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Private Banks See Deposit Revival but Face Margin Pressures Amid Rising Costs
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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India Set for Capex Boost as Domestic Demand Grows: CII
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 October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks
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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Kaynes Technology Acquires Iskraemeco India to Strengthen Presence in Smart Meters
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
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - October 4, 2024

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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Kaynes Technology Acquires Iskraemeco India to Strengthen Presence in Smart Meters
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - September 25, 2024

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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Government Expands Capex, Keeps Deficit in Check
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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E-commerce Boosts High-End Electronics Sales in India
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - September 19, 2024

E-commerce Boosts High-End Electronics Sales in India

E-commerce Boosts High-End Electronics Sales in India

In the first half of 2024, the Indian market witnessed a significant shift in consumer behaviour concerning the purchase of high-value items such as washing machines, air conditioners, laptops, and tablets. Traditionally, Indian consumers preferred to see, touch, feel, and be assured of these products in brick-and-mortar stores before making a purchase. However, recent data from GfK-NielsenIQ reveals that this trend is rapidly changing, with online sales of these products outpacing those in physical stores by a substantial margin.

According to the data, air conditioner (AC) sales online surged by 62% in value during the January-June 2024 period compared to the same period last year, while offline sales grew by only 30%. Similarly, washing machine sales saw a 15% increase in value online, with offline sales remaining flat. In the laptop segment, online sales grew by 7%, whereas offline sales declined by 3%. The trend was even more pronounced for tablets, where online purchases doubled in value, compared to an 18% growth in physical stores.

Industry experts have noted that the gap in sales growth between online and offline channels for these electronic products has never been this wide. Historically, online sales growth for such products was typically only 4-6 percentage points higher than offline sales, except during the Covid-19 pandemic when physical stores were forced to shut down. However, the current data indicates a much more significant divergence.

Anant Jain from GfK India noted a significant change in consumer behaviour. He observed that online shopping is no longer limited to entry-level products, with many customers now researching in stores but buying online for better deals and convenience. Additionally, Jain emphasized that the average selling prices for categories like ACs, washing machines, and laptops are relatively higher than other products, which has contributed to the overall growth in sales value through online channels.

The data also shows that overall sales of consumer electronic goods grew by 17% online during the January-June period, compared with a 12% growth in offline sales. Interestingly, while sales growth by volume—or the number of units sold—was two percentage points higher offline at 12%, the value growth in the online market was notably stronger. This indicates that consumers are increasingly purchasing more premium products through e-commerce platforms and direct-to-consumer channels offered by brands.

Satish NS, the president of electronics company Haier India, noted that the previous resistance to buying premium models online has significantly diminished. He observed that many younger consumers are now choosing to purchase high-value electronics online, foregoing the traditional “touch and feel” experience. However, Satish emphasized that for the vast majority of consumers, price remains the most critical factor influencing their purchasing decisions, even more so than convenience.

This shift in consumer behaviour is also evident in the smartphone market. There has been a noticeable trend towards buying premium models online, a departure from the previous preference for in-store purchases of high-end devices. The online market for smartphones saw a boost during the summer sales in the April-June quarter of 2024, a period when offline sales were adversely affected by severe heat waves that kept people indoors.

The rapid growth of online sales in the high-value electronics segment signals a broader transformation in the Indian retail landscape. As more consumers embrace e-commerce for purchasing premium products, the traditional dominance of brick-and-mortar stores is being challenged. The convenience of online shopping, coupled with attractive deals and a growing comfort level with purchasing expensive items without physically examining them, is reshaping the way Indian consumers approach buying electronics. The shift towards online purchases is expected to persist, narrowing the divide between digital and physical retail channels. In the coming years, this trend may potentially lead to e-commerce platforms becoming the dominant sales channel for consumer electronics.

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OfBusiness $1 Billion IPO A Milestone in India's Startup Evolution
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - September 19, 2024

OfBusiness $1 Billion IPO A Milestone in India's Startup Evolution

OfBusiness $1 Billion IPO A Milestone in India’s Startup Evolution

With plans to conduct an initial public offering (IPO) that may generate up to $1 billion, SoftBank-backed OfBusiness, an Indian startup that specialises in B2B finance and commerce, is making headlines. This IPO is not only a big step forward for the business, but it also shows how the Indian startup scene is changing. The decision was made at a time when there are a tonne of chances in the market for companies who have effectively used technology to upend established sectors.

Asish Mohapatra, Ruchi Kalra, and Bhuvan Gupta founded OfBusiness (formerly known as OFB Tech Pvt. Ltd.) in 2015, and it has quickly expanded to become a significant player in the SME financing and industrial supply chain industries in India. The business offers working capital funding, technological solutions, and raw materials to small and medium-sized businesses (SMEs). It operates at the nexus of commerce, finance, and technology.

OfBusiness has established a name for itself by serving sectors with steady and significant demand for raw materials, such as manufacturing, construction, and infrastructure. The firm has positioned itself as a one-stop shop for SMEs, who frequently suffer with credit and liquidity concerns, by providing both finance and procurement options.

With a target of raising up to $1 billion, the proposed IPO is anticipated to be among the biggest in India’s tech-driven corporate sector. Executives at the firm have stated that OfBusiness would utilise the profits from the IPO to support its goals for growth.

Given the favourable market circumstances and growing investor interest for tech-driven enterprises with great growth prospects, the timing of the IPO seems strategically sound. OfBusiness is well-positioned to benefit from the present market momentum thanks to the success of recent initial public offerings (IPOs) in India, notably those of IT and fintech businesses.

OfBusiness’s IPO gains further trust from SoftBank’s engagement, one of the biggest tech investors globally. SoftBank’s Vision Fund has a history of supporting prosperous startups, and the fund’s investment in OfBusiness demonstrates its strong belief in the company’s development potential and business plan. Furthermore, early investors like SoftBank will have the chance to partially exit and get returns on their investments thanks to the IPO. Given that SoftBank recycles funds from profitable exits into new investments, this may be very tempting to them.

Investors find OfBusiness’s IPO to be appealing for a number of reasons. First off, the business is in a fast-growing industry. Following the epidemic, the Indian economy has been steadily recovering, with the government placing a major emphasis on manufacturing and the expansion of infrastructure. As a result, there is a strong need for the financing options and raw materials that OfBusiness offers.

Second, small and medium-sized businesses (SMEs), the backbone of the Indian economy, can meet their demands using the organization’s business strategy.  In India, SMEs frequently struggle with access to loans, operating cash, and procurement. By providing a smooth platform that combines financing and procurement, OfBusiness solves these problems and allows SMEs to grow their business without the typical limitations.

Although there is a lot of room for expansion with the IPO, OfBusiness will face a number of obstacles. There are many companies fighting for market share in India’s B2B financing and commerce sectors, which is getting more and more competitive. Infra.Market and Udaan are two other companies making progress in this area, and OfBusiness will need to keep coming up with new ideas to stay ahead of the competition. The macroeconomic situation also presents a unique set of hazards. Inflation and rising interest rates may have an effect on the need for finance solutions, and supply chain interruptions may have an influence on raw material availability. Businesses must use good risk management and diversification techniques to reduce these hazards.

To conclude the SoftBank backed OfBusiness $ 1 Billion IPO displays the company’s goals of maintaining its growth trajectory and solidifying its market position. OfBusiness is well-positioned for success despite the obstacles that still lie ahead because to its solid business strategy and the support of well-known investors like SoftBank. The IPO is a strong indication for the larger Indian startup ecosystem in addition to being a critical milestone for OfBusiness.

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Tiny Titans: Grand Re-Entry of Small Cars
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - September 19, 2024

Tiny Titans: Grand Re-Entry of Small Cars

Tiny Titans: Grand Re-Entry of Small Cars

Industry experts predict a strong resurgence for small cars in India’s auto market, despite recent SUV dominance. Several factors point to a resurgence in demand for small cars, including a recent surge in two-wheeler sales indicating improving sentiment at the entry level of the personal mobility market, an expanding pool of two-wheeler owners looking to upgrade to four-wheelers, and the need for affordable and efficient mobility solutions in metro cities and urban areas. Small car segment to gain development by 2026, expert says.

Maruti Suzuki, India’s car market leader which previously relied heavily on small cars, is expected to expand its portfolio of such models beyond the Alto. The company plans to offer a mix of petrol, CNG, and electric options, with reports suggesting they are already testing small electric vehicles. Maruti Suzuki’s chairman, RC Bhargava, emphasized the company’s commitment to small cars at a recent annual general meeting, Bhargava emphasized the importance of affordable small cars in India’s economic landscape. Despite a temporary dip in demand, he projected a revival of the small car segment by the end of fiscal year 2025-26.

The small car segment’s market share in India has declined significantly over the years, dropping from around 50% two decades ago to just 3.24% currently. This decline coincided with a sharp increase in average vehicle prices, rising from Rs 3.48 lakh in 2019 to Rs 6.98 lakh. Increased prices, driven by BS-VI emission compliance and required safety upgrades, are believed to be key factors in the market’s downturn. Among auto manufacturer Tata Motors and Datsun abandoning small car segment. However, the increasing congestion in city roads and limited parking spaces are causing small cars to regain Favor among buyers.

Today’s small car buyers have diverse drivetrain choices beyond just petrol, including CNG and electric options, contrasting with the limited fuel selections of the past. MG Motors’ compact EV, Comet, has already attained success in the price-sensitive market segment. Satinder Bajwa, chief commercial officer at JSW MG Motor, emphasized the crucial role this segment plays in making car ownership more accessible across cities, especially as urban populations expand, and traffic congestion intensifies.

Experts suggest that increased model diversity and government incentives, especially for EVs, could revitalize the entry-level vehicle market. The shift in consumer behaviour towards using financing options to upgrade lifestyles is expected to be a key factor in the segment’s revival. Ravi Bhatia, president of Jato Dynamics, suggests that automakers need to leverage electric powertrains, modular platforms, and lightweight materials to offer well-packaged vehicles with lower total cost of ownership.

Dealers emphasize that government support to make vehicles affordable is crucial for driving growth in this segment. Dealer Nikunj Sanghi proposes GST cuts and scrappage-based upgrades to boost small car sales. Maruti Suzuki’s Bhargava also notes that rising rural incomes will help narrow the affordability gap, and government recognition and action to support the sector could accelerate this process.

The revival of the small car segment is not just a matter of market dynamics but also a reflection of changing urban needs and environmental concerns. As cities grapple with pollution and congestion, small cars, especially electric ones, offer a more sustainable and practical solution for personal mobility. The success of models like the MG Comet demonstrates that there is a market for well-designed, affordable small cars that cater to urban needs.

In conclusion, while the small car segment has faced challenges in recent years, a combination of factors including changing urban landscapes, technological advancements, and potential policy support point towards its resurgence. As automakers adapt to these new realities and consumer preferences, the small car segment in India appears set for a renaissance, potentially reshaping the country’s automotive landscape once again.

The image added is for representation purposes only

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