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Thoughts on ‘Trump’ trade The complete and unprecedented control of all arms of the US government by the Republican Party may result in (1) higher US earnings through likely corporate tax cuts, (2) higher tariffs on imports into the US and (3) higher US fiscal deficits. The former two will be a negative for EMs in general, and the latter will result in eventual US dollar weakness after the initial euphoria. Likely stronger US growth will favor US markets over EMs The Repu...
Strategy Update: Thoughts on `Trump` trade by Kotak Institutional Equities
ERD services: Auto pulse–challenges ahead Our analysis of global auto OEMs’ and Tier-1 suppliers’ R&D spend outlook suggests some caution on spends on electrification initiatives. OEMs’ R&D spend growth remained healthy albeit decelerating in 1HCY24. However, some OEMs have indicated that software development programs related to new platform launches are on track. We believe spends on programs related to new architecture development would be relatively stabl...
IT Services : ERD services : Auto pulse–challenges ahead by Kotak Institutional Equities
Favorable base keeps inflation in check CPI inflation in July fell to 3.5% from 5.1% in June supported by a favorable base despite a continued increase in vegetable prices. This spike has started to dissipate in August and will likely reverse over the next 1-2 months. We maintain our FY2025 average CPI inflation estimate at 4.5%. We continue with our call for a shallow rate cut cycle, starting in the December policy. Favorable base offsets food price increases in July The July CPI in...
Economy Update : Favorable base keeps inflation in check by Kotak Institutional Equities
Affordable HFCs: Getting a fillip The much-awaited PMAY scheme was announced over the weekend. Launched with some tweaking, the CLSS scheme can help sustain high growth in the sector. Most affordable HFCs continue to deliver high growth and stable asset quality performance, albeit with some margin pressure. On a separate note, the large stake sale by Aavas’s promoters reduces the overhang of PE shareholding and augurs well for the entire sector. Retain a positive stance on affordable...
Sector Update : Diversified Financials by Kotak Institutional Equities
Tepid act, thunderous applause 1QFY25 results are quite tepid, with (1) a 0.7% yoy increase in the net profits of the Nifty-50 Index companies, (2) weak volume growth and (3) moderate compression in margins. The market has cheered modest beats and dismissed large misses in earnings, which shows the ‘incremental’ nature of the prevalent investment approach. The sharp increase in prices in laggard sectors in the past few weeks renders stock-picking even more challenging. 0.7% ...
Strategy : Tepid act, thunderous applause by Kotak Institutional Equities
Government spending picks up pace in June The central government’s fiscal deficit in 1QFY25 remained low at 8.4% of FY2025BE, aided by strong direct tax collection growth and a slow spending pace. Income tax growth was strong at 50% in 1QFY25. While the pace of spending picked up in June after a slow pace during the election, the pace of capex remains slow. We expect the government to achieve its FY2025BE GFD/GDP target of 4.9%. Tax collections buoyed by direct taxes in 1QFY25 ...
Economy Update : Government spending picks up pace in June by Kotak Institutional Equities
US rate cuts: Rate cuts priced in, earnings cuts less so The gradual weakening of the US economy, especially in the labor markets, with the consistently soft inflation prints, has sharply increased the probability of the US Fed cutting rates. A cut in US rates may see higher EM and India inflows. However, the recovery trajectory in the export-oriented Indian sectors will depend on the growth trajectory of the US economy. Moderating core inflation creates the necessary conditions for rat...
Strategy : US rate cuts : Rate cuts priced in, earnings cuts less so by Kotak Institutional Equities
ERD services—increasing caution on automotive demand Indian ESPs’ revenue growth moderated in 1QFY25 and is lower than our estimate. More signs of weakening demand emerged in the automotive segment. EBIT margins improved marginally at KPIT and TELX, but declined across others sequentially. Cyient (DET) lowered its FY2025E revenue growth outlook, whereas LTTS and KPIT retained their guidance. We maintain SELL on LTTS, KPIT, TELX and TTL on rich valuations, baking in unrealistic ...
IT Sector Update : ERD services - increasing caution on automotive demand by Kotak Institutional Equities
Takeaways from SEBI report on retail intraday trading SEBI’s report (link) on intraday cash trading by retail highlights the strong (~5x) growth in retail intraday traders over FY2019-23, driven by young traders with small trading amounts. Experience over FY2019-23 indicates that a large share (~70%) of retail makes losses, even though the average number of trades, trade size and loss per individual have declined, probably due to peak margin rules capping intraday leverage in 2021, i...
Diversified Financials: Takeaways from SEBI report on retail intraday trading by Kotak Institutional Equities
A stringent measure to comply on LCR of banks The RBI has introduced a draft guideline, effective in FY2026, which would require banks that have a higher share of internet and mobile banking customers to hold more granular deposits than before. As per the last available data, all banks would have an 8-15% point impact on the current LCR ratio, but would still be compliant with the current guidelines. Increasing the share of retail/stable deposits for LCR calculation The RBI has intro...
Banks: A stringent measure to comply on LCR of banks by Kotak Institutional Equities
FY2025 union budget: Prudent and balanced The FY2025 union budget delivered a prudent balance between capital expenditure, fiscal prudence and welfarism. The government continued with its focus on spending in core infrastructure areas, while expenditure on certain social welfare schemes was under control. The budget did minor tinkering on tax rates for individuals, while capital gains taxes were rationalized across asset classes. Central GFD/GDP of 4.9% highlights sharper focus on conso...
Kotak Institutional Equities: Strategy: FY2025 union budget: Prudent and balanced
Assessing the impact of budget proposal for real estate The government has rationalized the long-term capital gains tax on real estate by removing the indexation benefit while simultaneously reducing the applicable rate to 12.5% from 20% earlier. We highlight that the impact of the change is case-specific: a seller would now have a lower tax implication in the case of higher price appreciation (>10% average). We view the change as having negligible impact on end-users (75-80% of demand)...
Real Estate, July 24, 2024 by Kotak Institutional Equities
Motor drags down overall growth in June The weakness in the motor business (up 6% yoy) dragged down overall GWP growth (up 9% yoy) for the industry in June 2024. Competitive intensity in the motor OD segment is likely settling down, leading to faster growth for large players such as ICICI Lombard. Retail health growth was strong in June 2024 (up 16% yoy) and 1QFY25 (up 19% yoy). Star Health lost its share to other SAHIs. Motor drags down overall industry growth; health fares better I...
Insurance Sector Update : Motor drags down overall growth in June by Kotak Institutional Equities
Decoding the industry’s consumer postpaid subscribers Based on the TRAI’s machine-to-machine (M2M) subs reporting, we infer: 1) the industry’s consumer postpaid (retail + corporate) subs account for a modest ~38 mn subs (~3% of overall subs), but higher ~8% of overall revenue; 2) Bharti accounts for 60%+ of consumer postpaid market share; 3) ~60% of Vi’s reported postpaid subs are typically lower-paying M2M subs; 4) R-Jio’s consumer postpaid base market share ...
Telecom Sector Upadate : Decoding the industry`s consumer postpaid subscribers by Kotak Institutional Equities
Earnings offer no surprise; multiples continue to do Electric utilities have rallied up to 34% in the past six months on the back of an expected increase in investments for setting up new power capacities and related T&D infrastructure. While we do concede the need for new investments following the moderated pace of capacity addition in the past decade, we highlight that the earnings benefit from such investments will only trickle in beyond FY2030, implying an early-teen CAGR in earnin...
Kotak Institutional Equities: Electric Utilities: Earnings offer no surprise; multiples continue to do
1QFY25 preview: Weak for most namesWe expect 1QFY25 to be weak for most oil & gas names, except GAIL and PLNG. For RIL, O2C segment weakness would offset modest growth in R-Jio/retail for 8% qoq EBITDA decline. For OMCs, EBITDA could decline ~35-43% on weaker GRM and also qoq lower auto-fuel marketing margins. GAIL and PLNG should benefit from higher gas consumption, while sharp tariff cut would offset higher volumes for GSPL. Rising APM shortfall and full impact of price cuts would impac...
Kotak Institutional Equities: Oil & Gas 1QFY25 preview: Weak for most names
Best may be behind, outlook crucialEarnings growth for banks will be weaker, led by slow operating profit growth due to muted NII growth; asset-quality trends (barring seasonal variations) continue to hold up well, leading to low credit costs. We expect NBFC?s growth and profitability to hold reasonably well, although we would watch for early asset-quality indicators and outlook. In the meantime, equity tailwinds continue to buoy capital-market plays.Banks: Unexciting trends, but less worriso...
Banks and Diversified Financials: Best may be behind, outlook crucial - Kotak Institutional Equities
In this study, we look back at the impact of agriculture waivers by various states and the consequences on impairment ratios. While these data sets are not robust on quality, we can conclude that the negative impact of these waivers is high, both on waivers and the credit flow. The impact is the highest when large states make these waivers and if the program being covered encompasses all forms of agriculture loans.Agriculture loans: Growth picks up in 2024 but so have the conversationsExhibit...
Banking Sector Update : Agriculture loans - Looking through the waivers by Kotak Institutional Equities
The curious case of rising capex among O&G PSUs O&G PSUs’ capex has increased at a rapid pace, and was up over 3X during FY2019-24 (versus FY2005-09). However, returns have been weak. In upstream, despite large capex, oil/gas production and reserves are declining. In refining, there is surplus capacity, and creation of new capacity is questionable. Petchem is a new focus area for PSUs, but their track-record has been dismal. High capex has led to low FCF relative to PAT for P...
Oil & Gas Sector Update : The curious case of rising capex among O&G PSUs By Kotak Institutional Equities
Weak retail trends across segments The auto sector reported a weak set of numbers with PV, CV and tractor segment retail volumes declining on a yoy basis, whereas domestic 2W segment retail volumes growth moderated to low single digit on a yoy basis in June 2024. In terms of wholesale, domestic PV segment volumes grew by low single digit as inventory levels remain at elevated levels whereas CV and tractor wholesales trends were flat on a yoy basis. 2W domestic wholesale volumes grew by low...
Automobiles & Components : Weak retail trends across segments by Kotak Institutional Equities
Alphabet Factor Portfolios Our Alphabet Factor Portfolios had an impressive performance in the last month, with the multifactor approach offering a good hedge against the volatile first week while participating in the sentiment ride thereafter. We show our model results aren’t a mere luck but are backed by substance, with strong outperformance not only during the back-test period but also out of sample since the go-live date. Traversing through the initial volatility The jugger...
Quant Research - Alphabet Factor Portfolios July`24 by Kotak Institutional Equities
Crop & Chemical Dashboard: China output growth is a worry Data published by the European Chemical Industry Association (CEFIC) shows that China’s chemical output continues to grow nearly 10% yoy, threatening a flood of exports worldwide, even as a broad-based demand recovery remains elusive—industry participants expect a weak 1HFY25. Meanwhile, crop prices have softened in recent months, and could raise worries for the agrochemical industry with regard to the health of grow...
Specialty Chemicals Update : Crop & Chemical Dashboard: China output growth is a worry by Kotak Institutional Equities
Promoters selling, retail (through MFs) buying The trend of stake sale by promoters (majority shareholders) and PE/VC investors accelerated in 1HCY24, helped by a benign ‘exit’ environment. The ongoing sell-down is quite broad-based across sectors. The selling by promoters partly reflects strategic compulsions (business, debt reduction, MPS) in a few cases and tactical (exits by PE investors) considerations. The selling trend continues The trend of promoter stake sale tra...
Strategy Update : Promoters selling, retail (through MFs) buying by Kotak Institutional Equities
IT preview-moderate improvements We forecast moderate growth rate improvement across many companies in our coverage universe, led by seasonal strength, large deal ramp-up and reducing intensity of cuts in discretionary programs. The EBIT margin performance will vary sequentially based on wage revision, but on yoy basis it will be steady or increasing for many. We expect Infosys, TCS, LTI, PSYS and KPIT to report robust sequential growth rates, while HCLT, Cyient and Mphasis will repo...
IT Sector Update : IT preview-moderate improvements by Kotak Institutional Equities
R-Jio takes the lead with ~20% tariff hikes R-Jio has announced new unlimited plans, raising tariffs by ~17-25% on popular pre-paid plans and by ~17% on entry-level postpaid plans. The tariff hike is largely in line with our expectations (20% from June 2024) and is already built into our estimates. Further, R-Jio has also restricted unlimited 5G data usage to 2GB/day and above plans (versus Rs239 and above plans earlier), which could potentially lead to up-trading by higher data consumers....
Telecom Sector Update : R-Jio takes the lead with ~20% tariff hike by Kotak Institutional Equitiess
Hanging on to the good numbers, for now The RBI’s FSR report indicated that Indian banks are still in a healthy position. Gross NPLs declined 40 bps to ~2.8% in 2HFY24. RoE is at a decadal high at ~14%; RoA has touched 1.3%. Near-term forecasts on NPLs are still being lowered. Loan demand is slowing down in certain specific sectors. Deposit growth has been weak and historical evidence suggests the likelihood of a slowdown in loan growth to converge this gap. Discussion on unsecured ...
Banking Sector Update : Hanging on to the good numbers, for now - Kotak institutional equities
Amid the energy crisis and economic stagnation, 2023 was a year of gradual progress in the uptake of global carbon pricing instruments (CPI). Multi-dimensional efforts are being undertaken worldwide to promote these instruments’ uptake and improve prices to meet the 2°C goal, especially in mid-income countries. The final bill for the rollout of the Indian carbon market is approved, and the finer details are awaited. We believe that companies enabling/transitioning to a lower carbon ...
ESG: Global carbon pricing trends 2023: Needs more ambition by Kotak Institutional Equities
Inflation remains steady in May Headline CPI inflation at 4.75% and core inflation at 3% were marginally lower than April levels. Inflation continues to pan out as we had expected—only a gradual moderation toward the RBI’s 4% target. We maintain our FY2025 average inflation estimate at around 4.4%. We continue to expect a shallow rate cut cycle, starting in December, with the stance changing to neutral either in October policy or along with rate action. Food inflation ...
Economy: Inflation remains steady in May by Kotak Institutional Equities
Microfinance—no concerns, but staying watchful The 4QFY24 update from CRIF Highmark puts microfinance gross loan portfolio (GLP) at ~Rs4.4 tn (up ~27% yoy). GLP growth was led by a robust 18% yoy growth in unique active borrowers, indicating an optimistic environment. NBFC-MFIs have slowed a bit, thereby narrowing the growth gap with other lenders. Delinquencies have inched up marginally in select areas, but overall the asset quality situation seems comfortable. While we remain watch...
Bank Sector Update: Microfinance-no concerns, but staying watchful by Kotak Institutional Equities
CTSH–big bet in core engineering services CTSH announced the acquisition of Belcan for a consideration of US$1.29 bn, through a mix of cash and stock. Belcan is a North American ERD services provider, with significant presence in asset-heavy industries such as aerospace, defense and industrial products. Acquisition consideration implies a transaction multiple of 1.6X EV/sales. The acquisition follows moves by large Indian IT peers, adopting the inorganic route to acquire ERD services...
IT Services: CTSH–big bet in core engineering services by Kotak Institutional Equities
Fight, flee or join a stampede? The unexpected market reaction (sanguine) to an unexpected result in the 2024 national elections (BJP falling short of majority) highlights the unusual nature of the Indian market. Non-institutional investors remain extremely confident about making high returns from the Indian market, irrespective of prices and valuations. Institutional investors can choose to fight, flee or join. Shrug off the shock The market’s sanguine reaction to the sh...
Strategy: Fight, flee or join a stampede? by Kotak Institutional Equities
Coalition journey: Long travails ahead Fears of the current coalition government being unstable are too premature. The more probable outcome would be slower decision making with slower passage of legislative agendas given a larger opposition and major executive decisions requiring a more consultative approach. All solutions to electoral losses need not be translated into populism and away from a macro framework built over the last decade. We expect the government to remain fiscally prudent...
Economy: Coalition journey: Long travails ahead by Kotak Institutional Equities
NoP drives APE growth for private players Private life insurers reported strong 22% yoy APE growth and 16% two-year CAGR. The growth was largely driven by higher volumes, Number of policies (NoP) up 17% yoy and at a two-year CAGR of 11%. Growth trends look promising compared with moderate outlook of listed players. Though ICICI Prudential delivered a 23% APE two-year CAGR, HDFC Life, SBI Life and Max Life reported 16-18% two-year CAGRs. APE growth driven largely by higher volumes Lif...
Insurance, NoP drives APE growth for private players by Kotak Institutional Equities
Stable performance across metrics on loan growthThe key takeaways from the RBI?s release on loans: (1) Loan growth is holding up at ~20% (higher due to the merger of HDFC Ltd with HDFC Bank), which would be weighing down on the various growth metrics until 2QFY25. (2) Private banks are growing faster than public banks. (3) Household demand for loans is holding up relatively well. The intent to lend is still holding up, as there is negligible stress on the balance sheet of all banks. (4) Corpo...
Banking Sector Update : Stable performance across metrics on loan growth by Kotak Institutional Equities
Elections 2024: NDA wins, just about The BJP-led NDA coalition won the 2024 national elections narrowly, with 292 out of 543 seats in the Lok Sabha. The market may have concerns about political stability, but we assume that the BJP/NDA government will form the next government and continue with its economic agenda. We see further reset in expectations and valuations in the ‘narrative’ parts of the market. NDA won 292 seats, with BJP winning 240 seats in the 543-member Lok Sab...
Strategy: Elections 2024: NDA wins, just about by Kotak Institutional Equities
As blurry as it gets 4QFY24 business trends were weak for a variety of reasons across different players—margin compression, slowdown in agency/primary banking partner and higher payouts. Takeaways remain similar across players—lack of clarity on FY2025E product strategy, focus on expansion/growth coupled with higher payouts and regulatory developments, all of which provide low near-term visibility. We await clouds to recede and more clarity to emerge; valuations remain undemand...
Insurance, As blurry as it gets by Kotak Institutional Equities
Strong on expected lines across BFSI Earnings for the quarter across banks, NBFCs, capital market players and insurance have held up well: (1) Banks—one-offs driving earnings beat, but loan growth is stable; peak NIM contraction cycle is probably behind and asset quality is still not showing any signs of worry. (2) NBFCs reported strong loan growth along with improvement in asset quality. NIM trends were mixed with visibility of flattening. (3) Capital market companies benefited from...
Banks, Diversified Financials: Strong on expected lines across BFSI Quarterly review 4QFY24 by Kotak Institutional Equities
4QFY24 review: Sustaining momentum Key highlights of 4Q were: (1) OEMs—strong top-line growth, richer product mix and RM tailwinds driving good margin expansion; demand trends remain steady for 2W; however, growth moderation is seen in the PV segment; uptick in commodity prices needs to be monitored; (2) diversified auto ancillaries— strong automotive volume growth, coupled with pricing adjustments, drove strong earnings growth; and (3) tire companies—domestic tire compa...
Automobiles & Components Sector Update : 4QFY24 review - Sustaining momentum by Kotak Institutional Equities
Exit polls 2024: No drama Exit polls for the 2024 Lok Sabha elections suggest a comfortable majority for the BJP-led NDA, led by gains in East and South India and continued dominance in its traditional strongholds. We expect (1) the equity market to be further energized by the polls (although the numbers are similar to pre-poll surveys) and (2) the government to continue with its economic agenda. NDA may win 360-380 seats, as per exit polls Exit polls for the 2024 Lok Sabha elections...
Kotak Institutional Equities - Strategy: Exit polls 2024: No Drama
Surrendering to uncertainty Private sector life insurance stocks have sold off 4-7% in the past two days. Unconfirmed media sources (link) suggest that IRDA is proposing to revisit surrender penalties for traditional policies. Based on details available in the media, it appears that the impact on surrender income may be significant, exerting pressure on VNB margins. More than the eventual impact, the uncertainty around the regulatory framework is making it challenging for investors to take...
Insurance, Surrendering to uncertainty by Kotak Institutional Equities
Lower provisions aid RBI’s higher surplus transfer RBI’s surplus transfer of Rs2.1 tn was aided by a significantly lower provision of Rs428 bn (Rs1.3 tn in FY2023). For FY2026, we expect the surplus transfer to be at least as high as this year. This could potentially also be higher to the extent of 0.1-0.5% of GDP assuming different scenarios of interest income on FX assets and lower losses on investment revaluation, and lowering Available Realized Equity (ARE) to 6%. RBI&rs...
Economy: Lower provisions aid RBI`s higher surplus transfer by Kotak Institutional Equities
Rightfully optimistic, mistakenly euphoric The Indian market continues to be a mix of optimism and euphoria with (1) parts of the market rightfully reflecting the strength of the Indian economy and its long-term kgrowth prospects and (2) other parts reflecting extreme euphoria linked to baseless narratives with absolutely no linkage to fundamentals. 4QFY24 results did little to change (1) trends in sectors or (2) views on the market. Getting the election issue out of the way fir...
Kotak Institutional Equities - Strategy: Rightfully optimistic, mistakenly euphoric
Fund flows in April 2024. Listed funds witnessed US$419 mn of inflows, led by ETF inflows of US$428 mn, which was offset by non-ETF outflows of US$8 mn. India-dedicated funds witnessed inflows of US$1.5 bn, broken down into US$679 mn of ETF inflows and US$837 mn of non-ETF inflows whereas GEM funds saw US$697 mn of outflows, broken down into US$240 mn of ETF outflows and US$456 mn of non-ETF outflows. Emerging market flows. Listed emerging market fund flows were negative for m...
Kotak Institutional Equities - Strategy: Foreign fund-flow tracker, May 2024
RBI’s bonanza to the central government The RBI’s surplus transfer of Rs2.1 tn to the central government was an upside surprise. This bumper transfer provides the government with the choices of a faster pace of fiscal consolidation and/or higher spending and/or lower taxes. RBI announces a surplus transfer of Rs2.1 tn The RBI has approved the transfer of Rs2.1 tn as surplus to the central government for FY2024. We expect this transfer to have stemmed mainly from (1) large...
Kotak Institutional Equities - Economy: RBI`s bonanza to the central government
What does 100X P/E mean? The benevolence and/or complacency of market participants have resulted in a large number of stocks trading at astronomically high levels. Investors may want to get a handle on the market size implied by such high multiples. A 100X P/E essentially implies earnings growing at the rate of cost of equity over 100 years or at much higher growth rates over a shorter period of time. Astronomical valuations being ascribed to higher number of stocks The Indian equity...
Kotak Institutional Equities - Strategy: What does 100X P/E mean?
Not a bad start to the year Private life insurance companies reported 23% APE growth in April 2024 on a low base, translating to 11% on 2-year CAGR basis. This is an ‘okay-ish’ start considering sluggish activity at the beginning of the year and moderate growth outlook by all listed players. Among listed players, HDFC Life and Max Life fared better than peers, reporting 14% 2-year APE CAGR. ICICI Prudential Life and SBI Life reported muted 7-9% growth in APE (2-year C...
Insurance Sector Update : Not a bad start to the year by Kotak Institutional Equities
EPAM—another guidance cut on sluggish recovery EPAM trimmed its revenue expectations for CY2024. It now expects a revenue decline of 2% at the mid-point of the guided band, implying consecutive years of revenue declines. Management indicated that its earlier expectation of recovery in discretionary demand in 2HCY24 is unlikely to materialize, leading to a guidance cut. EPAM has been impacted due to pullback in discretionary spends and lower offshore delivery presence, as enterprise...
IT Sector Update : EPAM - another guidance cut on sluggish recovery by Kotak Institutional Equities
Pledged holding analysis, March 2024 quarter. Our analysis of the pledged holdings of BSE-500 stocks shows that the value of the promoter (majority shareholder) pledged holding as a percentage of the promoter holding has come down marginally to 1.10% in the March 2024 quarter from 1.17% in the December 2023 quarter. Promoters of 73 companies in the BSE-500 Index have pledged part of their holdings in the March 2024 quarter. The value of pledged promoter holdings stood at Rs1.96 tn (about...
Kotak Institutional Equities - Strategy: Pledged shareholding report, March 2024 quarter
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