and railways get around two years. Weighted average is 1.5 years execution period.

Year End (March) FY20 FY21 FY22 FY23 FY24 Q1FY25
Order Book 352 670 1,517 2,486 4,115 5,039
Change in O.B 318 847 969 1629 924
Revenue 368 421 706 1126 1805 2309

Focus on Widening client base to de-risk

Kaynes has de-risked its business by widening client base. Top 1 client contribute 26% of the business while top-5 and top-10 contribute 53% and 69% respectively. Top-5 and top-10 contribution rose to 53% and 69% in FY24 vs 37% and 51% in FY22 respectively. This trend prove the lower client concentration in the company’s business model.

Kaynes has long-standing relationships with its clients, and the average relationship is in the range of 9-10 years whereas industrial and railways clients are >10 years. In automotive, IJL (India Japan Lighting Pvt Ltd) is the top client while in the industrial vertical, the key customers are from global manufacturers of electronic instruments and electromechanical devices. In the railways vertical, Siemens and Hitachi are the key customers.

Peer Comparison

Kaynes has been one of the fastest growing horse in EMS players, recording revenue/EBITDA/PAT of 37/44/108% over FY20-24. Particularly in topline growth, Kaynes stand first at 37% CAGR followed by Syrma at 30%, Cyient DLM at 21% and Avalon at 6%. This growth momentum will continue in the coming years led by strong order book, industry tailwind and entrance in new business vertical.

 

Income statement 

Year End (March) FY20 FY21 FY22 FY23 FY24 FY25E FY26E FY27E FY28E FY29E
Net Revenue 368 421 706 1126 1,805 2,996 4,195 5,523 6,689 7,693
Growth YoY% 0% 14% 68% 59% 60% 66% 40% 32% 21% 15%
COGS 242 286 489 780 1,330 2,067 2,894 3,811 4,616 5,308
Gross Profit 127 135 217 346 475 929 1,300 1,712 2,074 2,385
Gross Margin% 34.36% 31.98% 30.70% 30.73% 26.32% 31.00% 31.00% 31.00% 31.00% 31.00%
Employee Cost 42 46 60 77 103 210 294 387 468 538
Other expenses 44 48 63 101 118 240 336 442 535 615
EBITDA 41 41 94 168 254 479 671 884 1,070 1,231
EBITDA Margin% 11.08% 9.72% 13.27% 14.95% 14.07% 16.00% 16.00% 16.00% 16.00% 16.00%
Depreciation 7 10 13 19 25 60 84 110 134 154
EBIT 34 31 81 150 229 419 587 773 936 1,077
EBIT Margin% 9% 7% 11% 13% 13% 14% 14% 14% 14% 14%
Interest expense 23 24 26 35 53 52 52 52 52 52
Other Income 2 4 4 11 56 30 42 55 67 77
PBT 13 11 59 126 232 397 577 776 951 1,102
Total Tax 2 1 17 31 49 99 144 194 238 275
Tax rate% 17% 10% 29% 24% 21% 25% 25% 25% 25% 25%
PAT 11 10 42 95 183 298 433 582 714 826
PAT Margin% 3% 2% 6% 8% 10% 10% 10% 11% 11% 11%
EPS 16.4 2.3 9 16.4 28.68 46.57 67.64 90.99 111.49 129.12
EPS Growth (%) 0% -86% 291% 82% 75% 62% 45% 35% 23% 16%

Balance Sheet

Year End (March) FY20 FY21 FY22 FY23 FY24
Sources of funds
Equity Capital 7 8 47 58 64
Reserves 98 131 156 901 2,423
Total Shareholders Funds 104 139 203 959 2,487
Long term Debt 10 17 29 15 11
Short term Debt 113 122 140 121 295
Total Debt 122 140 170 136 306
Net Deferred Taxes 8 5 7 8 4
Other Non Current Liabilities 3 13 25 25 20
Total Sources of Funds 238 297 404 1,128 2,817
Application of Funds
Net Block 50 65 82 107 285
Goodwill 2 2 2 2 15
CWIP 12 13 8 29 76
Intangible assets 5 13 29 22 46
Non Current Investment 2 2 2 3 145
Other Non Current Asset 8 6 13 24 110
Total Non-Current Assets 79 100 136 188 677
Inventories 151 164 226 413 548
Debtors 95 122 198 227 355
Other Current Assets 35 19 41 105 151
Cash & Equivalents 12 14 22 486 1,525
Total Current Assets 294 319 486 1,231 2,579
Creditors 99 95 164 223 360
Other current Liabilities & Provns 35 28 55 68 79
Total Current Liabilities 134 123 219 291 439
Net Current Assets 160 196 268 940 2,140
Total Application of Funds 238 297 404 1,128 2,817

Cashflow Statement 

Year End (March) FY20 FY21 FY22 FY23 FY24
Profit from operations 43 20 98 171 272
Adjustments:
Receivables 29 -28 -76 -29 -142
Inventory -29 -13 -63 -187 -135
Payables 16 9 92 87 145
Loans Advances -12 0 -29 -34 -23
Other WC items 0 21 1 1 1
Working capital changes 4 -11 -75 -162 -154
Interest paid 0 21 0 0 0
Direct taxes -2 -4 -2 -50 -48
Other operating items 0 1 0 0 0
Operating Cashflow 45 27 21 -41 70
Capex -31 -25 -42 -58 -383
Free cashflow 14 2 -21 -99 -313
Investments 22 1 -2 -435 -1,123
Investing Cashflow -9 -24 -44 -493 -1506
Proceeds from shares 0 1 0 660 1,344
Proceeds from borrowings 8 7 30 0 174
Repayment of borrowings -20 -12 0 -34 -4
Interest paid fin -24 -22 -26 -35 -53
Other financing items 0 26 23 -37 -32
Financing Cashflow -36 0 27 554 1429
Net Cashflow 0 3 4 20 -7

Ratio Analysis

Year End (March) FY20 FY21 FY22 FY23 FY24
Profitability (%)
Gross Profit Margin 34% 32% 31% 31% 26%
EBITDA Margin 11% 10% 13% 15% 14%
EBIT Margin 9% 7% 11% 13% 13%
PBT Margin 4% 3% 8% 11% 13%
PAT Margin 3% 2% 6% 8% 10%
Return (%)
ROE 11% 7% 21% 10% 7%
ROCE 5% 3% 10% 8% 6%
Efficiency (x)
Total Asset Turnover 1.0 1.0 1.1 0.8 0.6
Fixed Asset Turnover 7.3 6.5 8.6 10.5 6.3
Inventory Turnover 1.6 1.8 2.5 2.4 2.8
Debtor Turnover 3.9 3.9 4.4 5.3 6.2
Debtor days 93 104 101 73 71
Inventory days 225 206 167 191 148
Payables days 148 120 121 103 97
Cash conversion cycle (days) 170 190 147 160 122
Leverage
Debt/Equity 1.2 1.0 0.8 0.1 0.1
Debt/Assets 0.3 0.3 0.3 0.1 0.1
Debt/EBITDA 3.0 3.4 1.8 0.8 1.2
Debt/Capital 0.5 0.5 0.4 0.1 0.1
CFO/Debt 0.4 0.2 0.1 -0.3 0.2
Interest Coverage 1.5 1.3 3.1 4.3 4.3
Cash Ratio
Free Cashflow 14 2 -21 -99 -313
CFO/Total Assets 0.1 0.1 0.0 0.0 0.0
CFO/Total Debt 0.4 0.2 0.1 -0.3 0.2
CFO/Capex -1.5 -1.1 -0.5 0.7 -0.2
Valuations
P/E (x) 58.81 100.41
P/BV (x) 5.8 7.4
EV/EBITDA (x) 43.5 252 122.3 82.6 54.77
Dividend Yield (%) 0% 0% 0% 0% 0%

 

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Fiscal Discipline in Focus: Government Plans Deficit Reduction by FY26
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - September 20, 2024

Government Expands Capex, Keeps Deficit in Check

Government Expands Capex, Keeps Deficit in Check

As of July 24, 2024, the central government’s fiscal deficit has decreased to ₹1.41 lakh crore, down from ₹1.54 lakh crore in the same period last year. This positive trend reflects the government’s ongoing commitment to fiscal prudence and responsible economic management.

This reduction in fiscal deficit to two primary factors: a moderate growth in tax revenues and controlled government spending, according to a recent analysis by financial services firm Anand Rathi. The fiscal deficit for April-July 2024 was at ₹2.8 lakh crore, representing 17.2% of the annual target, indicating better budget control than the previous year. This marks a significant improvement from the previous year when the deficit had reached ₹6.1 lakh crore during the same period.

Interestingly, government expenditure during these initial months has been more restrained compared to the previous year. Capital expenditure, in particular, has seen a notable decrease of 17.6% year-on-year. This cautious approach to spending suggests that the government is carefully balancing its growth initiatives with fiscal responsibility.

Personal income tax collections have been a notable strength in the current financial environment, demonstrating resilience and outperforming expectations. As the deadline for annual tax returns approached in July 2024, these collections surged by an impressive 64% compared to the same month last year. This strong showing has resulted in personal income tax revenues reaching 33% of the budgeted target for the fiscal year 2024-25, indicating a healthy pace of collection.

The corporate tax situation is more nuanced and multifaceted compared to other areas of tax revenue. After briefly showing signs of recovery in June 2024, corporate tax collections have once again turned negative. This fluctuation is partly attributed to ongoing tax refunds, which have impacted the net collection figures. The volatility in corporate tax revenues highlights the challenges faced by businesses and the need for continued economic support and reforms.

On a more positive note, indirect tax collections have shown improvement, particularly in the realm of customs duties. Customs duty collections have significantly rose, posting a 29% increase compared to the same period last year. This increase could be indicative of recovering international trade volumes or changes in import patterns.

While divestment receipts have remained stagnant, suggesting potential challenges in the government’s asset monetization plans, there’s been a substantial boost in non-tax revenues. These have surged by 70% year-on-year, providing a welcome cushion to the government’s overall revenue position. This increase in non-tax revenues could be attributed to various factors such as dividends from public sector enterprises, fees, and other miscellaneous sources.

Government expenditure for the initial quarter of the fiscal year has reached 27% of the annual budget allocation, indicating a gradual recovery in spending patterns. This figure provides insight into the pace of government expenditure and its alignment with annual budgetary plans. July 2024 saw a mixed picture, with monthly revenue expenditure decreasing by 14% year-on-year, while capital expenditure rebounded strongly with a 108% year-on-year growth.

Despite this recent rebound in capital spending, it’s important to note that overall capital expenditure for the first four months of the fiscal year remains 18% lower than the previous year. This slower pace of capital spending can be partially attributed to the implementation of the model code of conduct during the first two months of the year, coinciding with the general elections. The subsequent recovery in spending after the elections has been limited, as the government awaited the full-year budget announcement.

The government expenditure is expected to accelerate in the coming months. This anticipated increase is likely to be triggered by the release of funds following the Parliament’s approval of the finance bill. As budgetary allocations are formalized and disbursed, we can expect to see a pickup in both developmental and welfare spending.

A significant boost to the government’s fiscal position has come from an unexpected quarter – the Reserve Bank of India (RBI). The government’s finances received a significant boost from the central bank’s unprecedented dividend payment, which amounted to ₹2.11 lakh crore. This windfall, combined with the strong performance of personal income tax collections, has created a more favorable fiscal environment. These positive developments may help offset potential shortfalls in other areas, particularly in divestment collections, which have yet to gain significant momentum this fiscal year.

The government’s ability to maintain this balance between fiscal prudence and necessary expenditure will be key to supporting India’s economic growth trajectory. Factors such as global economic conditions, domestic consumption patterns, and the pace of structural reforms will all play important roles in shaping the fiscal outcomes for the remainder of the year.

In conclusion, the latest fiscal data presents a picture of cautious optimism. While challenges remain, particularly in areas like corporate tax collections and divestment proceeds, the overall trend suggests that the government is making strides in its fiscal consolidation efforts. The coming months will be critical in determining whether this positive momentum can be sustained and translated into long-term economic benefits for the nation.

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