Financial and Investment Sector Analysis

Financial Institutions


Sectors

The financial services sector in India mainly consists of the capital markets (asset management, broking, wealth management, investment banking, depository companies) and non-banking financial companies (NBFCs). The market regulator has also allowed new entities such as payments banks to be created recently thereby adding to the types of entities operating in the sector.





Fundamentals

  • Supply

  • Plenty to meet personal finance needs but not enough to meet long-term infrastructure needs.

  • Demand

  • India being a growing economy, demand for long-term loans, especially infrastructure and personal finance is high.

  • Barriers to entry

  • Stringent regulatory norms prevent new entrants. Customers prefer to invest their money with a reputed financial services company offering a wide range of services.

  • Bargaining power of suppliers

  • Low, as the industry is highly regulated by the market regulator and government.

  • Bargaining power of customers

  • Medium. Although customers do not have much bargaining power, they can easily switch to another company based on the terms and quality of services provided.

  • Competition

  • Competition between big players is intense in the industry. Financial services companies often compete on the basis of offering lower financing rates, higher deposit rates and investment services

  • Threat of Substitutes

  • The threat of substitute products—payment services and peer-to-peer lending—continues to threaten the financial industry.


Economy

  • The financial services sector in India mainly consists of the capital markets (asset management, broking, wealth management, investment banking, depository companies) and non-banking financial companies (NBFCs). The market regulator has also allowed new entities such as payments banks to be created recently thereby adding to the types of entities operating in the sector.

  • The explosion of mobile phones, adoption of technologies such as cloud computing and rising pace of interconnectivity have led companies in the financial services industry to ramp up investment in information technology (IT) to better serve their end-customers.

  • The growth of the financial sector can be attributed to rise in financial inclusion, increasing penetration of financial assets, wider participation in equity markets and technology adoption

  • Rising awareness about benefits of investing in equity markets and growing popularity of ways of investing, such as SIP, are some of the factors contributing to the increased participation of domestic individual investors in the Indian mutual fund industry. The AUM of the mutual fund industry in India has grown at a CAGR of 15.5% over the past five years, with the equity AUM growing at a CAGR of 17.3%.

  • During the last five years, the Indian equity markets also achieved a healthy balance between the domestic institutional investors (largely Mutual Funds) and Foreign Portfolio Investors (FPIs), thereby significantly reducing the skew towards reliance on FPI inflows, lending more stability to the Indian markets.

  • The Indian equity market is expanding in terms of listed companies and market capitalization, widening the playing field for brokerage firms. In FY20, the number of listed companies on NSE and BSE were 1942 and 5461, respectively. Sophisticated products segment within the market is growing rapidly, reflected in the steep rise in growth of derivatives trading

  • The Government of India has taken various steps to deepen the reforms in the capital markets, including simplification of the Initial Public Offer (IPO) process which allows qualified foreign investors (QFIs) to access the Indian markets. India has scored a perfect 10 in protecting shareholder rights in the World Bank's Ease of Doing Business 2020 report.

  • There is a growing opportunity for depository companies (which hold demat accounts of investors) as there is a strong long term structural growth trend in the securities market. According to the market regulator, the number of new depository accounts opened in FY20, was the most in a decade at 4.9 million. It has also become mandatory for unlisted companies to get their shares dematerialized if they issue or transfer shares, offering additional growth opportunities to depository companies. The opportunity size is 60,000 companies.

  • The RBI's Internal Working Group (IWG) recently recommended significant changes with respect to NBFCs stating that large NBFCs with an asset size of Rs 500 billion, including those owned by large corporate houses, may be allowed to convert to private banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance. For payments banks intending to convert to a small finance bank, track record of three years of experience as payments bank may be considered as sufficient.

  • The RBI has also decided to put in place guidelines regarding dividend distribution for NBFCs. Unlike banks, currently there are no guidelines in place. However, it has now been decided by the RBI that different categories of NBFCs would be allowed to declare dividend as per a matrix of parameters, subject to a set of conditions.

Demand (Global and Domestic)

DOMESTIC

  • Rising income is driving the demand for financial services across income brackets.

  • Investment corpus in Indian insurance sector might rise to US$ 1 trillion by 2025.

  • Assets under management have more than doubled since FY08

  • Indian equity market meeting the global pace

  • Vibrant capital market evident through large number of listings


GLOBAL

  • The global financial services market is expected to grow from $20,490.46 billion in 2020 to $22,515.17 billion in 2021 at a compound annual growth rate (CAGR) of 9.9%.

  • The growth is mainly due to the companies rearranging their operations and recovering from the COVID-19 impact, which had earlier le

  • d to restrictive containment measures involving social distancing, remote working, and the closure of commercial activities that resulted in operational challenges.

  • The market is expected to reach $28,529.29 billion in 2025 at a CAGR of 6%.


















3 Top Stocks

CDSL, Bajaj Finance and L&T Finance Holdings were the top performers over the last 5 years in terms of sales and profit growth.

CDSL's growth can be attributed to its position as one of the only two depositories in India with a steadily gaining market share. The last 5 years have been quite good for CDSL with the advent of newcomers into the stock market. As there is a huge spike in the number of new demat accounts being opened, CDSL continues to be one of the biggest beneficiaries of this trend.

Bajaj Finance, with its strong business profile has emerged as one of the largest retail asset financings NBFCs in India, and has grown on the back of its two-pronged strategy of building scale and maximizing profit.

Asset management companies such as HDFC AMC and Nippon Life AMC that have listed more recently have also done very well. The stock of HDFC AMC has given over 40% returns in the last 2 years since its listing.


3 Undervalued Stocks

Nahar Capital & Financial Services in the business of finance and investment companies and also company is doing Real Estate Business